-----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, JJykpvd6Z182EH0qjpTP58pjhvVGja3iE8xAT7G/RlxrvdaM2+rwAJkBuGoCkS/f vWxeBQCbvhSmbu0bYCtK0g== 0000950153-97-000329.txt : 19970401 0000950153-97-000329.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950153-97-000329 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICA WEST AIRLINES INC CENTRAL INDEX KEY: 0000706270 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 860418245 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12337 FILM NUMBER: 97571427 BUSINESS ADDRESS: STREET 1: 4000 E SKY HARBOR BLVD STREET 2: STE 2100 CITY: PHOENIX STATE: AZ ZIP: 85034 BUSINESS PHONE: 6026930800 MAIL ADDRESS: STREET 1: 4000 EAST SKY HARBOR BLVD STREET 2: STE 2100 CITY: PHOENIX STATE: AZ ZIP: 85034 10-K405 1 FORM 10-K DATED 12/31/96. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-12649 AMERICA WEST HOLDINGS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0847214 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 51 W. THIRD STREET (602) 693-0800 TEMPE, ARIZONA 85281 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED: CLASS B COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE COMMISSION FILE NUMBER 1-10140 AMERICA WEST AIRLINES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 86-0418245 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 4000 E. SKY HARBOR BOULEVARD (602) 693-0800 PHOENIX, ARIZONA 85034-3899 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED: CLASS B COMMON STOCK WARRANT, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether each of the registrants (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes. X No. --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 under the Securities Exchange Act of 1934) is not contained herein, and will not be contained, to the best of each of the registrants' 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. X --- As of March 14, 1997, there were 44,597,298 shares of America West Holdings Corporation Class B Common Stock, $.01 par value, and 8,177,844 warrants to purchase America West Holdings Corporation Class B Common Stock, $.01 par value, from America West Airlines, Inc., respectively, issued and outstanding. As of such date, 40,017,361 shares of Class B Common Stock, having an aggregate market value of approximately $620,269,095.50, were held by non-affiliates. For purposes of the above statement only, all directors and executive officers of the registrants are assumed to be affiliates. As of March 14, 1997, all outstanding equity securities of America West Airlines, Inc. were owned by America West Holdings Corporation. Indicate by check mark whether the registrant has filed all documentation and reports required to be filed by Section 12, 13 and 15(d) of the Seucrities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No. --- --- DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement related to America West Holdings Corporation's 1997 annual meeting of stockholders, which proxy statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of America West Holdings Corporation's fiscal year ended December 31, 1996, are incorporated by reference into Part III of this Form 10-K. ================================================================================ 2 TABLE OF CONTENTS
PAGE PART I Item 1. Business........................................................................................................2 Item 2. Properties.....................................................................................................14 Item 3. Legal Proceedings..............................................................................................14 Item 4. Submission of Matters to a Vote of Security Holders............................................................16 PART II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters..........................................18 Item 6. Selected Consolidated Financial Data...........................................................................19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................20 Item 8A. Consolidated Financial Statements and Supplementary Data--America West Holdings Corporation....................29 Item 8B. Financial Statements and Supplementary Data--America West Airlines, Inc........................................54 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................................77 PART III Item 10. Directors and Executive Officers of the Registrants................................................................77 Item 11. Executive Compensation.............................................................................................77 Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................................77 Item 13. Certain Relationships and Related Transactions.....................................................................77 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................77
Note Concerning Forward-Looking Information This Report contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, the words "anticipate," "estimate," "project," "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Among the key factors that may have a direct bearing on the Company's results are competitive practices in the airline industry generally and particularly in the Company's principal markets, the ability of the Company to meet existing financial obligations in the event of adverse industry or economic conditions or to obtain additional capital to fund future commitments and expansion, the Company's relationship with employees and the terms of future collective bargaining agreements and the impact of current and future laws and governmental regulations affecting the airline industry and the Company's operations. For additional discussion of such risks see "Business--Risk Factors," included in Item 1 of this Report. -1- 3 PART I This combined Form 10-K is separately filed by America West Holdings Corporation ("Holdings") and America West Airlines, Inc. ("AWA"). Information contained herein relating to AWA is filed by Holdings and separately by AWA on its own behalf. Holdings is a Delaware corporation and became the holding company for AWA effective midnight December 31, 1996. Holdings' only material asset is the capital stock of AWA. Unless otherwise indicated, the terms "the Company" and "America West" refer collectively to Holdings and AWA, its direct wholly owned subsidiary. ITEM 1. BUSINESS OVERVIEW The Company adopted a holding company structure effective midnight December 31, 1996 when Holdings became the parent company of AWA. Management believes the holding company structure improves the Company's ability to manage separate business segments effectively and that the holding company provides a platform for further expansion of the Company's businesses, including its leisure travel businesses. The Company intends to continue to evaluate investment and expansion opportunities which allow the Company to capitalize on its key strengths and market position. AWA is the ninth largest commercial airline carrier in the United States, operating through its principal hubs located in Phoenix, Arizona and Las Vegas, Nevada, and a mini-hub located in Columbus, Ohio. The Company believes AWA is the lowest cost full service carrier in the United States. At December 31, 1996 AWA served 56 destinations, including six destinations in Mexico and one in Canada, with a fleet of 101 aircraft. AWA offers service to an additional 18 destinations through an alliance agreement with Continental Airlines ("Continental") and 17 commuter service and regional destinations through an alliance agreement with Mesa Airlines ("Mesa"). AWA is the leading airline serving Phoenix and Las Vegas, with approximately 35% and 23% of total revenue passenger miles, respectively, based on the twelve months ended September 30, 1996. The Phoenix and Las Vegas airports are the seventh and thirteenth largest airports and the fifth and eight largest domestic hubs in the United States as measured by passenger enplanements. In addition, these cities are among the fastest growing in the nation. The Company believes these hubs are well positioned for continued growth due to their geographically favorable locations with strategic access to key southwestern and west coast markets, relatively low operating costs, year-round fair weather and modern, uncongested facilities. Substantially all of AWA's passenger traffic is channeled into or through its hubs, which serve as gateways for AWA's route network. Through its hub-and-spoke system, AWA serves more markets with greater frequency than would be possible with the same number of aircraft in a point-to-point route system. AWA operates with a low cost structure. The Company's operating cost per available seat mile ("ASM") for 1996 was 7.43 cents, excluding the $65.1 million nonrecurring special charge, which was approximately 17.8% less than the average cost per ASM of the eight largest domestic full service airlines. Management believes that AWA's low cost structure is a significant competitive advantage relative to other full service carriers and also enables AWA to compete effectively against low cost carriers in its short-haul local markets. As a full service airline, the Company believes AWA distinguishes itself from other low cost carriers by offering passenger services that include assigned seating, meal service, participation in computerized reservation systems, interline ticketing, first class cabins, baggage transfer and various other services. Through its America West Vacations division, AWA arranges and sells vacation packages that include hotel accommodations, air fare, ground transportation and a variety of entertainment options. This business unit generated approximately $190 million in gross package sales in 1996. America West Vacations occupies a substantial position in the Las Vegas destination market and arranges packages for travel to the other traditional vacation destinations served by AWA including Arizona, California, Florida, Canada and Mexico. To further develop this business, America West -2- 4 Vacations will be combined with AWA's charter business and reorganized as a separate subsidiary of Holdings during 1997. STRATEGY The Company's strategy seeks to achieve revenue growth and profitability by capitalizing on AWA's key competitive strengths while maximizing financial flexibility. The principal elements of the Company's strategy are (i) strengthening AWA's position in its existing hubs through strategic expansion, (ii) maintaining AWA's position as a leading low cost full service carrier, (iii) focusing on airline reliability and customer service, (iv) operating a modern and efficient fleet, (v) continuing to develop AWA's passenger base through key alliances and (vi) pursuing opportunities to expand in the leisure travel market. STRENGTHEN POSITION IN EXISTING HUBS THROUGH STRATEGIC EXPANSION AWA's strategy is designed to capitalize on its strong position in its Phoenix and Las Vegas hubs. In February 1996, the Company began implementation of a two-year plan to expand its principal hub operations and increase connecting traffic and service to longer-haul nonstop markets. Pursuant to this plan, during 1996 the Company increased available seat miles ("ASMs") by 11.3% and added six new cities to AWA's route network. In addition, AWA has increased flight frequencies to enhance service to existing West Coast destinations and to expand connecting opportunities through Phoenix to long-haul flights to the East and Midwest. AWA has also sought to increase asset utilization through the expansion of its night flight service to Las Vegas, utilizing aircraft for this service that otherwise would be idle overnight. Pursuant to the growth plan, the Company expects to increase ASMs by an additional 11% and introduce service to at least two additional cities by December 31, 1997. MAINTAIN ITS POSITION AS A LOW COST AIRLINE The Company is committed to maintaining AWA's low cost structure, which it has achieved primarily through employee productivity, favorable labor costs per ASM and industry-leading asset utilization. The Company maintained low unit costs by focusing on productivity at all levels. The Company increased its ASMs by 11.3% in 1996 while increasing its workforce by 10.8%. Management anticipates that ASMs will increase by 11% during 1997 while employment is expected to increase by only 9.1%. If those targets are achieved, the Company's growth plan will have increased the size of the airline by nearly 23% while increasing its workforce by less than 20%. Aircraft utilization has been enhanced through a restructuring of the Company's route network and expansion of the Las Vegas night flight program. FOCUS ON RELIABILITY AND CUSTOMER SERVICE AWA is committed to maintaining the airline's reliability and to improving its overall customer service. As a result of customer service and operational issues encountered in the third quarter of 1996, AWA initiated a program entitled Pride in All We Do, aimed at maximizing the airline's reliability and further improving customer service. Consistent with its strategy of being a low cost airline, these initiatives are designed to be implemented without adversely affecting the Company's cost structure. OPERATE A MODERN AND EFFICIENT FLEET AWA enjoys operational efficiencies due to its modern, fuel efficient fleet. At December 31, 1996, AWA's fleet consisted of 61 Boeing 737s, 26 Airbus A320s and 14 Boeing 757s, with an average age of approximately 10.1 years. Most of AWA's existing aircraft are held under leases with considerable fleet plan flexibility. As a result, in the event economic conditions change adversely, AWA can reduce its fleet size and reduce its aircraft related financial obligations by not renewing expiring aircraft leases. -3- 5 CONTINUE TO DEVELOP PASSENGER BASE THROUGH ALLIANCES AWA plans to continue to employ alliance agreements to expand the Company's passenger base and in some cases to achieve cost savings through the reduction of redundant labor and facilities. AWA's alliance agreements generally provide for codesharing arrangements and linking of frequent flyer programs, and in some cases involve coordination of flight schedules, sharing of ticket counter space, coordination of ground handling operations and joint purchasing and marketing efforts. AWA currently has alliance agreements with Continental, British Airways, Northwest Airlines and Mesa. Management believes that its codesharing activities result in increased travel and profitability for AWA and intends to pursue additional alliances as opportunities warrant. EXPAND LEISURE TRAVEL BUSINESSES The Company's strategic plan includes the expansion of its leisure tour packaging and charter businesses which, management believes, present opportunities for growth. Management further believes that the Company will be competitive in these businesses because of its low cost structure and expertise gained in developing and managing its America West Vacations division and its successful professional and college sports chartering business. During 1997, the Company expects to combine the America West Vacations and charter business under a separate subsidiary of Holdings, establish a private label tour packaging business, pursue the management of other airlines' vacation packaging businesses, expand the scope of its vacation and charter products and introduce new package tour destinations. OPERATIONS AIRLINE OPERATIONS AWA is the ninth largest commercial airline carrier in the United States, operating through its principal hubs located in Phoenix, Arizona and Las Vegas, Nevada, and a mini-hub located in Columbus, Ohio. The Company believes AWA is the lowest cost full service carrier in the United States. At December 31, 1996 AWA served 56 destinations, including six destinations in Mexico and one in Canada, with a fleet of 101 aircraft. AWA also offers service to additional destinations through alliance agreements with Continental and Mesa. The Company seeks to maximize its market share by operating primarily through hub airports in Phoenix and Las Vegas and, to a lesser extent, through its mini-hub in Columbus. The success of AWA's hub system depends on its ability to attract passengers traveling to and from its hubs, as well as passengers traveling through the hubs to AWA's other destinations. The Company believes the success of its operations in Phoenix and Las Vegas is in part due to such airports being among the world's largest 25 in passenger traffic and such cities being among the fastest growing in the nation. In addition, the Company believes these hubs are well positioned for continued growth due to their geographically favorable locations with strategic access to key southwestern and west coast markets, relatively low operating costs, year-round fair weather, and modern, uncongested facilities. AWA is the leading airline serving Phoenix Sky Harbor International Airport and McCarran International Airport in Las Vegas, based upon revenue passenger miles, with approximately 35% and 23% of total revenue passenger miles, respectively, for the twelve months ended September 30, 1996. In both markets the Company's principal competitor is Southwest Airlines, with approximately 22% and 17% of total revenue passenger miles in Phoenix and Las Vegas, respectively, for the twelve months ended September 30, 1996. At December 31, 1996, the Company served 48 destinations from its Phoenix hub, 44 destinations from its Las Vegas hub and 13 destinations from Columbus. During 1996, the Company had approximately 47% of Columbus revenue passenger miles compared to approximately 10% for US Airways, the Company's principal competitor in Columbus. At December 31, 1996, the Company offered service to an additional 18 destinations through its alliance with Continental and 17 commuter service and regional destinations through its alliance with Mesa. -4- 6 As a result of certain customer service and operational issues in the third quarter of 1996, AWA initiated a program entitled Pride in All We Do, aimed at maximizing the airline's on-time performance and further improving customer service. If successfully implemented, management believes this program will achieve significant advances in reliability through refinements to hub connection schedules, the addition of an operational spare aircraft and approximately 60 line mechanics, the establishment of two additional overnight maintenance bases, and improved coordination with providers of the airline's heavy aircraft maintenance. Management anticipates that those initiatives, together with expanded training of front line staff, increased staffing in critical areas (such as reservations), advanced technologies installed during 1996, enhanced aircraft appearance as the result of first class and new interior installations completed in 1996 and improved catering and onboard entertainment, will all operate together to improve customer satisfaction during 1997. ALLIANCES AWA has alliance agreements with Continental, British Airways, Northwest Airlines and Mesa. AWA's alliance agreement with Continental provides for codesharing arrangements, coordinating flight schedules, sharing ticket counter space, linking frequent flyer programs and membership clubs, and coordinating ground handling operations. Through codesharing, each airline is able to offer additional destinations to its customers without materially increasing operating and capital expenses. AWA has achieved cost savings from the Continental alliance primarily through the consolidation of airport facilities and resources and the elimination of duplicative costs for labor and equipment at key locations. In addition, through joint purchasing, both carriers may receive greater volume discounts on certain cost items. AWA's alliance agreement with British Airways includes codesharing arrangements, reciprocal frequent flyer privileges and ground handling operations, and, using AWA's existing service, allows British Airways to offer connecting service to and from British Airways' Phoenix gateway to eight destinations served by AWA in the western United States. Through AWA's codeshare agreement with Northwest Airlines, AWA provides connecting service from Northwest Airlines' Pacific routes to Las Vegas and Phoenix. AWA's codesharing agreement with Mesa, which adds 17 destinations to the Company's route network, establishes Mesa as a feeder carrier for the Company at its Phoenix hub. The codesharing agreement with Mesa provides for coordinated flight schedules, passenger handling and computer reservations under the AWA flight designator code, thereby allowing passengers to purchase one air fare for their entire trip. On codesharing flights, Mesa operates under the name "America West Express" and has incorporated AWA's color scheme and commercial logo on certain aircraft utilized on these routes. LEISURE TRAVEL BUSINESSES Through its America West Vacations division, AWA arranges and sells vacation packages that include hotel accommodations, air fare, ground transportation and a variety of entertainment options. This business unit generated approximately $190 million in gross package sales in 1996, sold approximately 823,000 room nights and approximately 137,000 rental car days, and handled approximately 557,000 passengers. America West Vacations occupies a substantial position in the Las Vegas destination market and arranges packages for travel to the other traditional vacation destinations served by AWA including Arizona, California, Florida, Canada and Mexico. To further develop this business, America West Vacations will be combined with AWA's charter business and reorganized as a separate subsidiary of Holdings during 1997. -5- 7 AIRCRAFT At December 31, 1996, AWA operated a fleet of 61 Boeing 737s, 26 Airbus A320s and 14 Boeing 757s as follows:
AVERAGE REMAINING NUMBER AVERAGE LEASE AIRCRAFT TYPE STATUS(1) AIRCRAFT AGE (YRS.) TERM (YRS.) - ------------- --------- -------- ---------- ----------- B737-100....................... Owned 1 27.2 -- B737-200....................... Leased 15 16.5 4.2 B737-200....................... Owned 5 17.8 -- B737-300....................... Leased 29 9.8 3.9 B737-300....................... Owned 11 8.2 -- B757-200....................... Leased 12 10.4 8.3 B757-200....................... Owned 2 7.3 -- A320-200....................... Leased 26 6.4 11.1 --- 101 10.1 6.9 ===
- ------------------------ (1) Each of the aircraft that is designated as owned serves as collateral for a loan pursuant to which the aircraft was acquired by AWA or serves as collateral for a non-purchase money loan. As of December 31, 1996 and through December 1998, leases for 21 of AWA's aircraft are scheduled to terminate (such aircraft are 12 Boeing B737-300s, three Boeing B737-200s, four Airbus A320-231s, and two Boeing B757-200s). At the option of the lessor, the lease for one of the B737-300 aircraft may be extended for up to 48 months, and the leases for six of the B737-300 aircraft may each be extended for up to 60 months, at set rates, which are currently less than market rates. At the option of either the lessor or AWA, the leases for two Airbus A320 aircraft may be extended for a period of two years, and the lease for one Airbus A320 aircraft may be extended for a period of one year. There are no contractual options to extend any other of such leases. See "Item 7. --Management's Discussion and Analysis of Financial Condition and Results of Operations." EMPLOYEES At December 31, 1996, the Company employed 8,500 full-time and 2,366 part-time employees, for an equivalent of 9,652 full-time employees. LABOR RELATIONS The airline business is labor intensive. Wages, salaries and benefits represented approximately 23.1% of the Company's consolidated operating expenses for the year ended December 31, 1996. To encourage increased productivity by its workforce, the Company awards performance bonuses ("AWArd Pay") from 5% to 25% of base pay to eligible non-executive non-union employees provided certain annually established operating income targets are attained. Eligibility is determined at the time of distribution. In February 1996, the Company paid performance awards amounting to 10.25% of each eligible employee's base pay for 1995 performance. The operating income targets established for 1996 were not achieved, largely as the result of AWA's performance during the third quarter of that year. See "Item 7.--Management's Discussion and Analysis of Financial Condition and Results of Operations." However, the Company's Board of Directors concluded that the failure to achieve the 1996 operating income target was due largely to circumstances beyond the control of the eligible employees and that it was important to reward the eligible employees for their substantial efforts in achieving the Company's first and second quarter record performance and in AWA's return to record earnings in the fourth quarter. Accordingly, in an exception to policy, in February 1997, the -6- 8 Board of Directors elected to pay AWArd Pay performance bonuses equal to the minimum of 5% of eligible employees' base pay in respect of 1996 performance. There have been numerous attempts by unions to organize AWA's employees, and the Company expects such organization efforts to continue in the future. Several groups of the Company's employees have selected their collective bargaining representatives and negotiations are in progress. The Company cannot predict at this time the outcome or the terms of any future collective bargaining agreement and therefore the effect, if any, on AWA's operations or financial performance. AWA's pilots are represented by the Airline Pilots Association. In May 1995, a five-year collective bargaining agreement with AWA's pilots became effective. The terms of this contract are consistent with AWA's productivity objectives. Under this contract, pilot wage scales will increase 9.41% from December 31, 1996 until April 29, 2000, or approximately 2.8% per year during that period. Terms of the agreement include a single pay scale for all aircraft types, flexible work rules, management's right to staff the airline and to enter into strategic alliances and the preclusion of sympathy work stoppages. In September 1994, the National Mediation Board ("NMB") certified the Association of Flight Attendants as the collective bargaining representative of AWA's flight attendants and contract negotiations are ongoing. In January 1996, the International Brotherhood of Teamsters ("IBT") filed an application with the NMB seeking to be certified as the bargaining representative for AWA's mechanics, including related personnel. Following a representation election in April 1996, the NMB certified the IBT as the collective bargaining representative for that work group. The Company is currently litigating the certification of the IBT and the matter is presently before the Ninth Circuit Court of Appeals. To comply with the ruling of the lower court, the Company has commenced negotiations with the IBT on a provisional basis. In April 1996, the IBT filed an application with the NMB seeking to become the collective bargaining representative of AWA's 40 stock clerks. The IBT lost the representation election in July 1996. Following the announcement of those election results, the IBT filed a claim of election interference against AWA. Both AWA and the IBT filed submissions with the NMB in connection with the election interference charge, and the matter will be decided by the NMB in due course. If the NMB rules in favor of IBT, a rerun election will be ordered. In September 1996, the Transportation Workers Union ("TWU") was certified to represent AWA's approximately 40 dispatchers and contract negotiations have commenced. COMPETITION AND MARKETING The airline industry is highly competitive and is susceptible to price discounting, which involves the offering of discount or promotional fares to passengers. Any such fares offered by one airline are normally matched by competing airlines, and may result in lower industry yields with little or no increase in traffic levels. AWA competes with other major full service airlines based on price and, due to its low cost structure, is able to compete with other low cost carriers in its short haul local markets. The entry of additional carriers on many of AWA's routes (as well as increased competition from or the introduction of new services by established carriers) could negatively impact AWA's results of operations. AWA competes with a number of major airlines on medium- and long-haul routes through its hubs, with Southwest Airlines for short-haul flights at its Phoenix and Las Vegas hubs and with USAirways at its Columbus mini-hub. Most tickets for travel on AWA are sold by travel agents through computer reservation systems that have been developed and are controlled by other airlines. Travel agents generally receive commissions based on the price of tickets sold. Accordingly, airlines compete not only with respect to the price of tickets sold but also with respect to the amount of commissions paid. Airlines often pay additional commissions in connection with special revenue programs. Federal regulations have been promulgated that are intended to diminish preferential schedule displays and other -7- 9 practices with respect to the reservation systems that place AWA and other similarly situated users at a competitive disadvantage to the airlines controlling the systems. Effective January 8, 1996, AWA implemented electronic or paperless ticketing to respond to customer needs and to reduce distribution costs for tickets booked directly through the Company, and by year end 1996, approximately 21% of its tickets were processed electronically. FREQUENT FLYER PROGRAM All major U.S. airlines have established frequent flyer programs to encourage travel on that particular carrier. AWA offers the FlightFund program that allows members to earn mileage credits by flying AWA, by using the services of other program participants such as hotels, car rental firms and other specialty services and by flying certain partner carriers. Through AWA's alliance agreement with both Continental and British Airways, AWA has formed frequent flyer program partnerships. FlightFund and Continental One Pass program members may earn and redeem mileage credit in connection with flights to all AWA and Continental destinations. FlightFund and British Airways Executive Club members may also earn and redeem mileage credit for flights to all AWA and British Airways destinations. In addition, AWA periodically offers special short-term promotions that allow members to earn additional free travel awards or mileage credits. When a FlightFund member accumulates mileage credits of 20,000 miles, AWA issues mileage award certificates that can be redeemed for various travel awards, including first class upgrades and tickets on AWA or other airlines participating in AWA's frequent flyer program. Most travel awards are subject to blackout dates and capacity controlled seating. Mileage award certificates automatically expire after two years if issued prior to April 1, 1993 and after three years for certificates issued after that date. Travel is valid up to one year from the date of ticketing. FlightFund awards may also be redeemed for flights to certain international destinations and Hawaii. AWA is required to purchase space on other airlines to accommodate such award redemption. The Company accounts for the FlightFund program under the incremental cost method whereby travel awards are valued at the incremental cost of carrying one additional passenger. Costs including passenger food, beverages, supplies, fuel, liability insurance, purchased space on other airlines and denied boarding compensation are accrued as frequent flyer program participants accumulate mileage to their accounts. Such unit costs are based upon expenses expected to be incurred on a per passenger basis. No profit or overhead margin is included in the accrual for these incremental costs. FlightFund's membership at December 31, 1996 was approximately 2.7 million participants. At December 31, 1996, 1995 and 1994, the Company estimated that approximately 358,000, 342,000 and 369,000, respectively, travel awards were expected to be redeemed. Correspondingly, the Company had an accrued liability of $11.3 million, $10.7 million and $9.8 million for 1996, 1995 and 1994, respectively. The accrual is based upon the Company's estimates of mileage earned that will eventually be redeemed for a travel award. The number of FlightFund travel awards redeemed for round-trip travel for the years ended December 31, 1996, 1995 and 1994, was approximately 130,000, 111,000 and 109,000, respectively, representing 2.3%, 2.3% and 2.6% of total revenue passenger miles for each respective period. The Company does not believe that the usage of free travel awards results in any significant displacement of revenue passengers due to AWA's ability to manage frequent flyer travel. FACILITIES The Company's principal facilities are associated with AWA's hub operations in Phoenix, Las Vegas and Columbus. AWA operates from Terminal 4 of Phoenix Sky Harbor International Airport pursuant to a lease agreement that includes 28 gates and approximately 255,000 square feet of space at December 31, 1996. AWA also leases approximately 39,000 square feet of additional space at the airport for administrative offices and pilot training and owns a 375,000 square foot maintenance and technical support facility that includes four hangar bays, hangar shops, two flight simulator bays, and warehouse and commissary facilities. -8- 10 In Las Vegas, AWA leases approximately 79,000 square feet of space at McCarran International Airport, which includes seven gates and adjoining holding room areas. At its Columbus mini-hub, AWA leases 30,000 square feet and seven gates. Pursuant to AWA's alliance agreement with Continental, certain of the station operations for both carriers have been consolidated in an effort to reduce operating expenses. Space for ticket counters, gates and back offices has also been obtained at each of the other airports served by AWA, either by lease from the airport operator or by sublease from another airline. The Company owns the 68,000 square foot America West Corporate Center at 222 S. Mill Avenue in Tempe, Arizona. The Company currently leases approximately 389,000 square feet of general office and other space in Phoenix and Tempe, Arizona. GOVERNMENT REGULATIONS NOISE ABATEMENT AND OTHER RESTRICTIONS The Airport Noise and Capacity Act of 1990 provides, with certain exceptions, that after December 31, 1999, no person may operate certain large civilian turbo-jet aircraft in the United States that do not comply with Stage III noise levels, which is the Federal Aviation Administration ("FAA") designation for the quietest commercial jets. These regulations require carriers to gradually phase out their noisier jets, either replacing them with quieter Stage III jets or equipping them with hush kits to comply with noise abatement regulations, over a five-year period commencing December 31, 1994. At December 31, 1996, AWA's fleet consisted of 101 aircraft, all of which meet Stage III noise reduction requirements except for 21 aircraft that meet the FAA's Stage II (but not Stage III) noise reduction requirements. The aircraft that do not meet the Stage III standards must be retired or significantly modified prior to the year 2000. Management is currently considering its options regarding these aircraft and expects to decide whether to install hush kits on those aircraft or replace them with Stage III aircraft during 1997. Numerous airports served by AWA, including those at Boston, Denver, Los Angeles, Minneapolis-St. Paul, New York City, San Diego, San Francisco, San Jose, Orange County, Washington, D.C., Burbank and Long Beach have imposed restrictions such as curfews, limits on aircraft noise levels, mandatory flight paths, runway restrictions and limits on number of average daily departures, which limit the ability of air carriers to provide service to or increase service at such airports. AWA's Boeing 757-200s, Boeing 737-300s and Airbus A320s all comply with the current noise abatement requirements of the airports listed above. FUEL TAX INCREASES In August 1993, the federal government increased taxes on fuel, including aircraft fuel, by 4.3 cents per gallon. Initially, commercial aviation fuel was exempt from this tax; however, the exemption expired on September 30, 1995 and the Company began paying such tax on October 1, 1995. The expiration of such exemption increased the Company's annual operating expenses by approximately $15.1 million for 1996. EXCISE TAXES Effective March 7, 1997, the federal air transportation excise taxes (the 10% ticket tax based on the price of the ticket, the 6.25% air cargo tax based on freight charges and the $6.00 per passenger international departure tax), which had been effective from August 27, 1996 but had expired on December 31, 1996, were reinstated for the period ending September 30, 1997. As a result of competitive pressure, AWA and other airlines have been limited in their abilities to pass on the cost of the excise taxes to passengers through fare increases. -9- 11 PASSENGER FACILITY CHARGES During 1990, Congress enacted legislation to permit airport authorities, with prior approval from the Department of Transportation ("DOT"), to impose passenger facility charges ("PFCs") as a means of funding local airport projects. These charges, which are intended to be collected by the airlines from their passengers, are limited to $3.00 per enplanement, and to no more than $12.00 per round trip. As a result of competitive pressure, the Company and other airlines have been limited in their abilities to pass on the cost of the PFCs to passengers through fare increases. AGING AIRCRAFT MAINTENANCE The FAA issued several Airworthiness Directives ("ADs") in 1990 mandating changes to the older aircraft maintenance programs. These ADs were issued to ensure that the oldest portion of the nation's aircraft fleet remains airworthy. The FAA requires that these aircraft undergo extensive structural modifications. These modifications are required upon the accumulation of 20 years time in service, prior to the accumulation of a designated number of flight cycles or prior to 1994 deadlines established by the various ADs, whichever occurs later. Four of AWA's aircraft are currently affected by these aging aircraft ADs and are in compliance with such ADs. AWA constantly monitors its fleet of aircraft to ensure safety levels which meet or exceed those mandated by the FAA or the DOT. FAA FUNDING Congress recently enacted the FAA Reauthorization Act of 1996, which established a 21 member National Aviation Civilian Review Commission (the "Review Commission"). The Review Commission, with the assistance of the DOT, will conduct an independent study of FAA funding requirements through the year 2002, and develop a cost allocation model for distribution of the cost of using the United States aviation system to each segment of the system. The Review Commission will also analyze funding and propose alternatives to the excise taxes (primarily the 10% ticket tax) which currently fund the FAA. The excise taxes had expired December 31, 1996 but were reinstated effective March 7, 1997 for the period through September 30, 1997. The report of the Review Commission is scheduled to be released on September 30, 1997. The Company cannot forecast the results of the Review Commission's activities or what proposals the Review Commission will make but no change in the funding mechanism is expected to be enacted prior to the completion of the Review Commission's activities. Implementation of these proposals could significantly increase the cost of airline operations and could have a material adverse impact on the Company's operating results. AIRCRAFT MAINTENANCE AND OPERATIONS AWA is subject to the jurisdiction of the FAA with respect to aircraft maintenance and operations, including equipment, dispatch, communications, training, flight personnel and other matters affecting air safety. The FAA has the authority to issue new or additional regulations. To ensure compliance with its regulations, the FAA conducts regular safety audits and requires AWA to obtain operating, airworthiness and other certificates which are subject to suspension or revocation for cause. In addition, a combination of FAA and Occupational Safety and Health Administration regulations on both federal and state levels apply to all of AWA's ground-based operations. AWA is also subject to the jurisdiction of the Department of Defense with respect to its voluntary participation in their Commercial Passenger Airlift program administered by the Air Force's Air Mobility Command. The carrier recently successfully underwent its biannual capability survey and has been approved for continued use by the military. ADDITIONAL SECURITY AND SAFETY MEASURES The President's Commission on Aviation Safety and Security (the "Aviation Safety Commission") and the U.S. Congress have recently adopted increased safety and security measures designed to increase airline passenger security and protect against terrorist acts. Such measures have resulted in additional operating costs to the airline industry. Examples of increased security measures include increased passenger profiling, enhanced pre-board screening -10- 12 of passengers and carry-on baggage, positive bag match for profile selections, continuous physical bag search at checkpoints, additional airport security personnel, expanded criminal background and FBI fingerprint checks for selected airport employees, significantly expanded use of bomb-sniffing dogs, certification of screening companies and aggressive testing of existing security systems. The Aviation Safety Commission issued a final report on February 12, 1997 which reaffirms its earlier recommendations, including feasibility analyses of the deployment and use of positive bag match systems, enhanced passenger profiling procedures and advanced cockpit voice and flight data recorders. The final report makes additional recommendations for certain safety and security measures to be implemented by December 31, 1997, including the installation of new ground proximity warning systems on all commercial aircraft, expansion of aging aircraft inspections to include non-structural components, development of objective methods for carriers to monitor and improve their own level of safety, and implementation of positive bag match based on passenger profiling. Future decisions which place increased security and safety requirements on the airline industry could be significant. The Company cannot forecast, based upon the final report of the Aviation Safety Commission, what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements, although such costs and revenue impact could be significant. SLOT RESTRICTIONS At New York City's John F. Kennedy Airport and LaGuardia Airport, Chicago's O'Hare International Airport and Washington's National Airport, which have been designated "High Density Airports" by the FAA, there are restrictions on the number of aircraft that may land and take off during peak hours. In the future, these take-off and landing time slot restrictions and other restrictions on the use of various airports and their facilities may result in further curtailment of services by, and increased operating costs for, individual airlines, including AWA, particularly in light of the increase in the number of airlines operating at such airports. In general, the FAA rules relating to allocated slots at the High Density Airports contain provisions requiring the relinquishment of slots for nonuse and permit carriers, under certain circumstances, to sell, lease or trade their slots to other carriers. All slots must be used on 80% of the dates during each two-month reporting period. Failure to satisfy the 80% use rate will result in loss of the slot which would revert to the FAA and be reassigned through a lottery arrangement. AWA currently utilizes two slots at New York City's Kennedy Airport, four slots at New York City's LaGuardia Airport, four slots at Chicago's O'Hare International Airport and six slots at Washington's National Airport. Four of the slots at Washington's National airport are subject to expiration in December 1997, and AWA intends to file a timely application for renewal. Approval of such application is discretionary with the FAA. The utilization rates by AWA of all the foregoing slots ranged from 94% to 99% in 1996. ENVIRONMENTAL MATTERS The Company is subject to regulation under major environmental laws administered by federal, state and local agencies, including laws governing air, water and waste discharge activities. While the Company strives to comply with environmental laws and regulations, the Company has incurred and may incur costs to comply with applicable environmental laws, including soil and groundwater cleanup and other related response costs. The Company believes, however, that under current environmental laws and regulations these costs would not have a material adverse effect on the Company's financial condition. The Comprehensive Environmental Response Compensation and Liability Act of 1980, also known as Superfund, and comparable state laws impose liability without regard to fault on certain classes of persons that may have contributed to the release or threatened release of a "hazardous substance" into the environment. These persons include the owner or operator of a facility and persons that disposed or arranged for the disposal of hazardous substances. Many airports in the United States, including Phoenix Sky Harbor International Airport, are the subject of Superfund investigations or state implemented groundwater investigations. Although AWA occupies facilities at some of these -11- 13 affected airports, the Company does not believe that its operations have been included within the ambit of any of these investigations. The trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment, and the Company expects that the costs of compliance will continue to increase. RISK FACTORS COMPETITIVE INDUSTRY CONDITIONS The airline industry is highly competitive and industry earnings are volatile. From 1990 to 1992, the airline industry experienced unprecedented losses due to high fuel costs, general economic conditions, intense price competition and other factors. Airlines compete on the basis of pricing, scheduling (frequency and flight times), on-time performance, frequent flyer programs and other services. The airline industry is susceptible to price discounting, which involves the offering of discount or promotional fares to passengers. Any such fares offered by one airline are normally matched by competing airlines, which may result in lower industry yields without a corresponding increase in traffic levels. Most of AWA's markets are highly competitive and are served by larger carriers with substantially greater financial resources than the Company. A number of the Company's larger competitors have proprietary reservation systems providing them with certain competitive advantages. Also, in recent years several new carriers have entered the industry, typically with low cost structures. In some cases, new entrants have initiated or triggered further price discounting. The entry of additional new carriers on many of AWA's routes, as well as increased competition from or the introduction of new services by established carriers, could negatively impact the Company's results of operations. In addition, the introduction of broadly available, deeply discounted fares by a U.S. airline would result in lower yields for the entire industry and could have a material adverse effect on the Company's operating results. LEVERAGE; FUTURE CAPITAL REQUIREMENTS At December 31, 1996, the Company had $376.4 million of long-term indebtedness (including current maturities). The Company does not have available lines of credit or significant unencumbered assets and thus may be less able than certain of its competitors to withstand adverse industry conditions or a prolonged economic recession. In addition, at December 31, 1996, AWA had firm commitments for a total of 17 Airbus A320-200 aircraft for delivery beginning in 1999. The aggregate net cost of such aircraft is based on formulae that include certain price indices (including indices for various aircraft components such as metal products) for periods preceding the various delivery dates. Based on an assumed 5% annual price escalation, the Company estimates such aggregate net cost to be approximately $850 million. The Company has arranged for financing for up to one-half of the commitment relating to such aircraft and will require substantial capital from external sources to meet its remaining financial commitment. There can be no assurance that the Company will be able to obtain such capital in sufficient amounts or on acceptable terms. The Company is presently negotiating to expand that arrangement from 17 to 22 firm orders for new aircraft, obtain financing support for 16 of the 22 firm orders and improve financing terms and conditions under which aircraft would be purchased. See Item 7.--"Management's Discussion and Analysis of Financial Condition and Results of Operations." LABOR RELATIONS There have been numerous attempts by unions to organize the employees of the Company, and the Company expects such organization efforts to continue in the future. Several groups of the Company's employees have selected their respective collective bargaining representatives and negotiations are in progress. The Company cannot predict which, if any, other employee groups may seek union representation or the outcome or the terms of any future collective -12- 14 bargaining agreement and therefore the effect, if any, on the Company's operations or financial condition. See "Item 1. --Business--Labor Relations." CONCENTRATION OF VOTING POWER, INFLUENCE OF CERTAIN PRINCIPAL STOCKHOLDERS TPG Partners, L.P. ("TPG") (together with its affiliates TPG Parallel I, L.P. ("TPG Parallel") and Air Partners II, L.P. ("Air Partners")), Continental and Mesa collectively control approximately 60.7% of the total voting power of the Company and are subject to the terms of a Stockholders' Agreement which provides for certain voting restrictions until the first annual meeting of stockholders after August 25, 1997. As a result, these stockholders are able to elect a majority of their designees to the Board of Directors and otherwise control the Company. Mesa and Continental are engaged in the airline industry and are parties to alliance agreements with AWA. Each of TPG, TPG Parallel and Air Partners are controlled by TPG Advisors, Inc., a Delaware corporation, whose executive officers and directors, through their positions in Air Partners, L.P., a significant shareholder of Continental, may be deemed to own beneficially a significant percentage of Continental's common stock. Also, Larry L. Risley, a director of the Company, is the chairman and chief executive officer of Mesa. There can be no assurance that the controlling stockholders identified above will not seek to influence the Company in a manner that would favor their own personal interests over the interests of the Company. See "Item 12.--Security Ownership of Certain Beneficial Owners and Management." AIRCRAFT FUEL Aircraft fuel costs constitute approximately 14% of the Company's total operating expenses during 1996. At current consumption levels, a one cent per gallon change in the price of jet fuel would affect the Company's annual operating results by approximately $3.5 million. Accordingly, a substantial increase in the price of jet fuel or the lack of adequate fuel supplies in the future would have an adverse effect on the Company's operating results. The Company's performance during 1996 was adversely affected by the price of jet fuel. The average price of jet fuel purchased by AWA during 1996 was 66.49 cents per gallon or 19.1% higher than the average price paid by AWA in 1995. Those price increases were largely responsible for AWA's 1996 jet fuel expense exceeding that incurred in 1995 by $59.3 million or 34.1%. See "Item 7.--Management's Discussion and Analysis of Operating Results and Financial Condition." AWA purchases its fuel from petroleum refiners and suppliers on standard trade terms under master agreements. Although the Company is currently able to obtain adequate supplies of jet fuel, future supplies and price trends may change as a result of geopolitical developments, regional production patterns, environmental concerns and other unpredictable events. In 1996, the Company implemented a fuel hedging program to manage the risk from fluctuating jet fuel prices. The program's objectives are to provide some protection against extreme, upward movements in the price of jet fuel and to protect the Company's ability to meet its annual fuel expense budget. Under the program, the Company may enter into certain cap and swap transactions with approved counterparties for a period not to exceed twelve months. This program will primarily address the Company's exposure associated with its East Coast fuel requirements which correlate well with risk management vehicles having adequate market liquidity. Due to the scope and nature of the America West route system, AWA purchases a substantially greater share of jet fuel on the United States West Coast than its larger competitors. West Coast jet fuel prices tend to be more volatile than jet fuel prices in other domestic markets. Further, the propensity of West Coast jet fuel prices to move independently from the other United States jet fuel markets renders many conventional hedging techniques ineffective in managing this portion of AWA's jet fuel price risk. FAA FUNDING The federal air transportation excise taxes, which expired December 31, 1996, have been reenacted effective March 7, 1997 through September 30, 1997. Such taxes (the 10% ticket tax, the 6.25% air cargo tax and the -13- 15 $6.00 international departure tax) generate a substantial portion of funding for the FAA. A coalition of the seven largest U.S. airlines is proposing a user fee as a replacement for the excise taxes. A fuel tax is also being considered. The National Aviation Civilian Review Commission will conduct an independent review of possible funding mechanisms to replace the excise taxes and will issue a report in September 1997. Implementation by Congress of a user fee as proposed by the seven airlines which would favor AWA's larger competitors, or other proposals recommended by the Review Commission, could significantly increase the cost of AWA's airline operations, and could have a material adverse impact on the Company's operating results. See "Item 1.--Business--Government Regulations--FAA Funding." SECURITY AND SAFETY MEASURES Congress recently adopted increased safety and security measures designed to increase airline passenger security and protect against terrorist acts. Such measures have resulted in additional operating costs to the airline industry. The Aviation Safety Commission's report recommends the adoption of further measures aimed at improving the safety and security of air travel. The Company cannot forecast what additional security and safety requirements may be imposed in the future or the costs or revenue impact that would be associated with complying with such requirements. See "Item 1.--Business--Government Regulations--Security and Safety Measures." OTHER REGULATORY MATTERS The FAA has issued a number of maintenance directives and other regulations relating to, among other things, retirement of older aircraft, collision avoidance systems, airborne windshear avoidance systems, noise abatement and increased inspections and maintenance procedures to be conducted on older aircraft. At December 31, 1996, 21 of AWA's 101 aircraft did not meet the FAA's Stage III noise reduction requirements and must be retired or significantly modified prior to the year 2000. These modifications may require substantial capital expenditures. See "Item 1.--Business--Government Regulations--Noise Abatement and Other Restrictions" and "Item 7.--Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The FAA is currently revising procedures for airline surveillance of outsourced maintenance and training. Additional laws and regulations have been proposed from time to time that could significantly increase the cost of airline operations by imposing additional requirements or restrictions on operations. The Company cannot predict what laws and regulations will be adopted or what changes to international air transportation agreements will be effected, if any, or how they will affect AWA. See "Item 1.--Business --Government Regulations." ITEM 2. PROPERTIES For a description of the Company's properties, see Item 1 of Part I of this Annual Report on Form 10-K. ITEM 3. LEGAL PROCEEDINGS AWA emerged from bankruptcy on August 25, 1994 after operating as a debtor-in-possession since June 27, 1991, when the Company filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court confirmed the Company's plan of reorganization (the "Reorganization Plan") on August 10, 1994. As contemplated by the Reorganization Plan, certain administrative and priority tax claims remain pending against AWA, which, if ultimately allowed by the Bankruptcy Court, would represent general obligations of AWA. Such claims include claims of various state and local tax authorities, most of which represent pre-bankruptcy tax obligations not paid during the pendency of the bankruptcy proceedings and various other matters. In connection with the state and local tax claims, the Company has reserved certain amounts believed by management to be adequate. At December 31, 1996, approximately 399,000 shares of the Company's Class B Common Stock remained with an escrow agent pending final resolution of claims in connection with the bankruptcy. All other securities issued pursuant to the bankruptcy have been -14- 16 distributed. The Company believes that it will reach final settlement of all remaining unresolved claims such that the remaining approximately 399,000 shares will be distributed during 1997. Following the commencement of the Company's bankruptcy proceedings in June 1991, the Securities and Exchange Commission ("Commission") requested information from AWA concerning disclosures made in the Company's annual and quarterly reports filed with the Commission in 1991. This inquiry ultimately led to a settlement with the Commission, pursuant to which the Commission issued an "Order Instituting Proceedings Pursuant to Section 21C of the Exchange Act and Opinion and Order of the Commission" (the "Order") finding AWA's Form 10-K for the year ending December 31, 1990 violated Section 13 (a) of the Exchange Act and Rule 13a-1 thereunder, and that the Company's Form 10-Q for the first quarter of 1991 violated Section 13(a) of the Exchange Act and Rule 13a-13 thereunder, and ordered that AWA cease and desist from violating Section 13(a) of the Exchange Act and Rules l3a-1 and 13a-13 promulgated under the Exchange Act. The Order provided that AWA neither admits nor denies any violation of the securities laws. The Company leases six aircraft which may be subject to a claim in an unspecified amount as a result of the Internal Revenue Service potentially disallowing investment tax credits and accelerated depreciation claimed by the lessor of such aircraft. Under the terms of indemnity agreements, if such tax benefits were fully or partially disallowed, AWA's monthly payment obligation under the agreements could be increased by up to approximately $15,000 per aircraft (approximately $1,080,000 per year for all six aircraft) for the period from 1991 to 2013. The payment increase applicable to periods prior to the determination of an indemnity obligation would be payable monthly over a 24-month period, with interest calculated at a specified prime rate. AWA is unable to predict whether the Internal Revenue Service will prevail in matters asserted against the lessor and, consequently, whether AWA will incur any liability in connection with such claims or the amount of any such liability, if incurred. Based on information and relevant documents available to the Company, however, management currently believes that it is unlikely that the disposition of these matters will have a material adverse effect on the Company's financial condition. In November 1995, a group of individuals who are current or former employees of Continental, commenced a lawsuit in the Federal District Court for the Western District of Washington against Continental and AWA, alleging that the plaintiffs were wrongfully discharged from their employment. The court has certified a class of approximately 230 plaintiffs. AWA and attorneys for the plaintiffs have agreed to settle all claims against AWA and the terms of that settlement have been submitted for court approval. AWA's obligations under that settlement would be fully covered by insurance. Following AWA's outsourcing of its heavy maintenance, on December 27, 1995, the IBT and five individuals commenced a lawsuit against AWA in federal court alleging that the individual plaintiffs had been terminated because they were IBT committee members or open supporters of the union and that AWA wrongfully terminated approximately 378 members of the mechanics and related craft or class in connection with the outsourcing in violation of federal labor laws. In September 1996, the court dismissed the claims of the four discharged mechanics who had signed release agreements and found that the IBT did not have standing in its own behalf to pursue a claim under the Railway Labor Act ("RLA"). Later that month, the IBT filed a second supplemental amended complaint seeking to assert claims under the RLA on behalf of the current mechanics and the discharged mechanics who did not sign releases. The main relief requested by the IBT is an injunction requiring AWA to discontinue the subcontracting of heavy maintenance, and an order of reinstatement for the discharged mechanics who did not release their claims. The remaining plaintiff asserted an Arizona wrongful discharge claim and sought punitive damages. The court's decision on AWA's motion to dismiss the plaintiffs' second supplemental amended complaint is pending. AWA is a named defendant in a number of additional lawsuits and proceedings arising in the ordinary course of business. While the outcome of the contingencies, lawsuits or other proceedings against AWA cannot be predicted with certainty, management currently expects that any liability arising from such matters, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the financial results and operations of the Company. -15- 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is information respecting the names, ages, positions and offices with the Company of the executive officers of the Company. WILLIAM A. FRANKE -- AGE 59. Chairman of the Board and Chief Executive Officer of Holdings; Chairman of the Board of AWA (Executive Committee). Mr. Franke was named Chairman of the Board of Directors of AWA in September 1992. From January 1, 1994 to February 4, 1997, Mr. Franke served as AWA's Chief Executive Officer and from May 23, 1996 to February 4, 1997 he served as AWA's President. In addition to his responsibilities at the Company, Mr. Franke serves as president of Franke & Company, Inc., a financial services company he has owned since May 1987. Mr. Franke serves as a director of Phelps Dodge Corp., Central Newspapers Inc., the Air Transport Association of America, Beringer Wine Estates, Inc. and Mtel Latin America, Inc. Mr. Franke serves as a Director and Chairman of the Board of Airplanes Limited and a controlling trustee and chairman of Airplanes U.S. Trust, entities involved in aircraft financing and leasing. Mr. Franke also serves as a managing partner of Newbridge Latin America L.P., an investment fund controlled by TPG. RICHARD R. GOODMANSON -- AGE 49. President and Director of Holdings; President, Chief Executive Officer and Director of AWA. Mr. Goodmanson joined the Company in June 1996 and became a member of AWA Board of Directors effective on October 15, 1996. On February 4, 1997, Mr. Goodmanson was elected President of Holdings and President and Chief Executive Officer of AWA. From 1992 until 1996, Mr. Goodmanson served as Senior Vice President of Operations at Frito-Lay, Inc. From 1980 until 1992, Mr. Goodmanson served as a principal at the consulting firm of McKinsey and Company, Inc. RONALD A. ARAMINI -- AGE 51. Senior Vice President -- Operations of AWA. Mr. Aramini joined the Company in September 1996. From October 1993 until September 1996, Mr. Aramini served as President and Chief Executive Officer of Allegheny Airlines, a Pennsylvania-based regional airline subsidiary of US Air Group, Inc. Before that, he served for three years at Air Wisconsin, including in positions as Vice President -- Operations, Senior Vice President -- Operations, and President and Chief Operating Officer. Prior to his position at Air Wisconsin, Mr. Aramini served in various positions at Continental. JOHN R. GAREL -- AGE 38. Senior Vice President -- Marketing and Sales of AWA. Mr. Garel joined the Company in April 1995. From 1993 until early 1995, Mr. Garel was the Chief Executive Officer of Cadmus Journal Services, a division of Cadmus Communications. From 1990 until 1992, Mr. Garel served as Vice President, Financial Planning and Analysis of Northwest Airlines and, thereafter, as Vice President, Market Development and Area Marketing. Prior to that, Mr. Garel worked for American Airlines in several management capacities. STEPHEN L. JOHNSON -- AGE 40. Senior Vice President -- Legal Affairs of AWA and Holdings. Mr. Johnson joined the Company in February 1995. From 1993 to 1994, Mr. Johnson served as Senior Vice President and General Counsel to GE Capital Aviation Services Limited. From 1989 to 1993 Mr. Johnson was employed by GPA from 1989 to 1991 as Vice President and Senior Counsel and from 1991 to 1993 as Senior Vice President and General Counsel to GPA's Leasing Division. Prior to joining GPA, Mr. Johnson was engaged in the private practice of law. W. DOUGLAS PARKER -- AGE 35. Senior Vice President and Chief Financial Officer of AWA and Holdings. Mr. Parker joined the Company in June 1995. From 1991 through June of 1995, Mr. Parker worked in various capacities at Northwest Airlines, including positions as Vice President -- Assistant Treasurer and Vice President -- Financial Planning and Analysis. From 1986 through 1991, Mr. Parker served in various financial management positions at American Airlines. -16- 18 MICHAEL A. VESCUSO -- AGE 51. Senior Vice President -- Human Resources of AWA. Mr. Vescuso joined the Company in September 1994. From 1992 to 1994, Mr. Vescuso worked as an organizational and management development consultant. From 1990 to 1992 he was the Director, Organization and Development of Frito-Lay, Inc. From 1978 to 1990, he held several senior management positions at HBJ, Inc., including the position of human resources officer. Mr. Vescuso has announced his intention to retire from the Company upon the naming of his successor. MICHAEL R. CARREON -- AGE 43. Vice President and Controller of AWA. Mr. Carreon joined the Company in December 1994 as Senior Director -- Corporate Audit. On January 1, 1996, he was appointed Vice President and Controller. From 1986 to 1994, Mr. Carreon held accounting and audit-related management positions at United Airlines. Prior to that, he served for five years in the Audit Services Practice of Arthur Andersen & Co. in Chicago. C. A. HOWLETT -- AGE 53. Vice President -- Public Affairs of AWA and Holdings. Mr. Howlett joined the Company in January 1995. Prior to such time, Mr. Howlett maintained a government relations practice as a principal at the law firm of Lewis and Roca in Phoenix. Mr. Howlett's prior work experience included senior positions with Salt River Project, the City of Phoenix and The White House where he served as special assistant to President Ronald Reagan for intergovernmental affairs. -17- 19 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective midnight December 31, 1996, AWA became a direct wholly owned subsidiary of Holdings. Each share of Class A Common Stock of AWA was exchanged for one share of Class A Common Stock of Holdings and each share of Class B Common Stock of AWA was exchanged for one share of Class B Common Stock of Holdings. As a result, Holdings became the successor issuer to AWA of the Class A and Class B Common Stock. Also, each Warrant, which previously entitled holders to purchase from AWA one share of Class B Common Stock of AWA, now entitles the holders to purchase from AWA one share of Class B Common Stock of Holdings. The Class A Common Stock of Holdings, par value $.01 per share (the "Class A Common Stock"), is not publicly traded. The Class B Common Stock, par value $.01 per share (the "Class B Common Stock") and AWA's Warrants to purchase Class B Common Stock (the "Warrants") have been traded on the New York Stock Exchange ("NYSE") under the symbol "AWA" and "AWAws," respectively, since August 26, 1994. The following table sets forth, for the periods indicated, the high and low sales prices of the Class B Common Stock and the Warrants as reported on the New York Stock Exchange.
