-----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, RQEgOc8Lv5FOV4C2EE3qno2gmsMN6dzdYZLBPyhkZMSUH3ap+Sf3fg7dR08Cmv7u WTBdKtPFYrGPecbhDPnofA== 0000950152-96-001288.txt : 19960402 0000950152-96-001288.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950152-96-001288 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD AIRLINES INC /NEW/ CENTRAL INDEX KEY: 0000278327 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 431145889 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07815 FILM NUMBER: 96542060 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-K405 1 TWA 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 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 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 43-1145889 (I.R.S. EMPLOYER IDENTIFICATION NO.) One City Centre 515 N. 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 ------------------------------------------------------ Common Stock, par value $.01 per share 12% Cumulative Preferred Stock, par value $.01 per share 12% Senior Secured Reset Notes Due 1998 Warrants (expiring August 23, 2002) NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------------------------------------------ American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange ------------------ Securities registered pursuant to Section 12(g) of the Act: 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 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 PROCEEDINGS 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 No / / The aggregate market value of voting stock held by non-affiliates of the registrant as of March 22, 1996: $692,675,531.00. As of March 22, 1996, 36,942,695 shares of the 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 21, 1996 -- Part III - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS INTRODUCTION Trans World Airlines, Inc. ("TWA", the "Company" or the "Registrant"), a Delaware corporation organized in 1978, is the seventh largest U.S. air carrier (based on 1995 revenue passenger miles ("RPMs") and available seat miles ("ASMs")), whose primary business is transporting passengers, cargo and mail. TWA's North American operations have a primarily domestic hub in St. Louis at Lambert International Airport ("St. Louis") and a domestic-international hub at New York's John F. Kennedy International Airport ("JFK"). TWA is the predominant carrier at St. Louis. Given its location in the center of the country, St. Louis is well-suited to function as an omni-directional hub for both north-south and east-west transcontinental traffic. TWA's international operations are concentrated at JFK, where TWA has a hub system designed to provide domestic feed traffic for its transatlantic service. JFK is the industry's largest international gateway from North America. The Company focuses its international operations on business markets that it believes can support non-stop service. RECENT DEVELOPMENT -- OFFERING OF 8% CUMULATIVE CONVERTIBLE EXCHANGEABLE PREFERRED STOCK In March 1996, the Company completed the sale of an aggregate of 3,869,000 shares of a newly authorized series of convertible preferred stock, the 8% Cumulative Convertible Exchangeable Preferred Stock (the "8% Preferred Stock"). The gross proceeds from the sale of the 8% Preferred Stock were approximately $193.5 million, and the net proceeds to the Company were approximately $186.2 million after commissions and expenses. A portion of the net proceeds of the offering will be used to redeem the Company's outstanding 12% Cumulative Preferred Stock (the "12% 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. The Company intends to use the balance of the net proceeds for general corporate purposes, including but not limited to capital expenditures and increasing working capital. The offering and sale of the 8% Preferred Stock was made pursuant to Rule 144A of the Securities Act of 1933 and, accordingly, such shares are not currently registered under federal and state securities laws. The Company has agreed to file a shelf registration statement in respect of the 8% Preferred Stock, the debentures issuable on the exchange thereof and the shares of common stock issuable upon the conversion thereof. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." BUSINESS STRATEGY -- STRATEGIC REPOSITIONING OF THE COMPANY Beginning with the hiring of the new management team in 1994, TWA has instituted a strategic repositioning of the Company designed to improve the Company's overall operating and financial performance. In addition to the financial restructuring, cost savings and operating efficiencies achieved as a result of a prepackaged Chapter 11 plan of reorganization filed by the Company on June 30, 1995 (the "'95 Reorganization"), the key ongoing elements of this strategy are: Route Structure The Company is endeavoring to optimize its route structure by redeploying its assets to markets where it believes it has a competitive advantage and to limit 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 71% of total 1995 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 3 connecting opportunities to many travelers in its key Midwestern markets than competing airlines. The Company has increased its number of daily departures at St. Louis from 229 in 1993 to 348 in 1995 and is projected to reach 358 in 1996. At the same time, the Company has eliminated domestic operations where the Company concluded it could not compete profitably. For example, in 1994 the Company closed its Atlanta hub due to continued poor results. Management estimates the Atlanta hub was generating approximately $3 million per month in operating losses. The Company has redeployed most of the former Atlanta based employees and equipment to St. Louis. Prior to November 1995, commuter feed service to JFK had been provided by Trans World Express, Inc., a wholly-owned subsidiary of TWA ("TWE"). TWA outsourced such service to Trans States Airlines, Inc. ("Trans States") after TWA's management determined that Trans States could provide such service on a more cost efficient basis and discontinued the operations of TWE. Management estimates that, as a result, TWA's operating results should be improved by approximately $1 million per month in 1996. TWE is currently being liquidated. Internationally, the Company's operations are concentrated at JFK, supplemented by certain routes from Boston and St. Louis. The Company's strategy is to reduce and streamline operations to focus on business markets that it believes can support non-stop service. As a result, during 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 plans to add seasonal capacity in key markets with strong leisure demand, such as JFK to Milan, Rome and Tel Aviv. 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. Customer Service; Travel Agent Commissions Over the past two 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 initiatives to build brand loyalty among existing customers and increase its market share of value-conscious business travelers and price-conscious leisure travelers. The 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 has converted its wide-body fleet of Boeing 747 and 767 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 2 4 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 Agents' 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 the Company maintaining and improving its long-term relationships with such travel agents. See "-- Operations -- Travel Agents' Commissions." Cooperative Labor Relationship Management believes TWA's cooperative relationship with its employees, including employees represented by trade unions, is a valuable asset and distinguishes the Company from many other major U.S. airlines. The Company's employees have demonstrated significant loyalty and commitment to TWA's future by agreeing to various wage and work rule concessions to improve productivity in connection with a Chapter 11 bankruptcy case filed by the Company on January 31, 1992 (the "'93 Reorganization") and the '95 Reorganization. As a result of these 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 the Air Line Pilots Association, International ("ALPA"), the International Association of Machinists and Aerospace Workers ("IAM"), and the Independent Federation of Flight Attendants ("IFFA"), who together constitute approximately 84% of TWA's total employees, to elect four of the Company's 15 directors. Union and non-union employees are also eligible under an employee stock incentive plan (the "ESIP") to increase their level of stock ownership through grants and purchases of additional shares over a five year period commencing in 1997. See "-- Employees." 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 enhancement of the Company's ability to provide high-quality air travel and customer service. 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. These include "Change Teams" which are designed to focus upon cost savings and revenue enhancing opportunities at a local level and are in place at every TWA domestic location. Change Teams are led by 10 full-time non-management advisors selected by union leadership, in the case of represented employees, and non-contract employee peers, in the case of unrepresented employees. Internationally, Change Teams are in the process of being formed. A second initiative, the Productivity Task Force, is designed to focus upon broader cost savings opportunities and is comprised of both labor and management members. These initiatives are supported by the Management/Labor Advisory Task Force, consisting of union leaders, the 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. Fleet Upgrade 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 which will result in a decrease in operating and maintenance costs. In addition, the Company plans to simplify its fleet by reducing the number of aircraft types to decrease crew training and aircraft maintenance costs, and to "right-size" the fleet to conform better to the requirements of TWA's route structure. 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. 3 5 During 1996 and 1997, the Company intends to replace its 15 remaining L-1011 aircraft (three-engine, three-pilot jets with an average age of approximately 21.5 years) with new, more efficient twin engine, two-pilot Boeing 757 aircraft. TWA recently announced (i) a firm commitment with a major operating lessor to lease 10 new Boeing 757s with deliveries in 1996 and 1997 and (ii) the firm purchase of an additional 10 new Boeing 757 aircraft with deliveries scheduled to commence in February 1997. The Company also acquired the right, subject to certain conditions, to purchase up to 20 additional new Boeing 757 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. Finally, the Company is continuing the process of outfitting its DC-9 fleet with "hush-kits" in order to bring such aircraft into compliance with Stage 3 requirements of the Noise Act. See "Regulatory Matters -- Noise Abatement." 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. When fully implemented later in 1996, 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. The Company is also implementing a "QIK-Res" system, a front-end reservations software program designed to increase productivity and decrease call handling time for its reservation agents. Other technology systems in which TWA has invested or will likely invest include field sales force automation, weather recovery, crew scheduling and revenue accounting. Cost and Efficiency Initiatives Management believes that achieving and maintaining a low cost structure is crucial to the Company's business strategy. Although the Company has significantly reduced its costs of operations over the last two years, management believes further cost reductions are both achievable and necessary to ensure the Company's long-term profitability. In 1995, TWA's airline operating cost per ASM was 8.28c, which the Company believes is below the average for the six largest U.S. carriers. 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 results. In addition, the Company is undertaking limited increases to seating density across TWA's aircraft fleet to bring its seating density closer to industry standards. This reconfiguration is intended, however, to retain more legroom in TWA's Comfort Class(R) ("Comfort Class") than comparable classes of service offered by TWA's major competitors. The Company has also increased to 11 the number of "banks" of flights operating into its St. Louis hub (including a night bank) to increase further the utilization of its aircraft. TWA is also evaluating installation of a new ticketless system and will be testing the proposed system in six city markets in the second quarter of 1996. In addition, TWA will continue to explore other opportunities to reduce costs and improve efficiency in the areas of aircraft maintenance, airport operations, purchasing, food service, cargo delivery operations and administrative functions. Management believes that successful implementation of its financial restructuring initiatives and strategic operational initiatives should position the Company to compete successfully in the highly competitive airline industry by becoming one of the lowest-cost operators among full-service domestic carriers. However, there can be no assurance that TWA will be successful in implementing all of these initiatives or that they will provide the desired benefits. Successful implementation of many of these initiatives may be affected by events and conditions outside management's control. 4 6 Management Changes On March 28, 1994, the Board of Directors elected Jeffrey H. Erickson to the post of President and Chief Operating Officer. Also on March 28, 1994, Mr. Erickson was appointed to TWA's Board of Directors pursuant to the Company's Certificate of Incorporation and By-laws, filling one of two then current vacancies. Mr. Erickson's employment and directorship commenced on April 5, 1994. In August 1994, Mr. Erickson was elected as Chief Executive Officer with Mr. Donald F. Craib, then Chief Executive Officer and Chairman of the Board of Directors, continuing as Chairman. The Board of Directors has completed the installation of a new senior management team with the election of Richard P. Magurno as Senior Vice President and General Counsel and Scott Gibson as Vice President -- Market Planning in May 1994, Mark J. Coleman as Senior Vice President -- Marketing in July 1994, Robert A. Peiser as Executive Vice President -- Finance and Chief Financial Officer in August 1994 and Don Monteath as Senior Vice President -- Operations in February 1995. At the regular meeting of the Board of Directors in September 1994, Jewel Lafontant-Mankarious and John C. Cahill were appointed as directors to fill the vacancies created by the earlier resignations of Messrs. Glenn R. Zander and Robert H. H. Wilson. Mr. Cahill's appointment was effective as of September 20, 1994 and the appointment of Ms. Lafontant-Mankarious was effective as of October 4, 1994. Mr. Craib resigned as Chairman of the Board and director on February 28, 1995 with Mr. Cahill being elected as Chairman effective that date. At the regular meeting of the Board of Directors on March 21, 1995, Thomas H. Jacobsen was appointed as director to fill the vacancy created by the earlier resignation of Mr. Craib. Due to the illness of Mr. Cahill, Thomas F. Meagher was authorized to assume the position of Chairman on October 24, 1995. The Company regrets reporting the death of Mr. Cahill on November 4, 1995. Mr. Meagher was elected Chairman on November 14, 1995. Victoria L. Frankovich resigned as a member of the Board of Directors effective January 1, 1996. At the regular meeting of the Board of Directors on January 23, 1996, William M. Hoffman was appointed as director to fill the vacancy created by the earlier resignation of Ms. Frankovich. At the regular meeting of the Board of Directors on March 19, 1996, John W. Bachmann was appointed as director, effective April 1, 1996, to fill the vacancy created by the death of Mr. Cahill. LINES OF BUSINESS -- INDUSTRY SEGMENTS See Note 19 to the Consolidated Financial Statements. OPERATIONS TWA's airline passenger business is its chief source of revenue. TWA also carries cargo (mail and freight) on its domestic and international systems. In addition, TWA provides contract maintenance services for a number of companies, principally airlines. Historically, TWA's airline operations have followed a seasonal pattern with the second and third quarters of the calendar year producing substantially better operating results than the first and fourth quarters. 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 35 states, the District of Columbia, Puerto Rico, Mexico, 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 1995, TWA's North American revenues accounted for approximately 79% of its total revenues. St. Louis. TWA is the predominant carrier at St. Louis, with approximately 350 scheduled daily departures serving 76 cities. In 1995, TWA had approximately a 71% share of airline passenger enplanements in St. Louis, while the next largest competitor enplaned approximately 15%. During 1995, TWA added service from its St. Louis hub to Jackson, Mississippi; Reno, Nevada; Memphis, Tennessee; Knoxville, Tennessee; Mexico City, Cancun, Puerto Vallarta and Ixtapa/Zihuatenejo, Mexico; and Montego Bay, Jamaica. In addition, the U.S. Department of Transportation (the "DOT") made a preliminary award to TWA of a St. 5 7 Louis-Toronto route on February 23, 1996. TWA intends to commence operations in this market by May 1, 1996. JFK. TWA serves 32 cities from its JFK hub, with approximately 54 daily departures. JFK, which is the 8th largest origination/destination hub in the United States, is both the Company's and the industry's largest international gateway from North America. The Company offers non-stop flights from JFK to 11 cities in Europe and the Middle East as well as 21 destinations in the U.S. and the Caribbean. During 1995, TWA added service from its JFK hub to Pittsburgh, Pennsylvania and Santo Domingo, Dominican Republic. Commuter Feed. TWA outsources to Trans States Airlines, Inc. ("Trans States") operation of its commuter feed into the Company's hubs at St. Louis and, as of November 1995, JFK. Trans States, an independently owned regional commuter carrier, currently operates approximately 166 daily flights into St. Louis and 47 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. The Company entered into an agreement with Trans States to provide JFK feeder service after announcing on September 5, 1995 that the operations of TWE would be discontinued on November 6, 1995. International Route Structure TWA's international operations consist of both nonstop and through service from JFK, Boston 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 cities served include Athens, Barcelona, Cairo, Frankfurt, Lisbon, Madrid, Milan, Riyadh, Rome and Tel Aviv from JFK; Paris from JFK, Boston and St. Louis; and London-Gatwick from St. Louis. In 1995, TWA's international revenues accounted for approximately 21% of total revenues. 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. 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. 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 6 8 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. Fuel Cost and Availability 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. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." The following table details TWA's fuel consumption and costs for the three years ended December 31, 1995, 1994 and 1993:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 ------ ------ ------ Gallons consumed (in millions)........................ 811.7 852.2 804.2 Total cost (1) (in millions).......................... $496.3 $477.6 $458.6 Average cost per gallon (cents)....................... $ 0.61 $ 0.56 $ 0.57 Percentage of operating expenses...................... 14.4% 13.0% 13.9% - --------------- (1) Excludes into-plane fees.
In August 1993, the United States increased taxes on fuel, including aircraft fuel, by 4.3c per gallon. Airlines were exempted from this tax increase until October 1995. Pending legislation in Congress would continue the exemption through September 30, 1997, subject to termination of the exemption on September 30, 1996 if excise taxes relating to certain aviation trust funds are not extended. These excise taxes expired on December 31, 1995 and had not, as of March 18, 1996, been extended. There can be no assurance that the continuation of the fuel tax exemption will be enacted, or of the terms under and the period for which the exemption will, if enacted, be effective. The additional fuel tax is currently being collected. The expiration of the exemption in October increased the Company's fourth quarter 1995 operating expenses by approximately $7 million. Based on TWA's 1995 fuel consumption levels, non-extension of the fuel tax exemption would increase the Company's future annual operating expenses by an estimated $28 million. Additional Capital Requirements For a discussion of certain additional capital requirements relevant to the Company's business, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources - -- Capital Resources." Travel Agents' 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 1995, 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 customary rate of 10% on all domestic fares. In February, 1995, following actions taken by other major carriers, the Company evaluated its travel agent commission structure, and instituted a cap of $50 and $25 per domestic round-trip and one-way tickets, respectively. This and similar actions by other major carriers resulted in litigation by travel agents against such carriers, including TWA. TWA subsequently settled with the travel agents and eliminated the cap. See "Item 3. Legal Proceedings." In the international market, TWA pays 11% on 7 9 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 More than 90% of all travel agencies in the U.S. obtain their airline travel information through access to computer reservation systems ("CRSs"). CRSs, which are typically owned and operated by airlines, are also used by travel agents to make airline, hotel and car reservations and to issue airline tickets. In February 1990, the Company, Delta Air Lines and Northwest Airlines ("Northwest") formed WORLDSPAN for the purpose of owning and operating the PARS CRS, formerly owned by the Company and Northwest, and the DATAS II CRS, formerly owned by Delta. In 1994, WORLDSPAN completed the process of combining the DATAS II CRS and PARS CRS systems into a single WORLDSPAN system using the PARS CRS software as the platform. Affiliates of TWA, Northwest, Delta and ABACUS Distributions Systems Pte Ltd., a Singapore-based CRS vendor owned by numerous Asian air carriers, own approximately 25%, 32%, 38% and 5% of WORLDSPAN respectively. WORLDSPAN is subject to CRS regulations promulgated by the DOT. Management believes that the distribution of its airline products through the WORLDSPAN CRS is a key factor to the success of the Company's future operations. TWA believes that its partial ownership of WORLDSPAN assures it of such distribution. WORLDSPAN also operates the internal reservations system used by both TWA and Northwest. 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 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 awards, compared with accumulated mileage credits for approximately 614,653 awards at December 31, 1994. Because TWA expects that some award certificates will never be redeemed, the calculations of the accrued liability for incremental costs at December 1995 and 1994 were based on approximately 70% and 67%, 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 $17.0 million at December 31, 1994. TWA's customers redeemed awards for free travel representing approximately 6.0%, 6.3% and 7.4% of TWA's RPMs in 1995, 1994 and 1993, respectively. 8 10 EMPLOYEES At December 31, 1995, the Company employed approximately 23,268 full-time employees. A majority of TWA's employees are represented by labor organizations according to the respective craft or class in which such employees work. ALPA, the IAM and IFFA are the three principal unions representing approximately 84% of the Company's employees. 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 previously granted to the Company pursuant to three-year concession agreements, which were effective September 1, 1992, between the Company and its unions (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. 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 has (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, while in the case of the IAM there is to be a 1% wage increase plus a 2% contribution to the IAM "B Plan."). 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 into wage increases. Similarly, the Company implemented comparable wage increases and productivity incentives to its non-union (including management) employees. On August 23, 1995 (the "'95 Effective Date"), TWA issued to certain trusts established for the benefit of its unionized employees shares of a special class of voting preferred stock (the "Employee Preferred Stock") with 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 Company's Common Stock, $.01 par value per share (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 non-union 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 Stock 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 9 11 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. 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, 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. 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, Chicago's O'Hare International Airport, New York's LaGuardia Airport 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 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 decreases TWA's ability to adjust its flight schedules at the High Density Airports. 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. For example, in September 1993, the U.S. and Germany signed an interim bilateral aviation agreement which in effect froze capacity in Germany for a period of four years. The U.S. and Germany recently announced agreement on a new, more liberal "open skies" bilateral aviation agreement. It is expected that the new agreement will come into effect during 1996 and lead to, among other things, additional competition on TWA's routes to Frankfurt. 10 12 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 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. 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. To comply with the 1996 requirement, the Company plans to retrofit, by means of engine hush-kits, 28 of its DC-9 aircraft. The aggregate cost of these hush-kits is estimated to approximate $49 million. The Company is exploring various financing options to fund the majority of such expenditure, including an extension of the current leases at increased rental rates to finance the expenditure. The Company will be required to reduce its specified base level of Stage 2 aircraft by at least 50% by December 31, 1996, 75% by December 31, 1998 and 100% by December 31, 1999. As of December 31, 1995, 87, approximately 46% of TWA's aircraft, 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. 11 13 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. Labor The Railway Labor Act (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. 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 five domestic unions representing five separate employee groups. Aging Aircraft Maintenance The FAA issued several Airworthiness Directives ("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 1994 and 1995, TWA spent approximately $5.7 million and $2.6 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 $15.6 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. 12 14 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 "Item 3. -- Legal Proceedings." 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. CORPORATE REORGANIZATIONS Background 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. Carl C. 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 TWA emerged from the '93 Reorganization. During the pendency of the '93 Reorganization, the Company (i) negotiated, effective September 1, 1992, the '92 Labor Agreements providing for, among other things, a 15% reduction in wages and benefits and certain work-rule concessions designed to reduce costs substantially, (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, Mr. Icahn and certain of his affiliates (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 also agreed to provide up to $200 million of financing to TWA secured by receivables and flight equipment in connection with the '93 Reorganization (the "Icahn Loans"). '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, during 1995 the Company proposed and consummated a financial restructuring in order to reduce or satisfy certain of the Company's then current and future financial obligations. In the second quarter of 1995, the Company solicited and received sufficient acceptances to effect a proposed "prepackaged" plan of bankruptcy. Therefore, on June 30, 1995, the Company filed the '95 Reorganization, which with certain modifications was confirmed by the United States Bankruptcy Court in St. Louis on August 4, 1995. On the '95 Effective Date, approximately eight weeks after filing the prepackaged 13 15 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. Pursuant to the '95 Reorganization, the Company, among other things, eliminated additional debt approximating $500 million (approximately $300 million book value). New labor agreements were reached in the second half of 1994, providing for the continuance of wage concessions previously granted and work rule modifications with respect to the Company's union employees, and certain corresponding cost savings were also implemented with respect to the Company's non-union employees. Pursuant to the '95 Reorganization, the Company issued the Employee Preferred Stock to its union employees and Common Stock to its non-union employees, which resulted in the union and non-union employees achieving an ownership of approximately 30% of the voting equity of the Company as of the '95 Effective Date. 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 representing 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." 14 16 FLIGHT EQUIPMENT As of December 31, 1995, TWA's operating fleet consisted of 188 aircraft, of which 49 were owned by TWA and 139 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, 1995 are listed below.
AVERAGE AGE SEATS IN OF AIRCRAFT STANDARD TWA TYPE OWNED(2) LEASED TOTAL(3) (IN YEARS) CONFIGURATION - ------------------------------ -------- ------ -------- ----------- ------------ Douglas DC-9-10............... -- 7 7 29.0 68 Douglas DC-9-30............... -- 36 36 26.0 98 Douglas DC-9-40............... -- 3 3 21.2 98 Douglas DC-9-50............... -- 12 12 18.9 107 Douglas MD-80/83.............. -- 48 48 8.5 142 Boeing 727-200(1)............. 28 13 41 21.9 146 Boeing 747 (1)................ 6 5 11 24.0 434 Boeing 767.................... 5 10 15 10.9 195 Lockheed L-1011............... 10 5 15 21.5 254 --- ------ --- ----- Total.................... 49 139 188 18.6 ========= ====== ======== =========== - --------------- (1) Excludes the following aircraft which are not in the active fleet: eight Boeing 727-100, two Boeing 727-200, one Boeing 747-100 and one Boeing 747-200. (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. Business. Regulatory Matters -- Noise Abatement."
Beginning in 1996, the Company intends to replace its remaining fifteen L-1011 aircraft with newer and more efficient Boeing 757. In February 1996, TWA executed definitive agreements providing for the lease of up to 10 new Boeing 757 aircraft from a major operating lessor to be delivered in 1996 and 1997 and the purchase of 10 new Boeing 757 aircraft from the manufacturer with deliveries scheduled to commence in February 1997. The Company also acquired the right, subject to certain conditions, to purchase up to 20 additional Boeing 757 aircraft from the manufacturer. In addition to leasing three new MD-83 aircraft in the late summer and fall of 1995 for initial nine year lease terms, the Company has agreed to lease two additional used MD-83 aircraft also for nine year terms, with leases expected to commence in April 1996. Aggregate annual rentals for these five aircraft will approximate $14 million. 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 A and B). 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 A and Terminal B 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 15 17 TWA's right to occupy Terminals A and B, provided TWA paid the rent set forth in the Term Sheet, made certain specified financed improvements to Terminals A and B, 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 A and B for a term expiring on March 31, 2001. 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 -- Other Actions." 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, 1997. Additionally, during 1994, TWA relocated its St. Louis area reservation facility and customer relations department within the City of St. Louis, Missouri. ITEM 3. LEGAL PROCEEDINGS REORGANIZATION PROCEEDINGS The '93 Reorganization The '93 Reorganization began on January 31, 1992, with the filing by TWA in the United States Bankruptcy Court in Delaware of a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. On August 12, 1993, the bankruptcy court confirmed the Company's '93 Reorganization plan, which became effective on November 3, 1993. On June 21, 1995, the bankruptcy court found that the bankruptcy estate had been fully administered and entered a final decree closing the '93 Reorganization. All claims that were before the bankruptcy court in the '93 Reorganization have been resolved, except for certain claims which are being resolved in non-bankruptcy forums. Some such claims, when resolved, may result in distributions being made, in the case of administrative expense claims, in cash, and in the case of all other claims, in securities and other property held in a disputed claims reserve established in accordance with the '93 Reorganization plan. All such unresolved claims which do not constitute administrative claims, if and to the extent allowed upon final resolution, will be satisfied solely out of securities and other property in the applicable disputed claims reserve. The unresolved claims which constitute administrative expense claims are for postpetition expenses for, among other things, aircraft return condition, unpaid rent and professional fees. TWA has accrued amounts it believes will be adequate to satisfy such claims. The '95 Reorganization On June 30, 1995, the Company commenced the '95 Reorganization by filing a voluntary petition for Chapter 11 relief, together with its '95 Reorganization plan, in the bankruptcy court. As the Company had "prepackaged" the '95 Reorganization by soliciting and obtaining, before the filing of the petition, the acceptances of all classes of creditors and equity security holders necessary to achieve confirmation of the '95 Reorganization plan, the Company was able to proceed promptly to obtain, on August 4, 1995, the entry of an order by the bankruptcy court approving the Company's solicitation process, and the adequacy of disclosure 16 18 for the '95 Reorganization plan, as modified, and confirming the '95 Reorganization plan, as modified. On August 23, 1995 the '95 Reorganization plan became effective, and the Company emerged from the protection of the bankruptcy court. On December 28, 1995, the Bankruptcy Court in St. Louis found that the bankruptcy estate had been fully administered and entered a final decree closing the '95 Bankruptcy case. Pursuant to the '95 Reorganization and related agreements, the Company eliminated approximately $500 million (approximately $300 million book amount) of indebtedness and lease obligations and canceled outstanding equity securities in exchange for new securities and other consideration, and on the '95 Effective Date issued (i) approximately 17.2 million shares of Common Stock, (ii) approximately 6.4 million shares of Employee Preferred Stock, (iii) equity rights for the purchase of approximately 13.2 million shares of Common Stock, (iv) warrants for the purchase of approximately 1.7 million shares of Common Stock (exercisable over a seven year period at $14.40 per share), (v) warrants for the purchase of up to 1.15 million shares of Common Stock for nominal consideration, (vi) $170 million in principal amount of the Company's 12% Senior Secured Reset Notes due 1997, (vii) $244.3 million in principal amount of PBGC Notes, (viii) $109 million aggregate liquidation value of 12% Preferred Stock, (ix) $30 million in Ticket Vouchers, and (x) certain contingent payment rights, which under certain conditions provide for the payment of up to $18 million to holders. The number of shares of Common Stock issued pursuant to the '95 Reorganization were calculated as though a one-for-46.8722 reverse split of the Company's common stock outstanding prior to the '95 Effective Date had been effected. Pursuant to the '95 Reorganization, the Company also adopted an amendment to the Certificate of Incorporation to (i) increase the Company's total authorized capital stock to 300 million shares, consisting of 150 million shares of Common Stock, 12,500,000 shares of the Company's cumulative preferred stock (which was retired in connection with the '95 Reorganization) and 137,500,000 shares of additional preferred stock; (ii) authorize the issuance of the Employee Preferred Stock and the 12% Preferred Stock; and (iii) implement various corporate governance matters. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters -- Outstanding Shares and Voting Rights." OTHER ACTIONS On March 22, 1993, the United States District Court for the Northern District of Georgia, Atlanta Division entered into a settlement involving TWA and eight other major airline defendants and the Airline Tariff Publishing Company, an airline-owned fare publishing company, ("ATPC") in a class action lawsuit filed in June 1990 which alleged that the airlines used ATPC to avoid competition to, from or through some 23 specified hub airports. Under the terms of the settlement the airline defendants paid approximately $45 million in cash and issued approximately $396.5 million in discount coupons valid for air travel on any of the defendant airlines. TWA's share of the settlement included the payment of $1 million in cash and the issuance of discount coupons in the amount of $20 million for future travel. The discount coupons issued by TWA and the other settling defendants are interchangeable. While TWA presently does not have any reason to expect that the face amount of the discount coupons that will be redeemed for future travel on TWA will not reasonably approximate the face amount of discount coupons TWA will contribute 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. 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 take several months. 17 19 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 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. 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. However, a final order has not yet been issued and Travellers has appealed the decision of the bankruptcy court in the matter. 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. ValuJet has subsequently amended its original complaint and all parties are undertaking legal discovery with respect to the amended complaint. The Company intends to vigorously defend itself in this action and believes all of the allegations contained therein lack merit. In addition, based on certain written grievances or complaints filed by ValuJet, the Company has been informed that the United States Department of Justice, Antitrust Division is investigating the circumstances of the slot lease transaction to determine whether an antitrust violation has occurred. The Company is cooperating in this investigation and believes that the slot lease transaction did not violate any antitrust laws. On January 10, 1996, a complaint was filed by an individual resident of New York, Joel Gerber, relating to the slot lease transaction (the "New York Action"). Mr. Gerber purports to bring the action on his own behalf as well as on behalf of an unspecified number of purported class members who have traveled or will travel between LaGuardia and Atlanta as of November 1, 1995 claiming damages as the result of alleged antitrust violations and conspiracy to commit same against the Company and Delta. The United States District Court for the Southern District of New York has not certified the New York Action as a class action. The Company will vigorously contest all of the class action allegations as well as all allegations of liability and damages in the New York Action. 18 20 In December 1995, the Company filed a lawsuit in the Circuit Court of St. Louis County, Missouri against Karabu, Mr. Icahn and affiliated companies seeking damages and to enjoin further violations with regard to the Ticket Agreement as referred to in "Item 1. Business -- '95 Reorganization." The parties negotiated a series of standstill agreements pursuant to which the Company's lawsuit was withdrawn, while the Company and Mr. Icahn endeavored to negotiate a settlement of their differences and respective claims. The last extension of such standstill expired on March 20, 1996. On March 20, 1996 the Company reinstated its lawsuit against Karabu, Mr. Icahn and affiliated companies, charging violation of the Ticket Agreement. TWA seeks a declaratory judgment that Mr. Icahn and his affiliates are in default of the Ticket Agreement and also seeks unspecified damages as a result of the unauthorized distribution of TWA tickets through travel agencies to the general public. 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. This is an action brought for damages in the United States District Court for the Southern District of New York. The Company believes it has meritorious defenses to the claims made in this action. 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 The Annual Meeting of Stockholders of Trans World Airlines, Inc. was held on November 14, 1995. The following matters were considered and acted upon at the Annual Meeting: 1. Election of five Class II Directors of the Company for terms ending with the 1998 Annual Meeting of Stockholders; 2. Approval of the Company's 1994 Key Employee Stock Incentive Plan (the "KESIP"); 3. Approval of amendments to and restatement of the Company's Amended and Restated Certificate of Incorporation; 4. Approval of the Company's 1995 Outside Directors' Stock Ownership and Stock Option Plan (the "Directors' Plan"); and 5. Ratification of the appointment of KPMG Peat Marwick LLP as independent accountants for the fiscal year ending December 31, 1995. Proxies were solicited concerning the above matters and the following information is furnished with regard to each: 1. Election of Directors The following individuals were elected as Directors at the Annual Meeting: William F. Compton, Victoria L. Frankovich, Gerald L. Gitner, Myron Kaplan and William O'Driscoll. The votes cast in the election of the above-named Directors were as follows:
FOR WITHHELD ---------- -------- William F. Compton.............................................. 1,721,765 -0- Victoria L. Frankovich.......................................... 881,880 -0- Gerald L. Gitner................................................ 25,441,624 304,206 Myron Kaplan.................................................... 25,452,937 292,893 William O'Driscoll.............................................. 3,821,473 -0-
19 21 In addition, the following individuals' terms of office as Directors of TWA continued after such meeting: Eugene P. Conese, Jeffrey H. Erickson, Thomas H. Jacobsen, Jewel Lafontant-Mankarious, James A. Lawrence, Thomas F. Meagher, G. Joseph Reddington, Lawrence K. Roos, and William W. Winpisinger. 2. The votes cast with regard to approval of the Company's KESIP were as follows:
FOR AGAINST ABSTAIN ---------- --------- ------- 18,587,990 2,130,919 142,037
3. The votes cast with regard to approval of amendments to and restatement of the Company's Amended and Restated Certificate of Incorporation were as follows:
FOR AGAINST ABSTAIN ---------- --------- ------- 31,228,004 820,919 120,246
4. The votes cast with regard to approval of the Directors' Plan were as follows:
FOR AGAINST ABSTAIN ---------- --------- ------- 19,351,612 1,334,498 174,860
5. The votes cast with regard to approval of ratification of the appointment of KPMG Peat Marwick LLP, as independent accountants for the fiscal year ending December 31, 1995 were as follows:
FOR AGAINST ABSTAIN ---------- --------- ------- 31,888,780 197,687 84,481
20 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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 (January 1 through March 22)................. 19.750 9.313
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. See Notes 7 and 9 to the Consolidated Financial Statements. As of March 22, 1996, there were 36,942,695 shares of the Company's Common stock issued and outstanding and 11,488 holders of record of the Common Stock. There were, on such date 6,425,118 shares of Employee Preferred Stock issued and outstanding. ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below relates to periods in the five year period ended December 31, 1995. 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 these periods was derived from the audited consolidated financial statements of the Company. 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 Entries 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 17 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 21 23 to the '93 Reorganization. Accordingly, a vertical black line separates these periods. Earnings per share of the predecessor companies have not been presented as the amounts are not meaningful.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REORGANIZED PRIOR PREDECESSOR COMPANY PREDECESSOR COMPANY COMPANY -------------------------------------------- --------------------------------------------- ------------ TEN MONTHS TWO MONTHS YEAR EIGHT MONTHS FOUR MONTHS YEAR ENDED DECEMBER 31, ENDED ENDED ENDED ENDED ENDED ---------------------------- OCTOBER 31, DECEMBER 31, DECEMBER 31, AUGUST 31, DECEMBER 31, 1991 1992 1993 1993 1994 1995 1995 ------------ ------------ ------------ ------------ ------------ ------------- ------------ STATEMENT OF OPERATIONS DATA: Operating revenues........ $3,651,380 $3,618,661 $2,633,937 $ 520,821 $3,407,702 $ 2,218,355 $1,098,474 Operating income (loss)(1)....... (362,090) (420,432) (225,729) (58,251) (279,494) 14,642 10,446 Loss before income taxes and extraordinary items(2)........ (513) (314,292) (362,620) (88,140) (432,869) (338,309) (32,268) Provision (credit) for income taxes........... 10,259 3,361 1,312 (248) 960 (96) 1,370 Loss before extraordinary items........... (10,772) (317,653) (363,932) (87,892) (433,829) (338,213) (33,638) Extraordinary items(3)........ 45,323 -- 1,075,581 -- (2,005) 140,898 3,500 Net income (loss).......... 34,551 (317,653) 711,649 (87,892) (435,834) (197,315) (30,138) Per share amounts(4): Loss before extraordinary items....... $ (1.15) Net loss...... (1.05) Ratio of earnings to fixed charges(5)...... -- -- -- -- -- -- --
REORGANIZED PRIOR PREDECESSOR COMPANY PREDECESSOR COMPANY COMPANY ---------------------------- ---------------------------- ------------ DECEMBER 31, ---------------------------------------------------------------------------- 1991 1992 1993 1994 1995 ------------ ------------ ------------ ------------ ------------ SELECTED BALANCE SHEET DATA: Cash and cash equivalents........................ $ 234,305 $ 42,389 $ 170,404 $ 121,306 $ 286,793 Current assets................................... 914,192 576,511 689,149 567,540 710,976 Net working capital (deficiency)................. (1,629,612) (316,165) (150,744) (1,279,457) (111,570) Flight equipment, net............................ 1,100,601 827,747 660,797 508,625 455,434 Total property and equipment, net................ 1,444,829 1,114,345 886,116 693,045 600,066 Intangible assets, net........................... -- -- 1,024,846 921,659 1,275,995 Total assets..................................... 2,682,964 2,132,647 2,941,549 2,495,210 2,850,664 Current maturities of long-term debt and capital leases (6)..................................... 1,446,523 327,251 108,345 1,149,739 110,401 Liabilities subject to Chapter 11 reorganization proceedings (7)................................ -- 2,026,895 -- -- -- Long-term debt, less current maturities (6)...... -- -- 1,053,644 -- 764,031 Long-term obligations under capital leases, less current maturities............................. 692,292 -- 376,646 339,895 259,630 Shareholders' equity (deficiency)(8)............. (797,899) (1,149,733) 18,358 (417,476) 302,855 - --------------- (1) Includes special charges of $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 Notes 14 and 18 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 and 1991 results include non-recurring gains of $254.6 million and $681.7 million, respectively, from the disposition of assets. (3) 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
22 24 discharge of indebtedness pursuant to the consummation of the '93 Reorganization. The extraordinary items in 1991 include a net gain of $27.9 million resulting from the early extinguishment of debt and a tax benefit of $17.4 million from the utilization of a portion of the Company's net operating loss carry forward for financial reporting purposes. (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) For purposes of determining the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes, extraordinary items and fixed charges (excluding capitalized interest) and "fixed charges" consist of interest (including capitalized interest) on all debt and that portion of rental expense that management believes to be representative of interest. Earnings were not sufficient to cover "fixed charges" as follows (in millions): for the four months ended December 31, 1995, $32.3; for the eight months ended August 31, 1995, $338.3; for the year ended December 31, 1994, $435.0; for the two months ended December 31, 1993, $88.4; for the ten months ended October 31, 1994, $364.7; and for the years ended December 31, 1992 and 1991, $317.4 and $4.0, respectively. (6) Long-term debt in 1994 was reclassified to current maturities as a result of certain alleged defaults and payment defaults. See Note 7 to the Consolidated Financial Statements. (7) 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. (8) 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 17 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 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 and the Company's current business strategy, the Company has 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 dominance 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 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. In March 1996 the Company completed the sale of 3,869,000 shares of a newly authorized series of convertible preferred stock, the 8% Cumulative Convertible Exchangeable Preferred Stock (the "8% Preferred Stock"). The gross proceeds from the sale of the 8% Preferred Stock were approximately $193.5 million and the net proceeds to the Company were approximately $186.2 million, after commissions and expenses. A portion of the net proceeds from the offering will be used to redeem the Company's outstanding 12% 23 25 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 such redemption date. On March 22, 1996, the Company announced that it had called all of its issued and outstanding 12% Cumulative Redeemable Preferred Stock for redemption on April 26, 1996. The Company intends to use the balance of the net proceeds for general corporate purposes, including but not limited to, capital expenditures and increasing working capital. 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 on March 15, 1998 at the rate of $50.00 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 and certain other conditions are met. The offering and sale of the 8% Preferred Stock was made pursuant to Rule 144A of the Securities Act of 1933 and, accordingly, such shares are not currently registered under federal and state securities laws. The Company has agreed to file a shelf registration statement in respect of the 8% Preferred Stock, the Debentures issuable on the exchange thereof and the shares of Common Stock issuable upon the conversion thereof. GENERAL The Company's operating results are significantly affected by both the general and the airline industry economic environment. Small fluctuations in yield per RPM and cost per ASM can have a significant impact on the Company's financial results. During the early 1990s, the Company experienced significant losses, with operating losses totaling $284.0 million in 1993 and $279.5 million in 1994. Factors contributing to these losses included, among other things, adverse publicity associated with the Company's financial difficulties; excessive labor costs; the continuing impact of a relatively weak economy, which resulted in weak air travel demand; and domestic pricing policies of other airlines, which decreased industry revenue yields and generated intense competition. The Company's 1995 operating results for the combined eight and four month periods prior to and following the '95 Effective Date demonstrate a significant improvement over 1994. Operating income for 1995 improved $304.6 million to $25.1 million, the Company's first annual operating profit since 1989. The Company's net loss showed similarly dramatic results, improving $208.4 million to a $227.5 million loss for 1995 (including net charges of $155.8 million related to the '95 Reorganization). The operating income and net results for 1995 and 1994 include a number of significant non-recurring and unusual items. Operating income included non-cash earned stock compensation charges of $58.0 million in 1995, a non-recurring charge to compensation in 1994 of $36.3 million, and other special charges of $1.7 million and $138.8 million in 1995 and 1994, respectively. Excluding these items, operating income would have improved approximately $189.2 million in 1995 over 1994. Additionally, net income in 1995 was further affected by charges for reorganization items of $242.2 million and extraordinary gains of $144.4 million from the extinguishment of debt, principally as a result of the '95 Reorganization, as compared to an extraordinary loss of $2.0 million in 1994. Excluding these additional items, net income would have improved by $188.8 million over 1994. Operating revenues were $90.9 million lower in 1995 than in 1994, principally as a result of the sale of certain subsidiaries in the prior year, which also favorably affected operating expense comparisons. Employment costs (excluding earned stock compensation) were $164.8 million less in 1995 than in 1994, which included a non-recurring charge of $36.3 million. The reduction was principally the result of savings realized from the '94 Labor Agreements and certain similar agreements with the Company's non-union employees. 24 26 The Company's ability to continue to improve its financial position and meet its financial obligations will depend upon a variety of factors, including: improved operating results, favorable domestic and international airfare pricing environments, absence of adverse general economic conditions, continued operating cost controls, and the Company's ability to attract new capital. The '94 Labor Agreements, which substantially reduced the Company's labor costs, will become amendable in the latter half of 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-Strategic Repositioning of the Company." The Company will seek to continue to improve employee productivity and will continue to explore other ways to control and/or reduce operating expenses. Additionally, the Company will seek to continue improving its market share as compared with its competitors by continuing to modify its flight schedule and route structure and by continuing to increase customer preference based on TWA's improved product quality. At December 31, 1995, the Company had shareholders' equity of approximately $302.9 million and debt, obligations under capital leases and redeemable preferred stock aggregating approximately $1.2 billion. Like its principal competitors, TWA typically operates with a working capital deficit, which in the case of TWA aggregated $111.6 million at December 31, 1995. On December 31, 1995, the Company had cash and cash equivalents of approximately $286.8 million. However, due to, among other things, the seasonality of its business, payments on its indebtedness and capital expenditures (including payments for hush-kits prior to reimbursement through financing anticipated but not yet consummated) and pre-delivery payments relating to the purchase of certain new Boeing 757 aircraft, the Company anticipates that by March 31, 1996, excluding the net proceeds from the sale of the 8% Preferred Stock received on March 22, 1996, its cash balance would have been reduced to a level significantly below that reported on December 31, 1995. 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). 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. The Company's first quarter operating results have historically been considerably less favorable than for other quarters and typically reflect substantial operating and net losses. For example, for the first quarter of 1995, the Company reported an operating loss of $76.3 million and a net loss of $122.8 million. The Company realized significant improvements in operating income in each of the last two quarters of 1995, and in the first quarter of 1996 anticipates a smaller operating loss than 1995's first quarter operating loss. During the first quarter of 1996, however, the Company is incurring higher maintenance and training expenses due in part to a concentration of maintenance work in such quarter as a result of the Company's maintenance cycle and also to prepare for the introduction of additional aircraft into service during the summer of 1996. In addition, the Company has experienced significant revenue reductions and additional costs as a result of the recent severe winter weather experienced in the Midwest and on the Eastern Seaboard. Consequently, the Company does not expect the improvement in operating results to be as significant for the first quarter of 1996 as has been achieved during the past two quarters. The Company expects to report substantial operating and net losses for the first quarter of 1996. There are a number of uncertainties relating to agreements with employees, the resolution of which could result in non-cash charges to future operating results of the Company. 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 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 $60 million based upon such target prices and the number of shares of Common Stock and Employee Preferred Stock outstanding at December 31, 1995. 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, 25 27 $12.10, $13.31, $14.64, $16.11 and $17.72 for the years 1997 to 2002). Additionally, the allocation of approximately 1.1 million shares of Employee Preferred Stock issued to a trust for employees represented by ALPA pursuant to the '95 Reorganization will, when allocated to individual employees so represented, result in a charge equal to the fair market value of the shares on the dates allocated. Finally, the IAM has indicated that it does not agree with the Company's method of computing certain amounts owed to IAM represented employees relating to overtime "bonus" claims under the '92 Labor Agreements (as defined herein). The Company estimates its obligation to be approximately $26.3 million and the IAM has, while not specifying an amount, indicated they believe the amount owed is significantly greater. See Notes 11 and 14 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. While numerous uncertainties concerning the level of revenues and expenses always exist, the nature of such uncertainties is constantly changing, and it is not possible to predict the potential impact of any of such uncertainties upon TWA's income from operations. Among the uncertainties that might adversely impact TWA's future earnings are: (i) competitive pricing initiatives; (ii) competitive flights added by competing airlines; (iii) changes in the cost of fuel; (iv) reduced levels of air passenger traffic resulting from war, threat of war, international terrorism and changes in the economy; (v) limitations on the ability of TWA to service certain airports as a result of certain noise abatement practices or regulations imposed on carriers operating at such airports; (vi) current and future regulatory requirements requiring additional capital expenditures with respect to, among other things, noise abatement; and (vii) the possible effect on the Company's yields of a discount ticket program entered into by the Company with an affiliate of Mr. Icahn in connection with the '95 Reorganization, referred to in "-- Liquidity and Capital Resources -- Liquidity." The airline industry is both cyclical and seasonal in nature. The demand for air transportation is closely related to general U.S. and worldwide economic conditions. 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. TWA believes that the Company's operating results were further impacted by the adverse publicity surrounding its financial condition and bankruptcy proceedings, in particular by the loss of higher-yield business traffic. Furthermore, the substantial increase in transatlantic service provided by other major U.S. carriers has resulted in a more competitive environment over many of the Company's international routes. 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 September 1993, the U.S. and Germany signed an interim bilateral aviation agreement which in effect freezes capacity in Germany for a period of four years. On February 29, 1996, the U.S. and Germany announced agreement on a new, more liberal "open skies" bilateral aviation agreement. It is expected that the new agreement will come into effect during 1996. It is anticipated that this agreement may lead to additional competition on TWA's routes to Frankfurt. TWA's operating strategy contemplates a capacity increase in 1996 of approximately 7% as measured by total ASMs, through, among other things, the acquisition of four additional used Boeing 747s, 12 additional MD-80s/83s and three new Boeing 757s, an increase in seating density across TWA's fleet and more efficient use of existing equipment. This capacity increase is measured net of the capacity decrease resulting from aircraft retirements. 26 28 TWA's passenger traffic data, for scheduled passengers only and excluding TWE, are shown in the table below for the indicated periods(1):
1993 1994 1995 ------- ------- ------- NORTH AMERICA Passenger revenues ($ millions)............................... $ 1,996 $ 2,221 $ 2,292 Revenue passenger miles (millions)(2)......................... 15,623 17,543 17,902 Available seat miles (millions)(3)............................ 25,044 27,963 28,194 Passenger load factor (4)..................................... 62.4% 62.7% 63.5% Passenger yield (cents)(5).................................... 12.78c 12.66c 12.80c Passenger revenue per available seat mile (cents)(6).......... 7.97c 7.94c 8.13c INTERNATIONAL Passenger revenues ($ millions)............................... $ 575 $ 597 $ 544 Revenue passenger miles (millions)(2)......................... 7,041 7,363 7,000 Available seat miles (millions)(3)............................ 10,634 11,228 9,719 Passenger load factor(4)...................................... 66.2% 65.6% 72.1% Passenger yield (cents)(5).................................... 8.17c 8.10c 7.78c Passenger revenue per available seat mile (cents)(6).......... 5.41c 5.31c 5.60c TOTAL SYSTEM Passenger revenues ($ millions)............................... $ 2,571 $ 2,818 $ 2,836 Revenue passenger miles (millions)(2)......................... 22,664 24,906 24,902 Available seat miles (millions)(3)............................ 35,678 39,191 37,905 Passenger load factor(4)...................................... 63.5% 63.5% 65.7% Passenger yield (cents)(5).................................... 11.35c 11.31c 11.39c Passenger revenue per available seat mile (cents)(6).......... 7.21c 7.19c 7.48c Operating cost per available seat mile (cents)(7)............. 9.08c 8.45c 8.28c Average daily utilization per aircraft (hours)(8)............. 9.23 9.30 9.45 Aircraft in fleet being operated at end of period............. 186 185 188 - --------------- (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 available seat miles. (7) Operating expenses, excluding special charges, earned stock compensation and other nonrecurring charges, divided by available seat miles. (8) The average block hours flown per day in revenue service per aircraft.