CLASS B COMMON STOCK WARRANTS ------------ -------- HIGH LOW HIGH LOW ---- --- ---- --- Year Ended December 31, 1995 First Quarter............................ $ 9 1/8 $ 6 3/8 $ 3 5/8 $1 3/4 Second Quarter........................... 12 5/8 8 1/2 5 1/8 2 3/4 Third Quarter............................ 16 1/2 11 3/4 6 7/8 4 3/8 Fourth Quarter........................... 19 12 5/8 8 3/4 4 3/4 Year Ended December 31, 1996 First Quarter............................ 22 1/4 15 1/2 11 7/8 6 3/8 Second Quarter........................... 23 3/4 18 3/4 13 7/8 9 3/8 Third Quarter............................ 21 7/8 10 7/8 11 5/8 4 3/4 Fourth Quarter........................... 16 3/8 11 8 1/8 5
As of December 31, 1996, there were five record holders of Class A Common Stock, approximately 12,992 record holders of Class B Common Stock and approximately 12,088 record holders of Warrants. The Company has not paid cash dividends in any of the last two fiscal years and does not anticipate paying cash dividends in the foreseeable future. The Company expects that it will retain all available earnings generated by the Company's operations for the development and growth of its business. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors of the Company and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. Certain debt instruments of the Company restrict the Company's ability to pay cash dividends on the Common Stock and make certain other restricted payments (as defined therein). Under these restrictions, as of December 31, 1996, the Company's ability to pay dividends, together with any other restricted payments, would be limited to an aggregate of $68.2 million. See "Item 7.--Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." -18- 20 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated data presented below under the captions "Consolidated Statements of Operations Data" and "Consolidated Balance Sheet Data" as of and for the years ended December 31, 1996 and 1995, the period August 26 through December 31, 1994, and the period January 1 through August 25, 1994 and each of the years in the two year period ended December 31, 1993 are derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected consolidated data should be read in conjunction with the consolidated financial statements for the respective periods, the related notes and the independent auditors' report. The independent auditors' report as of and for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994 contains an explanatory paragraph that states the consolidated financial statements of the Reorganized Company reflect the impact of adjustments to reflect the fair value of assets and liabilities under fresh start reporting. As a result, the consolidated financial statements of the Reorganized Company are presented on a different basis than those of the Predecessor Company and, therefore, are not comparable in all respects.
REORGANIZED COMPANY | PREDECESSOR COMPANY (a) ------------------------------------------ | ------------------------------------------- AUGUST 26 TO | JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, | AUGUST 25, YEAR ENDED DECEMBER 31, 1996 1995 1994 | 1994 1993 1992 ----------- ----------- ------------ | ------------ ----------- ----------- (IN THOUSANDS EXCEPT | PER SHARE AMOUNTS) | CONSOLIDATED STATEMENTS OF | OPERATIONS DATA: | Operating revenues ................. $ 1,739,526 $ 1,550,642 $ 469,766 | $ 939,028 $ 1,325,364 $ 1,294,140 Operating expenses ................. 1,670,860 1,395,910 430,895 | 831,522 1,204,310 1,368,952 Operating income (loss) ............ 68,666 154,732 38,871 | 107,506 121,054 (74,812) Income (loss) before income taxes | and extraordinary items ......... 34,493 108,378 19,736 | (201,209) 37,924 (131,761) Income taxes ....................... 24,883 53,608 11,890 | 2,059 759 -- Income (loss) before | extraordinary items ............. 9,610 54,770 7,846 | (203,268) 37,165 (131,761) Extraordinary gain (loss) (b) ...... (1,105) (984) -- | 257,660 -- -- Net income (loss) .................. 8,505 53,786 7,846 | 54,392 37,165 (131,761) Earnings (loss) per share: (c) | Primary: | Before extraordinary items .. .21 1.18 .17 | (7.03) 1.50 (5.58) Extraordinary gain (loss) (b) (.02) (.02) -- | 9.02 -- -- ----------- ----------- ----------- | ----------- ----------- ----------- Net income (loss) ........... .19 1.16 .17 | 1.99 1.50 (5.58) Fully diluted: | Before extraordinary items .. .20 1.17 .17 | (4.96) 1.04 (5.58) Extraordinary gain (loss) (b) (.02) (.02) -- | 6.37 -- -- ----------- ----------- ----------- | ----------- ----------- ----------- Net income (loss) ........... .18 1.15 .17 | 1.41 1.04 (5.58) Shares used for computation | Primary ......................... 47,635 47,666 45,127 | 28,550 27,525 23,914 Fully diluted ................... 47,945 47,666 45,127 | 40,452 41,509 23,914 CONSOLIDATED BALANCE SHEET DATA | (AT END OF PERIOD): | Total assets ....................... $ 1,597,650 $ 1,588,709 $ 1,545,092 | $ -- $ 1,016,743 $ 1,036,441 Long-term debt, less current | maturities (d) .................. 330,148 373,964 465,598 | -- 620,992 647,015 Total stockholders' equity | (deficiency) .................... 622,753 649,472 595,446 | -- (254,262) (294,613)
- --------------- -19- 21 (a) Includes net expense incurred by the Predecessor Company in connection with its reorganization of $273.7 million for the period January 1 through August 25, 1994 and $25.0 million, and $16.2 million for the years ended December 31, 1993 and 1992, respectively. (b) Includes (i) an extraordinary loss of $1.1 million in 1996 resulting from the partial prepayment of its 10 3/4% Unsecured Notes; (ii) an extraordinary loss of $984,000 in 1995 resulting from the exchange of debt by the Company; and (iii) an extraordinary gain of $257.7 million in 1994 resulting from the discharge of indebtedness pursuant to the consummation of the Plan of Reorganization. (c) Historical per share data for the Predecessor Company are not meaningful since the Company has been recapitalized and has adopted fresh start reporting as of August 25, 1994. (d) Includes certain balances reported as Estimated liabilities subject to Chapter 11 proceedings for the Predecessor Company. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Holdings became the holding company for AWA effective midnight, December 31, 1996. Holdings' primary business activity is ownership of all the capital stock of AWA. Management's Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the consolidated financial statements of Holdings presented in Item 8A. Financial statements for AWA, Holdings' wholly owned subsidiary, are presented in Item 8B. 1996 IN REVIEW In 1996, AWA had net income of $8.5 million, or $0.18 per share fully diluted. The 1996 earnings included a $65.1 million pretax nonrecurring special charge resulting from the Company's decisions to order certain new aircraft and cancel a prior order, and to make certain other related adjustments (See Note 13, "Restructuring and Other Nonrecurring Special Charges" in Notes to Consolidated Financial Statements). Excluding this charge, net income for the year was $48.7 million, or $1.02 per share fully diluted. Excluding the special charge, these results reflected one of the best years in the airline's history. Another measure the Company uses to evaluate its financial performance is EBITDAR (operating income before depreciation, amortization, rent and nonrecurring charges). The Company's EBITDAR margin for 1996 was 28.3% which the Company believes was the highest EBITDAR margin among the major U.S. airlines. For the first six months of 1996, AWA posted record results. Net income before extraordinary item for that period was $43.2 million, an increase of 65.8% over the first half of 1995. Revenues rose to $877.1 million, due in part to the growth plan announced in September 1995, which increased capacity by 8.6%, a 13.8% increase in passenger traffic and solid passenger revenue yields. Higher year-over-year operating costs, primarily from higher fuel and passenger traffic related expenses, were more than offset by the favorable revenue performance. In the third quarter, the Company experienced a setback in the 1996 trend of record results with a net loss of $45.7 million, which included the $65.1 million nonrecurring special charge discussed above. The decline in earnings resulted from a number of factors, including the $65.1 million charge, lower yields caused by untimely revenue decisions made in June and July 1996, high jet fuel prices and operating dependability difficulties encountered during the summer of 1996. The Company took action to address these problems as follows: Revenue Management - Established a full time revenue recovery team led by senior management, to review and address the problems that led to poor revenue management decisions. -20- 22 - Increased staffing of and upgraded the revenue management team. - Conducted a market-by-market review and addressed pricing/yield issues. - Implemented policies and procedures to enhance controls over the revenue management process. - Committed to $7.3 million in new revenue management systems. Fuel Cost - Established a hedging program to manage the Company's exposure to fluctuating fuel prices. Operations - Initiated Get The Product Right...Together, a comprehensive program designed to improve operational and customer service performance, including increasing the airline's maintenance workforce, adding two additional overnight maintenance stations and increasing reservations staffing and technology. - Implemented a structured "work out process" whereby teams of front-line employees develop solutions to operational problems. - Authorized the acquisition of an additional spare aircraft. The fourth quarter of 1996 saw a return to record profitability with pretax earnings of $16.8 million. Net income for the quarter was $12.1 million. Bolstered by a record 69.1% load factor, revenues for the fourth quarter were a record $439.9 million, an 11% improvement over 1995. Operating cost per available seat mile ("CASM") (excluding special charges) decreased 2.6% from 7.38 cents per ASM in the fourth quarter of 1995 to 7.19 cents per ASM in the 1996 quarter, despite a 23.1% increase in the average price of fuel consumed. Operational reliability also showed marked improvement as the percentage of scheduled aircraft miles completed averaged more than 98% in the 1996 fourth quarter as compared to a low of 96% in the third quarter of 1996. SELECTED OPERATING DATA The table below sets forth selected operating data for the Company. The data for the year ended December 31, 1994 is shown on a combined basis.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- COMBINED PERCENT PERCENT BASIS CHANGE CHANGE 1996 1995 1994 1996-1995 1995-1994 ---- ---- ---- --------- --------- Available seat miles (in millions)................. 21,625 19,421 18,060 11.3 7.5 Revenue passenger miles (in millions).............. 15,321 13,313 12,233 15.1 8.8 Load factor (percent).............................. 70.9 68.5 67.7 3.5 1.2 Yield per revenue passenger mile (cents)........... 10.69 10.91 10.79 (2.0) 1.1 Revenue per available seat mile: Passenger (cents)............................. 7.57 7.48 7.31 1.2 2.3 Total (cents)................................. 8.04 7.98 7.80 .8 2.3 Passenger enplanements (in thousands).............. 18,178 16,848 15,669 7.9 7.5 Average stage length (miles)....................... 732 686 676 6.7 1.5 Average passenger journey (miles).................. 1,042 986 979 5.7 .7 Average daily aircraft utilization (hours)......... 11.8 11.4 11.2 3.5 1.8 Aircraft (end of period)........................... 101 93 87 8.6 6.9 Full-time equivalent employees (end of period)............................... 9,652 8,712 10,715 10.8 (18.7) Fuel price (cents per gallon)...................... 66.49 55.82 54.89 19.1 1.7 Fuel consumption (gallons in millions)............. 351 312 289 12.5 8.0
-21- 23 The table below sets forth the major components of operating expense per ASM for the Company for the applicable periods. The data for the year ended December 31, 1994 is shown on a combined basis for the Reorganized and Predecessor Company. (See Note 1, "Summary of Significant Accounting Policies--(a) Basis of Presentation" in Notes to Consolidated Financial Statements).
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- COMBINED PERCENT PERCENT BASIS CHANGE CHANGE 1996 1995 1994 1996-1995 1995-1994 ---- ---- ---- --------- --------- (IN CENTS) Salaries and related costs......................... 1.78 1.97 1.83 (9.6) 7.7 Aircraft rents..................................... .94 .89 .89 5.6 - Other rents and landing fees....................... .52 .56 .58 (7.1) (3.4) Aircraft fuels..................................... 1.08 .90 .88 20.0 2.3 Agency commissions................................. .62 .64 .64 (3.1) - Aircraft maintenance materials and repairs......... .58 .34 .25 70.6 36.0 Depreciation and amortization...................... .24 .25 .40 (4.0) (37.5) Amortization of reorganization value in excess of amounts applicable to identifiable assets....... .12 .17 .07 (29.4) nm Restructuring and other nonrecurring special charges................................. .30 .05 - nm nm Other.............................................. 1.55 1.42 1.45 9.2 (2.1) ------- -------- -------- 7.73 7.19 6.99 7.5 2.9 ======= ======== ========
nm - not meaningful RESULTS OF OPERATIONS The Company's operating results are significantly affected by general economic conditions as well as competitive factors, jet fuel price levels, government regulations, taxes on jet fuel and taxes specific to the air transport industry and other conditions affecting the airline industry. In recent periods, airlines have achieved generally improved operating results as a result of more favorable economic conditions and as a result of focusing on their areas of relative strength, eliminating service to under-performing markets and rationalizing operations, route systems and pricing strategies. Due to the greater demand for air travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. Other factors that are not necessarily seasonal also significantly affect results, including the extent and nature of price and other competition from other airlines, changing levels of operations, international events, fuel prices and general economic conditions. The following discussion provides an analysis of the Company's results of operations and reasons for material changes therein for the years ended December 31, 1996 and 1995, and the combined periods from January 1 through August 25, 1994, when the Company completed its reorganization and emerged from bankruptcy protection, and August 26 through December 31, 1994. The Company's results of operations for the periods subsequent to August 25, 1994 have not been prepared on a basis of accounting consistent with its results of operations for periods prior to August 26, 1994 due to the implementation of fresh start reporting upon AWA's emergence from bankruptcy. IMPACT OF FRESH START REPORTING In connection with its emergence from bankruptcy in August 1994, the Company adopted fresh start reporting in accordance with Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") of the American Institute of Certified Public Accountants. Fresh start reporting significantly affects -22- 24 the Company's consolidated statements of income including the financial statement accounting for income taxes. However, actual cash flows, including cash taxes payable do not materially change as a result of fresh start reporting. Under fresh start reporting, the reorganization value of the Company has been allocated to its assets and liabilities on a basis substantially consistent with purchase accounting. The portion of reorganization value not attributable to specific tangible assets has been recorded as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets." Certain fresh start reporting adjustments, primarily related to the adjustment of the Company's assets and liabilities to fair market values, have had and will have a significant effect on the Company's consolidated statements of income. The more significant adjustments relate to (i) reduced rent expense due to the revaluation of aircraft leases to market rates, (ii) reduced maintenance expense due to the write-off of previously capitalized overhauls, (iii) reduced depreciation expense on property and equipment due to the revaluation of such assets to fair value, (iv) the addition of amortization expense relating to reorganization value in excess of amounts allocable to identifiable assets, (v) increased interest expense due to the re-valuation of aircraft leases to market rates, and (vi) increased income tax expense principally because the amortization of excess reorganization value is not deductible for income tax purposes giving rise to an effective tax rate for financial reporting purposes that is significantly greater than the current U.S. corporate statutory rate of 35%. 1996 COMPARED WITH 1995 In 1996, the Company realized net income of $8.5 million which included a pretax, nonrecurring special charge of $65.1 million (See Note 13, "Restructuring and Other Nonrecurring Special Charges" in Notes to Consolidated Financial Statements). Excluding the nonrecurring special charge, the Company recorded net income of $48.7 million. Comparative amounts for 1995 were net income of $60.3 million (excluding a $10.5 million restructuring charge), and income tax expense for financial reporting purposes of $53.6 million. The decline in pretax income (excluding the nonrecurring special charge and before extraordinary item) for the 1996 period resulted from untimely revenue decisions made in June and July of 1996, high jet fuel prices and operating dependability difficulties encountered during the summer of 1996. Industry capacity increases into Las Vegas and aggressive fare sale activity also adversely impacted 1996. Total operating revenues were $1.7 billion in 1996 compared to $1.6 billion in 1995. Passenger revenues for 1996 were $1.6 billion, an increase of 12.8% over the prior year. Cargo and other revenues increased 3.4% to $101.8 million in 1996. Other revenues consist primarily of alcoholic beverage sales, contract service sales and service charges. Capacity, as measured by ASMs, increased 11.3% in 1996 compared to 1995 as the Company completed the first year of a two-year strategic growth plan. Revenue passenger miles increased 15.1% in 1996. Load factor for the 1996 period increased by 3.5% (2.4 points) to a Company record of 70.9%, despite the 11.3% capacity increase. Revenue per passenger mile (yield) decreased 2.0%, and revenue per available seat mile ("RASM") increased by 1.2%, in 1996 from 1995. CASM increased to 7.73 cents in 1996 from 7.19 cents in 1995 primarily due to a nonrecurring special charge of $65.1 million and increases in jet fuel prices. Excluding the nonrecurring special charge, and jet fuel and related taxes, CASM increased year-over-year only 1.0% to 6.24 cents in 1996. The changes in the components of operating expense per available seat mile (excluding the nonrecurring special charge) are explained as follows: - The 9.6% decrease in salaries and related costs per ASM was primarily related to the $12.1 million reduction in salaries related to the Company's outsourcing of its heavy aircraft maintenance in December 1995 and a reduction in AWArd Pay and incentive pay due to the Company's decline in income. In addition, the Company continued to improve productivity as full-time equivalent head count increased 10.8% versus an 11.3% increase in ASMs. -23- 25 - Aircraft rents per ASM increased 5.6% primarily due to a net addition of eight leased aircraft to the fleet during 1996. - Rentals and landing fees per ASM decreased primarily due to the 11.3% increase in ASMs. - The average price per gallon of aircraft fuel increased 19.1% to 66.49 cents in 1996 from 55.82 cents in 1995. This increase in fuel price increased 1996 operating expense by approximately $37.5 million. - Aircraft maintenance materials and repairs expense per ASM increased 70.6% due primarily to an increase in capitalized maintenance which increased capitalized maintenance amortization expense by $27.7 million in 1996 when compared with 1995. The unamortized balance of capitalized maintenance grew to $102.5 million at December 31, 1996, an increase of $47.5 million from December 31, 1995. In addition, maintenance expense per ASM increased further in the 1996 period due to the classification for accounting purposes of fees paid to outside vendors to complete aircraft maintenance following the outsourcing of that work in late 1995. This increase in maintenance expense was substantially offset by a reduction in maintenance payroll expense as discussed above. - Amortization of reorganization value in excess of identifiable assets expense per ASM decreased 29.4% primarily due to the reduction in the unamortized balance of excess reorganization value as the result of (i) utilization of tax attributes of the pre-reorganization Company, including net operating loss carryforwards, such reduction amounting to $16.7 million in 1996 and $50 million in 1995, and (ii) recognition of a deferred tax asset of $74.7 million in 1995. - Other operating expenses per ASM increased 9.2% primarily due to the 4.3 cents per gallon federal fuel tax for which the Company became liable commencing October 1, 1995, an increase in interrupted trip expense due to the operating dependability difficulties discussed above, and an increase in passenger traffic related costs. - Contributing to the increase in operating cost per ASM was the effect of the first class installation program that was completed in late 1995 and reduced 1996 ASMs by 2.6% but had no significant effect on operating costs. Net nonoperating expenses decreased $12.2 million to $34.2 million in 1996 from $46.4 million in 1995 due primarily to a net decrease in interest expense resulting from reduced levels of debt and lower interest rates. Income tax expense for financial reporting purposes in 1996 decreased to $24.9 million from $53.6 million in 1995 due principally to lower pretax income. The Company incurred extraordinary charges in 1996 and 1995 of $1.1 million and $984,000, respectively, for the partial prepayment of its 10 3/4% Unsecured Notes. These amounts were net of income tax benefit of $918,000 and $984,000, respectively. YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE COMBINED PERIODS FROM AUGUST 26, 1994 THROUGH DECEMBER 31, 1994 AND JANUARY 1, 1994 THROUGH AUGUST 25, 1994 For the periods ended December 31, 1995 and 1994, the Company realized net income of $53.8 million and a combined $62.2 million, respectively. Net income for 1995 included income tax expense for financial reporting purposes of $53.6 million compared to a combined $13.9 million in 1994. The increase in income tax expense for financial reporting purposes resulted principally from the adoption of fresh start reporting. Net income for the combined periods of 1994 included reorganization expense of $273.7 million and an extraordinary gain of $257.7 million. -24- 26 Total operating revenues were $1.6 billion in 1995 compared to a combined $1.4 billion for 1994. Passenger revenues increased 10% to $1.5 billion during 1995. Cargo and other revenues increased 10.7% to $98.4 million for 1995. The balance of other revenues includes revenues generated primarily from alcoholic beverage sales, contract service sales and service charges. Capacity, as measured by ASMs, increased 7.5% in 1995 compared to the combined 1994 period, primarily due to an increase in the average stage length of 1.5% and the addition of six aircraft to the fleet. Revenue passenger miles increased 8.8% in 1995 compared to the combined 1994 period while load factor increased by 0.8 points and yield increased 1.1%. CASM increased to 7.19 cents in 1995 from 6.99 cents for the combined 1994 period. The changes in the components of operating expense per available seat mile are explained as follows: - The increase in salaries and related costs per ASM is primarily the result of accruals totaling $17.7 million in 1995 to provide for performance awards related to the Company's profitability. In addition, such costs were affected in May 1995 by a significant initial increase in pilot salaries under their collective bargaining agreement and the adoption of the Company's Total Pay program in January 1995. These pay increases were effected in order to make employees' compensation levels more competitive with that of other low cost carriers and local employers. These pay increases were largely offset by improvements in productivity and through a reduction in the size of the work force. - Aircraft rents per ASM were flat primarily due to the decrease related to the amortization of deferred credits recorded in the Company's adjustment of operating leases to fair market value under fresh start reporting. Such decrease was offset by a net addition of six aircraft to the fleet. - Rentals and landing fees per ASM decreased primarily due to the 7.5% increase in ASMs. - The average price per gallon of aircraft fuel increased slightly to 55.8 cents in 1995 from 54.9 cents for the combined 1994 period. - Aircraft maintenance materials and repairs expense per ASM increased largely as the result of the change in classification of the amortization expense associated with heavy engine and airframe overhauls from depreciation and amortization expense to aircraft maintenance materials and repairs expense in August 1994. For 1995 and the period August 26 through December 31, 1994, amortization of capitalized maintenance totaling $11.9 million and $356,000, respectively, is included in aircraft maintenance materials and repairs expense. Amortization of capitalized maintenance totaling $24 million for the period January 1 through August 25, 1994 is included in depreciation and amortization. In addition, costs associated with a new auxiliary power unit repair agreement which commenced in April 1994 increased in 1995 as compared to 1994. - Depreciation and amortization expense per ASM decreased due to the $24 million change in the classification of the amortization expense associated with capitalized aircraft maintenance materials and repairs expense discussed above. In addition, the revaluation of property and equipment under fresh start reporting reduced expense by $835,000 in 1995. - Amortization of reorganization value in excess of identifiable assets expense increased $20.8 million compared to 1994. - A restructuring charge incurred in 1995 associated with the Company's outsourcing of its heavy aircraft maintenance consisted of a provision for employee severance and related cost of $10.5 million. -25- 27 - Other operating expenses per ASM decreased primarily due to the reduction in property taxes and the fixed nature of certain other costs. Net nonoperating expenses decreased $281.5 million to $46.4 million in 1995 from a combined $327.9 million for 1994. This net decrease resulted from: a decrease in reorganization expense of $273.7 million since the Company emerged from bankruptcy; an increase in interest income of $10.7 million due to higher cash and cash equivalent balances in 1995; partially offset by a net increase in interest expense of $2.0 million because the Company did not accrue and pay interest on unsecured prepetition long-term debt during its bankruptcy proceedings in conformity with SOP 90-7, and an increase in interest expense due to the revaluation of aircraft leases to market rates as part of fresh start reporting. Income tax expense for financial reporting purposes in 1995 increased to $53.6 million from a combined $13.9 million in 1994 due principally to the increase in the amortization of the excess reorganization value which is not deductible for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES Unrestricted cash and cash equivalents and short-term investments decreased to $176.6 million at December 31, 1996 from $224.4 million as of December 31, 1995 primarily due to the prepayment of $25 million of its 10 3/4% Senior Notes and the repurchase of Class B Common Stock and warrants totaling $42.1 million. Net cash provided from operating activities decreased to $230.3 million in 1996 from $260.4 million in 1995, a decrease of $30.1 million. This decrease was principally due to the period over period change in air traffic liability, which grew 11.6% in the 1996 period as compared to 50.6% in 1995. Net cash used in investing activities increased to $199 million in 1996 from $107.4 million in 1995, an increase of $91.6 million. The increase was primarily the result of increased expenditures for capitalized maintenance and automation projects and reinvestment of certain cash-equivalents into certain income producing short-term investments with maturities greater than 90 days. Net cash used in financing activities increased to $118.2 million for the year ended December 31, 1996 from $111.2 million in the 1995 period. The increase was principally due to the repurchase of Class B Common Stock and warrants in 1996 which was partially offset by a lower prepayment on the Company's senior unsecured notes in 1996 as compared to 1995. The Company has a working capital deficiency which increased to $170.9 million at December 31, 1996 from $70.4 million at December 31, 1995. Operating with a working capital deficiency is common in the airline industry as tickets sold for transportation which has not yet been provided are classified as a current liability while the related income producing assets, the aircraft, are classified as non-current. Despite the working capital deficiency, the Company expects to meet all of its obligations as they become due. The Company's long-term debt maturities through 1999 consist primarily of principal amortization of notes payable secured by certain of the Company's aircraft. As of December 31, 1996, such maturities were $46.2 million, $43.2 million and $70.4 million, respectively, for 1997, 1998 and 1999. Management expects to fund these requirements with cash from operations. At December 31, 1996, the Company had net operating loss carryforwards ("NOL"), general business tax credit carryforwards and alternative minimum tax credit carryforwards of approximately $498.7 million, $12.7 million and $1.2 million, respectively. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a loss corporation has an "ownership change" within a designated testing period, its ability to use its NOL and credit carryforwards is subject to certain limitations. The Company is a loss corporation within the meaning of Section 382. The issuance of certain common stock by the Company pursuant to the plan of reorganization resulted in an ownership change within the meaning of Section 382. This ownership change has resulted in an annual limitation (the "Section 382 Limitation") upon the Company's ability to offset any post-change taxable income with pre-change NOL. Should the Company generate insufficient taxable income in any post-change taxable year to fully utilize the Section 382 Limitation of that year, any excess limitation will be carried forward to use in subsequent tax years, provided the pre-change NOL has not -26- 28 been exhausted nor has the carryforward period expired. The alternative minimum tax credit may be carried forward indefinitely and is available to reduce future income tax payable. The Company's reorganization and the associated implementation of fresh start reporting gave rise to significant items of expense for financial reporting purposes that are not deductible for income tax purposes. In large measure, it is these nondeductible expenses that result in an effective tax rate (for financial reporting purposes) significantly greater than the current U.S. corporate statutory rate of 35%. Nevertheless, the Company's actual cash income tax liability (i.e., income taxes payable) is considerably lower than income tax expense shown for financial reporting purposes. This difference in financial expense compared to actual income tax liability is in part attributable to tax attributes (including NOLs, subject to certain limitations) of the Predecessor Company that serve to reduce the Company's actual income tax liability below the amount of expense reflected in the consolidated financial statements. To the extent tax expense for financial reporting purposes exceeds the Company's actual income tax liability, that difference is applied to reduce the carrying balance of the Company's Reorganization Value in Excess of Amounts Allocable to Identifiable Assets. In December 1994, the Company entered into a support contract with International Aero Engines ("IAE") which provides for the purchase by the Company of six new V2500-A5 spare engines scheduled for delivery beginning in 1998 through 2000 for use on the Company's A320 fleet. Such engines have an estimated aggregate cost of $42 million. At December 31, 1996, the Company had commitments to AVSA S.A.R.L., an affiliate of Airbus Industrie ("AVSA"), for a total of 22 Airbus A320-200 aircraft with delivery dates that fall in the years 1999 through 2001 (see restructuring of AVSA agreement discussed below). The aggregate net cost of such aircraft is based on formulae that include certain price indices (including indices for various aircraft components such as metal products) for periods preceding the various delivery dates. Based on an assumed 5% annual price escalation, the Company estimates such aggregate net cost to be approximately $1.1 billion. The Company has the option to cancel without cause up to five of these aircraft. If the Company exercised its existing rights to cancel five aircraft under the AVSA agreement, the aggregate net cost (based upon the assumptions described above) of commitments under such agreement would be reduced to approximately $850 million. The Company has arranged for financing from AVSA for up to one-half of the deliveries under the AVSA agreement, although the Company intends to seek financing on more favorable terms from other sources. Additionally, the Company will require capital from external sources to meet the balance of its financial commitments for aircraft and other equipment orders. The Company intends to seek such financing in the future when and as appropriate. There can be no assurance that the Company will be able to obtain such capital in sufficient amounts or on terms acceptable to the Company. A default by the Company under the AVSA agreement or any such commitment could have a material adverse effect on the Company. In September 1996, the Company and AVSA signed a term sheet, which, subject to the satisfaction of a number of conditions, provides for the restructuring of the Company's arrangements with AVSA, and specifically that (i) the number of aircraft ordered by the Company would be increased from 22 to 34 (including 24 A320 aircraft and 10 A319 aircraft), (ii) the orders subject to cancellation would be increased from five to 12 (resulting in the Company being committed to purchase 12 A320s and ten A319s), (iii) AVSA and the manufacturer of the engines for the aircraft would agree to provide certain financing support for 16 of the 22 firm orders, and (iv) the financing terms and conditions under which aircraft would be purchased would be improved from the Company's perspective. There can be no assurance that the conditions to the restructuring of the Company's arrangements with AVSA will be satisfied or that a final agreement will be reached or finalized in the form described above. In November 1996, America West Airlines 1996-1 Pass Through Trusts issued $218.6 million of Pass Through Trust Certificates in connection with the refinancing of eight Airbus A320 aircraft and three IAE V2500 spare jet engines. The combined effective interest rate on the financing is 7.05%. The proceeds of the transaction were used to refinance the indebtedness incurred by the owners of the aircraft and engines leased to the Company. Under the arrangements, the financial benefits of the transactions are shared among the Company, the equity investors in leverage leases covering the aircraft and U.S. subsidiaries of GPA Group plc ("GPA"), the original lessees under the restructured -27- 29 leases. Benefits to the Company include the agreed termination of arrangements with GPA pursuant to which GPA could cause the Company to lease up to four aircraft over the balance of the decade and a reduction in rental expense approximating $500,000 per year. The Pass Through Certificates were issued by separate pass through trusts. The equipment notes are secured by a security interest in the aircraft and engines and an assignment of the Company's aircraft leases. Neither the equipment notes nor the pass through certificates are direct obligations of, or guaranteed by, the Company, and the corresponding debt and interest expense are not included in the Company's consolidated financial statements. As of December 31, 1996, the Company's fleet consisted of 101 aircraft of which 21 aircraft meet the FAA's Stage II (but not Stage III) noise reduction requirements and must be retired or significantly modified prior to the year 2000. Management is currently considering its options regarding such aircraft. If the Company determines to modify such aircraft to comply with Stage III, the required capital expenditures for such modifications are currently estimated to be approximately $2 million per aircraft. There can be no assurance that the Company will be able to lease or purchase substitute aircraft in sufficient quantities or on favorable terms if the Company elected not to carry out such modifications. Capital expenditures for the years ended December 31, 1996, 1995 and 1994 were approximately $155.7 million, $107.4 million and $75.9 million, respectively. Capital expenditures for capitalized maintenance were $87.2 million and $60.4 million for the years ended December 31, 1996 and 1995, respectively. Capital expenditures for 1997 are expected to increase to $168 million principally due to an increase in capitalized maintenance and expenditures for computer systems and equipment. The Company currently intends to fund such expenditures with cash from operations. Certain of the Company's long-term debt agreements contain minimum cash balance requirements, leverage ratios, coverage ratios and other financial covenants with which the Company was in compliance at December 31, 1996. GOVERNMENT REGULATIONS On August 20, 1996, the Small Business Job Protection Act of 1996 reinstated the federal air transportation excise taxes (the 10% ticket tax, the 6.25% air cargo tax and the $6.00 international departure tax) effective August 27, 1996. Management believes that the Company benefited from the expiration of the federal air transportation excise taxes on December 31, 1995 and that the reimposition of such excise taxes on August 27, 1996 had a negative impact on the Company, although the amount of such benefit or negative impact directly resulting from the excise taxes cannot be precisely determined. The reinstated federal air transportation excise taxes expired on December 31, 1996 and on March 7, 1997, the taxes were reimposed to September 30, 1997. It is unclear at this time whether the taxes will expire on September 30, 1997, or will once again be extended. In addition, the Company's operating costs have been and will continue to be affected by various safety, security and other regulations and requirements applicable to its operations. The National Aviation Civilian Review Commission, with the assistance of the Department of Transportation (the "D.O.T."), will conduct an independent study of funding requirements for the FAA and develop a cost allocation model for distribution of the cost of using the United States aviation system to each segment of the system. The Review Commission will also analyze and propose funding alternatives to the existing air transportation excise taxes (primarily the 10% ticket tax) which currently fund the FAA which expired on December 31, 1996 but were reinstated effective March 7, 1997 through September 30, 1997. The report of the Review Commission is scheduled to be released in September 1997. The Company cannot forecast the results of the Review Commission's activities or what proposals the Review Commission will make. Implementation of these proposals could increase the cost of the airline operations and could have a material adverse effect on the Company's operating results. The President's Commission on Aviation Safety and Security and the U.S. Congress recently adopted increased safety and security measures designed to increase airline passenger security and protect against terrorist acts which place -28- 30 additional security and safety requirements and result in additional operating costs on the airline industry. The Company cannot forecast what additional costs or revenue impact that would be associated with complying with such increased safety and security requirements. ITEM 8A. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - HOLDINGS Consolidated balance sheets of Holdings as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994, together with the related notes and the report of KPMG Peat Marwick LLP, independent certified public accountants, are set forth on the following pages. -29- 31 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders America West Holdings Corporation: We have audited the accompanying consolidated balance sheets of America West Holdings Corporation and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of America West Holdings Corporation and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994, in conformity with generally accepted accounting principles. As discussed in Note 14 to the consolidated financial statements, on August 25, 1994, America West Airlines, Inc. emerged from bankruptcy. The consolidated financial statements of the Reorganized Company reflect the impact of adjustments to reflect the fair value of assets and liabilities under fresh start reporting. As a result, the consolidated financial statements of the Reorganized Company are presented on a different basis of accounting than those of the Predecessor Company and, therefore, are not comparable in all respects. KPMG Peat Marwick LLP Phoenix, Arizona February 28, 1997 -30- 32 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS EXCEPT SHARE DATA)
ASSETS 1996 1995 ---- ---- Current assets: Cash and cash equivalents.................................................... $ 137,499 $ 224,367 Short-term investments....................................................... 39,131 - Accounts receivable, less allowance for doubtful accounts of $3,091 in 1996 and $2,515 in 1995........................................ 106,215 69,094 Expendable spare parts and supplies, less allowance for obsolescence of $1,713 in 1996 and $2,115 in 1995..................................... 21,423 28,643 Prepaid expenses............................................................. 47,545 43,315 ------------- ------------- Total current assets.................................................... 351,813 365,419 ------------- ------------- Property and equipment: Flight equipment............................................................. 669,654 546,591 Other property and equipment................................................. 107,993 104,106 Equipment purchase deposits.................................................. 56,665 27,489 ------------- ------------- 834,312 678,186 Less accumulated depreciation and amortization............................... 163,718 76,123 ------------- ------------- 670,594 602,063 ------------- ------------- Other assets: Restricted cash.............................................................. 26,433 31,694 Reorganization value in excess of amounts allocable to identifiable assets, net 447,044 489,045 Deferred income taxes........................................................ 74,700 74,700 Other assets, net............................................................ 27,066 25,788 ------------- ------------- 575,243 621,227 ------------- ------------- $ 1,597,650 $ 1,588,709 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt......................................... $ 46,238 $ 54,157 Accounts payable............................................................. 115,458 89,157 Air traffic liability........................................................ 214,056 191,744 Accrued compensation and vacation benefits................................... 30,085 41,616 Accrued taxes................................................................ 72,047 34,359 Other accrued liabilities.................................................... 44,836 24,802 ------------- ------------- Total current liabilities............................................... 522,720 435,835 ------------- ------------- Long-term debt, less current maturities......................................... 330,148 373,964 Deferred credits and other liabilities.......................................... 122,029 129,438 Commitments and contingencies................................................... Stockholders' equity: Preferred stock, $.01 par value. Authorized 48,800,000 shares; no shares issued - - Class A common stock, $.01 par value. Authorized 1,200,000 shares; issued and outstanding 1,200,000 shares............................................. 12 12 Class B common stock, $.01 par value. Authorized 100,000,000 shares; issued and outstanding 44,626,056 shares in 1996, and 44,141,330 shares in 1995..... 446 441 Additional paid-in capital................................................... 577,267 588,927 Retained earnings............................................................ 70,137 61,632 ------------- ------------- 647,862 651,012 Less: cost of Class B common stock in treasury, 1,353,911 shares in 1996 and 112,000 shares in 1995............................................... (25,109) (1,540) ------------- ------------- Total stockholders' equity.......................................... 622,753 649,472 ------------- ------------- $ 1,597,650 $ 1,588,709 ============= =============
See accompanying notes to consolidated financial statements. -31- 33 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA)
PREDECESSOR REORGANIZED COMPANY COMPANY --------------------------------------- | ------------ PERIOD FROM| PERIOD FROM YEAR ENDED DECEMBER 31, AUGUST 26 TO| JANUARY 1 TO ------------------------- DECEMBER 31,| AUGUST 25, 1996 1995 1994 | 1994 ----------- ----------- -------------| ------------ | Operating revenues: | Passenger.............................................. $ 1,637,762 $ 1,452,261 $ 437,775 | $ 882,140 Cargo.................................................. 46,519 44,425 16,648 | 27,645 Other.................................................. 55,245 53,956 15,343 | 29,243 ----------- ----------- ----------- | ---------- Total operating revenues............................ 1,739,526 1,550,642 469,766 | 939,028 ----------- ----------- ----------- | ---------- Operating expenses: | Salaries and related costs............................. 385,840 382,032 117,562 | 213,722 Aircraft rents......................................... 202,237 173,571 54,983 | 105,547 Other rents and landing fees........................... 111,947 108,264 35,839 | 68,163 Aircraft fuel.......................................... 233,522 174,195 58,165 | 100,646 Agency commissions..................................... 133,015 124,146 37,265 | 78,988 Aircraft maintenance materials and repairs............. 125,768 65,925 17,590 | 28,109 Depreciation and amortization.......................... 52,937 49,083 15,538 | 56,694 Amortization of reorganization value in excess of | amounts applicable to identifiable assets.......... 25,263 31,958 11,145 | - Restructuring and other nonrecurring | special charges.................................... 65,098 10,500 - | - Other.................................................. 335,233 276,236 82,808 | 179,653 ----------- ----------- ----------- | ---------- Total operating expenses........................... 1,670,860 1,395,910 430,895 | 831,522 ----------- ----------- ----------- | ---------- Operating income.......................................... 68,666 154,732 38,871 | 107,506 ----------- ----------- ----------- | ---------- Nonoperating income (expenses): | Interest income........................................ 12,861 15,045 3,834 | 470 Interest expense (contractual interest of $44,747 | for the period ended August 25, 1994).............. (46,866) (58,598) (22,636) | (33,998) Gain (loss) on disposition of property and | equipment.......................................... 1,288 (2,734) (398) | (1,659) Reorganization expense, net ........................... - - - | (273,659) Other, net............................................. (1,456) (67) 65 | 131 ----------- ----------- ----------- | ---------- Total nonoperating expenses, net................. (34,173) (46,354) (19,135) | (308,715) ----------- ----------- ----------- | ---------- Income (loss) before income taxes and | extraordinary items......................... 34,493 108,378 19,736 | (201,209) Income taxes.............................................. 24,883 53,608 11,890 | 2,059 ----------- ----------- ----------- | ---------- Income (loss) before extraordinary items........ 9,610 54,770 7,846 | (203,268) Extraordinary items, net of tax........................... (1,105) (984) - | 257,660 ----------- ----------- ----------- | ---------- Net income...................................... $ 8,505 $ 53,786 $ 7,846 | $ 54,392 =========== =========== =========== | ========== Earnings (loss) per share: | Primary: | Income (loss) before extraordinary items............ $ .21 $ 1.18 $ .17 | $ (7.03) Extraordinary items................................. (.02) (.02) - | 9.02 ----------- ----------- ----------- | ---------- Net income.......................................... $ .19 $ 1.16 $ .17 | $ 1.99 =========== =========== =========== | ========== Fully Diluted: | Income (loss) before extraordinary items............ $ .20 $ 1.17 $ .17 | $ (4.96) Extraordinary items................................. (.02) (.02) - | 6.37 ----------- ----------- ----------- | ---------- Net income.......................................... $ .18 $ 1.15 $ .17 | $ 1.41 =========== =========== =========== | ========== Shares used for computation: | Primary................................................ 47,635 47,666 45,127 | 28,550 =========== =========== =========== | ========== Fully diluted.......................................... 47,945 47,666 45,127 | 40,452 =========== =========== =========== | ==========
See accompanying notes to consolidated financial statements. -32- 34 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------------ |------------ PERIOD FROM | PERIOD FROM YEAR ENDED DECEMBER 31, AUGUST 26 TO |JANUARY 1 TO ------------------------- DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ---------- ---------- ------------- | ---------- | Cash flows from operating activities: | Net income..................................................... $ 8,505 $ 53,786 $ 7,846 | $ 54,392 Adjustments to reconcile net income to net cash provided by | (used in) operating activities: | Depreciation and amortization................................ 52,937 49,083 15,538 | 56,694 Amortization of capitalized maintenance..................... 39,679 11,934 356 | - Amortization of reorganization value......................... 25,263 31,958 11,145 | - Income taxes attributable to reorganization items and other.. 23,091 52,913 11,854 | - Amortization of deferred credits............................. (11,563) (10,952) (3,961) | (2,966) Nonrecurring special charge.................................. 65,098 - - | - Reorganization items......................................... - - - | 185,226 Extraordinary items.......................................... 1,105 984 - | (257,660) Other ..................................................... 2,099 7,199 1,576 | 1,276 Changes in operating assets and liabilities: | Decrease (increase) in accounts receivable, net................ (37,121) (11,172) 27,439 | (18,769) Decrease (increase) in expendable spare parts and supplies, net (3,793) (4,819) 1,165 | 397 Decrease (increase) in prepaid expenses........................ (1,467) (14,031) 4,371 | 1,284 Decrease (increase) in other assets, net....................... (3,173) (7,312) (10,635) | 12,971 Increase (decrease) in accounts payable........................ 26,301 10,308 (17,289) | (15,557) Increase (decrease) in air traffic liability................... 22,312 64,388 (26,452) | 30,510 Increase (decrease) in accrued compensation and vacation benefits (11,531) 25,840 (11,667) | 15,739 Increase (decrease) in accrued taxes........................... 37,688 7,298 (2,104) | 25,999 Increase (decrease) in other accrued liabilities............... 8,315 (663) (13,785) | 67,429 Increase (decrease) in other liabilities....................... (13,411) (6,314) 2,521 | (14,749) ---------- ---------- ----------- | ---------- Net cash provided by (used in) operating activities.......... 230,334 260,428 (2,082) | 142,216 ---------- ---------- ----------- | ---------- Cash flows from investing activities: | Purchases of property and equipment............................ (155,742) (107,387) (14,658) | (61,271) Increase in short-term investments............................. (39,131) - - | - Other.......................................................... (4,082) (9) 600 | 334 ---------- ---------- ----------- | ---------- Net cash used in investing activities........................ (198,955) (107,396) (14,058) | (60,937) ---------- ---------- ----------- | ---------- Cash flows from financing activities: | Proceeds from issuance of debt................................. - 29,300 - | 100,000 Repayment of debt.............................................. (79,216) (137,421) (23,355) | (173,699) Issuance of common stock....................................... 3,074 1,545 3 | 114,862 Debt issuance cost............................................. - (3,130) - | - Acquisition of treasury stock.................................. (23,964) (1,540) - | - Acquisition of warrants........................................ (18,141) - - | - ---------- ---------- ----------- | ---------- Net cash provided by (used in) financing activities.......... (118,247) (111,246) (23,352) | 41,163 ---------- ---------- ----------- | ---------- Net increase (decrease) in cash and cash equivalents............. (86,868) 41,786 (39,492) | 122,442 ---------- ---------- ----------- | ---------- Cash and cash equivalents at beginning of period................. 224,367 182,581 222,073 | 99,631 ---------- ---------- ----------- | ---------- Cash and cash equivalents at end of period....................... $ 137,499 $ 224,367 $ 182,581 | $ 222,073 ========== ========== =========== | ========== Cash, cash equivalents and short-term investments at end of | period ........................................................ $ 176,630 $ 224,367 $ 182,581 | $ 222,073 ========== ========== =========== | ==========
See accompanying notes to consolidated financial statements. -33- 35 AMERICA WEST HOLDINGS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD AUGUST 26 THROUGH DECEMBER 31, 1994, AND THE PERIOD JANUARY 1 THROUGH AUGUST 25, 1994 (IN THOUSANDS EXCEPT SHARE DATA)
CONVERTIBLE CLASS A CLASS B ADDITIONAL PREFERRED COMMON COMMON COMMON PAID-IN STOCK STOCK STOCK STOCK CAPITAL ----------- --------- --------- --------- ---------- BALANCE AT JANUARY 1, 1994 .................... $ 18 $ -- $ -- $ 6,323 $ 197,010 --------- --------- --------- --------- --------- Issuance of 336,277 shares of common stock pursuant to convertible preferred stock dividends .................................. -- -- -- 84 2,932 Employee stock purchase plan: Cancellation of 7,678 shares of common stock at: $1.19-$4.03 per share ................... -- -- -- (2) (49) Deferred compensation ................... -- -- -- -- (1) Issuance of 108,825 shares of common stock pursuant to exercise of stock options ...... -- -- -- 27 166 Net income .................................... -- -- -- -- -- Eliminate predecessor equity accounts in connection with fresh start ................ (18) -- -- (6,432) (200,058) Eliminate employee stock receivable ........... -- -- -- -- -- Record excess of reorganization value over identifiable assets ........................ -- -- -- -- -- Sale of 1,200,000 shares of Class A common stock and 14,000,000 shares of Class B common stock ............................... -- 12 140 -- 114,710 Issuance of 29,925,000 shares of new Class B common stock ............................... -- -- 299 -- 472,339 --------- --------- --------- --------- --------- BALANCE AT AUGUST 25, 1994 .................... -- 12 439 -- 587,049 --------- --------- --------- --------- --------- Issuance of common stock ...................... -- -- -- -- 100 Net income .................................... -- -- -- -- -- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1994 .................. -- 12 439 -- 587,149 --------- --------- --------- --------- --------- Issuance of 4,057 shares and 170,667 shares of common stock pursuant to the exercise of stock warrants and stock options ........... -- -- 2 -- 1,543 Issuance of 30,334 shares of restricted stock . -- -- -- -- 235 Acquisition of treasury stock at: $13.63-$14.00 per share .................... -- -- -- -- -- Net income .................................... -- -- -- -- -- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1995 .................. -- 12 441 -- 588,927 --------- --------- --------- --------- --------- Issuance of 12,725 shares and 314,001 shares of common stock pursuant to the exercise of stock warrants and stock options ........... -- -- 3 -- 3,071 Issuance of 158,000 shares of restricted stock -- -- 2 -- 2,761 Acquisition and issuance of treasury stock at: $13.63-$21.88 per share .................... -- -- -- -- 649 Repurchase of 2,187,475 warrants at $8.29 per warrant ................................ -- -- -- -- (18,141) Net income .................................... -- -- -- -- -- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1996 .................. $ -- $ 12 $ 446 $ -- $ 577,267 ========= ========= ========= ========= =========
DEFERRED COMPENSATION AND NOTES RETAINED CLASS B RECEIVABLE- EARNINGS/ TREASURY EMPLOYEE STOCK (DEFICIT) STOCK PURCHASE PLANS TOTAL --------- --------- -------------- --------- BALANCE AT JANUARY 1, 1994 .................... $(438,626) $ -- $ (18,987) $(254,262) --------- --------- --------- --------- Issuance of 336,277 shares of common stock pursuant to convertible preferred stock dividends .................................. -- -- -- 3,016 Employee stock purchase plan: Cancellation of 7,678 shares of common stock at: $1.19-$4.03 per share ................... -- -- 43 (8) Deferred compensation ................... -- -- 606 605 Issuance of 108,825 shares of common stock pursuant to exercise of stock options ...... -- -- -- 193 Net income .................................... 54,392 -- -- 54,392 Eliminate predecessor equity accounts in connection with fresh start ................ 206,508 -- -- -- Eliminate employee stock receivable ........... (18,338) -- 18,338 -- Record excess of reorganization value over identifiable assets ........................ 668,702 -- -- 668,702 Sale of 1,200,000 shares of Class A common stock and 14,000,000 shares of Class B common stock ............................... -- -- -- 114,862 Issuance of 29,925,000 shares of new Class B common stock ............................... (472,638) -- -- -- --------- --------- --------- --------- BALANCE AT AUGUST 25, 1994 .................... -- -- -- 587,500 --------- --------- --------- --------- Issuance of common stock ...................... -- -- -- 100 Net income .................................... 7,846 -- -- 7,846 --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1994 .................. 7,846 -- -- 595,446 --------- --------- --------- --------- Issuance of 4,057 shares and 170,667 shares of common stock pursuant to the exercise of stock warrants and stock options ........... -- -- -- 1,545 Issuance of 30,334 shares of restricted stock . -- -- -- 235 Acquisition of treasury stock at: $13.63-$14.00 per share .................... -- (1,540) -- (1,540) Net income .................................... 53,786 -- -- 53,786 --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1995 .................. 61,632 (1,540) -- 649,472 --------- --------- --------- --------- Issuance of 12,725 shares and 314,001 shares of common stock pursuant to the exercise of stock warrants and stock options ........... -- -- -- 3,074 Issuance of 158,000 shares of restricted stock -- -- -- 2,763 Acquisition and issuance of treasury stock at: $13.63-$21.88 per share .................... -- (23,569) -- (22,920) Repurchase of 2,187,475 warrants at $8.29 per warrant ................................ -- -- -- (18,141) Net income .................................... 8,505 -- -- 8,505 --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1996 .................. $ 70,137 $ (25,109) $ -- $ 622,753 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. -34- 36 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES America West Holdings Corporation ("Holdings"), a Delaware corporation, became the holding company for America West Airlines, Inc. ("AWA"), effective midnight, December 31, 1996. Holdings' primary business activity is ownership of all the capital stock of AWA, the ninth largest commercial airline carrier in the United States serving more than 90 destinations in the U.S., Canada and Mexico. (a) Basis of Presentation The consolidated financial statements include the accounts of Holdings and its wholly owned subsidiary AWA (collectively, the "Company"). The Company's consolidated financial statements give effect to the formation of the holding company discussed above for all periods presented. All significant inter-company balances and transactions have been eliminated. America West Airlines, Inc., D.I.P. (the "Predecessor Company") filed a voluntary petition on June 27, 1991, to reorganize under Chapter 11 of the Federal Bankruptcy Code. On August 10, 1994, the Plan of Reorganization ("Plan"), filed by the Predecessor Company, was confirmed and became effective on August 25, 1994 (the "Effective Date"). On August 25, 1994, AWA, (the "Reorganized Company") adopted fresh start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") of the American Institute of Certified Public Accountants. Accordingly, the Company's post-reorganization consolidated balance sheets and consolidated statements of income have not been prepared on a consistent basis with such pre-reorganization financial statements and are not comparable in all respects to financial statements prior to reorganization. For accounting purposes, the inception date of the Reorganized Company is deemed to be August 26, 1994. A vertical black line is shown in the financial statements to separate the Reorganized Company from the Predecessor Company since they have not been prepared on a consistent basis of accounting. (b) Cash and Cash Equivalents Cash equivalents consist of all highly liquid debt instruments purchased with original maturities of three months or less. The debt instruments are classified as held-to-maturity and are carried at amortized cost which approximates fair value. (See Note 9, "Investments in Debt Securities.") (c) Short-term Investments Short-term investments consist of cash invested in certain debt securities with original maturities greater than 90 days. The debt securities are classified as held to maturity and are carried at amortized cost which approximates fair value. (See Note 9, "Investments in Debt Securities.") (d) Expendable Spare Parts and Supplies Flight equipment expendable spare parts and supplies are valued at average cost. Allowances for obsolescence are provided, over the estimated useful life of the related aircraft and engines, for spare parts expected to be on hand at the date the aircraft are retired from service. -35- 37 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (e) Property and Equipment Property and equipment are recorded at cost. Interest capitalized on advance payments for aircraft acquisitions and on expenditures for aircraft improvements are part of these costs. No interest was capitalized in the year ended December 31, 1996 due to the pending restructuring of the aircraft purchase agreement with AVSA S.A.R.L., an affiliate of Airbus Industrie ("AVSA") (See Note 11, "Commitments and Contingencies"). Interest capitalized for the year ended December 31, 1995 was $2.7 million. Property and equipment is depreciated and amortized to residual values over the estimated useful lives or the lease term, whichever is less, using the straight-line method. The estimated useful lives for the Company's ground property and equipment range from three to 12 years for owned property and equipment and to 30 years for the reservation and training center and technical support facilities. The estimated useful lives of the Company's owned aircraft, jet engines, flight equipment and rotable parts range from 11 to 22 years. Leasehold improvements relating to flight equipment and other property on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. (f) Restricted Cash Restricted cash includes cash deposits securing certain letters of credit. (g) Aircraft Maintenance and Repairs Routine maintenance and repairs are charged to expense as incurred. The cost of major scheduled airframe, engine and certain component overhauls are capitalized and amortized over the periods benefited and are included in aircraft maintenance materials and repairs expense for the Reorganized Company as part of fresh start reporting and in depreciation and amortization expense for the Predecessor Company. The balance of capitalized maintenance relating to aircraft and engines was reduced as part of the revaluation of property and equipment and operating leases under fresh start reporting. Additionally, a provision for the estimated cost of scheduled airframe and engine overhauls required to be performed on leased aircraft prior to their return to the lessors has been recorded. (h) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets Reorganization value in excess of amounts allocable to identifiable assets is amortized on a straight line basis over 20 years. Accumulated amortization at December 31, 1996 and 1995 was $68.4 million and $43.1 million, respectively. During the years ended December 31, 1996 and 1995, reductions in reorganization value of $16.7 million and $50 million were recorded as a result of the utilization of the Predecessor Company tax attributes including net operating loss carryforwards. Additionally, in 1995 the Company established a deferred tax asset, which reduced reorganization value by $74.7 million. The Company assesses the recoverability of this asset based upon expected future undiscounted cash flows and other relevant information. (i) Frequent Flyer Awards The Company maintains a frequent travel award program known as "FlightFund" that provides a variety of awards to program members based on accumulated mileage. The estimated cost of providing the free travel, using the incremental cost method as adjusted for estimated redemption rates, is recognized as a liability and charged to operations as program members accumulate mileage. -36- 38 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (j) Deferred Credit-Operating Leases Operating leases were adjusted to fair market value at the Effective Date. The net present value of the difference between the stated lease rates and the fair market rates has been recorded as a deferred credit in the accompanying consolidated balance sheets. The deferred credit will be increased through charges to interest expense and decreased on a straight-line basis as a reduction in rent expense over the applicable lease periods. At December 31, 1996 and 1995, the unamortized balance of the deferred credit was $95.6 million and $107.2 million, respectively. (k) Passenger Revenue Passenger revenue is recognized when the transportation is provided. Ticket sales for transportation which has not yet been provided are recorded as air traffic liability. Passenger traffic commissions and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are included as a prepaid expense. (l) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (m) Stock Option Plan Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and proforma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provision of SFAS No. 123. (See Note 4, "Stock Options and Awards.") (n) Per Share Data Primary earnings per share is based upon the weighted average number of shares of common stock outstanding and dilutive common stock equivalents (stock options and warrants). Primary earnings per share reflects net income adjusted for interest on borrowings effectively reduced by the proceeds from the assumed exercise of common stock equivalents but only if the effect of such adjustments are dilutive. Fully diluted earnings per share is based on the average number of shares of common stock, dilutive common stock equivalents (stock options and warrants) and the conversion of outstanding convertible preferred stock (none -37- 39 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED outstanding at December 31, 1996) as well as for the Predecessor Company the conversion of convertible subordinated debentures. Fully diluted earnings per share reflects net income adjusted for interest on borrowings effectively reduced by the proceeds from the assumed exercise of common stock equivalents or conversion of debentures but only if the effect of such adjustments are dilutive. (o) Use of Estimates Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (p) Advertising Costs The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 1996 and 1995 and for the combined period ending December 31, 1994 was $26.6 million, $25.2 million and $23.8 million, respectively. (q) Reclassification Certain reclassifications have been made in the prior year's consolidated financial statements to conform them to the current year's presentation. 2. LONG-TERM DEBT Long-term debt at December 31 consists of the following:
1996 1995 -------- -------- (IN THOUSANDS) SECURED Notes payable, primarily fixed interest rates of 9.53% to 10.79%, averaging 10.32%, installments due 1999 through 2008.................................................... $234,494 $274,751 Borrowings under lines of credit, floating interest rates of Prime + 1% to three months LIBOR +4%, averaging 9.42%, installments due through 1999. No available borrowings remain ..................................................................... 8,277 14,794 Industrial development revenue bonds, variable interest rate of 2.9% to 5.6%, averaging 3.83%, due 2016(a) .................................................................... 29,300 29,300 -------- -------- 272,071 318,845 -------- -------- UNSECURED 10 3/4% Senior Notes, face amount of $50 million, interest only payment until due in 2005(b) ........................................................................ 48,197 71,984 Notes payable, interest rates of 8% to 90-day LIBOR +3%, averaging 8.39%, installments due through 2000 ......................................................... 55,910 36,708 Other ..................................................................................... 208 584 -------- -------- 104,315 109,276 -------- -------- Total long-term debt ...................................................................... 376,386 428,121 Less: current maturities ................................................................. 46,238 54,157 -------- -------- $330,148 $373,964 ======== ========
-38- 40 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (a) The industrial development revenue bonds are backed by an irrevocable direct pay letter of credit issued by the Industrial Bank of Japan, Limited, Los Angeles Agency; the letter of credit is secured by the Company's maintenance facility and related improvements, seventeen spare engines and a flight simulator with a combined net book value of $42.1 million and a pledge of $3.2 million in cash. The interest rate varies weekly and from January 1, 1996 to December 31, 1996 ranged from 2.9% to 5.6%. The bondholders have the right to put the bonds back to the Company on a weekly basis if the bonds bear interest at a weekly rate or monthly if the bonds bear interest at a monthly rate. If the bonds are put back to the Company, the remarketing agent or the transfer agent will, at the direction of the Company, remarket such bonds. Any bonds not remarketed will be retired utilizing the $29.9 million letter of credit which represents the principal plus 60 days of interest at a maximum rate of 12%. The letter of credit was extended in November 1996 for one year and is subject to mandatory redemption under certain circumstances. The estimated annual cost for the letter of credit is approximately $1.1 million. (b) In June 1996, the Company prepaid $25 million in principal of the 10 3/4% Senior Notes. The 10 3/4% Senior Notes mature on September 1, 2005 and interest is payable in arrears semi-annually commencing on March 1, 1996. The 10 3/4% Senior Notes may be redeemed at the option of the Company on or after September 1, 2001 at any time in whole or from time to time in part, at a redemption price equal to the following percentage of principal redeemed, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period beginning:
SEPTEMBER 1, PERCENTAGE ------------ ---------- 2000 .............. 105.375% 2001 .............. 103.583% 2002 .............. 101.792% 2003 and thereafter 100.000%
Secured financings totaling $272.1 million are collateralized by assets, primarily aircraft and engines, with a net book value of $388.5 million at December 31, 1996. At December 31, 1996, the estimated maturities of long-term debt are as follows:
(IN THOUSANDS) 1997.................... $ 46,238 1998.................... 43,210 1999.................... 70,430 2000.................... 28,000 2001.................... 20,720 Thereafter.............. 167,788 ---------- $ 376,386 ==========
Certain of the Company's long-term debt agreements contain minimum cash balance requirements, leverage ratios, coverage ratios, limitations on investments and restricted payments including cash dividends, and other financial covenants with which the Company was in compliance at December 31, 1996. 3. CAPITAL STOCK Effective midnight, December 31, 1996, AWA became a wholly owned subsidiary of Holdings and each share of AWA Class A and Class B Common Stock was exchanged for one share of Holdings Class A or Class B Common -39- 41 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Stock. Holdings' Class B Common Stock is listed on the New York Stock Exchange. On August 25, 1994, AWA issued approximately 10.4 million warrants to purchase Class B Common Stock with an exercise price of $12.74 per share. The warrants are exercisable by the holders any time before August 25, 1999 and 10.4 million shares of Class B Common Stock have been reserved for the exercise of these warrants. In May 1996, approximately 2.2 million warrants were repurchased by AWA for approximately $18 million. As of December 31, 1996, 17,054 warrants have been exercised at $12.74 per share. Pursuant to their terms, as part of the holding company formation transaction, the AWA warrants became rights to acquire shares of Holdings Class B Common Stock. AWA has made arrangements for the issuance of Holdings Class B Common Stock upon the exercise of such warrants by purchasing an option from Holdings to acquire such stock. AWA issued a $62.4 million note payable due December 31, 2005 with an interest rate of 11%. Subsequently, Holdings made a capital contribution to AWA issuing a note payable to AWA for $62.4 million due December 31, 2045 with an interest rate of 10 7/8%. Preferred Stock The Company's Board of Directors by resolution may authorize the issuance of the Preferred Stock as a class, in one or more series, having the number of shares, designations, relative voting rights, dividend rights, liquidation and other preferences and limitations that the Board of Directors fixes without any stockholder approval. No shares of Preferred Stock have been issued. Common Stock The holders of Class A Common Stock are entitled to fifty votes per share, and the holders of Class B Common Stock are entitled to one vote per share, on all matters submitted to a vote of common stockholders except that voting rights of non-U.S. citizens are limited. The Class A Common Stock is convertible into an equal number of Class B shares at any time at the election of the holders of the Class A Common Stock. Holders of Common Stock of all classes participate equally as to any dividends or distributions on the Common Stock, except that dividends payable in shares of Common Stock, or securities to acquire Common Stock, will be made in the same class of Common Stock as that held by the recipient of the dividend. Holders of Common Stock have no right to cumulate their votes in the election of directors. The Common Stock votes together as a single class, subject to the right to a separate class vote in certain instances required by law. Pursuant to the Stockholder's Agreement, the Company, TPG Partners, L.P. ("TPG"), TPG Parallel, Air Partners II, Continental Airlines, Inc. ("Continental") and Mesa Air Group ("Mesa") will vote all shares of the Common Stock owned by them in favor of the reelection of the initially designated Independent Directors for as long as such Independent Directors continue to serve or until the first annual meeting after August 25, 1997. 4. STOCK OPTIONS AND AWARDS In 1994, the Company adopted the 1994 Incentive Equity Plan, (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to officers and key employees. The Plan authorized grants of options to purchase up to 3.5 million shares of authorized but unissued Class B Common Stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant, generally become exercisable over a three-year period and expire if unexercised at the end of 10 years. The Company's Board of Directors has approved an amendment to the Plan that would increase the maximum number of shares available under the Plan from 3.5 million to 7.5 million subject to stockholders' approval. -40- 42 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Stock option activity during the periods indicated is as follows: WEIGHTED- NUMBER OF AVERAGE SHARES EXERCISE PRICE ---------- -------------- Balance at December 31, 1993: -- $ -- Granted ................. 1,147,000 $ 8.73 ---------- ------ Balance at December 31, 1994: 1,147,000 $ 8.73 Granted ................. 1,396,000 $12.39 Exercised ............... (170,667) $ 8.75 Canceled ................ (204,000) $ 9.30 ---------- ------ Balance at December 31, 1995: 2,168,333 $11.03 Granted ................. 2,058,000 $15.55 Exercised ............... (314,001) $ 9.28 Canceled ................ (374,332) $12.27 ---------- ------ Balance at December 31, 1996: 3,538,000 $13.68 =========
At December 31, 1996, the range of exercise prices was $8.75 - $23.00 and the weighted-average remaining contractual life of outstanding options was 9.15 years. The number of options exercisable at December 31, 1996 and 1995 was 972,669 and 846,308, respectively, and the weighted-average exercise price of those options was $10.98 and $9.62, respectively. The per share weighted-average fair value of stock options granted during 1996 and 1995 was $6.48 and $4.73 on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 1996 - expected dividend yield 0.0%, risk-free interest rate of 6.3%, volatility of 43.13% and an expected life of 4 years; 1995 - expected dividend yield 0.0%, risk-free interest rate of 6.5%, volatility of 37%, and an expected life of 4 years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1996 1995 ---- ---- Net income: As reported $ 8,505 $ 53,786 ======= ========= Pro forma $ 6,343 $ 52,704 ======= ========= Earnings per share: Primary As reported $ 0.19 $ 1.16 ======= ========= Pro forma $ 0.14 $ 1.13 ======= ========= Fully diluted As reported $ 0.18 $ 1.15 ======= ========= Pro forma $ 0.13 $ 1.11 ======= =========
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. Under the 1994 Incentive Equity Plan, the Company granted 158,000 shares, 30,384 shares, and 11,000 shares in 1996, 1995 and 1994, respectively, of Class B Common Stock as restricted stock. Compensation expense of $785,000, $235,000 and $97,000 was recorded based upon the fair value at the date of grant and applicable vesting provisions for 1996, 1995 and 1994, respectively. At December 31, 1996, 87,056 shares of restricted stock were vested. -41- 43 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The 1994 Incentive Equity Plan also provides for the issuance of restricted stock and grant of stock options to non-employee directors. The Company has granted options to purchase 117,000 shares of Class B Common Stock to members of the Board of Directors who are not employees of the Company. The options have a ten-year term and are exercisable six months after the date of grant. At December 31, 1996, 117,000 options to purchase Class B Common Stock were exercisable at prices ranging from $8.00 to $19.75 per share. 5. EMPLOYEE BENEFIT PLAN The Company has a 401(k) defined contribution plan, covering essentially all employees of the Company. Participants may contribute from 1 to 15% of their pretax earnings to a maximum of $9,500 in 1996. The Company's matching contribution is 50% of a participant's contributions up to 6% of the participant's annual pretax earnings or 25% of a participant's contributions, whichever is greater. The Company's contribution expense to the plan totaled $5.9 million, $5.9 million and $3.8 million in 1996, 1995 and the combined 1994 period, respectively. 6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (a) Fair Value of Financial Instruments Cash Equivalents and Short-term Investments The carrying amount approximates fair value because of the short-term maturity of these instruments. Long-term Debt At December 31, 1996 and 1995, the fair value of long-term debt was approximately $379 million and $431 million, respectively, based on quoted market prices for the same or similar debt including debt of comparable remaining maturities. (b) Fuel Price Risk Management The Company is exposed to risk from fluctuating jet fuel prices. To manage this risk, the Company implemented a fuel hedging program in late 1996. Oversight of this program is the responsibility of the Fuel Hedge Committee ("FHC"), a group of the Company's senior officers, which sets acceptable levels of risk and reviews hedging activities. Under the program, the Company may enter into certain cap and swap transactions with approved counterparties for a period not to exceed twelve months. Gains and losses on such transactions are recorded as adjustments to fuel expense when the underlying fuel being hedged is used. As of December 31, 1996, there were no transactions outstanding. The Company is exposed to credit risks in the event any counterparty fails to meet its obligations. The Company does not anticipate such non-performance as counterparties are selected based on credit ratings, exposure to any one counterparty is limited based on formal guidelines and the relative market positions with such counterparties are monitored by the FHC. (c) Concentration of Credit Risk The Company does not believe it is subject to any significant concentration of credit risk. Most of the Company's receivables result from tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on AWA. These receivables are short-term, generally being settled shortly after the sale. -42- 44 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 7. INCOME TAXES The Company recorded income tax expense for the periods shown below (exclusive of extraordinary items) as follows:
| PREDECESSOR REORGANIZED COMPANY | COMPANY --------------------------------------------- | ----------- PERIOD FROM | PERIOD FROM YEAR ENDED DECEMBER 31, AUGUST 26 TO | JANUARY 1 TO -------------------------- DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 --------- -------- ------------ | --------- (IN THOUSANDS) | | Current Taxes: | Federal....................................... $ 943 $ 505 $ - | $ 1,869 State......................................... 849 190 36 | 190 --------- -------- -------- | --------- Total current taxes..................... 1,792 695 36 | 2,059 --------- -------- -------- | --------- Deferred taxes................................... - - - | - --------- -------- -------- | --------- Income taxes attributable to | reorganization items and other................ 23,091 52,913 11,854 | - --------- -------- -------- | --------- Total income tax expense......................... $ 24,883 $ 53,608 $ 11,890 | $ 2,059 ========= ======== ======== | =========
With respect to the years ended December 31, 1996 and 1995 and the period August 26, 1994 through December 31, 1994, income tax expense pertains both to income before extraordinary items as well as certain adjustments necessitated by the effectiveness of the Plan and the resultant fresh start adjustments to the Company's financial statements. The Company's reorganization and the associated implementation of fresh start reporting gave rise to significant items of expense for financial reporting purposes that are not deductible for income tax purposes. In large measure, it is these nondeductible (for income tax purposes) expenses that result in an effective tax rate (for financial reporting purposes) significantly greater than the current U.S. corporate statutory rate of 35%. Nevertheless, the Company's actual cash income tax liability (i.e., income taxes payable) is considerably lower than income tax expense shown for financial reporting purposes. This difference in financial expense compared to actual income tax liability is in part attributable to the utilization of certain tax attributes of the Predecessor Company that serve to reduce the Company's actual income tax liability. The excess of financial expense over the Company's actual income tax liability ($16.7 million for 1996) is applied to reduce the carrying balance of the Company's reorganization value in excess of amounts allocable to identifiable assets. For the years ended December 31, 1996 and 1995, the Company recognized income tax benefits of $918,000 and $984,000, respectively, arising from extraordinary charges. For the periods January 1, 1994 through August 25, 1994 and August 26 through December 31, 1994, income tax expense pertains solely to income before extraordinary item. No income tax expense was recognized with respect to the extraordinary gain resulting from the cancellation of indebtedness that occurred in connection with the effectiveness of the Plan as such gain is not subject to income taxation. Income tax expense, exclusive of extraordinary items, recorded for the periods shown below, differs from amounts computed at the federal statutory income tax rate as follows: -43- 45 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
| PREDECESSOR REORGANIZED COMPANY | COMPANY --------------------------------------------- | ----------- PERIOD FROM | PERIOD FROM AUGUST 26 TO | JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, | AUGUST 25, --------------------------- ------------ | ----------- 1996 1995 1994 | 1994 --------- -------- -------- | --------- | Income tax expense at U.S. statutory rate........ $ 12,073 $ 37,932 $ 6,908 | $ 19,758 State income taxes, net of federal income | tax benefit................................... 1,984 4,505 1,663 | 190 Nondeductible amortization of reorganization | value in excess of amounts allocable | to identifiable assets........................ 8,842 11,188 3,901 | - Benefit of loss carryforwards.................... - - - | (17,889) Other, net....................................... 1,984 (17) (582) | - --------- -------- -------- | --------- Total......................................... $ 24,883 $ 53,608 $ 11,890 | $ 2,059 ========= ======== ======== | =========
As of December 31, 1996, the Company has available net operating loss, business tax credit and alternative minimum tax credit carryforwards for Federal income tax purposes of approximately $498.7 million, $12.7 million and $1.2 million, respectively. The net operating loss carryforwards expire during the years 1999 through 2009 while the business credit carryforwards expire during the years 1997 through 2006. However, such carryforwards are not fully available to offset federal (and in certain circumstances, state) alternative minimum taxable income. Further, as a result of a statutory "ownership change" (as defined for purposes of Section 382 of the Internal Revenue Code) that occurred as a result of the effectiveness of the Company's Plan of Reorganization, the Company's ability to utilize its net operating loss and business tax credit carryforwards may be restricted. The alternative minimum tax credit may be carried forward without expiration and is available to offset future income tax payable. Composition of Deferred Tax Items: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, the significant components of the Company's deferred tax assets and liabilities are a result of the temporary differences related to the items described as follows:
1996 1995 --------- --------- (IN THOUSANDS) Deferred income tax liabilities: Property and equipment, principally depreciation and "fresh start" differences............................................................... $(111,989) $ (89,766) --------- --------- Deferred tax assets: Aircraft leases ............................................................. 32,789 39,812 Reorganization expenses ..................................................... 21,356 23,591 Net operating loss carryforwards ............................................ 190,548 203,879 Tax credit carryforwards .................................................... 13,861 13,777 Other ....................................................................... 16,568 14,240 --------- --------- Total deferred tax assets ................................................ 275,122 295,299 --------- --------- Valuation allowance ........................................................ (88,433) (130,833) --------- --------- Net deferred tax asset.................................................... $ 74,700 $ 74,700 ========= =========
-44- 46 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SFAS 109 requires a "more likely than not" criterion be applied when evaluating the realizability of a deferred tax asset. In 1996 the Company reduced the valuation allowance by $42.4 million from its 1995 balance principally for the portion of its net operating loss carryforwards (a Predecessor Company tax attribute) that it anticipates will, more likely than not, be utilized. The remaining valuation allowance of $88.4 million is necessary as at this time, the Company has not determined it is more likely than not that the balance of the deferred tax assets will be realized. The Company continues to monitor the valuation allowance and will make adjustments as appropriate. If in future tax periods, the Company were to recognize additional tax benefits related to items attributable to the Predecessor Company such as net operating loss and other carryforwards, such benefits would be applied to further reduce reorganization value in excess of amounts allocable to identifiable assets. 8. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information and non-cash investing and financing activities were as follows:
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------- | ------------- PERIOD FROM | PERIOD FROM YEAR ENDED DECEMBER 31, AUGUST 26 TO | JANUARY 1 TO ----------------------- DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ------- --------- ------------ | ------------- (IN THOUSANDS) | | Non-cash transactions: | Notes payable issued to seller .......... $26,112 $ 5,723 $ -- | $ -- Accrued interest reclassified to | long-term debt .................... -- 65 -- | 5,563 Issuance of stock as success bonus ...... -- -- -- | 1,224 Equipment acquired through capital leases -- -- -- | 138 | Cash transactions: | Interest paid, net of amounts capitalized 37,555 50,293 11,262 | 29,253 Income taxes paid ....................... 498 795 425 | 1,253
Cash flows from reorganization items in connection with the Chapter 11 proceedings included interest received on cash accumulations of $3.7 million and professional fees paid for services rendered of $23.6 million. -45- 47 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 9. INVESTMENTS IN DEBT SECURITIES Cash equivalents consist of highly liquid debt instruments with original maturities of three months or less while short-term investments consists of highly liquid debt instruments with original maturities in excess of three months. These highly liquid debt instruments as of December 31 are classified as follows:
1996 1995 -------- -------- (IN THOUSANDS) Held to Maturity: Debt securities issued by the U.S. Treasury and other U.S. government agencies $ 36,973 $129,288 Bankers acceptances .......................................................... 49,141 37,686 Corporate debt securities .................................................... 90,418 20,466 Other debt securities ........................................................ 98 1,341 -------- -------- 176,630 188,781 Cash ......................................................................... -- 35,586 -------- -------- Total cash, cash equivalents and short-term investments ........... $176,630 $224,367 ======== ========
10. EXTRAORDINARY GAINS AND LOSSES In June 1996, the Company had an extraordinary loss of $1.1 million net of an income tax benefit of $918,000 for the write-off of debt issuance cost relating to the prepayment of $25 million of its 10 3/4% Senior Notes. In August 1995, the Company had an extraordinary loss of $984,000, net of a tax benefit of $984,000 for the write-off of debt issuance cost relating to the prepayment of $48 million of its $123 million 11 1/4% Senior Notes and the exchange of the remaining $75 million of such notes for $75 million of 10 3/4% Senior Notes. The extraordinary gain recorded in the period January 1 through August 25, 1994 includes $257.7 million from the discharge of indebtedness pursuant to the consummation of the Plan of Reorganization. No income tax expense was recognized with respect to the extraordinary gain resulting from the cancellation of indebtedness that occurred in connection with the effectiveness of the Plan as such gain is not subject to income taxation. 11. COMMITMENTS AND CONTINGENCIES (a) Leases As of December 31, 1996, the Company had 82 aircraft under operating leases with remaining terms ranging from five months to approximately 22 years. The Company has options to purchase certain of the aircraft at fair market values at the end of the lease terms. Certain of the Company's aircraft lessors have the option to call their respective aircraft. Usually, if such call options are exercised, the Company has the right of first refusal to retain the aircraft. None of these options have been exercised and the last of these call options expires in July 1997. The Company does not believe that the possible exercise of any or all of these options will have a material effect on its operations. Certain of the agreements require security deposits, minimum return provisions and maintenance reserve payments and provide the aircraft lessor the option to reset their respective rentals to the greater of the existing rentals being paid under the leases or the then current fair market rates. The Company also leases certain terminal space, ground facilities and computer and other equipment under noncancelable operating leases. -46- 48 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED At December 31, 1996, the scheduled future minimum cash rental payments under noncancelable operating leases with initial terms of more than one year are as follows:
(IN THOUSANDS) 1997................... $ 237,545 1998................... 201,575 1999................... 188,575 2000................... 176,186 2001................... 154,127 Thereafter............. 920,002 ------------ $ 1,878,010 ============
Rent expense (excluding landing fees) was approximately $281 million, $251 million, $81 million and $154 million for the years ended December 31, 1996 and 1995, for the period August 26 through December 31, 1994, and the period January 1 through August 25, 1994, respectively. Collectively, the operating lease agreements require security deposits with lessors of $9.7 million and bank letters of credit of $17.6 million. The letters of credit are collateralized by $17.6 million of restricted cash as of December 31, 1996 and 1995. (b) Revenue Bonds Special facility revenue bonds issued by a municipality have been used to fund the acquisition of leasehold improvements at the Phoenix Sky Harbor airport which have been leased by the Company. Under the operating lease agreements, the Company is required to make rental payments sufficient to pay principal and interest when due on the bonds. Pursuant to the agreement, payment of principal and interest at 8.3% on the Series 1994A Bonds ends on January 1, 2006 while payment of principal and interest at 8.2% on the Series 1994B Bonds ends on January 1, 1999. At December 31, 1996, the outstanding balance of Series 1994 Bonds was $16.1 million. (c) Aircraft Acquisitions In September 1996, the Company and AVSA, signed a term sheet (the "AVSA Term Sheet"), which, subject to the satisfaction of a number of conditions provides for the restructuring of the Company's arrangements with AVSA, and specifically that (i) the number of aircraft ordered by the Company would be increased from 22 to 34 (including 24 A320 aircraft and 10 A319 aircraft), (ii) the orders subject to cancellation would be increased from five to 12 (resulting in the Company being committed to purchase 12 A320s and 10 A319s), (iii) AVSA and the manufacturer of the engines for the aircraft would agree to provide certain financing support for 16 of the 22 firm orders, and (iv) the financing terms and conditions under which aircraft would be purchased would be improved from the Company's perspective. There can be no assurance that the conditions to the restructuring of the Company's arrangements with AVSA will be satisfied or that a final agreement will be reached or finalized in the form described above. At December 31, 1996, the Company had commitments to AVSA, for a total of 22 Airbus A320-200 aircraft with delivery dates that fall in the years 1999 through 2001. The aggregate net cost of such aircraft is based on formulae that include certain price indices (including indices for various aircraft components such as metal products) for periods preceding the various delivery dates. Based on an assumed 5% annual price escalation, the Company estimates such aggregate net cost to be approximately $1.1 billion. The Company has the option to cancel without cause up to five of these aircraft. If the Company exercised its existing rights to cancel five aircraft under the AVSA agreement, the -47- 49 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED aggregate net cost (based upon the assumptions described above) of commitments under such agreement would be reduced to approximately $850 million. In December 1994, the Company entered into a support contract with International Aero Engines ("IAE") which provides for the purchase by the Company of six new V2500-A5 spare engines scheduled for delivery beginning in 1998 through 2000 for use on certain of the A320 fleet. Such engines have an estimated aggregate cost of $42 million. The following table reflects estimated cash payments under the aircraft and engine purchase contracts. Actual payments may vary due to inflation factor adjustments and changes in the delivery schedule of the equipment. The estimated cash payments include the progress payments that will be made in cash, as opposed to being financed under an existing progress payment financing facility.