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. 27 29 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 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 10 and 11 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 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. 28 30 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 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 also Note 15 to Consolidated Financial Statements. In future periods, the amortization or 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 4 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. RESULTS OF OPERATIONS FOR 1994 COMPARED TO THE TWO MONTHS ENDED DECEMBER 31, 1993 AND TEN MONTHS ENDED OCTOBER 31, 1993 Total operating revenues of $3,407.7 million were $253.0 million greater than the combined total operating revenues of $520.8 million and $2,633.9 million for the two months ended December 31, 1993 and the ten months ended October 31, 1993, respectively. The increase was primarily reflected in TWA passenger revenues which were $246.4 million higher than in 1993, while revenue from Getaway Vacations increased $14.2 million, revenue from freight and mail increased $14.3 million and revenue from contract work decreased $15.5 million. Capacity and traffic were significantly higher in 1994 than in 1993 as TWA continued to rebuild capacity following the implementation of cost-saving measures in the fourth quarter of 1992 intended to streamline operations, including flight schedule reductions. System-wide capacity, measured in ASMs, increased by 9.9% as compared to 1993 (representing increases in domestic and international ASMs of 11.7% and 5.6% respectively). Passenger traffic volume carried by TWA in scheduled air transportation during 1994 increased 9.9% as compared to 1993 (representing increases in domestic and international RPMs of 12.3% and 4.6%, respectively). TWA's yield per passenger mile for 1994 decreased to 11.31 cents from 11.35 cents in 1993 (reflecting a domestic decrease to 12.66 cents from 12.78 cents and an international decrease to 8.10 cents from 8.17 cents). 29 31 Operating expenses of $3,687.2 million in 1994 reflect an increase of $248.5 million (7.2%) over the combined operating expenses of $579.1 million and $2,859.7 million for the two months ended December 31, 1993 and the ten months ended October 31, 1993, respectively, representing a net change in the following expense groups. After excluding the $36.3 million contractual benefit accrual recorded in 1994, employment costs decreased $9.8 million from the combined employment costs recorded for the two months ended December 31, 1993 and the ten months ended October 31, 1993 of $219.0 million and $1,048.0 million, respectively, primarily due to a decrease in the number of employees on the payroll. The decrease in employees to 22,771 in December 1994 from 26,073 in December 1993 was not fully reflected in the 1994 costs since reductions generally took place late in the year. Aircraft fuel and oil expense decreased $18.7 million to $477.6 million in 1994 from a combined expense of $79.6 million for the two months ended December 31, 1993 and $416.7 million for the ten months ended October 31, 1993. The combined effect of increased fuel usage (5.0%) and a decrease in unit price (8.4%) resulted in a decrease of 3.8% in fuel cost for 1994. The average unit price of fuel was $0.56 per gallon in 1994 compared to $0.61 in 1993. Passenger sales commission expense of $288.0 million in 1994 was $27.9 million greater than the combined commission expense of $41.6 million in the two months ended December 31, 1993 and $218.5 million in the ten months ended October 31, 1993, respectively. Approximately $10.5 million of the increase can be attributed to an adjustment in the second quarter of 1993 to reduce previously established accruals for incentive commissions which TWA estimated would not be paid. The remaining increase is principally due to the increase in passenger revenue and commissionable sales. Aircraft maintenance materials and repairs expense increased $8.5 million to $145.3 million in 1994 from $25.6 million and $111.2 million for the two-month and ten-month periods of 1993, respectively. The increase for 1994 is primarily attributable to adjustments in 1993 for certain excess and repairable parts inventory which had previously been expended which were reestablished with a corresponding reduction to maintenance expense of approximately $24 million in 1993. Depreciation and amortization increased $16.7 million to $183.3 million in 1994 over the combined $30.2 million for the two months ended December 31, 1993 and the $136.4 million for the ten months ended October 31, 1993. The increase is attributable to the amortization of intangible assets established in fresh start accounting on the '93 Effective Date, aggregating approximately $42.5 million in 1994 and $7.2 million in the two months ended December 31, 1993, offset primarily by reduced depreciation and amortization of property and equipment arising from asset sales and reductions in the cost basis of various assets in fresh start accounting. Operating lease rentals increased $51.3 million to $261.4 million in 1994 versus $36.6 million for the last two months of 1993 and $173.5 million for the first ten months of 1993. Seventeen new aircraft were leased in 1994 while nine Boeing 727s and four L-1011s were returned to lessors. Passenger food and beverage expense increased $3.8 million in 1994 to $120.8 million from $18.7 million and $98.3 million for the two months ended December 31, 1993 and the ten months ended October 31, 1993, respectively. The 10% increase in traffic carried, partially offset by reduction in meal service offered, were the primary factors behind this net increase. All other operating expenses, excluding special charges, decreased $6.4 million in 1994 to $778.4 million from $127.8 million for the two months ended December 31, 1993 and $657.0 million for the ten months ended October 31, 1993. Special charges totaled $138.8 million in 1994. See Note 14 of the Notes to Consolidated Financial Statements. Other charges (credits) were a net charge of $153.4 million in 1994, a $13.4 million decrease over the combined charge of $29.9 million for the last two months of 1993 and a net charge of $136.9 million for the first ten months of 1993. This net favorable change of $13.4 million was the result of several items, including: (i) a nonoperating charge in 1993 of approximately $342.4 million reflecting the settlement of TWA's 30 32 obligation under certain former TWA pension plans pursuant to the consummation of a settlement agreement among the Company, its principal labor unions, Mr. Icahn, the PBGC and other parties in connection with the '93 Reorganization; (ii) an unfavorable net change of $268.1 million from 1993 primarily due to fresh start reporting adopted upon the effectiveness of the '93 Reorganization; (iii) an unfavorable change in interest expense of $72.3 million, which reflects the interest costs for debt securities issued pursuant to the '93 Reorganization and the suspension of interest accruals on prepetition unsecured or undersecured debt in the ten months ended October 31, 1993; and (iv) a favorable net change of $11.4 million in all other charges and credits-net. The extraordinary loss of $2.0 million recorded in 1994 was the result of a prepayment premium on the retirement of debt related to the sale and leaseback of four MD-80 aircraft on March 31, 1994. The extraordinary gain recorded in the ten months ended October 31, 1993 included $172.9 million from the cancellation in January 1993 of TWA debt securities held by certain Icahn Entities pursuant to a settlement agreement among the Company, its principal labor unions, Mr. Icahn, the PBGC and other parties in connection with the '93 Reorganization and $902.6 million from the discharge of indebtedness pursuant to the consummation of the '93 Reorganization. As a result of the above, the operating loss of $279.5 million for 1994 was $4.5 million less than the operating loss for the combined periods of 1993. The net loss for 1994 was $435.8 million, as compared to net income of $623.8 million for the combined periods of 1993, which included $1,075.6 million in extraordinary gains related to the consummation of the '93 Reorganization. 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 for the year ended December 31, 1995 increased by $165.5 million to $286.8 million (including approximately $28.0 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). The net increase was primarily due to the improvement in cash provided by operations which increased to $212.2 million in 1995, compared to $6.0 million in 1994. This improvement was attributable to improved operating performance and working capital management, including lease deferrals. Net cash used in investing activities was $18.9 million in 1995, compared to net cash provided by investing activities of $55.0 million in 1994. Proceeds from asset sales decreased to $9.3 million in 1995 from $76.2 million in 1994, while capital expenditures increased to $59.5 million from $44.9 million over the same periods. Cash used in financing activities decreased to $27.8 million in 1995 as compared to $110.1 million in 1994, principally as a result of the net proceeds from an equity rights offering (as further discussed below) and the proceeds of debt issued to finance, in part, the acquisition of an aircraft in the fourth quarter of 1995. Because of the seasonality of its business, payments on indebtedness and capital expenditures (including payments for hush-kits prior to reimbursement through financing anticipated but not yet consummated) and pre-delivery payments relating to the purchase of certain new Boeing 757 aircraft, the Company anticipates that by March 31, 1996, excluding the net proceeds from the sale of the 8% Preferred Stock received on March 22, 1996, its cash balance would have been reduced to a level significantly below that reported on December 31, 1995. In the fourth quarter of 1995, TWA received approximately $55.3 million in gross proceeds from the exercise at $4.1875 per share of 13,206,247 equity rights issued pursuant to the '95 Reorganization. The Company had previously entered into an agreement pursuant to which certain parties agreed to purchase any shares not subscribed for pursuant to the equity rights offering, and the Company paid a fee of approximately $3.4 million in September 1995 in connection therewith. 31 33 Also pursuant to the '95 Reorganization, the Company issued an aggregate number of 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 has agreed to repurchase 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 will be approximately $8.1 million in 1996. Concurrent with the Company's restructuring initiatives, 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 and are expected to approximate $22.4 and $8.3 million in 1996 and 1997, respectively. On June 14, 1995, the Company signed an agreement (the "Extension and Consent Agreement") with Karabu Corporation, a Delaware company controlled by Mr. Icahn ("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 on 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, 1995, the outstanding balance of the Icahn Loans was approximately $188 million (excluding approximately $7.5 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 as contemplated by the Extension and Consent Agreement, 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. Considering the number of restrictions placed on Karabu's resale of tickets to the public, this agreement is intended to produce net incremental revenue to TWA. 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. The Company has informed Karabu that if it does not cease sales through travel agents, the Company will enforce its rights under the Ticket Agreement by legal action. 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 32 34 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 under 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 and 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. The last extension of such a standstill expired on March 20, 1996. Those negotiations reached an impasse and the Company re-filed its suit on March 20, 1996 in the St. Louis 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. The Company intends to press its claims vigorously and believes it has meritorious defenses to Mr. Icahn's claims. 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 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. The Company has instituted legal action against two travel agencies in St. Louis alleging that by selling TWA tickets purchased from Mr. Icahn such defendants have breached certain contractual obligations and duties as agents of TWA pursuant to the Airline Reporting Corporation agreements. 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, 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 current blended interest rate on the PBGC Notes of 8.19% is subject to an increase in 1998, up to a rate as high as 9.4%, if the price of TWA's Common Stock does not exceed $12 per share for each of 30 consecutive trading days during the 24 month period commencing January 1, 1996 and ending on December 31, 1997. 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 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. If not previously redeemed, other dividend payments due in 1996, for which the Company has not made an election, are on May 1, August 1 and November 1, in the amount of $3.3 million on each date which may be paid in Common Stock or cash. 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. 33 35 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. Commitments TWA's capital expenditures for 1996 are currently anticipated to total approximately $120 million, including approximately $75 million for flight equipment related expenditures (e.g., progress payments for aircraft and the purchase of aircraft engines and parts). In February 1996, TWA executed definitive agreements providing for the lease of up to 10 new Boeing 757 aircraft from a major operating lessor to be delivered in 1996 and 1997 and the purchase of 10 new Boeing 757 aircraft from the manufacturer with deliveries to commence in February 1997. The Company also acquired the right, subject to certain conditions, to purchase up to 20 additional Boeing 757 aircraft from the manufacturer. The Company has secured financing commitments from engine and airframe manufacturers for approximately $420 million of the aggregate purchase price of the purchased aircraft. The purchase price for the aircraft and related spare parts and equipment is approximately $550 million. The leases with respect to the leased aircraft have an initial term of 10 years. Although individual aircraft rentals escalate over the term of the leases, aggregate rental obligations are estimated to average approximately $51 million per annum over the lease terms after all 10 aircraft have been delivered. On December 29, 1995, the Company acquired a used Boeing 767-200 aircraft and concurrently arranged financing for the purchase thereof. The financing for this aircraft is approximately $22.0 million, which is repayable over five years at an interest rate of slightly more than 7% per annum. TWA's operating strategy contemplates the acquisition of four additional used Boeing 747s, 10 additional MD-80/83s and three new Boeing 757s during 1996. Agreements have not been signed with respect to all of the Boeing 747 and MD80/83 aircraft, and market conditions could cause the Company to modify its current plans. TWA has purchase agreements (collectively, the "AVSA Agreement") for the purchase of 10 A330 aircraft with AVSA, S.A.R.L. ("AVSA"), a subsidiary of Airbus Industries, C.I.E., and has options to acquire an additional 10 aircraft. The current delivery schedule calls for the ten firm aircraft to be delivered during the period from April 1999 to September 2000. Additionally, delivery dates for the option aircraft have been rescheduled to commence in December 1999 and extend through April 2001, subject to TWA's exercise thereof. In connection with the AVSA Agreement, TWA is required to issue promissory notes to AVSA in the aggregate principal amount of approximately $4.3 million in the months of April, May, June, July and September of 1996. The Company intends to seek to negotiate a deferral of this obligation which has previously been deferred twice. However, there can be no assurance that any such deferral will be granted. TWA has not yet made arrangements for the permanent financing of the A330 aircraft ordered pursuant to the AVSA Agreement. In the event of cancellation of the AVSA Agreement, prepayments amounting to approximately $14 million would be subject to forfeiture. TWA has also entered into agreements (collectively, the "Equipment Agreement") with Rolls-Royce plc ("Rolls Royce") relating to the purchase of Rolls Royce engines, modules, and spare parts at the time of the purchase of, and to support, the A330 aircraft described above. In the event of cancellation of the Equipment Agreement, pre-delivery payments amounting to approximately $3.9 million made by TWA with respect to the Equipment Agreement would be subject to forfeiture. 34 36 During 1995 the Company returned one Lockheed L-1011 and one Boeing 727 to their respective lessors upon termination of the leases. The Company plans to retire six additional L-1011s during 1996, one of which was returned to the lessor in February 1996, and to return five Boeing 727s to their respective lessors upon lease terminations during 1996. The Noise Act provides, with certain exceptions, that no person may operate large civilian turbo-jet aircraft in the U.S. after December 31, 1999 that do not comply with Stage 3 noise levels. Stage 3 is an FAA designation for the quietest commercial jet aircraft. TWA has elected to comply with the transition requirements of the Noise Act by adopting the Stage 2 aircraft phase out/retrofit option, which will require that 50% of its base level (December 1990) Stage 2 fleet be phased out/retrofitted by the end of 1996, 75% by the end of 1998 and 100% by the end of 1999. To comply with the 1996 requirement, the Company plans to retrofit, by means of engine hush-kits, 28 of its DC-9 aircraft. The aggregate cost of these hush-kits is estimated to approximate $49 million. The Company is exploring various financing options to fund the majority of such expenditure, including an extension of the current leases at increased rental rates to finance the expenditure. As of March 22, 1996, the Company has purchased five hush-kits amounting to $8.1 million with internal funds. The Company's management currently estimates that it will generate sufficient resources to fund its operations and meet its debt obligations during 1996. 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. 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. TWA cannot predict whether or to what extent any change in its planned capital expenditures may adversely affect its future ability to operate or its financial condition. In addition, while it has recently acquired a number of additional aircraft, if TWA were to acquire further additional aircraft, as it currently plans to do, it cannot predict how any such acquisitions, together with the related obligations to make rental payments or repay any indebtedness incurred in connection therewith, ultimately may affect its profitability and relative market share. Availability of NOLs The Company estimates that it had, for federal income tax purposes, net operating loss carryforwards ("NOLs") amounting to approximately $167.0 million at December 31, 1995, which expire in 2008 through 2010 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. As a result of such a change in ownership caused by the '95 Reorganization, utilization of the Company's NOLs will, depending upon certain elections to be made by the Company, be either substantially restricted (to approximately $12 million per year) or reduced (by approximately $45 million) in future periods. Any future ownership change may result in the imposition of a significantly lower annual limitation on the Company's utilization of NOLs and extend the period over which any benefits are realized therefrom. Moreover, if the Company elects to reduce its NOLs rather than to apply the $12 million annual limitation described above, and if another ownership change were to occur during the two-year period following the '95 Reorganization, the annual limitation on the Company's utilization of its existing NOLs would be reduced to zero. The Company believes that no ownership change will occur as a result of the Offering. There can be no assurance, however, that the Offering will not be a contributing factor to an ownership change or that an unrelated 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 substantially all of the tax net operating loss carryforwards will, to the 35 37 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. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), will require pro forma disclosures in 1996 of net income and earnings per share as if a new method based on the estimated fair value of employee stock options had been adopted. The Company has not decided if the optional accounting treatment proposed by SFAS No. 123 will be adopted. 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. Such factors are described above and in the documents filed by the Company from time to time with the Commission, including registration statements filed under the Securities Act. 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 36 38 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 21, 1996. 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 21, 1996. 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 21, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Inapplicable 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 page 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 December 29, 1995. This filing reports the Company's adoption of a Stockholder Rights Plan. (2) A Form 8-K was filed on March 20, 1996. This filing reports the Company's offering of the 8% Preferred Stock. (3) A Form 8-K was filed on March 21, 1996. This filing reports the Company's litigation with Mr. Icahn. Exhibits. The exhibits listed on the Exhibit Index following the signature page hereof are filed herewith in response to this Item. 37 39 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE NO. ---- FINANCIAL STATEMENTS: Independent Auditors' Report.......................................................... F-2 Statements of Consolidated Operations for the Four Months Ended December 31, 1995, the Eight Months Ended August 31, 1995, the Year Ended December 31, 1994, the Two Months Ended December 31, 1993 and the Ten Months Ended October 31, 1993................... F-3 Consolidated Balance Sheets, December 31, 1995 and 1994............................... F-4 Statements of Consolidated Cash Flows for the Four Months Ended December 31, 1995, the Eight Months Ended August 31, 1995, the Year Ended December 31, 1994, the Two Months Ended December 31, 1993 and the Ten Months Ended October 31, 1993................... F-6 Consolidated Statements of Shareholders' Equity (Deficiency) for the Four Months Ended December 31, 1995, the Eight Months Ended August 31, 1995, the Year Ended December 31, 1994, the Two Months Ended December 31, 1993 and the Ten Months Ended October 31, 1993.................................................................... 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 40 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, 1995 and 1994, and the related statements of consolidated operations, cash flows and shareholders' equity (deficiency) for the four months ended December 31, 1995, the eight months ended August 31, 1995, the year ended December 31, 1994, the two months ended December 31, 1993 and the ten months ended October 31, 1993. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule for the four months ended December 31, 1995, the eight months ended August 31, 1995, the year ended December 31, 1994, the two months ended December 31, 1993 and the ten months ended October 31, 1993. 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, 1995 and 1994, and the results of their operations and their cash flows for the four months ended December 31, 1995, the eight months ended August 31, 1995, the year ended December 31, 1994, the two months ended December 31, 1993 and the ten months ended October 31, 1993, 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 1 to the consolidated financial statements, the consolidated financial statements reflect the application of fresh start reporting as of September 1, 1995 and November 1, 1993 and, therefore, are not comparable in all respects to the consolidated financial statements for periods prior to such dates. KPMG PEAT MARWICK LLP Kansas City, Missouri March 6, 1996 F-2 41 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, THE YEAR ENDED DECEMBER 31, 1994, THE TWO MONTHS ENDED DECEMBER 31, 1993, AND THE TEN MONTHS ENDED OCTOBER 31, 1993 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRIOR PREDECESSOR REORGANIZED COMPANY COMPANY PREDECESSOR COMPANY ---------- ------------ ------------------------------------------ TEN MONTHS FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS ENDED ENDED ENDED ENDED ENDED OCTOBER DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, 31, 1995 1995 1994 1993 1993 ------------ ------------ ------------ ------------ ---------- Operating Revenues: Passenger.................................... $ 943,077 $1,929,166 $2,875,851 $440,174 $2,193,567 Freight and mail............................. 48,384 94,784 149,932 26,264 109,360 All other.................................... 107,013 194,405 381,919 54,383 331,010 ------------ ------------ ------------ ------------ ---------- Total.................................. 1,098,474 2,218,355 3,407,702 520,821 2,633,937 ------------ ------------ ------------ ------------ ---------- Operating Expenses: Salaries, wages and benefits................. 373,041 755,708 1,293,570 219,007 1,048,021 Earned stock compensation (Note 11).......... 2,192 55,767 -- -- -- Aircraft fuel and oil........................ 161,799 296,833 477,555 79,581 416,717 Passenger sales commissions.................. 80,045 185,981 288,000 41,609 218,492 Aircraft maintenance materials and repair.... 51,998 95,657 145,321 25,633 111,204 Depreciation and amortization................ 55,168 106,474 183,283 30,201 136,379 Operating lease rentals...................... 96,393 182,548 261,365 36,593 173,462 Passenger food and beverages................. 34,676 68,137 120,804 18,634 98,374 Special charges (Note 14).................... -- 1,730 138,849 -- -- All other.................................... 232,716 454,878 778,449 127,814 657,017 ------------ ------------ ------------ ------------ ---------- Total.................................. 1,088,028 2,203,713 3,687,196 579,072 2,859,666 ------------ ------------ ------------ ------------ ---------- Operating Income (Loss)........................ 10,446 14,642 (279,494) (58,251) (225,729) ------------ ------------ ------------ ------------ ---------- Other Charges (Credits): Interest expense (contractual interest of $141,967 for the eight months ended August 31, 1995 and $224,935 for the ten months ended October 31, 1993).................... 45,917 123,247 195,352 31,204 91,877 Interest and investment income (Note 15)..... (7,484) (10,366) (12,058) (2,274) (16,136) Disposition of assets, gains and losses -- net (Note 13).................................. (3,330) 206 (1,072) 348 2,617 Reorganization items (Note 17)............... -- 242,243 -- -- (268,110) Pension settlement expense (Note 5).......... -- -- -- -- 342,405 Other charges and credits -- net (Note 15)... 7,611 (2,379) (28,847) 611 (15,762) ------------ ------------ ------------ ------------ ---------- Total.................................. 42,714 352,951 153,375 29,889 136,891 ------------ ------------ ------------ ------------ ---------- Loss Before Income Taxes and Extraordinary Items........................................ (32,268) (338,309) (432,869) (88,140) (362,620) Provision (Credit) For Income Taxes (Note 4)... 1,370 (96) 960 (248) 1,312 ------------ ------------ ------------ ------------ ---------- Loss Before Extraordinary Items................ (33,638) (338,213) (433,829) (87,892) (363,932) Extraordinary Items, net of income taxes (Note 12).......................................... 3,500 140,898 (2,005) -- 1,075,581 ------------ ------------ ------------ ------------ ---------- Net Income (Loss).............................. (30,138) (197,315) (435,834) (87,892) $ 711,649 =========== Preferred Stock Dividend Requirements.......... 4,751 11,554 15,000 2,425 ------------ ------------ ------------ ------------ Loss Applicable to Common Shares............... $ (34,889) $ (208,869) $ (450,834) $(90,317) ============ ============ ============ ============ Per Share Amounts: Loss Before Extraordinary Item............... $ (1.15) Extraordinary Item........................... .10 ------------ Net Loss..................................... $ (1.05) ============
See Notes to Consolidated Financial Statements F-3 42 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
REORGANIZED PREDECESSOR COMPANY COMPANY ----------- ----------- 1995 1994 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents........................................... $ 286,793 $ 121,306 Receivables, less allowance for doubtful accounts, $13,517 in 1995 and $14,832 in 1994 (Note 7)..................................... 226,451 240,804 Spare parts, materials and supplies, less allowance for obsolescence, $2,201 in 1995 and $20,928 in 1994 (Note 7)........ 143,374 156,662 Prepaid expenses and other.......................................... 54,358 48,768 ----------- ----------- Total....................................................... 710,976 567,540 ----------- ----------- Property (Notes 7, 8 and 16): Property owned, at cost: Flight equipment................................................. 298,093 399,924 Land, buildings and improvements................................. 54,054 74,383 Other property and equipment..................................... 37,543 48,540 ----------- ----------- Total owned property........................................ 389,690 522,847 Less accumulated depreciation.................................... 11,457 95,696 ----------- ----------- Property owned -- net....................................... 378,233 427,151 ----------- ----------- Property held under capital leases, at capitalized value: Flight equipment................................................. 172,812 206,652 Land, buildings and improvements................................. 54,761 96,169 Other property and equipment..................................... 6,862 10,784 ----------- ----------- Total property held under capital leases.................... 234,435 313,605 Less accumulated amortization.................................... 12,602 47,711 ----------- ----------- Property held under capital leases -- net................... 221,833 265,894 ----------- ----------- Total property -- net....................................... 600,066 693,045 ----------- ----------- Investments and Other Assets: Investments in affiliated companies (Note 3)........................ 98,156 107,986 Other investments and receivables (Note 8).......................... 144,421 180,340 Routes, gates and slots -- net...................................... 450,916 762,174 Reorganization value in excess of amounts allocable to identifiable assets -- net.................................................... 825,079 159,485 Prepayments, deferred charges and other assets...................... 21,050 24,640 ----------- ----------- Total....................................................... 1,539,622 1,234,625 ----------- ----------- Total................................................................. $ 2,850,664 $ 2,495,210 ========= =========
See Notes to Consolidated Financial Statements F-4 43 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
REORGANIZED PREDECESSOR COMPANY COMPANY ----------- ----------- 1995 1994 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Current maturities of long-term debt (Note 7)....................... $ 67,566 $ 1,102,146 Current obligations under capital leases (Note 8)................... 42,835 47,593 Advance ticket sales................................................ 209,936 172,044 Accounts payable, principally trade................................. 121,667 114,638 Accounts payable to affiliated companies (Note 3)................... 6,104 5,915 Accrued expenses: Employee compensation and vacations earned....................... 101,637 109,715 Contributions to retirement and pension trusts (Note 5).......... 17,716 20,718 Interest on debt and capital leases.............................. 44,710 68,717 Taxes............................................................ 16,995 16,968 Other accrued expenses........................................... 193,380 188,543 ----------- ----------- Total....................................................... 822,546 1,846,997 ----------- ----------- Long-Term Liabilities and Deferred Credits: Long-term debt, less current maturities (Note 7).................... 764,031 -- Obligations under capital leases, less current obligations (Note 8)............................................................... 259,630 339,895 Postretirement benefits, other than pensions (Note 5)............... 461,346 489,216 Noncurrent pension liabilities (Note 5)............................. 21,253 30,059 Other noncurrent liabilities and deferred credits................... 157,573 206,519 ----------- ----------- Total....................................................... 1,663,833 1,065,689 ----------- ----------- Mandatorily Redeemable 12% Preferred Stock, (aggregate liquidation preference of $111,179) (Note 9).................................... 61,430 -- ----------- ----------- Commitments and Contingent Liabilities (Notes 1, 2, 5, 6, 7, 8, 9, 10, 11, 14 and 16) Shareholders' Equity (Deficiency): Employee Preferred Stock, $0.01 liquidation preference; special voting rights; 5,277 shares issued and outstanding in 1995....... 53 -- Common Stock, $0.01 par value; 35,129 shares issued and outstanding in 1995.......................................................... 351 -- Cumulative Preferred Stock, $0.01 par value; limited voting; 12,500 shares issued and outstanding in 1994............................ -- 125 Common Stock, $0.01 par value; 20,000 shares authorized, issued and outstanding in 1994.............................................. -- 200 Additional paid-in capital.......................................... 332,589 105,925 Accumulated deficit................................................. (30,138) (523,726) ----------- ----------- Total....................................................... 302,855 (417,476) ----------- ----------- Total................................................................. $ 2,850,664 $ 2,495,210 ========= =========
See Notes to Consolidated Financial Statements F-5 44 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, THE YEAR ENDED DECEMBER 31, 1994, THE TWO MONTHS ENDED DECEMBER 31, 1993, AND THE TEN MONTHS ENDED OCTOBER 31, 1993 (AMOUNTS IN THOUSANDS)
PRIOR REORGANIZED PREDECESSOR COMPANY PREDECESSOR COMPANY ---------------------------------------- COMPANY ------------ EIGHT ----------- FOUR MONTHS MONTHS TWO MONTHS TEN MONTHS ENDED ENDED YEAR ENDED ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ------------ ---------- ------------ ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................... $(30,138) $ (197,315) $ (435,834) $(87,892) $ 711,649 Adjustments to reconcile to net cash provided (used) by operating activities: Amounts provided for claims related to the settlement of litigation and other matters (Note 15).......... -- -- -- -- 15,000 Depreciation and amortization........................ 55,168 106,474 183,283 30,201 136,379 Amortization of discount and expense on debt......... 3,063 12,472 18,571 2,453 208 Interest paid in common stock........................ 11,587 -- -- -- -- Equity in undistributed earnings of affiliates not consolidated....................................... 12,169 (2,339) 5,517 2,527 (6,470) Non-cash special charges............................. -- -- 119,829 -- -- Reorganization items................................. -- 242,243 -- -- (294,360) Gain on cancellation of debt......................... (3,500) (140,898) -- -- (1,075,581) Pension settlement expense........................... -- -- -- -- 342,405 Employee earned stock compensation................... 2,192 55,767 -- -- -- (Gains) and losses -- net, on disposition of fixed, intangible and noncurrent investment assets........ (3,330) 206 (1,072) 348 2,617 Change in assets and liabilities, exclusive of investing and financing activity transactions: Decrease (Increase) in: Receivables...................................... 69,121 (62,094) 37,628 71,997 (55,234) Inventories...................................... 510 5,866 1,259 1,817 (16,119) Other current assets............................. 6,589 (2,505) (67) 11,197 (23,618) Other noncurrent assets and deferred charges..... (1,991) 3,163 (3,049) (5,500) (2,450) Increase (Decrease) in: Accounts payable and accrued expenses............ (40,047) 105,084 48,587 20,245 97,793 Advance ticket sales............................. (43,706) 81,598 (33,890) (35,709) 90,422 Other noncurrent liabilities and deferred credits........................................ (5,559) (27,667) 65,182 (28,500) 36,929 ------------ ---------- ------------ ------------ ----------- Net cash provided (used)....................... 32,128 180,055 5,944 (16,816) (40,430) ------------ ---------- ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposition of fixed and/or intangible assets and sales of subsidiaries..................... 7,069 2,221 76,240 9,847 2,400 Capital expenditures................................... (42,973) (16,554) (44,897) (10,407) (30,218) Refund of certain prepaid deposits..................... -- -- -- 8,859 -- Net decrease in noncurrent investments and receivables other than sales included in proceeds above.......... 16,397 14,926 23,733 20,193 19,675 Proceeds from sale of and payments received on note receivable........................................... -- -- -- -- 124,733 ------------ ---------- ------------ ------------ ----------- Net cash provided (used)......................... (19,507) 593 55,076 28,492 116,590 ------------ ---------- ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term notes payable................... -- -- -- -- (75,000) Proceeds from long-term debt issued.................... 22,100 -- 6,213 439 209,931 Principal payments on long-term debt and capital lease obligations.......................................... (39,654) (62,158) (116,331) (15,838) (161,991) Net proceeds from exercise of equity rights, warrants and options.......................................... 51,930 -- -- -- -- Proceeds from sale and leaseback of certain aircraft and properties....................................... -- -- -- 58,072 24,566 ------------ ---------- ------------ ------------ ----------- Net cash provided (used)......................... 34,376 (62,158) (110,118) 42,673 (2,494) ------------ ---------- ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents..... 46,997 118,490 (49,098) 54,349 73,666 Balance at beginning of period........................... 239,796 121,306 170,404 116,055 42,389 ------------ ---------- ------------ ------------ ----------- Cash and cash equivalents at end of period............... $286,793 $ 239,796 $ 121,306 $170,404 $ 116,055 ========== ========= ========== ========== ==========
See Notes to Consolidated Financial Statements F-6 45 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, THE YEAR ENDED DECEMBER 31, 1994, THE TWO MONTHS ENDED DECEMBER 31, 1993, AND THE TEN MONTHS ENDED OCTOBER 31, 1993 (AMOUNTS IN THOUSANDS) SUPPLEMENTAL CASH FLOW INFORMATION
PRIOR REORGANIZED PREDECESSOR COMPANY PREDECESSOR COMPANY COMPANY ------------ ------------------------------------------ ----------- FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS ENDED ENDED ENDED ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ------------ ------------ ------------ ------------ ----------- CASH PAID DURING THE PERIOD FOR: Interest.......................... $ 27,318 $ 55,878 $110,287 $ 13,727 $46,075 ========== ========== ========== ========== ======== Income taxes...................... $ 7 $ 39 $ 24 $ 1 3 ========== ========== ========== ========== ======== INFORMATION ABOUT NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES: Property acquired and obligations recorded under new capital lease transactions except sale/leaseback transactions included in Cash Flows from Financing Activities........... $ -- $ 12,690 $ 7,000 $ 738 $ 693 ========== ========== ========== ========== ========
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 46 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, THE YEAR ENDED DECEMBER 31, 1994, THE TWO MONTHS ENDED DECEMBER 31, 1993 AND THE TEN MONTHS ENDED OCTOBER 31, 1993 (AMOUNTS IN THOUSANDS)
PREFERRED ADDITIONAL ADJUSTMENT AND EMPLOYEE PAID-IN FOR MINIMUM PREFERENCE COMMON PREFERRED CAPITAL ACCUMULATED PENSION STOCKS STOCK STOCK (DEFICIENCY) DEFICIT LIABILITY TOTAL ---------- ------ --------- ------------ ----------- ----------- ----------- PRIOR PREDECESSOR COMPANY: Balance December 31, 1992............ $ 255,735 $259 $ -- $(75,922) $(1,060,900) $(268,905) $(1,149,733) Eliminate adjustment for minimum pension liability and reflect cancellation of $14 Preferred Stock in connection with pension settlement in 1993 (Note 5)........ (151,735) -- -- -- 151,735 268,905 268,905 Net income for the ten months ended October 31, 1993................... -- -- -- -- 711,649 -- 711,649 Eliminate Prior Predecessor equity accounts in connection with fresh start reporting.................... (104,000) (259) -- 75,922 28,337 -- -- Record excess of reorganization value over identifiable assets........... -- -- -- -- 169,179 -- 169,179 Issuance of common stock and preferred stock pursuant to '93 Reorganization..................... 125 200 -- 105,925 -- -- 106,250 ---------- ------ --------- ------------ ----------- ----------- ----------- Balance, November 1, 1993............ 125 200 -- 105,925 -- -- 106,250 PREDECESSOR COMPANY: Net loss for the two months ended December 31, 1993.................. -- -- -- -- (87,892) -- (87,892) ---------- ------ --------- ------------ ----------- ----------- ----------- 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 Stock and Employee Preferred Stock pursuant to '95 Reorganization..................... -- 172 53 269,775 -- -- 270,000 ---------- ------ --------- ------------ ----------- ----------- ----------- Balance, August 31, 1995............. -- 172 53 269,775 -- -- 270,000 REORGANIZED COMPANY: Equity rights exercised.............. -- 132 -- 51,727 -- -- 51,859 Interest paid on 12% Notes 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........... $ -- $351 $ 53 $332,589 $ (30,138) $ -- $ 302,855 ========= ======= ======= ========== ========== ========== ==========
See Notes to Consolidated Financial Statements F-8 47 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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: Trans World Airlines, Inc. ("TWA" or the "Company") 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 19). 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. The airline industry has experienced substantial volatility in profitability in recent years 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. While the financial restructuring completed by TWA in 1995 and actions taken by management have improved the liquidity position and the recent operating results of the Company, 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 January 31, 1992 and June 30, 1995. The emergence from the 1993 Chapter 11 proceeding (the " '93 Reorganization") on November 3, 1993 (the " '93 Effective Date") and from the 1995 Chapter 11 proceeding (the " '95 Reorganization") on August 23, 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 17-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 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 January 31, 1992 to the '93 Effective Date in the case of the '93 Reorganization, and from June 30, 1995 to the '95 Effective Date in the case of the '95 Reorganization. (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. F-9 48 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 (amounts in thousands):
1995 1994 -------- -------- Routes........................................................... $276,000 $548,976 Gates............................................................ 86,649 141,310 Slots............................................................ 95,800 110,065 -------- -------- 458,449 800,351 Accumulated Amortization......................................... 7,533 38,177 -------- -------- $450,916 $762,174 ======== ======== - --------------- (1) Prior to January 1, 1995, the Company utilized an estimated useful life for route authorities of 40 years (also see Note 14 -- Special Charges and Other Nonrecurring Items).
The reorganization value in excess of amounts allocable to identifiable assets is being amortized over a 20 year period on the straight-line method. Accumulated amortization at December 31, 1995 and 1994 was $13,984,000 and $9,693,000, respectively. 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 discounted 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 F-10 49 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. In the ten months ended October 31, 1993, TWA increased the carrying value of certain excess and repairable spare parts, which had been previously expensed in expectation that such inventories would not be utilized in operations, to reflect management's revised estimates as to utilization. The adjustments resulted in a reduction of maintenance expense of approximately $24 million. (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. TWA has entered into agreements, as amended, to purchase for cash from third parties ticket vouchers acquired by such third parties. Pursuant to these agreements, TWA expects to pay $8.1 million in cash in 1996. 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. At December 31, 1995, approximately 396,000 vouchers were outstanding. (i) Interest Capitalized: Interest cost associated with funds expended for the acquisition of qualifying assets is capitalized. There was no interest capitalized during 1995. Interest capitalized was $2,133,000 in 1994, and $267,000 and $2,104,000 for the two months ended December 31, 1993 and the ten months ended October 31, 1993, respectively. (j) Income Taxes: TWA adopted Statement of Financial Accounting Standards ("SFAS") No. 109, in the first quarter of 1993. 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: SFAS No. 106, 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. TWA adopted this Standard in the first quarter of 1993 and initially elected to utilize the delayed method of implementation by recognizing the transition obligation over a period of 20 years. In connection with the consummation of the '93 Reorganization, TWA recognized as a liability the remaining unrecognized accumulated postretirement benefit obligation as part of the application of fresh start reporting. (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 a deferred credit as part of the application of fresh start reporting. The deferred credit will be increased through the accrual of interest expense and reduced through a reduction in operating lease rentals over the terms of the respective aircraft leases. At December 31, 1995 and 1994, the unamortized balance of the deferred credit was $41,727,000 and $58,074,000 respectively. F-11 50 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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 environment 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. (n) Mandatorily Redeemable 12% Preferred Stock: The Mandatorily Redeemable 12% Preferred Stock issued in connection with the '95 Reorganization was recorded at its estimated fair value. The carrying amount will be increased in future periods by amortization of the difference between the redemption value and the carrying amount. The interest method is utilized, with such amounts recorded as additional preferred stock dividend requirements. These amounts are currently charged against additional paid in capital due to a deficit in retained earnings. (o) Earnings (Loss) Per Share: In computing the loss applicable to common shares for 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). 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 (28.0 million) and Employee Preferred Stock (5.3 million) 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 companies 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, 1995 most of the Company's receivables related to tickets sold to individual passengers through the use of major credit cards (47%) 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. 2. CHAPTER 11 REORGANIZATIONS On January 31, 1992, TWA commenced a reorganization case 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. 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. 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 F-12 51 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The '93 Reorganization resulted in the discharge of approximately $1.05 billion of indebtedness. 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 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. Icahn (the "Icahn Loans"). The Company also (i) effected a reverse stock split of its then outstanding common stock and exchange such shares 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. 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 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 eliminating so called snapbacks, i.e., the automatic restoration of the wage reductions granted in such agreements at the end of their term 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. F-13 52 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On June 14, 1995, as one of the transactions contemplated by the extension of the Icahn Loans, TWA and an entity affiliated with Icahn, Karabu Corporation ("Karabu"), entered into an agreement for the sale of airline tickets (the "Ticket Agreement"). The Ticket Agreement, among other things, provides for the sale of two types of tickets: (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. 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. The 1995 ticket sales under the Ticket Agreement, which commenced in September 1995, were $16.0 million. Of this amount, $11.5 million is included as passenger revenues for the four months ended December 31, 1995 as the related transportation had been provided. 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, 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. 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. Considering the number of restrictions placed on Karabu's resale of tickets to the public, this agreement is intended to produce net incremental revenue to TWA. 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 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 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. The Company has informed Karabu that if it does not cease sales through travel agents, the Company will enforce its rights under the Ticket Agreement by legal action. In December 1995, the Company filed a lawsuit against Karabu, Mr. Icahn and certain affiliated companies seeking damages and to enjoin further violations. Mr. Icahn countered threatening to attempt to declare a default on the Icahn Loans. Mr. Icahn alleged that there was a default under the Icahn Loans based on a variety of claims related to his various interpretations of the security documents applicable 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 has 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 and 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 the security trustee and requested the release of the liens on such aircraft. To date, the trustee has not released such aircraft. The parties have negotiated a series of standstill agreements pursuant to which TWA's original lawsuit was withdrawn, while the Company and Mr. Icahn endeavor to negotiate a settlement of their differences and respective claims. The latest extension of such a standstill expires on March 20, 1996. Unless a subsequent extension to the standstill is entered into, after that date either party will F-14 53 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) be free to attempt to enforce their various interpretations of the applicable agreements. It is entirely possible that Mr. Icahn or one of his affiliates may file suit against TWA at any time on or after March 20, 1996. The Company may also file suit against Mr. Icahn. The Company intends to press its claims vigorously and believes it has meritorious defenses to Mr. Icahn's claims. 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 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. 3. 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. ("NWA") 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. Additionally, through another wholly-owned subsidiary, TWA had a 50% partnership interest in PARS Service Partnership ("PSP"), which supplied on-line computer services to its two partners, TWA and NWA, and to WORLDSPAN. TWA accounts for its investments in the partnerships on the equity basis. TWA's share of the combined net earnings (loss) of the partnerships was approximately $(11,535,000) for the four months ended December 31, 1995, $3,607,000 for the eight months ended August 31, 1995, $(3,616,000) for the year ended December 31, 1994, $(2,636,000) for the two months ended December 31, 1993, and $5,629,000 for the ten months ended October 31, 1993, 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, 1995 and 1994, the unamortized balance of this excess amounted to approximately $33.9 million and $35.8 million, respectively. The partnerships provide 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 two partnerships, which is included in all other operating expenses in TWA's Statements of Consolidated Operations, is approximately as follows (amounts in thousands):
COST OF SERVICES PURCHASED BY TWA ---------------------------------- WORLDSPAN PSP COMBINED --------- ------- -------- Four Months Ended December 31, 1995.................. $16,556 $ -- $16,556 Eight Months Ended August 31, 1995................... $29,604 $ -- $29,604 Year Ended December 31, 1994......................... $43,638 $ -- $43,638 Two Months Ended December 31, 1993................... $10,454 $ -- $10,454 Ten Months Ended October 31, 1993.................... $28,142 $14,632 $42,774
F-15 54 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summary financial data for WORLDSPAN is as follows:
DECEMBER 31, --------------------- 1955 1994 -------- -------- Current assets................................................. $ 84,854 $ 57,425 Non-current assets............................................. 410,901 470,398 -------- -------- Total assets......................................... $495,755 $527,823 ======== ======== Current liabilities............................................ $101,219 $101,005 Non-current liabilities........................................ 137,220 137,789 Partners' equity............................................... 257,316 289,029 -------- -------- Total liabilities and equity......................... $495,755 $527,823 ======== ========
YEAR ENDED DECEMBER 31, --------------------- 1955 1994 -------- -------- Revenues....................................................... $498,138 $441,078 Costs and expenses............................................. 529,852 455,543 -------- -------- Net income (loss).................................... $(31,714) $(14,465) ======== ========
4. INCOME TAXES: Effective January 1, 1993, the Company adopted the liability method of accounting for income taxes required by SFAS No. 109. In connection with the adoption of SFAS No. 109, a valuation allowance was established to eliminate the net deferred tax asset, considering that TWA was operating under Chapter 11 of the Bankruptcy Code. Accordingly, no adjustment to reflect the cumulative effect of adoption of SFAS No. 109 was required. As the result of the application of fresh start reporting in 1993 and 1995, deferred income taxes were recorded to reflect the income tax effects of adjustments to record the estimated fair values of assets and liabilities. Income tax liabilities at December 31, 1995 and 1994, included in other noncurrent liabilities, consist of the following (amounts in millions):
1995 1994 ----- ----- Current taxes.......................................................... $ -- $ -- Deferred taxes: Federal.............................................................. 10.7 15.6 Other income and franchise taxes..................................... .3 .4 ----- ----- Total income tax liability................................... $11.0 $16.0 ===== =====
F-16 55 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Company's deferred tax liabilities and assets as of December 31, 1995 and 1994 are as follows (amounts in millions):
1995 1994 ------- ------- Deferred tax liabilities: Property and spare parts, net.................................... $ 24.7 $ 32.6 Routes, gates, and slots, net.................................... 178.1 301.1 Investment in affiliate.......................................... 38.8 42.7 ------- ------- Total deferred tax liabilities........................... $ 241.6 $ 376.4 ======= ======= Deferred tax assets: Postretirement benefits, other than pensions..................... $ 194.6 $ 198.3 Pension obligations.............................................. 83.4 127.3 Employee compensation and other benefits......................... 60.2 48.0 Capital leases, net.............................................. 56.6 73.9 Net operating loss carryforwards................................. 66.0 69.0 Other, net....................................................... 86.7 73.3 ------- ------- Total deferred tax assets................................ 547.5 589.8 ------- ------- Net deferred tax asset before valuation allowance.................. (305.9) (213.4) Deferred tax asset valuation allowance............................. 316.9 229.4 ------- ------- Net deferred tax liability............................... $ 11.0 $ 16.0 ======= =======
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. A summary of the provision (credit) for income taxes is as follows (amounts in thousands):
REORGANIZED PRIOR COMPANY PREDECESSOR ----------- PREDECESSOR COMPANY COMPANY FOUR MONTHS ------------------------------------------ ----------- ENDED EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS DECEMBER ENDED ENDED ENDED ENDED 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ----------- ------------ ------------ ------------ ----------- Current, primarily foreign................... $ 1,370 $(96) $960 $ (248) $ 1,312 Deferred.................... -- -- -- -- -- ----------- ------ ------ ------------ ----------- Total provision (benefit) for income taxes, net.................... $ 1,370 $(96) $960 $ (248) $ 1,312 ========= ========== ========== ========== ========
F-17 56 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 (amounts in thousands):
REORGANIZED PRIOR COMPANY PREDECESSOR ----------- PREDECESSOR COMPANY COMPANY FOUR MONTHS ------------------------------------------ ----------- ENDED EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS DECEMBER ENDED ENDED ENDED ENDED 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ----------- ------------ ------------ ------------ ----------- Income tax benefit at United States statutory rates.... $ (11,294) $ (118,408) $ (151,504) $(30,849) $ (126,917) Amortization of reorganization value in excess of amounts allocable to identifiable assets.................... 4,894 1,976 2,870 522 -- Meals and entertainment disallowance.............. 1,419 2,838 4,663 301 1,504 Foreign taxes............... 1,370 (96) 960 (248) 812 Net operating loss not benefited and other items..................... 4,981 113,594 143,971 30,026 125,913 ----------- ------------ ------------ ------------ ----------- Income tax expense (benefit)....... $ 1,370 $ (96) $ 960 $ (248) $ 1,312 ========= ========== ========== ========== =========
A provision for income tax on the extraordinary gain from the extinguishment of debt in the ten months ended October 31, 1993 and 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 7-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 carry forward 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 will have, for federal income tax purposes, net operating loss carryforwards ("NOL's") amounting to approximately $167.0 million at December 31, 1995, which expire in 2008 through 2010 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. As a result of such a change in ownership caused by the '95 Reorganization, utilization of the Company's NOLs will, depending upon certain elections to be made by the Company, be either substantially restricted (to approximately $12 million per year) or reduced (by approximately $45 million) in future periods. Any future ownership change may result in the imposition of a significantly lower annual limitation on the Company's utilization of NOLs and extend the period over which any benefits are realized therefrom. Moreover, if the Company elects to reduce its NOLs rather than to apply the $12 million annual limitation described below, and if another ownership change were to occur during the two-year period following the '95 Reorganization, the annual limitation on the Company's utilization of its existing NOLs would be reduced to zero. In addition, the NOLs are subject to examination by the IRS, and, thus, are subject to adjustment or F-18 57 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 excess of amounts allocable to identifiable assets. 5. EMPLOYEE BENEFIT PLANS: Substantially all of TWA's employees are covered by noncontributory defined benefit retirement plans. TWA's policy is 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 10 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. 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 7 -- 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 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. As a result of the consummation of the Comprehensive Settlement Agreement in the first quarter of 1993, TWA recognized the settlement of its obligation under the Pension Plans through the issuance of the PBGC Notes, which were estimated to have a fair value of approximately $300,000,000. The recognition of F-19 58 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the obligation under the PBGC Notes, the elimination of previously recorded pension liabilities and the elimination of the charge to shareholders' equity for additional minimum pension liabilities resulted in a charge against earnings of approximately $342,405,000 in the ten months ended October 31, 1993. Furthermore, TWA recorded in the first quarter of 1993, as an extraordinary item, a gain from the early extinguishment of debt resulting from abandonment of the debt securities held by the Icahn Entities of $172,924,000, representing TWA's net carrying value of such debt securities. The net periodic pension expense recorded for TWA's foreign defined benefit retirement plans is presented below (amounts in thousands).
PRIOR REORGANIZED PREDECESSOR COMPANY PREDECESSOR COMPANY COMPANY ------------ ------------------------------------------ ----------- FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS ENDED ENDED ENDED ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ------------ ------------ ------------ ------------ ----------- Service cost........................ $ 274 $ 493 $1,190 $ 383 $ 1,661 Interest cost....................... 583 1,040 3,053 675 3,351 Actual return on assets............. (100) (200) (864) (191) (614) Net amortization and deferral....... -- -- -- -- (65) ------------ ------------ ------------ ------------ ----------- Net pension expense....... $ 757 $1,333 $3,379 $ 867 $ 4,333 ========== ========== ========== ========== ========
Actuarial assumptions used for determining pension costs were:
PRIOR REORGANIZED PREDECESSOR COMPANY PREDECESSOR COMPANY COMPANY ------------ ------------------------------------------ ----------- FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS ENDED ENDED ENDED ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ------------ ------------ ------------ ------------ ----------- Discount rate for interest cost...................... 7.00% 8.50% 8.50% 7.00% 8.25% Rate of increase in future compensation levels....... 5.50% 5.50% 7.50% 7.50% 7.50% Expected long-term rate of return on plan assets..... 11.00% 11.00% 11.00% 11.00% 11.00%
F-20 59 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 7.0% and 8.5% at December 31, 1995 and 1994 respectively) and amounts recognized in the Consolidated Balance Sheet at December 31, 1995 and 1994, for defined benefit plans covering foreign employees, are as follows (in thousands):
DECEMBER 31, ----------------------------------------------------- 1995 1994 ------------------------- ------------------------- PLANS IN WHICH PLANS IN WHICH ------------------------- ------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ----------- ----------- ----------- ----------- Actuarial present value of benefit obligations: Vested benefit obligation............. $ 23,986 $13,958 $ 22,739 $ 8,329 Nonvested benefit obligation.......... 14 2,338 13 1,693 ----------- ----------- ----------- ----------- Accumulated benefit obligation........ 24,000 16,296 22,752 10,022 Projected benefit obligation more than accumulated benefit obligation..... 1,327 8,273 1,260 5,645 ----------- ----------- ----------- ----------- Projected benefit obligation.......... 25,327 24,569 24,012 15,667 Plan assets at fair value(a)............ 47,814 -- 45,537 -- ----------- ----------- ----------- ----------- Projected benefit obligation more (less) than plan assets at fair value........ (22,487) 24,569 (21,525) 15,667 Unrecognized net gain (loss)............ -- 949 -- 18,270 ----------- ----------- ----------- ----------- Pension liability (asset) before adjustment............................ (22,487) 25,518 (21,525) 33,937 Adjustment to reduce pension assets to estimated recoverable amount(b)....... 18,222 -- 17,646 -- ----------- ----------- ----------- ----------- Pension liability (asset) recognized in Consolidated Balance Sheets........... $ (4,265) $25,518 $ (3,879) $33,937 ========= ========= ========= =========
- --------------- (a) Plan assets are invested in cash equivalents, international stocks, fixed income securities and real estate. (b) This adjustment represents the amount by which the net pension asset exceeds the amount estimated to be recoverable pursuant to a planned termination of a pension plan covering certain foreign employees. The foreign laws governing the pension plan require the sharing of the surplus funding with employees, through benefit improvements and other means, and accordingly, TWA expects to receive a lesser amount from the reversion of excess plan assets. TWA has several defined contribution plans covering most of its employees. Total pension expense for these plans was $14.1 million, $26.8 million, $46.0 million, $7.5 million, and $35.8 million for the four months ended December 31, 1995, the eight months ended August 31, 1995, the year ended December 31, 1994, the two months ended December 31, 1993 and the ten months ended October 31, 1993, 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 determined as a percentage, ranging from 2% to 11%, of pay; and (b) a 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. F-21 60 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Effective January 1, 1993, TWA adopted SFAS No. 106. This standard 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. As permitted under SFAS 106, TWA initially began to recognize the excess of the accumulated postretirement benefit obligation ("APBO") at January 1, 1993 over previously accrued postretirement benefit costs (the transition obligation) of $370 million ratably over a period of 20 years. In connection with the adoption of fresh start reporting in November 1993, TWA recorded a charge of $405.4 million as a reorganization item to reflect as a liability the entire APBO on such date, thereby eliminating the previously unrecognized transition obligation. The following table sets forth a reconciliation of the accrued postretirement benefit cost as of December 31, 1995 and 1994 (amounts in millions):
DECEMBER DECEMBER 31, 31, 1995 1994 ----------- ----------- Accumulated postretirement benefit obligation: Actives fully eligible.............................................. $ 158 $ 143 Other actives....................................................... 140 124 Retirees............................................................ 195 196 ----------- ----------- Total APBO.................................................. 493 463 Unrecognized cumulative gain.......................................... -- 39 ----------- ----------- Accrued postretirement benefit cost................................... $ 493 $ 502 ========= =========
The components of net periodic postretirement benefit cost for the four months ended December 31, 1995, the eight months ended August 31, 1995, the year ended December 31, 1994, the two months ended December 31, 1993 and the ten months ended October 31, 1993 are as follows (amounts in millions):
PRIOR REORGANIZED PREDECESSOR COMPANY PREDECESSOR COMPANY COMPANY ------------- ------------------------------------------ ----------- FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS ENDED ENDED ENDED ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ------------- ------------ ------------- ------------- ----------- Service cost.............................. $ 3.0 $ 5.4 $ 9.5 $ 1.8 $ 7.2 Interest cost............................. 11.0 25.5 34.5 5.7 28.2 Amortization of transition obligation..... -- -- -- -- 15.4 ------ ------ ------ --- ----------- Total............................ $14.0 $ 30.9 $44.0 $ 7.5 $50.8 ============= ============ ============= ============= ===========
The discount rate used to determine the APBO was 7.0% at December 31, 1995, 8.5% at December 31, 1994, and 7.0% at December 31, 1993. The discount rate used to determine net periodic postretirement benefit costs was 7.0% for the four months ended December 31, 1995, 8.5% for the eight months ended August 31, 1995, 7.0% for the year ended December 31, 1994 and the two months ended December 31, 1993 and 8.5% for the 10 months ended October 31, 1993. The assumed health care cost trend rate used in measuring the APBO was 9% in 1996 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, 1995 would be increased by approximately 8% and 1995 periodic postretirement benefit cost would increase approximately 10%. F-22 61 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. CONTINGENCIES: On July 15, 1993, a complaint was filed in the Circuit Court for the City of St. Louis against TWA by five named plaintiffs on behalf of a purported class of approximately 300 similarly situated persons. The complaint alleged that false representations were made to recruits for tuition-based reservation agent training at the Trans World Travel Academy regarding job prospects with TWA in violation of the Missouri Merchandising Practices Act. Plaintiffs seek refunds of tuition and compensatory and punitive damages of at least $10 million. TWA removed the action from the Circuit Court to the United States District Court for the Eastern District of Missouri and plaintiffs have moved to remand it back to the Circuit Court. TWA believes this case will not materially impact the Company. 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. However, the decision has been appealed by Travellers. Pursuant to the Icahn Financing Facilities, amounts received pursuant to these proceedings must be used to repay, in part, TWA's obligations thereunder. In June 1985, the U.S. Environmental Protection Agency (the "EPA") conducted a site inspection of TWA's maintenance overhaul base in Kansas City, Missouri and indicated its intention to bring an enforcement proceeding against TWA under the Resource Conservation and Recovery Act of 1976, alleging violations resulting from TWA's past hazardous waste disposal and related environmental practices. On May 31, 1988, the EPA filed an administrative complaint within its agency seeking civil penalties as well as other relief requiring TWA to take remedial procedures at the overhaul base. Simultaneously, TWA became a party to a consent agreement and a consent order with the EPA pursuant to which TWA paid in 1988 a civil penalty of $100,000 and agreed to implement a schedule of F-23 62 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 in connection with the hazardous waste management activities identified in the site inspection described above, 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 the EPA will take several months. 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 $7.0 million, a majority of which represents costs associated with long-term groundwater monitoring and operation 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 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 has subsequently amended its original complaint and all parties are undertaking legal discovery with respect to the amended complaint. The Company intends to vigorously defend itself in this action and believes all of the allegations contained therein lack merit. In addition, based on certain written grievances or complaints filed by ValuJet, the Company has been informed that the United States Department of Justice, Antitrust Division is investigating the circumstances of the slot lease transaction to determine whether an antitrust violation has occurred. The Company is cooperating in this investigation and believes that the slot lease transaction did not violate any antitrust laws. On January 10, 1996, a complaint was filed by an individual resident of New York, Joel Gerber, relating to the slot lease transaction. Mr. Gerber purports to bring the action on his own behalf as well as on behalf of an unspecified number of purported class members who have or will travel between LaGuardia and Atlanta as of November 1, 1995 claiming damages as the result of alleged antitrust violations and conspiracy to commit same against the Company and Delta. The Court has not certified the New York action as a class action. The F-24 63 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company will vigorously contest all of the class action allegations as well as all allegations of liability and damages in the New York action and will seek a transfer of the New York action to the same federal court where the Atlanta action is pending. 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. TWE is proceeding with an orderly liquidation and has reached agreement with substantially all of its creditors relating to the settlement of obligations and claims. 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. 7. 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 (amounts in thousands):
DECEMBER 31, ------------------------- 1995 1994 -------- ---------- 12% Senior Secured Reset Notes due 1998(a)................. $145,184 $ -- 12% Contingent Payment Rights due 1996(b).................. 11,265 -- 10% Senior Secured Notes due 1998(c)....................... -- 171,327 8% Senior Secured Notes due 2000(c)........................ -- 166,602 8% IAM Backpay Notes(d).................................... 11,037 8,570 PBGC Notes(e).............................................. 201,164 322,163 Icahn Loans(f)............................................. 187,977 190,000 Equipment Trust Certificates(g)............................ 17,929 26,895 Various Secured Notes, 4.0% to 12.4%, due 1996-2001(h)..... 103,847 67,065 Installment Purchase Agreements, 10.44% to 10.53%, due 1996-2003(i)......................................... 111,033 107,363 IRS Deferral Note(j)....................................... 10,937 10,937 WORLDSPAN Note(k).......................................... 31,224 31,224 -------- ---------- Total long-term debt(1).......................... 831,597 1,102,146 Less current maturities.......................... 67,566 1,102,146 -------- ---------- Long-term debt, less current maturities.......... $764,031 $ -- ======== =========
- --------------- (a) The 12% Senior Secured Reset Notes due 1998 pay interest semi-annually beginning August 1, 1995, with interest 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, subject to certain conditions. The Company elected to pay interest due and payable for the first two periods in Common Stock. The notes are reflected net of unamortized discount of $24.8 million at December 31, 1995, to reflect an effective interest rate of 17.4%. The notes are secured by: (i) a first lien on certain slots, equipment and spare parts; (ii) a lien on the stock of a wholly owned subsidiary which owns TWA's interest in a hangar at Los Angeles International Airport; and (iii) a floating first lien on certain of TWA's domestic airport ground equipment. (b) The Contingent Payment Rights, arising under the terms of the '95 Reorganization, will be paid in 1996 and are secured by the same collateral as the 12% Senior Secured Reset Notes. F-25 64 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) The 10% Senior Secured Notes due 1998 and 8% Senior Secured Notes due 2000 were cancelled as of the '95 Effective Date. The 10% and 8% Senior Secured Notes are reflected net of discounts aggregating approximately $54.0 million and $170.2 million at December 31, 1994, resulting in effective rates of approximately 19.1% and 22.9%, respectively. (d) The 8% IAM Backpay Notes have a stated principal amount of $22.9 million and are reflected net of unamortized discount of $11.9 million and $12.6 million at December 31, 1995 and 1994 respectively, to reflect an effective interest rate of approximately 25.6%. 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. (e) At December 31, 1995 the PBGC Notes, issued in exchange for the 11% PBGC Notes as part of the '95 Reorganization, have a stated principal amount of $244.3 million, and are reflected net of unamortized discount of $43.2 million at December 31, 1995, to reflect an effective interest rate of approximately 11.75%. Interest on the PBGC Notes is payable semi-annually at an average stated rate of 8.19% per annum (subject to an increase in 1998 of up to 9.4% if the trading value of TWA's Common Stock does not exceed certain levels). Principal payments are due in semi-annual installments beginning in 1999 through 2007 subject to acceleration under certain circumstances. The PBGC 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. The PBGC Notes are subject to various mandatory prepayment provisions in the event of a sale by TWA of collateral securing the PBGC Notes or in the event of a transfer of substantially all of TWA's assets in a sale, merger or otherwise. (f) The Icahn Loans include a $75 million Asset Based Facility and a $125 million Receivables Facility, which had principal balances of $70.5 million and $117.5 million, respectively, at December 31, 1995. Interest is payable monthly at a rate of prime plus 1.75% per annum. On June 14, 1995, the Company signed an agreement with Karabu to extend the term of the Icahn Loans, from January 8, 1995 to January 8, 2001. 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. See Note 2-Chapter 11 Reorganizations. (g) The Equipment Trust Certificates pay interest semi-annually, beginning March 31, 1994, 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. (h) Various Secured Notes represent borrowings to finance the purchase or lease of certain flight equipment and other property. (i) Installment Purchase Agreements represent borrowings to finance the purchase of four Boeing 767-231 aircraft. The borrowings mature in annual installments through 2003, and require interest at rates ranging from 10.44% to 10.53% per annum. (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 (also see Note 4-Income Taxes). 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. F-26 65 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (l) At December 31, 1995, aggregate principal payments due for long-term debt for the succeeding five years were as follows (amounts in thousands):
YEAR -------------------------------------------------------------------------- 1996...................................................................... $ 67,566 1997...................................................................... 68,414 1998...................................................................... 196,176 1999...................................................................... 68,162 2000...................................................................... 52,926
All long-term debt was classified as current at December 31, 1994 as the result of certain alleged defaults and related cross default provisions contained in substantially all of TWA's debt agreements. TWA discontinued, effective June 30, 1995 and February 1, 1992, the accrual of interest on prepetition debt that was unsecured or estimated to be undersecured through the '95 Effective Date and the '93 Effective Date, respectively. Contractual interest expense for the eight months ended August 31, 1995 was approximately $18.7 million in excess of reported interest expense. Contractual interest expense for the ten months ended October 31, 1993 was approximately $133.1 million in excess of reported interest expense. The Company's debt agreements contain various limitations on the payment of dividends on, or the redemption of, common stock or preferred stock. Generally, TWA may not declare or pay cash dividends or other distributions on the Company's Common or Preferred Stock (the "Restricted Payments"), if the aggregate of such Restricted Payments shall exceed the sum of: (i) 50% of the cumulative consolidated net income of the Company, if any, subsequent to the '95 Effective Date, plus (ii) the aggregate net proceeds received by the Company from the issue or sale subsequent to the '95 Effective Date of any common or preferred stock or from the exercise of any options, warrants or rights to purchase any common stock or preferred stock, except for any such proceeds which the Company elects to apply to the concurrent purchase, redemption, retirement or other acquisition of any shares of the Company's common or preferred stock, less (iii) the cumulative consolidated net loss of the Company subsequent to the '95 Effective Date. 8. LEASES AND RELATED GUARANTEES: Eighteen of the aircraft in the Company's fleet at December 31, 1995 were leased under capital leases. The remaining lease periods for these aircraft range from two to eleven 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 1996 will be approximately $42.2 million for the 18 aircraft held under capital leases. One hundred twenty-one of the aircraft in TWA's fleet at December 31, 1995 were leased under operating leases. Other than five leases on a month-to-month basis, the remaining lease periods range from one month to 16 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 F-27 66 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TWA's assets located at the 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, 1995, the Company's contingent indemnification obligations in connection with the tax benefit transfers were collateralized by bank letters of credit aggregating $11,778,000, for which the Company has posted $11,778,000 in cash collateral to secure its reimbursement obligations and the bank letters of credit. In addition, the Company has pledged $7,596,000 in cash collateral to secure its obligation with respect to four of the tax benefit transfers and has pledged flight equipment having a net book value of $24,871,000 to secure its obligation with respect to two of the tax benefit transfers. At December 31, 1995, 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 (amounts in thousands):
MINIMUM LEASE PAYMENTS --------------------- CAPITAL OPERATING YEAR LEASES LEASES --------------------------------------------------------------- -------- ---------- 1996........................................................... $ 68,656 $ 222,987 1997........................................................... 62,357 205,060 1998........................................................... 55,219 159,902 1999........................................................... 52,511 131,711 2000........................................................... 49,249 112,684 Subsequent..................................................... 132,181 571,247 -------- ---------- Total................................................ 420,173 $1,403,591 ========= Less imputed interest.......................................... 117,708 -------- Present value of capital leases................................ 302,465 Less current portion........................................... 42,835 -------- Obligations under capital leases, less current portion......... $259,630 ========
Included in the Minimum Lease Payments for Operating Leases are estimates of increased rentals to cover lessor financing of "hushkits" for engines on 28 aircraft. The estimated amounts assume an eight year extension of the respective aircraft leases from date of hushkit installation. F-28 67 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In January 1996, TWA entered into agreements for the lease of ten Boeing 757 aircraft, with delivery of the first aircraft in July 1996 and the final aircraft in July 1997. Estimated future lease payments under the individual leases, which are for an initial lease term of ten years each, are as follows (amounts in thousands): 1996........................................................... $ 3,740 1997........................................................... 36,323 1998........................................................... 45,362 1999........................................................... 45,902 2000........................................................... 46,442 Subsequent..................................................... 295,331 -------- Total................................................ $473,100 ========
9. 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 has an aggregate redemption value of approximately $109.0 million, and is cumulative, having an initial liquidation preference of $100 per share. Commencing November 1995, dividends accrue 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 dividend may 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 is valued at 90% of the fair market value, based upon trading prices for the 20 days prior to the record date for the dividend payment. Under the terms of Mandatorily Redeemable 12% Preferred Stock, TWA is generally prohibited from declaring or paying dividends in cash, evidences of indebtedness, property, or other stock of TWA ranking on parity with or senior to the Mandatorily Redeemable 12% Preferred Stock, unless dividends on the Mandatorily Redeemable 12% Preferred Stock are being paid in cash. The dividend, redemption and liquidation rights of the Mandatorily Redeemable 12% Preferred Stock are senior to the Employee Preferred Stock and common stock. If TWA fails to pay dividends in cash or Common Stock for an aggregate of six dividend payment dates, holders of the Mandatorily Redeemable 12% Preferred Stock will have the right to elect one director to serve on the Board of Directors of TWA. The Mandatorily Redeemable 12% Preferred Stock is redeemable on May 1, 2005, subject to a requirement to redeem on May 1, 2002 if the amount of dividends paid in cash do not satisfy certain requirements. Subject to certain conditions, TWA may elect to exchange the Mandatorily Redeemable 12% Preferred Stock for 11% subordinated exchange notes at the rate of $100 principal amount for each $100 of liquidation preference. The Mandatorily Redeemable 12% Preferred Stock is subject to redemption, at the option of TWA, at a redemption price per share equal to 75% of the liquidation value on or before May 1, 1997, and increasing amounts thereafter through the final redemption date. TWA Gate Holdings, Inc. ("Gate Holdings"), a wholly owned subsidiary of TWA, has guaranteed the full and complete payment of amounts payable with respect to the liquidation preference, redemption price, and accrued and unpaid dividends of the Mandatorily Redeemable 12% Preferred Stock (or in the event of exchange, the 11% subordinated exchange notes). The Gate Holdings guarantee provides that Gate Holdings will make any payments required with respect to the Mandatorily Redeemable 12% Preferred Stock if TWA shall fail to make such payment. Furthermore, Gate Holdings is required to pay the liquidation preference and any unpaid and accrued dividends on the Mandatorily Redeemable 12% Preferred Stock in the event of a default under the pledge agreement. The Gate Holdings guarantee is secured by a pledge of all of the capital F-29 68 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) stock of certain of its subsidiaries previously established in the '93 Reorganization, which were assigned TWA's leasehold interest in the gates and related facilities at the various domestic airports served by TWA (other than gates at St. Louis' Lambert Airport), which were in turn subleased to TWA. The Gate Holdings guarantee is further secured by a pledge of TWA's rights to net proceeds of all domestic gates now or hereafter leased by TWA (exclusive of the St. Louis gates) and a capital note, as further described below. Furthermore, Gate Holdings is subject to covenants which limit the creation of further liens and encumbrances on its assets, limiting mergers, consolidations and transfers of assets, prohibiting the issuance of additional shares, limiting dividends and repurchases of its common stock and limiting the incurrence of indebtedness. Pursuant to the '95 Reorganization, TWA contributed a note in the principal amount of $25 million in exchange for the assignment by a subsidiary of Gate Holdings of its leasehold interest in certain gates at LaGuardia, JFK and Newark airports to TWA. The following tables present consolidating condensed financial statements for the Company, Gate Holdings and its subsidiaries, and other subsidiaries (amounts in millions).