(IN THOUSANDS) 1997................... $ 63,134 1998................... 106,218 1999................... 264,707 2000................... 297,368 2001................... 328,207 ------------ $ 1,059,634 ============
At December 31, 1996, the Company has significant capital commitments for a number of aircraft, as discussed above. Although the Company has arranged for financing for up to one-half of such commitment, the Company will require substantial capital from external sources to meet the remaining financial commitments. The Company intends to seek additional financing (which may include public debt financing or private financing) in the future when and as appropriate. There can be no assurance that sufficient financing will be obtained for all aircraft and other capital requirements. A default by the Company under any such commitment could have a material adverse effect on the Company. In November 1996, the America West Airlines 1996-1 Pass Through Trusts issued $218.6 million of Pass Through Certificates, representing fractional undivided interests in such trusts. The certificates were issued in connection with the refinancing of eight Airbus A320 aircraft and three IAE V2500 spare jet engines. The combined effective interest rate on the financing was 7.05%. The proceeds of the transaction were used to refinance the indebtedness incurred by the owners of the aircraft and engines leased to the Company. Under the arrangements, the financial benefits of the transactions are shared among the Company, the equity investors in leverage leases covering the aircraft and U.S. subsidiaries of GPA Group plc ("GPA"), the original lessees under the restructured leases. Benefits to the Company include the agreed termination of arrangements with GPA pursuant to which GPA could cause the Company to lease up to four aircraft under a put agreement and a reduction in rental expense approximating $500,000 per year. The Pass Through Certificates were issued by separate pass through trusts. The equipment notes are secured by a security interest in the aircraft and engines and an assignment of the Company's leases. Neither the equipment notes nor the pass through certificates are direct obligations of, or guaranteed by, the Company, and the corresponding debt and interest expense are not included in the Company's consolidated financial statements. (d) Contingent Legal Obligations Certain administrative and priority tax claims are pending against the Company which, if ultimately allowed by the Bankruptcy Court, would represent general obligations of the Company. Such claims include claims of various -48- 50 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED state and local tax authorities and certain contractual indemnification obligations. The Company is also a defendant in various lawsuits. Management cannot reasonably predict the outcome of the pending lawsuits and administrative and priority tax claims. However, management believes, after considering a number of factors, including the advice of outside counsel, the nature of the contingencies to which the Company is subject and its prior experience, that although the outcome of these matters could adversely affect future operating results, the resolution of these actions will not have a material adverse effect on the Company's financial condition. As discussed in Note 13, "Restructuring and Other Nonrecurring Special Charges," the Company has recorded a liability for loss contingencies in accordance with generally accepted accounting principles. 12. RELATED PARTY TRANSACTIONS In exchange for certain concessions principally arising from cancellation of the right of GPA to lease to America West 10 Airbus A320 aircraft at specified rates, GPA received on August 25, 1994, (i) 900,000 shares of Class B Common Stock; (ii) 1,384,615 warrants to purchase shares of Class B Common Stock at an exercise price of $12.74 per share; (iii) a cash payment of approximately $30.5 million and (iv) the rights to require the Company to lease up to eight aircraft of types operated by the Company, which was terminated in September 1996. During 1996, GPA sold 900,000 shares of Class B Common Stock and the Company repurchased all of the outstanding warrants (discussed in (ii) above) from GPA as part of the buyback program authorized by the Board of Directors. In February 1996, certain stockholders of the Company who hold shares of Class B Common Stock registered under the Company's shelf registration statement sold 7.2 million of such shares pursuant to an underwritten public offering. The selling stockholders were affiliates of TPG, Mesa, Continental and Lehman Brothers Inc., ("Lehman"). The shares offered were purchased by the selling stockholders in connection with AWA's emergence from bankruptcy in August 1994. The Company has entered into various aircraft acquisitions and leasing arrangements with GPA at terms comparable to those obtained from third parties for similar transactions. The Company currently leases eight aircraft from GPA and the rental payments for such leases and the eight aircraft refinanced under the America West Airlines 1996-1 Pass Through Trusts amount to $62.4 million, $68 million, and $63.3 million for the twelve months ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, the Company was obligated to pay approximately $500 million under the GPA leases which expire at various times through the year 2013. As part of the Reorganization, both Continental and Mesa made an investment in the Company, and the Company entered into Alliance agreements with Continental and Mesa. Pursuant to a code-sharing agreement entered into with Mesa in December 1992, the Company collects a per-passenger charge for facilities, reservations and other services from Mesa for enplanements in Phoenix on the Mesa system. Such payments by Mesa to the Company totaled $3.5 million, $2.9 million and $2.5 million for the twelve months ended December 31, 1996, 1995 and 1994, respectively. In addition the Company is a party to agreements with Continental related to code-sharing arrangements and ground handling operations. The Company paid Continental approximately $21.7 million, $14 million and $2 million and also received approximately $13 million, $11 million and $1 million in 1996, 1995, and 1994, respectively, from Continental for such services. 13. RESTRUCTURING AND OTHER NONRECURRING SPECIAL CHARGES During the third quarter of 1996, the Company recorded a nonrecurring special charge of approximately $65.1 million. Approximately $49.7 million of the charge was associated with the Company's renegotiation of an aircraft purchase agreement with AVSA (See Note 11, "Commitments and Contingencies"), the re-evaluation of its facilities, and completing its plan for the disposition of certain aircraft inventories and equipment. The charge includes $18.8 million for cancellation penalty payments, write-off of capitalized interest on advance payments; a provision for -49- 51 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED maintenance costs on certain leased aircraft currently scheduled to be returned due to accelerated deliveries under the new agreement; $7.5 million to reduce the carrying value to estimated fair value of certain under-utilized facilities and $23.4 million to write-down certain aircraft related inventories and equipment to estimated fair value. The remaining $15.4 million of the charge represents loss contingencies based on estimated settlements of pending and threatened litigation. The $65.1 million represents the Company's best estimate of the expected charge. However, the actual charge may be different from the amount estimated. In December 1995, the Company recorded a $10.5 million restructuring charge. The amount includes severance costs of approximately $9.5 million for approximately 500 employees, and $1.0 million for other costs related to the outsourcing of the heavy aircraft maintenance work. 14. CHAPTER 11 REORGANIZATION AND FRESH START REPORTING Chapter 11 Reorganization Upon the Company's emergence from bankruptcy on August 25, 1994, the partners of AmWest Partners, L.P., a limited partnership which includes TPG; Continental; and Mesa; together with Lehman and Fidelity Investments ("Fidelity"), as assignees of AmWest, invested $205.3 million in consideration for the issuance of securities by the Reorganized Company, consisting of (i) 1,200,000 shares of Class A Common Stock at a price of $7.467 per share; (ii) 12,981,636 shares of Class B Common Stock, consisting of 12,259,821 shares at a price of $7.467 per share and 721,815 shares at $8.889 per share (representing shares acquired as a result of cash elections made by unsecured creditors); (iii) 2,769,231 warrants to purchase shares of Class B Common Stock at an exercise price of $12.74 per share and (iv) $100 million principal amount of 11 1/4% Senior Unsecured Notes, due September 1, 2001. The Plan of Reorganization also provided for many other matters, including the satisfaction of certain other prepetition claims in accordance with negotiated settlement agreements, the disposition of the various types of claims asserted against the Company, the adherence to the Company's aircraft lease agreements, the amendment of the Company's aircraft purchase agreements and the release of the Company's employees from all obligations arising under the Company's stock purchase plan in consideration for the cancellation of the shares of Predecessor Company stock securing such obligations. As of December 31, 1996, distributions on $307.9 million of allowed general unsecured claims have been made. Approximately 25.6 million shares of the Company's Class B Common Stock and cash proceeds equivalent to an additional 783,936 shares have been distributed in settlement. The remaining shares will be distributed as the remaining general unsecured claims are allowed. To the extent that the total allowed amount of claims is less than the $312 million reserve set by the Bankruptcy Court, the holders of such claims will receive a supplemental distribution. -50- 52 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Reorganization expense recorded by the Predecessor Company consisted of the following:
PERIOD FROM JANUARY 1 TO AUGUST 25, 1994 --------------- (IN THOUSANDS) Professional fees and other expenses directly related to the Chapter 11 proceedings .......................... $ 31,959 Adjustments of assets and liabilities to fair value .... 166,829 Provisions for settlement of claims .................... 66,626 Reorganization success bonuses ......................... 11,956 Interest income ........................................ (3,711) --------- $ 273,659 =========
Fresh Start Reporting In connection with its emergence from bankruptcy, the Company adopted fresh start reporting in accordance with SOP 90-7. The fresh start reporting common equity value of $587.5 million was determined by the Company with the assistance of its financial advisors. The significant factors used in the determination of this value were analyses of industry, economic and overall market conditions and the historical and estimated performance of the Company as well as of the airline industry, discussions with various potential investors and certain other financial analyses. Under fresh start reporting, the reorganization value of the entity has been allocated to the Company's assets and liabilities on a basis substantially consistent with purchase accounting. The portion of reorganization value not attributable to specific tangible assets has been recorded as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" in the accompanying balance sheet. The fresh start reporting adjustments, primarily related to the adjustment of the Company's assets and liabilities to fair market values, will have a significant effect on the Company's future statements of income. The more significant of these adjustments relate to reduced depreciation expense on property and equipment, increased amortization expense relating to reorganization value in excess of amounts allocable to identifiable assets and increased interest expense. -51- 53 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The effects of the Plan and fresh start reporting on the balance sheet at the Effective Date are as follows:
PREDECESSOR REORGANIZED COMPANY (a) (b) (c) COMPANY ----------- ------------ ISSUE OF AUGUST 25, DEBT DEBT AND FRESH START AUGUST 25, 1994 DISCHARGE STOCK ADJUSTMENTS 1994 ----------- ----------- ----------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents .................. $ 156,401 $ (140,284) $ 205,956 $ -- $ 222,073 Accounts receivable, net ................... 77,682 -- 6,831 -- 84,513 Expendable spare parts and supplies ........ 27,715 -- -- (2,371) 25,344 Prepaid expenses ........................... 34,540 -- -- (885) 33,655 ----------- ----------- ----------- ----------- ----------- Total current assets ......................... 296,338 (140,284) 212,787 (3,256) 365,585 Property and equipment, net .................. 702,442 -- -- (138,830) 563,612 Restricted cash .............................. 30,503 -- -- -- 30,503 Reorganization value in excess of amounts allocable to identifiable assets ........... -- -- -- 668,702 668,702 Other assets, net ............................ 24,497 -- 1,575 (2,449) 23,623 ----------- ----------- ----------- ----------- ----------- Total assets ................................. $ 1,053,780 $ (140,284) $ 214,362 $ 524,167 $ 1,652,025 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current maturities of long-term debt ....... $ 119,185 $ (65,014) $ -- $ -- $ 54,171 Accounts payable ........................... 98,080 6,500 -- 969 105,549 Air traffic liability ...................... 153,808 -- -- -- 153,808 Accrued compensation and vacation benefits . 27,443 -- -- -- 27,443 Accrued interest ........................... 5,620 -- -- -- 5,620 Accrued taxes .............................. 26,613 14,405 -- -- 41,018 Other accrued liabilities .................. 29,161 -- -- -- 29,161 ----------- ----------- ----------- ----------- ----------- Total current liabilities .................... 459,910 (44,109) -- 969 416,770 Estimated liabilities subject to Chapter 11 proceedings ................................ 382,769 (382,769) -- -- -- Long-term debt, less current maturities ...... 368,939 28,934 100,000 -- 497,873 Manufacturers' and deferred credits .......... 70,625 -- -- 51,530 122,155 Other liabilities ............................ 57,932 -- -- (30,205) 27,727 Stockholders' equity (deficiency) Preferred stock ............................ 18 -- -- (18) -- Common stock, Predecessor Company .......... 6,432 -- -- (6,432) -- Common stock, Reorganized Company .......... -- -- 152 299 451 Additional paid in capital ................. 200,058 -- 114,710 272,281 587,049 Accumulated deficit ........................ (474,565) 257,660 (500) 217,405 -- ----------- ----------- ----------- ----------- ----------- (268,057) 257,660 114,362 483,535 587,500 Deferred compensation and notes receivable - employee stock purchase plans ............ 18,338 -- -- (18,338) -- ----------- ----------- ----------- ----------- ----------- Total stockholders' equity (deficiency) ...... (286,395) 257,660 114,362 501,873 587,500 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity (deficiency) ............................... $ 1,053,780 $ (140,284) $ 214,362 $ 524,167 $ 1,652,025 =========== =========== =========== =========== ===========
- ---------- (a) To record the discharge or reclassification of prepetition obligations pursuant to the Plan of Reorganization, as well as the repayment in cash of $77.6 million of D.I.P. financing and a $62.7 million priority term loan. (b) To record proceeds received from the issuance of new debt and equity securities and to record the preferred stock settlement payment of $500,000 and the receipt of approximately $1.1 million for the purchase of Class B Common Stock. -52- 54 AMERICA WEST HOLDINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (c) To record adjustments to reflect assets and liabilities at fair market values and to record reorganization value in excess of amounts allocable to identifiable assets. During the reorganization period, pursuant to SOP 90-7, prepetition liabilities were reported on the basis of the expected amounts of such allowed claims, as opposed to the amounts for which those allowed claims may be settled and were classified as "Estimated liabilities subject to Chapter 11 proceedings." The accrual for interest on such unsecured or undersecured liabilities was discontinued from the period June 27, 1991 to August 25, 1994, the Effective Date of the Plan. 15. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1996 and 1995 are as follows (in thousands of dollars except per share amounts):
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 - ---- Total operating revenues (a)....................................$ 413,150 $ 463,949 $ 422,518 $ 439,909 Operating income (loss) (b)..................................... 34,318 62,083 (53,143) 25,408 Nonoperating expense, net....................................... (8,898) (8,293) (8,377) (8,605) Income tax (expense) benefit.................................... (11,693) (24,268) 15,813 (4,735) Net income (loss)............................................... 13,727 28,417 (45,707) 12,068 Earnings (loss) per share: Primary....................................................... .28 .58 (1.03) .27 Fully diluted................................................. .27 .58 (1.03) .26
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1995 - ---- Total operating revenues........................................$ 345,790 $ 399,916 $ 408,627 $ 396,309 Operating income (c)............................................ 24,895 52,957 54,160 22,720 Nonoperating expense, net....................................... (13,927) (11,760) (11,047) (9,620) Income tax expense.............................................. (5,758) (20,324) (20,414) (7,112) Net income...................................................... 5,210 20,873 21,715 5,988 Earnings per share: Primary....................................................... .12 .46 .46 .13 Fully diluted................................................. .12 .45 .45 .12
- --------------- (a) During the second quarter of 1996, operating revenues include an $8 million adjustment arising from the reconciliation of estimated passenger revenues. (b) During the third quarter of 1996, the Company recorded a nonrecurring special charge of $65.1 million. (See Note 13, "Restructuring and Other Nonrecurring Special Charges.") (c) During the fourth quarter of 1995, the Company recorded restructuring charge of $10.5 million to provide for employee severance and related costs associated with the Company's outsourcing of its heavy aircraft maintenance. -53- 55 ITEM 8B. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - AMERICA WEST AIRLINES, INC. Balance sheets of America West Airlines, Inc. as of December 31, 1996 and 1995, and the related statements of income, cash flows and stockholder's equity for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994, together with the related notes and the report of KPMG Peat Marwick LLP, independent certified public accountants, are set forth on the following pages. -54- 56 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholder America West Airlines, Inc.: We have audited the accompanying balance sheets of America West Airlines, Inc. as of December 31, 1996 and 1995, and the related statements of income, cash flows and stockholder's equity for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the 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 financial statements referred to above present fairly, in all material respects, the financial position of America West Airlines, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994, in conformity with generally accepted accounting principles. As discussed in Note 13 to the financial statements, on August 25, 1994, America West Airlines, Inc. emerged from bankruptcy. The financial statements of the Reorganized Company reflect the impact of adjustments to reflect the fair value of assets and liabilities under fresh start reporting. As a result, the financial statements of the Reorganized Company are presented on a different basis of accounting than those of the Predecessor Company and, therefore, are not comparable in all respects. KPMG Peat Marwick LLP Phoenix, Arizona February 28, 1997 -55- 57 AMERICA WEST AIRLINES, INC. BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS EXCEPT SHARE DATA)
ASSETS 1996 1995 ---- ---- Current assets: Cash and cash equivalents ..................................................... $ 137,499 $ 224,367 Short-term investments ........................................................ 39,131 -- Accounts receivable, less allowance for doubtful accounts of $3,091 in 1996 and $2,515 in 1995 ........................................ 106,215 69,094 Expendable spare parts and supplies, less allowance for obsolescence of $1,713 in 1996 and $2,115 in 1995 ..................................... 21,423 28,643 Prepaid expenses .............................................................. 47,545 43,315 ---------- ----------- Total current assets ..................................................... 351,813 365,419 ---------- ----------- Property and equipment: Flight equipment .............................................................. 669,654 546,591 Other property and equipment .................................................. 107,993 104,106 Equipment purchase deposits ................................................... 56,665 27,489 ---------- ----------- 834,312 678,186 Less accumulated depreciation and amortization ................................ 163,718 76,123 ---------- ----------- 670,594 602,063 ---------- ----------- Other assets: Restricted cash ............................................................... 26,433 31,694 Reorganization value in excess of amounts allocable to identifiable assets, net 447,044 489,045 Deferred income taxes ......................................................... 74,700 74,700 Other assets, net ............................................................. 27,093 25,788 ---------- ----------- 575,270 621,227 ---------- ----------- $1,597,677 $ 1,588,709 ========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current maturities of long-term debt .......................................... $ 46,238 $ 54,157 Accounts payable .............................................................. 115,458 89,157 Air traffic liability ......................................................... 214,056 191,744 Accrued compensation and vacation benefits .................................... 30,085 41,616 Accrued taxes ................................................................. 72,047 34,359 Other accrued liabilities ..................................................... 44,836 24,802 ---------- ----------- Total current liabilities ................................................ 522,720 435,835 ---------- ----------- Long-term debt, less current maturities ........................................... 330,148 373,964 Deferred credits and other liabilities ............................................ 122,029 129,438 Commitments and contingencies Stockholder's equity: Preferred stock, $.01 par value. Authorized 48,800,000 shares; no shares issued -- -- Class A common stock, $.01 par value. Authorized 1,200,000 shares; issued and outstanding 1,200,000 shares in 1995 ..................................... -- 12 Class B common stock, $.01 par value. Authorized 1,000 shares; issued and outstanding 1,000 shares in 1996; Authorized 100,000,000 shares; issued and outstanding 44,141,330 shares in 1995 ......................... -- 441 Additional paid-in capital .................................................... 552,643 588,927 Retained earnings ............................................................. 70,137 61,632 ---------- ----------- 622,780 651,012 Less: cost of Class B common stock in treasury, 112,000 shares in 1995 ........ -- (1,540) ---------- ----------- Total stockholder's equity ........................................... 622,780 649,472 ---------- ----------- $1,597,677 $ 1,588,709 ========== ===========
See accompanying notes to financial statements. -56- 58 AMERICA WEST AIRLINES, INC. STATEMENTS OF INCOME (IN THOUSANDS)
| PREDECESSOR REORGANIZED COMPANY | COMPANY ---------------------------------------------------------------- PERIOD FROM | PERIOD FROM AUGUST 26 TO | JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ----------- ----------- --------- | --------- | Operating revenues: | Passenger ....................................... $ 1,637,762 $ 1,452,261 $ 437,775 | $ 882,140 Cargo ........................................... 46,519 44,425 16,648 | 27,645 Other ........................................... 55,245 53,956 15,343 | 29,243 ----------- ----------- --------- | --------- Total operating revenues .................... 1,739,526 1,550,642 469,766 | 939,028 ----------- ----------- --------- | --------- Operating expenses: | Salaries and related costs ...................... 385,840 382,032 117,562 | 213,722 Aircraft rents .................................. 202,237 173,571 54,983 | 105,547 Other rents and landing fees .................... 111,947 108,264 35,839 | 68,163 Aircraft fuel ................................... 233,522 174,195 58,165 | 100,646 Agency commissions .............................. 133,015 124,146 37,265 | 78,988 Aircraft maintenance materials and repairs ...... 125,768 65,925 17,590 | 28,109 Depreciation and amortization ................... 52,937 49,083 15,538 | 56,694 Amortization of reorganization value in excess of | amounts applicable to identifiable assets .... 25,263 31,958 11,145 | -- Restructuring and other nonrecurring | special charges .............................. 65,098 10,500 -- | -- Other ........................................... 335,233 276,236 82,808 | 179,653 ----------- ----------- --------- | --------- Total operating expenses .................. 1,670,860 1,395,910 430,895 | 831,522 ----------- ----------- --------- | --------- | Operating income .................................... 68,666 154,732 38,871 | 107,506 ----------- ----------- --------- | --------- | Nonoperating income (expenses): | Interest income ................................. 12,861 15,045 3,834 | 470 Interest expense (contractual interest of $44,747 | for the period ended August 25, 1994) ........ (46,866) (58,598) (22,636) | (33,998) Gain (loss) on disposition of property and | equipment ................................... 1,288 (2,734) (398) | (1,659) Reorganization expense, net ..................... -- -- -- | (273,659) Other, net ...................................... (1,456) (67) 65 | 131 ----------- ----------- --------- | --------- Total nonoperating expenses, net .......... (34,173) (46,354) (19,135) | (308,715) ----------- ----------- --------- | --------- | Income (loss) before income taxes and | extraordinary items ................... 34,493 108,378 19,736 | (201,209) Income taxes ........................................ 24,883 53,608 11,890 | 2,059 ----------- ----------- --------- | --------- Income (loss) before extraordinary items .. 9,610 54,770 7,846 | (203,268) Extraordinary items, net of tax ..................... (1,105) (984) -- | 257,660 ----------- ----------- --------- | --------- Net income ................................ $ 8,505 $ 53,786 $ 7,846 | $ 54,392 =========== =========== ========= | =========
See accompanying notes to financial statements. -57- 59 AMERICA WEST AIRLINES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
REORGANIZED COMPANY | PREDECESSOR | COMPANY ------------------------------------------------------------- PERIOD FROM | PERIOD FROM AUGUST 26 TO | JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 --------- --------- --------- | --------- | Cash flows from operating activities: | Net income ...................................................... $ 8,505 $ 53,786 $ 7,846 | $ 54,392 Adjustments to reconcile net income to net cash provided by | (used in) operating activities: | Depreciation and amortization ................................ 52,937 49,083 15,538 | 56,694 Amortization of capitalized maintenance ..................... 39,679 11,934 356 | -- Amortization of reorganization value ......................... 25,263 31,958 11,145 | -- Income taxes attributable to reorganization items and other .. 23,091 52,913 11,854 | -- Amortization of deferred credits ............................. (11,563) (10,952) (3,961) | (2,966) Nonrecurring special charge .................................. 65,098 -- -- | -- Reorganization items ......................................... -- -- -- | 185,226 Extraordinary items .......................................... 1,105 984 -- | (257,660) Other ........................................................ 2,099 7,199 1,576 | 1,276 Changes in operating assets and liabilities: | Decrease (increase) in accounts receivable, net ................. (37,121) (11,172) 27,439 | (18,769) Decrease (increase) in expendable spare parts and supplies, net . (3,793) (4,819) 1,165 | 397 Decrease (increase) in prepaid expenses ......................... (1,467) (14,031) 4,371 | 1,284 Decrease (increase) in other assets, net ........................ (3,173) (7,312) (10,635) | 12,971 Increase (decrease) in accounts payable ......................... 26,301 10,308 (17,289) | (15,557) Increase (decrease) in air traffic liability .................... 22,312 64,388 (26,452) | 30,510 Increase (decrease) in accrued compensation and vacation benefits (11,531) 25,840 (11,667) | 15,739 Increase (decrease) in accrued taxes ............................ 37,688 7,298 (2,104) | 25,999 Increase (decrease) in other accrued liabilities ................ 8,315 (663) (13,785) | 67,429 Increase (decrease) in other liabilities ........................ (13,411) (6,314) 2,521 | (14,749) --------- --------- --------- | --------- Net cash provided by (used in) operating activities .......... 230,334 260,428 (2,082) | 142,216 --------- --------- --------- | --------- Cash flows from investing activities: | Purchases of property and equipment ............................. (155,742) (107,387) (14,658) | (61,271) Increase in short-term investments .............................. (39,131) -- -- | -- Other ........................................................... (4,082) (9) 600 | 334 --------- --------- --------- | --------- Net cash used in investing activities ........................ (198,955) (107,396) (14,058) | (60,937) --------- --------- --------- | --------- Cash flows from financing activities: | Proceeds from issuance of debt .................................. -- 29,300 -- | 100,000 Repayment of debt ............................................... (79,216) (137,421) (23,355) | (173,699) Issuance of common stock ........................................ 3,074 1,545 3 | 114,862 Debt issuance cost .............................................. -- (3,130) -- | -- Acquisition of treasury stock ................................... (23,964) (1,540) -- | -- Acquisition of warrants ......................................... (18,141) -- -- | -- --------- --------- --------- | --------- Net cash provided by (used in) financing activities .......... (118,247) (111,246) (23,352) | 41,163 --------- --------- --------- | --------- Net increase (decrease) in cash and cash equivalents ......... (86,868) 41,786 (39,492) | 122,442 --------- --------- --------- | --------- Cash and cash equivalents at beginning of period ................... 224,367 182,581 222,073 | 99,631 --------- --------- --------- | --------- Cash and cash equivalents at end of period ......................... $ 137,499 $ 224,367 $ 182,581 | $ 222,073 ========= ========= ========= | ========= Cash, cash equivalents and short-term investments at end of period . $ 176,630 $ 224,367 $ 182,581 | $ 222,073 ========= ========= ========= | =========
See accompanying notes to financial statements. -58- 60 AMERICA WEST AIRLINES, INC. STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD AUGUST 26 THROUGH DECEMBER 31, 1994, AND THE PERIOD JANUARY 1 THROUGH AUGUST 25, 1994 (IN THOUSANDS EXCEPT SHARE DATA)
CONVERTIBLE CLASS A CLASS B ADDITIONAL PREFERRED COMMON COMMON COMMON PAID-IN STOCK STOCK STOCK STOCK CAPITAL ----------- -------- -------- -------- ---------- BALANCE AT JANUARY 1, 1994 .......................... $ 18 $-- $-- $ 6,323 $ 197,010 --------- ---- ----- ------- --------- Issuance of 336,277 shares of common stock pursuant to convertible preferred stock dividends ...................................... -- -- -- 84 2,932 Employee stock purchase plan: Cancellation of 7,678 shares of common stock at: $1.19-$4.03 per share ....................... -- -- -- (2) (49) Deferred compensation ....................... -- -- -- -- (1) Issuance of 108,825 shares of common stock pursuant to exercise of stock options .......... -- -- -- 27 166 Net income .......................................... -- -- -- -- -- Eliminate predecessor equity accounts in connection with fresh start .................... (18) -- -- (6,432) (200,058) Eliminate employee stock receivable ................. -- -- -- -- -- Record excess of reorganization value over identifiable assets ............................ -- -- -- -- -- Sale of 1,200,000 shares of Class A common stock and 14,000,000 shares of Class B common stock ................................... -- 12 140 -- 114,710 Issuance of 29,925,000 shares of new Class B common stock ................................... -- -- 299 -- 472,339 --------- ---- ----- ------- --------- BALANCE AT AUGUST 25, 1994 .......................... -- 12 439 -- 587,049 --------- ---- ----- ------- --------- Issuance of common stock ............................ -- -- -- -- 100 Net income .......................................... -- -- -- -- -- --------- ---- ----- ------- --------- BALANCE AT DECEMBER 31, 1994 ........................ -- 12 439 -- 587,149 --------- ---- ----- ------- --------- Issuance of 4,057 shares and 170,667 shares of common stock pursuant to the exercise of stock warrants and stock options ............... -- -- 2 -- 1,543 Issuance of 30,334 shares of restricted stock ....... -- -- -- -- 235 Acquisition of 112,000 shares of treasury stock at: $13.63-$14.00 per share ........................ -- -- -- -- -- Net income .......................................... -- -- -- -- -- --------- ---- ----- ------- --------- BALANCE AT DECEMBER 31, 1995 ........................ -- 12 441 -- 588,927 --------- ---- ----- ------- --------- Issuance of 12,725 shares and 314,001 shares of common stock pursuant to the exercise of stock warrants and stock options ............... -- -- 3 -- 3,071 Issuance of 158,000 shares of restricted stock ...... -- -- 2 -- 2,761 Acquisition and issuance of treasury stock at: $13.63-$21.88 per share ........................ -- -- -- -- 649 Repurchase of 2,187,475 warrants at $8.29 per warrant .................................... -- -- -- -- (18,141) Net income .......................................... -- -- -- -- -- Purchase of stock option from Holdings .............. -- -- -- -- (62,373) Contribution of capital by Holdings ................. -- -- -- -- 62,400 Reorganization as wholly- owned subsidiary of Holdings ....................................... -- (12) (446) -- (24,651) --------- ---- ----- ------- --------- BALANCE AT DECEMBER 31, 1996 ........................ $ -- $-- $-- $ -- $ 552,643 ========= ==== ===== ======= =========
DEFERRED COMPENSATION AND NOTES RETAINED CLASS B RECEIVABLE- EARNINGS/ TREASURY EMPLOYEE STOCK (DEFICIT) STOCK PURCHASE PLANS TOTAL ----------- ----------- -------------- --------- BALANCE AT JANUARY 1, 1994 .......................... $(438,626) $ -- $(18,987) $(254,262) --------- -------- -------- --------- Issuance of 336,277 shares of common stock pursuant to convertible preferred stock dividends ...................................... -- -- -- 3,016 Employee stock purchase plan: Cancellation of 7,678 shares of common stock at: $1.19-$4.03 per share ....................... -- -- 43 (8) Deferred compensation ....................... -- -- 606 605 Issuance of 108,825 shares of common stock pursuant to exercise of stock options .......... -- -- -- 193 Net income .......................................... 54,392 -- -- 54,392 Eliminate predecessor equity accounts in connection with fresh start .................... 206,508 -- -- -- Eliminate employee stock receivable ................. (18,338) -- 18,338 -- Record excess of reorganization value over identifiable assets ............................ 668,702 -- -- 668,702 Sale of 1,200,000 shares of Class A common stock and 14,000,000 shares of Class B common stock ................................... -- -- -- 114,862 Issuance of 29,925,000 shares of new Class B common stock ................................... (472,638) -- -- -- --------- -------- -------- --------- BALANCE AT AUGUST 25, 1994 .......................... -- -- -- 587,500 --------- -------- -------- --------- Issuance of common stock ............................ -- -- -- 100 Net income .......................................... 7,846 -- -- 7,846 --------- -------- -------- --------- BALANCE AT DECEMBER 31, 1994 ........................ 7,846 -- -- 595,446 --------- -------- -------- --------- Issuance of 4,057 shares and 170,667 shares of common stock pursuant to the exercise of stock warrants and stock options ............... -- -- -- 1,545 Issuance of 30,334 shares of restricted stock ....... -- -- -- 235 Acquisition of 112,000 shares of treasury stock at: $13.63-$14.00 per share ........................ -- (1,540) -- (1,540) Net income .......................................... 53,786 -- -- 53,786 --------- -------- -------- --------- BALANCE AT DECEMBER 31, 1995 ........................ 61,632 (1,540) -- 649,472 --------- -------- -------- --------- Issuance of 12,725 shares and 314,001 shares of common stock pursuant to the exercise of stock warrants and stock options ............... -- -- -- 3,074 Issuance of 158,000 shares of restricted stock ...... -- -- -- 2,763 Acquisition and issuance of treasury stock at: $13.63-$21.88 per share ........................ -- (23,569) -- (22,920) Repurchase of 2,187,475 warrants at $8.29 per warrant .................................... -- -- -- (18,141) Net income .......................................... 8,505 -- -- 8,505 Purchase of stock option from Holdings .............. -- -- -- (62,373) Contribution of capital by Holdings ................. -- -- -- 62,400 Reorganization as wholly- owned subsidiary of Holdings ....................................... -- 25,109 -- -- --------- -------- -------- --------- BALANCE AT DECEMBER 31, 1996 ........................ $ 70,137 $ -- $ -- $ 622,780 ========= ======== ======== =========
See accompanying notes to financial statements. -59- 61 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES America West Holdings Corporation ("Holdings"), a Delaware corporation, became the holding company for America West Airlines, Inc. ("AWA" or the "Company"), effective midnight, December 31, 1996. Holdings' primary business activity is ownership of all the capital stock of AWA, the ninth largest commercial airline carrier in the United States serving more than 90 destinations in the U.S., Canada and Mexico. (a) Basis of Presentation The accompanying financial statements include the accounts of America West Airlines, Inc., a wholly-owned subsidiary of Holdings. America West Airlines, Inc., D.I.P. (the "Predecessor Company") filed a voluntary petition on June 27, 1991, to reorganize under Chapter 11 of the Federal Bankruptcy Code. On August 10, 1994, the Plan of Reorganization ("Plan"), filed by the Predecessor Company, was confirmed and became effective on August 25, 1994 (the "Effective Date"). On August 25, 1994, AWA, (the "Reorganized Company") adopted fresh start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") of the American Institute of Certified Public Accountants. Accordingly, the Company's post-reorganization balance sheet and statements of income have not been prepared on a consistent basis with such pre-reorganization financial statements and are not comparable in all respects to financial statements prior to reorganization. For accounting purposes, the inception date of the Reorganized Company is deemed to be August 26, 1994. A vertical black line is shown in the financial statements to separate the Reorganized Company from the Predecessor Company since they have not been prepared on a consistent basis of accounting. (b) Cash and Cash Equivalents Cash equivalents consist of all highly liquid debt instruments purchased with original maturities of three months or less. The debt instruments are classified as held-to-maturity and are carried at amortized cost which approximates fair value. (See Note 8, "Investments in Debt Securities.") (c) Short-term Investments Short-term investments consist of cash invested in certain debt securities with original maturities greater than 90 days. The debt securities are classified as held to maturity and are carried at amortized cost which approximates fair value. (See Note 8, "Investments in Debt Securities.") (d) Expendable Spare Parts and Supplies Flight equipment expendable spare parts and supplies are valued at average cost. Allowances for obsolescence are provided, over the estimated useful life of the related aircraft and engines, for spare parts expected to be on hand at the date the aircraft are retired from service. (e) Property and Equipment Property and equipment are recorded at cost. Interest capitalized on advance payments for aircraft acquisitions and on expenditures for aircraft improvements are part of these costs. No interest was capitalized in the year ended December 31, 1996 due to the pending restructuring of the aircraft purchase agreement with AVSA S.A.R.L., an affiliate of Airbus Industrie ("AVSA") (See Note 10, "Commitments and Contingencies"). Interest capitalized for the year ended December 31, 1995 was $2.7 million. Property and equipment is depreciated and amortized to residual values over the estimated useful lives or the lease term, whichever is less, using the straight-line method. -60- 62 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED The estimated useful lives for the Company's ground property and equipment range from three to 12 years for owned property and equipment and to 30 years for the reservation and training center and technical support facilities. The estimated useful lives of the Company's owned aircraft, jet engines, flight equipment and rotable parts range from 11 to 22 years. Leasehold improvements relating to flight equipment and other property on operating leases are amortized over the life of the lease or the life of the asset, whichever is shorter. (f) Restricted Cash Restricted cash includes cash deposits securing certain letters of credit. (g) Aircraft Maintenance and Repairs Routine maintenance and repairs are charged to expense as incurred. The cost of major scheduled airframe, engine and certain component overhauls are capitalized and amortized over the periods benefited and are included in aircraft maintenance materials and repairs expense for the Reorganized Company as part of fresh start reporting and in depreciation and amortization expense for the Predecessor Company. The balance of capitalized maintenance relating to aircraft and engines was reduced as part of the revaluation of property and equipment and operating leases under fresh start reporting. Additionally, a provision for the estimated cost of scheduled airframe and engine overhauls required to be performed on leased aircraft prior to their return to the lessors has been recorded. (h) Reorganization Value in Excess of Amounts Allocable to Identifiable Assets Reorganization value in excess of amounts allocable to identifiable assets is amortized on a straight line basis over 20 years. Accumulated amortization at December 31, 1996 and 1995 was $68.4 million and $43.1 million, respectively. During the years ended December 31, 1996 and 1995, reductions in reorganization value of $16.7 million and $50 million were recorded as a result of the utilization of the Predecessor Company tax attributes including net operating loss carryforwards. Additionally, in 1995 the Company established a deferred tax asset, which reduced reorganization value by $74.7 million. The Company assesses the recoverability of this asset based upon expected future undiscounted cash flows and other relevant information. (i) Frequent Flyer Awards The Company maintains a frequent travel award program known as "FlightFund" that provides a variety of awards to program members based on accumulated mileage. The estimated cost of providing the free travel, using the incremental cost method as adjusted for estimated redemption rates, is recognized as a liability and charged to operations as program members accumulate mileage. (j) Deferred Credit-Operating Leases Operating leases were adjusted to fair market value at the Effective Date. The net present value of the difference between the stated lease rates and the fair market rates has been recorded as a deferred credit in the accompanying balance sheets. The deferred credit will be increased through charges to interest expense and decreased on a straight-line basis as a reduction in rent expense over the applicable lease periods. At December 31, 1996 and 1995, the unamortized balance of the deferred credit was $95.6 million and $107.2 million, respectively. -61- 63 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (k) Passenger Revenue Passenger revenue is recognized when the transportation is provided. Ticket sales for transportation which has not yet been provided are recorded as air traffic liability. Passenger traffic commissions and related fees are expensed when the related revenue is recognized. Passenger traffic commissions and related fees not yet recognized are included as a prepaid expense. (l) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (m) Use of Estimates Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (n) Advertising Costs The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 1996, 1995 and for the combined period ending December 31, 1994 was $26.6 million, $25.2 million and $23.8 million, respectively. (o) Reclassification Certain reclassifications have been made in the prior year's financial statements to conform them to the current presentation. -62- 64 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 2. LONG-TERM DEBT Long-term debt at December 31 consists of the following:
1996 1995 ----------- ---------- (IN THOUSANDS) SECURED Notes payable, primarily fixed interest rates of 9.53% to 10.79%, averaging 10.32%, installments due 1999 through 2008 ............................................... $234,494 $274,751 Borrowings under lines of credit, floating interest rates of Prime + 1% to three months LIBOR +4%, averaging 9.42%, installments due through 1999. No available borrowings remain ................................................................ 8,277 14,794 Industrial development revenue bonds, variable interest rate of 2.9% to 5.6%, averaging 3.83%, due 2016(a) ............................................................... 29,300 29,300 -------- -------- 272,071 318,845 -------- -------- UNSECURED 10 3/4% Senior Notes, face amount of $50 million, interest only payment until due in 2005(b) ................................................................... 48,197 71,984 Notes payable, interest rates of 8% to 90-day LIBOR +3%, averaging 8.39%, installments due through 2000 .................................................... 55,910 36,708 Other ................................................................................. 208 584 -------- -------- 104,315 109,276 -------- -------- Total long-term debt .................................................................. 376,386 428,121 Less: current maturities ............................................................. 46,238 54,157 -------- -------- $330,148 $373,964 ======== ========
(a) The industrial development revenue bonds are backed by an irrevocable direct pay letter of credit issued by the Industrial Bank of Japan, Limited, Los Angeles Agency; the letter of credit is secured by the Company's maintenance facility and related improvements, seventeen spare engines and a flight simulator with a combined net book value of $42.1 million and a pledge of $3.2 million in cash. The interest rate varies weekly and from January 1, 1996 to December 31, 1996 ranged from 2.9% to 5.6%. The bondholders have the right to put the bonds back to the Company on a weekly basis if the bonds bear interest at the weekly rate or monthly if the bonds bear interest at a monthly rate. If the bonds are put back to the Company, the remarketing agent or the transfer agent will, at the direction of the Company, remarket such bonds. Any bonds not remarketed will be retired utilizing the $29.9 million letter of credit which represents the principal plus 60 days of interest at a maximum rate of 12%. The letter of credit was extended in November 1996 for one year and is subject to mandatory redemption under certain circumstances. The estimated annual cost for the letter of credit is approximately $1.1 million. (b) In June 1996, the Company prepaid $25 million in principal of the 10 3/4% Senior Notes. The 10 3/4% Senior Notes mature on September 1, 2005 and interest is payable in arrears semi-annually commencing on March 1, 1996. The 10 3/4% Senior Notes may be redeemed at the option of the Company on or after September 1, 2001 at any time in whole or from time to time in part, at a redemption price equal to the following percentage of principal redeemed, plus accrued and unpaid interest to the date of redemption, if redeemed during the 12-month period beginning: -63- 65 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 1, PERCENTAGE - ------------ ---------- 2000.................................................... 105.375% 2001.................................................... 103.583% 2002.................................................... 101.792% 2003 and thereafter..................................... 100.000%
Secured financings totaling $272.1 million are collateralized by assets, primarily aircraft and engines, with a net book value of $388.5 million at December 31, 1996. At December 31, 1996, the estimated maturities of long-term debt are as follows:
(IN THOUSANDS) 1997....................................................... $ 46,238 1998....................................................... 43,210 1999....................................................... 70,430 2000....................................................... 28,000 2001....................................................... 20,720 Thereafter................................................. 167,788 ------------- $ 376,386 =============
Certain of the Company's long-term debt agreements contain minimum cash balance requirements, leverage ratios, coverage ratios, limitations on investments and restricted payments including cash dividends, and other financial covenants with which the Company was in compliance at December 31, 1996. 3. CAPITAL STOCK Effective midnight, December 31, 1996, AWA became a wholly owned subsidiary of Holdings and each share of AWA Class A and Class B Common Stock and options to purchase Class B Common Stock were exchanged for one share of Holdings Class A or Class B Common Stock and options to purchase Class B Common Stock. Holdings' Class B Common Stock is listed on the New York Stock Exchange. On August 25, 1994, AWA issued approximately 10.4 million warrants to purchase Class B Common Stock with an exercise price of $12.74 per share. The warrants are exercisable by the holders any time before August 25, 1999 and 10.4 million shares of Class B Common Stock have been reserved for the exercise of these warrants. In May 1996, approximately 2.2 million warrants were repurchased by AWA for approximately $18 million. As of December 31, 1996, 17,054 warrants have been exercised at $12.74 per share. Pursuant to their terms, as part of the holding company formation transaction the AWA warrants became rights to acquire shares of Holdings Class B Common Stock. AWA has made arrangements for the issuance of Holdings Class B Common Stock upon the exercise of such warrants by purchasing an option from Holdings to acquire such stock. AWA issued a $62.4 million note payable due December 31, 2005 with an interest rate of 11%. Subsequently, Holdings made a capital contribution to AWA issuing a note payable to AWA for $62.4 million due December 31, 2045 with an interest rate of 10 7/8%. AWA has the right on December 31, 2005 to repay all or a portion of the then outstanding principal balance of its note payable by offsetting by an equal amount the then outstanding principal balance of its note receivable and thus, these notes have been offset in the accompanying financial statements in accordance with applicable accounting standards. -64- 66 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 4. EMPLOYEE BENEFIT PLAN The Company has a 401(k) defined contribution plan, covering essentially all employees of the Company. Participants may contribute from 1 to 15% of their pretax earnings to a maximum of $9,500 in 1996. The Company's matching contribution is 50% of a participant's contributions up to 6% of the participant's annual pretax earnings or 25% of a participant's contributions, whichever is greater. The Company's contribution expense to the plan totaled $5.9 million, $5.9 million and $3.8 million in 1996, 1995 and the combined 1994 period, respectively. 5. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (a) Fair Value of Financial Instruments Cash Equivalents and Short-term Investments The carrying amount approximates fair value because of the short-term maturity of these instruments. Long-term Debt At December 31, 1996 and 1995, the fair value of long-term debt was approximately $379 million and $431 million, respectively, based on quoted market prices for the same or similar debt including debt of comparable remaining maturities. (b) Fuel Price Risk Management The Company is exposed to risk from fluctuating jet fuel prices. To manage this risk, the Company implemented a fuel hedging program in late 1996. Oversight of this program is the responsibility of the Fuel Hedge Committee ("FHC"), a group of the Company's senior officers, which sets acceptable levels of risk and reviews hedging activities. Under the program, the Company may enter into certain cap and swap transactions with approved counterparties for a period not to exceed twelve months. Gains and losses on such transactions are recorded as adjustments to fuel expense when the underlying fuel being hedged is used. As of December 31, 1996, there were no transactions outstanding. The Company is exposed to credit risks in the event any counterparty fails to meet its obligations. The Company does not anticipate such non-performance as counterparties are selected based on credit ratings, exposure to any one counterparty is limited based on formal guidelines and the relative market positions with such counterparty are monitored by the FHC. (c) Concentration of Credit Risk The Company does not believe it is subject to any significant concentration of credit risk. Most of the Company's receivables result from tickets sold to individual passengers through the use of major credit cards or to tickets sold by other airlines and used by passengers on AWA. These receivables are short-term, generally being settled shortly after the sale. -65- 67 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 6. INCOME TAXES The Company recorded income tax expense for the periods shown below (exclusive of extraordinary items) as follows:
| PREDECESSOR REORGANIZED COMPANY | COMPANY ---------------------------------------- | ------------ PERIOD FROM | PERIOD FROM AUGUST 26 TO | JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ------- ------ ------------ | ------------ (IN THOUSANDS) | | Current Taxes: | Federal ...................... $ 943 $ 505 $ -- | $1,869 State ........................ 849 190 36 | 190 ------- ------- ------- | ------ Total current taxes .. 1,792 695 36 | 2,059 ------- ------- ------- | ------ Deferred taxes ................... -- -- -- | -- ------- ------- ------- | ------ Income taxes attributable to | reorganization items and other 23,091 52,913 11,854 | -- ------- ------- ------- | ------ Total income tax expense ......... $24,883 $53,608 $11,890 | $2,059 ======= ======= ======= | ======