GATE HOLDINGS AND OTHER TWA SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------- ------------ ------------ ------------ AS OF AND FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995 ------------------------------------------------------------------- Operating revenues....................... $1,051 $15 $ 37 $ (5) $1,098 Depreciation and amortization............ 53 2 -- -- 55 Other operating expenses................. 981 15 42 (5) 1,033 ------ --- ------ ------------ ------------ Operating income (loss)................ 17 (2) (5) -- 10 Other charges (credits).................. 46 (1) 4 (6) 43 ------ --- ------ ------------ ------------ Loss before income taxes and extraordinary items................. (29) (1) (9) 6 (33) Provision for income taxes............... 1 -- -- -- 1 ------ --- ------ ------------ ------------ Loss before extraordinary items........ (30) (1) (9) 6 (34) Extraordinary items...................... -- -- 4 -- 4 ------ --- ------ ------------ ------------ Net income (loss)...................... $ (30) $(1) $ (5) $ 6 $ (30) ====== ========= ========= ========= ========= Current assets........................... $ 706 $-- $ 32 $ (27) $ 711 Non-current assets....................... 2,186 72 100 (218) 2,140 Current liabilities...................... 812 -- 38 (27) 823 Long-term liabilities and deferred credits................................ 1,716 -- 10 (62) 1,664 Mandatorily Redeemable 12% Preferred Stock.................................. 61 -- -- -- 61 Shareholders' equity (deficit)........... 303 72 84 (156) 303
F-30 69 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GATE HOLDINGS AND OTHER TWA SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ FOR THE EIGHT MONTHS ENDED AUGUST 31, 1995 ------------------------------------------------------------------ Operating revenues....................... $2,111 $ 31 $ 81 $ (5) $2,218 Depreciation and amortization............ 98 7 1 -- 106 Other operating expenses................. 1,980 31 91 (5) 2,097 ------ ------ ------ --- ------------ Operating income (loss)................ 33 (7) (11) -- 15 Reorganization items..................... 212 30 -- -- 242 Other charges (credits).................. 159 -- 16 (64) 111 ------ ------ ------ --- ------------ Loss before income taxes and extraordinary items................. (338) (37) (27) 64 (338) Provision for income taxes............... -- -- -- -- -- ------ ------ ------ --- ------------ Loss before extraordinary items........ (338) (37) (27) 64 (338) Extraordinary items...................... 141 -- -- -- 141 ------ ------ ------ --- ------------ Net income (loss)...................... $ (197) $(37) $(27) $ 64 $ (197) ====== ========== ========= ========= =========
GATE HOLDINGS AND OTHER TWA SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------- ------------ ------------ ------------ AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1994 ------------------------------------------------------------------- Operating revenues...................... $3,197 $ 44 $227 $ (60) $3,408 Depreciation and amortization........... 168 10 5 -- 183 Other operating expenses................ 3,267 44 254 (60) 3,505 ------ ------ ------ ------------ ------------ Operating income (loss)............... (238) (10) (32) -- (280) Other charges (credits)................. 196 -- 43 (86) 153 ------ ------ ------ ------------ ------------ Loss before income taxes and extraordinary items................ (434) (10) (75) 86 (433) Provision for income taxes.............. -- -- 1 -- 1 ------ ------ ------ ------------ ------------ Loss before extraordinary items....... (434) (10) (76) 86 (434) Extraordinary items..................... (2) -- -- -- (2) ------ ------ ------ ------------ ------------ Net income (loss)..................... $ (436) $ (10) $(76) $ 86 $ (436) ====== ========== ========= ========= ========= Current assets.......................... $ 553 $ -- $ 40 $ (25) $ 568 Non-current assets...................... 1,887 88 155 (202) 1,928 Current liabilities..................... 1,826 -- 48 (27) 1,847 Long-term liabilities and deferred credits............................... 1,031 -- 94 (59) 1,066 Shareholders' equity (deficit).......... (417) 88 53 (141) (417)
10. 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, 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 11), 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 F-31 70 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consideration), and $109.0 million aggregate liquidation value of Mandatorily Redeemable 12% Preferred Stock. Subsequently, TWA issued 2.07 million additional shares of Common Stock to previous holders of TWA's 10% Senior Secured Notes based upon the subsequent trading prices of securities distributed pursuant to the '95 Reorganization. Additionally, TWA distributed 1.887 million additional shares of Common Stock in payment of interest on the 12% Senior Secured Reset Notes. 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. In October 1995, TWA received approximately $55.3 million in gross proceeds from the exercise of 13,206,247 equity rights, representing substantially all of the related proceeds, and issued 13,206,247 shares of Common Stock. The Company paid a fee of approximately $3.4 million in September 1995 to certain standby purchasers of shares covered by the equity rights. At December 31, 1995 there were 1,746,874 Seven Year Warrants outstanding. Additionally, 402,525 warrants for the purchase of Common Stock for nominal consideration were outstanding at December 31, 1995. The Company has adopted the 1994 Key Employee Stock Incentive Plan (the "KESIP") which provides for the award of incentive and nonqualified stock options for up to 7% of the Company's post-Restructuring Common Stock and Employee Preferred Stock outstanding as of the first vesting date under the KESIP, excluding any Common Stock issued after the '95 Effective Date not related to the '95 Reorganization. Options granted under the KESIP have a five year life and vest at a 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. At December 31, 1995 options for 2,243,146 shares had been granted under the KESIP at exercise prices ranging from $4.64 to $11.68. Operating results include charges of $0.02 million and $0.02 million for 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 the Common Stock on the date of grant over the exercise price, over the vesting period. 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. Pursuant to the '95 Reorganization, 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. Additionally, 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. 11. EARNED STOCK COMPENSATION: Pursuant to the '94 Labor Agreements, the Company agreed to provide not less than 30% of the Common Stock and Employee Preferred Stock of the Company on a post-restructured basis in exchange for these F-32 71 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) concessions (as well as in consideration for their prior equity ownership, which was 45% prior to the 1995 Restructuring). 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 in the eight months ended August 31, 1995 include a charge of approximately $4.3 million, representing the value of the shares allocated at such time, based upon the market price of TWA's Common Stock. The operating results for the four months ended December 31, 1995 includes a proportionate charge of approximately $2.0 million for the shares to be allocated to ALPA represented employees in 1996, based upon the then current 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. 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%, subject to potential dilution from a non-proportionate exercise of the Equity Rights in October 1995 and from any subsequent issuance of Common Stock, of the combined total number of outstanding Common Stock and Employee Preferred Stock over the five year period commencing in July 1997. 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 and Employee Preferred if the average trading price of the Common Stock over a thirty day period exceeds a target price of $11.00 per share following January 1, 1997 or would be made on any date thereafter if the average trading price of the Common Stock over a thirty day period 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 outstanding at the time, 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 than $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 other than those which were scheduled to be made in 2001 and 2002. 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 F-33 72 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 ESIP provides for the grant of additional shares under certain circumstances if the percentage of employee ownership should be reduced below specified levels as a result of the issuance of additional Common Stock to third parties. In the event of a merger, sale or consolidation of TWA where TWA is not the surviving entity, the grants are generally accelerated if the target prices are achieved and, under certain circumstances, additional grants will be made. 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. 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 approximately 950,000 additional shares will be distributed. The number of shares of Employee Preferred Stock outstanding at December 31, 1995 does not reflect any such additional shares. 12. EXTRAORDINARY ITEMS: 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 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 $2,005,000 related to the sale and lease back of four McDonnell Douglas MD-80 aircraft. The extraordinary gain recorded in the ten months ended October 31, 1993 included $172,924,000 from the cancellation in January 1993 of TWA debt securities held by certain Icahn Entities pursuant to the Comprehensive Settlement Agreement and $902,657,000 from the discharge of indebtedness pursuant to the consummation of the '93 Reorganization. 13. DISPOSITION OF ASSETS: Disposition of assets resulted in net gains of approximately $3,330,000 and $1,072,000 for the four months ended December 31, 1995 and full year 1994, respectively, and net losses of $206,000, $348,000 and $2,617,000 for the eight months ended August 31, 1995, the two months ended December 31, 1993 and ten months ended October 31, 1993, respectively. 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. On April 30, 1993, affiliates of TWA and NWA sold substantially all the assets and liabilities of PSP to Worldspan (also see Note 3 -- Investments). The sale resulted in a loss of $1.0 million. F-34 73 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SPECIAL CHARGES AND OTHER NONRECURRING ITEMS: 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. 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. The amount of this liability has been subsequently reduced to $26.3 million because of certain credits allowed pursuant to the '92 Labor Agreement and a further reduction related to an agreement to reduce proportionately the obligation based upon the size of the reduction of indebtedness achieved by the '95 Reorganization. The payments will be made in three equal annual installments, beginning in 1998. The IAM has subsequently indicated that it does not agree with the Company's method of computing the amount of the obligation and believes that the amount owed is greater, although they have not indicated any specific amount. The Company does not believe that the IAM is correct in their interpretation of the amount of the obligation and that the amount owed is properly reflected in the consolidated financial statements. 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 16 -- 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, are 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. F-35 74 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. INTEREST AND INVESTMENT INCOME, OTHER CHARGES AND CREDITS AND REORGANIZATION ITEMS:
PRIOR REORGANIZED PREDECESSOR COMPANY PREDECESSOR COMPANY COMPANY ------------ ------------------------------------------- ----------- FOUR MONTHS EIGHT MONTHS YEAR TWO MONTHS TEN MONTHS ENDED ENDED ENDED ENDED ENDED DECEMBER 31, AUGUST 31, DECEMBER 31, DECEMBER 31, OCTOBER 31, 1995 1995 1994 1993 1993 ------------ ------------- ------------ ------------ ----------- (AMOUNTS IN THOUSANDS) Interest and Investment Income: Interest income on short-term investments.................. $ (7,484) $ (10,366) $(12,058) $ (2,274) $ (17,262) Realized and unrealized losses on marketable securities..... -- -- -- -- 1,126 ------------ ------------- ------------ ------------ ----------- Total Interest and Investment Income..... $ (7,484) $ (10,366) $(12,058) $ (2,274) $ (16,136) ========== =========== ========== ========== ========= Reorganization Items: Professional fees and expenses related to reorganization proceedings.................. $ -- $ 13,447 $ -- $ -- 11,250 Charge to reflect IRS Settlement Agreement (Note 5)........... -- -- -- -- 15,000 Net charge (credit) arising from the adjustment of assets and liabilities to fair value on the '95 and '93 Effective Dates and other reorganization costs......... -- 228,796 -- -- (294,360) ------------ ------------- ------------ ------------ ----------- Total Reorganization Items................. $ -- $ 242,243 $ -- $ -- $ (268,110) ========== =========== ========== ========== ========= Other Charges and Credits: 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........ 26 351 200 352 1,646 Foreign currency transaction (gains) losses -- net........ 1,156 384 (1,941) 187 2,711 Finance charge income earned on receivables carried by TWA... (2,662) (6,198) (9,557) (1,799) (9,765) Equity in (earnings)/losses of TWA's investment in Worldspan.................... 11,535 (3,607) 3,616 2,636 (5,629) Miscellaneous other nonoperating charges (credits) -- net(a).......... (5,444) (4,309) (32,265) (765) (4,725) ------------ ------------- ------------ ------------ ----------- Total Other Charges and Credits............... $ 7,611 $ (2,379) $(28,847) $ 611 $ (15,762) ========== =========== ========== ========== =========
- --------------- (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 18 -- Supplemental Financial Information (Unaudited)). F-36 75 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. AIRCRAFT COMMITMENTS: Purchase options, prepayments, deposits and other arrangements concerning future aircraft deliveries to TWA were as follows as of December 31, 1995 (dollar amounts in thousands):
QUANTITY AMOUNT BALANCE APPROXIMATE OF OF OF FIRM TOTAL AIRCRAFT TYPE AIRCRAFT PREPAYMENT COMMITMENT COMMITMENT(A) ----------------------------------------- -------- ---------- ---------- -------------- Firm Orders: Airbus A330-300........................ 10 $ 12,002 $ 988,187 $1,000,189 Trent Engines.......................... 3,958 34,828 38,746 ---------- -------------- $1,023,015 $1,038,935 ========= ============ Purchase Options: Airbus A330-300........................ 10 2,000 ---------- Total Prepayments.............. $ 17,960 ========
TWA has entered into purchase agreements with AVSA, S.A.R.L. ("AVSA"), a subsidiary of Airbus Industrie, G.I.E., and with Rolls-Royce plc ("RR"), relating to the purchase of certain aircraft and engines, modules and spare parts to support those aircraft. The AVSA Agreement, as amended, includes the following provisions: (i) the delivery of ten A330-300 twin-engine wide body aircraft ("firm aircraft") to TWA beginning in 1999; (ii) allows TWA the option to purchase ten additional aircraft ("option aircraft"); (iii) requires TWA to make predelivery payments totaling nineteen percent of the cost of each aircraft due in installments beginning the thirty-sixth month prior to delivery of each aircraft; (iv) requires AVSA to finance, if certain conditions are met, all predelivery payments except the installment due the first day of the thirtieth month prior to delivery. As a result of the rescheduling of delivery dates, the requirement to resume issuance of promissory notes was deferred until April 1996, and TWA agreed to make a cash payment on October 1, 1996 in the principal amount of $893,025 plus interest. Additionally, TWA would be required to issue promissory notes to AVSA in the principal amount of approximately $4.3 million in the months of April, May, June, July and September of 1996. TWA has not yet made arrangements for the permanent financing of the A330 aircraft ordered pursuant to the AVSA Agreement. In the event of cancellation of the AVSA Agreement, prepayments amounting to approximately $14 million would be subject to forfeiture. During 1990, TWA executed agreements with RR (the "Equipment Agreement") relating to the purchase of RR engines, modules, and spare parts to support the original 20 firm and 20 option AVSA aircraft. In addition, RR agreed to provide product support with respect to the transaction and to purchase certain promissory notes from TWA to help TWA fund predelivery payments due RR and AVSA as well as certain spares from RR. To secure the promissory notes, TWA assigned to RR TWA's rights under the AVSA Agreement and the Equipment Agreement. On October 26, 1993 the Equipment Agreement was amended to include the following provisions: (i) the quantities of spare engine equipment to be purchased by TWA was reduced from nine to six units, which reduced the initial predelivery deposit required and estimated aggregate cost to $3.9 million and $39 million, respectively; (ii) requires TWA to pay to RR 30% of the cost of the equipment in installments prior to delivery and the balance of the cost at delivery; (iii) TWA's promissory note dated January 18, 1991, for approximately $26 million was reinstated in a principal amount of approximately $27.4 million, which represented the principal amount of the original note plus interest due on that note; (iv) required TWA to assume a spare parts purchase agreement dated December 31, 1990 and to pay cure payments in the approximate amount of $2.7 million in two equal installments on June 1, 1994 and June 1, 1995; and (v) RR's obligation to purchase additional notes from TWA under the original equipment agreement was eliminated. F-37 76 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RR will, however, reduce the amount of TWA's promissory note by approximately $1.3 million for any firm order aircraft subsequently cancelled by AVSA. During July 1995, RR consented to the deferral and rescheduling by TWA and AVSA of A330 aircraft delivery dates, which will defer performance by RR under the Equipment Agreement. In the event of cancellation of the Equipment Agreement, predelivery payments amounting to approximately $3.9 million made by TWA with respect to the Equipment Agreement would be subject to forfeiture. In February 1996, TWA entered into a purchase agreement (the "Purchase Agreement") with the Boeing Company ("Boeing") to purchase ten Boeing Model 757-231 aircraft. The Company has secured financial commitments for the aircraft from engine and airframe manufacturers for an estimated aggregate amount of $420 million. The Purchase Price for the aircraft and related spare parts and equipment is approximately $550 million. The final purchase price of each aircraft, is subject to certain economic adjustment factors as defined in the Purchase Agreement. The aircraft are scheduled for delivery in 1997, 1998, and 1999. The Company also received the right, subject to certain conditions, to purchase up to 20 additional aircraft from the manufacturer. TWA is required to make certain predelivery payments at various dates prior to the delivery of each aircraft. Concurrent with the Purchase Agreement, TWA entered into a separate agreement to obtain financing for a portion of these predelivery payments. Total aircraft predelivery payments required to be paid by TWA, net of the financing obtained, are approximately $25.6 million in 1996 and $20.7 million in 1997. 17. 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 77 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 ========== ============ ============== ============== ===========
F-39 78 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (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 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 Reorganization 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. In 1993 TWA applied fresh start reporting, in accordance with SOP 90-7, which resulted in the creation of a new reporting entity and the Company's assets and liabilities being adjusted to reflect fair values on the '93 Effective Date. For accounting purposes, the '93 Effective Date was deemed to be November 1, 1993. In the fresh start reporting, aggregate values of $75 million and $31.25 million were assigned to TWA's newly authorized common stock and newly authorized preferred stock, respectively. 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 at that time. The reorganization value of TWA was allocated to the 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. The excess of the reorganization value over the fair value of identifiable tangible and intangible assets has been reflected in the Company's balance sheet as reorganization value in excess of amounts allocable to identifiable assets. F-40 79 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the impact of the '93 Reorganization Plan and the related fresh start adjustments is presented below (amounts in thousands).
NOVEMBER 1, 1993 -------------------------------------------------------------------------- PREDECESSOR DEBT FRESH START OTHER REORGANIZED COMPANY DISCHARGE(A) ADJUSTMENTS(B) ADJUSTMENTS(C) COMPANY ----------- ------------ -------------- -------------- ----------- Current Assets: Cash and cash equivalents............... $ 50,518 $ 65,537 $ -- $ -- $ 116,055 Receivables............................. 399,735 -- -- -- 399,735 Spare parts, materials and supplies..... 183,884 -- -- -- 183,884 Prepaid expenses and other.............. 66,676 -- -- -- 66,676 ----------- ------------ -------------- -------------- ----------- Total Current Assets............. 700,813 65,537 -- -- 766,350 ----------- ------------ -------------- -------------- ----------- Property and Equipment.................... 1,004,555 -- (69,098) -- 935,457 ----------- ------------ -------------- -------------- ----------- Other Assets: Investment in affiliated companies...... 67,328 -- 46,879 -- 114,207 Other investments and receivables....... 335,361 (143,000) (5,320) -- 187,041 Routes, gates and slots................. -- -- 862,875 -- 862,875 Reorganization value in excess of amounts allocable to identifiable assets................................ -- -- -- 169,179 169,179 Other assets............................ 29,652 -- (13,902) -- 15,750 ----------- ------------ -------------- -------------- ----------- Total Other...................... 432,341 (143,000) 890,532 169,179 1,349,052 ----------- ------------ -------------- -------------- ----------- Total..................................... $ 2,137,709 $ (77,463) $821,434 $169,179 $ 3,050,859 ============ ============ ============ ============ ========== Current Liabilities: Current maturities of long-term debt.... $ 226,215 $ (164,818) $ -- $ -- $ 61,397 Current obligations under capital leases................................ 2,724 41,571 (3,586) -- 40,709 Advance ticket sales.................... 241,643 -- -- -- 241,643 Accounts payable and other accrued expenses.............................. 479,442 13,685 12,240 -- 505,367 ----------- ------------ -------------- -------------- ----------- Total............................ 950,024 (109,562) 8,654 -- 849,116 ----------- ------------ -------------- -------------- ----------- Liabilities Subject To Chapter 11 Reorganization Proceedings.............. 1,829,419 (1,829,419) -- -- -- ----------- ------------ -------------- -------------- ----------- Noncurrent Liabilities and Deferred Credits: Long-term debt, less current maturities............................ 544,601 525,884 -- -- 1,070,485 Obligations under capital leases, less current obligations................... 36,508 360,477 (15,697) -- 381,288 Other noncurrent liabilities and deferred credits...................... 143,353 -- 500,367 -- 643,720 ----------- ------------ -------------- -------------- ----------- Total............................ 724,462 886,361 484,670 -- 2,095,493 ----------- ------------ -------------- -------------- ----------- Shareholders' Equity (Deficiency): Old preferred stock..................... 99,000 -- -- (99,000) -- Old common stock........................ 259 -- -- (259) -- Preference stock........................ 5,000 -- -- (5,000) -- New Preferred Stock..................... -- 125 -- -- 125 New Common Stock........................ -- 110 90 -- 200 Additional paid-in capital.............. (75,922) 72,265 33,660 75,922 105,925 Accumulated deficit..................... (1,394,533) 902,657 294,360 197,516 -- ----------- ------------ -------------- -------------- ----------- Total............................ (1,366,196) 975,157 328,110 169,179 106,250 ----------- ------------ -------------- -------------- ----------- Total..................................... $ 2,137,709 $ (77,463) $821,434 $169,179 $ 3,050,859 ============ ============ ============ ============ ==========
F-41 80 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (a) To record the discharge of indebtedness pursuant to the '93 Reorganization Plan and reclassification of debt and capital lease obligations between current and non-current based upon their revised terms. Cash and cash equivalents reflect the receipt of approximately $143 million of amounts held in escrow (included in other investments and receivables) and the payment of approximately $102 million to holders of the 15% Senior Secured Notes on the '93 Effective Date. Additionally, the adjustment to cash and cash equivalents reflects the receipt of approximately $25 million in net proceeds from the sale and leaseback of certain assets on the '93 Effective Date. Debt securities issued pursuant to the '93 Reorganization were recorded at their estimated fair value on the '93 Effective Date. The excess of indebtedness eliminated over the fair value of securities issued in settlement of those claims, approximately $902.7 million, is reflected as an extraordinary item in the ten months ended October 31, 1993. (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 credit to reorganization items of approximately $339.6 million in the ten months ended October 31, 1993. Charges to reorganization items were recorded for various items related to the consummation of the '93 Reorganization aggregating approximately $45.1 million. Such charges included a charge of $33.8 million relating to the value of nine million shares of common stock contributed to employee trusts on the '93 Effective Date, pursuant to the '93 Reorganization, estimated costs of the relocation of TWA's corporate headquarters to St. Louis of approximately $10.2 million and various other fees and expenses associated with the consummation of the '93 Reorganization. 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 interest in affiliated companies, including Worldspan. -- Adjustments to reflect the fair value of TWA's international route authorities, take-off and landing time slots and airport gate leaseholds. -- Adjustments to reflect the fair value of capital lease obligations using current rates of interest. -- An adjustment of $405.4 million to accrue the accumulated postretirement benefit obligation, including the unamortized transition obligation related to SFAS No. 106. -- An adjustment of $14.8 million to record the excess of projected benefit obligations over plan assets of TWA's pension plans covering certain foreign employees and the estimated impact of the pending termination of one of the pension plans. -- An adjustment of $66.4 million to record a deferred credit representing the present value of the excess of contractual aircraft rents over current fair market rents during the remaining term of aircraft operating leases. -- An adjustment of $16 million to record deferred income taxes. (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 excess of reorganization value over amounts allocable to identifiable assets. F-42 81 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED): Selected consolidated financial data (unaudited) for each quarter within 1995 and 1994 are as follows (amounts in thousands):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- -------- --------- --------- Reorganized Company Four Months Ended December 31, 1995 Operating revenues.................. $ -- $ -- $ 293,890(a) $ 804,584 ========= ======== ========= ========= Special charges (note 13)........... $ -- $ -- $ --(a) $ -- ========= ======== ========= ========= 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 13)........... $ -- $ -- $ 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) $ -- ========= ======== ========= ========= Predecessor Company Year Ended December 31, 1994 Operating revenues.................. $ 760,648 $884,524 $ 990,271 $ 772,259 ========= ======== ========= ========= Special charges (note 13)........... $ -- $ -- $ 13,337 $ 125,512 ========= ======== ========= ========= Operating income (loss)............. $ (79,523) $(18,647) $ 34,695 $(216,019) ========= ======== ========= ========= Disposition of assets, gains (losses) -- net................... $ 445 $ (232) $ 435 $ 424 ========= ======== ========= ========= Income (loss) before extraordinary item.............................. $(122,437) $(58,150) $ (8,012) $(245,230) ========= ======== ========= ========= Extraordinary items................. $ (2,005) $ -- $ -- $ -- ========= ======== ========= ========= Net loss............................ $(124,442) $(58,150) $ (8,012) $(245,230) ========= ======== ========= =========
- --------------- (a) One month ended September 30, 1995. (b) Two months ended August 31, 1995. 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. F-43 82 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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. The results for the fourth quarter of 1994 include a reduction of non-operating expenses of approximately $21.1 million to reflect reductions of certain liabilities which were estimated on the '93 Effective Date, including obligations for payments of professional fees and expenses, certain priority taxes and other similar obligations. Subsequent negotiations, settlements and Bankruptcy Court orders during 1994 substantially reduced these estimated liabilities. The results for the fourth quarter of 1994 also include a charge to operating expenses of approximately $36.3 million to reflect an obligation for payments due employees represented by the IAM (also See Note 14 -- Special Charges and Other Nonrecurring Items). The results for the second quarter of 1994 include a reduction of operating expenses of approximately $11.7 million to reflect the receipt by TWA of a refund of certain landing fee charges and other related items from the British government. The refund was received in settlement of TWA's claim for excess charges during the period 1982 to 1989. 19. FOREIGN OPERATIONS: TWA conducts operations in various foreign countries, principally in Europe and the Middle East. Operating revenues from foreign operations were approximately $228.7 million in the four months ended December 31, 1995, $474.4 million in the eight months ended August 31, 1995, $794.1 million in the year ended December 31, 1994, $107.1 million in the two months ended December 31, 1993 and $660.5 million in the ten months ended October 31, 1993. 20. 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, 1995 and 1994. (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. F-44 83 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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, 1995 and December 31, 1994, approximately $145.2 million and $337.9 million, respectively, of the carrying value of TWA's debt was traded publicly. The aggregate market value of such debt was approximately $160.4 million and $194.8 million on those dates, respectively. The Company believes the fair value of the remaining debt which had an aggregate carrying value of approximately $686.4 million and $764.2 million at December 31, 1995 and 1994, respectively, was approximately $644.5 million and $616.0 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 this date. F-45 84 SCHEDULE II TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE FOUR MONTHS ENDED DECEMBER 31, 1995, THE EIGHT MONTHS ENDED AUGUST 31, 1995, THE YEAR ENDED DECEMBER 31, 1994, THE TWO MONTHS ENDED DECEMBER 31, 1993, AND THE TEN MONTHS ENDED OCTOBER 31, 1993 (AMOUNTS IN THOUSANDS)
COLUMN C COLUMN B ---------- COLUMN E ------------ ADDITIONS ---------- COLUMN A BALANCE AT CHARGED TO COLUMN D BALANCE AT - -------------------------------------------------- BEGINNING OF COSTS & ---------- END OF DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD - -------------------------------------------------- ------------ ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) Four Months ended December 31, 1995 Reserves deducted from assets to which they apply: Allowance for doubtful accounts.............. $ 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 accounts.............. $ 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 accounts.............. $ 11,159 $ 16,267 $ 12,594(a) $ 14,832 ======= ======= ======= ======= Allowance for obsolescence................... $ 1,470 $ 19,837 $ 379 $ 20,928 ======= ======= ======= ======= Two Months ended December 31, 1993 Reserves deducted from assets to which they apply: Allowance for doubtful accounts.............. $ 11,893 $ 2,602 $ 3,336(a) $ 11,159 ======= ======= ======= ======= Allowance for obsolescence................... $ -- $ 1,482 $ 12 $ 1,470 ======= ======= ======= ======= Ten Months ended October 31, 1993 Reserves deducted from assets to which they apply: Allowance for doubtful accounts.............. $ 10,361 $ 13,342 $ 11,810(a) $ 11,893 ======= ======= ======= ======= Allowance for obsolescence................... $ 54,044 $ 7,470 $ 61,514(c) $ -- ======= ======= ======= =======
- --------------- (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 85 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 29, 1996 TRANS WORLD AIRLINES, INC. By: /s/JEFFREY H. ERICKSON Jeffrey H. Erickson President 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/ JEFFREY H. ERICKSON President and Chief Executive March 29, 1996 Jeffrey H. Erickson Officer (Principal Executive Officer) /s/ ROBERT A. PEISER Executive Vice President -- Finance March 29, 1996 Robert A. Peiser and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) WILLIAM F. COMPTON* Director March 29, 1996 William F. Compton EUGENE P. CONESE* Director March 29, 1996 Eugene P. Conese /s/ JEFFREY H. ERICKSON Director March 29, 1996 Jeffrey H. Erickson GERALD L. GITNER* Director March 29, 1996 Gerald L. Gitner WILLIAM M. HOFFMAN* Director March 29, 1996 William M. Hoffman THOMAS H. JACOBSEN* Director March 29, 1996 Thomas H. Jacobsen MYRON KAPLAN* Director March 29, 1996 Myron Kaplan JAMES A. LAWRENCE* Director March 29, 1996 James A. Lawrence JEWEL LAFONTANT-MANKARIOUS* Director March 29, 1996 Jewel Lafontant-Mankarious THOMAS F. MEAGHER* Chairman of the Board March 29, 1996 Thomas F. Meagher WILLIAM O'DRISCOLL* Director March 29, 1996 William O'Driscoll
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SIGNATURE TITLE DATE - ---------------------------------------- ----------------------------------------------------- G. JOSEPH REDDINGTON* Director March 29, 1996 G. Joseph Reddington LAWRENCE K. ROOS* Director March 29, 1996 Lawrence K. Roos WILLIAM W. WINPISINGER* Director March 29, 1996 William W. Winpisinger *By:/s/ ROBERT A. PEISER March 29, 1996 Robert A. Peiser Attorney-in-fact
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EXHIBITS. *2.1.1 Second Amended Plan of Reorganization, dated May 28, 1993 (Exhibit 28.1 to 6/93 8-K) *2.1.2 Modifications to the Second Amended Plan of Reorganization, dated August 10, 1993; Supplemental Modifications to the Second Amended Plan of Reorganization, dated August 11, 1993; and Second Supplemental Modifications to the Second Amended Plan of Reorganization, dated August 12, 1993 (Exhibit 2.1 to 6/93 10-Q) *2.2 Confirmation Order, dated August 12, 1993, with Exhibits A-L attached (Exhibit 2.2 to 6/93 10-Q) *2.3 Final Decree, dated June 21, 1995, related to the '93 Reorganization (Exhibit 2.3 to 6/95 10-Q) *2.4 Joint Plan of Reorganization, dated May 12, 1995 (Appendix B to the Registrant's Registration Statement on Form S-4, Registration Number 33-84944, as amended.) *2.5 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) *2.6 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) 2.7 Final Decree, dated December 28, 1995, related to the '95 Reorganization *3(i) Amended and Restated Certificate of Incorporation of Trans World Airlines, Inc. (2) *3(ii) Amended and Restated By-Laws of Trans World Airlines, Inc., effective July 25, 1995 (Exhibit 3(ii) to 6/95 10-Q) 3(iii) Second Amended and Restated Certificate of Incorporation of the Registrant *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 Trans World Employees' Stock Ownership Plan and related Trust Agreement, dated August 31, 1993, between TWA, the IAM Plan Trustee Committee and the IAM Trustee (Exhibit 4.4 to 9/93 10-Q) *4.3 IFFA Trans World 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 Trans World Airlines, Inc. 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 Registration Rights Agreement, dated November 3, 1993, between TWA and the Initial Significant Holders (Exhibit 4.9 to 9/93 10 -Q) *4.8 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) *4.9 Indenture between TWA and Harris Trust and Savings Bank, dated November 3, 1993 relating to TWA's 8% Senior Secured Notes Due 2000 (Exhibit 4.11 to 9/93 10-Q) *4.10 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) *4.11 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) *4.12 The TWA Air Line Pilots 1995 Employee Stock Ownership Plan, effective as of January 1, 1995 (Exhibit 4.12 to 9/95 10-Q) *4.13 TWA Air Line Pilots Supplemental Stock Plan, effective September 1, 1994 (Exhibit 4.13 to 9/95 10-Q) *4.14 TWA Air Line Pilots Supplemental Stock Plan Trust, effective August 23, 1995 (Exhibit 4.14 to 9/95 10-Q)
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EXHIBITS. *4.15 TWA Air Line Pilots Supplemental Stock Plan Custodial Agreement, effective August 23, 1995 (Exhibit 4.15 to 9/95 10-Q) *10.1.1 Icahn Receivables 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) *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 N93108 (Exhibit 10.7 to 9/93 10-Q) *10.8 '92 Labor Agreements (Exhibits 2.1, 2.2 and 2.3 to 9/92 8-K) *10.9 Comprehensive Settlement Agreement, dated January 5, 1993 (Exhibit 10(iv)(1) to '92 10-K) 10.9.1 Omnibus Amendment and Supplement to Agreements between TWA and Karabu Corp. dated as of March 28, 1994(1) *10.10.1 Orders of the Bankruptcy Court, dated October 29, 1993 and September 8, 1993, respectively, relating to employment and severance of Glenn R. Zander (Exhibit 10.10 to '93 10-K) *10.10.2 Order of the Bankruptcy Court, dated January 12, 1993, designating Glenn R. Zander and Robert H. H. Wilson as Responsible Persons of TWA (Exhibit 10.10 to '93 10-K)
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EXHIBITS. *10.10.3 Amended Letter Agreement, dated January 7, 1993, between TWA and Glenn R. Zander relating to employment by TWA (Exhibit 10.10 to '93 10-K) *10.11 Amended Letter Agreement, dated January 7, 1993, between TWA and Robert H. H. Wilson relating to employment by TWA (Exhibit 10.11 to '93 10-K) *10.12 Agreement, dated January 6, 1994, between TWA and William R. Howard relating to resignation and termination of employment agreement (Exhibit 10.12 to '93 10-K) *10.13 Memorandum of Understanding, dated April 13, 1994, between TWA and Jeffrey H. Erickson relating to employment by TWA (Exhibit 10.13 to 3/94 10-Q) *10.14 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) *10.15 Letter Agreement, dated June 29, 1994, between TWA and Mark J. Coleman relating to employment by TWA (Exhibit 10.15 to 6/94 10-Q) *10.16 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) *10.17 Form of Stock Appreciation Right Agreement between TWA and certain executive officers of TWA relating to the grant of certain stock appreciation rights (Exhibit 10.17 to 6/94 10-Q) *10.18 Letter Agreement, dated August 10, 1994, between TWA and Robert H. H. Wilson ("Wilson") relating to a severance agreement between TWA and Wilson (Exhibit 10.18 to 6/94 10-Q) 10.19 Letter Agreement, dated August 30, 1994, between TWA and Robert A. Peiser relating to employment by TWA(1) 10.20.1 Purchase Agreement, dated as of December 15, 1993 between TWA and Pacific AirCorp DC9, Inc. with respect to aircraft N927L and N928L(1) 10.20.2 Lease Agreement 927, dated as of December 15, 1993, between Pacific AirCorp DC9, Inc. and TWA with respect to aircraft N927L(1) 10.20.3 Lease Agreement 928, dated as of December 15, 1993, between Pacific AirCorp DC9, Inc. and TWA with respect to aircraft N928L(1) 10.21.1 Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.), Inc. dated March 31, 1994, with respect to aircraft N950U(1) 10.21.2 Aircraft Purchase Agreement between TWA and Mitsui & Co. (U.S.A.), Inc., dated March 31, 1994, with respect to aircraft N953U(1) 10.21.3 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) 10.21.4 Aircraft Purchase Agreement between TWA and McDonnell Douglas Finance Corporation, dated March 31, 1994, with respect to aircraft N951U(1) 10.21.5 Aircraft Purchase Agreement between TWA and McDonnell Douglas Finance Corporation, dated March 31, 1994, with respect to aircraft N952U(1) 10.21.6 Lease Agreement, dated as of March 31, 1994 between McDonnell Douglas Finance Corporation and TWA with respect to aircraft N951U and N952U(1) 10.22.1 Aircraft Purchase Agreement, dated March 31, 1994, between McDonnell Douglas Finance Corporation and TWA with respect to aircraft N306TW (formerly N534AW)(1) 10.22.2 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) 10.22.3 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) 10.23 Commuter Air Service Agreement dated July 22, 1992, between TWA and Trans World Express, Inc.(1) 10.24 Commuter Air Service Agreement dated October 27, 1993, between TWA and Alpha Air(1) 10.25 Air Service Agreement dated October 1, 1994, between TWA and Trans States Airlines, Inc.(1) 10.26 Consulting Agreement between TWA and Fieldstone, Private Capital Group, L.P. dated July 11, 1994(1) 10.27 Consulting Agreement dated July 15, 1994, between TWA and Simat, Helliesen & Eichner, Inc.(1)
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EXHIBITS. 10.28.1 Agreement for Purchase and Sale dated as of August 29, 1994, between TWA and Browsh & Associates, Inc.(1) 10.28.2 Agreement for Purchase and Sale dated as of August 29, 1994, between TWA and Travel Marketing Holding Corporation(1) 10.29.1 Term Sheet dated September 13, 1994 relative to sale of Midcoast Aviation, Inc. executed by Midcoast Aviation, Inc. and Sabreliner Corporation(1) 10.29.2 Acquisition Agreement dated as of October 31, 1994 relative to the sale of Midcoast Aviation, Inc. executed by Midcoast Aviation, Inc., and Sabreliner Corporation(1) *10.29.3 Addendum to Stock Purchase Agreement (identified in 10.29.2) dated October 31, 1994 (Exhibit 10.29.3 to 9/94 10-Q) *10.29.4 Addendum to Stock Purchase Agreement (identified in 10.29.2) dated November 2, 1994 (Exhibit 10.29.4 to 9/94 10-Q) 10.30 Acquisition Agreement for sale of Airport Terminal Services, Inc. dated September 9, 1994, among TWA, Airport Terminal Services, Inc., Richard S. Hawes, III, Richard B. Hawes, and Midcoast Aviation, Inc.(1) 10.31.1 Form of Agreement dated as of August 31, 1994, between TWA and the Air Line Pilots Association, International(1) 10.31.2 Form of Agreement dated as of September 1, 1994, between TWA and the International Association of Machinists and Aerospace Workers(1) 10.31.3 Form of Agreement dated as of September 1, 1994, between TWA and the Independent Federation of Flight Attendants(1) *10.31.4 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) 10.32.1 Trust Agreement dated as of August 24, 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) 10.32.2 Stock Pledge and Intercreditor Agreement dated as of August 24, 1994 among TWA, TWA Stock Holding Company, Inc. and United States Trust Company of New York(1) 10.33.1 Key Employee Stock Incentive Plan(1) 10.33.2 Form of Option Agreements for options issued pursuant to the 1994 Key Employee Stock Incentive Plan(1) 10.34 Form of Pledge and Security Agreement dated as of August 23, 1995 by TWA Gate Holdings, Inc. in favor of First Security Bank of Utah, National Association, as trustee for the 12% Senior Preferred Stock(1) *10.35 Letter Agreement, dated January 25, 1995 between TWA and Don Monteath relating to employment by TWA and March 9, 1995 letter amending such Agreement (Exhibit 10.35 to '94 10-K) *10.36 Letter Agreement, dated March 24, 1995 between TWA and Joseph R. Vilmain relating to employment by TWA (Exhibit 10.36 to 6/95 10-Q) *10.37 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) 10.37.1 Karabu Ticket Program Agreement between TWA and Karabu Corp. dated as of June 14, 1995 *10.38 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) *10.39 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) *10.40 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) *10.41 Equity Rights Put Agreement dated as of September 15, 1995 between TWA and Elliott Associates L.P., a Delaware limited partnership (Exhibit 10.41 to 9/95 10-Q) *10.42 Equity Rights Put Agreement dated as of September 15, 1995 between TWA and Westgate International L.P., a Cayman Islands limited partnership (Exhibit 10.42 to 9/95 10-Q)
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EXHIBITS. *10.43 Equity Rights Put Agreement dated as of September 15, 1995 between TWA and United Equities (Commodities) Company, a New York general partnership (Exhibit 10.43 to 9/95 10-Q) *10.44 Equity Rights Put Agreement dated as of September 15, 1995 between TWA and Grace Brothers, Ltd., an Illinois limited partnership (Exhibit 10.44 to 9/95 10-Q) *10.45 Equity Rights Put Agreement dated as of September 15, 1995 between TWA and First Capital Alliance, L.P., an Illinois limited partnership (Exhibit 10.45 to 9/95 10-Q) *10.46 Equity Rights Put Agreement dated as of September 15, 1995 between TWA and Romulus Holdings Corp. a Delaware Corporation (Exhibit 10.46 to 9/95 10-Q) *10.47 Letter Agreement, dated August 22, 1995 between TWA and Marilyn M. Hoppe relating to employment by TWA (Exhibit 10.47 to 9/95 10-Q) 10.48 Purchase Agreement, dated February 9, 1996 between The Boeing Company and TWA relating to Boeing Model 757-231 Aircraft (Purchase Agreement Number 1910) 10.49 Employee Stock Incentive Program dated as of August 23, 1995 by TWA 11 Statement re Computation of Per Share Earnings 21 Subsidiaries of TWA 23.1 Consent of KPMG 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 the Registrant's Registration Statement on Form S-4, Registration Number 33-84944. (2) Incorporated herein by reference to Exhibit 3.1.3 to the Registrant's Registration Statement on Form S-4, Registration Number 33-84944. REPORTS ON FORM 8-K Current Report on Form 8-K filed December 29, 1995. Current Report on Form 8-K filed March 20, 1996. Current Report on Form 8-K filed March 21, 1996. EX-2.7 2 EXHIBIT 2.7 1 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MISSOURI EASTERN DIVISION In re: ) ) Chapter 11 TRANS WORLD AIRLINES, INC., ) ) Case No. 95-43748-399 Debtor. ) ) Employer Tax I.D. No. 43-1145889 ) - ---------------------------------------- FINAL DECREE Upon the statement of Trans World Airlines, Inc., in its Application for Final Decree and for Entry of Order Closing Case, and it appearing therefrom that the Modified Joint Plan of Reorganization confirmed by this Court on August 4, 1995 has been substantially consummated, and it further appearing that this case has been fully administered and is in a position to be closed, it is ORDERED, ADJUDGED AND DECREED that the above-captioned case be and the same is hereby closed. ENTERED this 28th day of December, 1995. /s/ Barry S. Shermer ------------------------------ The Honorable Barry S. Shermer United States Bankruptcy Judge EX-3.III 3 EXHIBIT 3(III) 1 Exhibit 3(iii) SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TRANS WORLD AIRLINES, INC. (which FURTHER AMENDS AND RESTATES THE Amended And Restated Certificate Of Incorporation Of Trans World Airlines, Inc. originally INCORPORATED ON AUGUST 15, 1978 AS "New TWA CORPORATION") The undersigned, Jeffrey H. Erickson, President and Chief Executive Officer of Trans World Airlines, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware ("GCL"), does hereby certify on behalf of the Corporation as follows: That pursuant to the provisions of Section 245 of the GCL, the Corporation's Amended and Restated Certificate of Incorporation dated August 17, 1995 be amended and restated by deleting the text therein in its entirety and inserting in lieu thereof the following: ARTICLE FIRST. The name of the corporation is Trans World Airlines, Inc. (the "Corporation"). ARTICLE SECOND. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the GCL, except that the Corporation shall not in any state, territory, district, possession or country carry on any business or exercise any powers which a corporation organized under the laws thereof could not carry on or exercise. ARTICLE FOURTH. Intentionally left blank. ARTICLE FIFTH. Section 1. Authorized Capital Stock. The Corporation is authorized to issue three classes of capital stock. The total number of shares of capital stock that the Corporation is authorized to issue is three hundred million (300,000,000) shares, consisting of (i) one hundred fifty million (150,000,000) shares of common stock with a par value of $.01 per share (the "Common Stock"), (ii) twelve million five hundred thousand (12,500,000) shares of Cumulative Preferred Stock with a par value of $.01 per share referred to in the Certificate of Designation, Preferences and Rights dated November 3, 1993 (the "Preferred Stock"), and (iii) one hundred thirty seven million five hundred thousand (137,500,000) shares of preferred stock with a par value of $.01 per share (the "Additional Preferred Stock"). The Corporation will not issue nonvoting capital stock to the extent prohibited by the United States Bankruptcy Code (the "Bankruptcy Code"), 11 U.S.C. sec. 1123; PROVIDED, HOWEVER, this sentence (a) will have not further force and effect beyond that required under such section, (b) will have such force and effect, if any, only for so long as such section is in effect and applicable to the Corporation, and (c) in all events may be amended or eliminated in accordance with applicable law as from time to time in effect. Section 2. Preferred Stock. The Preferred Stock shall be issued in one series. The Board of Directors of the Corporation (the "Board"), are hereby authorized to issue shares of Preferred Stock and to fix before issuance the number of shares to be issued and the designation, relative powers, preferences, and rights and qualifications, limitations, or restrictions of all shares. The authority of the Board will include, without limiting the generality of the foregoing, the determination of any or all of the following: (a) the number of shares and the designation to distinguish the shares; (b) the voting powers, if any, and whether such voting powers are full or limited; (c) the redemption provisions, if any, including the redemption price or prices to be paid; (d) whether dividends, if any, will be cumulative or noncumulative, the dividend rate, and the dates and preferences of dividends; (e) the rights upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (f) the provisions, if any, of a sinking fund; and (g) any other relative, participating, optional, or other special powers, preferences, rights, qualifications, limitations, or 2 restrictions thereof; all as may be determined by the Board and stated in the resolution or resolutions providing for the issuance or issuances of such Preferred Stock (collectively, the "Preferred Stock Designation"). Section 3. Common Stock. Except as may otherwise be provided in the Preferred Stock Designation or any Additional Preferred Stock Designation (as hereinafter defined), the holders of Common Stock will be entitled to one vote for each share of Common Stock held of record by such holder as of the record date for such meeting (i) on each matter submitted to a vote at a meeting of stockholders and (ii) for each of the directors to be elected at an annual meeting of shareholders. Except as may otherwise be provided in the Preferred Stock Designation or any Additional Preferred Stock Designations, (i) the holders of the Common Stock shall be entitled to receive, when, as and if declared by the Board, out of funds legally available therefor, dividends payable in cash, stock or otherwise, and (ii) upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the remaining net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interests. Section 4. Additional Preferred Stock. The Additional Preferred Stock shall be issued in one or more series. The Board is hereby authorized to issue shares of Additional Preferred Stock and to fix before issuance the number of shares to be issued and the designation, relative powers, preferences, and rights and qualifications, limitations, or restrictions of all shares. The authority of the Board will include, without limiting the generality of the foregoing, the determination of any or all of the following: (a) the number of shares and the designation to distinguish the shares; (b) the voting powers, if any, and whether such voting powers are full or limited; (c) the redemption provisions, if any, including the redemption price or prices to be paid; (d) whether dividends, if any, will be cumulative or noncumulative, the dividend rate, and the dates and preferences of dividends; (e) the rights upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (f) the provisions, if any, of a sinking fund; and (g) any other relative, participating, optional, or other special powers, preferences, rights, qualifications, limitations, or restrictions thereof; all as may be determined by the Board and stated in the resolution or resolutions providing for the issuance or issuances of such Additional Preferred Stock (each such designation is collectively, the "Additional Preferred Stock Designation"). ARTICLE SIXTH. The Board may make, amend, and repeal the By-Laws of the Corporation. Any By-Law made by the Board under the powers conferred hereby may be amended or repealed by the Board (except as specified in any such By-Law so made or amended) or by the Corporation's stockholders in the manner provided in the By-Laws of the Corporation; provided, however, that notwithstanding anything in the By-Laws to the contrary, no provision of the By-Laws may be adopted, amended, altered or repealed by the holders of the Company's capital stock other than by the affirmative vote of the holders of three-fourths or more of the then outstanding shares of Voting Stock (defined below) voting together as a single class. The Corporation may in its By-Laws confer powers upon the Board in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board by applicable law. For the purposes of this Second Amended and Restated Certificate of Incorporation, the term "Voting Stock" means stock of the Corporation of all classes and series entitled to vote generally in the election of directors and shall not include any class or series of preferred stock of the Corporation unless the certificate of designations, preferences and rights for such class or series shall specifically state that such class or series shall be deemed Voting Stock for purposes of this Article Sixth. Notwithstanding anything contained in this Second Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least three-fourths of the Voting Stock, voting together as a single class, is required to amend or repeal, or to adopt any provisions inconsistent with, this Article Sixth. ARTICLE SEVENTH. The existence of the Corporation shall be perpetual. ARTICLE EIGHTH. Subject to the rights of holders of Preferred Stock or Additional Preferred Stock: (a) any action required or permitted to be taken by the stockholders of the Corporation must be effected at duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing of such stockholders; and 2 3 (b) special meetings of stockholders of the Corporation may be called only by (i) the Chairman of the Board (the "Chairman"), (ii) the Corporate Secretary of the Corporation (the "Secretary") within ten (10) calendar days after receipt of the written request of a majority of the total number of Directors that the Corporation would have if there were no vacancies, provided, however, that the total number of Directors shall be determined without inclusion of Directors to be named by holders of Preferred Stock or Additional Preferred Stock until such persons have been elected in accordance with the By-Laws of Corporation (the "Whole Board"), and (iii) as provided in Section 2.3(b) of the By-Laws. At any annual meeting or special meeting of stockholders of the Corporation, only such business will be conducted or considered as has been brought before such meeting in the manner provided in the By-Laws of the Corporation. Notwithstanding anything contained in this Second Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of at least a majority of the Voting Stock, voting together as a single class, will be required to amend or repeal, or adopt any provision inconsistent with, this Article Eighth. ARTICLE NINTH. Section 1. Number, Election and Terms of Directors. The Board shall be reconstituted pursuant to the Plan of Reorganization and Section 303 of the GCL. Subject to the rights, if any, of the holders of Preferred Stock to elect additional Directors under circumstances specified in the Preferred Stock Designation, the number of Directors of the Corporation shall be fifteen (15). The Directors, other than those who may be elected by the holders of Preferred Stock, shall be classified with respect to the time for which they severally hold office into three (3) classes of five (5) Directors per class, designated Class I, Class II and Class III. Effective upon November 3, 1993, the following persons shall be Directors of the Corporation pursuant to the Confirmation Order and Section 303 of the GCL: in Class I, William R. Howard, Glenn R. Zander, Robert H. H. Wilson, Eugene Conese, Sr. and Lawrence K. Roos; in Class II, Gerald Gitner, Myron Kaplan, William O'Driscoll, William Compton and Victoria Frankovich; in Class III, James A. Lawrence, Thomas Meagher, Joseph Reddington, Donald Craib and Timothy Connolly. The Directors first appointed to Class I will hold office for a term expiring at the annual meeting of stockholders to be held in 1994; the Directors first appointed to Class II will hold office for a term expiring at the annual meeting of stockholders to be held in 1995; and the Directors first appointed to Class III will hold office for a term expiring at the annual meeting of stockholders to be held in 1996. The members of each such class will hold office until their successors are elected and qualified. The subsequent terms of service for all Directors will be three (3) years for the second term and one (1) year for each term thereafter for all Directors, regardless of their classification. Subject to the rights, if any, of the holders of Preferred Stock to elect additional Directors under circumstances specified in the Preferred Stock Designation, Directors may be elected by the stockholders only at an annual meeting of stockholders. Election of Directors need not be by written ballot unless requested by the Chairman or by the holders of a majority of the Voting Stock present in person or represented by proxy at a meeting of the stockholders at which Directors are to be elected. Section 2. Nomination of Director Candidates. Except as otherwise provided herein, advance notice of stockholder nominations for the election of Directors must be given in the manner provided in the By-Laws of the Corporation. The reconstituted Board of Directors, as set forth in Section 1 of this Article Ninth, was nominated as follows: the management of the Corporation nominated William R. Howard, Glenn R. Zander, and Robert H. H. Wilson as Directors in Class I; the Creditors' Committee (as hereinafter defined) nominated Eugene Conese, Sr. and Lawrence K. Roos as Directors in Class I, Gerald Gitner and Myron Kaplan as Directors in Class II and James A. Lawrence, Thomas Meagher, Joseph Reddington and Donald Craib as Directors in Class III; IAM (as hereinafter defined) nominated William O'Driscoll as a Director in Class II and Timothy Connolly as a Director in Class III; ALPA (as hereinafter defined) nominated William Compton as a Director in Class II; and IFFA nominated Victoria Frankovich as a Director in Class II. In connection with the first three annual elections of Directors following November 3, 1993, the Board will, at least seventy-five (75) calendar days prior to the date of the relevant election, request the continuing Directors who were nominated by the same Original Nominating Entity (as hereinafter defined) as the Director whose term is then expiring to nominate a person to succeed the retiring Director. If no such Directors remain, the Board will, at least seventy-five (75) calendar days prior to the date of the relevant election, request nomination of a person from such Original Nominating Entity. Such nomination shall be accompanied by the signed consent of the nominee to serve as Director of the Corporation if elected and information about the 3 4 nominee as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board. Not more than five (5) business days after receipt of the nomination, the Board of Directors will advise the nominating Directors or the Original Nominating Entity, as the case may be, if the nominee is not acceptable. If such notice of unacceptability is given, the Directors or entity making the nomination will provide an additional nominee or nominees. A notice of unacceptability may be given by the Board of Directors only after obtaining an opinion of outside counsel stating that the acceptance of the relevant nominee would be a breach of fiduciary duty of the Board to the stockholders of the Corporation. If no notice of unacceptability is given, the nominee shall be deemed to be acceptable to the Board of Directors to fill the position of the vacating director. If a notice of unacceptability is given, the Original Nominating Entity or Directors, as the case may be, and the Board of Directors will, in good faith, repeat the foregoing procedures until an acceptable nominee is found. Vacancies on the Board created by resignation, removal or otherwise and occurring prior to the third annual election of Directors and as to Directors elected at such third annual election shall be filled by a nominee of the remaining Directors who were nominated by the same Original Nominating Entity as the vacating Director. If no such Directors remain, the Board will request nomination of a person for the vacant directorship from the Original Nominating Entity which nominated the vacating Director. Promptly upon receipt of such name, the Board will advise the nominating Director or entity, as the case may be, if the nominee is not acceptable. If such notice of unacceptability is given, the Directors or entity making the nomination will provide an additional nominee or nominees. A notice of unacceptability may be given by the Board only after obtaining an opinion of outside counsel stating the acceptance of the relevant nominee would be a breach of fiduciary duty of the Board to the stockholders of the Corporation. If no notice of unacceptability is given, the nominee shall fill the position of the vacating Director. If a notice of unacceptability is given, the Original Nominating Entity or Directors, as the case may be, and the Board will, in good faith, repeat the foregoing procedures until an acceptable nominee is found. The following terms shall have the following meanings: "ALPA" means the Air Line Pilots Association, International. "Creditors' Committee" means the Official Unsecured Creditors' Committee of the Corporation appointed by the Office of the United States Trustee pursuant to Section 1102 of the Bankruptcy Code in the bankruptcy case captioned In re Trans World Airlines, Inc. (Case No. 92-115) filed in the United States Bankruptcy Court for the District of Delaware. "IAM" means the International Association of Machinists and Aerospace Workers. "IFFA" means the Independent Federation of Flight Attendants. "Original Nominating Entity" means, as applicable, each of the management of the Corporation, ALPA, IAM, IFFA and the Creditors' Committee until dissolved and thereafter in lieu thereof, the Voting Trust. "Voting Trust" means the voting trust established pursuant to the Plan of Reorganization for holding shares of Common Stock. Section 3. Newly Created Directorships and Vacancies. Subject to the rights, if any, of the holders of Preferred Stock to elect additional Directors under circumstances specified in the Preferred Stock Designation, and subject to the provisions of Section 2 of this Article Ninth and Article III of the By-Laws regarding appointment of successor Directors, any vacancies on the Board resulting from death, resignation, disqualification, removal or other cause will be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board, or by a sole remaining Director. Any Director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of Directors in which the vacancy occurred and until such Director's successor has been elected and qualified. No decrease in the number of Directors constituting the Board may shorten the term of any incumbent Director. 4 5 Section 4. Removal. Subject to the rights, if any, of the holders of Preferred Stock to elect additional Directors under circumstances specified in the Preferred Stock Designation, and Section 2 of this Article Ninth and Article III of the By-Laws, any Director may be removed from office by the stockholders only for cause and only in the manner provided in this Section 4. At any annual meeting or special meeting of the stockholders, the notice of which states that the removal of a Director or Directors is among the purposes of the meeting, the affirmative vote of the holders of at least a majority of the Voting Stock, voting together as a single class, may remove such Director or Directors for cause. Section 5. Meetings of Board. Except as otherwise provided herein, at all meetings of the Board, a majority of the Whole Board shall be required to constitute a quorum for the transaction of business. No action may be taken at a meeting at which a quorum is not present, except to vote to adjourn such meeting or fill a vacancy on the Board. Except as otherwise provided herein, no action shall be taken by the Corporation unless such action is authorized by the affirmative vote of a majority of the Directors in attendance at a meeting at which a quorum is present. Section 6. Amendment, Repeal, Etc. Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of at least eighty percent (80%) of the Voting Stock, voting together as a single class, is required to amend or repeal, or adopt any provision inconsistent with, this Article Ninth. ARTICLE TENTH. To the full extent permitted by the GCL or any applicable law currently or hereinafter in effect, a Director of the Corporation shall not be personally liable either to the Corporation or to any stockholder for monetary damages for breach of fiduciary duty as a Director, except for liability of a Director (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions which are not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for an act or omission for which the liability of such Director is expressly provided under the GCL or (iv) for any transaction from which the Director derived an improper personal benefit. Neither amendment nor repeal of this Article Tenth nor the adoption of any provision of this Second Amended Restated Certificate of Incorporation inconsistent with this Article Tenth shall eliminate or reduce the effect of this Article Tenth in respect of any matter occurring. or any cause of action, suit or claim that, but for this Article Tenth, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. This Article Tenth shall not eliminate or limit the personal liability of a Director for any act or omission occurring prior to the effective date hereof. No contact or transaction between the Corporation and one or more of its directors, officers, or stockholders or between the Corporation or any person (as used herein "person" means any other corporation, partnership, association, firm, trust, joint venture, political subdivision, or instrumentality) or other organization in which one or more of its directors, officers, or stockholders are directors, officers, or stockholders, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee which authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or the committee, in good faith, authorizes the contact or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; or (ii) the material facts as to his, her or their relationship or interest and as to the contact or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders: or (iii) the contact or transaction is fair as to the Corporation as of the time it is authorized, approved, or ratified by the Board, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. Any amendment or repeal of, or adoption of any provision inconsistent with, this Article Tenth will not adversely affect any right or protection existing hereunder, or arising out of facts occurring, prior to such amendment, repeal, or adoption, and no such amendment, repeal, or adoption will affect the legality, validity, or enforceability of any contact entered into or right granted prior to the effective date of such amendment, repeal, or adoption. 5 6 ARTICLE ELEVENTH. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to, or testifies in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature, by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permitted by law, and the Corporation may adopt By-Laws or enter into agreements with any such person for the purpose of providing for such indemnification. To the extent that a director or officer of the Corporation has been successful on the merits or otherwise (including without limitation settlement by nolo contendere) in defense of any action, suit or proceeding referred to in the immediately preceding paragraph, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Expenses incurred by an officer, director, employee or agent in defending or testifying in a civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation against such expenses as authorized by this Article Eleventh, and the Corporation may adopt By-Laws or enter into agreements with such persons for the purpose of providing for such advances. The indemnification permitted by Article Eleventh shall not be deemed exclusive of any other rights to which any person may be entitled under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding an office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, employee benefit plan trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article Eleventh or otherwise. If the GCL is amended to further expand the indemnification permitted to directors, officers, employees or agents of the Corporation, then the Corporation shall indemnify such persons to the fullest extent permitted by the GCL, as so amended. Nothing contained in this Second Amended and Restated Certificate of Incorporation shall be deemed to reinstate any obligation of the Corporation to indemnify any person or entity, which was otherwise released under or in connection with that certain Settlement Agreement, dated as of January 5, 1993 (the "Settlement Agreement") among Trans World Airlines, Inc., Official Unsecured Creditors' Committee of Trans World Airlines, Inc., Pension Benefit Guaranty Corporation, International Association of Machinists and Aerospace Workers, Independent Federation of Flight Attendants, Air Line Pilots Association, International, Transport Workers Union of America, Carl C. Icahn, The Icahn Entities (as set forth therein), and Pichin Corp., as the Icahn Sponsor or which was otherwise expressly released or discharged. ARTICLE TWELFTH. The Corporation reserves the right to amend, alter, change or repeal any provision of this Second Amended and Restated Certificate of Incorporation in the manner now or hereafter prescribed by statute or herein, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE THIRTEENTH. The affirmative vote of at least two-thirds of the Voting Stock of the Corporation, voting together as a single class, shall be necessary for the purpose of authorizing or effecting any 6 7 of the following action prior to September 1, 2000: (a) any merger or consolidation of the Corporation with or into any other entity; (b) any business combination within the meaning of Section 203 of the Delaware General Corporation Law; (c) any dissolution or liquidation of the Corporation; and (d) any repurchase, retirement or redemption of the Corporation's capital stock or other securities, issued after the effective date of this Article Thirteenth, prior to their scheduled maturity or expiration except for mandatory redemptions of any redeemable preferred stock of the Corporation and redemptions out of the proceeds of any substantially concurrent offering of comparable or junior securities unless such matter referred to in (a) through (d) shall have been approved by a vote of at least eighty percent (80%) of the Board of Directors then in office in which event no vote by the holders of Voting Stock shall be required except to the extent otherwise required by this Certificate of Incorporation, by law or as the Board of Directors may recommend by the affirmative vote of a majority of the Board of Directors then in office. This Article Thirteenth will terminate on September 1, 2000. IN WITNESS WHEREOF, Jeffrey H. Erickson, a duly authorized representative of the Corporation, has signed this Second Amended and Restated Certificate of Incorporation on this, the 16th day of November, 1995. TRANS WORLD AIRLINES, INC. By: -------------------------------------- Jeffrey H. Erickson Its: President and Chief Executive Officer ATTEST: By: - -------------------------------------- Kathleen A. Soled Its: Corporate Secretary [CORPORATE SEAL] 7 8 STATE OF MISSOURI SS.: COUNTY OF ST. LOUIS
The undersigned, a Notary Public in and for the aforesaid County and State, certifies that on this 16th day of November, 1995, Jeffrey H. Erickson, the President and Chief Executive Officer of Trans World Airlines, Inc. (the "Corporation") and Kathleen A. Soled, Corporate Secretary of the Corporation, known to me personally to be such, duly executed the foregoing Certificate before me and acknowledged said Certificate to be their act and deed made on behalf of the Corporation, and acknowledged that the facts stated therein are true. The signatures on the attached Certificate of said President and Chief Executive Officer and Corporate Secretary of the Corporation are in the handwriting of said President and Chief Executive Officer and said Corporate Secretary, respectively, and the seal affixed to the Certificate is the corporate seal of the Corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal of office this 16th day of November, 1995. ------------------------------------- Notary Public (Notarial Seal) 8 EX-10.37.1 4 EXHIBIT 10.37.1 1 KARABU TICKET PROGRAM AGREEMENT This KARABU TICKET PROGRAM AGREEMENT (the "Agreement") is being entered into as of this 14 day of June, 1995 between TRANS WORLD AIRLINES, INC., a Delaware corporation ("TWA"), and Karabu Corp., a Delaware corporation ("Karabu"). W I T N E S S E T H: WHEREAS, TWA and Karabu have heretofore entered into that certain Loan Agreement dated as of January 5, 1993, as amended, (the "Receivables Agreement") and a related Security Agreement dated as of January 5, 1993 (the "Receivables Security Agreement"); and WHEREAS, TWA and Karabu have heretofore entered into that certain Note Agreement dated as of January 5, 1993, as amended, (the "Asset Agreement"), and TWA and State Street Bank & Trust Company of Connecticut, National Association (in its individual capacity, "State Street"), as Security Trustee, have entered into a related Security Agreement -- Trust Deed dated as of January 5, 1993 (the "Asset Security Agreement"); and WHEREAS, TWA and Karabu have heretofore amended and supplemented the Receivables Agreement, the Receivables Security Agreement, the Asset Agreement and the Asset Security Agreement (such documents as so amended and supplemented, collectively, the "Loan Agreements") pursuant to that certain Omnibus Amendment and Supplement to Agreements dated as of March 28, 1994; and WHEREAS, the aggregate principal amounts of the loans outstanding and unpaid under the Loan Agreements (the "Karabu Loans") as of the date of this Agreement is $190 million plus accrued unpaid interest; and WHEREAS, the Loan Agreements have been further amended and supplemented pursuant to the terms of that certain Extension, Refinancing and Consent Agreement of even date herewith by and between TWA and Karabu (the "Extension and Consent Agreement") to provide for (i) the extension of the maturity of the Karabu Loans and to reflect certain other agreements between TWA and Karabu and (ii) consent, upon fulfillment of certain conditions, by the Icahn Entities to, among other things, the exchange with TWA of the Old PBGC Notes for $244,344,987 principal amount of New PBGC Notes and $77,817,513 principal amount of Equity Notes redeemable, subject to certain conditions, for 2,658,470 shares of common stock of TWA in 1995, more or less, all substantially as provided in the Registration Statement (the "PBGC Debt and Equity Exchange"); and 2 WHEREAS, this Agreement is one of the transactions contemplated by the Extension and Consent Agreement. NOW, THEREFORE, for and in consideration of the mutual covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, TWA and Karabu hereby agree as follows: 1. DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings specified below: "Agreement," "this Agreement," "herein" and words of similar import shall mean this Ticket Program Agreement. "ARC" shall mean the Airline Reporting Corporation or its functional equivalent at any point in time. "Asset Agreement" shall have the meaning given that term in the recitals to this Agreement. "Asset Security Agreement" shall have the meaning given that term in the recitals to this Agreement. "Bankruptcy Code" shall mean the United States Bankruptcy Code. "Bankruptcy Event" shall mean the voluntary commencement by TWA of a case or proceeding under the bankruptcy laws of the United States of America or the commencement of a case or proceeding under such laws by any third party against TWA which is not dismissed within sixty (60) days of the filing thereof; provided, however, that "Bankruptcy Event" shall not be deemed to include the filing by TWA of a petition for relief under Chapter 11 of the Bankruptcy Code accompanied by the necessary consents to the Plan of Reorganization attached as Appendix B to the Registration Statement. "Bulk Fare Rate" shall mean an unpublished fare (meaning a price for a ticket and the rules and restrictions relating to the purchase and use of such ticket) established by TWA for Domestic Consolidator Fares and International Consolidator Fares, for other fares negotiated with and at which air transportation is sold to Consolidators (Domestic) and/or Consolidators (International) other than Karabu and/or a Tour Operators/Wholesalers, which must be ticketed pursuant to tickets showing the words "Bulk Fare" (or such other designation as may be established from time to time by -2- 3 TWA) on the face of the ticket and which are non-commissionable to the selling entity, net of all applicable taxes, fees, passenger facility charges and other charges. "Commencement Date" shall mean the date of execution of this Agreement. "Comparable Fare(s)" shall mean with respect to an inventory capacity limited fare, another inventory capacity limited fare having substantially the same advance purchase, ticketing time limits, minimum/maximum stay, rebooking, reissue and refundability requirements, penalty and fee charges. "Consolidator" shall mean an entity which is authorized by TWA to only sell air transportation and which acts pursuant to a negotiated airfare agreement with TWA permitting the sale of tickets at Bulk Fare Rates. "Consolidator (Domestic)" shall mean a Consolidator offering tickets for sale between points in the United States. "Consolidator (International)" shall mean a Consolidator offering tickets for sale from points in the United States to points outside of the United States and from points outside of the United States to points in the United States. "Consolidator Fare(s)" shall mean International Consolidator Fares and Domestic Consolidator Fares and Domestic Consolidator Matching Fares for International Consolidator Markets and Domestic Consolidator Markets and for such other markets as applicable, respectively, for passenger travel on TWA net of all applicable taxes, fees, passenger facility charges and other charges. "Domestic Consolidator Fare(s)" shall mean from time-to-time Bulk Fare Rates computed in accordance with Exhibit A hereto, net of all applicable taxes, fees, passenger facility charges and other charges. "Domestic Consolidator Market(s)" shall mean, from time-to-time, the U.S. origin city and destination markets determined in accordance with Exhibit A hereto. "Domestic Consolidator Ticket(s)" shall mean Tickets issued at Domestic Consolidator Fare(s) for travel on TWA in Domestic Consolidator Markets subject to the rules, conditions and restrictions set out in this Agreement including Exhibit A hereto. "Domestic Consolidator Matching Fare(s)" shall mean Bulk Fare Rates equal to the Bulk Fare Rates offered for sale to Consolidators (Domestic) in markets other than Domestic Consolidator Markets, where the Bulk Fare Rate offered for sale to such Consolidator (Domestic) is less than the System Fare which is a Comparable Fare -3- 4 to such Bulk Fare Rate in the same market, such Bulk Fare Rate being net of all applicable taxes, fees, passenger facility charges and other charges. "Domestic Consolidator Matching Ticket" shall mean a Ticket issued at a Domestic Consolidator Matching Fare. "End User" shall mean the person who actually uses the Ticket for air transportation or such person's employer or any entity of which such person is an owner, partner, officer, director, consultant or agent. "Equity Notes" shall mean the three non-recourse promissory notes due 2007 in $77,817,513 aggregate principal amount held or to be held by the settlement trust on behalf of the PBGC and redeemable, subject to certain conditions, for 2,658,470 shares of common stock of TWA in 1995. "Existing Documentation" shall have the meaning given that term in the Extension and Consent Agreement. "Extension and Consent Agreement" shall have the meaning given that term in the recitals to this Agreement. "Fifteen Month Period" shall mean the period commencing on the Commencement Date and ending on the last day of the fifteenth full month after the Commencement Date. "Frequent Flyer Bonus Program" shall mean TWA's Frequent Flyer Bonus Program or any similar program from time to time adopted by TWA. "Icahn Entities" shall mean Mr. Carl Icahn and those entities, including without limitation, Karabu and Pichin, affiliated with Mr. Carl Icahn. "Affiliated with" means more than fifty percent (50%) owned, directly or indirectly, by Mr. Carl Icahn or another entity more than fifty percent (50%) owned by Mr. Carl Icahn. "IATA" shall mean the International Air Transport Association or its functional equivalent at any point in time. "International Consolidator Fare(s)" shall mean Bulk Fare Rates established from time-to-time by TWA in International Consolidator Markets for passenger travel on TWA net of all applicable taxes, fees, passenger facility charges and other charges. "International Consolidator Market(s)" shall mean points served by TWA with transportation from a point in the United States to a point outside of the United States and from a point outside of the United States to a point in the United States. -4- 5 "International Consolidator Matching Ticket(s)" shall mean Tickets issued at International Consolidator Fare(s) which are equal to those Bulk Fare Rates, and are offered under the same terms and conditions, as any other International Consolidator Fare. "Karabu" shall mean Karabu Corp., a Delaware corporation. "Karabu Loans" shall have the meaning given that term in the recitals to this Agreement. "Loan Documents" shall have the meaning given that term in the recitals to this Agreement. "Monthly Sales Report" shall have the meaning given that term in Exhibit B hereto. "New PBGC Notes" shall mean the three non-recourse promissory notes due 2007 in $244,344,987 original aggregate principal amount held or to be held by the settlement trust on behalf of the PBGC. "Old PBGC Notes" shall mean the three non-recourse promissory notes due 2007 in $322,162,500 aggregate principal amount held by the settlement trust on behalf of the PBGC. "Pension Plans" shall mean the defined benefit pension plans identified as the Pilots' Plan, the Employees' Plan and the IFFA Plan in that certain Settlement Agreement dated as of January 5, 1993 between TWA, the Official Unsecured Creditors' Committee of Trans World Airlines, Inc., the International Association of Machinists and Aerospace Workers, the Independent Federation of Flight Attendants, the Air Line Pilots Association, International, the Transport Workers Union of America, Carl C. Icahn, certain affiliates of Mr. Icahn and the PBGC. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "PBGC Debt and Equity Exchange" shall have the meaning given that term in the recitals to this Agreement. "Pichin" shall mean Pichin Corp., a Delaware corporation. "Purchase Price" shall mean the purchase price to Karabu of Tickets for passenger travel on TWA sold to Karabu pursuant to the Ticket Programs. -5- 6 "Published Fare(s)" shall mean the tariff or other fare established by TWA for passenger travel on TWA, net of all applicable taxes, fees, passenger facility charges and other charges. "Receivables Agreement" shall have the meaning given to that term in the recitals to this Agreement. "Receivables Security Agreement" shall have the meaning given to that term in the recitals to this Agreement. "Registration Statement" shall have the meaning given such term in the Consent and Extension Agreement. "Settlement Trust" shall mean the trust created pursuant to the Settlement Trust Agreement dated as of January 5, 1993 between TWA, as grantor, and American National Bank and Trust Company of Chicago, as trustee, as amended or supplemented from time to time. "System Fare(s)" shall mean Tickets whose Purchase Price by Karabu from TWA shall be fifty-five (55%) of the Published Fare(s) net of all applicable taxes, fees, passenger facility charges and other charges. "System Ticket(s)" shall mean Tickets issued at a System Fare(s). "Term" shall mean the period commencing on the Commencement Date and ending on the last day of the ninety-ninth (99th) full month following the Commencement Date. "Ticket Programs" shall mean the System Ticket program, the Domestic Consolidator Ticket program, the International Consolidator Matching Ticket program and the Domestic Consolidator Matching Ticket program collectively. "Ticket(s)" shall mean a ticket or tickets issued under the Ticket Programs, including but not limited to System Tickets, Domestic Consolidator Tickets and International Consolidator Matching Tickets and Domestic Consolidator Matching Tickets plated on TWA on standard industry or TWA ticket stock or through any other electronic or "ticketless" method that TWA may from time-to-time adopt for air transportation of passenger(s) on TWA excluding tickets for air transportation originating or terminating in St. Louis, Missouri. "Tour Operator/Wholesaler" shall mean a Travel Agent or other person authorized by TWA to sell inclusive tour packages in selected markets with air -6- 7 transportation at a Bulk Fare Rate with an inclusive tour package consisting of air/ground or air/sea components which are advertised using TWA's name and sold at a single price which does not separately identify the Bulk Fare Rate. "Tour Operator/Wholesaler Matching Fare" is defined in Section 3(g) hereof. "Travel Agent" shall mean any ARC/IATA travel agent or agency selling airline tickets to the public but excludes any such travel agent which meets all of the following conditions: (i) such travel agent is an Icahn Entity and (ii) such travel agent is not Affiliated with any other independent travel agent, group or consortium of travel agents other than other Icahn entities or travel agent trade associations. "TWA" shall means Trans World Airlines, Inc., a Delaware corporation, its successors and assigns. "UATP Account" shall mean a Universal Air Travel Plan master account, and any sub-accounts, established by TWA in favor of Karabu under the Ticket Programs pursuant to which UATP credit cards will be issued by TWA upon request by Karabu under the airline industry Universal Air Travel Plan to Icahn Entities and End Users which may not be Travel Agents; such credit cards to be authorized for use solely to purchase Tickets for air travel on TWA (and such credit card shall so state). "United States" shall mean the States of the United States, the District of Columbia and the territories and possessions of the United States. "Year" shall mean any period of 365/6 consecutive days. References to month or monthly period shall mean calendar months. 2. TICKET PROGRAMS. Karabu shall be entitled to issue the following Tickets under the terms and conditions set forth in this Agreement: (a) Domestic Consolidator Tickets: (i) with respect to Tickets sold during the Fifteen Month Period, Karabu shall be entitled to purchase and TWA shall be obligated to sell up to a maximum amount of $120 million of Domestic Consolidator Tickets, which $120 million will be computed based on the Published Fares used in computing the Domestic Consolidator Fares at which Tickets are sold to Karabu or for Karabu's account; and (ii) with respect to Tickets sold during the period commencing with the date which is the day following the last day of the Fifteen Month Period, Karabu shall be entitled to purchase and TWA shall be obligated to sell up to a maximum amount of -7- 8 $70 million of Domestic Consolidator Tickets per Year for seven consecutive Years, which $70 million will be computed based on the Published Fares used in computing the Domestic Consolidator Fares at which Tickets are sold to Karabu or for Karabu's account; and (b) Other Tickets - With respect to Tickets other than Domestic Consolidator Tickets, during the Term Karabu shall be entitled to purchase and TWA shall be obligated to sell System Tickets, Domestic Consolidator Matching Tickets and International Consolidator Matching Tickets. (c) In the event that the restructuring described in the Registration Statement is not accomplished, Karabu and the other Icahn Entities agree to consent to any future PBGC Debt and Equity Exchange proposed by TWA which is on substantially similar and no less favorable terms to Karabu as the PBGC Debt and Equity Exchange described in the Registration Statement. 3. TICKET PRICES. (a) Tickets sold to Karabu pursuant to the Ticket Programs contemplated by this Agreement shall be priced at the Purchase Price, net to TWA, which shall be: (i) the Domestic Consolidator Fare which shall be 40% of the applicable Published Fare determined in accordance with this Agreement excluding Exhibit A hereto; (ii) the System Fare which shall be fifty-five percent (55%) of the Published Fare; or (iii) the International Consolidator Fare, and (iv) the Domestic Consolidator Matching Fare. The Purchase Price is exclusive of tax. All applicable taxes, fees, fuel, passenger facility, terminal and security charges which are not included in the Published Fares or in the International Consolidator Fare(s) or the Domestic Consolidator Fare(s) or the Domestic Consolidator Matching Fare and which are charged to persons paying such fares must be added to the total fare collected. Karabu may not absorb any passenger facility or similar such surcharge otherwise due from a passenger. The Published Fare for each Ticket sold at the Purchase Price under this Agreement will be shown on the face of each Ticket unless the Ticket is issued at a Consolidator Fare or at a Tour Operator/Wholesaler Matching Fare in which case the fare code "Bulk Fare" or such similar terms as TWA may from time to time designate for use generally on tickets sold to Consolidators (other than Karabu) and/or Tour Operators/Wholesalers will be shown on the face of such tickets with the Bulk Fare Rate and the applicable Published Fare shown on the auditor's coupon for each such Ticket. Karabu shall be responsible for proper ticketing under the correct fare code and under all such other terms as may be set forth in this Agreement, including but not limited to Exhibits A and B hereto and under all other applicable terms and conditions as may be required by TWA and which are required by TWA on the sales of tickets -8- 9 generally and any failure to show the correct fare code will not diminish the Purchase Price payable to TWA. In the event that TWA itself issues any Tickets, Karabu shall not be responsible for ticketing errors on such Tickets. Any Tickets that are refundable or reissuable only upon payment of a fee or other penalty or charge, will be permitted to be refunded or reissued without payment of any such fee, penalty or charge except that Domestic Consolidator Matching Tickets are subject to the same refund, reissue and penalty rules as are applicable to the tickets being offered by the Consolidator (Domestic) whose fare is being matched. Except for Domestic Consolidator Tickets, other Tickets which are totally non-refundable may be applied in full to the purchase of other Tickets without fee, penalty or charge. (b) During the terms of the ticket Programs, Karabu will be entitled to elect to purchase Tickets from TWA from time-to-time pursuant to such Ticket Programs, at its option and subject to all applicable conditions with respect to each Ticket at the Purchase Price which shall be: (i) fifty-five percent (55%) of Published Fare(s), net to TWA, or (ii) the International Consolidator Fare(s); or (iii) the Domestic Consolidator Fare(s), or (iv) the Domestic Consolidator Matching Fare(s), or (v) Tour Operator/Wholesaler Matching Fare(s). (c) With respect to transportation originating in the United States and destined for a point outside of the United States, TWA will provide International Consolidator Fare(s) to Karabu under the same price conditions as TWA is then providing to any other Consolidator (International) operating in International Consolidator Markets, exclusive of special promotional items or services of de minimus value that may be provided to other Consolidators in connection with specific, limited promotional activities. TWA will provide to Karabu such information and at the same time as TWA provides in the normal course to other Consolidators (International) operating in International Consolidator Markets and upon Karabu's written request, TWA will provide to Karabu a list of then applicable Bulk Fare Rates charged to Consolidators (International) operating in TWA's International Consolidator Markets. (d) With respect to transportation originating outside of the United States and destined for a point in the United States, Karabu may at its option sell Tickets at International Consolidator Fares for such passenger transportation under the same conditions as TWA is then providing to any other Consolidator (International) which is then selling tickets for transportation originating at points outside of the United States -9- 10 in International Consolidator Markets. Such Tickets at International Consolidator Fares for transportation originating outside of the United States may only be sold by an Icahn Entity which is an IATA approved agency and is otherwise operating in compliance with the laws of the nation in which the transportation is sold and in which the transportation originates and which otherwise complies with the sales reporting procedures otherwise applicable to tickets sold by others outside of the United States which currently includes but are not limited to bank settlement plans. (e) TWA will provide Domestic Consolidator Fares to Karabu only in accordance with the rules, terms and conditions which are set forth herein and in Exhibits A and B which are attached hereto and made a part hereof. (f) in the event that TWA currently has or in the future enters into an agreement with a Consolidator(s) (Domestic) for the sale of transportation in the Domestic Consolidator Markets at Bulk Fare Rates which are equal to or less than the Purchase Price to Karabu of a Comparable Fare, TWA, shall for such period of time as such Bulk Fare Rate remains in effect, reduce the Purchase Price to Karabu to an amount that is 10% lower than the Bulk Fare Rate provided to the Consolidator(s) (Domestic) and Tickets issued at such lower rate shall be Domestic Consolidator Tickets. For the purposes of this section, the Bulk Fare Rate provided to the Consolidator (Domestic) is exclusive of special promotional items or services of de minimus value such as luggage tags, drink chits, travel bags or similar such items that may be provided to other Consolidators (Domestic) in connection with specific, limited promotional activities. (g) TWA agrees that it will provide to Karabu a written summary of any agreement(s) which it now has or which it may in the future enter into with any: (i) Consolidator(s) (Domestic) and/or, (ii) with any Tour Operator(s)/Wholesaler(s) for the sale of inclusive tour packages for travel within the United States. Such summaries shall set out the Bulk Fare Rates for markets covered by any such agreement(s) including all applicable terms and conditions applicable to the reservations, sale, ticketing and use of such Bulk Fare Rates. Summaries of all such agreements currently in effect will be provided to Karabu within ten (10) business days following the execution of this Agreement. Summaries of any amendments to such existing agreements or of any new agreements entered into during the Term of this Agreement, upon execution by both parties to such amendments or agreements, shall be provided to Karabu promptly but in any event no later than the earlier of within five (5) business days of execution by both parties or within five (5) business days prior to the effectiveness for use of the Bulk Fare Rates covered by such amendments or agreements. If any Consolidator (Domestic) or Tour Operator/Wholesaler can purchase tickets from TWA at a Bulk Fare Rate in a market which is less than the System Fare in the same market which is a Comparable Fare to such Bulk Fare Rate, then Karabu shall have the right to buy Tickets at the Domestic Consolidator Matching -10- 11 Fare in such market or at the Bulk Fare Rate provided to the Tour Operator/Wholesaler in such market (under the same terms, conditions and rules as may be applicable to such Bulk Fare Rate; the "Tour Operator/Wholesaler Matching Fare") as the case may be. Karabu and TWA agree that in view of the complexity and changing nature of fares in individual city pair markets, which has the effect of changing the Purchase Price of fares in such individual markets, it is not possible for TWA to determine with accuracy on a continuing basis the differential between Bulk Fare Rates provided to such Consolidator(s) (Domestic) and/or Tour Operator(s)/Wholesaler(s) in all markets and System Fares which are Comparable Fares to such Bulk Fare Rates in the same markets. The occurrence of any such differential(s) shall not at any time constitute a violation of this Agreement including but not limited to the terms set out in Section 12 hereunder. (h) For the purposes of the foregoing clauses of this Section 3 concerning Bulk Fare Rates offered by TWA to other Consolidators (Domestic) and Tour Operator(s)/Wholesaler(s), in comparing the Purchase Price to Karabu with Bulk Fare Rates charged to other Consolidators (Domestic) and Tour Operator(s)/Wholesaler(s), the Bulk Fare Rates charged to other Consolidators (Domestic) and Tour Operator(s)/Wholesaler(s) shall be net of any commissions or the value (determined by TWA in good faith) of other economic incentives paid or allowed to such other Consolidators (Domestic) and Tour Operator(s)/Wholesaler(s), including advertising allowances. 4. NO COMMISSIONS PAYABLE. No commissions shall be payable by TWA for Tickets sold pursuant to this Agreement. 5. ADDITIONAL TICKET RESTRICTIONS. Tickets sold by TWA to Karabu pursuant to this Agreement shall: (i) not include Tickets whose origin or destination is St. Louis, Missouri; (ii) not include flights on other carriers operated under a code share and/or block space arrangement; (iii) be sold without any public advertisement or public promotion referring directly or indirectly to TWA in any way (including without limitation, any written advertisement through newspaper and/or facsimile solicitations; (iv) not during the Fifteen Month Period and during any subsequent Year of the Ticket Program exceed the amount of Domestic Consolidator Tickets permitted to be purchased by Karabu pursuant to Section 2(a)(i) or Section 2 (a)(ii) -11- 12 hereunder, respectively (each such Fifteen Month Period and Yearly limit being referred to as a "Period Cap") provided however that if the Period Cap is exceeded, TWA shall notify Karabu in writing and with specific detail of the amount of Domestic Consolidator Tickets sold in excess of the Period Cap and unless Karabu shall in writing within ten (10) business days of its receipt of such information identify errors in the calculation, Karabu shall promptly pay to TWA the difference between the Purchase Price and the applicable Published Fare for all Domestic Consolidator Tickets sold in excess of the Period Cap which are not in dispute and thereafter shall promptly pay the same difference in amounts for all Domestic Consolidator Tickets for which any additional proof of sale within the applicable period is required. For the purposes of determining the specific Domestic Consolidator Tickets which exceed the Period Cap, all Domestic Consolidator Tickets sold after the date during the Fifteen Month Period or during any subsequent Year on which the Period Cap was exceeded will be treated as excess; and (v) not in any one month period during the Term exceed more than 40% of the Fifteen Month Period or Yearly total of Domestic Consolidator Tickets permitted to be purchased by Karabu pursuant to Section 2(a)(i) or Section 2(a)(ii) hereof respectively (a "Monthly Cap"), provided, however, that if the Monthly Cap is exceeded, TWA shall notify Karabu in writing and with specific detail of the amount of Domestic Consolidator Tickets sold in excess of the Monthly Cap and unless Karabu shall in writing within ten (10) business days of its receipt of such information identify errors in the calculation, Karabu shall promptly pay to TWA the difference between the Purchase Price and the applicable Published Fare for all Domestic Consolidator Tickets sold in excess of the Monthly Cap which are not in dispute and thereafter shall promptly pay the same difference in amounts for all Domestic Consolidator Tickets for which any additional proof of sale within the applicable period is required. For the purposes of determining the specific Domestic Consolidator Tickets which exceed the Monthly Cap, all Domestic Consolidator Tickets sold after the date during the month on which the Monthly Cap was exceeded will be treated as excess. 6. APPLICABILITY OF FREQUENT FLIER PROGRAM. The Frequent Flyer Bonus Program will apply to Tickets sold pursuant to the Ticket Programs, subject to applicable rules as provided for by the Frequent Flyer Bonus Program and further provided that the Frequent Flyer Bonus Program will not apply to Domestic Consolidator Matching Tickets, International Consolidator Matching Tickets and Tickets sold at Tour Operator/Wholesaler Matching Fares if the tickets sold to the Consolidator (Domestic), Consolidator (International) or the Tour Operator/Wholesaler, as the case may be, at the fare being matched are not eligible for the Frequent Flyer Bonus Program. As full compensation to TWA for participation in the Frequent flyer Program as provided herein and without regard to the actual miles traveled, Karabu shall pay to TWA: (I) $428,571 during the Fifteen Month Period in four (4) equal installments on the six month, nine month, twelve month and fifteen month anniversary -12- 13 of the Commencement Date, and (ii) in each Year following the Fifteen Month Period, $250,000 in four (4) equal quarterly installments on the three month, six month, nine month and twelve month anniversary of the first day of such Year. 7. OTHER TICKET RESTRICTIONS. All Tickets sold pursuant to the Ticket Programs shall be subject to TWA's normal seat assignment and boarding pass rules and regulations. In addition, Tickets will be valid only on TWA flights, will be non-assignable to any other carrier and non-endorsable and, to the extent applicable under TWA's Published Fares, be non-refundable, except as may be otherwise set forth herein. Except as expressly provided in Sections 2 and 3 and Exhibit A hereof, the administration and use of Tickets will adhere to all applicable fare rules. All Tickets will be plated on TWA on standard industry or TWA ticket stock or through any other electronic or "ticketless" method that TWA may from time-to-time adopt. 8. DISTRIBUTION OF TICKETS. Tickets sold pursuant to the Ticket Program (other than Tickets sold by Karabu at Consolidator Fares referred to in clauses (ii) (iii) (iv), and (v) of Section 3(b) and Sections 3(f), (g) and (h) hereof) shall be marketed and sold by Karabu or its agents or a Travel Agent only to the End User and not to any Travel Agent, Consolidator, or Tour Operator/Wholesaler. There will be established by TWA one master UATP Account for the Icahn Entities with multiple sub-card accounts (which may be sub-card accounts of the Master Account) permitted subject to a one-time $15 administration charge per card assessed for each sub-card account requested by Karabu. UATP or equivalent cards may not be issued to any Travel Agent or to any other issuer of tickets which is not an Icahn Entity or an End User but will be issued by TWA, upon application by Karabu and/or its agents, solely to Icahn Entities and End Users. TWA will issue such card within five (5) business days after receipt of the necessary documentation. All such UATP or equivalent cards will bear on the card the following or substantially equivalent language: Valid Only for travel on TWA and Non-Commissionable. Tickets may be issued at any ARC or IATA Travel Agency (including, without limitation, a travel agency which is owned by one or more Icahn Entities), or at any TWA ATO/CTO, or other approved TWA ticketing outlet (including, without limitation, general sales agents, provided that Karabu will reimburse TWA for any commissions paid by TWA to general sales agents on account of Tickets issued to Karabu or for Karabu's account) provided, however, that Tickets issued at Consolidator Fares and/or Tour Operator/Wholesaler Marketing Fares may only be issued by Karabu or other Icahn Entities. Standard Denied Boarding Compensation Rules will apply to all Tickets sold pursuant to this Agreement as if sold by TWA at Published Fares. 9. TWA FLIGHT CANCELLATIONS. TWA will re-protect on other airlines all persons holding Tickets as if sold by TWA at Published Fares if due to weather conditions or operational difficulties such person is denied boarding due to the TWA flight being canceled on which such person holds a reservation, with TWA to be -13- 14 promptly paid by Karabu an amount equaling TWA's cost based on Rule 240 or any other similar such rule, term or condition as may be applicable, in excess of actual Ticket cost. TWA will provide invoices and backup information as set forth in Exhibit B hereto. Procedures for billing, paying, provision of accounting records and account information and adjusting amounts monthly between TWA and Karabu are set forth in Exhibit B which is attached hereto and made a part hereof. 10. KARABU OR NEW PBGC NOTE PREPAYMENTS. Periodically, as provided in this Section 10, the Purchase Price for Tickets purchased by Karabu or for Karabu's account pursuant to this Agreement shall either (i) be retained by Karabu and the amount so retained shall be credited as prepayments against the outstanding balance of the Karabu Loans, (first to past due interest and then to principal, pro rata based on the amount of past due interest on, or the outstanding principal balances of, as the case may be, the notes evidencing the Karabu Loans) or (ii) at Karabu's option, be paid over to the Settlement Trust by Karabu, for TWA's account, as prepayments of the New PBGC Notes (and shall be applied first to pay past due or deferred interest and then to prepay principal (in inverse order of maturity), pro rata based on the amounts of past due or deferred interest on, or the outstanding principal balances of, as the case may be, the New PBGC Notes), PROVIDED, HOWEVER, that so long as the Karabu Loans have not been paid in full, during each of the Fifteen Month Period and each subsequent Year of the Ticket Program, until at least the Minimum Prepayment Amount (as hereinafter defined) has been retained by Karabu and credited as prepayments of the Karabu Loans pursuant to clause (i) above, not more than 50% of the aggregate Purchase Price of Tickets purchased by Karabu or for Karabu's account during such Fifteen Month Period or Year, as the case may be, shall be paid over to the Settlement Trust as provided in clause (ii) above. "Minimum Prepayment Amount" means (x) $20 million for the Fifteen Month Period and (y) for each Year of the Ticket Program following the Fifteen Month Period (the "Subject Year") the lesser of (I) $20 Million or (II) the difference (but not less than 0) between (A) the product of $20 Million times the number of Years after the Fifteen Month Period plus one (1) to and including the subject Year and (B) the aggregate amount retained by Karabu and credited as prepayments of the Karabu Loans pursuant to clause (i) of the preceding sentence during the Fifteen Month Period and each subsequent Year of the Ticket Program to and including the Year immediately preceding the Subject Year. Karabu shall be responsible for paying over directly to the Settlement Trust such amount as Karabu elects to have applied against the New PBGC Notes pursuant to clause (ii) of the first sentence of this Section 10. Karabu shall notify TWA in writing on or prior to the thirtieth (30) day after Karabu receives from TWA the Monthly Sales Report described in Exhibit B hereto the amount so paid over to the Settlement Trust on account of the sale of Tickets included in such Monthly Sales Report and TWA shall credit the outstanding balance of the Karabu Loans in an amount equal to the aggregate Purchase -14- 15 Price of Tickets included in such Monthly Sales Report net of the amounts so paid over by Karabu to the Settlement Trust as indicated in such written notice to TWA; PROVIDED, HOWEVER, if at any time Karabu shall reasonably deem itself insecure with respect to the ability of TWA to continue to honor any Tickets sold under the Ticket Program, Karabu shall notify TWA in writing and thereafter (until such notice shall be rescinded), there shall not be credited against the outstanding balance of principal and interest on the Karabu Loans the lesser of 25% or the highest percentage holdback then being imposed by any credit card processing center handling TWA's credit card Receivables, of the amount of proceeds owing to TWA on account of Tickets sold under the Ticket Program included in such Monthly Sales Report. Any amount not credited against principal and interest on the Karabu Loans shall (A) accrue interest at the interest rate applicable to the Karabu Loans (or if such Loans have been paid in full, at the rate which would have been applicable to the Loans had they continued to be outstanding), which interest shall be added to the proceeds due TWA from Karabu in respect of the Ticket Program and (B) be credited, together with such interest, against the Karabu Loans on such date as TWA receives from Karabu the next succeeding notice of application of Ticket proceeds unless a Bankruptcy Event shall occur, in which event the then uncredited amount shall not be so credited until the then outstanding unused Tickets are actually utilized for flights on TWA. Karabu shall rescind any such notice at the earlier of (i) such time as a reasonable creditor would no longer deem itself insecure with respect to the ability of TWA to continue to honor any Tickets sold under the Ticket Program or (ii) 30 days after the end of the term of the Ticket Program or the sale of the last Ticket salable thereunder. After payment in full of the Karabu Loans, the Purchase Price will be paid over in cash to TWA or, at Karabu's option, paid over to the Settlement Trust for TWA's account as prepayments of the New PBGC Notes as provided in clause (ii) of the first sentence of this Section 10. Payments to TWA or to the Settlement Trust pursuant to the preceding sentence shall be made on or prior to the thirtieth (30) day after Karabu receives Monthly Sales Reports covering Tickets sold after the Karabu Loans are so paid; payments to TWA shall be accompanied by a written notice of the amount, if any, paid over to the Settlement Trust for application for TWA's account as a prepayment of the New PBGC Notes (first to overdue or deferred and unpaid interest and then to principal). 