With respect to the years ended December 31, 1996 and 1995 and the period August 26, 1994 through December 31, 1994, income tax expense pertains both to income before extraordinary items as well as certain adjustments necessitated by the effectiveness of the Plan and the resultant fresh start adjustments to the Company's financial statements. The Company's reorganization and the associated implementation of fresh start reporting gave rise to significant items of expense for financial reporting purposes that are not deductible for income tax purposes. In large measure, it is these nondeductible (for income tax purposes) expenses that result in an effective tax rate (for financial reporting purposes) significantly greater than the current U.S. corporate statutory rate of 35%. Nevertheless, the Company's actual cash income tax liability (i.e., income taxes payable) is considerably lower than income tax expense shown for financial reporting purposes. This difference in financial expense compared to actual income tax liability is in part attributable to the utilization of certain tax attributes of the Predecessor Company that serve to reduce the Company's actual income tax liability. The excess of financial expense over the Company's actual income tax liability ($16.7 million for 1996) is applied to reduce the carrying balance of the Company's reorganization value in excess of amounts allocable to identifiable assets. For the years ended December 31, 1996 and 1995, the Company recognized income tax benefit of $918,000 and $984,000, respectively, arising from extraordinary charges. For the periods January 1, 1994 through August 25, 1994 and August 26 through December 31, 1994, income tax expense pertains solely to income before extraordinary item. No income tax expense was recognized with respect to the extraordinary gain resulting from the cancellation of indebtedness that occurred in connection with the effectiveness of the Plan as such gain is not subject to income taxation. Income tax expense, exclusive of extraordinary items, recorded for the periods shown below, differs from amounts computed at the federal statutory income tax rate as follows: -66- 68 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------ | ----------- PERIOD FROM | PERIOD FROM AUGUST 26 TO | JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ------- ------ ----------- | ----------- (IN THOUSANDS) | | Income tax expense at U.S. statutory rate .. $12,073 $ 37,932 $ 6,908 | $ 19,758 State income taxes, net of federal income | tax benefit ............................ 1,984 4,505 1,663 | 190 Nondeductible amortization of reorganization | value in excess of amounts allocable | to identifiable assets ................. 8,842 11,188 3,901 | -- Benefit of loss carryforwards .............. -- -- -- | (17,889) Other, net ................................. 1,984 (17) (582) | -- ------- -------- -------- | -------- Total .................................. $24,883 $ 53,608 $ 11,890 | $ 2,059 ======= ======== ======== | ========
As of December 31, 1996, the Company has available net operating loss, business tax credit and alternative minimum tax credit carryforwards for Federal income tax purposes of approximately $498.7 million, $12.7 million and $1.2 million, respectively. The net operating loss carryforwards expire during the years 1999 through 2009 while the business credit carryforwards expire during the years 1997 through 2006. However, such carryforwards are not fully available to offset federal (and in certain circumstances, state) alternative minimum taxable income. Further, as a result of a statutory "ownership change" (as defined for purposes of Section 382 of the Internal Revenue Code) that occurred as a result of the effectiveness of the Company's Plan of Reorganization, the Company's ability to utilize its net operating loss and business tax credit carryforwards may be restricted. The alternative minimum tax credit may be carried forward without expiration and is available to offset future income tax payable. Composition of Deferred Tax Items: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, the significant components of the Company's deferred tax assets and liabilities are a result of the temporary differences related to the items described as follows:
1996 1995 --------- --------- (IN THOUSANDS) Deferred income tax liabilities: Property and equipment, principally depreciation and "fresh start" differences .................................................... $(111,989) $ (89,766) --------- --------- Deferred tax assets: Aircraft leases ................................................... 32,789 39,812 Reorganization expenses ........................................... 21,356 23,591 Net operating loss carryforwards .................................. 190,548 203,879 Tax credit carryforwards .......................................... 13,861 13,777 Other ............................................................. 16,568 14,240 --------- --------- Total deferred tax assets ..................................... 275,122 295,299 --------- --------- Valuation allowance .................................................... (88,433) (130,833) --------- --------- Net deferred tax asset ........................................... $ 74,700 $ 74,700 ========= =========
-67- 69 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED SFAS 109 requires a "more likely than not" criterion be applied when evaluating the realizability of a deferred tax asset. In 1996 the Company reduced the valuation allowance by $42.4 million from its 1995 balance principally for the portion of its net operating loss carryforwards (a Predecessor Company tax attribute) that it anticipates will, more likely than not, be utilized. The remaining valuation allowance of $88.4 million is necessary as at this time, the Company has not determined it is more likely than not that the balance of the deferred tax assets will be realized. The Company continues to monitor the valuation allowance and will make adjustments as appropriate. If in future tax periods, the Company were to recognize additional tax benefits related to items attributable to the Predecessor Company such as net operating loss and other carryforwards, such benefits would be applied to further reduce reorganization value in excess of amounts allocable to identifiable assets. 7. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information and non-cash investing and financing activities were as follows:
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------- | ----------- PERIOD FROM | PERIOD FROM AUGUST 26 TO | JANUARY 1 TO YEAR ENDED DECEMBER 31, DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ------- ------ ----------- | ----------- (IN THOUSANDS) | | Non-cash transactions: | Notes payable issued to seller ................................... $26,112 $ 5,723 $ -- | $ -- Accrued interest reclassified to | long-term debt ........................................... -- 65 -- | 5,563 Issuance of stock as success bonus ............................... -- -- -- | 1,224 Equipment acquired through capital leases ........................ -- -- -- | 138 | Cash transactions: | Interest paid, net of amounts capitalized ........................ 37,555 50,293 11,262 | 29,253 Income taxes paid ................................................ 498 795 425 | 1,253
Cash flows from reorganization items in connection with the Chapter 11 proceedings included interest received on cash accumulations of $3.7 million and professional fees paid for services rendered of $23.6 million. 8. INVESTMENTS IN DEBT SECURITIES Cash equivalents and short-term investments consist of highly liquid debt instruments with original maturities of three months or less while short-term investments consists of highly liquid debt instruments with original maturities in excess of three months. The highly liquid debt instruments as of December 31 are classified as follows: -68- 70 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED
1996 1995 ---------- ---------- (IN THOUSANDS) Held to Maturity: Debt securities issued by the U.S. Treasury and other U.S. government agencies $ 36,973 $129,288 Bankers acceptances .......................................................... 49,141 37,686 Corporate debt securities .................................................... 90,418 20,466 Other debt securities ........................................................ 98 1,341 -------- -------- 176,630 188,781 Cash ......................................................................... -- 35,586 -------- -------- Total cash, cash equivalents and short-term investments ........... $176,630 $224,367 ======== ========
9. EXTRAORDINARY GAINS AND LOSSES In June 1996, the Company had an extraordinary loss of $1.1 million net of an income tax benefit of $918,000 for the write-off of debt issuance cost relating to the prepayment of $25 million of its 10 3/4% Senior Notes. In August 1995, the Company had an extraordinary loss of $984,000, net of a tax benefit of $984,000 for the write-off of debt issuance cost relating to the prepayment of $48 million of its $123 million 11 1/4% Senior Notes and the exchange of the remaining $75 million of such notes for $75 million of 10 3/4% Senior Notes. The extraordinary gain recorded in the period January 1 through August 25, 1994 includes $257.7 million from the discharge of indebtedness pursuant to the consummation of the Plan of Reorganization. No income tax expense was recognized with respect to the extraordinary gain resulting from the cancellation of indebtedness that occurred in connection with the effectiveness of the Plan as such gain is not subject to income taxation. 10. COMMITMENTS AND CONTINGENCIES (a) Leases As of December 31, 1996, the Company had 82 aircraft under operating leases with remaining terms ranging from five months to approximately 22 years. The Company has options to purchase certain of the aircraft at fair market values at the end of the lease terms. Certain of the Company's aircraft lessors have the option to call their respective aircraft. Usually, if such call options are exercised, the Company has the right of first refusal to retain the aircraft. None of these options have been exercised and the last of these call options expires in July 1997. The Company does not believe that the possible exercise of any or all of these options will have a material effect on its operations. Certain of the agreements require security deposits, minimum return provisions and maintenance reserve payments and provide the aircraft lessor the option to reset their respective rentals to the greater of the existing rentals being paid under the leases or the then current fair market rates. The Company also leases certain terminal space, ground facilities and computer and other equipment under noncancelable operating leases. At December 31, 1996, the scheduled future minimum cash rental payments under noncancelable operating leases with initial terms of more than one year are as follows: (IN THOUSANDS) 1997........................................................ $ 237,545 1998........................................................ 201,575 1999........................................................ 188,575 2000........................................................ 176,186 2001........................................................ 154,127 Thereafter.................................................. 920,002 ---------------- $ 1,878,010 ================
-69- 71 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED Rent expense (excluding landing fees) was approximately $281 million, $251 million, $81 million and $154 million for the years ended December 31, 1996 and 1995, for the period August 26 through December 31, 1994, and the period January 1 through August 25, 1994, respectively. Collectively, the operating lease agreements require security deposits with lessors of $9.7 million and bank letters of credit of $17.6 million. The letters of credit are collateralized by $17.6 million of restricted cash as of December 31, 1996 and 1995. (b) Revenue Bonds Special facility revenue bonds issued by a municipality have been used to fund the acquisition of leasehold improvements at the Phoenix Sky Harbor airport which have been leased by the Company. Under the operating lease agreements, the Company is required to make rental payments sufficient to pay principal and interest when due on the bonds. Pursuant to the agreement, payment of principal and interest at 8.3% on the Series 1994A Bonds ends on January 1, 2006 while payment of principal and interest at 8.2% on the Series 1994B Bonds ends on January 1, 1999. At December 31, 1996, the outstanding balance of Series 1994 Bonds was $16.1 million. (c) Aircraft Acquisitions In September 1996, the Company and AVSA signed a term sheet (the "AVSA Term Sheet"), which, subject to the satisfaction of a number of conditions provides for the restructuring of the Company's arrangements with AVSA, and specifically that (i) the number of aircraft ordered by the Company would be increased from 22 to 34 (including 24 A320 aircraft and 10 A319 aircraft), (ii) the orders subject to cancellation would be increased from five to 12 (resulting in the Company being committed to purchase 12 A320s and 10 A319s), (iii) AVSA and the manufacturer of the engines for the aircraft would agree to provide certain financing support for 16 of the 22 firm orders, and (iv) the financing terms and conditions under which aircraft would be purchased would be improved from the Company's perspective. There can be no assurance that the conditions to the restructuring of the Company's arrangements with AVSA will be satisfied or that a final agreement will be reached or finalized in the form described above. At December 31, 1996, the Company had commitments to AVSA, for a total of 22 Airbus A320-200 aircraft with delivery dates that fall in the years 1999 through 2001. The aggregate net cost of such aircraft is based on formulae that include certain price indices (including indices for various aircraft components such as metal products) for periods preceding the various delivery dates. Based on an assumed 5% annual price escalation, the Company estimates such aggregate net cost to be approximately $1.1 billion. The Company has the option to cancel without cause up to five of these aircraft. If the Company exercised its existing rights to cancel five aircraft under the AVSA agreement, the aggregate net cost (based upon the assumptions described above) of commitments under such agreement would be reduced to approximately $850 million. In December 1994, the Company entered into a support contract with International Aero Engines ("IAE") which provides for the purchase by the Company of six new V2500-A5 spare engines scheduled for delivery beginning in 1998 through 2000 for use on certain of the A320 fleet. Such engines have an estimated aggregate cost of $42 million. The following table reflects estimated cash payments under the aircraft and engine purchase contracts. Actual payments may vary due to inflation factor adjustments and changes in the delivery schedule of the equipment. The estimated cash payments include the progress payments that will be made in cash, as opposed to being financed under an existing progress payment financing facility. -70- 72 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (IN THOUSANDS) 1997........................................................ $ 63,134 1998........................................................ 106,218 1999........................................................ 264,707 2000........................................................ 297,368 2001........................................................ 328,207 --------------- $ 1,059,634 ===============
At December 31, 1996, the Company has significant capital commitments for a number of aircraft, as discussed above. Although the Company has arranged for financing for up to one-half of such commitment, the Company will require substantial capital from external sources to meet the remaining financial commitments. The Company intends to seek additional financing (which may include public debt financing or private financing) in the future when and as appropriate. There can be no assurance that sufficient financing will be obtained for all aircraft and other capital requirements. A default by the Company under any such commitment could have a material adverse effect on the Company. In November 1996, the America West Airlines 1996-1 Pass Through Trusts issued $218.6 million of Pass Through Certificates, representing fractional undivided interests in such trusts. The certificates were issued in connection with the refinancing of eight Airbus A320 aircraft and three IAE V2500 spare jet engines. The combined effective interest rate on the financing was 7.05%. The proceeds of the transaction were used to refinance the indebtedness incurred by the owners of the aircraft and engines leased to the Company. Under the arrangements, the financial benefits of the transactions are shared among the Company, the equity investors in leverage leases covering the aircraft and U.S. subsidiaries of GPA Group plc ("GPA"), the original lessees under the restructured leases. Benefit to the Company include the agreed termination of arrangements with GPA pursuant to which GPA could cause the Company to lease up to four aircraft under a put agreement over the balance of the decade and a reduction in rental expense approximating $500,000 per year. The Pass Through Certificates were issued by separate pass through trusts. The equipment notes are secured by a security interest in the aircraft and engines and an assignment of the Company's leases. Neither the equipment notes nor the pass through certificates are direct obligations of, or guaranteed by, the Company, and the corresponding debt and interest expense are not included in the Company's consolidated financial statements. (d) Contingent Legal Obligations Certain administrative and priority tax claims are pending against the Company which, if ultimately allowed by the Bankruptcy Court, would represent general obligations of the Company. Such claims include claims of various state and local tax authorities and certain contractual indemnification obligations. The Company is also a defendant in various lawsuits. Management cannot reasonably predict the outcome of the pending lawsuits and administrative and priority tax claims. However, management believes, after considering a number of factors, including the advice of outside counsel, the nature of the contingencies to which the Company is subject and its prior experience, that although the outcome of these matters could adversely affect future operating results, the resolution of these actions will not have a material adverse effect on the Company's financial condition. As discussed in Note 13, "Restructuring and Other Nonrecurring Special Charges," the Company has recorded a liability for loss contingencies in accordance with generally accepted accounting principles. -71- 73 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED 11. RELATED PARTY TRANSACTIONS In exchange for certain concessions principally arising from cancellation of the right of GPA to lease to America West 10 Airbus A320 aircraft at specified rates, GPA received on August 25, 1994, (i) 900,000 shares of Class B Common Stock; (ii) 1,384,615 warrants to purchase shares of Class B Common Stock at an exercise price of $12.74 per share; (iii) a cash payment of approximately $30.5 million and (iv) the rights to require the Company to lease up to eight aircraft of types operated by the Company, which was terminated in September 1996. During 1996, GPA sold 900,000 shares of Class B Common Stock, and the Company repurchased all of the outstanding warrants (discussed in (ii) above) from GPA as part of the buy back program authorized by the Board of Directors. In February 1996, certain stockholders of the Company who hold shares of Class B Common Stock registered under the Company's shelf registration statement sold 7.2 million of such shares pursuant to an underwritten public offering. The selling stockholders were affiliates of TPG Partners, L.P. ("TPG"), Mesa Air Group ("Mesa"), Continental Airlines, Inc. (" Continental") and Lehman Brothers, Inc. ("Lehman"). The shares offered were purchased by the selling stockholders in connection with AWA's emergence from bankruptcy in August 1994. The Company has entered into various aircraft acquisitions and leasing arrangements with GPA at terms comparable to those obtained from third parties for similar transactions. The Company currently leases eight aircraft from GPA and the rental payments for such leases and the eight aircraft refinanced under the America West Airlines 1996-1 Pass Through Trusts amount to $62.4 million, $68 million, and $63.3 million for the twelve months ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, the Company was obligated to pay approximately $500 million under the GPA leases which expire at various times through the year 2013. As part of the Reorganization, both Continental and Mesa made an investment in the Company, and the Company entered into Alliance agreements with Continental and Mesa. Pursuant to a code-sharing agreement entered into with Mesa in December 1992, the Company collects a per-passenger charge for facilities, reservations and other services from Mesa for enplanements in Phoenix on the Mesa system. Such payments by Mesa to the Company totaled $3.5 million, $2.9 million and $2.5 million for the twelve months ended December 31, 1996, 1995 and 1994, respectively. In addition, the Company maintains agreements with Continental related to code-sharing arrangements and ground handling operations. The Company paid Continental approximately $21.7 million, $14 million and $2 million and also received approximately $13 million, $11 million and $1 million in 1996, 1995 and 1994, respectively, from Continental for such services. 12. RESTRUCTURING AND OTHER NONRECURRING SPECIAL CHARGES During the third quarter of 1996, the Company recorded a nonrecurring special charge of approximately $65.1 million. Approximately $49.7 million of the charge was associated with the Company's renegotiation of an aircraft purchase agreement with AVSA (See Note 10, "Commitments and Contingencies"), the re-evaluation of its facilities, and completing its plan for the disposition of certain aircraft inventories and equipment. The charge includes $18.8 million for cancellation penalty payments, write-off of capitalized interest on advance payments; a provision for maintenance costs on certain leased aircraft currently scheduled to be returned due to accelerated deliveries under the new agreement; $7.5 million to reduce the carrying value to estimated fair value of certain under-utilized facilities and $23.4 million to write-down certain aircraft related inventories and equipment to estimated fair value. The remaining $15.4 million of the charge represents loss contingencies based on estimated settlements of pending and threatened litigation. The $65.1 million represents the Company's best estimate of the expected charge. However, the actual charge may be different from the amount estimated. -72- 74 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED In December 1995, the Company recorded a $10.5 million restructuring charge. The amount includes severance costs of approximately $9.5 million for approximately 500 employees, and $1.0 million for other costs related to the outsourcing of the heavy aircraft maintenance work. 13. CHAPTER 11 REORGANIZATION AND FRESH START REPORTING Chapter 11 Reorganization Upon the Company's emerging from bankruptcy on August 25, 1994, the partners of AmWest Partners, L.P., a limited partnership which includes TPG; Continental; and Mesa; together with Lehman and Fidelity Investments ("Fidelity"), as assignees of AmWest, invested $205.3 million in consideration for the issuance of securities by the Reorganized Company, consisting of (i) 1,200,000 shares of Class A Common Stock at a price of $7.467 per share; (ii) 12,981,636 shares of Class B Common Stock, consisting of 12,259,821 shares at a price of $7.467 per share and 721,815 shares at $8.889 per share (representing shares acquired as a result of cash elections made by unsecured creditors); (iii) 2,769,231 warrants to purchase shares of Class B Common Stock at an exercise price of $12.74 per share and (iv) $100 million principal amount of 11 1/4% Senior Unsecured Notes, due September 1, 2001. The Plan of Reorganization also provided for many other matters, including the satisfaction of certain other prepetition claims in accordance with negotiated settlement agreements, the disposition of the various types of claims asserted against the Company, the adherence to the Company's aircraft lease agreements, the amendment of the Company's aircraft purchase agreements and the release of the Company's employees from all obligations arising under the Company's stock purchase plan in consideration for the cancellation of the shares of Predecessor Company stock securing such obligations. As of December 31, 1996, distributions on $307.9 million of allowed general unsecured claims have been made. Approximately 25.6 million shares of the Company's Class B Common Stock and cash proceeds equivalent to an additional 783,936 shares have been distributed in settlement. The remaining shares will be distributed as the remaining general unsecured claims are allowed. To the extent that the total allowed amount of claims is less than the $312 million reserve set by the Bankruptcy Court, the holders of such claims will receive a supplemental distribution. Reorganization expense recorded by the Predecessor Company consisted of the following:
PERIOD FROM JANUARY 1 TO AUGUST 25, 1994 --------------- (IN THOUSANDS) Professional fees and other expenses directly related to the Chapter 11 proceedings......................................... $ 31,959 Adjustments of assets and liabilities to fair value................... 166,829 Provisions for settlement of claims................................... 66,626 Reorganization success bonuses........................................ 11,956 Interest income....................................................... (3,711) ---------- $ 273,659 ==========
-73- 75 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED Fresh Start Reporting In connection with its emergence from bankruptcy, the Company adopted fresh start reporting in accordance with SOP 90-7. The fresh start reporting common equity value of $587.5 million was determined by the Company with the assistance of its financial advisors. The significant factors used in the determination of this value were analyses of industry, economic and overall market conditions and the historical and estimated performance of the Company as well as of the airline industry, discussions with various potential investors and certain other financial analyses. Under fresh start reporting, the reorganization value of the entity has been allocated to the Company's assets and liabilities on a basis substantially consistent with purchase accounting. The portion of reorganization value not attributable to specific tangible assets has been recorded as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" in the accompanying balance sheet. The fresh start reporting adjustments, primarily related to the adjustment of the Company's assets and liabilities to fair market values, will have a significant effect on the Company's future statements of income. The more significant of these adjustments relate to reduced depreciation expense on property and equipment, increased amortization expense relating to reorganization value in excess of amounts allocable to identifiable assets and increased interest expense. -74- 76 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED The effects of the Plan and fresh start reporting on the balance sheet at the Effective Date are as follows:
PREDECESSOR REORGANIZED COMPANY (a) (b) (c) COMPANY ----------- ISSUE OF ----------- AUGUST 25, DEBT DEBT AND FRESH START AUGUST 25, 1994 DISCHARGE STOCK ADJUSTMENTS 1994 ------------- ------------- ------------ ------------- ----------- ASSETS Current assets: Cash and cash equivalents ............................ $ 156,401 $(140,284) $ 205,956 $ -- $ 222,073 Accounts receivable, net ............................. 77,682 -- 6,831 -- 84,513 Expendable spare parts and supplies .................. 27,715 -- -- (2,371) 25,344 Prepaid expenses ..................................... 34,540 -- -- (885) 33,655 ----------- --------- --------- --------- ---------- Total current assets .................................... 296,338 (140,284) 212,787 (3,256) 365,585 Property and equipment, net ............................. 702,442 -- -- (138,830) 563,612 Restricted cash ......................................... 30,503 -- -- -- 30,503 Reorganization value in excess of amounts allocable to identifiable assets ............................... -- -- -- 668,702 668,702 Other assets, net ....................................... 24,497 -- 1,575 (2,449) 23,623 ----------- --------- --------- --------- ---------- Total assets ............................................ $ 1,053,780 $(140,284) $ 214,362 $ 524,167 $1,652,025 =========== ========= ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current maturities of long-term debt ................. $ 119,185 $ (65,014) $ -- $ -- $ 54,171 Accounts payable ..................................... 98,080 6,500 -- 969 105,549 Air traffic liability ................................ 153,808 -- -- -- 153,808 Accrued compensation and vacation benefits ........... 27,443 -- -- -- 27,443 Accrued interest ..................................... 5,620 -- -- -- 5,620 Accrued taxes ........................................ 26,613 14,405 -- -- 41,018 Other accrued liabilities ............................ 29,161 -- -- -- 29,161 ----------- --------- --------- --------- ---------- Total current liabilities ............................... 459,910 (44,109) -- 969 416,770 Estimated liabilities subject to Chapter 11 proceedings .......................................... 382,769 (382,769) -- -- -- Long-term debt, less current maturities ................. 368,939 28,934 100,000 -- 497,873 Manufacturers' and deferred credits ..................... 70,625 -- -- 51,530 122,155 Other liabilities ....................................... 57,932 -- -- (30,205) 27,727 Stockholders' equity (deficiency) Preferred stock ...................................... 18 -- -- (18) -- Common stock, Predecessor Company .................... 6,432 -- -- (6,432) -- Common stock, Reorganized Company .................... -- -- 152 299 451 Additional paid in capital ........................... 200,058 -- 114,710 272,281 587,049 Accumulated deficit .................................. (474,565) 257,660 (500) 217,405 -- ----------- --------- --------- --------- ---------- (268,057) 257,660 114,362 483,535 587,500 Deferred compensation and notes receivable - employee stock purchase plans ..................... 18,338 -- -- (18,338) -- ----------- --------- --------- --------- ---------- Total stockholders' equity (deficiency) ................. (286,395) 257,660 114,362 501,873 587,500 ----------- --------- --------- --------- ---------- Total liabilities and stockholders' equity (deficiency)......................................... $ 1,053,780 $(140,284) $ 214,362 $ 524,167 $1,652,025 =========== ========= ========= ========= ==========
- ----------------- (a) To record the discharge or reclassification of prepetition obligations pursuant to the Plan of Reorganization, as well as the repayment in cash of $77.6 million of D.I.P. financing and a $62.7 million priority term loan. -75- 77 AMERICA WEST AIRLINES, INC. NOTES TO FINANCIAL STATEMENTS - CONTINUED (b) To record proceeds received from the issuance of new debt and equity securities and to record the preferred stock settlement payment of $500,000 and the receipt of approximately $1.1 million for the purchase of Class B Common Stock. (c) To record adjustments to reflect assets and liabilities at fair market values and to record reorganization value in excess of amounts allocable to identifiable assets. During the reorganization period, pursuant to SOP 90-7, prepetition liabilities were reported in the basis of the expected amounts of such allowed claims, as opposed to the amounts for which those allowed claims may be settled and were classified as "Estimated liabilities subject to Chapter 11 proceedings." The accrual for interest on such unsecured or undersecured liabilities was discontinue from the period June 27, 1991 to August 25, 1994, the Effective Date of the Plan. 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1996 and 1995 are as follows (in thousands of dollars):
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 - ---- Total operating revenues (a) .................................... $ 413,150 $ 463,949 $ 422,518 $ 439,909 Operating income (loss) (b) ..................................... 34,318 62,083 (53,143) 25,408 Nonoperating expense, net ....................................... (8,898) (8,293) (8,377) (8,605) Income tax (expense) benefit .................................... (11,693) (24,268) 15,813 (4,735) Net income (loss) ............................................... 13,727 28,417 (45,707) 12,068 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1995 - ---- Total operating revenues ........................................ $ 345,790 $ 399,916 $ 408,627 $ 396,309 Operating income (c) ............................................ 24,895 52,957 54,160 22,720 Nonoperating expense, net ....................................... (13,927) (11,760) (11,047) (9,620) Income tax expense .............................................. (5,758) (20,324) (20,414) (7,112) Net income ...................................................... 5,210 20,873 21,715 5,988
- --------- (a) During the second quarter of 1996, operating revenues include an $8 million adjustment arising from the reconciliation of estimated passenger revenues. (b) During the third quarter of 1996, the Company recorded a nonrecurring special charge of $65.1 million. (c) During the fourth quarter of 1995, the Company recorded restructuring charges of $10.5 million. See note 13 for more information. -76- 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information respecting continuing directors and nominees of the Company is set forth under the caption "Information Concerning Directors and Nominees" in the Company's Proxy Statement relating to its 1997 Annual Meeting of Stockholders incorporated by reference into this Form 10-K Report. The Proxy Statement will be filed with the Securities and Exchange Commission in accordance with Rule 14a-6(c) promulgated under the Securities Exchange Act of 1934. With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K Report, the Proxy Statement is not being filed as a part hereof. Information respecting executive officers of the Company is set forth at Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For the information called for by Items 11, 12 and 13, reference is made to the Company's 1997 Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and portions of which are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements. The following financial statements and the Independent Auditors' Reports are filed in Part II, Item 8A and 8B of this report on the pages indicated: America West Holdings Corporation Independent Auditors' Report -- page 30. Consolidated Balance Sheets -- December 31, 1996 and 1995 -- page 31. Consolidated Statements of Income--Years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994--page 32. Consolidated Statements of Cash Flows--Years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994--page 33. Consolidated Statements of Stockholders' Equity--For the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994--page 34. -77- 79 Notes to Consolidated Financial Statements--page 35. America West Airlines, Inc. Independent Auditors' Report -- page 55. Balance Sheets -- December 31, 1996 and 1995 -- page 56. Statements of Income--Years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994--page 57. Statements of Cash Flows--Years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994--page 58. Statements of Stockholder's Equity--For the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994--page 59. Notes to Financial Statements--page 60. (b) Financial Statement Schedules. America West Holdings Corporation Independent Auditors' Report on Schedule and Consent--page 87. Schedule II: Valuation and Qualifying Accounts--page 88. America West Airlines, Inc. Independent Auditors' Report on Schedule--page 89. Schedule II: Valuation and Qualifying Accounts-- page 90. All other information and schedules have been omitted as not applicable or because the required information is included in the financial statements or notes thereto. (c) Exhibits
EXHIBIT NUMBER TITLE ------ ----- 2.1 -- Plan of Reorganization of America West Airlines, Inc. ("AWA"), as amended under Chapter 11 of the Bankruptcy Code, as amended-- Incorporated by reference to Exhibit 1 of AWA's Current Report on Form 8-K dated August 25, 1994. 2.2 -- Agreement and Plan of Merger, dated as of December 19, 1996, by and among America West Holdings Corporation ("Holdings"), AWA and AWA Merger, Inc., with an effective date and time as of midnight on December 31, 1996-- Incorporated by reference to Exhibit 2.1 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 3.1 -- Restated Certificate of Incorporation of AWA (included in Exhibit 2.2 above).
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EXHIBIT NUMBER TITLE - ------ ----- 3.2 -- Restated Bylaws of AWA-- Incorporated by reference to AWA's Annual Report on Form 10-K dated December 31, 1994. 3.3 -- Section 4.18 of the Restated Bylaws of AWA (included in Exhibit 2.2 above). 3.4 -- Certificate of Incorporation of Holdings (filed with the Secretary of State of the State of Delaware on December 13, 1996)-- Incorporated by reference to Exhibit 3.1 of Holdings' Registration Statement on Form 8-B dated January 13, 1997. 3.5 -- Bylaws of Holdings-- Incorporated by reference to Exhibit 3.2 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.1 -- Indenture for 10 3/4% Senior Unsecured Notes due 2003 -- Incorporated by reference to AWA's Form S-4 (No. 33-61099). 4.2 -- Form of Senior Note (included as Exhibit A to Exhibit 4.1 above). 4.3 -- Warrant Agreement dated August 25, 1994 between AWA and First Interstate, N.A., as Warrant Agent -- Incorporated by reference to Exhibit 4.3 to AWA's Current Report on Form 8-K dated August 25, 1994. 4.4 -- Form of Warrant (included as Exhibit A to Exhibit 4.3 above). 4.5 -- Supplemental Warrant Agreement dated effective as of December 31, 1996 between AWA and Harris Trust Company of California, as Warrant Agent-- Incorporated by reference to Exhibit 4.3 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. *4.6 -- Stockholders' Agreement for Holdings effective as of December 31, 1996 by and among TPG Partners, L.P., TPG Parallel I, L.P., Air Partners II, L.P., Continental Airlines, Inc., Mesa Air Group, Inc., Robert A. Ewert, David T. Obergfell, William A. Franke, Holdings and AWA. 4.7 -- Stock Option Agreement dated effective as of December 31, 1996, between Holdings and AWA-- Incorporated by reference to Exhibit 4.5 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.8 -- Registration Rights Agreement dated August 25, 1994 among AWA, AmWest Partners, L.P. and other holders-- Incorporated by reference to Exhibit 4.6 to the AWA's Current Report on Form 8-K dated August 25, 1994. 4.9 -- Assumption of Certain Obligations Under Registration Rights Agreement executed by Holdings for the benefit of TPG Partners, L.P., TPG Parallel I, L.P., Air Partners II, L.P., Continental Airlines, Inc., Mesa Airlines, Inc., Lehman Brothers, Inc., Belmont Capital Partners II, L.P. and Belmont Fund, L.P. -- Incorporated by reference to Exhibit 4.7 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.10 -- Form of Pass Through Trust Agreement, dated as of November 26, 1996, between AWA and Fleet National Bank, as Trustee -- Incorporated by reference to AWA's Report on Form 8-K dated November 26, 1996.
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EXHIBIT NUMBER TITLE - ------- ----- 10.1 -- Alliance Agreements dated August 25, 1994 between AWA and Continental Airlines, Inc. including the Master Ground Handling Agreement, the Reciprocal Frequent Flyer Participation Agreement, the Code Sharing Agreement, the Cargo Special Pro-Rate Agreement, the Reciprocal Club Usage Agreement and the Memorandum of Understanding Concerning Technology Transfers -- Incorporated by reference to Exhibit 10.12 to AWA's Current Report on Form 8-K dated August 25, 1994. 10.2 -- Service Agreement dated September 4, 1992, as amended on March 31, 1993, July 31, 1993 and August 25, 1994, between AWA and Mesa Airlines Inc.-- Incorporated by reference to Exhibit 10.12 to AWA's Current Report on Form 8-K dated August 25, 1994. 10.3 -- Third Revised Investment Agreement dated April 21, 1994 between AWA and AmWest Partners, L.P. -- Incorporated by reference to Exhibit 10.A to AWA's Quarterly Report on Form 10-Q for the period ended March 31, 1994. 10.4 -- Third Revised Interim Procedures Agreement dated April 21, 1994 between AWA's and AmWest Partners, L.P.-- Incorporated by reference to AWA's Annual Report on Form 10-K for the year ended December 31, 1993. 10.5 -- The GPA Term Sheet between AWA and GPA Group plc, dated June 13, 1994-- Incorporated by Reference to the Predecessor's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.6 -- America West Airlines Management Resignation Allowance Guidelines, as amended, dated November 18, 1993-- Incorporated by Reference to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.7 -- Airbus A320 Purchase Agreement (including exhibits thereto), dated as of September 28, 1990 between AVSA, S.A.R.L. and AWA, together with Letter Agreement Nos. 1-10, inclusive-- Incorporated by reference to Exhibit 10-(D) (1) to AWA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. 10.8 -- Loan Agreement, dated as of September 28, 1990, among AWA, AVSA, S.A.R.L. and AVSA, S.A.R.L., as agent-- Incorporated by reference to Exhibit 10-(D) (2) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.9 -- V2500-A1 Support Contract dated September 28, 1990, between AWA and IAE International Aero Engines AG, together with Side Letters Nos. 1-7, inclusive-- Incorporated by reference to Exhibit 10- (D) (3) to AWA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. 10.10 -- Official Statement dated August 11, 1986 for the $54,000,000 Variable Rate Airport Facility Revenue Bonds-- Incorporated by reference to Exhibit 10.e to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1986. 10.11 -- Airport Use Agreement dated July 1, 1989 among the City of Phoenix, The Industrial Development Authority of the City of Phoenix, Arizona and AWA-- Incorporated by reference to Exhibit 10-D(9) to AWA's Annual Report on Form 10-K for the year ended December 31, 1989. 10.12 -- First Amendment dated August 1, 1990 to Airport Use Agreement-- Incorporated by reference to Exhibit 10- (D) (9) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990.
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EXHIBIT NUMBER TITLE - ------ ----- 10.13 -- Revolving Loan Agreement dated April 17, 1990, by and among AWA, the Bank signatories thereto, and Bank of America National Trust and Savings Association, as Agent for the Banks (the "Revolving Loan Agreement")-- Incorporated by reference to Exhibit 10-1 to AWA's Quarterly Report on Form 10-Q for the period ended March 31, 1990. 10.14 -- First Amendment dated April 17, 1990 to Revolving Loan Agreement - Incorporated by reference to Exhibit 10-(D) (10) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.15 -- Second Amendment dated September 28, 1990 to the Revolving Loan Agreement-- Incorporated by reference to Exhibit 10-(D) (11) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.16 -- Third Amendment dated as of January 14, 1991 to the Revolving Loan Agreement-- Incorporated by reference to Exhibit 10-(D)(13) to AWA's Annual Report on Form 10-K for the year ended December 31, 1990. 10.17 -- Master Credit Modification Agreement dated as of October 1, 1992, among AWA, IAE International Aero Engines AG, Intlaero (Phoenix A320) Inc., Intlaero (Phoenix B737) Inc., CAE Electronics Ltd., and Hughes Rediffusion Simulation Limited-- Incorporated by reference to Exhibit 10-L to AWA's Annual Report on Form 10-K for the year ended December 31, 1992. 10.18 -- Key Employee Protection Agreement dated as of June 27, 1994 between AWA and William A. Franke -- Incorporated by reference to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.19 -- Management Rights Agreement dated August 25, 1994 between TPG Partners L.P., TPG Genpar, L.P. and AWA-- Incorporated by reference to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.20 -- V2500-A5 Support Contract dated December 23, 1994 between AWA and IAE International Aero Engines AG, as amended, together with Side Letters Nos. 1 and 2-- Incorporated by reference to AWA's Annual Report on Form 10-K for the year ended December 31, 1994. 10.21 -- America West 1994 Incentive Equity Plan, as restated on December 19, 1996-- Incorporated by reference to Exhibit 10.41 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. *10.22 -- First Amendment to America West 1994 Incentive Equity Plan, as restated, dated January 1, 1997. *10.23 -- Employment Agreement dated as of February 15, 1997 among Holdings, AWA and William A. Franke. *10.24 -- Employment Agreement dated as of February 15, 1997 among Holdings, AWA and Richard R. Goodmanson. *11.1 -- Statement regarding computation of net income (loss) per common share. 21.1 -- Subsidiaries of Holdings-- Incorporated by reference to Exhibit 10.41 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 23.1 -- Consent of KPMG Peat Marwick LLP included on page 87 of the Annual Report on Form 10-K. 24.1 -- Power of Attorney, pursuant to which amendments to this Annual Report on Form 10-K may be filed, is included on the signature pages of this Annual Report on Form 10-K.
-81- 83
Exhibit Number Title - ------- ----- *27.1 -- Financial Data Schedule for AWA (Financial Data Schedule for Holdings filed with Form 10-K for Holdings)
- --------------- * Filed herewith. (d) Reports on Form 8-K - -- Form 8-K filed by America West Airlines, Inc. on December 31, 1996 for the purpose of reporting its adoption of a holding company organizational structure. - -- Form 8-K filed by America West Airlines, Inc. on December 11, 1996 for the purpose of filing forms of certain documents as contemplated in the prospectus, dated November 22, 1996, filed with the Commission pursuant to Rule 424(b) with respect to $230,000,000 aggregate principal amount of America West Airlines 1996-1 Pass Through Trusts Pass Through Certificates, Series 1996-1. -82- 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, America West Holdings Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICA WEST HOLDINGS CORPORATION Date: March 28, 1997 By: /s/ William A. Franke ---------------------------------- William A. Franke, Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY We, the undersigned, directors and officers of America West Holdings Corporation, do hereby severally constitute and appoint William A. Franke, W. Douglas Parker and Stephen L. Johnson and each or any of them, our true and lawful attorneys and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents, and each or any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys and agents, and each of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities indicated on March 28, 1997.
Signature Title --------- ----- /s/ William A. Franke - ---------------------------------- Chairman of the Board and Chief Executive Officer William A. Franke (Principal Executive Officer) /s/ Richard R. Goodmanson - ---------------------------------- President and Director Richard R. Goodmanson /s/ W. Douglas Parker - ---------------------------------- Senior Vice President and Chief Financial Officer W. Douglas Parker (Principal Financial and Accounting Officer) /s/ Julia Chang Bloch - ---------------------------------- Director Julia Chang Bloch /s/ Stephen F. Bollenbach - ---------------------------------- Director Stephen F. Bollenbach /s/ Frederick W. Bradley, Jr. - ---------------------------------- Director Frederick W. Bradley, Jr.
-83- 85
Signature Title --------- ----- /s/ James G. Coulter - ------------------------------ James G. Coulter Director /s/ John F. Fraser - ------------------------------ John F. Fraser Director /s/ John L. Goolsby - ------------------------------ John L. Goolsby Director /s/ Richard C. Kraemer - ------------------------------ Richard C. Kraemer Director /s/ John R. Power, Jr. - ------------------------------ John R. Power, Jr. Director /s/ Larry L. Risley - ------------------------------ Larry L. Risley Director /s/ Frank B. Ryan - ------------------------------ Frank B. Ryan Director /s/ Richard P. Schifter - ------------------------------ Richard P. Schifter Director /s/ John F. Tierney - ------------------------------ John F. Tierney Director /s/ Raymond S. Troubh - ------------------------------ Raymond S. Troubh Director
-84- 86 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, America West Airlines, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICA WEST AIRLINES, INC. Date: March 28, 1997 By: /s/ William A. Franke --------------------------------- William A. Franke, Chairman of the Board POWER OF ATTORNEY We, the undersigned, directors and officers of America West Airlines, Inc., do hereby severally constitute and appoint William A. Franke, W. Douglas Parker and Stephen L. Johnson and each or any of them, our true and lawful attorneys and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys and agents, and each or any of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys and agents, and each of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities indicated on March 28, 1997.
Signature Title --------- ----- /s/ William A. Franke - --------------------------- William A. Franke Chairman of the Board /s/ Richard R. Goodmanson - --------------------------- Richard R. Goodmanson President, Chief Executive Officer and Director (Principal Executive Officer) /s/ W. Douglas Parker - --------------------------- W. Douglas Parker Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Michael R. Carreon - --------------------------- Michael R. Carreon Vice President and Controller (Principal Accounting Officer) /s/ Julia Chang Bloch - --------------------------- Julia Chang Bloch Director /s/ Stephen F. Bollenbach - --------------------------- Stephen F. Bollenbach Director
-85- 87
Signature Title --------- ----- /s/ Frederick W. Bradley, Jr. - ------------------------------- Frederick W. Bradley, Jr. Director /s/ James G. Coulter - ------------------------------- James G. Coulter Director /s/ John F. Fraser - ------------------------------- John F. Fraser Director /s/ John L. Goolsby - ------------------------------- John L. Goolsby Director /s/ Richard C. Kraemer - ------------------------------- Richard C. Kraemer Director /s/ John R. Power, Jr. - ------------------------------- John R. Power, Jr. Director /s/ Larry L. Risley - ------------------------------- Larry L. Risley Director /s/ Frank B. Ryan - ------------------------------- Frank B. Ryan Director /s/ Richard P. Schifter - ------------------------------- Richard P. Schifter Director /s/ John F. Tierney - ------------------------------- John F. Tierney Director /s/ Raymond S. Troubh - ------------------------------- Raymond S. Troubh Director
-86- 88 INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT The Board of Directors and Stockholders America West Holdings Corporation: The audits referred to in our report dated February 28, 1997, included the related consolidated financial statement schedule as listed in Item 14(b) for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994, included herein. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We consent to incorporation by reference in the Registration Statements (Form S-8 No. 33-60555) and (Form S-3 No. 333-02129) of America West Holdings Corporation of our report dated February 28, 1997, relating to the consolidated balance sheets of America West Holdings Corporation as of December 31, 1996 and 1995 and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994, and the related schedule, which report appears in the December 31, 1996 annual report on Form 10-K of America West Holdings Corporation. The audit report on the consolidated financial statements of America West Holdings Corporation referred to above contains an explanatory paragraph that states that as discussed in Note 14 to the consolidated financial statements, on August 25, 1994, America West Airlines, Inc. emerged from bankruptcy. The consolidated financial statements of the Reorganized Company reflect the impact of adjustments to reflect the fair value of assets and liabilities under fresh start reporting. As a result, the consolidated financial statements of the Reorganized Company are presented on a different basis of accounting than those of the Predecessor Company and, therefore, are not comparable in all respects. KPMG Peat Marwick LLP Phoenix, Arizona March 26, 1997 -87- 89 AMERICA WEST HOLDINGS CORPORATION SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD AUGUST 26, 1994 TO DECEMBER 31, 1994, AND THE PERIOD JANUARY 1, 1994 TO AUGUST 25, 1994 (IN THOUSANDS)
BALANCE AT BALANCE BEGINNING AT END DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD ----------- --------- --------- ---------- --------- Allowance for doubtful receivables: Year ended December 31, 1996 . $ 2,515 $2,950 $ 2,374 $3,091 ======== ====== ======== ====== Year ended December 31, 1995 . $ 3,531 $2,600 $ 3,616 $2,515 ======== ====== ======== ====== Period August 26, 1994 to December 31, 1994 ....... $ 2,833 $1,074 $ 376 $3,531 ======== ====== ======== ====== Period January 1, 1994 to August 25, 1994 .............. $ 3,030 $4,742 $ 4,939 $2,833 ======== ====== ======== ====== Reserve for obsolescence: Year ended December 31, 1996 . $ 2,115 $1,523 $ 1,925 $1,713 ======== ====== ======== ====== Year ended December 31, 1995 . $ 483 $1,664 $ 32 $2,115 ======== ====== ======== ====== Period August 26, 1994 to December 31, 1994 ....... $ -- $ 483 $ -- $ 483 ======== ====== ======== ====== Period January 1, 1994 to August 25, 1994 ......... $ 7,231 $ 794 $ 8,025(a) $ -- ======== ====== ======== ======
- ----------------- (a) Includes fresh start adjustment of approximately $7.9 million. -88- 90 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholder America West Airlines, Inc.: The audits referred to in our report dated February 28, 1997, included the related financial statement schedule as listed in Item 14(b) for the years ended December 31, 1996 and 1995, the period August 26, 1994 through December 31, 1994, and the period January 1, 1994 through August 25, 1994, included herein. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such 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. The audit report on the financial statements of America West Airlines, Inc. referred to above contains an explanatory paragraph that states that as discussed in Note 13 to the financial statements, on August 25, 1994, America West Airlines, Inc. emerged from bankruptcy. The financial statements of the Reorganized Company reflect the impact of adjustments to reflect the fair value of assets and liabilities under fresh start reporting. As a result, the financial statements of the Reorganized Company are presented on a different basis of accounting than those of the Predecessor Company and, therefore, are not comparable in all respects. KPMG Peat Marwick LLP Phoenix, Arizona March 26, 1997 -89- 91 AMERICA WEST AIRLINES, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, THE PERIOD AUGUST 26, 1994 TO DECEMBER 31, 1994, AND THE PERIOD JANUARY 1, 1994 TO AUGUST 25, 1994 (IN THOUSANDS)
BALANCE AT BALANCE BEGINNING AT END DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD ----------- --------- --------- ---------- --------- Allowance for doubtful receivables: Year ended December 31, 1996 . $ 2,515 $2,950 $ 2,374 $3,099 =========== ====== =========== ====== Year ended December 31, 1995 . $ 3,531 $2,600 $ 3,616 $2,515 =========== ====== =========== ====== Period August 26, 1994 to December 31, 1994 ....... $ 2,833 $1,074 $ 376 $3,531 =========== ====== =========== ====== Period January 1, 1994 to August 25, 1994 ......... $ 3,030 $4,742 $ 4,939 $2,833 =========== ====== =========== ====== Reserve for obsolescence: Year ended December 31, 1996 . $ 2,115 $1,523 $ 1,925 $1,713 =========== ====== =========== ====== Year ended December 31, 1995 . $ 483 $1,664 $ 32 $2,115 =========== ====== =========== ====== Period August 26, 1994 to December 31, 1994 ....... $ -- $ 483 $ -- $ 483 =========== ====== =========== ====== Period January 1, 1994 to August 25, 1994 ......... $ 7,231 $ 794 $ 8,025(a) $ -- =========== ====== =========== ======
- --------------- (a) Includes fresh start adjustment of approximately $7.9 million. -90- 92 Commission File Numbers 1-12649 1-10140 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- EXHIBITS FILED WITH 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, 1996 ------------------- AMERICA WEST HOLDINGS CORPORATION AMERICA WEST AIRLINES, INC. - -------------------------------------------------------------------------------- 93 INDEX TO EXHIBITS
EXHIBIT NUMBER TITLE ------ ----- 2.1 -- Plan of Reorganization of America West Airlines, Inc. ("AWA"), as amended under Chapter 11 of the Bankruptcy Code, as amended-- Incorporated by reference to Exhibit 1 of AWA's Current Report on Form 8-K dated August 25, 1994. 2.2 -- Agreement and Plan of Merger, dated as of December 19, 1996, by and among America West Holdings Corporation ("Holdings"), AWA and AWA Merger, Inc., with an effective date and time as of midnight on December 31, 1996 -- Incorporated by reference to Exhibit 2.1 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 3.1 -- Restated Certificate of Incorporation of AWA (included in Exhibit 2.2 above).