11. NONDISCRIMINATION. (a) TWA, subject to normal operating conditions of the computer reservations system which it is then using, will provide no less than the same access to seat availability in all fare categories on the same basis to Karabu as it provides to other Travel Agents with respect to all System Tickets and Tickets sold at Domestic Consolidator Fares and, in the case of sales of all other Tickets, to other Consolidators (International) and/or Consolidators (Domestic) respectively. TWA will also comply with the non-discrimination provisions of Exhibit A hereto; (b) If the Icahn Entities establish or acquire an ARC or IATA approved travel agency, TWA will deal with any such travel agency and will permit it to sell air transportation on TWA to and for the account of such travel agency and its customers in the same manner and on the -15- 16 same basis as TWA deals generally with other travel agencies (except in so far as any such dealings would be inconsistent with the terms of this Agreement) and TWA will not otherwise discriminate against such travel agency. 12. VIOLATION OF TERMS OF THE AGREEMENT. (a)(i) If Karabu or another Icahn Entity (collectively, an "Icahn Entity"); (aa) commits or engages in conduct constituting a breach of this Agreement which causes or is reasonably likely to cause material damage to TWA, or to deprive TWA of any material benefit intended to be provided under this Agreement, or (bb) engages in a series of related actions, inactions or omissions which although individually are in breach of this Agreement, are not material breaches of this Agreement, but which, when taken together, either cause or are reasonably likely to cause, material damage to TWA or otherwise deprives, or is reasonably likely to deprive TWA of any material benefit contemplated or provided for in this Agreement, or (cc) engages in a pattern of conduct (through actions, inactions, or omissions) which individually are in breach of this Agreement and which when viewed individually would not constitute material breaches of this Agreement, but when viewed together, either cause or are reasonably likely to cause material damage to TWA, or otherwise deprives, or is reasonably likely to deprive TWA of any material benefit contemplated or provided for in this Agreement; and (ii) such conduct is not discontinued, such breach is not cured or such breach does not otherwise cease to exist within five (5) business days of the Icahn Entity's receipt of a written notice from TWA containing a reasonably detailed description of the alleged conduct or breach (a "Default Notice"); provided, however, if such conduct is not capable of cure within five (5) business days, this condition will be satisfied if such cure is commenced and diligently pursued and satisfied within thirty (30) business days of the Icahn's Entity's receipt of such Default Notice and further provided that for the purposes of this Section, debit memos and/or discrepancy notices will, as applicable, qualify as Default Notices; and (iii) TWA subsequently obtains a final, non-appealable judgment from a court of competent jurisdiction that the Icahn Entity in fact breached this Agreement and the breach causes or is reasonably likely to cause material damage to TWA or to deprive TWA of any material benefit intended to be provided under this Agreement; -16- 17 then, if within the time period after the Icahn's Entity's receipt of a Default Notice, as referred to in clause (ii) above, the conduct described in the Default Notice has been discontinued, or the breach described in the Default Notice has been cured or otherwise ceased to exist, then Karabu shall pay to TWA immediately on demand, as liquidated damages and not as a penalty and without any requirement to satisfy subsection (a)(iii) above, an amount equal to the difference between (x) the Published Fares of all Tickets sold through the Icahn Entity to all persons pursuant to Section 3(b) hereof during the time period during which the conduct described in the Default Notice continued or the breach described in the Default Notice existed, as the case may be, solely in TWA's market area or areas in which TWA experienced the damage or deprivation of benefits as specified in the Default Notice and (y) the Purchase Price of such Tickets. For the purposes of this Section 12, violation by Karabu of clauses (iv) or (v) of Section 5 of this Agreement shall not constitute a breach of the Agreement. TWA and Karabu acknowledge that certain breaches of this Agreement do not readily lend themselves to a cure in that no action can be taken by the Icahn Entity to place the parties in the same position that they were in immediately prior to the occurrence of such breach, e.g. if an Icahn Entity were to place an advertisement in violation of Section 5 hereof, the Icahn Entity could take no action to alter the fact that the advertisement had been made public. In such instance, TWA and Karabu agree that if the Icahn Entity discontinued the conduct or the action which gave rise to the breach (e.g. the advertisement is discontinued), or the breach ceases to exist for any other reason (e.g. the advertisement was of limited duration and steps were taken, if necessary, to discontinue it as soon as the Icahn Entity received written notice from TWA), then Karabu shall be deemed to have cured the breach or the breach shall be deemed cured, as the case may be, on the date that the conduct or action is so discontinued or on the date that the breach otherwise ceases to exist provided that to the extent necessary commercially reasonable steps were taken to cure the breach upon receipt by the Icahn Entity of the Default Notice relating to such breach. In such instance, TWA would be entitled to the liquidated damages set forth in the preceding paragraph if the breach was so cured within the period specified in clause (ii) above or the liquidated damages provided for in the next succeeding paragraph of the breach was not so cured within the period set forth in clause (ii) above. Notwithstanding the foregoing, if the Icahn Entity shall have failed to discontinue the conduct or to cure said breach as set forth in such clause (i) within the time period specified in clause (ii) above, or continues in a pattern of ten (10) or more such breaches in any thirty-day period (e.g. repeated violations of the provisions of this Agreement regarding ticketing by an Icahn Entity exclusive of selling Tickets in excess of the Period Cap and/or the Monthly Cap as described in clauses (iv) and (v) of Section 5 hereof), then, upon compliance by TWA with clause (a)(iii) above, the Icahn Entity shall immediately pay to TWA, as liquidated damages and not as a penalty, the -17- 18 sum of Ten Million Dollars ($10,000,000.00), provided, however, that after the Karubu Loans are paid in full, if the breach by the Icahn Entities results from the failure to pay over to the Settlement Trust the Purchase Price of Tickets as provided in the last sentence of Section 10 hereof, the amount of liquidated damages shall be the greater of Ten Million Dollars ($10,000,000) or the amount that the Icahn Entities failed to so pay over. If any third-party, other than another Icahn Entity, with which an Icahn Entity has a business relationship involving the sale of Tickets by the Icahn Entity pursuant to this Agreement engages in conduct which, if engaged by an Icahn Entity, would be a breach of this Agreement, then upon receipt by the Icahn Entity from TWA of written notice of such conduct containing a reasonable description thereof, the Icahn Entity shall make commercially reasonable efforts to cause such third party to cease the conduct causing or otherwise cure such breach (and for the purposes of this sentence a breach shall be deemed cured as described in the second preceding paragraph) and, if such breach caused, or is reasonably likely to cause, material damage to TWA or to deprive TWA of any material benefit protection intended to be provided under this Agreement and the Icahn Entity is unable, using commercially reasonable efforts to cause the third party to cure said breach or cause the same to be cured, upon written request from TWA, the Icahn Entity will commence and diligently prosecute legal action against such third party seeking damages for such breach and any recovery to the Icahn Entity (or TWA, as the case may be) resulting therefrom shall be paid over to TWA. In the event that the Icahn Entity fails to commence and diligently prosecute such legal action, TWA may, at Karabu's expense, pursue such action. No Icahn Entity shall have liability to TWA on account of or any obligation with respect to any breaches of this Agreement caused by any such third-party except to comply with this paragraph. TWA acknowledges that while Karabu has an obligation to inform them of the restrictions set out in this Agreement, it will not be possible for the Icahn Entities to monitor the activities of all Travel Agents and end Users with whom the Icahn Entities have business relationships. In the event that any such Travel Agent or End User engages in conduct not authorized by the Icahn Entities which causes the Icahn Entities to be in breach of this Agreement (for example, a Travel Agent uses a UATP account to sell Tickets to persons other than the UATP cardholder or employees of the UATP cardholder, or a UATP cardholder purchases Tickets for resale rather than for use by such cardholder or its employees or a Travel Agent takes a commission on its issuance or reissuance of a Ticket), such conduct shall be deemed "conduct by such third-party which, if engaged in by the Icahn Entity would be a breach of this Agreement" within the meaning of this paragraph, shall not constitute a breach by the Icahn Entities, and the Icahn Entities sole obligations with respect thereto shall be to comply with this paragraph. The remedies for breach by an Icahn Entity set forth in this provision shall be TWA's sole and exclusive remedies and in no event shall TWA be entitled to terminate -18- 19 this Agreement or otherwise curtail the Ticket Program provided for herein as a result thereof. (b)(i) If TWA: (aa) commits or engages in conduct constituting a breach of this Agreement which causes or is reasonably likely to cause material damage to Karabu or to deprive Karabu of any material benefit intended to be provided under this Agreement (which by way of example only shall be deemed to include deliberate, repeated instances in which TWA denies an Icahn Entity the ability to make reservations in any specific fare category for a specific flight and date when there in fact is seat availability for such flight at the time that the request is made), or (bb) engages in a series of related actions, inactions or omissions which, although individually are in breach of this Agreement are not material breaches of this Agreement, but which, when taken together, either cause or are reasonably likely to cause, material damage to Karabu (or the other Icahn Entities), to interfere, in any material respect, with Karabu's or any other Icahn Entities' ability to market and sell Tickets as contemplated by this Agreement, or to otherwise deprive, or be likely to deprive, Karabu, or the other Icahn Entities of any material benefit contemplated or provided for in this Agreement, and (cc) engages in a pattern of conduct (through actions, inactions, or omissions) which individually are in breach of this Agreement and which when viewed individually would not constitute material breaches of this Agreement, but when viewed together, either cause or are reasonably likely to cause material damage to Karabu (or the other Icahn Entities), interfere, in any material respect, with Karabu's or any other Icahn Entities' ability to market and sell Tickets as contemplated by this Agreement, or otherwise deprives, or is likely to deprive, Karabu or the other Icahn Entities any material benefit contemplated or provided for in this Agreement, and (ii) such conduct is not discontinued or such breach is not cured or such breach does not otherwise cease to exist within five (5) business days of TWA's receipt of a written notice from an Icahn Entity containing a reasonably detailed, a description of the alleged conduct or breach (a "Default Notice"); provided, however, if such conduct is not capable of cure within five (5) business days, this condition will be satisfied if such cure is commenced, diligently pursued and satisfied within thirty (30) business days of TWA's receipt of such Default Notice; and (iii) an Icahn Entity subsequently obtains a final, non-appealable judgment from a court of competent jurisdiction that TWA in fact breached this Agreement and the breach had a material adverse effect on an Icahn Entity; -19- 20 then, if the event(s) listed in clause (i) above occurs, and either at the time TWA receives the Default Notice or within the period referred to in clause (ii) above the conduct described in the Default Notice has been discontinued or the breach described in the Default Notice has been cured, then TWA shall pay to Karabu on demand, as liquidated damages and not as a penalty and without any requirement to satisfy subsection 12(b)(iii) hereof, an amount equal to twice the Published Fare of any Tickets for which reservations were sought and which were denied. For the purposes of this Section 12, an inadvertent delay in providing the information called for in Section 3(g) and the fact that any differentials mentioned in the last sentence of clause (g) of Section 3 of this Agreement occurs or exists shall not constitute breaches of the Agreement. Notwithstanding the foregoing, if TWA shall have failed to discontinue the conduct or to cure said breach as set forth in such clause (i) within the time period specified in clause (ii) above or continues in a pattern of ten (10) or more such breaches in any thirty-day period (e.g. TWA's repeated denial of reservations in specific fare categories for flights on which such fares were available at the time that the request was made), then, upon compliance by Karabu with clause b(iii) above, TWA shall immediately pay to the Icahn Entity, as liquidated damages and not as a penalty, the sum of Ten Million Dollars ($10,000,000.00) and an Event of Default shall be deemed to have occurred under the Loan Agreements with same effect and giving Karabu the same rights as if any other Event of Default specified in the Loan Agreements had occurred and is continuing. The remedies for breach by TWA set forth in this provision shall be the Icahn Entity's sole and exclusive remedies except for the Icahn Entity's rights under the Loan Agreement to take any action specified therein or permitted thereby on account of the occurrence of an Event of Default if an Event of Default is deemed to have occurred as provided in the immediately preceding paragraph. Notwithstanding the foregoing, TWA shall not be in breach of this Agreement under any of the foregoing sections by reason of any of its usual promotional sales or ticket programs including but not limited to Consolidator (Domestic), Consolidator (International) and/or Tour Operator/Wholesaler ticket agreements requiring the sale of air transportation in connection with an air/ground and/or air/sea package, the sale of net fares in exchange for advertising or promotion benefits without regard to the fare level or by virtue of any agreement with any corporation, business or similar such entity providing for a discount or rebate of fares for air transportation on TWA provided that no such agreement prohibits the other party from dealing with Karabu or except where otherwise prohibited in the Agreement (for example, Karabu cannot sell Tickets to Travel Agents, Consolidators or Tour Operator(s)/Wholesaler(s)), from purchasing -20- 21 Tickets from Karabu or otherwise affirmatively penalizes the other party because of its dealing with Karabu. Karabu agrees that TWA may market and sell tickets to any End User or to any other person, firm or entity with which Karabu has an agreement for the sale of Tickets hereunder. TWA agrees that Karabu may market and sell Tickets to any person, firm or entity with which TWA has an agreement for the sale of air transportation at a discounted fare level provided that Karabu may not condition its agreement by prohibiting such person, firm or entity from otherwise dealing directly with TWA. In each instance, the party in receipt of a Default Notice containing a description of the alleged conduct or breach in violation of this Agreement, will have a reasonable period of time to investigate and shall respond in writing to the Default Notice with a disclosure of the relevant facts and a complete explanation of the background to and reasons for the alleged conduct or breach. Each party will keep and preserve records of matters arising under this Agreement in the same fashion as business records are generally maintained. TWA and Karabu agree that routine operating errors with respect to reservations and ticketing will not be considered to constitute a breach of this Agreement. TWA will designate to Karabu appropriate staff in its reservations and revenue accounting departments to be available to respond to questions concerning TWA's implementation and operations in respect of the Ticket Programs. Designated reservations staff will be available on a 24 hour basis to respond to inquiries from Karabu provided however Karabu must contact the designated staff and not general reservations staff personnel. Karabu shall designate to TWA personnel able to respond to questions concerning Karabu's implementation and operation of the Ticket Program. 13. ACCESS. Karabu shall, on a confidential basis, give TWA, upon TWA's prior written request, reasonable access to Karabu's books, records, and officers and employees and shall make such information available to TWA as TWA may reasonably request as, may be necessary for TWA to monitor Karabu's sales of Tickets and related operations under the Ticket Programs. All information supplied to TWA or its representatives shall be kept confidential and shall not be disclosed by TWA to any other person unless such disclosure is required in TWA's counsel's opinion by operation of law. In the event in TWA's counsel's reasonable opinion such disclosure is required, TWA shall endeavor to give Karabu at least ten (10) days prior written notice thereof. -21- 22 TWA shall, on a confidential basis, give Karabu, upon Karabu's prior written request, reasonable access to TWA's contracts on a no-name basis with Consolidators and Tour Operators/Wholesalers and TWA officers and employees having responsibility for administering such contracts, as, may be necessary for Karabu to monitor TWA's fares and conditions being provided to Consolidators. All information supplied to Karabu or its representatives shall be kept confidential and shall not be disclosed by Karabu to any other person unless such disclosure is required in Karabu's counsel's opinion by operation of law. In the event in Karabu's counsel's reasonable opinion such disclosure is required, Karabu shall endeavor to give TWA at least ten (10) days prior written notice thereof. 14. CARRIER FRAGMENTATION AND SALE OF ASSETS. (a) If TWA sells, transfers or disposes, in any one transaction or related series of transactions within a twelve (12) month period, routes which, net of route acquisitions, produced thirty percent (30%) or more of TWA's revenues for the twelve month period ending with the end of the most recently completed fiscal quarter, TWA shall cause the transferee or transferees of such routes to assume, on substantially equivalent terms and conditions, TWA's obligations with respect to a percentage of the remaining Ticket Program(s) equivalent to the percentage TWA's annual revenues produced by the routes which were so transferred to such transferee or transferees. (b) If TWA sells, transfers or disposes of all or substantially all of its assets in any one transaction or related series of transactions, TWA shall cause the transferee to assume, on substantially equivalent terms and conditions, TWA's obligations under the remaining Ticket Program(s). 15. BANKRUPTCY. (a) If a Bankruptcy Event (which shall include, for this purpose, the filing by TWA of a petition for relief under Chapter 11 as described in the proviso of the definition of Bankruptcy Event) occurs, TWA agrees not to seek to reject this Agreement, pursuant to section 365(a) of the Bankruptcy Code, as an executory contract, or to support any motion made by a third party seeking to force a rejection of this Agreement as an executory contract or for any other reason provided that Karabu honors at all times all of the terms and conditions of and is not otherwise in breach of the Extension and Consent Agreement and further provided that, if TWA is in compliance with this clause (a), Karabu waives any and all claims that it might have against TWA with respect to any such rejection except that Karabu may file a proof of claim relating to any claim that it may have under this Agreement or that may arise as a result of a rejection of this Agreement. -22- 23 (b) TWA acknowledges and agrees that credits against the Karabu Loans and payments made in respect of the PBGC Loans pursuant to Section 10 hereof shall be deemed to be made in the ordinary course of the businesses of the respective parties hereto, and, if a Bankruptcy Event occurs, TWA shall not seek (or support any attempt by any third party to seek), pursuant to sections 547(b), 550(a) of the Bankruptcy Code, to avoid and recover either the amounts of such credits or the funds retained by Karabu from Ticket sales which result in such credits as preferential transfers provided that Karabu honors at all times all of the terms and conditions of and is not otherwise in breach of the Extension and Consent Agreement and further provided that, if TWA is in compliance with this clause (b) Karabu waives any and all claims that it might have against TWA with respect to any such preference claims except that Karabu may file a proof of claim for any amounts or credits determined to be preferential transfers. (c) If a Bankruptcy Event (which shall include, for this purpose, the filing by TWA of a petition for relief under Chapter 11 described in the proviso of the definition of Bankruptcy Event) occurs, TWA agrees, at the request of Karabu, to use its best efforts to obtain as soon as practicable an order of the bankruptcy court approving the assumption of this Agreement under Section 365 of the Bankruptcy Code and, if a motion is made seeking the rejection of this Agreement, TWA shall at Karabu request either take all appropriate action to object to and oppose such motion or make and diligently pursue a cross-motion seeking an order of the bankruptcy court approving the assumption of this Agreement under Section 365 of the Bankruptcy Code. 16. INDEMNITIES. (a) Karabu agrees to indemnify and hold harmless TWA, its officers, directors, shareholders, subsidiaries, affiliates and employees (collectively, "TWA Indemnitees" and individually "TWA Indemnitee") from and against any and all claims, actions or cause of action arising directly or indirectly out Karabu's failure to act in accordance with the terms of applicable foreign, federal, state or local law, rule, regulation or ordinance concerning the marketing and sale of air transportation including any failure by Karabu to collect and pay over to TWA in accordance with Exhibit B hereto any and all percentage based transportation taxes, flat rate taxes, fees or surcharges (including without limitation, passenger facility charges, international departure taxes, APHIS and/or INS fees), together with any penalties or interest in respect of any thereof (collectively, "Taxes") which may be imposed on, incurred by or asserted against any TWA Indemnitee arising out of or in connection with the sale of any Ticket by or on behalf of Karabu or under the Ticket Program, including, without limitation, any reasonable legal fees, expenses or costs incurred by any TWA Indemnitee in the investigation or defense of any Taxes or claim of nonpayment of any Taxes by any governmental authority. (b) TWA agrees to indemnify and hold harmless Karabu, its officers, directors, shareholders, subsidiaries, affiliates, employees, agents, consultants and independent contractors (collectively, "Karabu Indemnitees" and individually "Karabu Indemnitee") -23- 24 from and against any and all claims, actions or causes of action arising out of TWA's failure to pay over to the appropriate governmental authorities when due any Taxes received from Karabu, including, without limitation, any reasonable legal fees, expenses or costs incurred by any Karabu Indemnitee in the investigation or defense of any claims, fines or penalties or claim of nonpayment of any thereof. (c) If the facts giving rise to any indemnification under clauses (a) or (b) of this Section 16 shall involve an actual claim or demand by any third party against a TWA Indemnitee or a Karabu Indemnitee (the "Indemnified Party"), the party which may be liable for indemnification (the "Indemnifying Party") shall be entitled to notice of and entitled (without prejudice to the right of any Indemnified Party to participate at its expense through counsel of its own choosing) to defend or prosecute such claim at its expense and through counsel of its own choosing if it gives written notice of its intention to do so no later than the time by which the interests of the Indemnified Party would be materially prejudiced as a result of its failure to have received such notice; PROVIDED, HOWEVER, that if the defendants in any action shall include both an Indemnifying Party and an Indemnified Party and the Indemnified Party shall have been advised by its counsel that the counsel selected by the Indemnifying Party has a conflict of interest because of the availability of different or additional defenses to the Indemnified Party, the Indemnified Party shall have the right to select separate counsel to participate in the defense of such action on its behalf, at the expense of the Indemnifying Party. The failure to notify the Indemnifying Party of a third Party claim or demand shall not relieve them of any liability which they may have to any Indemnified Party except to the extent that such failure materially prejudices the Indemnifying Party's ability to defend such claim or action. The Indemnified Party shall cooperate fully in the defense of any such claim or action and shall make available to the Indemnifying Party pertinent information under its control relating thereto, but shall be entitled to be reimbursed, as provided in this clause (c), for all out-of-pocket costs and expenses payable to third parties incurred by it in connection therewith. If any Indemnifying Party assumes the defense of any such claim or action, the Indemnifying Party will hold the Indemnified Party harmless from and against any and all damages arising out of any settlement approved by such Indemnifying Party on any judgment in connection with such claim or action. Payment by an Indemnifying Party to an Indemnified Party shall be made within ten (10) days after demand, unless indemnification arises on account of a third Party claim or action in which event payment shall be made within ten (10) days after final judgment, settlement or compromise, as the case may be. 17. CHOICE OF LAW. THE PARTIES AGREE THAT THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. -24- 25 18. BENEFIT/ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns; provided, however, that no party may assign this Agreement without the prior written consent of the other party except that, upon written notice to TWA, any one or more Icahn Entities may, by executing and delivering a written agreement in the form of Exhibit C hereto (a "Joiner Agreement"), join as a party to this Agreement as if an original signatory hereto with the right to operate all or any portion of the Ticket Programs (as Karabu and such Icahn Entities may determine in their discretion), provided, that Karabu shall not be relieved of any obligations related to the Ticket Programs which are not fully performed by any such Icahn Entity or of any obligations under any other agreement with TWA. The references herein to Karabu in the context of the rights and obligations of the parties hereto and the operation of the Ticket Programs shall mean Karabu and/or the Icahn Entities which execute and deliver Joinder Agreements. 19. CERTAIN NET WORTH REQUIREMENTS. From and after such time as the Karabu Loans have been paid in full, either (i) the aggregate book net worth (determined in accordance with generally accepted accounting principles, "GAAP"), and the net worth determined on the basis of the fair market value of assets less all liabilities (including contingent liabilities but excluding liabilities relating to minimum funding or the making of termination payments to or for the benefit of the Pension Plans or the PBGC or minimum funding or termination liabilities relating to any other employee benefit plan maintained by such Icahn Entities or trades or businesses under common control of such Icahn Entities) of the Icahn Entities who shall then be bound to TWA under this Agreement shall at all times during the term of this Agreement be $10 million or more, or (ii) there will be provided to TWA a guaranty, in form and substance reasonably satisfactory to TWA, of the obligations of the Icahn Entities under this Agreement given by the Icahn Entities having at all times during the term of this Agreement an aggregate net worth (computed as in clause (i) above) of $10 million or more. 20. TAX RULING. TWA and Karabu agree to execute the private letter ruling cooperation letter in the form attached hereto as Exhibit D. 21. MISCELLANEOUS. The waiver by either party of a breach or violation of any term or provision of this Agreement shall not operate as, or be construed to be, a waiver of any subsequent breach of the same provision by any party or of the breach of any other term or provision of this Agreement. Each of the parties has agreed to the use of the particular language of the provisions of this Agreement including all attached exhibits and schedules and any -25- 26 questions of doubtful interpretation shall not be resolved by any rule or interpretation against the draftsman but rather in accordance with the fair meaning thereof, having due regard to the benefits and rights intended to be conferred upon the parties hereto and the limitations and restrictions upon such rights and benefits intended to be provided. Any notice, demand or communication required, permitted, or desired to be given hereunder shall be in writing and shall be deemed effectively given when personally delivered, sent by facsimile transmission (receipt confirmed by phone) or mailed by prepaid certified mail, return receipt requested, addressed as follows: TWA: Trans World Airlines, Inc. One City Centre 515 N. Sixth Street St. Louis, Missouri 63101 Attention: Senior Vice President and General Counsel FAX: (314) 589-3267 With a copy to: Smith, Gambrell & Russell Suite 3100 Promenade II 1230 Peachtree Street, N.E. Atlanta, Georgia 30309-3592 Attention: Howard E. Turner FAX: (404) 815-3509 Karabu: Karabu Corp. 100 South Bedford Road Mt. Kisco, New York 10549 Attention: Mr. Carl C. Icahn FAX: (212) 635-5571 With a copy to: Gordon Altman Butowsky Weitzen Shalov & Wein 114 West 47th Street, 20th Floor -26- 27 New York, New York 10036 Attention: Marc Weitzen FAX: 212-626-0799 or to such other address, and to the attention of such other person or officer as any party may designate, with copies thereof to the respective counsel thereof as notified by such party. In addition, if TWA is notified by Karabu that another Icahn Entity or Entities have executed Joinder Agreements, TWA shall send copies of all notices, demands and communications required to be sent to Karabu pursuant to this Agreement to such Icahn Entity or Entity at the address or addresses designated for that purpose in the Joinder Agreement. This Agreement supersedes all prior contracts, understandings and agreements, whether written or oral, and constitutes the entire agreement of the parties respecting the within subject matter and no party shall be entitled to benefits other than those specified herein. As between or among the parties, no oral statements or prior written material not specifically included herein shall be of any force and effect; the parties specifically acknowledge that in entering into and executing this Agreement, the parties rely solely upon the representations and agreements contained in this Agreement and no others. No terms, conditions, warranties, or representations, other than those contained herein and no amendments or modifications hereto, shall be binding unless made in writing and signed by the party to be charged. This Agreement may be executed in multiple originals or counterparts, each and all of which shall be deemed an original and all of which together shall constitute but one and the same instrument. -27- 28 IN WITNESS WHEREOF, each of the parties have caused this Agreement to be executed on its behalf by its duly authorized officers, as of the date hereinabove first written. TRANS WORLD AIRLINES, INC. By: /s/ ---------------------------- Title: Senior Vice President KARABU CORP. By: /s/ ---------------------------- Title: ---------------------- -28- 29 EXHIBIT A DOMESTIC CONSOLIDATOR PROGRAM DOMESTIC CONSOLIDATOR FARES 1. Domestic Consolidator Fares are Bulk Fare Rates which are 40% of the Published Fares for the lowest priced domestic system wide advance purchase round trip excursion fare in effect on the dates specified in paragraph 2 and, on a sell-up basis, the second lowest priced domestic system-wide advance purchase round-trip excursion fares in effect on the dates specified in paragraph 2 ("Structural Fares") established by TWA from time-to-time for air transportation in Domestic Consolidator Markets. The sell-up feature available for Domestic Consolidator Fares refers to the availability of higher price levels which have added seat availability. For example, the 7 day advance purchase fare is presently the sell-up fare from the 21-day advance purchase fare. Structural Fares currently have the following features: - System wide advance purchase fare types that are effective for travel for at least three months; - Minimum and Maximum stay requirements; - Non-refundability in the event the fare is not used on the flight on which space was reserved; - Penalty charges for change in flight reservations and dates; - Black-out periods during which travel is restricted or conditioned by ticket purchase requirements; - Seat inventory capacity limitations; - Ticketing time limits within which tickets must be purchased within a fixed period at or after specific flight reservations are made. 1 30 These features are not set out for the purpose of limiting the scope or definition of Structural Fares but rather to better identify the qualities which functionally characterize the lowest Published Fares and which over the term of this Agreement would provide a basis for determining the lowest Published Fares from which the Domestic Consolidator Fare levels are to be determined. At the present time, for example, TWA's lowest domestic system-wide advance purchase excursion fare is the 21-day advance purchase fare bearing an E21N fare code basis. The second lowest advance purchase excursion fare is the 7-day advance purchase fare bearing an E7N fare code basis. In the event that the fare designator codes are changed for these fares or that the fare structure is changed so that either or both the 7-day and the 21-day advance purchase condition is lengthened or shortened, the Domestic Consolidator Fares will be determined on the basis of the new fares that are the functional equivalent of the 7-day and the 21-day advance purchase fares without regard to the new fare code or advance purchase period. For the purposes of this Agreement, the E21N and the E7N fares refer to the lowest domestic system-wide advance purchase excursion fare and the second lowest domestic system-wide advance purchase excursion fare respectively without regard to the actual advance purchase requirement of any later fares which bear different fare codes but which are the functional equivalent of these two fares. For the purposes of this Agreement, all references to the E21N fare and the E7N fare include the functional equivalents of one or both such fares in the event that one or both such fares have been eliminated. 2. Domestic Consolidator Fares will be in effect for periods of six months effective as of February 15 and October 15 (the "effective fare date"). Ticket sales on and after the effective fare date will be at a 60% discount from the applicable Structural Fare. TWA will notify Karabu of the new Domestic Consolidator Fares on or before the effective fare date. 3. For such period of time that Las Vegas is designated as an origin city or a destination city from another origin city under the Domestic Consolidator Fare Program, the Domestic Consolidator Fare for travel between Las Vegas and its related destination cities or such other origin cities and Las Vegas (in each case in both directions) will be adjusted as of the effective fare date. However, the Domestic Consolidator Fare for those city pair markets shall be adjusted at other dates in order to match fares in those city pair markets which are lower than the most recently offered Domestic Consolidator Fare ("Las Vegas matched fare"). In such an instance, the reduced Domestic Consolidator Fare in the particular Las Vegas city-pair market will be at a 60% discount from the Las Vegas matched fare and will only be in effect for such period of time as such Las Vegas matched fare is in effect for sale, provided however that such fare matching will not apply to Las Vegas matched fares offered for sale for three days or less. 2 31 4. The advance purchase, round-trip and minimum/maximum stay period requirements of the Structural Fares are not applicable to the Domestic Consolidator Fares and one-way Tickets to and from the origin and destination cities may be purchased. 5. The Domestic Consolidator Fare may be booked only in identified seat inventory classes. A seat inventory class is a mechanism for categorizing various fare types in order to control/limit the number of tickets sold at any particular fare level on any particular flight. At the present time, TWA has the following seat inventory classes shown in descending order: F C Y B Q K V T S For such period of time as the lowest Structural Fare which serves as the base for the Domestic Consolidator Fare is the E21N fare, this fare may only be booked in the "S" and "T" seat inventory classes. In the event that either or both of the "S" and/or "T" seat inventory classes have been eliminated, the E21N fare may be booked in the functional equivalent of the "S" and/or "T" seat inventory classes. In the event that the "S" and "T" seat inventory classes are closed for sale for whatever reason, the sell-up fare for the Domestic Consolidator Fare, the E7N fare may be booked in the "V" and/or "K" seat inventory class. In the event that either or both of the "V" and/or "K" seat inventory classes are eliminated, the E7N fare may be booked in the functional equivalent of the "V" and/or "K" seat inventory classes. If within three days of the departure date of a specific flight, the "V" and "K" seat inventory classes are fully booked, the E7N fare may be booked in the "Q" seat inventory class or its functional equivalent if the "Q" seat inventory class has been eliminated. In the event that the number of seat inventory classes for discounted Published Fares (the B, Q, K, V, T and S seat inventory classes) increases: - by one such class, the additional seat inventory class will be made available for the E21N fare; 3 32 - by more than one such class, then one-half of the additional classes (or if an odd number, the whole number which is rounded-up from one-half) will be made available for the E21N fare and the balance of the additional classes will be made available for the E7N fare. In the event that the number of seat inventory classes for discounted Published Fares decrease by one or more, then the "Q" seat inventory class or its functional equivalent if it has been eliminated would become available for the E7N fare. The two lowest order of seat inventory classes are available for the E21N fare, while the other seat inventory classes other than "Y" or "B" are available for the E7N fare. In the event that the number of seat inventory classes for discounted Published Fares decrease to three seat inventory classes or less, then all remaining seat inventory classes would be divided so that one-half of the inventory classes (or if an odd number, the whole number which is rounded-up from one-half) would be allocated to the E21N and the balance would be allocated to the E7N fares. In the event that all of the discounted seat inventory classes are eliminated, then the "Y" seat inventory class will become available for the E21N. TWA does not guarantee that with respect to any particular flight for which reservations are sought that at all times there will always be availability in "S", "T", "V", "K" and "Q" seat inventory classes. Tickets issued at the Domestic Consolidator Fare which are improperly issued and booked in any seat inventory class other "S", "T", "V", "K" or "Q" or their functional equivalent in the event that any or all of such seat inventory classes are eliminated, will be priced at the full Published Fare. 6. For reservations made for travel during the following periods and for such other similar such periods as may be established from time-to-time during the term of the Agreement, Karabu must provide is the Passenger Name Record the Ticket number of a ticket issued in connection with a reservation made to the following destinations during the following periods if, but only if, TWA applies this condition to all E21N or E7N fares offered for sale during these periods. To Florida: 12-15 APR95, 21/22NOV95, 20-26DEC95, 15-18FEB96, 03-06APR96, 26/27NOV96, 19-26DEC96. From Florida: 21-24APR95, 26/27NOV95, 31DEC95 - 03JAN96, 4 33 23-5FEB96, 12-14APR96, 02DEC96. Non-Florida: 21-22NOV95, 26-27NOV95, 20-26DEC95, 01-03JAN96, 26-27NOV96, 01-02DEC96, 19-26DEC96. 7. For reservations made more than 7 days before the date of flight departure, Tickets must be issued within 24-hours of the date on which the reservation was made. For reservations made within 7 days of flight departure, Tickets must be issued at the time that the reservations are made provided that such a ticketing condition is applied to all other Consolidators (Domestic) offering tickets for sale in Domestic Consolidator Markets. No stopovers are permitted on Domestic Consolidator Fare Tickets provided that this condition is also applicable to tickets sold by other Consolidators (Domestic) offering tickets for sale in Domestic Consolidator Markets. 8. Tickets issued at the Domestic Consolidator Fare are nonrefundable and nonreissuable and the value of such tickets may not be applied in full or in part against the purchase of any other Ticket or ticket. All Tickets issued at the Domestic Consolidator Fare must indicate "bulk fare", non-endorsable and non-refundable on the face of the Ticket. Tickets which fail to indicate this information on the face of the Ticket will be valued at the full Published Fare. DOMESTIC CONSOLIDATOR MARKETS 1. The Domestic Consolidator Markets will consist exclusively of transportation from 12 United States origin cities listed on the attachment hereto to destination cities listed on the attachment hereto. The attachment will be amended from time to time to reflect changes in origin/destination cities in accordance with this paragraph. The initial 12 origin cities will remain in place during the Fifteen Month Period. Three months prior to each End Date (as hereinafter defined), TWA will provide to Karabu a list of 12 alternate United States origin cities. Prior to each End Date, Karabu shall have the right to select 12 origin cities for the period ending on the next End Date from the 12 then current origin cities, the 12 alternate cities plus three additional alternate U.S. origin cities selected by Karabu, provided however that at no time may the 12 origin cities selected by Karabu include two origin cities each of which serve as a hub (as hereinafter defined) for any single major U.S. scheduled air carrier. The effective date on which Karabu must discontinue the sale and ticketing of Tickets from or to any origin/destination city market whether because the origin city will not be included on the list of 12 origin cities for the next succeeding Year or from any origin/destination city pair because the market share in such market has exceeded permissible market share levels as set forth below, will, except 5 34 as otherwise provided in the next sentence, be as of the day following the next succeeding End Date. TWA may, on three months notice to Karabu, remove an origin city as a point from which Karabu may operate at any time that TWA establishes a Hub at that origin city. In such an event, Karabu may select an alternate origin city so long as the inclusion of that origin city does not result in there being two origin cities which serve as a hub for any single major U.S. scheduled air carrier. In the event that a city pair which had previously been excluded from eligibility because it exceeded the applicable market share criteria falls below the applicable market share criteria, it shall be included as an eligible city pair effective on the day following the next End Date if the origin city of the city pair is included in the 12 origin cities effective as of the day following the next End Date. "End Date" means the last day of the fifteenth month following the Commencement Date and the last day of each subsequent twelve month period. "Hub" means a city in which TWA initiates non-stop service to six (6) new cities (other than service to its other hubs including St. Louis and JFK) with a minimum average of three (3) non-stop flights per day to each such city. 2. Destination cities from the 12 origin points must satisfy the following criteria: - the origin/destination city market must be one in which TWA has less than a 5% market share except for the origin city/ New York market which has a 10% market share limit; - during the initial fifteen months of the Ticket Program, market share data will be based on the Year end 2nd Quarter 1994 market share data prepared by the U.S. Department of Transportation; - during each subsequent Year of the Ticket Program, market share data will be based on the Year end 3rd Quarter market share data prepared by the U.S. Department of Transportation; - in the event that the U.S. Department of Transportation discontinues the publication of such market share data, the market share data will be determined from mutually acceptable industry recognized sources or in the event that there is no mutual agreement on such sources, then the then existing markets will remain in place; - in the event any origin city/destination market exceeds the applicable 5% or 10% market share and/or either city becomes a Hub, it will cease being eligible as a Domestic Consolidator Market as of the day following the next succeeding End Date; 6 35 - the origin/destination city markets must be ones in which TWA in fact files Published Fares; - San Juan and Honolulu are treated as domestic points for the purposes of this Agreement. 3. Domestic Consolidator Fares may not under any circumstances be sold: - for transportation where the origin city or the destination point is St. Louis; - for Trans World Express flights; - for any code-share and/or block space flights; - on nonstop flights in any otherwise eligible market in which TWA operates non-stop service. NONDISCRIMINATION Capacity controls applicable to Domestic Consolidator Markets will at all times be consistent with general system controls and models. TWA will not impose any such controls which are designed to specifically impact Karabu's operations in Domestic Consolidator Markets or the Domestic Consolidator Fares established hereunder. Published Fares will not be re-filed in different classes for the sole purpose of isolating and controlling the program described in this Exhibit and the Karabu Ticket Program Agreement. TWA will not initiate unpublished fares for the sole purpose of impacting such programs or the Domestic Consolidator Fares. TWA will not take any other action for the purpose of adversely impacting the Ticket Programs described in the Karabu Ticket Program Agreement. 7 36 EXHIBIT C JOINDER AGREEMENT Joinder Agreement, dated 19 , between Karabu Corporation, a Delaware corporation ("Karabu") and [Icahn Entity], a corporation ("New Party"). WHEREAS, Karabu is a party to that certain Karabu Ticket Program, dated as of , 1995 between Karabu and Trans World Airlines, Inc. ("TWA"); and WHEREAS, pursuant to Section 18 any one or more Icahn Entities (as defined in the Agreement) may, by executing and delivering this Agreement, be joined as a party to the Ticket Agreement as if an original signatory thereto; and WHEREAS, New Party is an Icahn Entity and desires to become a party to the Ticket Agreement; NOW THEREFORE, the parties hereto desiring to be legally bound, hereby agree as follows: 1. New Party elects to be joined as a party to the Ticket Agreement as if an original signatory thereto and shall be bound by all of the terms, conditions and restrictions thereof. 2. New Party represents that it is an Icahn Entity as defined in the Ticket Agreement. 3. Karabu shall remain liable for all of its obligations related to the Ticket Programs described in the Ticket Agreement notwithstanding the joinder of new Party as a party to the Ticket Agreement. 4. New Party's address for the purpose of receiving notices pursuant to the Ticket Agreement is: ----------------------------- ----------------------------- ----------------------------- 5. This Agreement shall be governed by the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused the execution of this Agreement on the day first above written. KARABU CORPORATION [NEW PARTY] By: By: --------------------- --------------------- Its: Its: --------------------- --------------------- 37 JOINDER AGREEMENT Joinder Agreement, dated August 14, 1995, between Karabu Corp., a Delaware corporation ("Karabu") and Global Discount Travel Services LLC, a Nevada limited liability company ("New Party"). WHEREAS, Karabu is a party to that certain Karabu Ticket Program Agreement, dated as of June 14, 1995 (the "Ticket Agreement") between Karabu and Trans World Airlines, Inc. ("TWA"); and WHEREAS, pursuant to Section 18 any one or more Icahn Entities (as defined in the Agreement) may, by executing and delivering this Agreement, be joined as a party to the Ticket Agreement as if an original signatory thereto; and WHEREAS, New Party is an Icahn Entity and desires to become a party to the Ticket Agreement; NOW THEREFORE, the parties hereto desiring to be legally bound, hereby agree as follows: 1. New Party elects to be joined a party to the Ticket Agreement as if an original signatory thereto and shall be bound by all to the terms, conditions and restrictions thereof. 2. New Party represents that it is an Icahn Entity as defined in the Ticket Agreement. 3. Karabu shall remain liable for all of its obligations related the Ticket Programs described in the Ticket Agreement notwithstanding the joiner of New Party as a party to the Ticket Agreement. 4. New Party's address for the purpose of receiving notices pursuant to the Ticket Agreement is: 4052 South Industrial Road Las Vegas, Nevada 89103 Attention: Mr. Terry O'Neal with copies to: Icahn Associates Corp. 114 West 47th Street, 19th Floor New York, New York 10036 38 Attention: Mr. Robert J. Mitchell Gordon Altman Butowsky Weitzen Shalov & Wein 114 West 47th Street, 21st Floor New York, New York 10036 Attention: Douglas S. Rich, Esq. 5. This Agreement shall be governed by the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused the execution of this Agreement on the day first above written. KARABU CORP. By: /s/ ----------------------------------- Its: Assistant Secretary GLOBAL DISCOUNT TRAVEL SERVICES LLC By: Karabu Corp., Member By: /s/ ----------------------------------- Its: Assistant Secretary -2- 39 Exhibit D Ruling Request Agreement This Agreement is being entered into as of this __ day of June, 1995 between Trans World Airlines, Inc., a Delaware corporation ("TWA"), and Karabu Corp., a Delaware corporation ("Karabu"). All defined terms used herein shall have the meaning set forth in the Karabu Ticket Program Agreement of even date between TWA and Karabu. Karabu may assign its rights under this Agreement to one or more of the Icahn Entities. Karabu may in its sole discretion make a request to the Internal Revenue Service for a private letter ruling or closing agreement ("Ruling") with respect to the application of the tax imposed by Section 4261 of the Internal Revenue Code of 1986, as amended (the "Code") to the tickets sold by Karabu in the Ticket Program. Specifically, Karabu intends to apply for a Ruling to the effect that the tax imposed by Section 4261 is based upon the amount paid by Karabu to TWA. In addition, such ruling request may seek guidance with respect to the proper procedures for collecting the tax. TWA agrees to cooperate with Karabu in connection with the above-mentioned ruling request and, if requested by Karabu, agrees to join with Karabu in filing such ruling request. IN WITNESS WHEREOF, each of the parties have caused this Agreement to be executed on its behalf by its duly authorized officers, as of the date hereinabove first written. TRANS WORLD AIRLINES, INC. By: ____________________________________ Title: _________________________________ KARABU CORP. By: ____________________________________ Title: _________________________________ EX-10.48 5 EXHIBIT 10.48 1 1910K/TWATrans World Airlines, Inc. PURCHASE AGREEMENT between THE BOEING COMPANY and TRANS WORLD AIRLINES, INC. Relating to Boeing Model 757-231 Aircraft Purchase Agreement Number 1910 P.A. 1910 K/TWA 2 TABLE OF CONTENTS
Page SA Number Number ------ ------ ARTICLES - -------- 1. Subject Matter of Sale.................................................. 1-1 2. Delivery, Title and Risk of Loss................................................................. 2-1 3. Price of Aircraft....................................................... 3-1 4. Taxes................................................................... 4-1 5. Payment................................................................. 5-1 6. Excusable Delay......................................................... 6-1 7. Changes to the Detail Specification........................................................... 7-1 8. Federal Aviation Requirements and Certificates and Export License......................................... 8-1 9. Representatives, Inspection, Flights and Test Data................................................... 9-1 10. Assignment, Resale or Lease............................................ 10-1 11. Termination for Certain Events......................................... 11-1 12. Product Assurance; Disclaimer and Release; Exclusion of Liabilities; Customer Support; Indemnification and Insurance.......................................................... 12-1 13. Buyer Furnished Equipment and Spare Parts............................................................ 13-1 14. Contractual Notices and Requests....................................... 14-1 15. Miscellaneous.......................................................... 15-1
i 3 TABLE OF CONTENTS
SA Number ------ EXHIBITS - -------- A Aircraft Configuration...................... B Product Assurance Document.................. C Customer Support Document................... D Price Adjustments Due to Economic Fluctuations - Airframe and Engines........................ E Buyer Furnished Equipment Provisions Document......................... F Defined Terms Document......................