94
EXHIBIT NUMBER TITLE - ------ ----- 3.2 -- Restated Bylaws of AWA-- Incorporated by reference to AWA's Annual Report on Form 10-K dated December 31, 1994. 3.3 -- Section 4.18 of the Restated Bylaws of AWA (included in Exhibit 2.2 above). 3.4 -- Certificate of Incorporation of Holdings (filed with the Secretary of State of the State of Delaware on December 13, 1996)-- Incorporated by reference to Exhibit 3.1 of Holdings' Registration Statement on Form 8-B dated January 13, 1997. 3.5 -- Bylaws of Holdings-- Incorporated by reference to Exhibit 3.2 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.1 -- Indenture for 10 3/4% Senior Unsecured Notes due 2003 -- Incorporated by reference to AWA's Form S-4 (No. 33-61099). 4.2 -- Form of Senior Note (included as Exhibit A to Exhibit 4.1 above). 4.3 -- Warrant Agreement dated August 25, 1994 between AWA and First Interstate, N.A., as Warrant Agent -- Incorporated by reference to Exhibit 4.3 to AWA's Current Report on Form 8-K dated August 25, 1994. 4.4 -- Form of Warrant (included as Exhibit A to Exhibit 4.3 above). 4.5 -- Supplemental Warrant Agreement dated effective as of December 31, 1996 between AWA and Harris Trust Company of California, as Warrant Agent-- Incorporated by reference to Exhibit 4.3 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. *4.6 -- Stockholders' Agreement for Holdings effective as of December 31, 1996 by and among TPG Partners, L.P., TPG Parallel I, L.P., Air Partners II, L.P., Continental Airlines, Inc., Mesa Air Group, Inc., Robert A. Ewert, David T. Obergfell, William A. Franke, Holdings and AWA. 4.7 -- Stock Option Agreement dated effective as of December 31, 1996, between Holdings and AWA-- Incorporated by reference to Exhibit 4.5 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.8 -- Registration Rights Agreement dated August 25, 1994 among AWA, AmWest Partners, L.P. and other holders-- Incorporated by reference to Exhibit 4.6 to the AWA's Current Report on Form 8-K dated August 25, 1994. 4.9 -- Assumption of Certain Obligations Under Registration Rights Agreement executed by Holdings for the benefit of TPG Partners, L.P., TPG Parallel I, L.P., Air Partners II, L.P., Continental Airlines, Inc., Mesa Airlines, Inc., Lehman Brothers, Inc., Belmont Capital Partners II, L.P. and Belmont Fund, L.P. -- Incorporated by reference to Exhibit 4.7 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 4.10 -- Form of Pass Through Trust Agreement, dated as of November 26, 1996, between AWA and Fleet National Bank, as Trustee -- Incorporated by reference to AWA's Report on Form 8-K dated November 26, 1996.
95
EXHIBIT NUMBER TITLE - ------- ----- 10.1 -- Alliance Agreements dated August 25, 1994 between AWA and Continental Airlines, Inc. including the Master Ground Handling Agreement, the Reciprocal Frequent Flyer Participation Agreement, the Code Sharing Agreement, the Cargo Special Pro-Rate Agreement, the Reciprocal Club Usage Agreement and the Memorandum of Understanding Concerning Technology Transfers -- Incorporated by reference to Exhibit 10.12 to AWA's Current Report on Form 8-K dated August 25, 1994. 10.2 -- Service Agreement dated September 4, 1992, as amended on March 31, 1993, July 31, 1993 and August 25, 1994, between AWA and Mesa Airlines Inc.-- Incorporated by reference to Exhibit 10.12 to AWA's Current Report on Form 8-K dated August 25, 1994. 10.3 -- Third Revised Investment Agreement dated April 21, 1994 between AWA and AmWest Partners, L.P. -- Incorporated by reference to Exhibit 10.A to AWA's Quarterly Report on Form 10-Q for the period ended March 31, 1994. 10.4 -- Third Revised Interim Procedures Agreement dated April 21, 1994 between AWA's and AmWest Partners, L.P.-- Incorporated by reference to AWA's Annual Report on Form 10-K for the year ended December 31, 1993. 10.5 -- The GPA Term Sheet between AWA and GPA Group plc, dated June 13, 1994-- Incorporated by Reference to the Predecessor's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.6 -- America West Airlines Management Resignation Allowance Guidelines, as amended, dated November 18, 1993-- Incorporated by Reference to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.7 -- Airbus A320 Purchase Agreement (including exhibits thereto), dated as of September 28, 1990 between AVSA, S.A.R.L. and AWA, together with Letter Agreement Nos. 1-10, inclusive-- Incorporated by reference to Exhibit 10-(D) (1) to AWA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. 10.8 -- Loan Agreement, dated as of September 28, 1990, among AWA, AVSA, S.A.R.L. and AVSA, S.A.R.L., as agent-- Incorporated by reference to Exhibit 10-(D) (2) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.9 -- V2500-A1 Support Contract dated September 28, 1990, between AWA and IAE International Aero Engines AG, together with Side Letters Nos. 1-7, inclusive-- Incorporated by reference to Exhibit 10- (D) (3) to AWA's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990. 10.10 -- Official Statement dated August 11, 1986 for the $54,000,000 Variable Rate Airport Facility Revenue Bonds-- Incorporated by reference to Exhibit 10.e to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1986. 10.11 -- Airport Use Agreement dated July 1, 1989 among the City of Phoenix, The Industrial Development Authority of the City of Phoenix, Arizona and AWA-- Incorporated by reference to Exhibit 10-D(9) to AWA's Annual Report on Form 10-K for the year ended December 31, 1989. 10.12 -- First Amendment dated August 1, 1990 to Airport Use Agreement-- Incorporated by reference to Exhibit 10- (D) (9) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990.
96
EXHIBIT NUMBER TITLE - ------ ----- 10.13 -- Revolving Loan Agreement dated April 17, 1990, by and among AWA, the Bank signatories thereto, and Bank of America National Trust and Savings Association, as Agent for the Banks (the "Revolving Loan Agreement")-- Incorporated by reference to Exhibit 10-1 to AWA's Quarterly Report on Form 10-Q for the period ended March 31, 1990. 10.14 -- First Amendment dated April 17, 1990 to Revolving Loan Agreement - Incorporated by reference to Exhibit 10-(D) (10) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.15 -- Second Amendment dated September 28, 1990 to the Revolving Loan Agreement-- Incorporated by reference to Exhibit 10-(D) (11) to AWA's Quarterly Report on Form 10-Q for the period ended September 30, 1990. 10.16 -- Third Amendment dated as of January 14, 1991 to the Revolving Loan Agreement-- Incorporated by reference to Exhibit 10-(D)(13) to AWA's Annual Report on Form 10-K for the year ended December 31, 1990. 10.17 -- Master Credit Modification Agreement dated as of October 1, 1992, among AWA, IAE International Aero Engines AG, Intlaero (Phoenix A320) Inc., Intlaero (Phoenix B737) Inc., CAE Electronics Ltd., and Hughes Rediffusion Simulation Limited-- Incorporated by reference to Exhibit 10-L to AWA's Annual Report on Form 10-K for the year ended December 31, 1992. 10.18 -- Key Employee Protection Agreement dated as of June 27, 1994 between AWA and William A. Franke -- Incorporated by reference to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.19 -- Management Rights Agreement dated August 25, 1994 between TPG Partners L.P., TPG Genpar, L.P. and AWA-- Incorporated by reference to AWA's Registration Statement on Form S-1 (No. 33-54243), as amended. 10.20 -- V2500-A5 Support Contract dated December 23, 1994 between AWA and IAE International Aero Engines AG, as amended, together with Side Letters Nos. 1 and 2-- Incorporated by reference to AWA's Annual Report on Form 10-K for the year ended December 31, 1994. 10.21 -- America West 1994 Incentive Equity Plan, as restated on December 19, 1996-- Incorporated by reference to Exhibit 10.41 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. *10.22 -- First Amendment to America West 1994 Incentive Equity Plan, as restated, dated January 1, 1997. *10.23 -- Employment Agreement dated as of February 15, 1997 among Holdings, AWA and William A. Franke. *10.24 -- Employment Agreement dated as of February 15, 1997 among Holdings, AWA and Richard R. Goodmanson. *11.1 -- Statement regarding computation of net income (loss) per common share. 21.1 -- Subsidiaries of Holdings-- Incorporated by reference to Exhibit 10.41 to Holdings' Registration Statement on Form 8-B dated January 13, 1997. 23.1 -- Consent of KPMG Peat Marwick LLP included on page 87 of the Annual Report on Form 10-K. 24.1 -- Power of Attorney, pursuant to which amendments to this Annual Report on Form 10-K may be filed, is included on the signature pages of this Annual Report on Form 10-K.
97
EXHIBIT NUMBER TITLE - ------ ----- *27.1 -- Financial Data Schedule for AWA (Financial Data Schedule for Holdings filed with Form 10-K for Holdings)
- ------------ * Filed herewith. EX-4.6 2 STOCKHOLDERS' AGREEMENT OF HOLDINGS. 1 EXHIBIT 4.6 2 STOCKHOLDERS' AGREEMENT FOR AMERICA WEST HOLDINGS CORPORATION THIS STOCKHOLDERS' AGREEMENT FOR AMERICA WEST HOLDINGS CORPORATION (this "Agreement") is entered into as of this 19th day of December, 1996 by and among TPG PARTNERS, L.P., a Texas limited partnership ("TPG Partners"), TPG PARALLEL I, L.P., a Texas limited partnership ("TPG Parallel"), AIR PARTNERS II, L.P., a Texas limited partnership ("Air Partners"), CONTINENTAL AIRLINES, INC., a Delaware corporation ("Continental"), MESA AIRLINES, INC., a Delaware corporation ("Mesa"), ROBERT A. EWERT, DAVID T. OBERGFELL, WILLIAM A. FRANKE and AMERICA WEST HOLDINGS CORPORATION, a Delaware corporation (the "Company"). PRELIMINARY STATEMENTS 1. On June 27, 1991, America West Airlines, Inc., a Delaware corporation ("AWA"), filed a case seeking relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Arizona (the "Bankruptcy Court"). 2. On December 8, 1993, the Bankruptcy Court entered an order on Motion to Establish Procedures for submission of Investment Proposals (the "Procedures Order"). 3. Pursuant to the Procedures Order, AmWest Partners, L.P., a Texas limited partnership ("AmWest") and AWA entered into that certain Third Revised Investment Agreement dated April 21, 1994 (the "Investment Agreement"), contemplating an investment by AmWest in AWA (the "Investment") and providing for the consummation of AWA's Plan on Reorganization (the "Plan"). 4. On August 10, 1994, the Bankruptcy Court entered an order confirming the Plan. 5. In consideration of the Investment, AWA issued common stock of AWA ("AWA Common Stock") consisting of Class A Common Stock ("AWA Class A Common") and Class B Common Stock ("AWA Class B Common") and warrants to purchase Class B Common to AmWest and others. 6. Pursuant to Section 6(b) of the Investment Agreement, (i) the official Committee of Equity Holders of America West Airlines, Inc., appointed in AWA's Chapter 11 case (the "Equity Committee") appointed Robert A. Ewert as a Stockholder Representative, (ii) the Official Committee of Unsecured Creditors of America West Airlines, Inc., appointed in AWA's Chapter 11 case (the "Creditors' Committee") appointed David T. Obergfell as a Stockholder Representative and (iii) the Board of Directors of AWA, as 3 constituted prior to consummation of the Plan, appointed William A. Franke as a Stockholder Representative. 7. In connection with the closing of the transactions contemplated by the Investment Agreement and the Plan, AWA, AmWest, GPA Group plc, a corporation organized under the laws of Ireland ("GPA"), and the Stockholder Representatives referred to above entered into that certain Stockholders' Agreement for America West Airlines, Inc. (the "Existing Stockholders' Agreement") pursuant to Section 218(c) of Title 8 of the Delaware Code (the "General Corporation Law"). 8. The rights of AmWest under the Existing Stockholders' Agreement have heretofore been assigned to, and assumed by, TPG Partners, TPG Parallel, Air Partners, Continental, and Mesa and the rights of GPA under the Existing Stockholders' Agreement have terminated. 9. The Company and AWA are parties to that certain Agreement and Plan of Merger (the "Merger Agreement") dated as of December 19, 1996, providing, among other things, for the merger (the "Merger") of AWA Merger, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company ("Merger Sub"), with and into AWA, with AWA being the surviving corporation in the Merger (in such capacity, the "Surviving Corporation"). 10. Pursuant to the Merger Agreement, at the Effective Time (as defined in the Merger Agreement), (i) each issued and outstanding share of AWA Class A Common will be converted into the right to receive one share of Class A Common Stock of the Company ("Class A Common"), (ii) each issued and outstanding share of AWA Class B Common will be converted into the right to receive one share of Class B Common Stock of the Company ("Class B Common"), (iii) each issued and outstanding share of common stock of Merger Sub will be converted into the right to receive one share of the common stock of the Surviving Corporation and (iv) each issued and outstanding share of common stock of the Company will be canceled without any consideration being paid therefor. 11. AWA currently has issued and outstanding warrants to purchase 8,180,086 shares of AWA Class B Common (the "Warrants"), the terms of which are governed by that certain Warrant Agreement dated as of August 25, 1994 between AWA and First Interstate Bank of California, as Agent (the "Warrant Agreement"). 12. Pursuant to the terms of the Warrant Agreement, as a result of the Merger, each of the Warrants will from and after the Effective Time represent the right to purchase a share of Class B Common from AWA. 13. The parties hereto have agreed to enter into this Agreement pursuant to Section 218(c) of the General Corporation Law. -2- 4 NOW, THEREFORE, in consideration of the premises herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS Capitalized terms used in this Agreement and not otherwise defined herein shall have the following respective meanings, except as otherwise provided herein or as the context shall otherwise require: "Affiliate" shall mean (i) when used with reference to any partnership, any person or entity that, directly or indirectly, owns or controls ten percent or more of either the capital or profit interests of such partnership or is a partner of such partnership or is a person or entity in which such partnership has a ten percent or greater direct or indirect equity interest, and (ii) when used with reference to any corporation, any person or entity that, directly or indirectly, owns or controls ten percent or more of the outstanding voting securities of such corporation or is a person or entity in which such corporation has a ten percent or greater direct or indirect equity interest. In addition, the term "Affiliate," when used with reference to any person or entity, shall also mean any other person or entity that, directly or indirectly, controls or is controlled by or is under common control with such person or entity. As used in the preceding sentence, (A) the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the entity referred to, whether through ownership of voting securities, by contract or otherwise, and (B) the terms "controlling" and "controls" shall have meanings correlative to the foregoing. Notwithstanding the foregoing, neither the Company nor any Fidelity Fund will be deemed to be an Affiliate of TPG Partners, TPG Parallel or Air Partners. "Agreement" shall have the meaning set forth in the introductory paragraph hereof. "Air Partners" shall have the meaning set forth in the introductory paragraph hereof. "Alliance Agreements" shall have the meaning set forth in the Investment Agreement. "AmWest" shall have the meaning set forth in the Preliminary Statements hereof. "AmWest Affiliates" shall mean AmWest GenPar, Inc., a Delaware corporation, TPG Partners, TPG Parallel, Air Partners, Continental, and Mesa. "AmWest Director" shall mean a director of the Company designated by an AmWest Affiliate pursuant to Section 2.01(a). -3- 5 "Annual Meeting" shall mean an annual meeting of the shareholders of the Company. "AWA" shall have the meaning set forth in the Preliminary Statements hereof. "AWA Class A Common" shall have the meaning set forth in the Preliminary Statements hereof. "AWA Class B Common" shall have the meaning set forth in the Preliminary Statements hereof. "AWA Common Stock" shall have the meaning set forth in the Preliminary Statements hereof. "Bankruptcy Court" shall have the meaning set forth in the Preliminary Statements hereof. "Board" shall mean the Company's Board of Directors. "Bylaws" shall mean the Bylaws of the Company. "Certificate of Incorporation" shall mean the Certificate of Incorporation of the Company. "Citizens of the United States" shall have the meaning set forth in Section 1301, Title 49, United States Code, as now in effect or as it may hereafter from time to time be amended. "Class A Common" shall have the meaning set forth in the Preliminary Statements hereof. "Class B Common" shall have the meaning set forth in the Preliminary Statements hereof. "Company" shall have the meaning set forth in the introductory paragraph hereof. "Continental" shall have the meaning set forth in the introductory paragraph hereof. "Creditors' Committee" shall have the meaning set forth in the Preliminary Statements hereof. "Creditors' Committee Director" shall mean a director of the company designated by the Creditors' Committee or otherwise pursuant to Section 2.01(b). -4- 6 "Equity Committee" shall have the meaning set forth in the Preliminary Statements hereof. "Equity Committee Director" shall mean a director of the Company designated by the Equity Committee or otherwise pursuant to Section 2.01(b). "Exchange Act" shall have the meaning set forth in Section 4.04. "Existing Stockholders' Agreement" shall have the meaning set forth in the Preliminary Statements hereof. "Fidelity Fund" shall mean a fund or account managed or advised by Fidelity Management Trust Company or any of its Affiliates or successors. "General Corporation Law" shall have the meaning set forth in the Preliminary Statements hereof. "GPA" shall have the meaning set forth in the Preliminary Statements hereof. "Independent Company Director" shall mean a director of the Company designated pursuant to Section 2.01(b). "Independent Directors" shall mean, collectively, the Creditors' Committee Directors, the Equity Committee Director, and the Independent Company Director. "Investment" shall have the meaning set forth in the Preliminary Statements hereof. "Investment Agreement" shall have the meaning set forth in the Preliminary Statements hereof. "Lehman" shall mean Lehman Brothers Inc. or any successor. "Merger" shall have the meaning set forth in the Preliminary Statements hereof. "Merger Agreement" shall have the meaning set forth in the Preliminary Statements hereof. "Merger Sub" shall have the meaning set forth in the Preliminary Statements hereof. "Mesa" shall have the meaning set forth in the introductory paragraph hereof. "Other Transaction" shall have the meaning set forth in Section 4.03. -5- 7 "Plan" shall have the meaning set forth in the Preliminary Statements hereof. "Primary Transaction" shall have the meaning set forth in Section 4.03. "Procedures Order" shall have the meaning set forth in the Preliminary Statements hereof. "Public Offering" shall have the meaning set forth in Section 4.02. "Regulation 13D-G" shall have the meaning set forth in Section 4.04. "Rule 144" shall have the meaning set forth in Section 4.02. "Securities Act" shall have the meaning set forth in Section 4.02. "Stockholder Representatives" shall mean the persons identified as such in the Preliminary Statements set forth above; provided, however, that in the case of the death, resignation, removal or disability of a Stockholder Representative, his or her successor shall be designated in the manner set forth in Section 2.01(b), and upon providing a written acknowledgment to such effect to all other parties hereto and agreeing to be bound and subject to the terms hereof, shall become a Stockholder Representative. "Successor Independent Director" shall the meaning set forth in Section 2.01(b). "Surviving Corporation" shall have the meaning set forth in the Preliminary Statements hereof. "Terminating Annual Meeting" shall mean the Annual Meeting held on the day immediately following the Termination Date. "Termination Date" shall mean the day immediately preceding the date on which the first Annual Meeting of the Company is held on or after August 25, 1997. "TPG Parallel" shall have the meaning set forth in the introductory paragraph hereof. "TPG Partners" shall have the meaning set forth in the introductory paragraph hereof. ARTICLE II DESIGNATION AND VOTING FOR COMPANY DIRECTORS Section 2.01 Designation and Voting for Directors. Until the Termination Date, subject to the exception set forth in Section 4.07(a), the Board shall consist of up to 14 persons, of whom -6- 8 nine persons shall be AmWest Directors and five persons shall be Independent Directors, all designated in accordance with the following procedure: (a) The AmWest Directors designated on Exhibit A hereto shall serve until the first Annual Meeting following the date hereof and until the successor to each such director shall be duly elected and qualified, or until their death, disability, removal or resignation. No less than 30 days in advance of each Annual Meeting prior to (but not including) the Terminating Annual Meeting, and no less than five days in advance of any other meeting of the Board prior to (but not including) the Terminating Annual Meeting at which a director will be elected to sit on the Board in a seat vacated by an AmWest Director because of death, disability, removal, resignation, or otherwise, the AmWest Affiliates shall give written notice to the other parties hereto designating the individual or individuals to serve as AmWest Directors. The Stockholder Representatives agree to recommend to the Independent Directors to vote or provide written consents in favor of such designees and to take any other action necessary to elect such designees. (b) Three Creditors' Committee Directors, one Equity Committee Director, and one Independent Company Director, each as designated on Exhibit A hereto, shall serve until the first Annual Meeting following the date hereof and until the successor to each such director shall be duly elected and qualified, or until their death, disability, removal or resignation. Until (but not including) the Terminating Annual Meeting, the Company shall nominate for reelection, and each of the AmWest Affiliates shall vote the Common Stock held and controlled by it in favor of, each Independent Director designated on Exhibit A for so long as he or she continues to serve on the Board. No less than five days in advance of any meeting of the Board prior to (but not including) the Terminating Annual Meeting at which a director will be elected to sit on the Board in a seat vacated by an Independent Director because of death, disability, removal, resignation, or otherwise (a "Successor Independent Director"), and no less than 30 days in advance of each Annual Meeting prior to (but not including) the Terminating Annual Meeting at which the term of any Successor Independent Director will expire, the Stockholder Representatives shall give written notice to the other parties hereto designating the individuals to serve as Independent Directors; provided, however, that (i) if the Creditors' Committee or the Equity Committee remain in effect, they shall have the right to designate the Creditors' Committee Directors and the Equity Committee Director, respectively, or the individuals to fill vacancies thereof, by giving written notice to the other parties hereto in accordance with the terms set forth above, and (ii) the Stockholder Representatives shall select any Successor Independent Director to replace the Independent Company Director from among the executive officers of the Company. Each of the AmWest Affiliates agrees to vote the Common Stock held and controlled by it and to cause the AmWest Directors to vote or provide written consents in favor of such designees and to take any other action necessary to elect such designees; provided, however, that each Independent Director shall be reasonably acceptable to the AmWest Affiliates at the time of his or her initial designation. -7- 9 (c) Except as otherwise provided herein, each of the AmWest Affiliates and each of the Stockholder Representatives agrees to nominate or cause the nomination of the AmWest Directors and the Independent Directors, respectively, in accordance with the Bylaws. (d) Notwithstanding the foregoing, no party hereto shall be obligated to vote any shares for which the voting rights have been suspended, whether voluntarily or involuntarily. (e) In the event that the AmWest Affiliates, the Creditors' Committee or the Equity Committee (for so long as each is in existence and has the ability to designate a director as herein provided), or the Stockholder Representatives shall fail or refuse to designate a nominee to the Board for a position allocated to and to be filled by such group or entity as herein provided, such position shall not be filled and shall remain vacant unless and until such designation shall be made as herein provided. (f) The parties hereto agree (i) to vote the Common Stock held and controlled by them (other than stock held individually by any Stockholder Representative) in favor of the removal from the Board, upon notice by the group or entity having the right to designate such director under this Section 2.01 and requesting such removal, of any person or persons designated to the Board by such group or entity, and (ii) to vote the Common Stock held and controlled by them (other than stock held individually by any Stockholder Representative) and to cause (or in the case of the Stockholder Representatives, recommend to) the directors designated by them to vote or take such action as may be required under the General Corporation Law or otherwise to implement the provisions of this Agreement. The group or entity who has nominated any director in accordance with this Agreement shall have the exclusive right to remove or replace such director by written notice as herein provided; provided, however, that nothing in this agreement shall be construed to limit or prohibit the removal of any director for cause. Section 2.02 Citizenship of Directors. Until the Termination Date, at least eight of the AmWest Directors, at least two of the Creditors' Committee Directors, the Equity Committee Director, and the Independent Company Director shall each be Citizens of the United States. Section 2.03 Restriction on Designation of AmWest Directors. Each of the AmWest Affiliates agrees that no AmWest Director shall be an officer or employee of Continental. ARTICLE III VOTING ON CERTAIN MATTERS Section 3.01 Recusal of Certain Directors. Any director who is selected by, or who is a director of, Continental shall recuse himself or herself from voting on, or otherwise receiving any confidential information regarding, matters in connection with negotiations between Continental and the Company or AWA (including, without limitation, negotiation between Continental and AWA -8- 10 of the Alliance Agreements) and matters in connection with any action involving direct competition between Continental and the Company or AWA. Any director who is selected by, or who is a director, officer or employee of, Mesa shall recuse himself or herself from voting on, or otherwise receiving any confidential information regarding, matters in connection with negotiations between Mesa and the Company or AWA (including, without limitation, negotiation between Mesa and AWA of the Alliance Agreements) and matters in connection with any action involving direct competition between Mesa and the Company or AWA. Section 3.02 Required Votes With Respect to Certain Matters. Until the Termination Date, the affirmative vote of the holders of a majority of the voting power of the outstanding shares of each class of common stock of the Company entitled to vote (excluding any shares owned by any of the AmWest Affiliates or any of their respective Affiliates, but not, however, excluding shares owned, controlled or voted by Mesa or any of its transferees or Affiliates that are not otherwise Affiliates of AmWest), voting as a single class, shall be required to approve, adopt or authorize: (a) any merger or consolidation of the Company or AWA with or into any of the AmWest Affiliates or any Affiliate of any of the AmWest Affiliates; (b) any sale, lease, exchange, transfer, or other disposition by the Company or AWA of all or any substantial part of its assets to any of the AmWest Affiliates or any Affiliate of any of the AmWest Affiliates; (c) any transaction with or involving the Company as a result of which the AmWest Affiliates or any of their respective Affiliates will, as a result of issuances of voting securities by the Company (or any other securities convertible into or exchangeable for such voting securities), acquire an increased percentage ownership of such voting securities, except for (i) the exercise of any of the Warrants, (ii) the conversion of Class A Common held by it to Class B Common, or (iii) otherwise pursuant to a transaction in which all holders of Class B Common may participate on a pro rata basis at the same price per share and on the same economic terms, including, without limitation, (A) a tender or exchange offer for all shares of the Common Stock and (B) a Public Offering; or (d) any related series or combination of transactions having or which will have, directly or indirectly, the same effect as any of the foregoing. At the request of any party proposing such a transaction, subject to the Board approving such request, the Company agrees to put to a vote of the shareholders the approval of any transaction referred to in subparagraphs (a) through (d) above (excluding the excepted transactions referred to in clauses (i), (ii), and (iii) of subparagraph (c)) at the next regular or any duly convened special meeting of the shareholders of the Company; provided, however, that, except to the extent otherwise required by applicable law, the shareholder voting requirements specified above shall not be applicable to a proposed action which has been approved or recommended by at least three Independent Directors. -9- 11 ARTICLE IV FURTHER COVENANTS Section 4.01 Proportional Ownership of Class A Common and Class B Common. None of the AmWest Affiliates or any of their respective Affiliates shall sell or otherwise transfer any Common Stock (other than to an Affiliate of the transferor) if, after giving effect thereto and to any related transaction by such party, the total number of shares of Class B Common beneficially owned by the transferor is less than twice the total number of shares of Class A Common beneficially owned by the transferor; provided, however, that nothing contained in this Section 4.01 shall prohibit any owner of Common Stock from selling or otherwise transferring, in a single transaction or related series of transactions, all shares of Common Stock owned by it, subject to the remaining provisions of this Agreement. Section 4.02 Restrictions With Respect to Governing Documents and Sale of Securities by AmWest Affiliates. Each of the AmWest Affiliates agrees that its constituent documents shall at all times require that this Agreement be binding upon all general and limited partners of such AmWest Affiliate, and any of their respective Affiliates who hold or receive shares of the Company or direct the voting of any shares held by such AmWest Affiliate, and upon any assignees or transferees in a single transaction or a related series of transactions of all or substantially all of the Common Stock owned by such AmWest Affiliate or any of its Affiliates or partners; provided, however, that this Agreement shall not be binding upon any assignee or transferee who acquires such Common stock pursuant to (a) a tender or exchange offer open to all shareholders of the Company on a pro rata basis at the same price per share and on the same economic terms, (b) a public distribution registered under the Securities Act of 1933, as amended (the "Securities Act"), or sale on the open market through a "brokers' transaction," as that term is defined in subsection (g) of Rule 144 (a "Public Offering"), or (c) a transfer made pursuant to Rule 144, as amended ("Rule 144"), under the Securities Act. None of AmWest Affiliates shall sell or transfer any Common Stock held by it to any of its general or limited partners, to any Fidelity Fund, to Lehman, or to any Affiliate of any of the AmWest Affiliates or such partners and none of the AmWest Affiliates shall sell or transfer all or substantially all of the Common Stock held by it in a single transaction or a related series of transactions, except in accordance with clauses (a), (b) or (c), above, unless and until it causes any assignee or transferee to provide a written acknowledgment to the other parties hereto that it accepts and is bound by and subject to the terms of this Agreement. Section 4.03 Restriction With Respect to Sale of Control. Each of the AmWest Affiliates covenants and agrees that, without the prior written consent of the Company given pursuant to a resolution duly adopted by the affirmative vote of not less than 75% of all directors of the Company, it shall not sell or transfer, alone or together with the other AmWest Affiliates, in a single transaction or a related series of transactions, shares of Common Stock representing 51% or more of the combined voting power of all shares of Common Stock then outstanding, other than (a) pursuant to or in connection with a tender or exchange offer for all shares of Common Stock and for the benefit of all holders of Class B Common on a pro rata basis at the same price per share and on -10- 12 the same economic terms, (b) to any Affiliate of any of the AmWest Affiliates, (c) pursuant to a bankruptcy or insolvency proceeding, (d) pursuant to a judicial order, legal process, execution, or attachment, (e) in a Public Offering, or (f) in any other transaction where the purchase price per share of the Common Stock being sold or transferred therein is equal to or less than the then-current market price per share (i.e., the average of the daily mean between the high and low sales prices regular way of the shares of Common Stock on the exchange on which shares of Common Stock are listed for ten consecutive trading days preceding the effective date of such transaction). For purposes of the foregoing, a transaction (the "Primary Transaction") involving any person or entity will not be deemed to be related to any other transaction (the "Other Transaction") if (i) the Other Transaction does not involve, directly or indirectly, such person or entity or any Affiliate of such person or entity, it being understood that, for purposes of this clause (i), TPG Partners, TPG Parallel, Air Partners, and Continental will be deemed not to be Affiliates of one another, and (ii) the Primary Transaction and the Other Transaction do not involve, directly or indirectly, persons or entities who are assignees, direct or indirect, of any of the AmWest Affiliates and who are acting in concert with respect thereto, it being understood that, for purposes of this clause (ii), persons or entities will be deemed to be acting in concert when they act jointly or on a coordinated basis pursuant to any express or tacit agreement, arrangement or understanding. Section 4.04 Certain Securities Law Filings. If required by applicable law, within ten days of the date hereof, each of the AmWest Affiliates shall file with the Securities and Exchange Commission, a Schedule 13D pursuant to Regulation 13D-G ("Regulation 13D-G") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and shall amend such filing as required by Regulation 13D-G. Each other party hereto covered by such filing covenants and agrees to promptly provide to each of the AmWest Affiliates all information pertaining to such party and necessary to make such amendments and to notify each of the AmWest Affiliates of any changes in facts or circumstances pertaining to such party that would require any amendments under Regulation 13D-G. Section 4.05 Amendments of Certificate of Incorporation and Bylaws. Each of the AmWest Affiliates agrees that it shall not, alone or together with the other AmWest Affiliates, cause any amendment to the provisions of the Certificate of Incorporation or the Bylaws or otherwise take any action that supersedes or materially adversely affects or impairs the rights and obligations of the parties under this Agreement or is contrary to the provisions of this Agreement. Section 4.06 Legending of Securities. (a) Each certificate evidencing shares of Common Stock issued to any of the AmWest Affiliates or any of its partners and any of their respective Affiliates, and any assignee or transferee bound by the terms hereof, including shares of Common Stock issued in connection with the exercise of any warrant, so long as such Common Stock is held by them and prior to the termination or expiration of this Agreement, shall be conspicuously stamped or marked with a legend including substantially as follows: THE RIGHTS AND OBLIGATIONS OF THE HOLDER OF THIS CERTIFICATE SHALL BE SUBJECT TO THE TERMS AND PROVISIONS OF THAT CERTAIN STOCKHOLDERS' -11- 13 AGREEMENT FOR AMERICA WEST HOLDINGS CORPORATION DATED DECEMBER 19, 1996, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF AMERICA WEST HOLDINGS CORPORATION. and each such certificate, for so long as such certificate is held by any of the AmWest Affiliates or any of its partners, any of their respective Affiliates, or any assignee or transferee bound by the terms hereof and prior to the termination or expiration of this Agreement, shall include in such legend the following: THIS CERTIFICATE AND ANY INTEREST HEREIN MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE AFORESAID STOCKHOLDERS' AGREEMENT. (b) All certificates evidencing shares of Common Stock and warrants of the Company that have not been registered pursuant to the Securities Act and that are not exempt from registration under Section 1145 of the Bankruptcy Code, shall at all times be conspicuously stamped or marked with a legend including substantially as follows: THE ISSUANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR PURSUANT TO THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED OTHER THAN IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND THE RULES AND REGULATIONS THEREUNDER OR AN EXEMPTION THEREFROM AND FROM ANY APPLICABLE STATE SECURITIES LAWS. (c) Upon the termination of this Agreement, the Company shall, without charge and upon surrender of certificates by the holders thereof and written request, cancel all certificates evidencing shares of Common Stock bearing any legend described in subparagraph (a) above and issue to the holders thereof replacement certificates that do not bear such a legend for an equal number of shares held by such holders. Upon the transfer of any Common Stock bearing any legend described in subparagraph (a) above to a party not bound by and subject to this Agreement, the Company shall, without charge and upon the surrender of certificates by the holders thereof and written request, cancel all certificates evidencing such shares of Common Stock and issue to the transferee thereof replacement certificates that do not bear any such legend. Section 4.07 Issuance of Preferred Stock. During the term of this Agreement, none of the AmWest Affiliates shall, alone or together with the other AmWest Affiliates, cause the issuance of any preferred stock by the Company that would (a) increase the number of directors in excess of the number provided in Section 2.01 (except for increases caused by a provision allowing holders of preferred stock to elect additional directors in the event of nonpayment of dividends), or (b) eliminate or reduce the number of Creditors' Committee Directors or eliminate the Equity Committee Director or the Independent Company Director. -12- 14 ARTICLE V RIGHTS UPON BREACH Section 5.01 Remedies. Each party hereto recognizes and agrees that a violation of any term, provision, or condition of this Agreement may cause irreparable damage to the other parties which is difficult or impossible to quantify or ascertain and that the award of any sum of damages may not be adequate relief to such other parties. Each party hereto therefore agrees that in the event of any breach of this Agreement, the other party or parties shall, in addition to any remedies at law which may be available, have the right to obtain appropriate equitable (including, but not limited to, injunctive) relief. All remedies hereunder shall be cumulative and not exclusive. Section 5.02 Additional Rights of the Company. In addition to any other remedies available at law or in equity, each party hereto agrees that the Company shall have the right (a) to withhold transfer, and to instruct any transfer agent for securities of the Company to withhold transfer, of any certificates evidencing shares of Common Stock held by any of the AmWest Affiliates or any partner or Affiliate of any of the AmWest Affiliates or transferee if the Company reasonably believes that such transfer would not be in material compliance with the terms and provisions of this Agreement, unless the transferee provides to the Company an opinion of legal counsel reasonably acceptable to the Company that such transfer will be in material compliance with the terms and provisions hereof, and (b) to require any person or entity requesting transfer of securities subject to this Agreement to provide such information as may reasonably be requested by the Company regarding ownership of securities, affiliations, if any, between the party requesting transfer and the transferee and such other matters pertaining to the transfer as may be appropriate to enable the Company to determine the compliance of the proposed transfer of securities with the terms and provisions of this Agreement. ARTICLE VI TERMINATION This Agreement shall automatically terminate without any action by any party on the Termination Date and shall not be extended except in accordance with Section 7.03. Upon such termination, the rights and obligations of each party hereunder shall terminate and the provisions of this Agreement shall be of no force and effect; provided, however, that no such termination shall relieve any person or entity from liability for breach or default of this Agreement prior to such termination. -13- 15 ARTICLE VII MISCELLANEOUS Section 7.01 Notices. All notices, requests, and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally or by facsimile transmission or mailed (first class postage prepaid) or by prepaid express courier at the following addresses or facsimile numbers: If to TPG Partners, TPG Parallel or Air Partners, to: TPG GenPar, L.P. 201 Main Street, Suite 2420 Fort Worth, Texas 76102 Attention: James G. Coulter Fax Number: (817) 871-4010 with copies to: Arnold & Porter 1200 New Hampshire Ave., N.W. Washington, D.C. 20036 Attention: Richard P. Schifter Fax Number: (202) 872-6720 and Jones, Day, Reavis & Pogue North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Attention: Lyle G. Ganske Fax Number: (216) 586-7864 If to Continental, to: 2929 Allen Parkway, Suite 2010 Houston, Texas 77019 Attention: Jeffrey Smisek Fax Number: (713) 834-2687 -14- 16 with copies to: Arnold & Porter 1200 New Hampshire Ave., N.W. Washington, D.C. 20036 Attention: Richard P. Schifter Fax Number: (202) 872-6720 and Jones, Day, Reavis & Pogue North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Attention: Lyle G. Ganske Fax Number: (216) 586-7864 If to Mesa, to: 2325 East 30th Street Farmington, New Mexico 87401 Attention: Larry L. Risley Fax Number: (505) 326-4485 with copies to: Jones, Day, Reavis & Pogue North Point 901 Lakeside Avenue Cleveland, Ohio 44114 Attention: Lyle G. Ganske Fax Number: (216) 586-7864 and Arnold & Porter 1200 New Hampshire Ave., N.W. Washington, D.C. 20036 Attention: Richard P. Schifter Fax Number: (202) 872-6720 -15- 17 If to Robert A. Ewert, to: Robert A. Ewert 3819 E. Nowata Drive Phoenix, Arizona 85044 Fax Number: (602) 893-2239 If to David T. Obergfell, to: David T. Obergfell 2606 Beechmont Drive Dallas, Texas 75228 Fax Number: (214) 965-6140 with a copy to: Stutzman & Bromberg 2323 Bryan Street, Suite 2300 Dallas, Texas 75201 Attention: Sandy Esserman Fax Number: (214) 969-4999 If to William A. Franke, to: William A. Franke America West Airlines, Inc. 4000 East Sky Harbor Boulevard Phoenix, Arizona 85034 Fax Number: (602) 693-5517 If to the Company, to: America West Holdings Corporation 4000 East Sky Harbor Boulevard Phoenix, Arizona 85034 Attention: General Counsel Fax Number: (602) 693-5904 -16- 18 with a copy to: Andrews & Kurth, L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 Attention: David G. Elkins Fax Number: (713) 220-4285 All such notices, requests and other communications will (a) if delivered personally to the address as provided in this Section 7.01, be deemed given upon delivery, (b) if delivered by facsimile transmission to the facsimile number as provided in this Section 7.01, be deemed given upon receipt, and (c) if delivered by mail or by express courier in the manner described above to the address as provided in this Section 7.01, be deemed given upon receipt (in each case regardless of whether such notice is received by any other person or entity to whom a copy of such notice, request or other communication is to be delivered pursuant to this Section 7.01). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice as provided in this Section 7.01 specifying such change to the other parties hereto. Nothing in this Section 7.01 shall be deemed or construed to alter any notice provisions contained in the Bylaws. Section 7.02 Governing Law. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of Delaware without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply. Section 7.03 Amendments and Waiver. This Agreement may only be amended, waived, supplemented, modified, or extended by a written instrument signed by authorized representatives of each party hereto. Section 7.04 Benefit and Burden. This Agreement shall inure to the benefit of and be binding upon each of the parties hereto and their respective successors and permitted assigns. Section 7.05 Counterparts. This Agreement may be executed by the parties hereto in counterparts and by telecopy, each of which shall be deemed to constitute an original and all of which together shall constitute one and the same instrument. Section 7.06 Severability. If any term or provision of this Agreement shall be found by a court of competent jurisdiction to be illegal, invalid, or unenforceable to any extent, the remainder of this Agreement shall not be affected thereby and shall be enforced to the greatest extent permitted by law. Section 7.07 Inconsistent Provisions. The parties hereto intend that in the case of any conflict or inconsistency between this Agreement and the Certificate of Incorporation or the Bylaws, that this Agreement shall control, and therefore, in the event that any term or provision of this -17- 19 Agreement is rendered invalid, illegal or unenforceable by the Certificate of Incorporation or the Bylaws, the parties agree to amend the Certificate of Incorporation or the Bylaws (as the case may be) so as to render such term or provision valid, legal, and enforceable, if and to the extent legally permitted. Section 7.08 Effectiveness and Termination of Existing Stockholders' Agreement. This Agreement shall become effective upon the later to occur of (a) the execution by each of the parties hereto of this Agreement and (b) the effectiveness of the Merger. Upon this Agreement becoming effective, the Existing Stockholders' Agreement shall terminate and be of no further force or effect; provided, however, that such termination of the Existing Stockholders' Agreement shall not relieve any of the parties thereto from liability for any breach or default of the Existing Stockholders' Agreement prior to such termination. IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the date first written above. TPG PARTNERS, L.P. By: TPG GenPar, L.P., its General Partner By: TPG Advisors, Inc., its General Partner By: /s/ Richard Eckleberry ------------------------------------ Richard Eckleberry, Vice President TPG PARALLEL I, L.P. By: TPG GenPar, L.P., its General Partner By: TPG Advisors, Inc., its General Partner By: /s/ Richard Eckleberry ------------------------------------ Richard Eckleberry, Vice President -18- 20 AIR PARTNERS II, L.P. By: TPG GenPar, L.P., its General Partner By: TPG Advisors, Inc., its General Partner By: /s/ Richard Eckleberry ----------------------------------- Richard Eckleberry, Vice President CONTINENTAL AIRLINES, INC. By: /s/ Jeffrey A. Smisek ------------------------------------------- Jeffrey A. Smisek, Executive Vice President MESA AIRLINES, INC. By: /s/ Larry L. Risley ------------------------------------------- Larry L. Risley, Chief Executive Officer STOCKHOLDER REPRESENTATIVES By: /s/ Robert A. Ewert ------------------------------------------- Robert A. Ewert, Stockholder Representative -19- 21 By: /s/ David T. Obergfell ----------------------------------- David T. Obergfell, Stockholder Representative By: /s/ William A. Franke ------------------------------------------- William A. Franke, Stockholder Representative AMERICA WEST HOLDINGS CORPORATION By: /s/ Stephen L. Johnson ------------------------------------------- Stephen L. Johnson, Senior Vice President -- Legal Affairs America West Airlines, Inc., a Delaware corporation, hereby executes this Agreement solely for the purposes of evidencing its consent to the termination of the Existing Stockholders' Agreement provided in Section 7.08 hereof. AMERICA WEST AIRLINES, INC. By: /s/ Stephen L. Johnson ------------------------------------------- Stephen L. Johnson, Senior Vice President -- Legal Affairs -20- 22 EXHIBIT A DIRECTOR DESIGNEES AmWest Directors: - ----------------- Julia Chang Bloch Frederick W. Bradley, Jr. James G. Coulter John F. Fraser John L. Goolsby Richard C. Kraemer Larry L. Risley Richard P. Schifter Richard R. Goodmanson Creditors' Committee Directors: - ------------------------------- Stephen F. Bollenbach Raymond S. Troubh Frank B. Ryan Equity Committee Director: - -------------------------- John R. Power, Jr. Independent Company Director: - ----------------------------- William A. Franke A-i EX-10.22 3 FIRST AMENDMENT TO 1994 INCENTIVE EQUITY PLAN. 1 EXHIBIT 10.22 2 FIRST AMENDMENT TO AMERICA WEST 1994 INCENTIVE EQUITY PLAN WHEREAS, effective as of December 1, 1994, America West Airlines, Inc. ("AWA") established the America West Airlines, Inc. 1994 Incentive Equity Plan (the "Original Plan"); WHEREAS, effective as of December 31, 1996, AWA became a wholly-owned subsidiary of America West Holdings Corporation ("Holdings") and, in connection therewith, the Original Plan was amended and restated in its entirety to evidence AWA's assignment of the Original Plan to Holdings and Holdings' assumption of the obligations of AWA under the Original Plan and to provide for the substitution of Holdings for AWA as the "Company" under the Original Plan (the Original Plan, as so amended and restated, being hereinafter referred to as the "Plan"); WHEREAS, the Board of Directors of Holdings is authorized by Paragraph 18(a) of the Plan to amend the Plan from time to time; and WHEREAS, the Board of Directors of Holdings deems it advisable to amend the Plan in certain respects and, to that end, such Board has duly adopted this First Amendment; NOW, THEREFORE, the Plan is hereby amended as set forth below, effective as of January 1, 1997. SECTION 1. Amendment of paragraph 2(j). Paragraph 2(j) of the Plan is amended to read in its entirety as follows: (j) "Date of Grant" means (i) with respect to an Award other than a Director Option or an automatic grant of Common Stock pursuant to Paragraph 11(d), the date specified by the Committee on which such Award will become effective (which date will not be earlier than the date on which the Committee takes action with respect thereto), (ii) with respect to a Director Option, the automatic grant date as provided in Paragraph 11(a) or 11(b) and (iii) with respect to a grant of Common Stock to a Nonemployee Director pursuant to Paragraph 11(d), the automatic grant date as provided in Paragraph 11 (d). SECTION 2. Amendment of Paragraph 2(s). Paragraph 2(s) of the Plan is amended to read in its entirety as follows: (s) "Participant" means an employee of the Company or any of its Subsidiaries who is selected by the Committee to receive an Award under any of 3 Paragraphs 4 through 10 and shall also include a Nonemployee Director who has received an automatic grant of Director Options pursuant to Paragraph 11(a) or 11(b) or an automatic grant of Common Stock pursuant to Paragraph 11(d). SECTION 3. Amendment of Paragraph 11. Paragraph 11 of the Plan is amended to read in its entirety as follows: 11. Director Options, etc. (a) Each Nonemployee Director who serves in such capacity on December 31, 1994 shall automatically receive, on such date, a Director Option for 3,000 shares of Common Stock. Each Nonemployee Director who is elected or appointed to the Board for the first time after the effective date of this Plan shall automatically receive, on the date of his or her election or appointment, a Director Option for 3,000 shares of Common Stock. (b) On the date following the regular meeting of the stockholders of the Company in each year that this Plan is in effect (commencing with the 1995 annual meeting of stockholders), each Nonemployee Director who is in office on that day and who was not elected for the first time at such annual meeting shall automatically receive a Director Option of 3,000 shares of Common Stock. (c) Each Director Option will be subject to all of the limitations contained in the following provisions: (i) Each Director Option shall become exercisable (vested) on the first day that is more than six months following its Date of Grant; provided that in no event shall any Director Option be exercisable prior to the approval of this Plan by the Company's stockholders. (ii) The Option Price of each Director Option shall be the Market Value per Share on its Date of Grant. (iii) Each Director Option that is vested may be exercised in full at one time or in part from time to time by giving written notice to the Company, stating the number of shares of Common Stock with respect to which the Director Option is being exercised, accompanied by payment in full of the Option Price for such shares, which payment may be (i) in cash by check acceptable to the Company, (ii) by the transfer to the Company of shares of Common Stock already-owned by the optionee having an aggregate Market Value per Share at the date of exercise equal to the aggregate Option Price, (iii) from the proceeds of a sale through a broker of some or all of the shares to which such exercise relates or (iv) by a combination of such methods of payment. -2- 4 (iv) Each Director Option shall expire ten years from the Date of Grant thereof, but shall be subject to earlier termination as follows: Director Options, to the extent exercisable as of the date a Nonemployee Director ceases to be a director of the Company, must be exercised within three months of such date unless such termination from the Board results from the Nonemployee Director's death, disability or retirement, in which case the Director Options may be exercised within three years from the date of termination; provided, however, that no such event shall extend the normal expiration date of such Director Options. (v) In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Director Options provided for at such time in Paragraphs 11(a) and 11(b) and all automatic grants of Common Stock provided for at such time in Paragraph 11(d), then Paragraph 11(d) shall take precedence over paragraphs 11(a) and 11(b) so that all automatic grants of Common Stock then required to be made under Paragraph 11(d) shall be made in full before any automatic grants of Director Options are made at such time under Paragraphs 11(a) and 11(b). In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Director Options provided for in Paragraphs 11(a) and 11(b) at such time, then all Nonemployee Directors who are entitled to an automatic grant of Director Options at such time shall share ratably in the number of shares then available for grant under this Plan and shall have no right to receive a grant with respect to the deficiencies in the number of available shares. (d) On December 31 in each year that this Plan is in effect (commencing on December 31, 1997), each Nonemployee Director who is in office on that day shall automatically receive, without additional consideration, a grant for that number of shares of Common Stock (rounded to the nearest whole number) determined by dividing 13,000 by the Market Value per Share on the December 31 immediately preceding the Date of Grant; provided, however, that the annual grant to any Nonemployee Director who has not been in office at all times during the 12-month period immediately prior to the Date of Grant shall be prorated based on the number of whole months that such Nonemployee Director has been in office during such 12-month period. Each such grant of Common Stock shall be subject to the following terms and conditions: (i) Each grant will constitute an immediate and nonforfeitable transfer of the ownership of shares covered thereby to the Nonemployee Director in consideration for services rendered by such Nonemployee Director, entitling such Nonemployee Director to voting and other ownership rights. (ii) In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Common Stock provided for at such time in this Paragraph 11(d) and all automatic -3- 5 grants of Director Options provided for at such time in Paragraphs 11(a) and 11(b), then this Paragraph 11(d) shall take precedence over Paragraphs 11(a) and 11(b) so that all automatic grants of Common Stock then required to be made under this Paragraph 11(d) shall be made in full before any automatic grants of Director Options are made at such time under Paragraphs 11(a) and 11(b). In the event that the number of shares of Common Stock available for grants under this Plan is insufficient at any time to make all automatic grants of Common Stock provided for in this Paragraph 11(d) at such time, then all Nonemployee Directors who are entitled to an automatic grant of Common Stock under this Paragraph 11(d) at such time shall share ratably in the number of shares then available for grant under this Plan and shall have no right to receive a grant with respect to the deficiencies in the number of available shares. SECTION 4. Amendment of Paragraph 12. Paragraph 12 of the Plan is amended to read in its entirety as follows: 12. Transferability. (a) Except as provided in subparagraph (b) below, no Award that has not become payable or earned will be transferable by a Participant other than by will or the laws of descent and distribution and Director Options, Option Rights or Appreciation Rights will be exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. (b) The Committee may, in its discretion, adopt rules or guidelines under which any Award previously granted or to be granted to a Participant (other than an incentive stock option) may be transferred (in whole or in part) by the Participant to (i) the spouse, children or grandchildren of the Participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of the Immediate Family Members and, if applicable, the Participant, (iii) a partnership in which such Immediate Family Members and, if applicable, the Participant are the only partners or (iv) section 501(c)(3) organizations. Following transfer, any such Awards shall continue to be subject to the same terms and conditions as were applicable to the Award immediately prior to transfer; provided, however, that no transferred Award shall be exercisable or payable, as the case may be, unless arrangements satisfactory to the Company have been made to satisfy any tax withholding obligations the Company may have with respect to the Award. SECTION 5. Amendment of Paragraph 17(a). Paragraph 17(a) of the Plan is amended by replacing the phrase "disinterested person", appearing in the first sentence thereof, with the phrase "non-employee director". -4- EX-10.23 4 EMPLOYMENT AGRMT BTWN HOLDINGS, AWA AND FRANKE. 