i 4 LETTER AGREEMENT INDEX SUBJECT REFERENCE 1910-1 Seller Purchased Equipment 1910-2 Spares Initial Provisioning i 5 TABLE OF CONTENTS SA Number RESTRICTED LETTER AGREEMENTS [ THE CONFIDENTIAL PORTION OF THIS DOCUMENT AND ALL DOCUMENTS THAT ARE OTHERWISE REFERRED TO ON THIS "TABLE OF CONTENTS- RESTRICTED LETTER AGREEMENTS" HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. ] i 6 PURCHASE AGREEMENT NO. 1910 Relating to BOEING MODEL 757-231 AIRCRAFT This Agreement is entered into as of ____ , 1996 by and between The Boeing Company, a Delaware corporation, with its principal office in Seattle, Washington (Boeing), and Trans World Airlines, Inc., a Delaware corporation, with its principal office in St. Louis, Missouri (Buyer). Accordingly, Boeing and Buyer agree as follows: 1 7 ARTICLE 1. Subject Matter of Sale. 1.1 The Aircraft. Boeing will manufacture and deliver to Buyer and Buyer will purchase and accept delivery from Boeing of ten (10) Boeing Model 757-231 aircraft (the Aircraft) manufactured in accordance with Boeing detail specification DS-44010-96 dated as of even date herewith, as described in Exhibit A, as modified from time to time in accordance with this Agreement (Detail Specification). 1.2 Additional Goods and Services. In connection with the sale of the Aircraft, Boeing will also provide to Buyer certain other things under this Agreement, including data, documents, training and services, all as described in this Agreement. 1.3 Performance Guarantees. Any performance guarantees applicable to the Aircraft will be expressly included in this Agreement. Where performance guarantees are included in this Agreement other than within the Detail Specification, such guarantees will be treated as being incorporated in the Detail Specification by this reference. 1.4 Defined Terms. For ease of use, certain terms are treated as defined terms in this Agreement. Such terms are identified with a capital letter and set forth and/or defined in Exhibit F. 1-1 8 ARTICLE 2. Delivery, Title and Risk of Loss. 2.1 Time of Delivery. The Aircraft will be delivered to Buyer by Boeing assembled and completed, ready for flight and Buyer will accept delivery of the Aircraft, in accordance with the following schedule:
Month and Year of Delivery Quantity of Aircraft ----------- -------------------- February 1997 One (1) April 1997 One (1) June 1997 One (1) August 1997 One (1) October 1997 One (1) September 1998 One (1) November 1998 One (1) January 1999 One (1) March 1999 One (1) May 1999 One (1)
2.2 Notice of Target Delivery Date. Boeing will give Buyer notice of the Target Delivery Date of the Aircraft approximately 30 days prior to the scheduled month of delivery. 2.3 Notice of Delivery Date. Boeing will give Buyer at least 21 days notice of the delivery date of the Aircraft. If an Aircraft delivery is delayed beyond such delivery date due to the responsibility of Buyer, Buyer will reimburse Boeing for all costs incurred by Boeing as a result of such delay, including amounts for storage, insurance, Taxes, preservation or protection of the Aircraft and interest on payments due. 2.4 Place of Delivery. The Aircraft will be delivered at a facility selected by Boeing in the State of Washington, unless mutually agreed otherwise. 2.5 Title and Risk of Loss. Title to and risk of loss of an Aircraft will pass from Boeing to Buyer upon delivery of such Aircraft, but not prior thereto. 2.6 Bill of Sale. Upon delivery of an Aircraft Boeing will deliver to Buyer a bill of sale conveying good title to such Aircraft, free of any encumbrances. 2-1 9 ARTICLE 3. Price of Aircraft. 3.1 Definitions. 3.1.1 Special Features are the features incorporated in Exhibit A which have been selected by Buyer. 3.1.2 Base Airframe Price is the Aircraft Basic Price excluding the price of Special Features and Engines. 3.1.3 Engine Price is the price established by the Engine manufacturer for the Engines installed on the Aircraft including all accessories, equipment and parts set forth in Exhibit D. 3.1.4 Aircraft Basic Price is comprised of the Base Airframe Price, the Engine Price and the price of the Special Features. 3.1.5 Economic Price Adjustment is the adjustment to the Aircraft Basic Price (Base Airframe, Engine and Special Features) as calculated pursuant to Exhibit D. 3.1.6 Aircraft Price is the total amount Buyer is to pay for the Aircraft at the time of delivery. 3.2 Aircraft Basic Price. The Aircraft Basic Price, expressed in July 1995 dollars, is set forth below:
Base Airframe Price: $43,168,000 Special Features From ILFC Detail Spec per 6-1162-RLL-1743 $1,154,600 From Exhibit A $1,335,900 Engine Price $11,610,000 Aircraft Basic Price $57,268,500
3-1 10 3.3 Aircraft Price. The Aircraft Price will be established at the time of delivery of such Aircraft to Buyer and will be the sum of: 3.3.1 the Aircraft Basic Price, which is Fifty Seven Million Two Hundred Sixty Eight Thousand Five Hundred Dollars ($57,268,500); plus 3.3.2 the Economic Price Adjustments for the Aircraft Basic Price, as calculated pursuant to the formulas set forth in Exhibit D (Price Adjustments Due to Economic Fluctuations - Airframe and Engine); plus 3.3.3 other price adjustments made pursuant to this Agreement or other written agreements executed by Boeing and Buyer. 3.4 Advance Payment Base Price. 3.4.1 Advance Payment Base Price. For advance payment purposes, the following estimated delivery prices of the Aircraft have been established, using currently available forecasts of the escalation factors used by Boeing as of the date of signing this Agreement. The Advance Payment Base Price of each Aircraft is set forth below:
Month and Year of Advance Payment Base Scheduled Delivery Price per Aircraft ------------------ ------------------ February 1997 $61,233,000 April 1997 $61,282,000 June 1997 $61,340,000 August 1997 $61,566,000 October 1997 $61,885,000 September 1998 $63,652,000 November 1998 $63,789,000 January 1999 $63,999,000 March 1999 $64,293,000 May 1999 $64,623,000
3-2 11 ARTICLE 4. Taxes and Customs Duties. 4.1 Taxes. In addition to the purchase price of the Aircraft, Buyer shall pay to Boeing, upon demand, any sales or use taxes required to be paid by Boeing as a result of any sale, use (by Buyer after valid tender of delivery), delivery, storage (after valid tender of delivery), or transfer under this Agreement of the Aircraft, accessories, equipment, Buyer Furnished Equipment (Article 9), services, instructions and data furnished or delivered hereunder; provided, however, that Buyer shall have no liability for any penalties or interest with respect to any such taxes, or for any tax which may be levied upon any payment to Boeing by Buyer for the purpose of paying such tax, arising out of Boeing's fault or negligence. If claim is made against Boeing for such taxes, Boeing shall promptly notify Buyer. If seasonably requested by Buyer in writing, Boeing shall, at Buyer's expense, take such action as Buyer may reasonably direct with respect to such asserted liability and shall not pay such tax except under protest, if protest is necessary. If payment be made, Boeing shall, at Buyer's expense, take such action as Buyer may reasonably direct to recover such payment and shall, if requested, permit Buyer in Boeing's name to file claim or commence an action to recover such payment. Buyer shall not be liable for any sales or use taxes pursuant to the provisions of this Article 4 for which it has not been invoiced within one (1) year from the date of delivery, storage or transfer of any Aircraft, accessory, equipment, Buyer Furnished Equipment, service, instruction or datum to which such sales or use taxes apply. 4.2 Customs Duties. In addition to the purchase price of the Aircraft, Buyer shall pay to Boeing on demand the amount of any United States custom duties required to be paid by Boeing with respect to the importation of any items of Buyer Furnished Equipment or any other accessory, equipment or part of foreign manufacture installed in the Aircraft at Buyer's request. Boeing shall use its best efforts to assist Buyer in obtaining a refund of such customs duties upon exportation of the Aircraft from the United States or in securing temporary free importation of such items under bond, to the extent permitted by law. Buyer shall reimburse Boeing for any expenses and hold Boeing harmless from any penalties incurred by or imposed upon Boeing as a result of any action taken under this Article 4.2. 4-1 12 ARTICLE 5. Payment. 5.1 Advance Payment Schedule. Advance payment for each Aircraft will be made to Boeing by Buyer as follows:
Due Date of Payment Amount Due per Aircraft - ------------------- ----------------------- (Percentage times Advance Payment Base Price) Upon signing the Agreement 1% (less the Deposit) 24 months prior to the first 4% day of the scheduled delivery month of the Aircraft 21 months prior to the first 5% day of the scheduled delivery month of the Aircraft 18 months prior to the first 5% day of the scheduled delivery month of the Aircraft 12 months prior to the first 5% day of the scheduled delivery month of the Aircraft 9 months prior to the first 5% day of the scheduled delivery month of the Aircraft 6 months prior to the first 5% day of the scheduled delivery month of the Aircraft -- Total 30%
5-1 13 5.2 Payment at Delivery. The Aircraft Price, less Advance Payments received by Boeing, is due on delivery of such Aircraft to Buyer. 5.3 Form of Payments. All payments due hereunder will be made by Buyer to Boeing by unconditional deposit in a bank account in the United States designated by Boeing or in other immediately available funds. All prices and payments set forth in this Agreement are in United States Dollars. 5.4 Monetary and Government Regulations. Buyer will be responsible for complying with all monetary control regulations and for obtaining necessary governmental authorizations related to payments hereunder. 5-2 14 ARTICLE 6. Excusable Delay. 6.1 General. Boeing will not be liable for or be deemed to be in default under this Agreement on account of any delay in delivery of any Aircraft or other performance hereunder arising out of causes such as: acts of God; war, armed hostilities, riots, fires, floods, earthquakes or serious accidents; governmental acts or failures to act affecting materials, facilities or Aircraft; strikes or labor troubles causing cessation, slowdown or interruption of work; damage to an Aircraft; failure of or delay in transportation; or inability, after due and timely diligence, to procure materials, systems, accessories, equipment or parts; or arising out of any other cause to the extent it is beyond Boeing's control or not occasioned by Boeing's fault or negligence. A delay resulting from such causes is referred to as an "Excusable Delay". 6.2 Excusable Delay of 12 Months. 6.2.1 Anticipated Delay. If Boeing concludes, based on its appraisal of the facts and normal scheduling procedures, that due to an Excusable Delay, delivery of an Aircraft will be delayed more than 12 months beyond the month in which delivery is scheduled, Boeing will promptly so notify Buyer in writing and either party may then terminate this Agreement with respect to such Aircraft by giving written notice to the other within 15 days after receipt by Buyer of Boeing's notice. Failure of a party to terminate the purchase of an Aircraft for an Excusable Delay pursuant to this paragraph results in a waiver of that party's right to terminate the purchase of such Aircraft for any delay in delivery caused by such Excusable Delay. 6.2.2 Actual Delay. If, due to an Excusable Delay, delivery of an Aircraft is delayed for more than 12 months beyond the month in which delivery is scheduled, and such right to terminate has not been waived under paragraph 6.2.1, either party may terminate this Agreement with respect to such Aircraft by giving written notice to the other within 15 days after the expiration of such 12-month period. 6.3 Aircraft Damaged Beyond Repair. If, prior to delivery, an Aircraft is destroyed or damaged beyond economic repair due to any cause, Boeing will promptly notify Buyer in writing and either party may then terminate this Agreement with respect to such Aircraft. If Boeing does not so terminate this Agreement with respect to such Aircraft, such notice will specify the earliest date reasonably possible, consistent with Boeing's other contractual commitments and production capabilities, by which Boeing will deliver a replacement for such Aircraft. This Agreement will thereupon terminate as to such Aircraft, 6-1 15 unless Buyer gives Boeing written notice, within 30 days after receipt of Boeing's notice, that Buyer desires the proposed replacement for such Aircraft. 6.4 Agreement Revision. If an Aircraft is delayed, or destroyed or damaged beyond economic repair, and this Agreement is not terminated pursuant to this Article, this Agreement will be appropriately revised. 6.5 Agreement Termination. 6.5.1 Termination under this Article will discharge all obligations and liabilities of Boeing and Buyer hereunder with respect to terminated Aircraft and all related undelivered items and services, except that Boeing will return to Buyer, without interest, all advance payments related to such Aircraft, 6.5.2 If either party terminates this Agreement as to any Aircraft pursuant to this Article, Boeing may, upon written notice to Buyer within 30 days after such termination, purchase from Buyer any Buyer Furnished Equipment related to such Aircraft, at the invoice prices paid, or contracted to be paid, by Buyer. 6.6 Exclusive Rights. The termination rights set forth in this Article are in substitution for any and all other rights of termination or contract lapse or any other claim arising by operation of law by virtue of delays in performance covered by this Article. 6-2 16 ARTICLE 7. Changes to the Detail Specification. 7.1 Development Changes. Boeing may, at its own expense and without Buyer's consent, incorporate Development Changes in the Detail Specification and the Aircraft prior to delivery to Buyer. Development Changes are defined as changes to the basic specification for Model 757-200 aircraft that do not affect the Aircraft Purchase Price or adversely affect Aircraft delivery, guaranteed weight, guaranteed performance or compliance with the interchangeability or replaceability requirements set forth in the Detail Specification. If Boeing makes changes pursuant to this paragraph, Boeing will promptly notify Buyer of such changes. 7.2 Change Orders. The Detail Specification and associated provisions of this Agreement may be amended by Change Order or other written agreement, which will state the particular changes to be made and any effect on design, performance, weight, balance, time of delivery, Aircraft Basic Price and Advance Payment Base Price. 7-1 17 ARTICLE 8. Federal Aviation Requirements and Certificates. 8.1 FAA Certificates. 8.1.1 Boeing will obtain from the Federal Aviation Administration (FAA): 8.1.1.1 a Type Certificate (transport category) issued pursuant to Part 21 of the Federal Aviation Regulations for the type of aircraft covered by this Agreement, and 8.1.1.2 a Standard Airworthiness Certificate for each Aircraft issued pursuant to Part 21 of the Federal Aviation Regulations, which will be provided to Buyer with delivery of the Aircraft. 8.1.2 Boeing will not be obligated to obtain any other certificates or approvals for the Aircraft. 8.1.3 If the use of either FAA certificate is discontinued prior to delivery of an Aircraft, references in this Agreement to such discontinued certificate will be deemed references to its superseding FAA certificate. If the FAA does not issue a superseding certificate, Boeing's only obligation under this paragraph will be to comply with the Detail Specification. 8.2 FAA Manufacturer Changes. 8.2.1 If the FAA, or any other governmental agency having jurisdiction, requires any change to the Aircraft, data relating to the Aircraft, or testing of the Aircraft in order to obtain the Standard Airworthiness Certificate (Manufacturer Change), such Manufacturer Change will be made prior to delivery of such Aircraft. 8.2.2 If prior to Aircraft delivery a Manufacturer Change is required to be incorporated in an Aircraft, it will be incorporated at no charge to Buyer, unless the requirement is promulgated subsequent to the date of this Agreement, in which case Buyer will pay Boeing's 8-1 18 charge only for Aircraft scheduled for delivery to Buyer 18 months or more after the date of this Agreement. 8.3 FAA Operator Changes. 8.3.1 Boeing will deliver each Aircraft with the changes in equipment incorporated (or, at Boeing's sole discretion, with suitable provisions for the incorporation of such equipment) that is required by Federal Aviation Regulations which (i) are generally applicable with respect to transport category aircraft to be used in United States certified air carriage and (ii) have to be complied with on or before the date of delivery of such Aircraft (Operator Changes). 8.3.2 If Operator Changes are incorporated in an Aircraft, Buyer will pay Boeing's charge applicable to such Aircraft. 8.4 Delays; Changes to this Agreement. If delivery of an Aircraft is delayed due to the incorporation of a Manufacturer Change or an Operator Change, the delivery of the Aircraft will be appropriately revised to reflect such delay. This Agreement will also be revised to reflect appropriate changes in the Aircraft Price, design, performance, weight and balance due to the incorporation of a Manufacturer Change or an Operator Change. 8-2 19 ARTICLE 9. Representatives, Inspection, Flights and Test Data. 9.1 Office Space at Boeing. From a date 12 months prior to delivery of the first Aircraft, and until the delivery of the last Aircraft, Boeing will furnish, without additional charge, suitable office space and equipment in or conveniently located near its plant in Seattle for the accommodation of up to five personnel of Buyer. 9.2 Inspection by Buyer. Designated representatives of Buyer may inspect the manufacturing of the Aircraft at all reasonable times. However, if access to any part of Boeing's plant is restricted by the United States Government, Boeing will be allowed a reasonable time to arrange for inspection elsewhere. All inspections by Buyer's representatives will be performed so as not to hinder manufacture or performance by Boeing. 9.3 Aircraft Flight. Prior to delivery, each Aircraft will be flown by Boeing for such periods as may be required to demonstrate to Buyer the function of the Aircraft and its equipment in accordance with Boeing's production flight test procedures and as necessary to demonstrate compliance with the Detail Specification. The aggregate duration of such flights will be not less than 1-1/2 hours or more than 4 hours. Five persons designated by Buyer may participate in such flights as observers. 9.4 Test Data. Boeing will furnish to Buyer, as soon as practicable, flight test data obtained on an aircraft of the type purchased hereunder, certified as correct by Boeing, to evidence compliance with any performance guarantees set forth in this Agreement. Any Performance Guarantee will be deemed to be met if reasonable engineering interpretations and calculations based on such flight test data establish that the Aircraft would, if actually flown, comply with such guarantee. 9.5 Special Aircraft Test Requirements. Boeing may use the Aircraft for flight and ground tests prior to delivery to Buyer, without reduction in the Aircraft Purchase Price, if such tests are deemed necessary by Boeing to: 9.5.1 obtain or maintain the Type Certificate or Standard Airworthiness Certificate for the Aircraft; or 9.5.2 evaluate aircraft improvement changes that may be offered for production or retrofit incorporation in any aircraft. 9.6 Indemnity. Boeing will indemnify and hold harmless Buyer and Buyer's observers from and against all 9-1 20 claims and liabilities, including costs and expenses (including attorneys' fees) incident thereto, for injury to or death of any person or persons, including employees of Boeing but excluding employees, officers or agents of Buyer, or for loss of or damage to any property, arising out of or in connection with the operation of the Aircraft during all demonstration and test flights conducted under the provisions of this Article, whether or not arising in tort or occasioned in whole or in part by the negligence of Buyer or any of Buyer's observers, whether active, passive or imputed. 9-2 21 ARTICLE 10. Assignment, Resale or Lease. 10.1 Assignment. This Agreement will inure to the benefit of and be binding upon each of the parties hereto and their respective successors and assigns. Neither the rights nor the duties of either party under this Agreement may be assigned or delegated, or contracted to be assigned or delegated, in whole or part, without the prior written consent of the other party, except that: 10.1.1 Either party may assign its interest to a corporation that (i) results from any merger or reorganization of such party or (ii) acquires substantially all the assets of such party; 10.1.2 Boeing may assign its rights to receive money; and 10.1.3 Boeing may assign all or any part of its rights and obligations under this Agreement to any wholly owned subsidiary of Boeing, provided that Boeing will remain fully and solely responsible to Buyer for all obligations and liabilities as the seller of the Aircraft, and Buyer will continue to deal exclusively with Boeing. 10.2 Transfer by Buyer at Delivery. Buyer may, and at Buyer's request Boeing will, take any action reasonably required for the purpose of causing an Aircraft, at time of delivery, to be subjected to an equipment trust, conditional sale, lien or other arrangement for the financing by Buyer of such Aircraft. No action taken by either party pursuant to this paragraph, however, will require Boeing to divest itself of title to or possession of such Aircraft until delivery and payment therefor pursuant to this Agreement. 10.3 Sale by Buyer After Delivery. If, following delivery of any Aircraft, Buyer sells such Aircraft (including any sale for financing purposes), then all of Buyer's rights with respect to such Aircraft under this Agreement will inure to the benefit of the purchaser of such Aircraft, effective upon Boeing's receipt of such purchaser's express written agreement, in form satisfactory to Boeing, to be bound by and to comply with all applicable terms, conditions and limitations of this Agreement. 10.4 Lease by Buyer After Delivery. If, following delivery of any Aircraft, Buyer leases such Aircraft, Buyer will not assign to the lessee of such Aircraft any rights under this Agreement without Boeing's prior written consent, which consent will not be unreasonably withheld. 10.5 No Increase in Boeing Liability. No action taken by Buyer or Boeing relating to the assignment, resale or lease of any Aircraft or this Agreement will subject 10-1 22 Boeing to any liability beyond that in this Agreement or modify in any way Boeing's obligations under this Agreement. 10.6 Exculpatory or Indemnity Clause in Post-Delivery Sale or Lease. If, following delivery of an Aircraft, Buyer sells or leases such Aircraft and obtains from the transferee an exculpatory or indemnity clause protecting Buyer, Buyer will include the same protection for Boeing. 10-2 23 ARTICLE 11. Termination for Certain Events. 11.1 Termination. This Agreement may be terminated at any time with regard to undelivered Aircraft and items and unperformed services by notice in writing by either party hereto if the other party: 11.1.1 Ceases doing business as a going concern, suspends all or substantially all its business operations (other than temporary shutdowns due to labor disputes or similar causes beyond the control of Buyer), makes an assignment for the benefit of creditors, is insolvent, or generally does not pay its debts, or admits in writing its inability to pay its debts; or 11.1.2 Petitions for or acquiesces in the appointment of any receiver, trustee or similar officer to liquidate or conserve its business or any substantial part of its assets; commences any legal proceeding such as insolvency, bankruptcy, reorganization, readjustment of debt, dissolution or liquidation available for the relief of financially distressed debtors; or becomes the object of any such proceeding, unless such proceeding is dismissed or stayed within a reasonable period, not to exceed 60 days. 11.2 Repayment of Advance Payments. If this Agreement is terminated with regard to any Aircraft by Buyer under this Article, Boeing will promptly repay to Buyer, without interest, any advance payments received by Boeing from Buyer with respect to such Aircraft. 11-1 24 ARTICLE 12. Product Assurance; Disclaimer and Release; Exclusion of Liabilities; Customer Support; Indemnification and Insurance. 12.1 Product Assurance. Boeing and Buyer are bound by the provisions of Exhibit B hereto (Product Assurance Document). 12.2 DISCLAIMER AND RELEASE. THE WARRANTIES, OBLIGATIONS AND LIABILITIES OF BOEING AND THE REMEDIES OF BUYER SET FORTH IN THE PRODUCT ASSURANCE DOCUMENT ARE EXCLUSIVE AND IN SUBSTITUTION FOR, AND BUYER HEREBY WAIVES, RELEASES AND RENOUNCES, ALL OTHER WARRANTIES, OBLIGATIONS AND LIABILITIES OF BOEING AND ALL OTHER RIGHTS, CLAIMS AND REMEDIES OF BUYER AGAINST BOEING, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN ANY AIRCRAFT OR OTHER THING PROVIDED UNDER THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO: (A) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS; (B) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; (C) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM THE NEGLIGENCE OF BOEING (WHETHER ACTIVE, PASSIVE OR IMPUTED); AND (D) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO ANY AIRCRAFT. 12.3 EXCLUSION OF CONSEQUENTIAL AND OTHER DAMAGES. BOEING WILL HAVE NO OBLIGATION OR LIABILITY, WHETHER ARISING IN CONTRACT (INCLUDING WARRANTY), TORT (INCLUDING ACTIVE, PASSIVE OR IMPUTED NEGLIGENCE) OR OTHERWISE, FOR LOSS OF USE, REVENUE OR PROFIT, OR FOR ANY OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN ANY AIRCRAFT OR OTHER THING PROVIDED UNDER THIS AGREEMENT. 12.4 Definitions. For the purposes of this Article, the term "BOEING" means The Boeing Company, its divisions, subsidiaries and affiliates, the assignees of each, and their directors, officers, employees and agents. 12.5 Customer Support and Indemnification; Insurance. Boeing and Buyer are bound by the provisions of Exhibit C hereto (Customer Support Document), which includes 12-1 25 indemnification and insurance requirements related to the use of Customer Support Services. 12-2 26 ARTICLE 13. Buyer Furnished Equipment and Spare Parts. 13.1 Buyer Furnished Equipment. Boeing and Buyer are bound by the provisions of Exhibit E (Buyer Furnished Equipment Document), which includes indemnification requirements related to Buyer Furnished Equipment. 13.2 Purchase of Boeing Spare Parts. Boeing will sell to Buyer and Buyer will purchase from Boeing materials, spare parts, assemblies, tools and items of equipment relating to the Aircraft pursuant to Customer Services General Terms Agreement No. 31-1. 13-1 27 ARTICLE 14. Contractual Notices and Requests. All notices and requests relating to this Agreement will be in English, and may be transmitted by any customary means of written communication addressed as follows: Buyer: Trans World Airlines, Inc. One City Centre, 19th Floor 515 North 6th Street St. Louis, Missouri 63101 Attention: Michael Robinson Boeing: Boeing Commercial Airplane Group P.O. Box 3707 Seattle, Washington 98124-2207 U.S.A. Attention: Vice President - Contracts Mail Stop 75-38 or to such other address as specified elsewhere herein or as otherwise directed in writing by either party. The effective date of any such notice or request will be the date on which it is received by the addressee. 14-1 28 ARTICLE 15. Miscellaneous. 15.1 Government Approval. Boeing and Buyer will use their best reasonable efforts to assist each other in obtaining any United States Governmental agency consents or approvals necessary or appropriate to effect certification and sale of the Aircraft under this Agreement. 15.2 Headings. Article and paragraph headings used in this Agreement are for convenient reference only and are not intended to affect the interpretation of this Agreement. 15.3 Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties concerning the subject matter hereof and supersedes all previous proposals, understandings, commitments or representations whatsoever, oral or written. This Agreement may be changed only in writing signed by authorized representatives of Boeing and Buyer, except in the case of certain changes permitted or required by this Agreement. 15.4 GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY THE LAW OF THE STATE OF WASHINGTON, U.S.A., EXCLUSIVE OF WASHINGTON'S CONFLICTS OF LAWS RULES. 15.5 Negotiated Agreement. This Agreement, including the provisions of Article 12 relating to DISCLAIMER AND RELEASE, the Exclusion of Consequential and Other Damages, and the provisions relating to indemnification and insurance set forth in this Agreement, has been the subject of discussion and negotiation and is fully understood by the parties; the Aircraft Purchase Price and other agreements of the parties set forth in this Agreement were arrived at in consideration of such provisions. ************************* TRANS WORLD AIRLINES, INC. THE BOEING COMPANY By By ------------------------- ------------------------- Its Its ------------------------- ------------------------- 15-1 29 1910K/TWATrans World Airlines, Inc. AIRCRAFT CONFIGURATION between THE BOEING COMPANY and TRANS WORLD AIRLINES, INC. Exhibit A to Purchase Agreement Number 1910 A 30 AIRCRAFT CONFIGURATION Dated _____________ relating to BOEING MODEL 757-231 AIRCRAFT The Detail Specification is Boeing Detail Specification D6-44010-96 dated as of even date herewith. Such Detail Specification will be comprised of Boeing Detail Specification D6-44010-77B dated September 12, 1995 as amended to incorporate the applicable specification language to reflect the effect of the changes set forth in the Master Changes and Change Requests listed below. Such Change Requests are set forth in Boeing Document D6-48240. As soon as practicable, Boeing will furnish to Buyer copies of the Detail Specification, which copies will reflect the effect of such changes. The Aircraft Basic Price reflects and includes all effects of such changes of price, except such Aircraft Basic Price does not include the price effects of Master Change Requests changing Buyer Furnished Equipment to Seller Purchased Equipment. A-1 31 Exhibit A to Purchase Agreement No. 1910 Page 2
PRICE PER MASTERCHANGE AIRCRAFT NO./TITLE (1995 STE $) --------- ------------ ======================================================= =========== 0310MP5132 $828,300 INCREASE CERTIFIED MAXIMUM TAXI WEIGHT IN 1000 POUND INCREMENTS TO A MAXIMUM OF 256,000 POUNDS FROM 221,000 POUNDS STATUS: ACCEPT 1110MP5092 NC EXTERIOR DECORATIVE FINISH - DESOTO H.S. IN LIEU OF DESOTO 1000 STATUS: ACCEPT 1110MP5093 NC EXTERIOR DECORATIVE MARKINGS - ILFC LEASE CUSTOMERS STATUS: ACCEPT 2123MP5010 NC SUPPLEMENTAL PASSENGER AIR DISTRIBUTION - INSTALLATION STATUS: IN-PROC 2210MP5001 NC BANK ANGLE HOLD AT AUTOPILOT COMMAND ENGAGE STATUS: ACCEPT 2210MP5005 NC FULL TIME FLIGHT DIRECTOR STATUS: ACCEPT 2210MP5130 NC MANUAL AUTOPILOT CHANNEL SELECTION UPON APPROACH MODE ENGAGEMENT STATUS: ACCEPT 2240MP5003 $3,600 REMOTE MAINTENANCE CONTROL PANEL INSTALLATION IN FLIGHT COMPARTMENT STATUS: ACCEPT 2311MP5069 NC DUAL HF COMMUNICATIONS SYSTEMS INSTALLATION IN EXISTING COMPLETE PROVISION FOR DUAL HF COMMUNICATIONS STATUS: ACCEPT
A-2 32 Exhibit A to Purchase Agreement No. 1910 Page 3
PRICE PER MASTERCHANGE AIRCRAFT NO./TITLE (1995 STE $) --------- ------------ ======================================================= =========== 2312MP5096 $20,900 THIRD VHF COMMUNICATIONS - INSTALLATION - BFE ROCKWELL INTERNATIONAL CORP (CONTROL PANEL GABLES P/N G6317) STATUS: ACCEPT 2322MP5061 $44,100 AIRCRAFT COMMUNICATIONS ADDRESSING AND REPORTING SYSTEM (ACARS) - INSTALLATION - PARTIAL PROVISIONS STATUS: ACCEPT 2322MP5251 $7,400 ACARS SYSTEM - INSTALLATION INTO EXISTING PROVISIONS - BFE - ALLIED SIGNAL - P/N 965-0728-003 STATUS: ACCEPT 2332MP5333 $3,600 VIDEO ENTERTAINMENT SYSTEM "VIDEO ON" LIGHT - INSTALLATION - FLIGHT COMPARTMENT STATUS: IN-PROC 2332MP5335 $126,600 VIDEO ENTERTAINMENT SYSTEM - 8.6" PSU MOUNTED LCD VIDEO MONITORS - SONY - PROVISIONS ONLY STATUS: IN-PROC 2332MP5337 $21,900 VIDEO ENTERTAINMENT SYSTEM - 8.6" PSU MOUNTED LCD VIDEO MONITORS - BFE SONY - INSTALLATION INTO EXISTING PROVISIONS AND CERTIFY STATUS: IN-PROC 2334MP5036 $8,500 AUDIO ENTERTAINMENT SYSTEM - INSTALLATION STATUS: OPEN
A-3 33 Exhibit A to Purchase Agreement No. 1910 Page 4
PRICE PER MASTERCHANGE AIRCRAFT NO./TITLE (1995 STE $) --------- ------------ ======================================================= =========== 2520MP5572 -$4,000 INTERIOR ARRANGEMENT - 22 FIRST CLASS AND 158 TOURIST CLASS PASSENGERS - GALLEYS G1A, G1B, G4B, SPACE PROVISIONS FOR G2A AND STATUS: ACCEPT 2524MP5165 $20,100 SFE RH UNDER-BIN CLOSET - INSTALLATION - STATION 407-426 STATUS: ACCEPT 2530MP5442 $18,600 GALLEY G2A - INSTALLATION - UNDERBIN WITH DRAIN CONNECTIONS ONLY - BFE DRIESSEN TBD STATUS: ACCEPT 2530MP5446 $10,800 PROVISIONS FOR GALLEY G2A - INSTALLATION - UNDERBIN WITH ELECTRICAL, AND WATER CONNECTIONS STATUS: IN-PROC 2560MP5074 $22,200 EMERGENCY EVACUATION SIGNAL SYSTEM INSTALLATION STATUS: IN-PROC 3141MP5002 NC EICAS STATUS MODE - DISPLAY OF HYDRAULIC PRESSURE STATUS: ACCEPT 3141MP5003 NC EICAS STATUS MODE - DISPLAY OF APU RPM STATUS: ACCEPT 3141MP5008 $21,200 EICAS MAINTENANCE MODE - DISPLAY OF ADDITIONAL ENVIRONMENTAL CONTROL STATUS: ACCEPT
A-4 34 Exhibit A to Purchase Agreement No. 1910 Page 5
PRICE PER MASTERCHANGE AIRCRAFT NO./TITLE (1995 STE $) --------- ------------ ======================================================= =========== 3141MP5061 NC EICAS MAINTENANCE PAGES AVAILABLE DURING NON-REVENUE FLIGHT STATUS: ACCEPT 3321MP5020 $10,500 PASSENGER CABIN LIGHTING - TWO ZONE CONTROL STATUS: ACCEPT 3351MP5020 -$1,600 FLOOR PROXIMITY EMERGENCY ESCAPE PATH MARKING SYSTEM - INSTALLATION - SPE LSI IN LIEU OF SFE BOEING STATUS: ACCEPT 3419MP5007 NC WINDSHEAR AMBER PREALERT DISPLAY ON EFIS EADI STATUS: ACCEPT 3421MP5010 NC INERTIAL REFERENCE UNIT (IRU) - ACTIVATION OF THE 1995 UPDATED AND EXPANDED MAGVAR TABLES STATUS: ACCEPT 3422MP5004 NC RADIO ALTITUDE ON EADI - ROUND DIAL STATUS: ACCEPT 3422MP5005 NC ILS DEVIATION WARNING ON EADI STATUS: ACCEPT 3422MP5008 NC FILLED INTEGRATED (SINGLE) CUE FLIGHT DIRECTOR COMMAND STATUS: ACCEPT 3422MP5034 NC RANGE ARCS ON EHSI STATUS: ACCEPT
A-5 35 Exhibit A to Purchase Agreement No. 1910 Page 6
PRICE PER MASTERCHANGE AIRCRAFT NO./TITLE (1995 STE $) --------- ------------ ======================================================= =========== 3422MP5250 NC EXPANDED AND FULL COMPASS ROSE EHSI FORMATS STATUS: ACCEPT 3422MP5255 NC TCAS 3NM RANGE RING ON EHSI STATUS: ACCEPT 3443MP5078 $14,500 WEATHER RADAR SYSTEM - ARINC 708A SINGLE WEATHER RADAR SYSTEM WITH PREDICTIVE WINDSHEAR - PARTIAL PROVISIONS STATUS: ACCEPT 3443MP5097 NC WEATHER RADAR SYSTEM - BFE ROCKWELL WITH PREDICTIVE WINDSHEER CAPABILITY DEACTIVATED (AND NO ADDITIONAL WIRING) IN LIEU OF STATUS: ACCEPT 3445MP5146 NC TCAS II - FULL INSTALLATION - BFE COLLINS EQUIPMENT - 757-200 STATUS: ACCEPT 3446MP5087 NC GPWS CALLOUTS - 500' (SMART) STATUS: ACCEPT 3458MP5029 $36,300 GLOBAL POSITIONING SYSTEM (GPS) - INSTALLATION - PARTIAL PROVISIONS STATUS: ACCEPT 3461MP5026 $77,400 FLIGHT MANAGEMENT COMPUTER - INCREASE NAV DATA BASE TO ONE (1) MILLION WORDS - PERFORMANCE DATA BASE CAPACITY ADDITION STATUS: ACCEPT 3461MP5245 $45,000 FMCS CONTROL DISPLAY UNIT REPLACEMENT WITH HYBRID MULTIFUNCTION CONTROL DISPLAY UNIT STATUS: ACCEPT
A-6 36 Exhibit A to Purchase Agreement No. 1910 Page 7
PRICE PER MASTERCHANGE AIRCRAFT NO./TITLE (1995 STE $) --------- ------------ ======================================================= =========== CR'S 42 TOTAL $1,335,900
A-7 37 1910K/TWATrans World Airlines, Inc. PRODUCT ASSURANCE DOCUMENT between THE BOEING COMPANY and TRANS WORLD AIRLINES, INC. Exhibit B to Purchase Agreement Number 1910 B 38 Relating to BOEING MODEL 757-231 AIRCRAFT This Product Assurance Document is Exhibit B to and forms a part of Purchase Agreement No. 1910 between The Boeing Company (Boeing) and Trans World Airlines, Inc. (Buyer) relating to the purchase of Boeing Model 757-231 aircraft. This Product Assurance Document consists of the following parts: PART A Boeing Warranty PART B Warranty Repairs and Modifications by Buyer PART C Boeing Service Life Policy PART D Boeing Indemnity Against Patent Infringement PART D-1 Boeing Indemnity Against Copyright Infringement PART E Supplier Warranties and Patent Indemnities PART F Engine Manufacturer Warranties PART G Boeing Interface Commitment PART H General 39 PART A BOEING WARRANTY 1. Warranties. Subject to the exceptions set forth herein, Boeing warrants that, at the time of delivery, each Aircraft, including all installed systems, accessories, equipment and parts, will: 1.1 conform to the Detail Specification, as it may be changed pursuant to this Agreement, except such portions stated to be estimates, approximations, design objectives, or design criteria, or described as not guaranteed; 1.2 be free from defects in material and workmanship, including process of manufacture; and 1.3 be free from defects in design, including selection of (i) materials and (ii) process of manufacture, in view of the state of the art at the time of design. For purposes of this Boeing Warranty, nonconformance with the Detail Specification, defects in material or workmanship and defects in design may hereinafter be called "defects" or a "defect", and the term "system", "accessory", "equipment" or "part" may hereinafter be called "item" or "items." 2. Exceptions. The warranties above will not apply to BFE. The warranty above covering material and workmanship and the warranty above covering design will not apply to Engines or to any other item purchased by Boeing but not manufactured to Boeing's detailed design. However, any defect in the Boeing workmanship installing such BFE, Engines or other items in an Aircraft will constitute a defect in workmanship. 3. Survival of Warranties. Neither the warranty of conformance to the Detail Specification applicable to Engines and other items purchased by Boeing but not manufactured to Boeing's detailed design, nor any Performance Guarantees, will 40 survive delivery of the Aircraft. The remaining warranties set forth herein will survive delivery of the Aircraft, subject to the limitations and conditions set forth herein. 4. Warranty Periods and Claims. 4.1 The warranty periods are: 4.1.1 As to a defect in conformance to the Detail Specification, 36 months after delivery of each Aircraft, and 4.1.2 As to a defect in material, workmanship or design in any item, 36 months after delivery of each Aircraft in which such item was initially installed. 4.2 Boeing's Product Assurance Regional Manager at Renton, Washington must receive the warranty claim in writing at the earliest practicable time after the defect becomes apparent but in no event later than 90 days after expiration of the applicable warranty period. 4.3 Such warranty claim must include the data set forth below and, if requested by Boeing, reasonable evidence that the claimed defect did not result from any act or omission of Buyer. 4.3.1 Identity of the item or Aircraft involved, including Boeing part number, serial number if applicable, nomenclature and the quantity claimed to be defective; 4.3.2 Identity of the Aircraft on which the claimed item was installed as original equipment; 4.3.3 Date the claimed defect became apparent which will be the date such defect was discovered by Buyer or the warranty date set forth in a Boeing service bulletin or service letter, whichever date occurs first; and 4.3.4 Description of the claimed defect and circumstances, including Boeing service bulletin or Boeing service letter number if claim involves a service bulletin or letter. 4.4 Upon completion of Boeing's warranty claim investigation, including examination of any item or Aircraft returned to Boeing, Boeing will provide a written disposition of its warranty claim findings to Buyer. In the event Boeing must reject Buyer's warranty claim, Boeing will provide reasonable substantiation of such rejection in its disposition. 5. Remedies. 41 Buyer's remedies under this Boeing Warranty are as follows: 5.1 As to a defect in conformance to the Detail Specification, the correction at Boeing's expense of such defect; provided, however, that Boeing will not be obligated to correct any defect that has no material adverse effect on the maintenance, use or operation of the Aircraft. The warranty period for the corrected item will be the unexpired warranty period for the defective item. 5.2 As to a defect in material or workmanship, (i) the repair at Boeing's expense of such defect or, (ii) at Boeing's option, the replacement of such item with a similar item free from defect or the issuance of a credit memorandum to reimburse Buyer for a spare part previously purchased from Boeing as the replacement for such defective item. The warranty period for either correction will be the unexpired warranty period for the defective item. 5.3 As to a defect in design, the correction at Boeing's expense of such defect. The warranty period for such correction is 18 months from receipt by Buyer of corrective material or the end of the original design warranty period for the defective item, whichever is later. 5.4 Boeing will issue a credit memorandum to reimburse Buyer at the Warranty Labor Rate for the direct labor hours required for removal from the Aircraft of a defective item and the reinstallation in the Aircraft of the corrected item. 6. Returned Items. Unless otherwise provided in this Agreement, the Aircraft or item claimed to be defective must be returned to Boeing as soon as practicable. Buyer may also provide specific technical repair or correction instructions with such return. The absence of such instructions will evidence Buyer's authorization for Boeing to proceed using Boeing information and data. The following criteria will apply with respect to return of Aircraft or items to Boeing: 6.1 As to Aircraft: 6.1.1 An Aircraft may be returned only if 6.1.1.1 substantially all the work to be performed by Boeing is covered by this Boeing Warranty, and 6.1.1.2 Buyer does not have the capability to perform, nor is it practical for Boeing personnel to perform, the warranty work away from Boeing's facilities. 42 6.1.2 All warranty work will be performed at Boeing's expense, with reasonable efforts to minimize Aircraft out-of-service time. In addition, Boeing will reimburse Buyer by issuing a credit memorandum for the cost of fuel, oil and landing fees incurred in ferrying the Aircraft to Boeing's facilities and in ferrying the Aircraft back to Buyer's facilities. Buyer will minimize the length of both ferry flights. 6.1.3 Any nonwarranty work performed by Boeing will be paid for by Buyer at Boeing's then-standard rates. 6.1.4 A separate agreement based on Boeing's then-standard form will be entered into to cover the return of and work on such Aircraft. 6.2 As to any system, accessory, equipment or part: 6.2.1 All warranty work will be performed at Boeing's expense, with reasonable efforts to minimize item out-of-service time for items returned. 6.2.2 Boeing's turnaround-time objectives for repair or replacement are: 10 working days for avionic and electronic items and 30 working days for other items when corrected at Boeing's facilities, or 40 working days when corrected at the facilities of a Boeing subcontractor. Turnaround time starts the date Boeing receives the returned item, together with Buyer's warranty claim describing the work, and ends the date of shipment by Boeing of such item. If a turnaround-time objective is not achieved and a resultant critical parts shortage is experienced by Buyer, and Buyer has procured spare parts for such item in accordance with the Boeing Recommended Spare Parts List, Boeing will, upon request from Buyer, either: 6.2.2.1 expedite repair or replacement of the item or 6.2.2.2 provide a similar item on a no-charge loan or no-charge lease basis until the repaired or replaced item is provided to Buyer. 6.2.3 The freight charge for shipment to Boeing of any item will be paid by Buyer; however, Boeing will reimburse Buyer by issuing a credit memorandum for such charge for any item determined to be defective under this Boeing Warranty. The freight charge for the return shipment to Buyer of any such defective item which has been repaired, replaced or corrected pursuant to this Boeing Warranty will be paid by Boeing. 6.3 Title to and risk of loss of any Aircraft or 43 item returned to Boeing will at all times remain with Buyer and/or any other owner of such Aircraft or item, except that at the time Boeing ships a replacement item to Buyer, title to and risk of loss (i) for the returned item will pass to Boeing and (ii) for the replacement item will pass to Buyer. While Boeing has care, custody and control of an Aircraft or item, Boeing will have only such liabilities as a bailee for mutual benefit would have, but will not be liable for loss of use. 7. Nonrepairable Items. Buyer may scrap any defective nonrepairable item having a then-current Boeing spare part selling price of $2,000 or less and make a claim for a replacement item. For a defective nonrepairable item having a then-current Boeing spare part selling price greater than $2,000, an authorized Boeing representative must confirm the nonrepairability of any such item. Buyer's claim for an item with a spare part selling price exceeding $2,000 must include such confirmation. 8. Reimbursement for Certain Inspection Labor Costs. 8.1 In addition to the remedies set forth in this Boeing Warranty, Boeing will reimburse Buyer by issuing a credit memorandum at the Warranty Labor Rate for the direct labor hours expended by Buyer in performing inspections of the Aircraft to determine whether or not a covered defect exists in any system, accessory, equipment or part manufactured to Boeing's detailed design, provided that: 8.1.1 such inspections are recommended by a Boeing service bulletin or service letter issued by Boeing within 36 months after delivery of such Aircraft, and 8.1.2 such reimbursement will not apply to any inspections performed as an alternative to accomplishing corrective action when such corrective action is available to Buyer at the time such inspections are performed. 8.2 If a covered defect is determined to exist as a result of the foregoing inspections, the remedies under this Boeing warranty will apply to Aircraft in warranty as of the warranty date set forth in the applicable Boeing service bulletin or service letter or the date the defect was discovered by Buyer, whichever date occurs first. 9. Wear and Tear. Normal wear and tear and the need for regular maintenance and overhaul will not constitute a defect. 10. Disclaimer and Release; Exclusion of Liabilities. 44 This Part A and the rights and remedies of Buyer and obligations of Boeing herein are subject to the Disclaimer and Release and Exclusion of Consequential and Other Damages provisions of Article 12 of this Agreement. 11. Buyer's Indemnification of Boeing. The provisions of Part E, "Buyer's Indemnification of Boeing and Insurance" of Exhibit C, will apply to all warranty work performed by Boeing hereunder in accordance with Buyer's specific technical repair or correction instructions, to the extent any legal liability of Boeing is based upon the content of such instructions. 45 PART B WARRANTY REPAIRS AND MODIFICATIONS BY BUYER 1. General. To expedite the return to service of any defective Aircraft or systems, accessories, equipment and parts (items) that Boeing is obligated to correct under the Boeing Warranty, repairs and modifications may, at Buyer's option, be performed by Buyer (work) and charged to Boeing, subject to the following: 2. Scope. This option applies only to items manufactured to Boeing's detailed design. The warranty and notice periods and all other conditions and limitations applicable to the Boeing Warranty apply to this option. 3. Repairs and Modifications. All work will be performed in accordance with Boeing's written instructions, using parts and materials as may be furnished by Boeing and/or Boeing approved parts and materials as may be furnished by Buyer. 4. Claims for Reimbursement. Buyer's claim for reimbursement must be submitted in writing to Boeing promptly after completion of the work. Such claim must include the data set forth in paragraph 4.3 of Part A of this Exhibit B and the following: 4.1 Description of the work performed by Buyer; 4.2 Date work was completed by Buyer; 4.3 Itemized account of the direct labor hours expended in performing the work; and 4.4 Itemized account of the direct materials incorporated in the work. 46 5. Reimbursement. Upon approval of Buyer's claim for reimbursement, Boeing will reimburse Buyer by issuing a credit memorandum as follows: 5.1 Direct Labor. At the Warranty Labor Rate specified herein for labor hours expended by Buyer's direct labor employees in performing the work, including removal, disassembly, inspection, bench testing, warrantable repair or modification, reassembly, final inspection, and reinstallation, but not to exceed Boeing's reasonable estimate of required labor hours, unless a greater number of direct labor hours is established by agreement between Boeing and Buyer, and excluding time for overhaul. 5.2 Direct Materials. At the invoice cost to Buyer for all direct materials incorporated in the work, excluding (i) materials used for overhaul, (ii) materials furnished by Boeing at no charge, (iii) materials which exceed Boeing's reasonable estimate of required materials, and (iv) allowances for handling, overhead, taxes, customs duties and the like. 5.3 Warranty Labor Rate. The Warranty Labor Rate is $41.25 per hour or 150% of Buyer's average direct hourly labor rate, whichever is greater. For this purpose, "average direct hourly labor rate" is defined as the average hourly rate (excluding all fringe benefits, premium-time allowances, social charges, business taxes and the like) paid by Buyer to Buyer's employees whose jobs are directly related to the performance of the work. Prior to or concurrently with submittal of Buyer's first claim for labor reimbursement, Buyer will notify Boeing of Buyer's then-current average direct hourly labor rate, and thereafter notify Boeing of any material change in such rate. Boeing may require data from Buyer to substantiate such rates. 5.4 Limitation. The total reimbursement with respect to the direct labor and direct materials incorporated in the work, will not exceed 65% of Boeing's then-current sales price for the item unless a greater percentage is established for a particular item by written agreement between Boeing and Buyer. All claims for reimbursement will be subject to audit by Boeing. Boeing will promptly notify Buyer of Boeing's disposition of each claim submitted hereunder. 47 6. Replaced Parts. If component parts of any assembly are replaced by Buyer, the replaced parts will be tagged with the assembly part number, the serial number and the warranty claim number and retained for a period of 60 days following the date of submittal of Buyer's claim, so as to be made available for Boeing's inspection. Such parts may be scrapped after such 60-day period. 48 PART C BOEING SERVICE LIFE POLICY 1. Definitions. 1.1 "Airframe Component" means any of the primary structural elements of the wing, fuselage, or vertical or horizontal stabilizer set forth in Attachment A hereto and installed in an Aircraft at the time of delivery. 1.2 "Landing Gear Component" means any of the primary structural elements of the landing gear set forth in Attachment A and installed in an Aircraft at the time of delivery. 1.3 "Spare Component" means any component set forth in Attachment A that was furnished to Buyer pursuant to this Policy or purchased by Buyer from Boeing as a spare part. 1.4 "Covered Component" means an Airframe Component, a Landing Gear Component or a Spare Component. 1.5 "Failure" means any breakage or defect in a Covered Component. 1.6 "Failed Component" means a Covered Component in which a Failure has occurred. 2. Service Life Policy. If a Failure occurs in any Covered Component within the following periods, Boeing will promptly, at a price calculated pursuant to this Policy, either (i) design and furnish to Buyer materials required to correct the Failed Component or (ii) furnish to Buyer a replacement Covered Component: 2.1 As to any Airframe Component or Landing Gear Component, within 12 years after delivery of the Aircraft in which such component was initially installed; or 2.2 As to any Spare Component, within 12 years after delivery of such Spare Component, or within 12 years after delivery by Boeing of the last new Model 757 aircraft to Buyer, whichever first expires. 3. Price. The price that Buyer will pay for the correction or replacement of a Failed Component will be calculated pursuant to the following formula: 49 P = CT ----- 144 where: P = price to Buyer C = Boeing spare parts sales price at time of correction or replacement T = total age in months of the Failed Component from the date of delivery to Buyer to the date of Failure. 4. Conditions and Limitations. Boeing's obligations under this Policy are conditioned upon the following: 4.1 Buyer must notify Boeing of the Failure within three months after it becomes apparent to Buyer. 4.2 Buyer must provide reasonable evidence that the claimed Failure is covered by this Policy and if requested by Boeing, that such Failure was not the result of (i) the breakage of or a defect in a component not covered by this Policy, (ii) an extrinsic force, (iii) an act or omission of Buyer, or (iv) operation or maintenance contrary to applicable regulations or Boeing's instructions. 4.3 If return of a Failed Component is practicable and requested by Boeing, Buyer will return such Failed Component to Boeing at Boeing's expense frieght collect. 4.4 Buyer's rights and remedies under this Policy are limited to the receipt of corrective materials or replacement components at prices calculated in accordance with this Policy. 50 5. Disclaimer and Release; Exclusion of Liabilities. This Part C and the rights and remedies of Buyer and the obligations of Boeing herein are subject to the Disclaimer and Release and Exclusion of Consequential and Other Damages provisions of Article 12 of this Agreement. 51 Attachment A to Part C COVERED AIRFRAME AND LANDING GEAR COMPONENTS 1. Wing. (a) Upper and lower skins and stiffeners between the forward and rear wing spars. (b) Wing spar webs, chords, and stiffeners. (c) Inspar wing ribs. (d) Inspar splice plates and fittings. (e) Main landing gear support structure. (f) Wing center section lower beams, spanwise beams and floor beams, but not the seat tracks attached to the beams. (g) Wing-to-body structural attachments. (h) Engine strut support fittings attached directly to wing primary structure. (i) Support structure in the wing for spoilers and spoiler actuators; for aileron hinges and reaction links; and for leading edge devices and trailing edge flaps. (j) Trailing edge flap tracks and carriages. (k) Aileron, leading edge device and trailing edge flap internal, fixed attachment and actuator support structure. 2. Body. (a) External surface skins and doublers, longitudinal stiffeners, longerons and circumferential rings and frames between the forward pressure bulkhead and the vertical stabilizer rear spar bulkhead, and structural support and enclosure for the APU but excluding all system components and related installation and connecting devices, insulation, lining, and decorative panels and related installation and connecting devices. (b) Window and windshield structure but excluding the windows and windshields. (c) Fixed attachment structure of the passenger 52 Attachment A to Part C doors, cargo doors and emergency exits, excluding door mechanisms and movable hinge components. Sills and frames around the body openings for the passenger doors, cargo doors and emergency exits, excluding scuff plates and pressure seals. (d) Nose wheel well structure, including the wheel well walls, pressure deck, forward and aft bulkheads, and the gear support structure. (e) Main gear wheel well structure including pressure deck, bulkheads and landing gear beam support structure. (f) Floor beams and support posts in the control cab and passenger cabin area, but excluding seat tracks. (g) Forward and aft pressure bulkheads. (h) Keel structure between the wing front spar bulkhead and the main gear wheel well aft bulkhead, including splices. (i) Wing front and rear spar support bulkheads, and vertical and horizontal stabilizer front and rear spar support bulkheads including terminal fittings but excluding all system components and related installation and connecting devices, insulation, lining, decorative panels, and related installation and connecting devices. (j) Support structure in the body for the stabilizer pivot and stabilizer screw. 3. Vertical Stabilizer. (a) External skins between front and rear spars. (b) Front, rear and auxiliary spar chords, webs, and stiffeners, and attachment fittings between vertical stabilizer and body. (c) Inspar ribs. (d) Support structure in the vertical stabilizer for rudder hinges, reaction links and actuator. (e) Rudder internal, fixed attachment and actuator support structure. 53 Attachment A to Part C (f) Rudder hinges and supporting ribs, excluding bearings. 4. Horizontal Stabilizer. (a) External skins between front and rear spars. (b) Front, rear and auxiliary spar chords, webs, and stiffeners. (c) Inspar ribs. (d) Stabilizer center splice fittings, pivot and screw support structure. (e) Support structure in the horizontal stabilizer for the elevator hinges, reaction links and actuators. (f) Elevator internal, fixed attachment and actuator support structure. 5. Engine Strut. (a) Strut external surface skin and doublers and stiffeners. (b) Internal strut chords, frames and bulkheads. (c) Strut to wing fittings and diagonal brace. (d) Engine mount support fittings attached directly to strut structure and including the engine mounted support fittings. 6. Main Landing Gear. (a) Outer cylinder. (b) Inner cylinder. (c) Upper and lower side struts, including spindles and universals. (d) Drag strut. (e) Side strut reaction link. (f) Side strut support link. (g) Downlock links including spindles and universals. (h) Orifice plate. 54 Attachment A to Part C (i) Trunnion link. (j) Truck beam. (k) Axles. (l) Torsion links. (m) Stabilizer link. 7. Nose Landing Gear. (a) Outer cylinder. (b) Inner cylinder. (c) Upper and lower drag strut, including lock links. (d) Axles. (e) Torsion links. (f) Steering plates and steering collar. (g) Orifice plate. NOTE: The Service Life Policy does not cover any bearings, bolts, bushings, clamps, brackets, actuating mechanisms or latching mechanisms used in or on the Covered Components. 55 PART D BOEING INDEMNITY AGAINST PATENT INFRINGEMENT 1. Indemnity. Subject to the provisions of this Part D, Boeing will indemnify and hold harmless Buyer from and against all claims, suits, actions, liabilities, damages and costs arising out of actual or alleged infringement, by any Aircraft or any system, accessory, equipment or part (item) installed thereon at the time of Aircraft delivery, of any patent issued under the laws of any country in which Buyer lawfully operates the Aircraft (Country). 2. Exceptions. 2.1 This indemnity will not apply unless, from the time of design of the allegedly infringing Aircraft or item until the resolution of the infringement claim, the Country and flag country of the Aircraft: (i) are fully bound by the Chicago Convention on International Civil Aviation of December 7, 1944, and are fully entitled to all benefits of Article 27 thereof, or (ii) have been parties to the International Convention for the Protection of Industrial Property (Paris Convention), or (iii) are the United States. 2.2 This indemnity will not apply to Buyer Furnished Equipment, Engines, any system, accessory, equipment or part that was not manufactured to Boeing's detailed design, or to any system, accessory, equipment or part manufactured to Boeing's detailed design without Boeing's authorization. 3. Conditions and Limitations. Buyer's remedy and Boeing's obligations hereunder are subject to the following: 3.1 Buyer must give Boeing written notice within 10 days after Buyer receives notice of a suit or action against Buyer alleging infringement or within 20 days after Buyer receives a written claim of infringement. 56 3.2 Following receipt of such notice Boeing may conduct negotiations with any party claiming infringement and may intervene in any suit or action. Whether or not Boeing intervenes, Boeing will be entitled at any stage of the proceedings to assume or control the defense. 3.3 Buyer will (i) promptly furnish to Boeing all data, records and assistance within Buyer's control which are material to any such claim, suit or action and (ii) (except as to amounts mandated by a judgment) obtain Boeing's prior approval to pay or assume any liabilities, damages, royalties or costs. 3.4 Boeing's obligations and Buyer's remedies herein exclude Buyer's incidental or consequential damages and liabilities, costs, loss of revenue or loss of profit resulting from loss of use, but include, at Boeing's option, replacing the infringing item with an equivalent non infringing unit or otherwise curing any infringement on account of which use of the Aircraft by Buyer is prevented. 3.5 Boeing's obligations and Buyer's remedies herein are exclusive and in substitution for, and Buyer hereby waives, releases and renounces, all other indemnities, obligations and liabilities of Boeing and any assignee of Boeing, and all other rights, remedies and claims, including claims for damages, direct, incidental or consequential, of Buyer against Boeing or any assignee of Boeing, express or implied, arising by law or otherwise, with respect to any actual or alleged patent infringement or the like by any Aircraft or any item installed therein. 57 PART D-1 BOEING INDEMNITY AGAINST COPYRIGHT INFRINGEMENT 1. Indemnity. Subject to the following, Boeing will indemnify Buyer with respect to claims, suits, damages and costs arising out of copyright infringement by any computer software included with the Aircraft when the Aircraft is first delivered by Boeing (Aircraft Software). 2. Exceptions, Limitations and Conditions. 2.1 Boeing will have no obligation to indemnify Buyer relative to Buyer Furnished Equipment, engines, software not manufactured to Boeing's detailed design, or software manufactured to Boeing's detailed design without Boeing's written authorization. 2.2 Boeing's obligation to indemnify Buyer is limited to infringements (a) in countries where Buyer lawfully operates the Aircraft (Countries), (b) where, from the time of creation of the allegedly infringing software until the resolution of the infringement claim, the Countries and flag country of the Aircraft are members of The Berne Union and recognize computer software as a "work" under The Berne Convention, and (c) in the United States. 2.3 Boeing will have no obligation or liability for loss of use, revenue or profit, or for any other incidental or consequential damages. 2.4 Boeing may, at its option, replace any infringing or allegedly infringing Aircraft Software (or item containing Aircraft Software) with a noninfringing equivalent. 2.5 Buyer must inform Boeing in writing (a) within 10 days after Buyer receives notice of a suit or other formal action against Buyer alleging copyright infringement involving Aircraft Software and (b) within 30 days after Buyer receives any written allegation or claim in the nature of copyright infringement involving Aircraft Software. 2.6 Boeing may negotiate with any party claiming infringement and may intervene or assume control of the defense at any stage in any infringement suit or action. 2.7 Buyer will promptly furnish to Boeing all data, records and assistance within Buyer's possession or control which may be material to any copyright infringement claim, suit or action relating to Aircraft Software. 58 2.8 Other than as required by a final judgment entered by a court of competent jurisdiction, Buyer will not make any payment or commitment to pay, assume any obligation, or make any material concession relative to any copyright infringement for which Boeing may otherwise be obligated. 2.9 The obligations of Boeing and remedies of Buyer set forth in this Part are exclusive and in substitution for, and Buyer hereby waives, releases and renounces, all other indemnities, obligations, and liabilities of Boeing and all other rights, claims and remedies of Buyer against Boeing, express or implied, arising by law or otherwise, with respect to any actual or alleged copyright infringement or the like by any Aircraft or any item included in any Aircraft. 59 PART E SUPPLIER WARRANTIES AND PATENT INDEMNITIES 1. Supplier Warranties and Supplier Patent Indemnities. Boeing will use diligent efforts to obtain adequate warranties and indemnities against patent infringement enforceable by Buyer from manufacturers (Suppliers) of systems, accessories, equipment or parts installed on the Aircraft at the time of delivery that were selected and purchased by Boeing, but not manufactured to Boeing's detailed design. Boeing will furnish copies of such warranties and patent indemnities to Buyer prior to delivery of the first Aircraft. 2. Boeing Assistance in Administration of Supplier Warranties. Buyer will be responsible for submitting warranty claims directly to Suppliers; however, if Buyer experiences problems enforcing any Supplier warranty obtained by Boeing for Buyer, Boeing will conduct an investigation of such problems and assist Buyer in the resolution of such claims. 3. Boeing Support in Event of Supplier Default. 3.1 If any Supplier defaults in the performance of a material obligation under a design, material or workmanship warranty obtained by Boeing for Buyer, and Buyer provides evidence to Boeing that such default has occurred, then the equivalent warranty and related provisions set forth in this Product Assurance Document will apply to the claimed defect. 3.2 At Boeing's request, Buyer will assign to Boeing, and Boeing will be subrogated to, Buyer's rights against the manufacturer providing such Supplier warranty. 