1 EXHIBIT 10.23 2 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), dated as of February 15, 1997, by and among AMERICA WEST HOLDINGS CORPORATION, a Delaware corporation ("Holdings"), AMERICA WEST AIRLINES, INC., a Delaware corporation and a wholly-owned subsidiary of Holdings ("AWA" and, together with Holdings, "Employers"), and WILLIAM A. FRANKE ("Franke"). WHEREAS, Employers desire to employ Franke in an executive capacity and Franke desires to serve in such capacity, all on the terms and conditions, and for the consideration, set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions and Interpretations 1.1. Definitions For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings: "AmWest Registration Agreement" shall have the meaning specified in Section 6.1. "Base Salary" shall have the meaning specified in Section 3.1(a). "Board" shall mean the Board of Directors of Holdings. "CEO" shall mean, when used with reference to any Constituent Company, the chief executive officer of such Constituent Company. "Chairman" shall mean, when used with reference to any Constituent Company, the Chairman of the Board of such Constituent Company. "Change in Control" shall occur if, after the date hereof: (i) the individuals who, as of the date hereof, constitute the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date 3 hereof whose election, or nomination for election by Holdings' stockholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (ii) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) acquires (directly or indirectly) the beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Holdings entitled to vote generally in the election of directors ("Voting Power"); or (iii) any shares of Class B Common Stock or other voting securities of Holdings shall be purchased pursuant to a tender or exchange offer (other than a tender or exchange offer made by Holdings); or (iv) Holdings' stockholders shall approve a merger or consolidation involving Holdings other than (A) a merger or consolidation in which the voting securities of Holdings outstanding immediately prior thereto will become (by operation of law), or are to be converted into, voting securities of the surviving corporation or its parent corporation immediately after such merger or consolidation that are owned by the same person or entity or persons or entities as immediately prior thereto and possess at least 75% of the Voting Power held by the voting securities of the surviving corporation or its parent corporation, (B) a merger or consolidation effected to implement a recapitalization of Holdings (or similar transaction) in which no person acquires more than 50% of the Voting Power or (C) a merger or consolidation in which Holdings is the surviving corporation and such transaction was determined not to be a Change in Control, which transaction and determination was approved by a majority of the Board in actions taken prior to, and with respect to, such transaction; or (v) Holdings' stockholders shall approve a merger, consolidation, reorganization, disposition of assets, liquidation or other transaction (or series of related transactions) in which Holdings will not survive as a publicly-owned corporation. "Code" shall mean the Internal Revenue Code of 1986, as in effect from time to time. "Confidential Information" shall have the meaning specified in Section 5.1(a). "Constituent Companies" shall mean, collectively, Holdings, AWA and all other direct or indirect subsidiaries of Holdings. "Disability" shall mean a physical or mental condition of Franke that, in the good faith judgment of not less than a majority of the entire membership of the Board, based upon -2- 4 certification by a licensed physician reasonably acceptable to Franke and the Board, (i) prevents Franke from being able to perform the services required under this Agreement, (ii) has continued for a period of at least six months during any period of twelve consecutive months and (iii) is expected to continue. "Dispute" shall have the meaning specified in Article VII. "Employment Period" shall mean that the period commencing on the date hereof and ending on the Expiration Date; provided, however, that if either Holdings or Franke gives a Notice of Termination pursuant to Section 4.1 or 4.2, then the Employment Period shall not extend beyond the relevant Termination Date. "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended. "Expiration Date" shall mean December 31, 1998. "Good Reason" shall mean any of the following actions or failures to act, but in each case only if it occurs during the Employment Period and then only if it is not consented to by Franke: (1) a material alteration by either Employer in the nature or status of Franke's applicable positions, functions, duties or responsibilities described in Section 2.2, including any change which would (i) alter Franke's reporting responsibilities described in Section 2.2 or (ii) cause Franke's positions with Employers to become of less dignity or importance than the applicable positions described in paragraphs (a) and (b) of Section 2.2; provided, however, that each such alteration shall cease to be a Good Reason on the date which is 90 days after the occurrence of such alteration unless, prior to such date, Franke gives a Notice of Termination pursuant to Section 4.1 on account of such alteration; (2) the failure of either Employer to perform any of its obligations under this Agreement in any material regard, but only if such failure shall continue unremedied for more than 15 days after written notice thereof is given by Franke to Holdings; (3) the relocation of the principal executive offices of either Employer outside the greater Phoenix, Arizona metropolitan area or either Employer's requiring Franke to be based other than at such principal executive offices; provided, however, that such relocation shall cease to be a Good Reason on the date which is 90 days after the occurrence of such relocation unless, prior to such date, Franke gives a Notice of Termination pursuant to Section 4.1 on account of such relocation; -3- 5 (4) the failure either Employer to elect or re-elect, or to appoint or re-appoint, Franke to the applicable offices described in paragraphs (a) and (b) of Section 2.2; (5) any purported termination by either Employer of Franke's employment not in accordance with the provisions of this Agreement; (6) the failure of either Employer to obtain any assumption agreement required by Section 9.5(a); or (7) the failure of Franke to be elected or appointed, or to be re-elected or re-appointed, as a director of either Employer as contemplated by Section 2.2(f). "Holders" shall have the meaning specified in Section 6.1. "Incentive Plan" shall mean the America West 1994 Incentive Equity Plan, as amended from time to time. "Market Value per Share" means, at any date, the closing price per share of Class B Common Stock of Holdings on that date (or, if there are no sales on that date, the last preceding date on which there was sale) in the principal market in which such shares are traded. "Misconduct" shall mean one or more of the following: (i) the willful and continued failure by Franke to perform his duties described in Section 2.2 (other than any such failure resulting from Franke's incapacity due to physical or mental illness) after written notice of such failure has been given to Franke by Holdings and Franke has had a reasonable period after receipt of such notice to correct such failure; (ii) the willful commission by Franke of acts that are both dishonest and demonstrably injurious to any Constituent Company (monetarily or otherwise) in any material respect, provided that no act taken by Franke shall be deemed to constitute Misconduct if such act was taken by Franke in good faith and in the reasonable belief that such act was in the best interests of the Constituent Companies or in furtherance of Franke's duties and responsibilities described in Section 2.2; (iii) the conviction of Franke for a felony offense involving moral turpitude; or -4- 6 (iv) a material breach by Franke of any of the covenants set forth in this Agreement (other than Section 2.2), but only if such breach shall continue unremedied for more than 15 days after written notice thereof is given to Franke by Holdings. "Notice of Termination" shall mean a notice purporting to terminate Franke's employment in accordance with Section 4.1 or 4.2, which notice shall set forth in reasonable detail the reason for such termination and the facts and circumstances claimed to provide a basis for such termination. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust and an unincorporated organization. "Piggyback Registration Notice" shall have the meaning specified in Section 6.2(a). "Registrable Securities" shall have the meaning specified in Section 6.1. "Restricted Period" shall have the meaning specified in Section 5.2(a). "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Stockholder Approval" shall have the meaning specified in Section 3.2(a). "Termination Date" shall mean the termination date specified in a Notice of Termination delivered in accordance with Article IV, provided that in no event shall such termination date be less than 30 nor more than 60 days after the date such Notice of Termination is given. "1995 Agreement" shall mean the Employment Agreement between Franke and AWA dated as of November 9, 1995. "1996 Stock Option" shall have the meaning specified in Section 3.2. 1.2. Interpretations (a) In this Agreement, unless a clear contrary intention appears, (i) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, (ii) reference to any Article or Section, means such Article or Section hereof, (iii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term, and (iv) where any provision of this Agreement refers to action to be taken by any party, -5- 7 or which such party is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such party. (b) The Article and Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any party solely because that party or its legal representative drafted such provision. ARTICLE II Employment; Term; Positions and Duties 2.1. Employment; Term Each Employer hereby employs Franke in an executive capacity and Franke hereby accepts employment by each Employer, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. Franke's employment hereunder shall commence on the date hereof and shall terminate on the Expiration Date, unless earlier terminated as provided in Article IV. 2.2. Positions and Duties (a) While employed hereunder, Franke shall serve as Chairman and CEO of Holdings and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such positions, including (without limitation) such duties and responsibilities as are set forth with respect to such positions in the certificate of incorporation and bylaws (as from time to time in effect) of Holdings. (b) While employed hereunder, Franke shall serve as Chairman of AWA and shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such position, including (without limitation) such duties and responsibilities as are set forth with respect to such position in the certificate of incorporation and bylaws (as from time to time in effect) of AWA. (c) Franke shall have such additional duties and responsibilities commensurate with the positions referred to above as from time to time may be reasonably assigned to him by the Board. (d) While employed hereunder, Franke shall report directly and exclusively to the Board and shall observe and comply with all lawful policies, directions and instructions of the Board which are consistent with paragraphs (a), (b) and (c) above. -6- 8 (e) During the Employment Period, (i) the President of Holdings and the President and CEO of AWA shall report directly to Franke, (ii) the chief operating officer, the chief financial officer, the chief legal officer and the chief public affairs officer of Holdings shall, unless otherwise directed by the Board, report directly to Franke and (iii) the chief operating officer, the chief financial officer, the chief legal officer and the chief public affairs officer of AWA shall, unless other directed by Franke or the Board, report jointly to Franke and the CEO of AWA. (f) Employers agree to use their reasonable best efforts to cause Franke to be elected or appointed, or re-elected or re-appointed, as director of each Employer at all times during the Employment Period. (g) While employed hereunder, Franke agrees to devote a reasonable portion (which need not constitute a substantial portion) of his business time, attention, skill and efforts to the faithful and efficient performance of his duties hereunder as Chairman and CEO of Holdings and as Chairman of AWA; provided, however, that Franke may engage in the following activities so long as they do not interfere in any material respect with the performance of Franke's duties and responsibilities hereunder: (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach on a part-time basis at educational institutions, (iii) manage his personal investments, (iv) serve as a managing partner of Newbridge Latin American Fund and (v) render consultation and financial advisory services to third parties. Employers acknowledge that Franke is the principal owner of Franke & Company, Inc. through which Franke owns and oversees equity interests in several enterprises and provides consultation and financial advisory services to third parties. 2.3. Place of Employment Franke's place of employment hereunder shall be at Holdings' principal executive offices in the greater Phoenix, Arizona metropolitan area. ARTICLE III Compensation and Benefits 3.1. Base Salary (a) For services rendered by Franke under this Agreement, Employers shall pay to Franke an annual cash base salary ("Base Salary") in the amount (subject to adjustment as provided in paragraph (b) below) of (i) $500,000 for the period ending June 30, 1997 and (ii) $250,000 for the remainder of his employment hereunder. The Base Salary shall be payable semi-monthly as earned during the Employment Period. -7- 9 (b) The Base Salary may be increased by the Board at any time or from time to time as the Board may deem appropriate. The Board may decrease the Base Salary at any time or from time to time after September 30, 1997 as the Board may deem appropriate; provided that in no event may the Base Salary be decreased below $100,000 without the prior written consent of Franke. 3.2. 1996 Stock Option Franke has heretofore been granted several options to purchase shares of Class B Common Stock of Holdings, the latest being an option purchase 71,000 shares of Class B Common Stock of Holdings for $12 per share (the "1996 Stock Option"). The following provisions of this Section 3.2 constitute the agreement required with respect to the 1996 Stock Option under Paragraph 4(i) of the Incentive Plan: (a) Subject to the approval by Holdings' stockholders of an appropriate increase in the number of shares covered by the Incentive Plan ("Stockholder Approval"), the 1996 Option shall become exercisable as to 10% of the shares covered thereby on October 28, 1997, as to 30% of the shares covered thereby on October 28, 1998 and as to 60% of the shares covered thereby on December 31, 1998, so that the 1996 Stock Option will be exercisable in full on December 31, 1998. (b) Upon the exercise of the 1996 Stock Option, the Person exercising the 1996 Stock Option shall pay to Holdings an amount equal to the exercise price, such amount to be paid (i) in cash, (ii) by delivering to Holdings issued and outstanding shares of Holdings' Class B Common Stock which have an aggregate Market Value per Share at the date of exercise equal to the exercise price, (iii) by directing Holdings to sell a sufficient number of shares to be acquired on exercise of the 1996 Stock Option through a broker approved by Holdings, in which event the proceeds of such sale shall be applied by Holdings to the payment of the exercise price, with any surplus then remaining to be paid to the Person exercising the 1996 Stock Option or its designee or (iv) by any combination of the foregoing. (c) Upon the occurrence of a Change in Control, the 1996 Stock Option shall become automatically vested in full and may be exercised at any time thereafter; provided, however, in no event shall the 1996 Stock Option be exercisable before Stockholder Approval or after October 28, 2006. (d) In the event Franke's employment is terminated by Franke pursuant to Section 4.1 other than for Good Reason or on account of Disability or by Holdings pursuant to Section 4.2 for Misconduct, the 1996 Stock Option, to the extent then vested, may be exercised at any time within six months following the Termination Date, but not thereafter; provided, however, in no event shall the 1996 Stock Option be exercisable before Stockholder Approval or after October 28, 2006. To the extent the 1996 Stock Option is not vested on such Termination Date, the 1996 Stock Option (or the portion thereof that is not vested on such Termination Date) shall automatically lapse and be canceled unexercised as of such Termination Date. -8- 10 (e) The 1996 Stock Option shall become automatically vested in full on the date of Franke's death and may be exercised at any time within the one-year period beginning on the date of Franke's death, but not thereafter; provided, however, in no event shall the 1996 Stock Option be exercisable before Stockholder Approval or after October 28, 2006. (f) In the event Franke's employment is terminated by reason of Disability, the 1996 Stock Option shall become automatically vested in full on the date of such Disability and may be exercised at any time within the 36-month period beginning on the date of such Disability, but not thereafter; provided, however, in no event shall the 1996 Stock Option be exercisable before Stockholder Approval or after October 28, 2006. (g) Except as otherwise provided herein, the 1996 Stock Option may be exercised in whole or in part or in two or more successive parts. (h) The 1996 Stock Option shall not be transferrable by Franke except for transfers permitted by the Incentive Plan and except for transfers by will or by laws of descent and distribution. During the lifetime of Franke, the 1996 Stock Option may not be exercised by anyone other than Franke or the Person to whom the 1996 Stock Option has been transferred in accordance with the Incentive Plan. (i) The 1996 Stock Option may be exercised from time to time by a notice in writing which identifies the 1996 Stock Option and specifies the number of shares in respect of which it is being exercised. Such notice shall be delivered to the Secretary of Holdings or addressed to the Secretary of Holdings at its principal corporate offices. The date of exercise of the 1996 Stock Option shall be the date the exercise notice is hand delivered or mailed to the Secretary of Holdings, whichever is applicable. An election to exercise the 1996 Stock Option shall be irrevocable. (j) The 1996 Stock Option is not intended to qualify as an incentive stock option under Section 422 of the Code. (k) The provisions of this Section 3.2 shall survive the termination of Franke's employment hereunder. 3.3. Life Insurance During the Employment Period, Employers agree to maintain, at all times and without cost to Franke, a term life insurance policy on the life of Franke in the amount of $2 million, the proceeds of which, in the event of Franke's death, shall be payable to one or more beneficiaries designated by Franke or, in the absence of any such designation, to his estate. Such policy shall be issued by a solvent insurance company reasonably acceptable to Franke. -9- 11 3.4. Annual Administrative Expense Allowance (a) During the Employment Period, Employers shall to pay to Franke or his designee, in accordance with past practices, an annual allowance of $51,125 (subject to adjustment as provided in paragraph (b) below) for administrative expenses incurred by Franke in connection with the performance of his duties and responsibilities and the exercise of his powers and authority under this Agreement. Each such annual allowance shall be paid to Franke in twelve equal monthly installments. So long as Employers are not in default under this Section 3.4, Franke shall be responsible for providing, in accordance with past practices, at least one administrative assistant/secretary. (b) The amount of the annual allowance referred to in paragraph (a) above shall be adjusted upwards or downwards, as the case may be, for each calendar year commencing on or after January 1, 1997 by the amount of the change, if any, in the Cost of Living during the prior calendar year based on the Consumer Price Index - All Urban Consumers - All Items Less Shelter - West A Region (1982-84=100) as published by the Bureau of Labor Statistics for the United States Department of Labor; provided, however, than in no event shall the amount of any such annual adjustment exceed 6%. If such Index is discontinued or revised in any material respect, the parties shall mutually agree upon a substitute index which shall thereafter be used in order to obtain substantially the same result as would have been obtained had such Index had not been so discontinued or revised. 3.5. Business Expenses Each Employer shall, in accordance with the rules and policies that it may establish from time to time for senior executives, reimburse Franke (without duplication) for business expenses reasonably incurred in the performance of Franke's duties hereunder. It is understood that Franke is authorized to incur reasonable business expenses for promoting the businesses and reputations of the Constituent Companies, including reasonable expenditures for travel, lodging, meals and client and/or business associate entertainment. Requests for reimbursement for such expenses must be accompanied by appropriate documentation. 3.6. Other Benefits Franke shall be entitled to receive all fringe benefits and other perquisites that may be offered by the Employers to their senior executives as a group or to any of its senior executives individually or to the members of the Board, including, without limitation, (i) participation in the various employee benefit plans or programs provided to senior executives of Employers in general (including split-dollar life insurance and disability insurance programs), subject to meeting the eligibility requirements with respect to each of such benefit plans or programs, (ii) tax/financial planning assistance, (iii) automobile allowances, (iv) club memberships, (v) on-line and interline, positive space travel privileges, (vi) participation in Employers' severance payment policies on plans for executives in general and (vii) participation in Employers' retiree medical insurance programs, subject to meeting the eligibility requirements of such programs other than the -10- 12 requirement relating to five years service with Employers, which requirement is hereby waived. However, nothing in this Section 3.6 shall be deemed to prohibit Employers from making any changes in any of the plans, programs or benefits described herein, provided the change similarly affects all senior executives of Employers or all members of the Board, as the case may be, similarly situated. Notwithstanding the foregoing, Franke shall not be entitled to participate in any incentive plans offered to key employees of either Employer other than the Incentive Plan. 3.7. No Director Fees In no event shall Franke be entitled to receive any additional compensation for serving as a director of any Constituent Company during the Employment Period. ARTICLE IV Termination of Employment 4.1. Termination by Franke Franke may, at any time prior to the Expiration Date, terminate his employment hereunder for any reason by delivering a Notice of Termination to the Board. 4.2. Termination by Holdings Holdings may, at any time prior to the Expiration Date, terminate Franke's employment hereunder for any reason by delivering a Notice of Termination to Franke; provided, however, that in no event shall Holdings be entitled to terminate Franke's employment hereunder prior to the Expiration Date unless the Board shall duly adopt, by the affirmative vote of at least a majority of the entire membership of the Board, a resolution authorizing such termination and stating that, in the opinion of the Board, sufficient reason exists therefor. 4.3. Payment of Accrued Base Salary, Vacation Pay, etc. (a) Promptly upon the termination of Franke's employment hereunder for any reason, Employers shall pay to Franke a lump sum amount for (i) any unpaid Base Salary earned hereunder prior to the termination date, (ii) all unused vacation time accrued by Franke as of the termination date in accordance with Employers' vacation policies for senior executives, (iii) all unpaid benefits earned by Franke as of the termination date under any and all incentive compensation plans or programs of Employers, (iv) all amounts owing to Franke under Sections 3.4 -11- 13 and 3.5 and (v) any additional amounts or benefits which may be required to be paid in a lump sum by applicable law. (b) A termination of Franke's employment in accordance with this Agreement shall not alter or impair (i) any of Franke's rights or benefits under or with respect to the 1996 Stock Option except as expressly provided in Section 3.2, (ii) any of Franke's rights or benefits under any prior employment agreement relating to stock options or stock grants previously awarded to Franke, (iii) any of Franke's rights or benefits under any other agreement with either Employer or (iv) any of Franke's rights or benefits, if any, under employee benefit plans or programs maintained by either Employer. 4.4. Other Termination Benefits and Privileges The following provisions shall apply if Franke terminates his employment hereunder for Good Reason or if Holdings terminates Franke's employment hereunder for any reason other than Misconduct or Disability: (a) Severance Payment. Employers shall promptly pay to Franke a severance payment (in cash or other immediately available funds) in the amount of (i) $1.5 million if the Termination Date is on or before June 30, 1997 and (ii) $1.0 million if the Termination Date is after June 30, 1997; provided, however, that such severance payment shall be reduced to the extent necessary so that no portion of such payment (or of any other payment or benefit which constitutes a "parachute payment" within the meaning of Section 280G of the Code and which Franke has received or is entitled to receive shall be subject to the excise tax imposed by Section 4999 of the Code, but only if, by reason of such reduction, Franke's net after tax benefit shall exceed the net after tax benefit if such reduction were not made. In the event Franke shall become entitled to receive a severance payment pursuant to this paragraph (a) under circumstances which entitle him to receive a severance payment under any severance policy or plan of either Employer, then the severance payment due to Franke pursuant to such policy or plan shall be automatically reduced by the amount of the severance payment due to him pursuant to this paragraph (a). (b) Medical Insurance. During the 24-month period following the Termination Date, each Employer, at its cost, shall maintain in full force and effect for the continued benefit of Franke and Franke's dependents all benefits available to Franke and Franke's dependents under all medical plans and programs of such Employer, provided that (i) Franke's continued participation is possible under the terms and provisions of such plans and programs and (ii) Franke pays the regular employee premium, if any, required by such plans and programs. In the event that participation by Franke (or his dependents) in any such plan -12- 14 or program after the Termination Date is barred pursuant to the terms thereof, or in the event either Employer shall terminate any such plan or program, such Employer shall obtain for Franke (and/or his dependents) comparable coverage under individual policies. (c) Life Insurance. During the 12-month period following the Termination Date, each Employer, at its cost, shall continue to provide Franke all life insurance coverages (and in the same amounts) provided to him by either Employer immediately prior to the date on which the relevant Notice of Termination is given in accordance with this Article IV. (d) Travel Privileges. Each Employer shall provide Franke (and his wife and dependents) lifetime on-line and interline, positive space travel privileges in accordance with the terms of its non-revenue travel policy as in effect on the date hereof; provided, however, that the travel privileges to be provided to Franke (and his wife and dependents) by each Employer under this clause (d) shall be at least as favorable to Franke (and his wife and dependents) as the travel privileges generally provided to the senior executives of such Employer from time to time. 4.5. Payment of Benefits During Pendency of Dispute Holdings may, within 10 days after its receipt of a Notice of Termination given by Franke, provide notice to Franke that a dispute exists concerning the termination, in which event such dispute shall be resolved in accordance with Article VII. Franke may, within 10 days after his receipt of a Notice of Termination given by Holdings, provide notice to Holdings that a dispute exists concerning the termination, in which event such dispute shall be resolved in accordance with Article VII. Notwithstanding the pendency of any such dispute and notwithstanding any provision herein to the contrary, Employers will (i) continue to pay Franke the Base Salary in effect when the notice giving rise to the dispute was given and (ii) continue Franke as a participant in all compensation and benefit plans in which Franke was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved or, with respect to a Notice of Termination given by Franke, the date of termination specified in such notice, if earlier, but, in each case, not past the Expiration Date. If (i) Holdings gives a Notice of Termination to Franke, (ii) Franke disputes the termination as contemplated by this Section 4.5 and (iii) such dispute is finally resolved in favor of Employers in accordance with Article VII, then Franke shall be required to refund to Employers any amounts paid to Franke under this Section 4.5 but only if, and then only to the extent, Franke is not otherwise entitled to receive such amounts under this Agreement. -13- 15 4.6. Resignation as a Director In the event Franke's employment under this Agreement is terminated for any reason, Franke agrees, if requested by the Board, to resign as a director of all Constituent Companies of which he is a director, such resignation to be effective immediately or at such later time as the Board shall request. ARTICLE V Confidential Information and Non-Competition 5.1. Confidential Information (a) Franke recognizes that the services to be performed by him hereunder are special, unique and extraordinary and that, by reason of his employment with Employers and the positions described in paragraphs (a) and (b) of Section 2.2, he may acquire Confidential Information (defined below) concerning one or more of the Constituent Companies, the use or disclosure of which would cause the Constituent Companies substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Franke agrees that he will not (directly or indirectly) at any time, whether during or after his employment hereunder, disclose any such Confidential Information to any Person except (i) in the performance of his obligations to the Constituent Companies hereunder, (ii) as required by applicable law, (iii) in connection with the enforcement of his rights under this Agreement, the 1995 Agreement or any other agreement, (iv) in connection with any disagreement, dispute or litigation (pending or threatened) between Franke and one or more of the Constituent Companies or (v) with the prior written consent of the Board. As used herein, "Confidential Information" includes information with respect to the services, strategies, facilities and methods, research and development, trade secrets and other intellectual property, pricing and revenue management systems, patents and patent applications, procedures, manuals, confidential reports, financial information, business plans, prospects or opportunities of any Constituent Company; provided, however, that such term shall not include any information that (x) is or becomes generally known or available other than as a result of a disclosure by Franke or (y) is or becomes known or available to Franke on a nonconfidential basis from a source (other than Employers) which, to Franke's knowledge, is not prohibited from disclosing such information to Franke by a legal, contractual, fiduciary or other obligation to any Constituent Company. (b) Franke confirms that all Confidential Information is the exclusive property of the relevant Constituent Company. All business records, papers and documents kept or made by -14- 16 Franke (whether electronically or otherwise) while employed by any Constituent Company relating to the business of any Constituent Company shall be and remain the property of such Constituent Company at all times. Upon the request of Holdings at any time, Franke shall promptly deliver to Holdings, and shall retain no copies of, any electronic media or written materials, records and documents made by Franke or coming into his possession while employed by any Constituent Company concerning the business or affairs of any Constituent Company other than personal materials, records and documents (including notes and correspondence) of Franke not containing proprietary information relating to such business or affairs. Notwithstanding the foregoing, Franke shall be permitted to retain copies of, or have access to, all such materials, records and documents relating to any disagreement, dispute or litigation (pending or threatened) between Franke and any Constituent Company. 5.2. Non-Competition (a) While employed hereunder and for a period of 18 months thereafter (the "Restricted Period"), Franke shall not, unless he receives the prior written consent of the Board, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any Person which competes with either Employer in the United States other than Alaska Airlines, American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines, TWA, United Airlines, USAir and ValueJet; provided, however, that the foregoing restriction shall not apply at any time if Franke's employment is terminated by Franke for Good Reason or by Holdings for any reason other than Misconduct. (b) Franke has carefully read and considered the provisions of this Section 5.2 and, having done so, agrees that the restrictions set forth in this Section 5.2 (including the Restricted Period, scope of activity to be restrained and the geographical scope) are fair and reasonable and are reasonably required for the protection of the interests of each Employer, its officers, directors, employees, creditors and shareholders. Franke understands that the restrictions contained in this Section 5.2 may limit his ability to engage in a business similar to that of any Constituent Company, but acknowledges that he will receive sufficiently high remuneration and other benefits hereunder to justify such restrictions. (c) During the Restricted Period, Franke shall not, whether for his own account or for the account of any other Person (excluding Holdings), intentionally (i) solicit, endeavor to entice or induce any employee of any Constituent Company to terminate his employment with such Constituent Company or accept employment with anyone else or (ii) interfere in a similar manner with the business of any Constituent Company. -15- 17 (d) In the event that any provision of this Section 5.2 relating to the Restricted Period and/or the areas of restriction shall be declared by a court of competent jurisdiction to exceed the maximum time period or areas such court deems reasonable and enforceable, the Restricted Period and/or areas of restriction deemed reasonable and enforceable by the court shall become and thereafter be the maximum time period and/or areas. 5.3. Stock Ownership Nothing in this Agreement shall prohibit Franke from acquiring or holding any issue of stock or securities of any Person that has any securities registered under Section 12 of the Exchange Act, listed on a national securities exchange or quoted on The Nasdaq Stock Market so long as (i) Franke is not deemed to be an "affiliate" of such Person as such term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act and (ii) Franke and members of his immediate family do not own or hold more than 5% of any voting securities of any such Person. 5.4. Injunctive Relief Franke acknowledges that a breach of any of the covenants contained in this Article V may result in material irreparable injury to the Constituent Companies for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and the Constituent Companies (or any of them) shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Franke from engaging in activities prohibited by this Article V or such other relief as may required to specifically enforce any of the covenants contained in this Article V. Franke agrees to and hereby does submit to in personam jurisdiction before each and every such court for that purpose. ARTICLE VI Piggyback Registration Rights 6.1. Definitions Capitalized terms used herein and in Exhibit A hereto that are not otherwise defined herein shall have the meanings ascribed to them in that certain Registration Rights Agreement dated August 25, 1994 among AWA, AmWest Partners, L.P., Lehman Brothers Inc., Belmont Capital Partners II, L.P., Belmont Fund, L.P. and Fidelity Copernicus Fund, L.P. and in that certain Assumption of Certain Rights Under Registration Rights Agreement executed by Holdings -16- 18 (collectively, "AmWest Registration Rights Agreement"), to which agreements reference is made for such definitions and for all purposes. In addition, the following terms, as used in this Article VI, have the following meanings: "Holders" shall mean (i) Franke, his heirs and personal representatives (ii) any other Person to whom Holdings has granted the right to have Registrable Securities held by such Person included in a registration statement filed by Holdings covering the offer and sale of its securities and (iii) any direct or indirect transferee of Registrable Securities. "Registrable Securities" means: (1) all equity securities of Holdings acquired by Franke as compensation for serving as an officer of either Employer, including, without limitation, (a) stock options, (b) any shares issued on exercise of stock options and (c) any securities issued or issuable with respect to any such securities by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, (2) Registrable Securities as such term is defined in the AmWest Registration Rights Agreement, and (3) equity securities of Holdings held by any other Person to whom Holdings has granted the right to have such equity securities included in a registration statement filed by Holdings covering the offer and sale of its securities. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such securities shall have been distributed in accordance with Rule 144, (iii) Holdings has caused to be delivered an opinion of counsel in accordance with Section 6.2(c) that such securities are distributable in accordance with Rule 144 or (iv) such securities shall have been otherwise transferred, new certificates therefor not bearing a legend restricting further transfer shall have been delivered in exchange therefor by Holdings and subsequent disposition of such securities shall not require registration or qualification under the Securities Act or any similar state law then in force. -17- 19 "Requisite Holders" means any Holder or Holders of a majority in interest of the Registrable Securities included or to be included in a registration or other relevant action, as the case may be. 6.2. Piggyback Registration (a) Right to Include Registrable Securities. If Holdings at any time proposes to register any of its equity securities under the Securities Act (other than by a registration (i) on Form S-4 or Form S-8, or any successor or similar form then in effect or (ii) pursuant to Section 2.1 of the AmWest Registration Rights Agreement) in a form and in a manner that would permit registration of the Registrable Securities, whether or not for sale for its own account, it will give prompt (but in no event less than 30 days prior to the proposed date of filing the registration statement relating to such registration) notice to all Holders of Registrable Securities of Holdings' intention to do so and of such Holders' rights under this Section 6.2. Upon the request of any such Holder made within 20 days after the receipt by such Holder of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method or methods of disposition thereof) (the "Piggyback Registration Notice"), Holdings will use Commercially Reasonable Efforts to effect the registration under the Securities Act of all Registrable Securities which Holdings has been so requested to register by the Holders thereof, to the extent required to permit the disposition (in accordance with the intended method or methods thereof as aforesaid) of the Registrable Securities so to be registered, provided that if, at any time after giving notice of its intention to register any equity securities and prior to the effective date of the registration statement filed in connection with such registration, Holdings shall determine for any reason not to register or to delay registration of such equity securities, Holdings may, at its election, give notice of such determination to each such Holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay all Registration Expenses in connection therewith) and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities for the same period as the delay in registering such other equity securities. (b) Priority in Piggyback Registration. If (i) a registration pursuant to this Section 6.2 involves an underwritten offering of the securities being registered, whether or not for sale for the account of Holdings, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction and (ii) the managing underwriter of such underwritten offering shall inform Holdings and the Holders requesting such registration by letter of its belief that the amount of securities requested to be included in such registration exceeds the amount which can be sold in (or during the time of) such offering within a price range acceptable to Holdings, then Holdings will include in such registration -18- 20 such amount of securities which Holdings is so advised can be sold in (or during the time of) such offering as follows: first, all securities proposed by Holdings to be sold for its own account; second, such securities of Holdings requested to be included in such registration pursuant to the terms of the AmWest Registration Rights Agreement; third, such Registrable Securities requested to be included in such registration by all other Holders pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included by such Holders; and fourth, all other securities of Holdings requested to be included in such registration pro rata on the basis of the amount of such securities so proposed to be sold and so requested to be included. (c) The Holders shall be entitled to exercise their registration rights pursuant to this Section 6.2 at any time or times until all of the Registrable Securities have been sold pursuant to an effective registration statement under the Securities Act, or until Holdings shall have obtained an opinion of counsel reasonably acceptable to Holdings and Holders that such Registrable Securities may be sold without registration pursuant to available exemptions under Rule 144 without limitation on amount. 6.3. Registration Procedures Each registration pursuant to Section 6.2 shall be effected in accordance with the procedures, and subject to the indemnification and other provisions, set forth in Exhibit A hereto. ARTICLE VII Dispute Resolution (a) In the event a dispute shall arise between Franke, on the one hand, and Holdings or AWA, on the other hand, as to whether the provisions of this Agreement have been complied with (a "Dispute"), the parties agree to resolve such Dispute in accordance with the following procedure: (1) A meeting shall be held promptly between Franke and Holdings, attended (in the case of Holdings) by one or more individuals with decision-making authority regarding the Dispute, to attempt in good faith to negotiate a resolution of the Dispute. (2) If, within 10 days after such meeting, Franke and Holdings have not succeeded in negotiating a resolution of the Dispute, the Dispute shall be submitted to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. -19- 21 (3) Franke and Holdings will jointly appoint a mutually acceptable mediator, seeking assistance in such regard from the American Arbitration Association if they have been unable to agree upon such appointment within 10 days following the 10-day period referred to in clause (2) above. (4) Upon appointment of the mediator, Franke and Holdings agree to participate in good faith in the mediation and negotiations relating thereto for 15 days. (5) If Franke and Holdings are not successful in resolving the Dispute through mediation within such 15-day period, the Dispute shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association. (6) The fees and expenses of the mediator/arbitrators shall be borne solely by the non-prevailing party or, in the event there is no clear prevailing party, as the mediator/arbitrators deem appropriate. (7) If any dispute shall arise under this Agreement involving termination of Franke's employment with Employers or involving the failure or refusal of Employers to fully perform in accordance with the terms hereof, Employers shall reimburse Franke (without duplication), on a current basis, for all legal fees and expenses, if any, incurred by Franke in connection with such dispute, together with interest thereon at the rate of 8% per annum, such interest to accrue from the date Holdings receives Franke's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of such dispute in accordance with this Article VII includes a finding denying, in all material respects, Franke's claims in such dispute, Franke shall be required to reimburse Employers, over a period not to exceed 12 months from the date of such resolution, for all sums advanced to Franke with respect to such dispute pursuant to this paragraph (7). (8) Except as provided above, each of Franke and Holdings shall pay its own costs and expenses (including, without limitation, attorneys' fees) relating to any mediation/arbitration proceeding conducted under this Article VII. (9) All mediation/arbitration conferences and hearings will be held in Maricopa County, Arizona. (b) In the event there is any disputed question of law involved in any arbitration proceeding, such as the proper legal interpretation of any provision of this Agreement, the arbitrators shall make separate and distinct findings of all facts material to the disputed question of -20- 22 law to be decided and, on the basis of the facts so found, express their conclusion of the question of law. The facts so found shall be conclusive and binding on the parties, but any legal conclusion reached by the arbitrators from such facts may be submitted by either Franke or Holdings to a court of law for final determination by initiation of a civil action in the manner provided by law. Such action, to be valid, must be commenced within 20 days after receipt of the arbitrators' decision. If no such civil action is commenced within such 20-day period, the legal conclusion reached by the arbitrators shall be conclusive and binding on the parties. Any such civil action shall be submitted, heard and determined solely on the basis of the facts found by the arbitrators. Neither Franke or Holdings shall, or shall be entitled to, submit any additional or different facts for consideration by the court. In the event any civil action is commenced under this paragraph (b) and if Franke is the party who prevails or substantially prevails (as determined by the court) in such civil action, Franke shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Franke in connection with such action and on appeal. In the event any civil action is commenced under this paragraph (b) and if Holdings is the party who prevails or substantially prevails (as determined by the court) in such civil action, Holdings shall be entitled to recover from Franke all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such action and on appeal. (c) Except as limited by paragraph (b) above, the parties agree that judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Franke is the party who prevails or substantially prevails in such legal proceeding, Franke shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Franke in connection with such legal proceeding and on appeal. In the event any civil action is commenced to enforce the rights awarded in an arbitration proceeding and if Holdings is the party who prevails or substantially prevails (as determined by the court) in such civil action, Holdings shall be entitled to recover from Franke all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such action and on appeal. (d) Except as provided above, (i) no legal action may be brought by any party with respect to any Dispute and (ii) all Disputes shall be determined only in accordance with the procedures set forth above. -21- 23 ARTICLE VIII Antidilution Provisions and Reservation of Shares 8.1. Antidilution (a) In the event of any change after the date hereof in the number of issued shares of common stock (or any class thereof) of Holdings by reason of any stock dividend, split-up, recapitalization, merger, combination, conversion, exchange of shares or other change in the corporate or capital structure of Holdings, then there shall be appropriate and equitable adjustments made (with adjustments being cumulative if more than one of such events shall have occurred) in the number and kind of shares of stock or other securities of Holdings thereafter issued to Franke upon exercise of the 1996 Stock Option and any other stock options heretofore or hereafter granted to Franke under the Incentive Plan. Whenever an adjustment is made as required or permitted by the provisions of this paragraph (a), Holdings shall promptly deliver to Franke written notice thereof setting forth a brief statement of the facts requiring such adjustment and the computation thereof. (b) In case of any liquidation, dissolution or winding up of the affairs of Holdings, Holdings shall make prompt, proportionate, equitable, lawful and adequate provision as part of the terms of such dissolution, liquidation or winding up such that Franke may thereafter receive, in lieu of each share which Franke would have been entitled to receive upon exercise of the 1996 Stock Option or any other option to purchase shares of Class B Common Stock of Holdings, the same kind and amount of any stock, securities or assets as may be issuable, distributable or payable on any such dissolution, liquidation or winding up with respect to each outstanding share of Class B Common Stock of Holdings. 