60 PART F ENGINE MANUFACTURER'S WARRANTY AND PRODUCT SUPPORT PLAN Boeing has obtained from United Technologies Corporation ("United") the right to extend to Buyer the provisions of Section 4.4.2, "Warranty for New Engines and New Parts for Engines" of United's "Product Support Plan for Customers Purchasing PW2000 Powered Boeing 757 Type Aircraft"; subject, however, to Buyer's acceptance of the conditions set forth in said Section 4.4.2. Accordingly, Boeing hereby extends to Buyer, and Buyer hereby accepts, the provisions of such "Warranty for New Engines and New Parts for Engines" applicable to such PW2000 engine(s) ("Engine(s)," including all "Parts" thereof), and such "Warranty for New Engines and New Parts for Engines" shall apply to Engines installed in the Aircraft at the time of delivery; provided that Buyer may, by notice given to Boeing and United prior to the delivery of the Aircraft, elect to substitute for such "Warranty for New Engines and New Parts for Engines" any corresponding warranty included either in a General Terms Agreement currently effective between Buyer and United or in a contract for the sale by United to Buyer of such Engines. In consideration for such extension, Buyer hereby releases and discharges Boeing and United from any and all claims, obligations and liabilities whatsoever arising out of the purchase or use of said installed Engines except as expressly assumed by United in such "Warranty for New Engines and New Parts for Engines." 61 UNITED TECHNOLOGIES CORPORATION WARRANTY FOR NEW ENGINES AND NEW PARTS FOR ENGINES 1. Defective Goods. United Technologies Corporation, Pratt & Whitney Group, Commercial Products Division (Seller) warrants to Customer (Buyer) that at the time of delivery the goods sold hereunder will be free from defects in material and manufacture and will conform substantially to Seller's applicable specification. Seller's liability and Buyer's remedy under this warranty are limited to the repair or replacement, at Seller's election, of goods or parts thereof returned to Seller which are shown to Seller's reasonable satisfaction to have been defective; provided that written notice of the defect will have been given by Buyer to Seller within ninety (90) days after the first operation or use of the goods (or if the goods are installed in new aircraft, within ninety (90) days after acceptance of such aircraft by its first operator) but in no event later than one (1) year after the date of delivery of such goods by Seller. Transportation charges for the return of defective goods to Seller and their reshipment to Buyer and the risk of loss thereof will be borne by Seller only if returned in accordance with written shipping instructions from Seller. 2. Title. Seller warrants to Buyer that it will convey good title to the goods sold hereunder. Seller's liability and Buyer's remedy under this warranty are limited to the removal of any title defect or, at the election of Seller, to the replacement of the goods or parts thereof which are defective in title; provided, however, that the rights and remedies of the parties with respect to patent infringement shall be limited to the provisions of paragraph 3 below. 3. Patent Infringement. Seller will conduct, at its own expense, the entire defense of any claim, suit or action alleging that, without further combination, the use or resale by Buyer or any subsequent purchaser or user of the goods delivered hereunder directly infringes any United States patent, but only on the conditions that (a) Seller receives prompt written notice of such claim, suit or action and full opportunity and authority to assume the sole defense thereof, including settlement and appeals, and all information available to Buyer and defendant for such defense; (b) said goods are made according to a specification or design furnished by Seller or, if a process patent is involved, the process performed by the goods is recommended in writing by Seller; and (c) the claim, suit or action is brought against Buyer or one expressly indemnified 62 by Buyer. Provided all of the foregoing conditions have been met, Seller will, at its own expense, either settle said claim, suit or action or will pay all damages and costs awarded by the court therein and, if the use or resale of such goods is finally enjoined, Seller will, at Seller's option, (i) procure for defendant the right to use or resell the goods, (ii) replace them with equivalent noninfringing goods, (iii) modify them so they become noninfringing but equivalent, or (iv) remove them and refund the purchase price (less a reasonable allowance for use, damage and obsolescence). If a claim, suit or action is based on a design or specification furnished by Buyer or on the performance of a process not recommended in writing by Seller, or on the use or sale of the goods delivered hereunder, in combination with other goods not delivered to Buyer by Seller, Buyer will indemnify and save Seller harmless therefrom. 4. Engine and Parts Service Policy. Seller warrants to Buyer that it will extend to Buyer, with respect to Engines sold to Buyer (whether installed as new equipment in aircraft by the manufacturer and delivered to Buyer or delivered directly by Seller to Buyer), allowances and adjustments in accordance with the applicable Engine and Parts Service Policy offered by said Seller on the date of Seller's receipt of the order therefor. Seller's liability and Buyer's remedy under this warranty (Warranty) are limited to the allowances and adjustments and are subject to the general conditions stipulated in such Engine and Parts Service Policy; provided, however, that no change in or retraction of such Policy shall apply to Engines delivered or to be delivered by Seller under orders received by Seller prior to Seller's announcement of any such change or retraction. 5. Exclusive Warranties Remedies. THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE GIVEN AND ACCEPTED IN LIEU OF (I) ANY AND ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND (II) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN CONTRACT OR TORT, WHETHER OR NOT ARISING FROM SELLER'S NEGLIGENCE, ACTUAL OR IMPUTED. THE REMEDIES OF BUYER SHALL BE LIMITED TO THOSE PROVIDED HEREIN TO THE EXCLUSION OF ANY AND ALL OTHER REMEDIES INCLUDING, WITHOUT LIMITATION, INCIDENTAL OR CONSEQUENTIAL DAMAGES. NO AGREEMENT VARYING OR EXTENDING THE FOREGOING WARRANTIES, REMEDIES OR THIS LIMITATION WILL BE BINDING UPON SELLER UNLESS IN WRITING, SIGNED BY A DULY AUTHORIZED OFFICER OF SELLER. 6. Warranty Pass On. 63 Seller will, upon the written request of the Buyer, extend Warranty coverage to Engines (or modules and/or parts thereof) sold by Buyer to another operator to the extent only, however, that such coverage exists at the time of such sale and subject to the provisions of the Warranty. 64 PART G BOEING INTERFACE COMMITMENT 1. Interface Problems. If Buyer experiences technical problems in the operation of an Aircraft or its systems, the cause of which is not readily identifiable by Buyer but which Buyer believes to be attributable to the design characteristics of the Aircraft or its systems (Interface Problem), Boeing will, without additional charge to Buyer, promptly conduct an investigation and analysis to determine the cause or causes of the Interface Problem and to recommend such corrective action as may be feasible. Buyer will furnish to Boeing all data and information in Buyer's possession relevant to the Interface Problem, and will cooperate with Boeing in the conduct of investigations and tests. Boeing will promptly advise Buyer at the conclusion of its investigation of Boeing's opinion as to the causes of the Interface Problem and Boeing's recommendation as to corrective action. 2. Boeing Responsibility. If Boeing determines that the Interface Problem is primarily attributable to the design of any item manufactured to Boeing's detailed design, Boeing will correct the design of such item to the extent of any then-existing obligations of Boeing under the provisions of the applicable Boeing Warranty or Boeing Service Life Policy. 3. Manufacturer Responsibility. If Boeing determines that the Interface Problem is primarily attributable to the design of an item not manufactured to Boeing's detailed design, Boeing will assist Buyer in processing a warranty claim against the manufacturer of such item. 4. Joint Responsibility. If Boeing determines that the Interface Problem is partially attributable to the design of an item manufactured to Boeing's detailed design and partially to the design of an item not manufactured to Boeing's detailed design, Boeing will seek a solution to the Interface Problem through the cooperative efforts of Boeing and the manufacturer of the other item and will promptly advise Buyer of resulting corrective actions and recommendations. 5. General. 65 Buyer will, if requested by Boeing, assign to Boeing any of Buyer's rights against any manufacturer as Boeing may require to fulfill its obligations hereunder. 6. Disclaimer and Release; Exclusion of Liabilities. This Part G and the rights and remedies of Buyer and the obligations of Boeing herein are subject to the Disclaimer And Release and Exclusion of Consequential and Other Damages provisions of Article 12 of this Agreement. 66 PART H GENERAL 1. Duplicate Product Assurance Remedies. Boeing will not provide or be requested to provide multiple remedies for any claim made pursuant to the provisions of this Product Assurance Document. 2. Notices. References to "Boeing" in connection with notices or communications throughout this Product Assurance Document mean Boeing's Product Assurance Regional Manager at Renton, Washington. 67 CUSTOMER SUPPORT DOCUMENT between THE BOEING COMPANY and TRANS WORLD AIRLINES, INC. Exhibit C to Purchase Agreement Number 1910 C 68 CUSTOMER SUPPORT DOCUMENT NO. 1910 Dated _________________ Relating to BOEING MODEL 757-231 AIRCRAFT _________________ This Customer Support Document is Exhibit C to and forms a part of Purchase Agreement No. 1910 between The Boeing Company (Boeing) and Trans World Airlines, Inc. (Buyer) relating to the purchase of Boeing Model 757-231 aircraft. This Customer Support Document consists of the following parts: PART A Boeing Maintenance Training Program PART B Boeing Customer Support Services PART C Boeing Flight Training Program PART D Technical Data and Documents PART E Buyer's Indemnification of Boeing and Insurance PART F Alleviation or Cessation of Performance C-I 69 PART A BOEING MAINTENANCE TRAINING PROGRAM 1. General. This Part describes the maintenance training to be provided by Boeing (Maintenance Training) at Boeing's training facility at or near Seattle. The Maintenance Training will be provided at no additional charge to Buyer, except as otherwise provided herein. All instruction, examinations and materials shall be prepared and presented in the English language and in the units of measure used by Boeing. Buyer will be responsible for the living expenses of Buyer's personnel during Maintenance Training. For Maintenance Training provided at or near Seattle, Boeing will transport Buyer's personnel between their local lodging and the training facility. 2. Maintenance Training Program. In conjunction with earlier sales to Buyer of the same model type aircraft as the Aircraft, Boeing has provided to Buyer comprehensive maintenance training and/or materials for such aircraft. If requested by Buyer at least 12 months prior to delivery of the first Aircraft, Boeing agrees to provide 1 Maintenance Training course consisting of classroom training to acquaint up to 15 of Buyer's personnel with any operational, structural or systems differences between the first Aircraft scheduled for delivery pursuant to this Agreement and the last aircraft of the same model type for which maintenance training and/or materials were delivered by Boeing to Buyer that are significant to the maintenance of the Aircraft. Such course will be scheduled by mutual agreement of Boeing's and Buyer's maintenance training organizations. C P.A. No. 1910 A-1 K/TWA 70 3. Training Materials. Boeing will provide Buyer with a narrative description defining the expected time to teach the various differences between the first Aircraft scheduled for delivery pursuant to this agreement and the last aircraft of the same model type for which maintenance training and/or materials were delivered by Boeing to Buyer. If Buyer chooses to have Boeing provide a differences Maintenance Training course, Boeing will provide at the beginning of the course, 1 copy of a training manual for the differences training course to each student attending such course. Boeing will also provide to the Buyer 1 set of visual aid projection transparencies and 1 set of black and white reproducible masters of the training manual graphics and text utilized in the Maintenance Training class. No revision service will be provided for such training manuals and materials. If Buyer chooses not to have Boeing provide a differences Maintenance Training course, Boeing will provide to Buyer at Buyer's direction, 1 set of visual aid projection transparencies and 1 set of black and white reproducible masters of the training manual graphics and text that would have been utilized in a differences Maintenance Training class. Delivery of requested materials will satisfy difference training entitlements as defined herein. No revision service will be provided for such training manuals and materials. 4. Training at a Facility Other Than Boeing's. If seasonably requested, Boeing will conduct the classroom training described above at a mutually acceptable alternate training site, subject to the following conditions: 4.1 Buyer will be responsible for providing acceptable classroom space and training equipment required to present the Boeing courseware. 4.2 Buyer will pay Boeing's then-current per diem charge for each Boeing instructor for each day, or fraction thereof, such instructor is away from Seattle, including travel time. P.A. No. 1910 C K/TWA A-2 71 4.3 Buyer will reimburse Boeing for round-trip transportation for Boeing's instructors and training materials between Seattle and such alternate training site. 4.4 Buyer will pay, or reimburse Boeing for, all taxes, fees, duties, licenses, permits and similar expenses incurred by Boeing and its employees as a result of Boeing's providing the training at such alternate site. 4.5 Those portions of training that require the use of Boeing's training devices, if any, will be conducted at Boeing-designated facilities. P.A. No. 1910 C K/TWA A-3 72 PART B BOEING CUSTOMER SUPPORT SERVICES 1. General. This Part describes the support services to be provided by Boeing at no additional charge to Buyer, unless otherwise specified herein. Except with respect to Field Services, the services described in this Part will be provided by Boeing during a period commencing with delivery of the first Aircraft and continuing so long as one Aircraft is regularly operated by Buyer in commercial air transport service. 2. Field Service Engineering. Boeing will furnish field service representation to advise Buyer on maintenance and operation of the Aircraft (Field Services) as follows: 2.1 Field Services will be available to Buyer at or near Buyer's main maintenance or engineering facility for a period beginning prior to delivery of the first Aircraft and terminating 12 months after delivery of the last Aircraft (Field Service Period. If such Field Service Periods overlap, the Field Services will be provided concurrently. 2.2 Buyer will furnish at no charge to Boeing suitable office space and equipment that will include desks, chairs, file cabinets and an electrical power source in, or convenient to, Buyer's facility where each/any Boeing representative is providing Field Services. As required, Buyer will assist each representative providing Field Services with visas, work permits, customs, mail handling, identification passes, and local airport authorities. 2.3 In addition to the Field Services referred to above, the services of any Boeing field service representative will also be available to Buyer anywhere Buyer may land the Aircraft. 2.4 Boeing may, from time to time, provide additional support services in the form of Boeing personnel visiting Buyer's facilities to work with Buyer's personnel in an advisory capacity. 3. Additional Engineering Support Services. Boeing will, if requested by Buyer in writing, provide technical advisory assistance with respect to the Aircraft and accessories, equipment and parts manufactured to Boeing's detailed design and installed in the Aircraft at the time of delivery. Such technical advisory assistance, which will be provided from Seattle, will include: 3.1 analysis of and comment on any Aircraft service or operational problem experienced by Buyer in order to determine the nature of the problem and its cause and to suggest possible solutions; 3.2 analysis of and comment on Buyer's engineering releases relating to structural repairs of the Aircraft not covered by Boeing's Structural Repair Manual; and 3.3 analysis of and comment on Buyer's engineering proposals for changes in, or replacement of, parts, accessories or equipment manufactured to Boeing's detailed design (excluding computer software embedded or included therein); provided that Boeing will not analyze or comment on any such change or replacement which constitutes a P.A. No. 1910 C K/TWA B-1 73 major structural change, nor on any engineering release related thereto, unless Buyer's request for such analysis and comment is accompanied by complete detailed drawings, substantiating data (including data, if any, required by applicable government agencies), all stress or other appropriate analysis, and a specific statement from Buyer of the kind of review and response desired by Buyer. 4. Special Services. 4.1 Facilities, Ground Equipment and Maintenance Planning Assistance. Boeing will, at Buyer's request, send qualified Boeing engineering representatives to Buyer's main base to evaluate Buyer's technical facilities, tools and equipment for servicing and maintaining the Aircraft, to recommend changes where necessary and to assist in the formulation of Buyer's overall maintenance plan. 4.2 Additional Services. Boeing may, at Buyer's request, provide additional special services with respect to the Aircraft after delivery, which may include such items as Master Changes (Kits and/or Data), training and maintenance and repair of the Aircraft. Providing such additional services will be subject to (i) mutually acceptable price, schedule and scope of work and (ii) Boeing's then-current standard contract therefor including disclaimer and release, exclusion of consequential and other damages and indemnification and insurance requirements. 4.3 Post-Delivery Aircraft Services. If Boeing performs unanticipated work on an Aircraft after delivery of such Aircraft, but prior to its initial departure flight, or upon its return to Boeing's facilities prior to completion of such flight, the following provisions will apply: 4.3.1 Title to and risk of loss of any such Aircraft will at all times remain with Buyer. 4.3.2 The provisions of the Boeing Warranty set forth in Exhibit B of this Agreement will apply to such work. 4.3.3 Buyer will reimburse Boeing for such work to the extent not covered by the Boeing Warranty applicable to the Aircraft. 4.3.4 The Disclaimer and Release and Exclusion of Consequential and Other Damages provisions set forth in Article 12 of this Agreement and the indemnification and insurance provisions set forth in this Exhibit C will apply to such Boeing work. 4.3.5 In performing such work, Boeing may rely upon the commitment authority of Buyer's personnel requesting such work. 5. Additional Informational Services. Boeing may, from time to time, provide Buyer with additional services in the form of information about the Aircraft or other aircraft of the same type, including information concerning design, manufacture, operation, maintenance, modification, repair and in-service experience. P.A. No. 1910 C K/TWA B-2 74 PART C BOEING FLIGHT TRAINING PROGRAM 1. General. This Part describes the flight training to be provided by Boeing (Flight Training) at or near Seattle, or at some other location to be determined pursuant to this Part. The Flight Training will be provided at no additional charge to Buyer, except as otherwise provided herein. All instruction, examinations and materials will be prepared and presented in the English language and in the units of measure used by Boeing. Buyer will be responsible for the living expenses of Buyer's personnel during the Flight Training Program. For Flight Training provided at or near Seattle, Boeing will transport Buyer's personnel between their local lodging and the training facility. 2. Flight Training Program. In conjunction with earlier sales to Buyer of aircraft of the same model type as the Aircraft, Boeing has provided to Buyer comprehensive flight training for such aircraft. If requested by Buyer at least 12 months prior to delivery of the first Aircraft, Boeing agrees to provide, if required, 1 classroom training class to acquaint up to 15 of Buyer's personnel with any operational, systems and performance differences significant to the operation of the Aircraft, between the first Aircraft scheduled for delivery pursuant to this Agreement and the last aircraft of the same model type as the aircraft previously delivered by Boeing to Buyer. Such course will be scheduled by mutual agreement of Boeing's and Buyer's flight training organizations. 3. Training Materials. Any training materials, if required, that are used in Flight Training shall be provided to Buyer at the conclusion of such class. No revision service shall be provided for such training materials. P.A. No. 1910 C K/TWA C-1 75 4. Training at a Facility Other Than Boeing's. If seasonably requested, Boeing will conduct the Flight Training at a mutually acceptable alternate training site, subject to the following conditions: 4.1 Buyer will be responsible for providing classroom space acceptable to Boeing, a flight simulator and training equipment required to present the Boeing courseware. 4.2 Buyer will pay Boeing's then-current per diem charge for each Boeing instructor for each day, or fraction thereof, such instructor is away from Seattle, including travel time. 4.3 Buyer will reimburse Boeing for round-trip transportation for Boeing's flight training instructors and materials between Seattle and such alternate site. 4.4 Buyer will pay, or reimburse Boeing for, all taxes, fees, duties, licenses, permits and similar expenses incurred by Boeing and its employees as a result of Boeing's providing the training at such alternate site. 4.5 Those portions of the training that require the use of Boeing's training devices, if any, will be conducted at Boeing-designated facilities. P.A. No. 1910 C K/TWA C-2 76 PART D TECHNICAL DATA AND DOCUMENTS 1. General. Boeing will furnish to Buyer the data and documents set forth herein at no additional charge to Buyer, unless otherwise specified herein. Such data and documents will, where applicable, be prepared essentially in accordance with the provisions of Revision 29 to Air Transport Association of America Specification No. 100, dated June 1, 1956, entitled "Specification for Manufacturers' Technical Data," with the following specific exceptions: The Illustrated Parts Catalog, will be prepared essentially in accordance with the provisions of Revision 28. The Overhaul and Component Maintenance Manuals will be written to the ATA Revision level established for the airplane model the component was originally used on. Such data and documents are only intended to provide Buyer with pertinent information on components, equipment and installations designed by Boeing for aircraft of the same model type as the Aircraft. Such data and documents will be in English and in the units of measure used by Boeing, except as otherwise specified herein or as may be required to reflect Aircraft instrumentation. 2. Treatment of Data and Documents. 2.1 The data and documents provided by Boeing under this Agreement ("Documents") are licensed to Buyer. They contain confidential, proprietary and/or trade secret information belonging to Boeing; and Buyer will treat them in confidence and use and disclose them only for Buyer's own internal purposes as specifically authorized herein. If Buyer makes copies of any Documents, the copies will also P.A. No. 1910 C K/TWA D-1 77 belong to Boeing and be treated as Documents under this Agreement. Buyer will preserve all restrictive legends and proprietary notices on all Documents and copies. 2.2 All Documents will only be used: (a) for the purpose of maintenance, repair, or modification of an Aircraft or spare part as permitted in the Spare Parts GTA or Customer Services GTA between Buyer and Boeing, and then only in connection with an Aircraft or spare part for which the Document in question is tabulated or identified by Boeing serial number, and (b) for the purpose of Buyer's own development and manufacture of training devices for use by Buyer, in connection with the Aircraft. 2.3 Any Document may be provided to Buyer's contractors for maintenance, repair, or modification of the Aircraft; and Airplane Flight Manuals, Operations Manuals, Aircraft Maintenance Manuals, Wiring Diagram Manuals, System Schematics Manuals, Component Maintenance/Overhaul Manuals and assembly and installation drawings may be provided to Buyer's contractors for development and manufacture of training devices for use by Buyer, but in both cases, only if Buyer's contractor is, at the time of transfer of Documents, bound by a Boeing Customer Services GTA, or other appropriate proprietary information protection agreement with Boeing, applicable to the Documents. 3. Document Formats and Quantities. The Attachment is provided to record the quantities and formats of Documents provided to Buyer which are applicable to aircraft previously delivered by Boeing of the same model type as the Aircraft. Revisions to such Documents will be provided as necessary to reflect the configuration, at time of delivery, of the Aircraft to which this Part applies. Space is provided in the Attachment for Buyer and Boeing to indicate changes, mutually agreed upon concurrently with signing this Agreement, in the quantities and formats of such Documents to be hereinafter provided. In the event Boeing determines that revisions would not be appropriate for any of the Documents described in the Attachment, Boeing reserves the right to furnish to Buyer, in lieu of such revisions, a separate publication of such Document for the Aircraft in the same format and quantity as P.A. No. 1910 C K/TWA D-2 78 indicated in the Attachment. Revision service for such publication shall be the same as for the Document it replaces. 4. Revision Service. Further revisions to any such Documents will be provided with respect to such Aircraft in accordance with the provisions applicable to such Documents, as set forth in the purchase agreement or purchase agreement supplement under which Boeing originally agreed to provide such Documents, as such provisions may have been amended by the parties. 5. Supplier Technical Data. Boeing will continue to maintain the supplier data program referred to in the purchase agreement or purchase agreement supplement under which data and documents for Buyer's aircraft of the same model type as the Aircraft were originally provided to Buyer. As indicated in such prior purchase agreement or supplement, the provisions of such supplier data program are not applicable to items of Buyer Furnished Equipment. 6. Additional Data and Documents. If Boeing provides data or documents other than Documents which are not covered by a Boeing Customer Services GTA or other proprietary information protection agreement between Boeing and Buyer, all such data and documents will be considered things delivered under this Agreement and treated as Documents. 7. Buyer's Shipping Address. Boeing will ship the Documents furnished hereunder to Buyer's shipping address for data and documents previously provided to Boeing. Buyer shall promptly notify Boeing of any change to such address. P.A. No. 1910 C K/TWA D-3 79 Attachment to Part D Page 1 WORKSHEET
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ A. FLIGHT OPERATIONS: 1. Airplane Flight Manual -------- -------- Printed 1 Side NOTE: An additional copy is placed aboard each airplane at delivery as required by FAR's. 2. Operations Manual and Quick Printed 2 Sides -------- -------- Reference Handbook 3. Weight and Balance Control -------- -------- Reproduced and Loading Manual 4. Dispatch Deviation -------- -------- Printed 2 Sides Procedures Guide 5. Flight Crew Training Manual Printed 2 Sides -------- -------- 6. Performance Engineer's Manual -------- -------- Printed 2 Sides 8. Fault Reporting Manual -------- -------- Printed 2 Sides/ 9. Jet Transport Performance -------- -------- Printed 2 Sides Methods (total quantity - all models) 10. FMC Supplemental Data -------- -------- Printed 2 Sides 11. Operational Performance Software (OPS) a. Inflight and Report Programs Digital Magnetic -------- -------- Tape Diskette, IBM Compatible: 3.5 Inch (720KB or -------- -------- -------- -------- 1.44MB) -------- -------- 5.25Inch (360KB or 1.2MB) -------- -------- Diskette, Macintosh -------- -------- 3.5 Inch (800KB or 1.4MB) b. Airplane Performance -------- -------- Digital Magnetic Monitoring (APM/HISTRY) Tape Diskette, IBM Compatible: -------- -------- 3.5 Inch (720KB or 1.44MB) -------- -------- 5.25Inch (360KB or 1.2MB) -------- -------- Diskette, Macintosh 3.5 Inch (800KB or 1.4MB)
P.A. No. 1910 C K/TWA D-A-1 80 Attachment to Part D Page 2 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ B. MAINTENANCE 1. Aircraft Maintenance Manual -------- -------- Printed 2 Sides -------- -------- Printed 1 Side -------- -------- Microfilm, 16mm Duplicate Duplicate -------- -------- Microfilm, 16mm Master Master -------- -------- Digital Format 2. Wiring Diagram Manual 1 1 Full-Size Mylar -------- -------- Reproducible of any Wiring Diagram or Chart on specific request therefor 1 1 Sets of 35mm -------- -------- Aperture Cards of all Wiring Diagrams and Charts Copies of Entire -------- -------- Standard Printed Manual Copies of all -------- -------- Standard Printed sections except EDP portion
P.A. No. 1910 C K/TWA D-A-2 81 Attachment to Part D Page 3 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ -------- -------- EDP portion in Microfilm, 16mm, Duplicate -------- -------- EDP portion in Microfilm, 16mm, Master -------- -------- Entire Manual, Microfilm, 16mm, Duplicate -------- -------- Entire Manual, Microfilm, 16mm, Master -------- -------- Digital Format -------- -------- 3. System Schematics Manual Printed 2 Sides -------- -------- Full-Size Mylar Reproducibles of any page, upon specific request therefor -------- -------- 35mm Aperture Cards -------- -------- Schematics, Microfilm, 16mm, Duplicate -------- -------- Microfilm, 16mm, Master -------- -------- Digital Format
P.A. No. 1910 C K/TWA D-A-3 82 Attachment to Part D Page 4 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ 5. BITE Manual -------- -------- Printed 2 Sides (if seperate) -------- -------- Microfilm, 16mm, Duplicate -------- -------- Microfilm, 16mm, Master 6. Ramp Maintenance Manual -------- -------- Printed 2 Sides -------- -------- Microfilm (16mm) -------- -------- Microfilm (Silver Halide) -------- -------- Digital Format (747-400/757/767/777) 7. Fault Isolation Manual Printed 2 Sides or -------- -------- (if separate) -------- -------- Microfilm, 16mm, Duplicate -------- -------- Microfilm, 16mm, Master -------- -------- Digital Format (737-700/747/757/767/777)
P.A. No. 1910 C K/TWA D-A-4 83 Attachment to Part D Page 5 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ 8. Structural Repair Manual -------- -------- Printed 2 Sides -------- -------- Printed 1 Side -------- -------- Microfilm, 16mm, Duplicate -------- -------- Microfilm, 16mm, Master -------- -------- Magnetic Tape Text (Print File Format) Illustrations (CGM Format) 9. Component Maintenance/ -------- -------- Printed 2 Sides Overhaul Manuals -------- -------- Microfilm, 16mm, Duplicate -------- -------- Microfilm, 16mm, Master -------- -------- Magnetic Tape Text (Print File Format) Illustrations (CGM Format) 10. Chapter 20 Standard Printed 2 Sides -------- -------- Overhaul Practices Manual (total quantity - all models) Printed 1 Side -------- -------- -------- -------- Microfilm, 16mm, Duplicate -------- -------- Microfilm, 16mm, Master
P.A. No. 1910 C K/TWA D-A-5 84 Attachment to Part D Page 6 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ 11. Chapter 20 Standard Wiring Printed 2 Sides Practices Manual (total quantity - all models) -------- -------- Microfilm, 16mm, Duplicate -------- -------- Microfilm, 16mm, Master Master -------- -------- -------- -------- Digital Format 12. Nondestructive Test Printed 2 Sides -------- -------- Manual -------- -------- Printed 1 Side Duplicate -------- -------- Microfilm, 16mm, Duplicate Master -------- -------- Microfilm, 16mm, Master -------- -------- Magnetic Tape Text (Print File Format) Illustrations (CGM Format) 13. Service Bulletins -------- -------- Printed 2 Sides 14. Service Bulletins Index -------- -------- Printed 2 Sides 15. Major Assembly and 1 1 Set Aperture -------- -------- Installation Drawings -------- -------- Cards (one set only at no charge) 16. Corrosion Prevention Manual -------- -------- Printed 2 Sides -------- -------- Printed 1 Side Duplicate -------- -------- Microfilm, 16mm, Duplicate Master -------- -------- Microfilm, 16mm, Master -------- -------- Magnetic Tape Text (Print File Format) Illustrations (CGM Format)
P.A. No. 1910 C K/TWA D-A-6 85 Attachment to Part D Page 7 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ 17. Power Plant Buildup Manual Printed 2 Sides -------- -------- -------- -------- Microfilm (16mm) -------- -------- Microfilm (Silver Halide)/ 18. In-Service Activity Report -------- -------- Printed 19. All Operators Letters -------- -------- Printed 20. Service Letters -------- -------- Printed 21. Structural Item Interim -------- -------- Printed Advisories 22. Maintenance Tips -------- -------- Printed 23. Combined Index -------- -------- Printed -------- -------- Digital Format 24. Production Management Data Base -------- -------- Digital Format (PMDB) C. MAINTENANCE PLANNING 1. Maintenance Planning -------- -------- Printed Data Documents 2. Maintenance Task Cards -------- -------- Printed 1 Side 3. Maintenance Inspection -------- -------- Printed Intervals Report (total quantity - all models) D. SPARES 1. Illustrated Parts Catalog Printed 2 Sides -------- -------- (select one format only) -------- -------- Printed 1 Side -------- -------- Microfilm (16mm) -------- -------- Microfilm (Silver Halide) 2. Standards Books a. Index -------- -------- Printed 2 Sides -------- -------- Microfilm b. Parts Standards -------- -------- Printed 2 Sides -------- -------- Microfilm
P.A. No. 1910 C K/TWA D-A-7 86 Attachment to Part D Page 8 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ c. Parts Specifications -------- -------- Printed 2 Sides -------- -------- Microfilm d. Standards for Repair -------- -------- Printed 2 Sides -------- -------- Microfilm e. Obsolete Standards -------- -------- Printed 2 Sides -------- -------- Microfilm f. Commercial Markers -------- -------- Printed 2 Sides -------- -------- Microfilm g. Commercial Markers 757 Printed 2 Sides -------- -------- -------- -------- Microfilm h. Passenger Cabin Symbology -------- -------- Printed 2 Sides (Commercial Placards) -------- -------- Microfilm i. Process Standards -------- -------- Printed 2 Sides -------- -------- Microfilm j. Material Standards -------- -------- Printed 2 Sides -------- -------- Microfilm k. Drafting Standards Practices -------- -------- Printed 2 Sides -------- -------- Microfilm l. Specification Support Printed 2 Sides -------- -------- Standards -------- -------- Microfilm
P.A. No. 1910 C K/TWA D-A-8 87 Attachment to Part D Page 9 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ E. FACILITIES AND EQUIPMENT PLANNING 1. Facilities and Equipment Printed 2 Sides Planning Document -------- -------- 2. Special Tool and Ground Sets Aperture -------- -------- Handling Equipment Drawings Cards Sets Reproducible -------- -------- Sets Black & White -------- -------- Copies 3. Special Tool and Ground Printed 2 Sides -------- -------- Handling Equipment Drawings Index 4. Supplementary Tooling Printed 2 Sides -------- -------- Documentation (total quantity - all models) 5. System Test Equipment Printed 1 Side -------- -------- Document 6. Illustrated Tool and Printed 2 Sides -------- -------- Equipment List/Manual / Printed 1 Side -------- -------- Microfilm, 16mm, -------- -------- Duplicate Microfilm, 16mm, -------- -------- Master Magnetic Tape -------- -------- Text (Print File Format) Illustrations (CGM Format) (737-700, 777) 7. Airplane Recovery Document Printed 2 Sides -------- -------- 8. Airplane Characteristics for Printed -------- -------- Airport Planning 9. Crash, Fire and Rescue Printed -------- -------- Document 10. Engine Handling Document Printed 2 Sides -------- --------
P.A. No. 1910 C K/TWA D-A-9 88 Attachment to Part D Page 10 WORKSHEET ---------
ORIGINAL REVISED ITEM NAME QUANTITY QUANTITY FORMAT - ---- ---- -------- -------- ------ F. EROPS Configuration, Maintenance Printed 2 Sides and Procedures for Extended -------- -------- Range Operations Document/ G. COMPUTER SOFTWARE DOCUMENTATION FOR AIRBORNE COMPONENTS Computer Software Index Printed 2 Sides -------- -------- H. Supplier Technical Data Product Support Supplier Printed -------- -------- Directory (total quantity - all models)
P.A. No. 1910 C K/TWA D-A-10 89 PART E BUYER'S INDEMNIFICATION OF BOEING AND INSURANCE 1. Buyer's Indemnification Of Boeing. Buyer hereby indemnifies and holds harmless Boeing from and against all claims and liabilities, including costs and expenses (including attorneys' fees) incident thereto or incident to successfully establishing the right to indemnification, for injury to or death of any person or persons, including employees of Buyer but not employees of Boeing, or for loss of or damage to any property, including Aircraft, arising out of or in any way related to the performance by Boeing of training, services or other obligations pursuant to this Exhibit C, whether or not arising in tort or occasioned in whole or in part by the negligence of Boeing, whether active, passive or imputed. 1.1 With regard to training, services and other obligations, the foregoing indemnification will not apply to the legal liability to persons or parties other than Buyer or Buyer's assignees arising out of an accident caused solely by a product defect in an Aircraft. 2. Buyer's Insurance. Evidence of insurance will be required 10 days prior to the scheduled delivery of the first Aircraft. Accordingly, Buyer will provide certificates of insurance specifically referencing the Agreement and paragraph 1 of this Part E. In addition to showing policy number, limits of liability, and effective dates of coverage, such certificates will contain but not be limited to the following provisions: P.A. No. 1910 C T/TWA E-1 90 2.1 Hull All Risk; Hull War & Allied Perils Insurance. Insurers and/or reinsurers will hold harmless and waive all rights of subrogation against Boeing for any damages or claims arising out of these Exhibit C services. 2.2 Aircraft Liability Insurance. (a) To name Boeing as an additional insured in connection with the performance by Boeing of training, services, or other obligations provided under this Exhibit C. (b) To provide that the insurance arranged herein will be primary and without right of contribution with respect to any other insurance which may be available for the protection of Boeing. (c) To provide that all provisions of the insurance, except the limits of liability, will operate to give each insured or additional insured the same protection as if there were a separate policy issued covering each insured or additional insured. (d) To provide that no act, omission, breach of any warranty or condition, or misrepresentation on the part of the Insured or any other person or party (other than by Boeing) will void, exclude, minimize, or adversely change this coverage as it applies to Boeing. 2.3 For Coverages Specified in 2.1 and 2.2. (a) Acknowledgment that the insurers and/or reinsurers are aware of and have seen a copy of the Agreement and accept and insure the risks and indemnity herein to the extent of the coverage and endorsements as described in this certificate. (b) To give 30 day written notice of cancellation, termination or adverse material alteration of the policies (7 day written notice in the eventof non payment of premium of War Risk or such lesser period as may be in effect with prior notice). (c) That Boeing will not be responsible for payment, set off, or assessment of any kind of any premiums in connection with the policies, endorsements or coverages described herein. (d) For the purpose of this Part E, "Boeing" is defined as The Boeing Company, its divisions, subsidiaries, affiliates, the assignees of each and their respective directors, officers, employees and agents. If more than one Aircraft is to be delivered under the Purchase Agreement, the insurance certificates must reference all Aircraft when delivered or separate certificates must be supplied for each Aircraft. The certificates of insurance will be kept current and valid. P.A. No. 1910 C T/TWA E-2 91 PART F Alleviation or Cessation of Performance Boeing will not be required to provide any services, training, data or goods at a facility while: 1. a labor stoppage or dispute in progress involving Buyer exists; 2. wars or warlike operations, riots or insurrections in the country where such facility is located exist; 3. conditions at such facility which, in the opinion of Boeing, are detrimental to the general health, welfare or safety of its personnel and/or their families exist; 4. the United States Government refuses permission to any Boeing personnel or their families to enter the country where such facility is located, or recommends that any Boeing personnel or their families leave such country; or 5. the United States Government refuses Boeing permission to deliver goods or services to the country where such facility is located. Boeing further reserves the right, upon the occurrence of any of such events, subsequent to the location of Boeing personnel at Buyer's facility, to immediately and without prior notice relocate its personnel and their families to a place of Boeing's choosing. Any delay resulting therefrom will be deemed a delay by mutual agreement. P.A. No. 1910 C K/TWA F-1 92 1910K/TWATrans World Airlines, Inc. AIRFRAME AND ENGINE PRICE ADJUSTMENT between THE BOEING COMPANY and TRANS WORLD AIRLINES, INC. Exhibit D to Purchase Agreement Number 1910 P.A. No. 1910 D K/TWA 93 Exhibit D Page 1 PRICE ADJUSTMENT DUE TO ECONOMIC FLUCTUATIONS AIRFRAME PRICE ADJUSTMENT (JULY 1995 Base Price) 1. Formula. The Airframe Price Adjustment will be determined at the time of Aircraft delivery in accordance with the following formula: Pa = (P)(L + M - 1) Where: Pa = Airframe Price Adjustment. L = .65 x ECI ----- 130.1 M = .35 x ICI ----- 123.6 P = Aircraft Basic Price (as set forth in Article 3.2 of this Agreement) less the base price of Engines (as defined in this Exhibit D) in the amount of $11,320,000. ECI = A value using the "Employment Cost Index for workers in aerospace manufacturing" (aircraft manufacturing, standard industrial classification code 3721, compensation, base month and year June 1989 = 100), as released by the Bureau of Labor Statistics, U.S. Department of Labor on a quarterly basis for the months of March, June, September and December, calculated as follows: A three-month arithmetic average value (expressed as a decimal and rounded to the nearest tenth) will be determined using the months set forth in the table below for the applicable Aircraft, with the released Employment Cost Index value described above for the month of March also being used for the months of January and February; the value for June also used for April and May; the value for September also used for July and August; and the value for December also used for October and November. ICI = The three-month arithmetic average of the released monthly values for the Industrial P.A. No. 1910 D-1 K/TWA 94 Exhibit D Page 2 Commodities Index as set forth in the "Producer Prices and Price Index" (Base Year 1982 = 100) as released by the Bureau of Labor Statistics, U.S. Department of Labor values (expressed as a decimal and rounded to the nearest tenth) for the months set forth in the table below for the applicable Aircraft. In determining the value of L, the ratio of ECI divided by 130.1 will be expressed as a decimal rounded to the nearest ten-thousandth and then multiplied by .65 with the resulting value also expressed as a decimal and rounded to the nearest ten-thousandth. In determining the value of M, the ratio of ICI divided by 123.6 will be expressed as a decimal rounded to the nearest ten-thousandth and then multiplied by .35 with the resulting value also expressed as a decimal and rounded to the nearest ten-thousandth.
Months to be Utilized Month of Scheduled in Determining the Aircraft Delivery Value of ECI and ICI - ----------------- -------------------- January June B, July B, Aug. B February July B, Aug. B, Sept. B March Aug. B, Sept. B, Oct. B April Sept. B, Oct. B, Nov. B May Oct. B, Nov. B, Dec. B June Nov. B, Dec. B, Jan. D July Dec. B, Jan. D, Feb. D August Jan. D, Feb. D, Mar. D September Feb. D, Mar. D, Apr. D October Mar. D, Apr. D, May D November Apr. D, May D, June D December May D, June D, July D
The following definitions of B and D will apply: B = The calendar year before the year in which the scheduled month of delivery as set forth in Article 2.1 occurs. D = The calendar year during which the scheduled month of delivery as set forth in Article 2.1 occurs. 2. If at the time of delivery of an Aircraft Boeing is unable to determine the Airframe Price Adjustment because the applicable values to be used to determine the ECI and ICI have not been released by the Bureau of Labor Statistics, then: P.A. No. 1910 D-2 K/TWA 95 Exhibit D Page 3 2.1 The Airframe Price Adjustment, to be used at the time of delivery of each of the Aircraft, will be determined by utilizing the escalation provisions set forth above. The values released by the Bureau of Labor Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery will be used to determine the ECI and ICI values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Airframe Price Adjustment. If no values have been released for an applicable month, the provisions set forth in Paragraph 2.2 below will apply. If prior to delivery of an Aircraft the U.S. Department of Labor changes the base year for determination of the ECI or ICI values as defined above, such rebased values will be incorporated in the Airframe Price Adjustment calculation. The payment by Buyer to Boeing of the amount of the Purchase Price for such Aircraft, as determined at the time of Aircraft delivery, will be deemed to be the payment for such Aircraft required at the delivery thereof. 2.2 If prior to delivery of an Aircraft the U.S. Department of Labor substantially revises the methodology used for the determination of the values to be used to determine the ECI and ICI values (in contrast to benchmark adjustments or other corrections of previously released values), or for any reason has not released values needed to determine the applicable Aircraft Airframe Price Adjustment, the parties will, prior to delivery of any such Aircraft, select a substitute for such values from data published by the Bureau of Labor Statistics or other similar data reported by non-governmental United States organizations, such substitute to lead in application to the same adjustment result, insofar as possible, as would have been achieved by continuing the use of the original values as they may have fluctuated during the applicable time period. Appropriate revision of the formula will be made as required to reflect any substitute values. However, if within 24 months from delivery of the Aircraft the Bureau of Labor Statistics should resume releasing values for the months needed to determine the Airframe Price Adjustment, such values will be used to determine any increase or decrease in the Airframe Price Adjustment for the Aircraft from that determined at the time of delivery of such Aircraft. 2.3 In the event escalation provisions are made non-enforceable or otherwise rendered null and void by any agency of the United States Government, the parties agree, to the extent they may lawfully do so, to equitably adjust the Purchase Price of any affected Aircraft to reflect an allowance for increases or decreases in labor compensation and material costs occurring since February, 1995, which is consistent with the applicable provisions of paragraph 1 of P.A. No. 1910 D-3 K/TWA 96 Exhibit D Page 4 this Exhibit D. 3. For the calculations herein, the values released by the Bureau of Labor Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery will be used to determine the ECI and ICI values for the applicable months (including those noted as preliminary by the Bureau of Labor Statistics) to calculate the Airframe Price Adjustment. Note: Any rounding of a number, as required under this Exhibit D with respect to escalation of the airframe price, will be accomplished as follows: if the first digit of the portion to be dropped from the number to be rounded is five or greater, the preceding digit will be raised to the next higher number. P.A. No. 1910 D-4 K/TWA 97 Exhibit D Page 5 ENGINE PRICE ADJUSTMENT - PRATT & WHITNEY (1995 BASE PRICE) (a) The Aircraft Basic Price of each Aircraft set forth in Article 3.2 of this Agreement includes an aggregate price for P&W 2037 engines and all accessories, equipment and parts therefor provided by the engine manufacturer (collectively in this Exhibit D called "Engines") of Eleven Million Three Hundred Twenty Thousand Dollars ($11,320,000). The adjustment in Engine price applicable to each Aircraft ("Engine Price Adjustment" herein) will be determined at the time of Aircraft delivery in accordance with the following formula: Pa = (P + F) (AA + BB + CC) - P/ (b) The following definitions will apply herein: Pa = Engine Price Adjustment P = Aggregate Engine Base Price as set forth in paragraph (a) above. AA = .60 x L ------ $17.80 BB = .30 x M ------ 130.6 CC = .10 x E ------ 76.6 In determining the value of AA, BB and CC, the ratio of L divided by $17.80, M divided by 130.6 and E divided by 76.6 will be expressed as a decimal and rounded to the nearest ten-thousandth but the decimal value resulting from multiplying such ratios by the respective constants (.60, .30 and .10) will not be rounded. The value of the sum of AA + BB + CC will also be rounded to the nearest ten-thousandth. L = Labor Index, which is the "Hourly Earnings of Aircraft Engines and Engine Parts Production Workers, SIC 3724" published by the Bureau of Labor Statistics, U.S. Department of Labor, for the seventh month preceding the month of scheduled Aircraft delivery. $17.80 = Published Labor Index (SIC 3724) for December, 1994. P.A. No. 1910 D-5 K/TWA 98 Exhibit D Page 6 M = Material Index, which is the "Producer Price Index - Code 10, Metals and Metal Products," (Base Year 1982 = 100) published by the Bureau of Labor Statistics, U.S. Department of Labor, for the seventh month preceding the month of scheduled Aircraft delivery. 130.6 = Published Material Index (Code 10) for December, 1994. E = Fuel Index, which is the "Producer Price Index - Code 5, Fuels and Related Products and Power" (Base Year 1982 = 100) published for the Bureau of Labor Statistics, U.S. Department of Labor, for the seventh month preceding the month of scheduled Aircraft delivery. 76.6 = Published Fuel Index (Code 5) for December, 1994. F = 0.005 (N)(P). Where N = the calendar year of scheduled Engine delivery, minus 1995. For purposes of this calculation, Engine delivery is assumed to be 3 months prior to the month of scheduled Aircraft delivery. The Engine Price Adjustment will not be made if it would result in a decrease in the aggregate Engine base price. (c) The value of the Labor, Material and Fuel Index used in determining the Engine Price Adjustment will be those published by the Bureau of Labor Statistics, U.S. Department of Labor as of a date 30 days prior to the scheduled Aircraft delivery to Buyer. Such Index values will be considered final and no revision to the Engine Price Adjustment will be made after Aircraft delivery for any subsequent changes in published Index values. (d) If the Bureau of Labor Statistics, U. S. Department of Labor, (i) substantially revises the methodology (in contrast to benchmark adjustments or other corrections of previously published data) or (ii) discontinues publication of any of the data referred to above, Pratt & Whitney Aircraft (P&WA) agrees to meet with Boeing and jointly select a substitute for the revised or discontinued data, such substitute data to lead in application to the same adjustment result, insofar as possible, as would have been achieved by continuing the use of the original data as it may have fluctuated had it not been revised or discontinued. Appropriate revision of the Engine Price Adjustment provisions set forth above will be made to accomplish this P.A. No. 1910 D-6 K/TWA 99 Exhibit D Page 7 result for affected Engines. In the event the Engine Price Adjustment escalation provisions of this Agreement are made non-enforceable or otherwise rendered null and void by any agency of the United States Government, P&WA agrees to meet with Boeing and jointly agree, to the extent that they may lawfully do so, to adjust equitably the Purchase Price of any affected Engine(s) to reflect an allowance for increases in labor, material and fuel costs that occurred from December, 1994 to the seventh month preceding the month of scheduled delivery of the applicable Aircraft. NOTES: Any rounding of a number, as required under this Exhibit D with respect to escalation of the Engine price, will be accomplished as follows: if the first digit of the portion to be dropped from the number to be rounded is five or greater, the preceding digit will be raised to the next higher number. P.A. No. 1910 D-7 K/TWA 100 1910K/TWATrans World Airlines, Inc. BUYER FURNISHED EQUIPMENT PROVISIONS DOCUMENT between THE BOEING COMPANY and TRANS WORLD AIRLINES, INC. Exhibit E to Purchase Agreement Number 1910 P.A. No. 1910 E K/TWA 101 BUYER FURNISHED EQUIPMENT PROVISIONS DOCUMENT Dated ________________ Relating to BOEING MODEL 757 AIRCRAFT ________________ This Buyer Furnished Equipment Provisions Document is Exhibit E to and forms a part of Purchase Agreement No. 1910, between The Boeing Company (Boeing) and Trans World Airlines, Inc. (Buyer) relating to the purchase of Boeing Model 757-231 aircraft. P.A. No. 1910 E K/TWA (I) 102 BUYER FURNISHED EQUIPMENT PROVISIONS DOCUMENT 1. General. Certain equipment to be installed in the Aircraft is furnished to Boeing by Buyer at Buyer's expense. This equipment is designated "Buyer Furnished Equipment" (BFE) and is listed in the Detail Specification. On or before May 24, 1996, Boeing will provide to Buyer a BFE Requirements On-Dock/Inventory Document (BFE Document) or an electronically transmitted BFE Report which may be periodically revised, setting forth the items, quantities, on-dock dates and shipping instructions relating to the in sequence installation of BFE. For planning purposes, a preliminary BFE on-dock schedule is set forth in the attachment to this Exhibit. 2. Supplier Selection. Buyer will: 2.1 Select and notify Boeing of the suppliers of the following BFE items by the following dates: Galley System Galley System Already Selected Seats (passenger) Seat System Already Selected Video Video System Already Selected 2.2 Meet with Boeing and such selected BFE suppliers promptly after such selection to: 2.2.1 complete BFE configuration design requirements for such BFE; and 2.2.2 confirm technical data submittal dates for BFE certification. P.A. No. 1910 E-1 K/TWA 103 3. Buyer's Obligations. Buyer will: 3.1 comply with and cause the supplier to comply with the provisions of the BFE Document or BFE Report; 3.1.1 deliver technical data (in English) to Boeing as required to support installation and FAA certification in accordance with the schedule provided by Boeing or as mutually agreed upon during the BFE meeting referred to above; 3.1.2 deliver BFE including production and/or flight training spares to Boeing in accordance with the quantities and schedule provided therein; and 3.1.3 deliver appropriate quality assurance documentation to Boeing as required with each BFE part (D6-56586, "BFE Product Acceptance Requirements"); 3.2 authorize Boeing to discuss all details of the BFE directly with the BFE suppliers; 3.3 authorize Boeing to conduct or delegate to the supplier quality source inspection and supplier hardware acceptance of BFE at the supplier location; 3.3.1 require supplier's contractual compliance to Boeing defined source inspection and supplier delegation programs, including availability of adequate facilities for Boeing resident personnel; and 3.3.2 assure that Boeing identified supplier's quality systems be approved to Boeing document D1-9000; 3.4 provide necessary field service representation at Boeing's facilities to support Boeing on all issues related to the installation and certification of BFE; 3.5 deal directly with all BFE suppliers to obtain overhaul data, provisioning data, related product support documentation and any warranty provisions applicable to the BFE; 3.6 work closely with Boeing and the BFE suppliers to resolve any difficulties, including defective equipment, that arise; 3.7 be responsible for modifying, adjusting and/or calibrating BFE as required for FAA approval and for all related expenses; P.A. No. 1910 E-2 K/TWA 104 3.8 warrant that the BFE will meet the requirements of the Detail Specification; and 3.9 be responsible for providing equipment which is FAA certifiable at time of Aircraft delivery, or for obtaining waivers from the applicable regulatory agency for non-FAA certifiable equipment. 4. Boeing's Obligations. Other than as set forth below, Boeing will provide for the installation of and install the BFE and obtain certification of the Aircraft with the BFE installed. 5. Nonperformance by Buyer. If Buyer's nonperformance of obligations in this Exhibit or in the BFE Document causes a delay in the delivery of the Aircraft or causes Boeing to perform out-of-sequence or additional work, Buyer will reimburse Boeing for all resulting expenses and be deemed to have agreed to any such delay in Aircraft delivery. In addition Boeing will have the right to: 5.1 work closely with Buyer to mitigate the damages to Buyer resulting from the nonperformance by Buyer; 5.2 provide and install specified equipment or suitable alternate equipment and increase the price of the Aircraft accordingly; and/or 5.3 deliver the Aircraft to Buyer without the BFE installed. 6. Return of Equipment. BFE not installed in the Aircraft will be returned to Buyer in accordance with Buyer's instructions and at Buyer's expense. Such equipment returned to Buyer will be returned in a mutually agreeable time period. P.A. No. 1910 E-3 K/TWA 105 7. Title and Risk of Loss. Title to and risk of loss of BFE will at all times remain with Buyer or other owner. Boeing will have only such liability for BFE as a bailee for mutual benefit would have, but will not be liable for loss of use. 8. Indemnification of Boeing. Buyer hereby indemnifies and holds harmless Boeing from and against all claims and liabilities, including costs and expenses (including attorneys' fees) incident thereto or incident to successfully establishing the right to indemnification, for injury to or death of any person or persons, including employees of Buyer but not employees of Boeing, or for loss of or damage to any property, including any Aircraft, arising out of or in any way connected with any nonconformance or defect in any BFE and whether or not arising in tort or occasioned in whole or in part by the active, passive or imputed negligence of Boeing. This indemnity will not apply with respect to any nonconformance or defect caused solely by Boeing's installation of the BFE. 9. Patent Indemnity. Buyer hereby indemnifies and holds harmless Boeing from and against all claims, suits, actions, liabilities, damages and costs arising out of any actual or alleged infringement of any patent or other intellectual property rights by BFE or arising out of the installation, sale or use of BFE by Boeing. 10. Definitions. For the purposes of the above indemnities, the term "Boeing" includes The Boeing Company, its divisions, subsidiaries and affiliates, the assignees of each, and their directors, officers, employees and agents. P.A. No. 1910 E-4 K/TWA 106 Attachment A to Exhibit E BOEING MODEL 757-200 AIRCRAFT Item Preliminary On-Dock Dates February 1997 Aircraft Seats - December 5, 1996 Galleys - November 19, 1996 Electronics - November 12, 1996 Furnishings - November 6, 1996 P.A. No. 1910 E K/TWA A-1 107 1910K/TWATrans World Airlines, Inc. DEFINED TERMS DOCUMENT between THE BOEING COMPANY and TRANS WORLD AIRLINES, INC. Exhibit F to Purchase Agreement Number 1910 P.A. No. 1910 F K/TWA 108 DEFINED TERMS DOCUMENT Dated _________________ Relating to BOEING MODEL 757-200 AIRCRAFT _________________ This Document is Exhibit F to and forms a part of Purchase Agreement No. 1910 (Agreement) between The Boeing Company (Boeing) and Trans World Airlines, Inc. (Buyer) relating to the purchase of Boeing Model 757-231 aircraft. The following is a list of those terms and their definitions as used and not otherwise defined in this Agreement. Such terms are identified in the Agreement by the use of an initial capital letter. P.A. No. 1910 F K/TWA (I) 109 DEFINED TERMS DOCUMENT EXHIBIT F TO AGREEMENT NO. 1910
TERM DEFINITION FIRST REFERENCE - ------------------------------------------------------------------------------------------------------------- Advance Payment Boeing's estimate of the Article 3 Base Price Aircraft Price is set forth in Article 3. Agreement Purchase Agreement Opening paragraph No. 1910, including all of the Agreement Exhibits, the Detail Specification, attachments, letter agreements and other written modifications and amendments thereto. Aircraft (includes The aircraft described in Article 1, "the", "all", Article 1, Para. 1.1. Para. 1.1 "first", "last" "such", /the "Block A Aircraft"/ /the "Block B Aircraft"/ etc.) Aircraft Basic The amount set forth in Article 3, Para. Price Article 3, Para. 3.1.4. 3.1.4 Aircraft Price The total amount Buyer is Article 3, Para. to pay for an Aircraft 3.1.6 which is described in Article 3, Para. 3.1.6. Aircraft Software The computer software Exhibit B, included with the Part D-1, Para 1 Aircraft when the Aircraft is delivered by Boeing, described in Exhibit B, Part D-1, Para. 1. Airframe Component A component described in Exhibit B Part C Exhibit B, Part C, Para. 1.1 Para. 1.1 Article An Article of the Article 6, Para. Agreement. 6.4 Base Airframe Price The airframe price Article 3, described in Article 3, Para. 3.1.2. Para. 3.1.2/ Boeing The Seller of the Opening paragraph Aircraft identified in of the Agreement the opening paragraph of the Agreement. Boeing Warranty Part A of Exhibit B to Exhibit B, Part A, the Agreement. Para. 1 Buyer The purchaser of the Opening paragraph Aircraft identified in of the Agreement the opening paragraph of the Agreement.
P.A. No. 1910 F-1 K/TWA 110 DEFINED TERMS DOCUMENT EXHIBIT F TO AGREEMENT NO. 1910
TERM DEFINITION FIRST REFERENCE - ------------------------------------------------------------------------------------------------------------- Buyer Furnished Equipment provided by Article 4.1 Equipment or BFE Buyer pursuant to Exhibit E for installation by Boeing on the Aircraft. Buyer Furnished Document provided by Article 13, Para. Equipment Document Boeing to Buyer defining 13.1 requirements for BFE. Exhibit E, Para. 1. Certificate of The certificate issued by Article 8, Para. Airworthiness the FAA pursuant to Part 8.1.1.2 21 of the Federal Aviation Regulations for the type of Aircraft purchased under this Agreement as described in Article 8. Change Order A change to the Detail Article 7, Para. Specification, as 7.2/ described in Article 7, Para. 7.2. Covered Component An Airframe Component as Exhibit B Part C described in Exhibit B, Para. 1.4 Part C, Para. 1.4. Customer Support Exhibit C to the Article 12, Para. Document Agreement. 12.5 Customer Support The Boeing services, Article 12, Para. Services training and other 12.5 obligations described in Exhibit C to the Agreement. Deposit The money paid by Buyer Article 5, Para. to Boeing as part of the 5.1 acceptance of the Aircraft proposal. Detail The Boeing document that Article 1, Para. Specification describes the 1.1 specifications of the Aircraft modified from time to time to include developmental and Buyer requested changes. Development Changes to the basic Article 7, Para. Change(s) specification that do not 7.1 affect price, delivery, guaranteed weight, performance or interchangeability as described in Article 7, Para. 7.1.
P.A. No. 1910 F-2 K/TWA 111 DEFINED TERMS DOCUMENT EXHIBIT F TO AGREEMENT NO. 1910
TERM DEFINITION FIRST REFERENCE - ------------------------------------------------------------------------------------------------------------- Disclaimer and The disclaimer and Article 12, Release Release set forth in Para. 12.2 Article 12, Para. 12.2. Documents The data and documents Exhibit C, Part D provided by Boeing under Para. 2 the Agreement. Economic Price Article 3, Para. 3.1.5./ Article 3, Adjustment Para. /3.1.5/ /3.1.4/ Engine(s) The engines installed on Article 3, the Aircraft as described Para. 3.1.2 in the Detail Specification. Engine Price The price of the Engines Article 3, Para. installed on the Aircraft 3.1.3 set forth in Exhibit D, including all accessories, equipment and parts therefor provided by the Engine manufacturer. Engine Price The adjustment to the Article 3 Para. Adjustment Engine Price as required 3.1.2 by Article 3, Para. 3.1.2, and as calculated pursuant to Exhibit D. Excusable Delay A delay resulting from Article 6, Para. any of the causes 6.1 described in Article 6, Para. 6.1. FAA The Federal Aviation Article 8, Para. Administration of the 8.1.1 Department of Transportation of the United States, including the Administrator of the Federal Aviation Administration, the National Transportation Safety Board and any other authority or agency of the Federal Government of the United States having like jurisdiction. Failed Component A component as described Exhibit B Part C in Exhibit B, Part C, Para. 1.6 Para. 1.6.
P.A. No. 1910 F-3 K/TWA 112 DEFINED TERMS DOCUMENT EXHIBIT F TO AGREEMENT NO. 1910
TERM DEFINITION FIRST REFERENCE - ------------------------------------------------------------------------------------------------------------- Failure Any breakage or defect as Exhibit B Part C described in Exhibit B, Para. 1.5 Part C, Para. 5. Federal Aviation The United States Federal Article 8, Para. Regulations Aviation Regulations and, 8.1.1.1 if they are redesignated or discontinued, any comparable regulations or parts thereof issued by the FAA. Field Service(s) Boeing-provided services Exhibit C, Part B, as described in Exhibit Para. 2 C, Part B, Para. 2. Field Service The length of time Boeing Exhibit C, Part B, Period provides Field Service to Para. 2.1 Buyer as described in Exhibit C, Part B, Para. 2.1. Flight Training A planning conference as Exhibit C, Part C, Planning Conference described in Exhibit C, Para. 2 Part C, Para. 2. Flight Training The program of flight Exhibit C, Part C, Program training described in Para. 3 Exhibit C, Part C, Para. 3. Interface Problem A technical problem Exhibit B, Part G, attributed to the design Para. 1 characteristics of the Aircraft or its systems, as described in Exhibit B, Part G, Para. 1. Landing Gear A component as described Exhibit B Part C Component in Exhibit B, Part C, Para. 1.2 Para. 1.2. Maintenance A planning conference as Exhibit C, Part A, Training Planning described in Exhibit C, Para. 2 Conference Part A, Para. 2. Maintenance The program of training Exhibit C, Part A, Training Program described in Exhibit C, Para. 3 Part A, Para. 3. Major Damage Damage described in Exhibit C Part C Exhibit C, Part C, Para. 11.3 Para. 11.3 Manufacturer A change to the Aircraft Article 8, Para. Change(s) or performance required 8.2.1 of Boeing as described in Article 8, Para. 8.2.1.
P.A. No. 1910 F-4 K/TWA 113 DEFINED TERMS DOCUMENT EXHIBIT F TO AGREEMENT TO 1910
TERM DEFINITION FIRST REFERENCE - ------------------------------------------------------------------------------------------------------------- Operator Change(s) A change to the Aircraft Article 8, Para. described in Article 8, 8.3.1 Para. 8.3.1. Performance The written guarantees Article 1, Para. Guarantees regarding the operational 1.3 performance of the Aircraft set forth in the Agreement or the Detail Specification. Policy (Boeing Exhibit B, Part C, Para. 2. Exhibit B, Part C, Service Life Policy) Article 3, Para. 3.1.7. Para. 2 Price First Article 3, Published Para. 3.1.7 Product Assurance Exhibit B of the Article 12, Para. Document Agreement. 12.1 Revenue Service Flight Training conducted Exhibit C, Part C, Training on the Aircraft during Para. 8 revenue service with cargo and/or passengers on board, as described in Exhibit C, Part C, Para. 8. Software A listing of components Exhibit C, Part D, Documentation and equipment referred to Para. 3.3.6 in Exhibit C, Part D, Para. 3.3.6. Spare Component A component as described Exhibit B Part C in Exhibit B, Part C, Para. 1.3 Para. 1.3. Special Features Article 3, Para. 3.1.1. Article 3, Para. 3.1.1 Standard A certificate issued by Article 8, Para. Airworthiness the FAA, pursuant to Part 8.1.1.2 Certificate 21 of the Federal Aviation Regulations as described in Article 8, Para. 8.1.1.2. Target Delivery A non binding estimated Article 2, Date delivery date provided Para. 2.2 for Buyer's planning purposes, described in Article 2. Taxes The term "Taxes" defined Article 2, Para. in Article 4, Para. 4.1. 2.3
P.A. No. 1910 F-5 K/TWA 114 DEFINED TERMS DOCUMENT EXHIBIT F TO AGREEMENT NO. 1910
TERM DEFINITION FIRST REFERENCE - ------------------------------------------------------------------------------------------------------------- Type Certificate A certificate issued by Article 8, the FAA pursuant to Part Para. 8.1.1.1 21 of the Federal Aviation Regulations described in Article 8, Para. 8.1.1.1. Warranty Labor Rate The hourly labor rate Exhibit B, Part B, defined in Exhibit B, Para. 5.3 Part B, Para. 5.3.
P.A. No. 1910 F-6 K/TWA 115 1910-1 Trans World Airlines, Inc. One City Centre 515 N. Sixth Street 19th Floor St. Louis, Missouri 63101 Subject: Letter Agreement No. 1910-1 to Purchase Agreement No. 1910- Seller Purchased Equipment This Letter Agreement amends Purchase Agreement No. 1910 dated of even date herewith (the Agreement) between The Boeing Company (Boeing) and Trans World Airlines, Inc. (Buyer) relating to Model 757-231 aircraft (the Aircraft). For purposes of this Letter Agreement the following definitions apply: Seller Purchased Equipment (SPE) is Buyer Furnished Equipment (BFE) that Boeing purchases for Buyer. Developmental Buyer Furnished Equipment (DBFE) is all BFE not previously certified for installation on the same model aircraft. Developmental Seller Purchased Equipment (DSPE) is DBFE which is converted to SPE. This Letter Agreement does not include developmental avionics. Developmental avionics are avionics that have not been previously certified for installation on the same model aircraft. All other terms used herein and in the Agreement, and not defined above, will have the same meaning as in the Agreement. Buyer may request that Boeing purchase as SPE the BFE which has been changed to SPE by Change Request. In such event, Boeing and Buyer agree as follows: 116 1910-1 Page 2 1. Price. Aircraft Price. The Aircraft Price will be adjusted to reflect (i) the actual costs charged Boeing by the SPE suppliers, (ii) a handling fee of 10% of such costs and (iii) transportation charges. If all DBFE, except for developmental avionics, is converted to SPE, Boeing will waive the handling fee for all SPE. 2. Responsibilities. 2.1 Buyer is responsible for: (i) selecting a FAA certifiable part; and (ii) providing to Boeing the SPE part specification/Buyer requirements. 2.2. Boeing is responsible for: (i) placing and managing the purchase order with the supplier; (ii) coordinating with the suppliers on technical issues; (iii) ensuring that the delivered SPE complies with the part specification; (iv) obtaining certification of the Aircraft with the SPE installed; and (v) obtaining for Buyer the supplier's standard warranty for the SPE. SPE is deemed to be BFE for purposes of Exhibit B, the Product Assurance Document, of the Agreement. 3. Changes. After this Letter Agreement is signed, changes to SPE may only be made by and between Boeing and the suppliers. Buyer's contacts with SPE suppliers relating to design (including selection of materials 117 1910-1 Page 3 and colors), weights, prices or schedules are for informational purposes only. If Buyer wants changes made to any of the above, requests must be made directly to Boeing for negotiating with the supplier. 4. Proprietary Rights. Boeing's obligation to purchase SPE will not impose upon Boeing any obligation to compensate Buyer or any supplier for any proprietary rights Buyer may have in the design of the SPE. 5. Remedies. If Buyer does not comply with the obligations above, Boeing may: (i) delay delivery of the Aircraft; (ii) deliver the Aircraft without installing the SPE; (iii) substitute a comparable part and invoice Buyer for the cost; (iv) increase the Aircraft Price by the amount of Boeing's additional costs attributable to such noncompliance. 6. Buyer's Indemnification of Boeing. Buyer will indemnify and hold harmless Boeing from and against all claims and liabilities, including costs and expenses (including attorneys' fees) incident thereto or incident to successfully establishing the right to indemnification, for injury to or death of any person or persons, including employees of Buyer but not employees of Boeing, or for loss of or damage to any property, including Aircraft, arising out of or in any way connected with any non conformance or defect in any SPE and whether or not arising in tort or occasioned in whole or in part by the negligence of Boeing, whether active, passive or imputed. This indemnity will not 118 1910-1 Page 4 apply with respect to any non conformance or defect caused solely by Boeing's installation of the SPE. Very truly yours, THE BOEING COMPANY By --------------------- Its Attorney-In-Fact --------------------- ACCEPTED AND AGREED TO as of this Date: , 1996 --------------- TRANS WORLD AIRLINES, INC. By --------------------- Its --------------------- 119 1910-2 Trans World Airlines, Inc. One City Centre 515 N. Sixth Street 19th Floor St. Louis, Missouri 63101 Subject: Letter Agreement No. 1910-2 to Purchase Agreement No. 1910- Spares Initial Provisioning This Letter Agreement amends Purchase Agreement No. 1910 dated of even date herewith (the Agreement) between The Boeing Company (Boeing) and Trans World Airlines, Inc. (Buyer) relating to Model 757-231 aircraft. Reference is also made to Purchase Agreement No. 1771, dated December 15, 1992, between The Boeing Company (Boeing) and International Lease Finance Corporation (Lessor) under which Lessor purchased Boeing Model 757-200 aircraft, including aircraft leased to Buyer. Reference is also made to that certain Aircraft Lease Agreement between Buyer and Lessor, under which Lessor agreed to lease the aircraft to Buyer. The aircraft purchased direct from Boeing by Buyer and the aircraft leased by Buyer from Lessor are collectively referred to as the Aircraft (the Aircraft). All terms used herein and in the Purchase Agreement, and not defined herein, will have the same meaning as in the Agreement. 1. Applicability. This letter will apply to initial provisioning for the 757-200 Aircraft covered by the Agreement and under lease by Buyer from Lessor. 2. Initial Provisioning Meeting. Boeing will conduct an initial provisioning meeting (Initial Provisioning Meeting) with Buyer to establish mutually agreeable procedures to accomplish Buyer's initial provisioning of spare parts for the Aircraft. The parties will agree, during the Initial 120 1910-2 Page 2 Provisioning Meeting on the operational data to be provided by Buyer for Boeing's use in preparing its quantity recommendations for initial provisioning of spare parts for the Aircraft, exclusive of special tools, ground support equipment, engines and engine parts (Provisioning Items). Such operational data to be provided by Buyer will be the data described in Section E of Boeing Manual D6-49090, entitled "Initial Provisioning Implementation Manual, Boeing Model 757, 767, 777, 747-400 and 737-300, -400 and - 500" (Boeing Initial Provisioning Implementation Manual) which will be furnished to Buyer prior to the Initial Provisioning Meeting. The parties will also agree on the provisioning documentation to be provided by Boeing. Such data will be essentially in accordance with the provisions of Chapter 1 of ATA International Specification 2000, Revision 1, dated April 20, 1989, as described in Boeing Initial Provisioning Implementation Manual D6-49090 (such data will be hereinafter referred to collectively as the "Provisioning Data"). Boeing will provide instruction in the use of the initial provisioning documentation. This instruction will be provided in conjunction with the Initial Provisioning Meeting. In addition, the parties will discuss spares ordering procedures and other matters related to the provisioning for the Aircraft. The time and location for such Initial Provisioning Meeting will be mutually agreed upon between the parties; however, Boeing and Buyer will use their best efforts to convene such meeting within 30 days after execution of the Agreement. 3. Initial Provisioning Documentation. 3.1 Provisioning Data. Boeing will furnish Provisioning Data to Buyer on or about March 1, 1996. The Provisioning Data will be as complete as possible and will cover Provisioning Items selected by Boeing for review by Buyer for initial provisioning for the Aircraft. The Provisioning Data will set forth the prices for Provisioning Items which are Boeing Spare Parts and such prices will be firm and remain in effect until the date or dates set forth in Paragraph 4.1, Boeing Spare Parts, by which orders must be placed with Boeing. Boeing will, from time to time, until a date approximately 90 days following delivery of the last Aircraft or until the delivery configuration of each of the Aircraft is reflected in the Provisioning Data, whichever is later, furnish to Buyer revisions to the Provisioning Data. 3.2 Provisioning IPC. Boeing will, on or about April 28, 1996, furnish to Buyer a Boeing Illustrated Parts Catalog (IPC), hereinafter referred to as the "Provisioning IPC." The Provisioning IPC 121 1910-2 Page 3 will be as complete as possible and will cover Provisioning Items selected by Boeing for review by Buyer for initial provisioning for the Aircraft. Boeing will, from time to time, until a date approximately 90 days following delivery of the last Aircraft, or until the delivery configuration of each of the Aircraft is reflected in the Provisioning IPC, whichever is later, furnish to Buyer revisions to the Provisioning IPC. 3.3 Buyer Furnished Equipment (BFE) Provisioning Data. 3.3.1 Boeing's Responsibility. Boeing will include BFE end items in the Provisioning Data and Provisioning IPC for BFE installed on Buyer's Aircraft provided such equipment has been installed on other Aircraft by Boeing and Boeing has data on the BFE. 3.3.2 Buyer's Responsibility. Buyer will be responsible for ensuring BFE data is provided to Boeing by the BFE supplier in a format acceptable to Boeing for BFE not covered by 3.3.1 above. If the data is not provided to Boeing in a timely manner and in a format acceptable to Boeing, such BFE equipment will not be included in Boeing's Provisioning Data or IPC. 3.4 Other Data. Boeing will submit to Buyer listings of Raw Materials, Standard Parts and Bulk Materials to be used by Buyer in the maintenance and repair of the Aircraft. 4. Purchase from Boeing of Spare Parts as Initial Provisioning for the Aircraft. 4.1 Boeing Spare Parts. Buyer will place orders, as required, for Provisioning Items by May 15, 1996; provided, however, that in those instances where Boeing submits any revision to the Provisioning Data, Buyer will place orders for Boeing Spare Parts covered by such revision within 60 days following the date of such submittal. At Buyer's request, Boeing will process "controlled shipments" by shipping full or partial quantities of an order on a schedule specified by Buyer, provided the final shipment is made no later than 24 months after receipt of the order. 4.2 Vendor Provisioning Items. Buyer may place orders with Boeing for Provisioning Items which are manufactured by vendors or to their detailed design and are covered by the Provisioning Data as initial provisioning for the Aircraft. The price to Buyer for any such vendor Provisioning Item will be 112% of the vendor's quoted price to Boeing therefor. If Buyer elects to purchase such vendor Provisioning Items from 122 1910-2 Page 4 Boeing, Buyer will place its orders therefor in accordance with the provisions of Paragraph 4.1, Boeing Spare Parts. 4.3 Ground Support Equipment and Special Tools. Buyer may place orders with Boeing for ground support equipment (GSE) and special tools manufactured by vendors which Buyer determines it will initially require for maintenance, overhaul and servicing of the Aircraft and/or engines. The price to Buyer for such GSE or special tools will be one hundred twelve percent (112%) of the vendor's quoted price to Boeing therefor. If Buyer elects to purchase such GSE and special tools from Boeing, Buyer will place its orders therefor by the date set forth in Paragraph 4.1, Boeing Spare Parts or such later date as the parties may mutually agree. 4.4 Spare Engines and Engine Spare Parts. Buyer may place orders with Boeing for spare engines and/or engine spare parts which Buyer determines it will initially require for support of the Aircraft or for maintenance and overhaul of the engines. The price to Buyer for such spare engines or such engine spare parts, will be 105% of the engine manufacturer's quoted price to Boeing for the engine, and 112% of the engine manufacturer's quoted price to Boeing for the engine spare parts. If Buyer elects to purchase such spare engines or engine spare parts through Boeing, Buyer will place its orders on a date to be mutually agreed upon during the Initial Provisioning Meeting. 4.5 QEC Kits. Boeing will, on or about March 15, 1996, furnish to Buyer a listing of all components which could be included in the Quick Engine Change (QEC) kits which may be purchased by Buyer from Boeing. Buyer agrees to review such listing and indicate by marking on one copy of such listing those components that Buyer desires included in its QEC kits. Buyer will return such marked copy to Boeing within 30 days after Buyer's receipt of such listing. Within 30 days after Boeing's receipt of such marked copy, Boeing will republish such listing to reflect only those components selected by Buyer and will provide copies of such republished listing to Buyer. Boeing will from time to time furnish revisions to such republished listing until a date approximately 90 days after delivery of the last QEC kit ordered by Buyer for the Aircraft. Boeing will furnish to Buyer as soon as practicable a statement setting forth a firm price for the QEC kit configuration selected by Buyer. Buyer agrees to place orders with Boeing for QEC kits by a minimum of sixty days prior to the date the QEC kits are required on dock by Buyer. 4.6 Payment for Provisioning Items. The 123 1910-2 Page 5 payment provisions of the General Terms Agreement between Boeing and Buyer will be applicable to Provisioning Items ordered by Buyer from Boeing for the Aircraft. 5. Delivery. Boeing will, insofar as reasonably possible, deliver to Buyer the Spare Parts ordered by Buyer in accordance with the provisions of this letter on dates reasonably calculated to conform to Buyer's anticipated needs in view of the scheduled deliveries of the Aircraft. Buyer and Boeing will agree upon the date to begin delivery of the Provisioning Spare Parts ordered in accordance with this letter. Where appropriate, Boeing will arrange for shipment of such Spare Parts, which are manufactured by vendors, directly to Buyer from the applicable vendor's facility. The routing and method of shipment for initial deliveries and all subsequent deliveries of such Spare Parts will be as mutually agreed between Boeing and Buyer. 6. Substitution for Obsolete Spare Parts. 6.1 Obligation to Substitute. In the event that, prior to delivery of the first Aircraft pursuant to the Agreement, any Spare Part purchased by Buyer from Boeing in accordance with this letter is rendered obsolete or unusable due to the redesign of the Aircraft or of any accessory, equipment or part therefor, (other than a redesign at Buyer's request), Boeing will deliver to Buyer new and usable Spare Parts in substitution for such obsolete or unusable Spare Parts and Buyer will return the obsolete or unusable Spare Parts to Boeing. Boeing will credit Buyer's account with Boeing with the price paid by Buyer for any such obsolete or unusable Spare Part and will invoice Buyer for the purchase price of any such substitute Spare Part delivered to Buyer. 6.2 Delivery of Obsolete Spare Parts and Substitutes Therefor. Obsolete or unusable Spare Parts returned by Buyer pursuant to this Item will be delivered to Boeing at its Seattle Distribution Center, or such other destination as Boeing may reasonably designate. Spare Parts substituted for such returned obsolete or unusable Spare Parts will be delivered to Buyer at Boeing's Seattle Distribution Center, or such other Boeing shipping point as Boeing may reasonably designate. Boeing will pay the freight charges for the shipment from Buyer to Boeing of any such obsolete or unusable Spare Part and for the shipment from Boeing to Buyer of any such substitute Spare Part. 7. Repurchase of Provisioning Items. 124 1910-2 Page 6 7.1 Obligation to Repurchase. During a period commencing 1 year after delivery of the first Aircraft under the Agreement, and ending 5 years after such delivery, Boeing will, upon receipt of Buyer's written request and subject to the exceptions in Paragraph 7.2, Exceptions, repurchase unused and undamaged Provisioning Items which (i) were recommended by Boeing in the Provisioning Data as initial provisioning for the Aircraft, (ii) were purchased by Buyer from Boeing, and (iii) are surplus to Buyer's needs. 7.2 Exceptions. Boeing will not be obligated under Paragraph 7.1, Obligation to Repurchase, to repurchase any of the following: (i) quantities of Provisioning Items in excess of those quantities recommended by Boeing in the Provisioning Data for the Aircraft, (ii) QEC Kits, Bulk Material Kits, Raw Material Kits, Service Bulletin Kits, Standards Kits and components thereof (except those components listed separately in the Provisioning Data), (iii) Provisioning Items for which an Order was received by Boeing more than 5 months after delivery of the last Aircraft, (iv) Provisioning Items which have become obsolete or have been replaced by other Provisioning Items as a result of (a) Buyer's modification of the Aircraft or (b) design improvements by Boeing or the vendor (other than Provisioning Items which have become obsolete because of a defect in design if such defect has not been remedied by an offer by Boeing or the vendor to provide no charge retrofit kits or replacement parts which correct such defect), and (v) Provisioning Items which become excess as a result of a change in Buyer's operating parameters, provided to Boeing pursuant to the Initial Provisioning meeting in Paragraph 2, which were the basis of Boeing's initial provisioning recommendations for the Aircraft. 7.3 Notification and Format. Buyer will notify Boeing, in writing, when Buyer desires to return Provisioning Items which Buyer's review indicates are eligible for repurchase by Boeing under the provisions of this Repurchase of Provisioning Items paragraph. Buyer's notification will include a detailed summary, in part number sequence, of the Provisioning Items Buyer desires to return. Such summary will be in the form of listings, tapes, diskettes or other media as may be mutually agreed between Boeing and Buyer, and will include part number, nomenclature, purchase order number, purchase order date and quantity to be returned. Within 5 business days after receipt of Buyer's notification, Boeing will advise Buyer, in writing, when Boeing's review of such summary will be completed. 125 1910-2 Page 7 7.4 Review and Acceptance by Boeing. Upon completion of Boeing's review of any detailed summary submitted by Buyer pursuant to Paragraph 7.3, Boeing will issue to Buyer a Material Return Authorization (MRA) for those Provisioning Items Boeing agrees are eligible for repurchase in accordance with this Repurchase of Provisioning Items paragraph. Boeing will advise Buyer of the reason that any spare part included in Buyer's detailed summary is not eligible for return. Boeing's MRA will state the date by which Provisioning Items listed in the MRA must be redelivered to Boeing and Buyer will arrange for shipment of such Provisioning Items accordingly. 7.5 Price and Payment. The price of each Provisioning Item repurchased by Boeing pursuant to this Repurchase of Provisioning Items paragraph will be an amount equal to 100% of the original invoice price thereof. In the case of Provisioning Items manufactured by a vendor which were purchased pursuant to Paragraph 4, Purchase from Boeing of Spare Parts as Initial Provisioning for the Aircraft, hereof the repurchase price will not include Boeing's 12% handling charge. Boeing will pay the repurchase price by issuing a credit memorandum in favor of Buyer which may be applied against amounts due Boeing for the purchase of aircraft, Spare Parts, services or data. 7.6 Delivery of Provisioning Items. Provisioning Items repurchased by Boeing pursuant to this Repurchase of Provisioning Items paragraph will be delivered to Boeing F.O.B. at its Seattle Distribution Center, or such other destination as Boeing may reasonably designate. Buyer will pay the freight charges for the shipment from Buyer to Boeing of any such Provisioning Items. 8. Obsolete Spare Parts and Surplus Provisioning Items - Title and Risk of Loss. Title to and risk of loss of any obsolete or unusable Spare Parts returned to Boeing pursuant to Paragraph 6, Substitution for Obsolete Spare Parts, will pass to Boeing upon delivery thereof to Boeing. Title to and risk of loss of any Spare Part substituted for an obsolete or unusable Spare Part pursuant to Paragraph 6, Substitution for Obsolete Spare Parts, will pass to Buyer upon delivery thereof to Buyer. Title to and risk of loss of any Provisioning Item repurchased by Boeing pursuant to Paragraph 7, Repurchase of Provisioning Items, will pass to Boeing upon delivery thereof to Boeing. With respect to the obsolete or unusable Spare Parts which may be returned to Boeing and the Spare Parts substituted therefore, pursuant to Paragraph 6, and the Provisioning Items 126 1910-2 Page 8 which may be repurchased by Boeing, pursuant to Paragraph 7, the party which has risk of loss of any such Spare Part or Provisioning Item will have the responsibility of providing any insurance coverage for it desired by such party. 9. Supplier Support. Boeing has entered, or anticipates entering, into product support agreements with suppliers (Boeing Suppliers) of major system components manufactured by such Suppliers to be installed on the Aircraft (Supplier Components). Such product support agreements commit, or are expected to commit, the Boeing Suppliers to provide to Boeing's Buyers and/or the Buyer's designees support services with respect to the Supplier Components which can be reasonably expected to be required during the course of normal operation. This support includes but is not limited to shelf-stock of certain spare parts, emergency spare parts, timely delivery of spare parts, and technical data related to the Supplier Components. Copies of such product support agreements will be provided to Buyer on or about March 1, 1996, in Boeing Document D6-56115, Volumes 1 and 2. In the event Buyer has used due diligence in attempting to resolve any difficulty arising in normal business transactions between Buyer and a Boeing Supplier with respect to product support for a Supplier Component manufactured by such Supplier and if such difficulty remains unresolved, Boeing will, if requested by Buyer, assist Buyer in resolving such difficulty. Assistance will be provided by the Spares Supplier Support and Data Management Organization within the Boeing Buyer Services Division. In the event of termination of the Agreement with respect to any Aircraft (i) pursuant to Article 6.2 of the Agreement, or (ii) pursuant to Article 6.3 of the Agreement such termination will, if Buyer so requests by written notice received by Boeing within 15 days after such termination, also discharge and terminate all obligations and liabilities of the parties as to any 127 1910-2 Page 9 Spare Parts which Buyer had ordered pursuant to the Provisions of this letter as initial provisioning for such Aircraft and which are undelivered on the date Boeing receives such written notice. Very truly yours, THE BOEING COMPANY By ----------------------------------- Its Attorney-In-Fact ----------------------------------- ACCEPTED AND AGREED TO this Date: , 1996 ------------------ TRANS WORLD AIRLINES, INC. By ----------------------------------- Its ----------------------------------- EX-10.49 6 EXHIBIT 10.49 1 EMPLOYEE STOCK INCENTIVE PROGRAM This EMPLOYEE STOCK INCENTIVE PROGRAM adopted as of August 23, 1995 (the "Program"), by Trans World Airlines, Inc., a Delaware corporation ("TWA" or the "Company"): W I T N E S S E T H: WHEREAS, TWA is effecting a financial restructuring (the "Restructuring") which includes a recapitalization of the Company through a prepackaged plan of reorganization (the "Prepackaged Plan") pursuant to Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"), all as more fully described in the Prospectus (as defined below); and WHEREAS, in connection with its restructuring, TWA entered into labor agreements in the third quarter of 1994 (the "'94 Labor Agreements") with the International Association of Machinists and Aerospace Workers ("IAM"), the Air Line Pilots Association, International ("ALPA"), the Transport Workers Union of America ("TWUA") and the Independent Federation of Flight Attendants ("IFFA") (collectively, the "Unions") which amended the terms of the existing labor agreements with such Unions and provided for, among other things, the issuance of Employee Preferred Stock (as defined below) to TWA's employees represented by the IAM, ALPA and IFFA and TWA common stock, par value $.01 per share ("Common Stock"), to TWA's non-union employees and employees represented by the TWUA; and WHEREAS, the purpose of the Program is to provide a mechanism whereby aggregate ownership of Common Stock and Employee Preferred Stock may be acquired by the employees of TWA in excess of the Base Ownership Percentage (as defined below); and WHEREAS, TWA, in its capacity as the representative of its domestic employees not represented by a union, has, and each of the Unions have, established one or more trusts (the "Employee Trusts") to hold on behalf of Employees (as defined below) any TWA securities to be granted pursuant to the Program and/or previously granted to Employees and former Employees under the '93 Plan (as defined below); and WHEREAS, the respective trustees of the Employee Trusts (the "Trustees") or the Stock Purchase Trustee (as defined below) will exercise on behalf of Employees any and all rights to purchase Common Stock and Employee Preferred Stock pursuant to the Program; NOW, THEREFORE, TWA hereby adopts the Program upon the following terms and conditions: Section 2 1. DEFINED TERMS. As used in this document, the following terms shall have the meanings specified below: "Actual Average Trading Value" shall mean for the First Value Determination Date and the Second Value Determination Date, respectively, the average Fair Market Value of the Common Stock for the twenty consecutive trading days prior to the First Value Determination Date and the Second Value Determination Date, respectively. "Adjusted Base Ownership Percentage" shall mean the Adjusted Maximum Percentage minus eight percentage points plus the percentage of Voting Equity represented by the number of Incentive Shares theretofore issued. "Adjusted Maximum Percentage" shall mean that Ownership Percentage determined based upon the aggregate gross proceeds to TWA from one or more Future Restructurings and/or the sales price to TWA Stockholders in the event of one or more M&A Events, by referring to the table below and interpolating between points on such table (e.g., if proceeds from additional shares issued are $100 million, the Adjusted Maximum Percentage shall be 34.0% if an M&A Event has not occurred or occurs at a Sale Price of at least $17.72, and a minimum of 32.5% if the Sale Price is below $11.00): DETERMINATION OF ADJUSTED MAXIMUM PERCENTAGE
Sale $0 $50MM $100MM $150MM $200MM - ---- -- ----- ------ ------ ------ Price - ----- No M&A Event 38.00% 36.00% 34.00% 32.00% 30.00% $17.72 or above 38.00% 36.00% 34.00% 32.00% 30.00% $16.11 37.40% 35.55% 33.70% 31.85% 30.00% $14.64 36.80% 35.10% 33.40% 31.70% 30.00% $13.31 36.20% 34.65% 33.10% 31.55% 30.00% $12.10 35.60% 34.20% 32.80% 31.40% 30.00% $11.00 or below 35.00% 33.75% 32.50% 31.25% 30.00%
; provided, however, the Adjusted Maximum Percentage shall be adjusted proportionately to the extent the Ownership Percentage following the Restructuring does not equal thirty percent (30%) (i) downward, if Employees or Trustees fail to exercise their ratable share of all Equity Rights allocated to them in connection with the Restructuring and (ii) upward, if Employees or Trustees exercise greater than their ratable share of all Equity Rights allocated to them in connection with the Restructuring. 2 3 "Allocable Group Percentage" shall mean 51.1811% in respect of the IAM represented Employees, 23.0596% in respect of the ALPA represented Employees, 11.8110% in respect of the IFFA represented Employees and 13.9483% in the respect of the non-contract and TWUA represented Employees. "ALPA" shall mean the Air Line Pilots Association, International. "Bankruptcy Code" shall have the meaning given that term in the recitals hereto. "Base Ownership Percentage" shall be an Ownership Percentage following the Restructuring equal to thirty percent (30%), including, for the purpose of calculating such percentage, shares of Common Stock issuable as Conditional Consideration but excluding shares of Common Stock issuable (i) upon the exercise of Warrants and (ii) in lieu of Warrants or Equity Rights; provided, however, that such percentage shall be adjusted upward or downward proportionately to the extent the Ownership Percentage following the Restructuring does not equal thirty percent (30%) by reason of the Employees and/or Trustees exercising more or less than their ratable share of Equity Rights allocated to them in connection with the Restructuring. "Common Stock" shall have the meaning given that term in the recitals hereto. "Conditional Consideration" shall mean the Common Stock and Series A Warrants issued or to be issued in respect of the First Value Determination Date and/or Second Value Determination Date, as appropriate, to the holders of the 10% Senior Secured Notes due 1998 and the holders of the 8% Senior Secured Notes due 2000 in connection with the Restructuring. "Defeasance Date" shall mean any date in a calendar year, on or prior to the Issuance Date occurring in such year, upon which TWA pays to Employees the amount determined in accordance with Section 6 hereof to defease its obligation to issue certain unearned Incentive Shares. "Effective Date" shall mean the effective date of the Restructuring as provided in the Prepackaged Plan. "Employee Group" shall mean, respectively, (i) the employees represented by the IAM, (ii) the employees represented by ALPA, (iii) the employees represented by IFFA and (iv) the non-contract employees and employees represented by the TWUA. "Employee Preferred Stock" shall mean TWA's three series of preferred stock, par value $.01 per share, designated ALPA Preferred Stock, IAM Preferred Stock and IFFA Preferred Stock. 3 4 "Employee Trusts" shall have the meaning given that term in the recitals hereto. "Employees" shall mean TWA's United States domestic employees. "Equity Rights" shall mean those rights to be issued in connection with the Restructuring entitling the holders thereof to purchase shares of Common Stock during the twenty-one (21) day period commencing twenty-three (23) days after the Effective Date. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Fair Market Value" shall mean (i) the closing sale price of the Common Stock on the applicable day(s) on the American Stock Exchange or another principal national securities exchange, or the National Association of Securities Dealers' Automated Quotation National Market ("NASDAQ National Market"), whichever is the principal market on which the Common Stock is then listed or admitted to trading, (ii) if no sale takes place on such day(s) on such exchange or the NASDAQ National Market the highest reported closing bid price on such day(s) as officially quoted on such exchange or the NASDAQ National Market, as the case may be, (iii) if the Common Stock is not then listed or admitted to trading on any such securities exchange or the NASDAQ National Market, as the case may be, the highest reported closing bid on such day(s) in the over-the-counter market as furnished by the NASDAQ system, (iv) if such corporation at the time is not engaged in the business of reporting such prices, such price as furnished by any similar firm then engaged in such business, or (v) if there is no such firm, such price as furnished by any nationally recognized member of the NASD selected by TWA which is independent of the Company. "Fair Market Value" shall mean the referenced prices of the Common Stock on a "regular way" basis, i.e., priced exclusive of dividends. "Fill-Up Prices" shall mean the Actual Average Trading Value of the Common Stock as of (i) the First Value Determination Date and (ii) the Second Value Determination Date. "First Value Determination Date" shall mean the date ninety (90) days after the Effective Date. "Future Restructuring" shall mean the issuance by the Company after the Effective Date of Common Stock other than Common Stock issued (i) in connection with the Restructuring, including without limitation, as Conditional Consideration, (ii) in satisfaction of any dividend, interest or other cash payment obligations with respect to securities issued in connection with the Restructuring, (iii) hereunder or under any other employee, officer or director stock option, stock grant or employee benefit plan or (iv) in connection with any M&A Event. 4 5 "Grant" shall mean each Grant of Common Stock and/or Employee Preferred Stock to be made pursuant to Section 4 hereof. "IAM" shall mean the International Association of Machinists and Aerospace Workers. "IFFA" shall mean the Independent Federation of Flight Attendants. "Incentive Shares" shall mean the shares of Voting Equity scheduled to be issued on each Issuance Date. "Issuance Date(s)" shall mean July 15 of each of the years 1997 through 2002. "Market Price" as of any given date shall mean the average Fair Market Value of the Common Stock for the thirty (30) consecutive trading days preceding such date. "Measurement Period" shall mean the period from January 1 of each year in which a Grant is scheduled to be made through the business day immediately preceding the Issuance Date falling within such year. "M&A Event" shall mean a merger into, or consolidation of TWA with, or a sale of all or substantially all the assets of TWA to, any other person, where or in which, TWA is not the surviving entity. "Surviving entity" is the entity that after the M&A Event owns all or substantially all the assets of TWA, whether directly or indirectly through one or more wholly-owned subsidiaries. "M&A Maximum Percentage" shall mean the Base Ownership Percentage plus five (5) percentage points. "'93 Plan" shall mean the Company's Second Amended Plan of Reorganization, dated as of May 28, 1993, and confirmed by the United States Bankruptcy Court for the District of Delaware on August 12, 1993. "'94 Labor Agreements" shall have the meaning given that term in the recitals hereto. "Ownership Percentage" shall mean the aggregate level of ownership (of record or beneficially through an Employee Trust, directly or otherwise) of Voting Equity of Employees and former Employees acquired under or in connection with the Program, the '93 Plan, the Restructuring or any existing collective bargaining agreement, at any given time, expressed as a percentage of all issued and outstanding Voting Equity, such percentage to be computed without reduction for or on account of any sales or other dispositions by or on behalf of Employees, former Employees or the Trustees after the Effective Date; provided, however, "Ownership 5 6 Percentage" shall not include ownership of any securities issued by reason of any Employee's or former Employee's ownership of 8% Senior Secured Notes due 2000 or shares of 12% preferred stock of the Company issued under the '93 Plan. "Prepackaged Plan" shall have the meaning given that term in the recitals hereto. "Program" shall mean this Employee Stock Incentive Program. "Prospectus" shall mean the Proxy Statement/Prospectus, Solicitation of Proxies, Offers to Exchange, Offering of Common Stock and Employee Preferred Stock, Solicitation of Consents, Solicitation of Acceptances of Prepackaged Plan of Reorganization and Solicitation of Consents to Amendment Related to Prepackaged Plan of Reorganization which forms a part of the Registration Statement. "Registration Statement" shall mean, collectively, TWA's Registration Statements on Form S-4 (Registration Nos. 33-84944 and 33-89764), as amended. "Restructuring" shall have the meaning given that term in the recitals hereto. "Sale Price" shall mean the fair market value of the consideration received per share of Common Stock by each holder thereof in any M&A Event. "Second Value Determination Date" shall mean the date one hundred and twenty (120) days after the Effective Date, subject to the right of the holders of the 8% Senior Secured Notes due 2000 to accelerate or defer such date, in certain circumstances. "Stock Purchase Shares" shall mean those shares of Voting Equity subject to the stock purchase right referred to in Section 8 hereof. "Stock Purchase Trustee" shall mean the trustee of a trust to be created pursuant to Section 8 hereof on behalf of Employees which trust is not covered by ERISA and shall not be prohibited by law from holding or exercising on behalf of the Employees the stock purchase rights referred to in Section 8 hereof. "Target Price" shall mean each price set forth in Section 4 hereof, which price the Market Price must equal or exceed in the applicable Measurement Period before the Grant scheduled to be made in the year set forth opposite such price may be made. "Term" shall have the meaning specified in Section 11. 6 7 "Third Parties" shall mean third parties unaffiliated with TWA and shall exclude, without limitation, Employees, the Trustees, the Employee Trusts, the Stock Purchase Trustee, the Unions and any subsidiary of TWA. "Trustees" shall have the meaning given that term in the recitals hereto. "TWA" or the "Company" shall mean Trans World Airlines, Inc., a Delaware corporation. "Unions" shall have the meaning given that term in the recitals hereto. "Voting Equity" shall mean Common Stock and Employee Preferred Stock, collectively. "Warrants" shall mean the warrants to purchase shares of Common Stock at an exercise price of $14.40 per share to be distributed in connection with the Restructuring. Section 2. PROGRAM. Subject to confirmation and effectiveness of the Prepackaged Plan, TWA hereby adopts and establishes the Program in accordance with the provisions hereof. Section 3. DISTRIBUTION IN CONNECTION WITH '94 LABOR AGREEMENTS. On The Effective Date, or as soon thereafter as practicable, TWA shall distribute the Voting Equity contemplated to be so distributed on such date under the '94 Labor Agreements and the Prepackaged Plan, including a corresponding distribution for TWA's non-union Employees and Employees represented by the TWUA, in each case to the requisite Employee Trust (or in certain cases with respect to Equity Rights directly to the Employees) and in the Allocable Group Percentages. In accordance with and subject to the provisions of the Prepackaged Plan and this Program, the Voting Equity so distributed (i) on the Effective Date, and (ii) after distribution of all Common Stock, if any, issued as Conditional Consideration on the First Value Determination Date and the Second Value Determination Date, shall be sufficient to result in an Ownership Percentage equal to the Base Ownership Percentage. Section 4. GRANTS. If with respect to any year set forth below, the Market Price equals or exceeds the Target Price set forth opposite such year at any time during the Measurement Period for such year, TWA shall issue, on the Issuance Date for such year, to the Employee Trusts, in accordance with the Allocable Group 7 8 Percentage applicable to such Trusts, for the benefit of Employees an aggregate number of Incentive Shares sufficient to increase the Ownership Percentage as of the applicable Issuance Date by the percentage set forth below opposite such year:
Incremental % of Target Number of Year Voting Equity Price Shares(1) ---- ------------- ----- --------- 1997 2.0% $11.00 1,470,588 1998 1.5% $12.10 1,160,991 1999 1.5% $13.31 1,214,575 2000 1.0% $14.64 841,346 2001 1.0% $16.11 868,056 2002 1.0% $17.72 896,057
- ---------------- (1) These share numbers are included herein for illustrative purposes only and are based on the issuance of an aggregate of fifty million shares of Voting Equity in connection with the Restructuring, including shares of Common Stock issuable as Conditional Consideration, and have not been adjusted for dilution. If on any Issuance Date TWA does not issue Incentive Shares because the applicable Target Price has not been met during the applicable Measurement Period, the Employees shall be deemed to have earned such shares at such future time during the Term, if any, as the Market Price equals or exceeds such Target Price, and such shares shall, in such event, be issued on the earlier of (i) the Issuance Date immediately following the achievement of the applicable Target Price or (ii) the business day immediately preceding an M&A Event. If shares of Common Stock are issued in a Future Restructuring, any additional Incentive Shares issuable hereunder as a result of such Future Restructuring(s) shall be issued only to the extent that the Ownership Percentage, after taking into account any shares of Voting Equity issued as a result of such Future Restructuring, is below the Adjusted Maximum Percentage. Section 5. ADJUSTMENT TO OWNERSHIP PERCENTAGE. If and to the extent, as a result of (i) a Future Restructuring or (ii) the issuance of new Common Stock in lieu of cash payment obligations on securities issued in connection with the Restructuring, the Ownership Percentage is reduced below the Adjusted Base Ownership Percentage, then the number of Incentive Shares to be issued in each of the years 1999 through 2002 shall be increased so 8 9 that each incremental percentage of Voting Equity outlined in the Table included in Section 4 hereof is increased by one-quarter of the difference between the new Ownership Percentage and the Adjusted Base Ownership Percentage but in no event (A) by more than one percentage point in each year or (B) shall the Ownership Percentage exceed the Adjusted Maximum Percentage. The withdrawal from any Employee Trust or any sale or other disposition of any shares of Voting Equity by any Employee or Trustee shall be disregarded and deemed not to have occurred for purposes of computing any percentage under Section 4 or otherwise hereunder. Section 6. DEFEASANCE OPTION. Other than in connection with an M&A Event, TWA shall have the right to defease its obligation to issue any unearned Incentive Shares by paying to the Employees, on any Defeasance Date an amount in immediately available funds equal to the product of (i) the number of Incentive Shares which TWA desires to defease and (ii) the greater of (A) the applicable Target Price(s) for the shares to be defeased and (B) eighty percent (80%) of the Market Price of such shares determined as of the Defeasance Date. Section 7. GRANT ADJUSTMENT UPON EQUITY OFFERING. If, in one or more public or private transactions, TWA issues shares of Common Stock at a price equal to or greater than $11.00 per share where the aggregate proceeds or debt reductions therefrom exceeds $20 million, then the Grants scheduled to be made in 2001 and 2002 shall be accelerated by aggregating such Grants and allocating the resulting aggregate equally to all then remaining Grants other than those which were scheduled to be made in 2001 and 2002. Section 8. STOCK PURCHASE RIGHT. Upon not less than 30 nor more than 45 days prior written notice to the Company, (i) at any time during the Term after July 15, 1997 or (ii) upon the consummation during the Term of an M&A Event with a Sale Price of more than $17.72, the Stock Purchase Trustee on behalf of the Employees will have the right exercisable quarterly by notice in writing to TWA, accompanied by the necessary immediately available funds given to purchase from TWA for cash a number of additional shares of Voting Equity up to an aggregate as to all such quarterly purchases of 2% of the Voting Equity then outstanding (the "Stock Purchase Shares") at a price per share equal to eighty percent (80%) of (A) the Market Price determined as of such date or (B) the Sale Price, as the case may be. The rights to purchase any such Stock Purchase Shares shall be allocated to the Employee Trusts in accordance with the Allocable Group Percentage. Employees will be entitled to make an election whether to acquire for cash a pro rata portion of the Stock Purchase Shares allocable to their respective Employee Group except that one or more Employee Groups (other than the non- 9 10 contract employees and the TWUA) may after August 22, 1997 agree among themselves through their duly authorized collective bargaining representatives upon a reallocation of any unexercised rights to purchase provided such agreement is in writing and in form and substance reasonably satisfactory to the Company. The Stock Purchase Trustee will be entitled to execute any such purchase elections on behalf of Employees in each Employee Group by payment in cash to the Company of the purchase price for that proportion of the Stock Purchase Shares being so purchased (up to but not exceeding the Allocable Group Percentage of the Stock Purchase Shares applicable to such Employee Group). All Stock Purchase Shares so purchased shall be acquired in a cash transaction and shall be issued by TWA (on behalf of the Employees for which the Stock Purchase Trustee is purchasing) to the applicable Employee Trusts in Employee Preferred Stock, in the case of the IAM, ALPA and IFFA Employee Trusts, and in Common Stock in the case of the non-contract/TWUA Employee Trust, in each case for allocation to the account of the individual purchasing Employees. The Company shall make such payroll deduction arrangements available to purchasing Employees as the Company, after consultation with applicable collective bargaining representatives of affected Employees, deems appropriate and reasonable to allow those Employees who wish to purchase Voting Equity pursuant to this provision except in the case of an M&A Event. The purchase price of Stock Purchase Shares purchased pursuant to payroll deduction shall be determined as of the date sufficient cash has been accumulated to effect the purchase. Section 9. MERGER, SALE OR CONSOLIDATION OF TWA. Upon the occurrence of an M&A Event, TWA shall issue to the Employee Trusts for the benefit of Employees immediately prior to or concurrently with the consummation of such transaction: (A) if the Sale Price is equal to or in excess of any of the Target Prices set forth in Section 4 hereof as to which a Grant has not previously been made, that number of Incentive Shares to which Employees would otherwise have been entitled under the Program, based upon an assumed Market Price equal to the Sale Price on any subsequent Issuance Date; provided, however, that in the event the Sale Price falls between two Target Prices, the number of Incentive Shares to be issued pursuant to the terms of this Paragraph (A) will be determined by interpolation between such Target Prices on a straight-line basis; and (B) if the Ownership Percentage is less than the M&A Maximum Percentage and the Sale Price is greater than the average of both of the Fill-Up Prices but less than the Target Price applicable to the year 1999, the number of Incentive Shares necessary to increase the Ownership Percentage by the 10 11 following amounts, less the number of Incentive Shares theretofore issued: (1) if the Sale Price is equal to or more than $0.60 but less than $1.20 above the average of both the Fill-Up Prices, two percent (2%); (2) if the Sale Price is equal to or more than $1.20 but less than $1.80 above the average of both the Fill-Up Prices, three and one-half percent (3.5%); and (3) if the Sale Price is $1.80 or more above the average of both the Fill-Up Prices, five percent (5%); provided, however, that in no event shall the number of Incentive Shares to be issued pursuant to this Paragraph (B) increase the Ownership Percentage above the M&A Maximum Percentage. Section 10. CASH CONTRIBUTION. If, following both (i) the issuance to Third Parties by TWA of a number of shares of Common Stock for cash or property equal to 1.0% or more of the total number of shares of Voting Equity outstanding immediately following consummation of the Restructuring and the issuance of all shares of Common Stock issued as Conditional Consideration and (ii) the issuance by TWA of shares of Voting Equity pursuant to Paragraphs (A) and (B) of Section 9 hereof, the Ownership Percentage is below the lesser of the M&A Maximum Percentage or the Adjusted Maximum Percentage, TWA shall at the sole election of the applicable Union (on behalf of Employees who are represented by such Union) or of TWA (on behalf of non-contract employees) make either (a) an immediate cash contribution to the pension plan for the benefit of the applicable Employees and cause the surviving entity of the M&A Event to agree to such contribution or (b) an immediate cash payment to each applicable Employee equal to (y) the applicable Employee's allotment, determined on a pro rata basis, of the number of shares of Voting Equity necessary to increase the Ownership Percentage to the lesser of the M&A Maximum Percentage and the Adjusted Maximum Percentage multiplied by (z) the Sale Price. The applicable Union or TWA, as the case may be, may elect that a contribution will be made in whole or in part to the Employee's pension plan or in whole or in part to the Employee, provided that each Employee receives his full allotment and that the election by such Union or TWA will not be made on an Employee 11 12 by Employee basis, but will be made uniformly (according to such Employee's allotment) on behalf of all Employees represented by such Union or TWA, as the case may be. Notwithstanding the foregoing provisions of this Section 10, neither a Union nor TWA may elect to contribute to an Employee's pension plan an amount that would when aggregated with all other payments required to be made to such pension plan in the same year violate any rule or limitation imposed by ERISA or the Internal Revenue Code of 1986, as amended. Section 11. TERM. The Term of the Program shall commence on the Effective Date and end on July 15, 2002. Section 12. TAX WITHHOLDING. In the event that any payment by TWA hereunder, any issuance or distribution of Incentive Shares hereunder or the exercise of any stock purchase right hereunder gives rise to taxable compensation income for any Employee or former Employee with respect to which TWA is required by federal, state or local law to withhold applicable taxes, TWA shall have the right to deduct and withhold any such taxes from any payment or payments otherwise due to, or for the benefit of, such Employee or former Employee (including, without limitation, any payment to, or for the benefit of, such Employee or former Employee hereunder) or, at TWA's election, to withhold Incentive Shares otherwise deliverable to, or for the benefit of, such Employee or former Employee having a fair market value equal to the amount of taxes required to be withheld; provided that TWA shall not withhold such Incentive Shares if and to the extent that such Employee or former Employee pays to TWA, for application to the applicable taxes, an amount equal to the taxes required to be withheld. In the event that TWA elects to deduct and withhold such taxes from any payment or payments otherwise due to, or for the benefit of, such Employee or former Employee rather than withholding Incentive Shares, TWA shall endeavor in good faith to withhold such taxes from the last such payment or payments which are due before withholding with respect to such taxable compensation income is required by law and which in the aggregate (and after taking into account any other required withholding) are at least equal to the amount of such taxes to be withheld. IN WITNESS WHEREOF, TWA has caused this Program to be duly adopted by it, as of the date hereinabove first written. TRANS WORLD AIRLINES, INC. By:____________________________ Title:_________________________ 12 EX-11 7 EXHIBIT 11 1 Trans World Airlines, Inc. and Subsidiaries EXHIBIT 11 Computation of Earnings Per Share (Amounts in Thousands, Except Per Share Amount)
Reorganized Company ----------- Four Months Ended December 31, 1995 ADJUSTMENTS TO NET INCOME (LOSS) Net income (loss) $ (30,138) Mandatorily Redeemable Preferred Stock dividend requirements (4,751) ----------- Net income (loss) applicable to common stock and common stock equivalents for primary computation $ (34,889) =========== ADJUSTMENTS TO OUTSTANDING SHARES Average number of shares of common stock (1) 33,330 Primary Adjustments Incremental shares associated with the assumed exercise of options and warrants (2) 0 ----------- Total average number of common and common equivalent shares used for primary calculation 33,330 =========== Earnings per common share $ (1.05) =========== (1) Includes 5,277 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) The computations do not give effect to common shares or Employee Preferred Stock issuable under stock options and warrants or common stock or Employee Preferred Stock which may be issued in future periods, as their inclusion would be anti-dilutive.
EX-21 8 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF TRANS WORLD AIRLINES, INC. ------------------------------------------ 1. Ambassador Fuel Corporation 2. Ambassador Health Sytems, 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 Aviation 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. 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, Inc. 38. TWA-Logan Gate Company, Inc. 39. TWA-D.C. Gate Company, Inc. 40. TWA-Omnibus Gate Company, Inc. 41. TWA-Hangar 12 Holding Company, Inc. 42. LAX Holding Company, Inc. 43. TWA Stock Holding Company, Inc. 44. TWA Gate Holdings, Inc. EX-23.1 9 EXHIBIT 23.1 1 EXHIBIT 23.1 AUDITORS' CONSENT The Board of Directors Trans World Airlines, Inc.: We consent to incorporation by reference in the registration statements on Form S-8 of Trans World Airlines, Inc. of our audit report dated March 6, 1996, relating to the consolidated balance sheets of Trans World Airlines, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related statements of consolidated operations, cash flows and shareholders' equity (deficiency) for the four months ended December 31, 1995, the eight months ended August 31, 1995, the year ended December 31, 1994, the two months ended December 31, 1993 and the ten months ended October 31, 1993 and the related financial statement schedule which report appears in the December 31, 1995 annual report on Form 10-K of Trans World Airlines, Inc. Our report refers to the application of fresh start reporting as of September 1, 1995 and November 1, 1993. KPMG PEAT MARWICK LLP Kansas City, Missouri March 26, 1996 EX-24 10 EXHIBIT 24 1 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 1996. By: /s/ William F. Compton ----------------------- William F. Compton 2 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 18th day of March, 1996. By: /s/ Eugene P. Conese ---------------------- Eugene P. Conese 3 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 1996. By: /s/ Gerald L. Gitner ---------------------- Gerald L. Gitner 4 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 18th day of March, 1996. By: /s/ William M. Hoffman ---------------------- William M. Hoffman 5 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 16th day of March, 1996. By: /s/ Thomas H. Jacobsen ---------------------- Thomas H. Jacobsen 6 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 1996. By: /s/ Myron Kaplan ---------------------- Myron Kaplan 7 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for her and in her name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 16th day of March, 1996. By: /s/ Jewel Lafontant-Mankarious ------------------------------ Jewel Lafontant-Mankarious 8 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 1996. By: /s/ James A. Lawrence ---------------------- James A. Lawrence 9 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 1996. By: /s/ Thomas F. Meagher ---------------------- Thomas F. Meagher 10 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 3rd day of March, 1996. By: /s/ William O'Driscoll ---------------------- William O'Driscoll 11 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 1996. By: /s/ G. Joseph Reddington ------------------------ G. Joseph Reddington 12 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 18th day of March, 1996. By: /s/ Lawrence K. Roos ---------------------- Lawrence K. Roos 13 POWER OF ATTORNEY The undersigned hereby constitutes and appoints Jeffrey H. Erickson, and/or Robert A. Peiser, each of them, with full power to act without the other, such substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the Trans World Airlines, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and any and all amendments thereto, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 1996. By: /s/ William W. Winpisinger -------------------------- William W. Winpisinger EX-27 11 EXHIBIT 27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 U.S. DOLLARS 4-MOS 8-MOS DEC-31-1995 DEC-31-1995 SEP-01-1995 JAN-01-1995 DEC-31-1995 AUG-31-1995 286,793 0 0 0 239,968 0 13,517 0 143,374 0 710,976 0 624,125 0 24,059 0 2,850,664 0 822,546 0 1,023,661 0 61,430 0 53 0 351 0 302,451 0 2,850,664 0 0 0 1,098,474 2,218,355 0 0 1,088,028 2,203,713 0 0 700 6,781 45,917 123,247 (32,268) (338,309) 1,370 (96) (33,638) (338,213) 0 0 3,500 140,898 0 0 (30,138) (197,315) (1.05) 0 (1.05) 0 Presented above are the operating results for the reorganized Company (four months ended December 31, 1995) and the predecessor Company (eight months ended August 31, 1995).
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