8.2. Covenant to Reserve Shares for Issuance Holdings covenants that it will at all times reserve and keep available (free of preemptive rights) out of its authorized and unissued shares of Class B Common Stock, solely for the purpose of issuance upon exercise of options granted to Franke to purchase shares of Class B Common Stock of Holdings, the full number of shares of Class B Common Stock of Holdings, if any, then issuable upon exercise of such options. Holdings further covenants that all shares of Class B Common Stock which shall be so issuable shall be duly and validly issued and fully paid and non-assessable. -22- 24 ARTICLE IX Miscellaneous 9.1. No Mitigation or Set Off The provisions of this Agreement are not intended to, nor shall they be construed to, require that Franke mitigate the amount of any payment provided for in this Agreement by seeking or accepting other employment, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Franke as the result of employment by another employer or otherwise. Without limitation of the foregoing, Employers' obligations to make the payments to Franke required under this Agreement and otherwise to perform their obligations hereunder shall not be affected by any set off, counterclaim, recoupment, defense or other claim, right or action that either Employer may have against Franke. 9.2. Assignability The obligations of Franke hereunder are personal and may not be assigned or delegated by Franke or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. Each Employer shall have the right to assign this Agreement and to delegate all its rights, duties and obligations hereunder as provided in Section 9.5. 9.3. Notices All notices and all other communications provided for in the Agreement shall be in writing and shall be sent, delivered or mailed, addressed as follows: (i) if to Employers (or either of them), at Holdings principal office address or such other address as Holdings may have designated by written notice to Franke for purposes hereof, directed to the attention of the Board with a copy to the Secretary of Holdings and (ii) if to Franke, at his residence address on the records of Holdings or to such other address as he may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, except that any notice of change of address shall be effective only upon receipt. 9.4. Severability The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. -23- 25 9.5. Successors; Binding Agreement (a) Each Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of such Employer, by agreement in form and substance reasonably acceptable to Franke, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that such Employer would be required to perform it if no such succession had taken place. Failure of such Employer to obtain such agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. As used herein, (i) the term "Holdings" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 9.5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law and (ii) the term "AWA" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 9.5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Franke hereunder shall inure to the benefit of and be enforceable by Franke's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Franke should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Franke's devisee, legatee, or other designee or, if there be no such designee, to Franke's estate. (c) This Agreement and all rights of the Constituent Companies hereunder shall inure to the benefit of an be enforceable by the Constituent Companies and their respective successors and assigns. 9.6. Tax Withholdings Each Employer shall withhold from all payments hereunder all applicable taxes (federal, state or other) which it is required to withhold therefrom unless Franke has otherwise paid to such Employer the amount of such taxes. 9.7. Amendments and Waivers No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Franke and such member of the Board as may be specifically authorized by the Board. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision -24- 26 of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9.8. Entire Agreement; Termination of Employment under 1995 Agreement (a) The parties acknowledge, confirm and agree that Franke's employment under the 1995 Agreement shall automatically terminate on the date hereof, the same as if the Expiration Date (as defined in the 1995 Agreement) occurred on the date hereof. (b) This Agreement is an integration of the parties agreement and no agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not set forth expressly in this Agreement. 9.9. Governing Law THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ARIZONA WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISION. 9.10. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 9.11. Indemnification Without Franke's prior written consent, neither Employer not amend, modify or repeal any provision of its certificate of incorporation or bylaws if such amendment, modification or repeal would materially adversely affect Franke's rights to indemnification by such Employer. 9.12. Remedies Cumulative No right, power or remedy granted under this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any other rights, powers or remedies referred to in this Agreement or otherwise available at law or in equity. 9.13. Joint and Several Liability The obligations of Employers hereunder shall be joint and several. -25- 27 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. AMERICA WEST HOLDINGS CORPORATION By: /s/ Richard C. Kraemer ---------------------------------------- Richard C. Kraemer Chairman, Compensation/Human Resources Committee AMERICA WEST AIRLINES, INC. By: /s/ Stephen L. Johnson ---------------------------------------- Stephen L. Johnson Senior Vice President - Legal Affairs /s/ William A. Franke ------------------------------------------- William A. Franke -26- EX-10.24 5 EMPLOYMENT AGRMNT BTWN HOLDINGS, AWA & GOODMANSON 1 EXHIBIT 10.24 2 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement"), dated as of February 15, 1997, by and among AMERICA WEST HOLDINGS CORPORATION, a Delaware corporation ("Holdings"), AMERICA WEST AIRLINES, INC., a Delaware corporation and a wholly-owned subsidiary of Holdings ("AWA" and, together with Holdings, "Employers"), and RICHARD GOODMANSON ("Employee"). WHEREAS, Employers desire to employ Employee in an executive capacity and Employee desires to serve in such capacity, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Definitions and Interpretations 1.1. Definitions For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, the following terms shall have the following respective meanings: "Base Salary" shall have the meaning specified in Section 3.1(a). "Board" shall mean the Board of Directors of Holdings. "Chairman" shall mean the Chairman of the Board of Holdings. "Change in Control" shall have the meaning specified in the Incentive Plan. "Code" shall mean the Internal Revenue Code of 1986, as in effect from time to time. "Confidential Information" shall have the meaning specified in Section 5.1(a). "Constituent Companies" shall mean, collectively, Holdings, AWA and all other direct or indirect subsidiaries of Holdings. 3 "Default" shall mean the continued failure by Employee to perform his duties described in Section 2.2 (other than any such failure resulting from Employee's incapacity due to physical or mental illness) after written notice of such failure has been given to Employee by Holdings and Employee has had a reasonable period (not to exceed 30 days) after receipt of such notice to correct such failure. "Disability" shall mean a physical or mental condition of Employee that, in the good faith judgment of the Board based upon certification by a licensed physician, (i) prevents Employee from being able to perform the services required under this Agreement, (ii) has continued for a period of at least six months during any period of twelve consecutive months and (iii) is expected to continue. "Dispute" shall have the meaning specified in Article VI. "Employment Period" shall mean that the period beginning on the date hereof and ending on the Expiration Date; provided, however, that if Holdings or Employee gives a Notice of Termination pursuant to Section 4.1 or 4.2, then the Employment Period shall not extend beyond the relevant Termination Date. "Expiration Date" shall mean June 17, 1999. "First Stock Option" shall have the meaning specified in Section 3.4(a). "Forfeiture Restriction" shall have the meaning specified in Section 3.3(b). "Good Reason" shall mean any of the following actions or failures to act, but in each case only if it occurs during the Employment Period and then only if it is not consented to by Employee: (1) a material alteration by either Employer in the nature or status of Employee's applicable positions, functions, duties or responsibilities described in Section 2.2, including any change which would (i) alter Employee's reporting responsibilities described in Section 2.2(d) or (ii) cause Employee's position with Employers to become of less dignity or importance than the applicable positions described in paragraphs (a) and (b) of Section 2.2; provided, however, that each such alteration shall cease to be a Good Reason on the date which is 90 days after Employee becomes aware of the occurrence of such alteration unless, prior to such date, Employee gives a Notice of Termination pursuant to Section 4.1 on account of such alteration; (2) the failure of either Employer to perform any of its obligations under this Agreement in any material regard, but only if such failure shall continue -2- 4 unremedied for more than 30 days after written notice thereof is given by Employee to Holdings; (3) the relocation of the principal executive offices of either Employer outside the greater Phoenix, Arizona metropolitan area or either Employer's requiring Employee to be based other than at such principal executive offices; provided, however, that such relocation shall cease to be a Good Reason on the date which is 90 days after the occurrence of such relocation unless, prior to such date, Employee gives a Notice of Termination pursuant to Section 4.1 on account of such relocation; (4) the failure of either Employer to elect or re-elect, or to appoint or re-appoint, Employee to the applicable offices described in paragraphs (a) and (b) of Section 2.2; or (5) the failure of Employee to be elected or appointed, or to be re-elected or re-appointed, as a director of either Employer as contemplated by Section 2.2(e). "Holdings" shall have the meaning specified in the recitals of this Agreement. "Incentive Plan" shall mean the America West 1994 Incentive Equity Plan, as amended from time to time. "Market Value per Share" means, at any date, the closing price per share of Class B Common Stock of Holdings on that date (or, if there are no sales on that date, the last preceding date on which there was sale) in the principal market in which such shares are traded. "Misconduct" shall mean one or more of the following: (i) the willful commission by Employee of acts that are both dishonest and demonstrably injurious to any Constituent Company (monetarily or otherwise) in any material respect; (ii) the conviction of Employee for a felony offense; or (iii) a material breach (other than a Default) by Employee of any of the covenants set forth in this Agreement, but only if such breach shall continue unremedied for more than 15 days after written notice thereof is given to Employee by by either Employer. "Notice of Termination" shall mean a notice purporting to terminate Employee's employment in accordance with Section 4.1 or 4.2, which notice shall specify the Termination -3- 5 Date and set forth in reasonable detail the reason for such termination and the facts and circumstances claimed to provide a basis for such termination. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust and an unincorporated organization. "Pledge Agreement" shall have the meaning specified in Section 3.3(g). "Prime Rate" shall have the meaning specified in Section 3.3(g). "Promissory Note" shall have the meaning specified in Section 3.3(g). "Restricted Period" shall have the meaning specified in Section 5.2(a). "Restricted Shares" shall have the meaning specified in Section 3.3(b). "Restricted Stock Grant" shall have the meaning specified in Section 3.3(a). "Second Stock Option" shall have the meaning specified in Section 3.4(a). "Stock Options" shall have the meaning specified in Section 3.4(a). "Stockholder Approval" shall have the meaning specified in Section 3.4(a). "Termination Date" shall mean the termination date specified in a Notice of Termination delivered in accordance with Article IV, provided that in no event shall such termination date be less than 30 nor more than 60 days after the date such Notice of Termination is given. "Transfer Restriction" shall have the meaning specified in Section 3.3(c). 1.2. Interpretation (a) In this Agreement, unless a clear contrary intention appears, (i) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, (ii) reference to any Article or Section, means such Article or Section hereof, (iii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term, and (iv) where any provision of this Agreement refers to action to be taken by either party, or which such party is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such party. -4- 6 (b) The Article and Section headings herein are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against either party solely because that party or its legal representative drafted such provision. ARTICLE II Employment; Term; Positions and Duties 2.1. Employment; Term (a) Each Employer hereby employs Employee in an executive capacity and Employee hereby accepts employment by each Employer, in each case on the terms and conditions, and for the consideration, set forth in this Agreement. (b) Employee's employment hereunder shall begin on the date hereof and shall terminate on the Expiration Date, unless earlier terminated as provided in Article IV. 2.2. Positions and Duties (a) While employed hereunder, Employee shall serve as President and Chief Executive Officer of AWA and while so serving shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such positions, including (without limitation) any such duties and responsibilities as are set forth with respect to such positions in AWA's certificate of incorporation and bylaws (as from time to time in effect). (b) While employed hereunder, Employee shall serve as President (but not Chief Executive Officer) of Holdings and while so serving shall have and may exercise all of the powers, functions, duties and responsibilities normally attributable to such position, including (without limitation) any such duties and responsibilities as are set forth with respect to such position in Holdings' certificate of incorporation and bylaws (as from time to time in effect). (c) Employee shall have such additional duties and responsibilities commensurate with the positions referred to above as from time to time may be reasonably assigned to him by the Chairman and/or the Board. (d) While employed hereunder, Employee shall report directly to the Chairman and shall observe and comply with all lawful policies, directions and instructions of the Chairman and/or the Board which are consistent with paragraphs (a), (b) and (c) above. During the Employment Period, (i) all executive officers of Holdings (other than the Chairman and other than Holdings' chief executive officer, chief financial officer, chief legal officer and chief public affairs officer) shall -5- 7 report directly to Employee and (ii) all executive officers of AWA (other than its chairman of the board) shall report directly to Employee except that the chief financial officer, chief legal officer and chief public affairs officer of AWA will, unless otherwise directed by the Board or the Chairman, report jointly to Employee and the Chairman. (e) Employers agree to use their reasonable best efforts to cause Employee to be elected or appointed, or re-elected or re-appointed, as a director of each Employer at all times during the Employment Period. (f) While employed hereunder, Employee agrees to devote substantially all of his business time, attention, skill and efforts to the faithful and efficient performance of his duties hereunder and shall not accept employment with or for any Person other than Employers. Notwithstanding the foregoing, Employee may engage in the following activities so long as they do not interfere in any material respect with the performance of Employee's duties and responsibilities hereunder: (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach on a part-time basis at educational institutions and (iii) manage his personal investments. (g) While employed hereunder, Employee shall at all times conduct himself in such a manner as not to knowingly prejudice, in any material respect, the reputation of any Constituent Company in the fields of business in which it engaged or with the investment community or the public at large. 2.3. Place of Employment Employee's place of employment hereunder shall be at AWA's principal executive offices in the greater Phoenix, Arizona metropolitan area. ARTICLE III Compensation and Benefits 3.1. Base Salary (a) For services rendered by Employee under this Agreement, Employers shall pay to Employee an annual cash base salary ("Base Salary") in the amount $500,000. The Base Salary shall be payable monthly as earned during the Employment Period. (b) The Board shall review the Base Salary at least annually and may increase the amount of the Base Salary at any time as the Board may deem appropriate in its sole discretion. If the Base Salary is increased as aforesaid, it may not thereafter be decreased unless a proportionally similar decrease is made to the base compensation of all other senior executives of Employers; -6- 8 provided that in no event may the Base Salary be decreased below $500,000 without the prior written consent of Employee. 3.2. Annual Incentive Compensation During the Employment Period, Employee shall be entitled to participate in Holdings' incentive compensation program (as from time to time amended) for executive officers of Employers in general. Subject to the terms of that program (including the achievement of applicable financial and individual goals and objectives), Employee's annual target bonus for each year during the Employment Period shall be 50% (or such other percentage as the Board may approve from time to time in its sole discretion) of the Base Salary. 3.3. Restricted Stock Grant (a) Employer holds 50,000 shares of Class B Common Stock of Holdings previously granted to him under the Incentive Plan as additional compensation for services rendered and to be rendered under this Agreement (the "Restricted Stock Grant"). The following provisions of this Section 3.3 constitute the agreement required with respect to the Restricted Stock Grant under Paragraph 6(f) of the Incentive Plan. (b) The shares of stock included in the Restricted Stock Grant (the "Restricted Shares") shall be subject to automatic forfeiture in the event Employee's employment is terminated by Employee pursuant to Section 4.1 other than for Good Reason or by Holdings pursuant to Section 4.2 for Misconduct or Default; provided, however, that such forfeiture restriction (the "Forfeiture Restriction") shall automatically lapse (i) as to one-third of the Restricted Shares on June 17, 1997 if Employee's employment is not so terminated by such date, (ii) as to an additional one-third of the Restricted Shares on June 17, 1998 if Employee's employment is not so terminated by such date and (iii) as to an additional one-third of the Restricted Shares on June 17, 1999 if Employee's employment is not so terminated by such date and, provided further, that the Forfeiture Restriction shall automatically lapse as all Restricted Shares which have not been previously forfeited as aforesaid (x) upon the occurrence of a Change in Control during the Employment Period, (y) in the event of Employee's death or (z) in the event Employee's employment is terminated by Employee for Good Reason or on account of Disability or by Holdings for any reason other than Default or Misconduct on account of the conviction of Employee for a felony. If any of the Restricted Shares are forfeited pursuant to this paragraph (b), Employee shall be obligated, for no consideration, to promptly surrender such Restricted Shares to Holdings. Holdings may require Employee to execute and deliver stock powers in the event of forfeiture. (c) Employee will not sell, transfer or otherwise dispose of any of the Restricted Shares which remain subject to the Forfeiture Restriction except for transfers expressly permitted by the Incentive Plan and except for transfers by will or by laws of descent and distribution. The foregoing transfer restriction is hereinafter referred to as the "Transfer Restriction". -7- 9 (d) Except as expressly set forth above in this Section 3.3, (i) the Restricted Stock Grant shall be irrevocable and unconditional and (ii) none of the Restricted Shares shall be subject to forfeiture or surrender for any reason. The Restricted Stock Grant shall become vested when the Forfeiture Restriction has lapsed with respect thereto. (e) Certificates evidencing the Restricted Shares will be issued in Employee's name. Holdings may cause such certificates to bear a legend setting forth or incorporating the Forfeiture Restriction and the Transfer Restriction, and Holdings may cause such certificates to be delivered upon issuance to the Secretary of Holdings (or such other depositary as may be designated by the committee which administers the Incentive Plan) as a depositary for safe-keeping until the Forfeiture Restriction and the Transfer Restriction lapse with respect thereto or until forfeiture occurs with respect thereto pursuant to paragraph (b) above. If the Forfeiture Restriction lapses as to any Restricted Shares evidenced by a certificate bearing a legend setting forth or incorporating the Forfeiture Restriction and the Transfer Restriction, then, if requested by Employee, Holdings will cause a new certificate to be issued in the name of Employee without such legend. (f) Subject to the terms of the Pledge Agreement, Employee shall be entitled to receive all dividends and distributions in respect of the Restricted Shares (subject to applicable tax withholding), to vote the Restricted Shares and to give consents, waivers and ratifications with respect to the Restricted Shares; provided, however, that dividends and distributions applicable to any Restricted Shares may be applied, at the option of Holdings, to the repayment of the indebtedness evidenced by the Promissory Note or, if and to the extent not so applied, held by Holdings until (i) the Forfeiture Restriction lapses with respect to such Restricted Shares, at which time such distributions shall be paid to Employee or his designee without interest or (ii) forfeiture occurs with respect to such Restricted Shares pursuant to paragraph (b) above, at which time such distributions shall be forfeited. (g) If requested by Employee, Holdings or AWA will loan Employee up to $600,000 solely for the purpose of enabling Employee to pay all or portion of the income taxes (Federal and state) attributable to the Restricted Stock Grant. Such loan shall be funded in one or more advances (not to exceed three) as requested by Employee upon not less than fifteen business days notice. Such loan shall be evidenced by, and subject to the terms and conditions of, a promissory note duly executed by Employee and payable to the order of Holdings or AWA, as the case may be (the "Promissory Note"). The Promissory Note shall be in form and substance reasonably satisfactory to Holdings and shall be secured by a pledge agreement (the "Pledge Agreement") covering all of the Restricted Shares. The Pledge Agreement shall be in form and substance reasonably satisfactory to Holdings and shall be accompanied by appropriate stock powers. Each advance under the Promissory Note shall be payable in two equal installments on the fifth and sixth anniversary dates of such advance and and shall bear interest, compounded monthly, at a floating rate per annum equal to the prime rate most recently announced by The Chase Manhattan Bank, such rate to automatically fluctuate upward and downward with and at the time specified in each such announcement (the "Prime Rate"). Employee shall not be personally liable for payments due under the Promissory Note, it being expressly understood and agreed that the sole -8- 10 recourse of Employers for satisfaction of the Promissory Note shall be against the Restricted Shares pledged as collateral for the Promissory Note under the Pledge Agreement. (h) The parties recognize that, from time to time after the date hereof, Holdings may register shares or units of its equity securities under the Securities Act of 1933, as amended, for sale to the public and that Employee may desire to include in such registration all or a portion of the Restricted Shares which are no longer subject to forfeiture in accordance with paragraph (b) above ("Vested Restricted Shares"). Accordingly, it is anticipated that, if (i) Holdings decides to effect a registration of any of its equity securities (other than a registration on Form S-4 or Form S-8 or any successor or similar form) for sale to the public after the date hereof, (ii) such registration is to be effected before the Expiration Date at a time, in a form and in a manner that, in the sole discretion of Holdings, would permit the inclusion of the Vested Restricted Shares in such registration without having an adverse effect on such registration or on any other aspect of Holdings' business and affairs and without interfering with or infringing upon the demand or "piggyback" registration rights of other holders of securities of Holdings, then Holdings will endeavor to consult with Employee regarding Employee's desire to include any of the Vested Restricted Shares in such registration and the terms, conditions and restrictions which would be applicable to such inclusion. It is specifically understood and agreed, however, that (i) nothing in this Agreement is intended to or shall obligate Holdings to register any of the Restricted Shares at any time or for any purpose and (ii) in no event shall any Constituent Company have or be subject to any liability to Employee under or based on this paragraph (h). (i) The provisions of this Section 3.3 shall survive the termination of Employee's employment hereunder. 3.4. Stock Options (a) Employee has heretofore been granted pursuant to the Incentive Plan: (i) an option to purchase 250,000 shares of Class B Common Stock of Holdings, with an exercise price per share equal to $19.625 (the "First Stock Option"); and (ii) subject to the approval by Holdings' stockholders of an appropriate increase in the number of shares covered by the Incentive Plan ("Stockholder Approval"), an option to purchase 100,000 shares of Class B Common Stock of Holdings, with an exercise price per share equal to $12.00 (the "Second Stock Option" and, together with the First Stock Option, the "Stock Options"). The following provisions of this Section 3.4 constitute the agreement required with respect to the Stock Options under Paragraph 4(i) of the Incentive Plan. (b) The First Stock Option shall become exercisable as to one-third of the shares covered thereby on June 17 in each of the years 1997, 1998 and 1999, so that the First Stock Option -9- 11 will be exercisable in full on June 17, 1999. In no event shall the First Stock Option be exercisable after May 23, 2006. (c) The Second Stock Option shall become exercisable as to 10% of the shares covered thereby on October 28, 1997 and as to 30% of the shares covered thereby on October 28 in each of the years 1998, 1999 and 2000, so that the Second Stock Option will be exercisable in full on October 28, 2000. In no event shall the Second Stock Option be exercisable before Stockholder Approval or after October 28, 2006. (d) Upon the exercise of either Stock Option, the Person exercising such Stock Option shall pay to Holdings an amount equal to the relevant exercise price, such amount to be paid (i) in cash, (ii) by delivering to Holdings issued and outstanding shares of Holdings' Class B Common Stock which have an aggregate Market Value per share at the date of exercise equal to the relevant exercise price, (iii) by directing Holdings to sell a sufficient number of shares to be acquired on exercise of such Stock Option through a broker approved by Holdings, in which event the proceeds of such sale shall be applied by Holdings to the payment of the relevant exercise price, with any surplus then remaining to be paid to the Person exercising such Stock Option or its designee or (iv) by any combination of the foregoing. (e) Upon the occurrence of a Change in Control, each Stock Option shall become automatically vested in full and may be exercised at any time thereafter; provided, however, in no event shall the First Stock Option be exercisable after May 23, 2006 or shall the Second Stock Option be exercisable before Stockholder Approval or after October 28, 2006. (f) In the event Employee's employment is terminated by Employee pursuant to Section 4.1 other than for Good Reason or on account of Disability or by Holdings pursuant to Section 4.2 for Misconduct or Default, each Stock Option, to the extent then vested, may be exercised at any time within six months following the relevant Termination Date, but not thereafter; provided, however, in no event shall the First Stock Option be exercisable after May 23, 2006 or shall the Second Stock Option be exercisable before Stockholder Approval or after October 28, 2006. To the extent either Stock Option is not vested on such Termination Date, such Stock Option (or the portion thereof that is not vested on such Termination Date) shall automatically lapse and be canceled unexercised as of such Termination Date. (g) Each Stock Option shall become automatically vested in full on the date of Employee's death and may be exercised at any time within the one-year period beginning on the date of Employee's death, but not thereafter; provided, however, in no event shall the First Stock Option be exercisable after May 23, 2006 or shall the Second Stock Option be exercisable before Stockholder Approval or after October 28, 2006. (h) In the event Employee's employment is terminated by reason of Disability, each Stock Option shall become automatically vested in full on the date of such Disability and may be exercised at any time within the 36-month period beginning on the date of such Disability, but not -10- 12 thereafter; provided, however, in no event shall the First Stock Option be exercisable after May 23, 2006 or shall the Second Stock Option be exercisable before Stockholder Approval or after October 28, 2006. (i) Except as otherwise provided herein, each Stock Option may be exercised in whole or in part or in two or more successive parts. (j) Neither Stock Option shall be transferrable by Employee except for transfers expressly permitted by the Incentive Plan and except for transfers by will or by laws of descent and distribution. During the lifetime of Employee, neither Stock Option may be exercised by anyone other than Employee or the Person to whom such Stock Option has been transferred in accordance with the Incentive Plan. (k) Each Stock Option may be exercised from time to time by a notice in writing which identifies such Stock Option and specifies the number of shares in respect of which it is being exercised. Such notice shall be delivered to the Secretary of Holdings or addressed to such Secretary at the principal corporate offices of Holdings. The date of exercise of each Stock Option shall be the date the exercise notice is hand delivered or mailed (as the case may be) to the Secretary of Holdings. An election to exercise either Stock Option shall be irrevocable. (l) Neither Stock Option is intended to qualify as an incentive stock option under Section 422 of the Code. (m) The provisions of this Section 3.4 shall survive the termination of Employee's employment hereunder. 3.5. Life Insurance During the Employment Period, Employers will endeavor to maintain, at all times and without cost to Employee, a term life insurance policy on the life of Employee in the amount of $400,000 and a split dollar life insurance policy on the life of Employee in the amount of $1,000,000, the proceeds of which, in the event of Employee's death, shall be payable to one or more beneficiaries designated by Employee or, in the absence of any such designation, to his estate. In the event Employee does not qualify for either such insurance policy during any period within the Employment Period, Holdings shall pay to Employee an amount equal to the premiums Employers would have otherwise paid in order to maintain such policy for such period. In addition, Employers will endeavor to make available to Employee, at his option and expense, an additional $200,000 of group term life insurance. -11- 13 3.6. 401(k) Plan During the Employment Period, Employee shall be entitled to participate in Holdings' 401(k) plan commencing September 1, 1997. If Employee remains employed by Holdings on August 31, 1997, Holdings shall pay to Employee, as soon as practicable after such date, a lump sum payment in an amount determined by Holdings to be the economic equivalent of the benefits which would have accrued to Employee had he participated in Holdings' 401(k) plan during the period from June 17, 1996 to and including August 31, 1997. The amount so determined by Holdings shall be binding on Employee in the absence of manifest error. 3.7. Vacation During the Employment Period, Employee shall be entitled to fifteen days of vacation per year or such greater number of vacation days as the Board may approve from time to time in its sole discretion. Employee shall not be entitled to accumulate or carryover unused vacation time or pay from year to year except to the extent permitted in accordance with Holdings' vacation policy (as from time to time amended) for senior executives in general. 3.8. Automobile Allowance During the Employment Period, Holdings or AWA shall pay to Employee an automobile allowance of $800 per month or such greater amount as the Board may approve from time to time in its sole discretion. 3.9. Professional Fees Holdings or AWA shall reimburse Employee for up to $5,000 (or such greater amount as the Board may approve from time to time in its sole discretion) per year for financial advisory and tax planning fees and expenses paid by Employee during the Employment Period. 3.10. Business Expenses Each Employer shall, in accordance with the rules and policies that it may establish from time to time for senior executives, reimburse Employee for business expenses reasonably incurred in the performance of Employee's duties hereunder. It is understood that Employee is authorized, during the Employment Period, to incur reasonable business expenses for promoting the businesses and reputations of the Constituent Companies, including reasonable expenditures for travel, lodging, meals and client and/or business associate entertainment. Requests for reimbursement for such expenses must be accompanied by appropriate documentation. -12- 14 3.11. Other Benefits Employee shall be entitled to receive all fringe benefits and other perquisites that may be offered by Employers to their senior executives as a group, including, without limitation, (i) participation in the various employee benefit plans or programs provided to senior executives of Employers in general (including split-dollar life insurance, medical and disability insurance programs), (ii) club memberships, (iii) on-line and interline travel privileges, (iv) change in control/severance pay programs, (v) participation in Employers' severance payment policies or plans for executives in general and (vi) participation in Employers' retiree medical insurance programs, subject, in each case, to meeting the applicable eligibility requirements. However, nothing in this Section 3.11 shall be deemed to prohibit Employers from making any changes in any of the plans, programs or benefits described herein, provided the change similarly affects all senior executives of Employers similarly situated. If and to the extent a particular benefit or other perquisite is provided to Employee by two or more provisions of this Article III, the provision which is most favorable to Employee shall govern and control to the exclusion of the other provisions. 3.12. No Director Fees, etc. In no event shall Employee be entitled to receive any additional compensation for serving as a director of any Constituent Company. ARTICLE IV Termination of Employment 4.1. Employee's Right of Termination Employee may, at any time prior to the Expiration Date, terminate his employment hereunder for any reason by delivering a Notice of Termination to the Chairman or the Board. 4.2. Holdings' Right of Termination Holdings may, at any time prior to the Expiration Date, terminate Employee's employment hereunder for any reason by delivering a Notice of Termination to Employee. 4.3. Payment of Accrued Base Salary, Vacation Pay, etc. (a) Promptly upon the termination of Employee's employment hereunder for any reason, Employers shall pay to Employee a lump sum amount for (i) any unpaid Base Salary earned hereunder prior to the termination date, (ii) all unused vacation time accrued by Employee as of the termination date in accordance with this Agreement and Employers' vacation policies for senior executives, (iii) all unpaid benefits earned by Employee as of the termination date under any and all -13- 15 incentive compensation plans or programs of Employers, (iv) all amounts owing to Employee under Sections 3.8, 3.9 and 3.10 and (v) any additional amounts or benefits which may be required to be paid in a lump sum by applicable law. (b) A termination of Employee's employment in accordance with this Agreement shall not alter or impair (i) any of Employee's rights or benefits under the Stock Options except as provided in Section 3.4 or in the Incentive Plan or (ii) any of Employee's rights or benefits, if any, under employee benefit plans or programs maintained by either Employer. 4.4. Termination by Holdings for Misconduct or by Employee for other than a Good Reason The following provisions shall apply if, prior to the Expiration Date, Employee terminates his employment hereunder for any reason other than a Good Reason or if Holdings terminates Employee's employment hereunder for Misconduct: (i) Severance Payment. Employers shall promptly pay to Employee a severance payment (in cash or other immediately available funds) in the amount equal to 25% of the Base Salary as in effect on the relevant Termination Date. Such severance payment shall be in lieu, and not in addition to, any severance payment due or which may become due to Employee under any other provision of this Article IV. In the event Employee shall become entitled to receive a severance payment pursuant to this Section 4.4 under circumstances which entitle him to receive a severance payment under any severance policy or plan of either Employer, then the severance payment due to Employee pursuant to such policy or plan shall be automatically reduced by the amount of the severance payment due to him pursuant to this Section 4.4. (ii) Travel Privileges. Neither Employer shall have any obligation to provide to Employee (or his wife or dependents) any post-employment travel privileges. 4.5. Termination by Holdings for Breach of Duties The following provisions shall apply if, prior to the Expiration Date, Holdings terminates Employee's employment hereunder for Default: (i) Severance Payment. Employers shall promptly pay to Employee a severance payment (in cash or other immediately available funds) in the amount equal to 100% of the Base Salary as in effect on the relevant Termination Date. Such severance payment shall be in lieu, and not in addition to, any severance payment due or which may become due to Employee under any other provision of this Article IV. In the event Employee shall become entitled to receive a severance payment pursuant to this Section 4.5 under circumstances which entitle him to receive a severance payment under any severance policy or plan of either Employer, then the severance payment due to Employee pursuant to such policy or plan shall -14- 16 be automatically reduced by the amount of the severance payment due to him pursuant to this Section 4.5. (ii) Travel Privileges. Each Employer shall provide Employee (and his wife and dependents) on-line, positive space travel privileges for two years after the relevant Termination Date, all in accordance with the terms of its post-employment, non-revenue travel policy as from time to time in effect; provided, however, each Employer shall be relived of its obligation under this clause (ii) if Employee violates any of his covenants and agreements set forth in Article V. 4.6. Termination by Employee for Good Reason or by Holdings for any Reason other than Misconduct, Default or Disability The following provisions shall apply if, prior to the Expiration Date, Employee terminates his employment hereunder for Good Reason or if Holdings terminates Employee's employment hereunder for any reason other than Misconduct, Default or Disability: (i) Severance Payment. Employers shall promptly pay to Employee a severance payment (in cash or other immediately available funds) in the amount of 150% of the Base Salary as in effect on the relevant Termination Date. Such severance payment shall be in lieu, and not in addition to, any severance payment due or which may become due to Employee under any other provision of this Article IV. In the event Employee shall become entitled to receive a severance payment pursuant to this Section 4.6 under circumstances which entitle him to receive a severance payment under any severance policy or plan of either Employer, then the severance payment due to Employee pursuant to such policy or plan shall be automatically reduced by the amount of the severance payment due to him pursuant to this Section 4.6. (ii) Travel Privileges. Each Employer shall provide Employee (and his wife and dependents) on-line, positive space travel privileges for five years after the relevant Termination Date, all in accordance with the terms of its post-employment, non-revenue travel policy as from time to time in effect; provided, however, each Employer shall be relived of its obligation under this clause (ii) if Employee violates any of his covenants and agreements set forth in Article V. 4.7. Payment of Benefits During Pendency of Dispute Holdings may, within 10 days after its receipt of a Notice of Termination given by Employee, provide notice to Employee that a dispute exists concerning the termination, in which event such dispute shall be resolved in accordance with Article VI. Employee may, within 10 days after his receipt of a Notice of Termination given by Holdings, provide notice to Holdings that a dispute exists concerning the termination, in which event such dispute shall be resolved in accordance with Article VI. Notwithstanding the pendency of any such dispute and notwithstanding -15- 17 any provision herein to the contrary, Employers will (i) continue to pay Employee the Base Salary in effect when the notice giving rise to the dispute was given, (ii) make the Restricted Stock Grant (if not already made) in accordance with Section 3.3 and (iii) continue Employee as a participant in all compensation and benefit plans in which Employee was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved or, with respect to a Notice of Termination given by Employee, the date of termination specified in such Notice, if earlier, but, in each case, not past the Expiration Date. If (i) Holdings gives a Notice of Termination to Employee, (ii) Employee disputes the termination as contemplated by this Section 4.7 and (iii) such dispute is finally resolved in favor of Employers in accordance with Article VI, then Employee shall be required to refund to Employers any amounts paid to Employee under this Section 4.7 but only if, and then only to the extent, Employee is not otherwise entitled to receive such amounts under this Agreement. Employee agrees to pay interest to Employers on any amount required to be refunded to Employers pursuant to the preceding sentence, such interest to accrue for the period from the due date until paid at the Prime Rate. 4.8. Resignation as Director If Employee's employment under this Agreement is terminated for any reason, Employee agrees to resign as a director of all Constituent Companies of which he is a director, such resignation to be effective (i) in the case of a termination by Employee pursuant to Section 4.6, on the date Employee delivers the relevant Notice of Termination in accordance with Section 4.1, (ii) in the case of a termination by Holdings pursuant to Section 4.4 or 4.5, on the date Employee receives the relevant Notice of Termination in accordance with Section 4.1 and (iii) in the case of a termination for any other reason, no later than the relevant Termination Date. ARTICLE V Confidential Information and Non-Competition 5.1. Confidential Information (a) Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary and that, by reason of his employment with Employers and the positions described in paragraphs (a) and (b) of Section 2.2, he may acquire Confidential Information (defined below) concerning one or more Constituent Companies, the use or disclosure of which would cause the Constituent Companies substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee agrees that he will not (directly or indirectly) at any time, whether during or after his employment hereunder, disclose any such Confidential Information to any Person except (i) as required by applicable law, (ii) in connection with, but only to the extent necessary for, the enforcement of his rights under this Agreement or (iii) with the prior written consent of the Board. As used herein, "Confidential Information" includes information with respect to the services, strategies, facilities and methods, -16- 18 research and development, trade secrets and other intellectual property, pricing and revenue management systems, patents and patent applications, procedures, manuals, confidential reports, financial information, business plans, prospects or opportunities of any Constituent Company; provided, however, that such term shall not include any information that (x) is or becomes generally known or available other than as a result of a disclosure by Employee or (y) is or becomes known or available to Employee on a nonconfidential basis from a source (other than Employers) which, to Employee's knowledge, is not prohibited from disclosing such information to Employee by a legal, contractual, fiduciary or other obligation to any Constituent Company. (b) Employee confirms that all Confidential Information is the exclusive property of the relevant Constituent Company. All business records, papers and documents kept or made by Employee (whether electronically or otherwise) while employed hereunder relating to the business of any Constituent Company shall be and remain the property of such Constituent Company at all times. Upon the request of Holdings at any time, Employee shall promptly deliver to Holdings, and shall retain no copies of, any electronic media or written materials, records and documents made by Employee or coming into his possession while employed hereunder concerning the business or affairs of any Constituent Company other than personal materials, records and documents (including notes and correspondence) of Employee not containing proprietary information relating to such business or affairs. Notwithstanding the foregoing, Employee shall be permitted to retain copies of, or have access to, all such materials, records and documents relating to any disagreement, dispute or litigation between Employee and Employers. 5.2. Non-Competition (a) While employed hereunder and for a period of two years thereafter (the "Restricted Period"), Employee shall not, unless he receives the prior written consent of the Board, own an interest in, manage, operate, join, control, lend money or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or otherwise, any Person which competes with any Constituent Company in the United States. (b) Employee has carefully read and considered the provisions of this Section 5.2 and, having done so, agrees that the restrictions set forth in this Section 5.2 (including the Restricted Period, scope of activity to be restrained and the geographical scope) are fair and reasonable and are reasonably required for the protection of the interests of each Employer, its officers, directors, employees, creditors and stockholders. Employee understands that the restrictions contained in this Section 5.2 may limit his ability to engage in a business similar to that of any Constituent Company, but acknowledges that he will receive sufficiently high remuneration and other benefits hereunder to justify such restrictions. (c) During the Restricted Period, Employee shall not, whether for his own account or for the account of any other Person (excluding the Constituent Companies), intentionally (i) solicit, endeavor to entice or induce any employee of any Constituent Company to terminate his -17- 19 employment with such Constituent Company or accept employment with anyone else or (ii) interfere in a similar manner with the business of any Constituent Company. (d) In the event that any provision of this Section 5.2 relating to the Restricted Period and/or the areas of restriction shall be declared by a court of competent jurisdiction to exceed the maximum time period or areas such court deems reasonable and enforceable, the Restricted Period and/or areas of restriction deemed reasonable and enforceable by the court shall become and thereafter be the maximum time period and/or areas. 5.3. Stock Ownership Nothing in this Agreement shall prohibit Employee from acquiring or holding any issue of stock or securities of any Person that has any securities registered under Section 12 of the Securities and Exchange Act of 1934, as amended, listed on a national securities exchange or quoted on The Nasdaq Stock Market so long as (i) Employee is not deemed to be an "affiliate" of such Person as such term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act of 1933, as amended, and (ii) Employee and members of his immediate family do not own or hold more than 5% of any voting securities of any such Person. 5.4. Injunctive Relief, etc. Employee acknowledges that the covenants contained in this Article V are intended for the benefit of, and may be enforced by, the Constituent Companies and their respective successors and assigns. Employee further acknowledges that a breach of any of the covenants contained in this Article V may result in material irreparable injury to the Constituent Companies for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach, any payments remaining under the terms of this Agreement shall cease and the Constituent Companies (or any of them) shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining Employee from engaging in activities prohibited by this Article V or such other relief as may required to specifically enforce any of the covenants contained in this Article V. Employee agrees to and hereby does submit to in personam jurisdiction before each and every such court for that purpose. ARTICLE VI Dispute Resolution (a) In the event a dispute shall arise between Employee, on the one hand, and Holdings or AWA, on the other hand, as to whether the provisions of this Agreement have been complied with (a "Dispute"), the parties agree to resolve such Dispute in accordance with the following procedure: -18- 20 (1) A meeting shall be held promptly between Employee and Holdings, attended by (in the case of Holdings) by one or more individuals with decision-making authority regarding the Dispute, to attempt in good faith to negotiate a resolution of the Dispute. (2) If, within 10 days after such meeting, Employee and Holdings have not succeeded in negotiating a resolution of the Dispute, the Dispute shall be submitted to mediation in accordance with the Commercial Mediation Rules of the American Arbitration Association. (3) Employee and Holdings will jointly appoint a mutually acceptable mediator, seeking assistance in such regard from the American Arbitration Association if they have been unable to agree upon such appointment within 10 days following the 10-day period referred to in clause (2) above. (4) Upon appointment of the mediator, Employee and Holdings agree to participate in good faith in the mediation and negotiations relating thereto for 15 days. (5) If Employee and Holdings are not successful in resolving the Dispute through mediation within such 15-day period, the Dispute shall be settled by arbitration in accordance with the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association. (6) The fees and expenses of the mediator/arbitrators shall be borne solely by the non-prevailing party or, in the event there is no clear prevailing party, as the mediator/arbitrators deem appropriate. (7) If any dispute shall arise under this Agreement involving termination of Employee's employment with Employers or involving the failure or refusal of Employers to fully perform in accordance with the terms hereof, Employers shall reimburse Employee (without duplication), on a current basis, for all legal fees and expenses, if any, incurred by Employee in connection with such dispute, together with interest thereon at the Prime Rate, such interest to accrue from the date Holdings receives Employee's statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of such dispute in accordance with this Article VI includes a finding denying, in all material respects, Employee's claims in such dispute, Employee shall be required to reimburse Employers, within 30 days after the date of such resolution, for all sums advanced to Employee with respect to such dispute pursuant to this paragraph (7). (8) Except as provided above, each of Employee and Holdings shall pay its own costs and expenses (including, without limitation, attorneys' fees) relating to any mediation/arbitration proceeding conducted under this Article VI. -19- 21 (9) All mediation/arbitration conferences and hearings will be held in Maricopa County, Arizona. (b) In the event there is any disputed question of law involved in any arbitration proceeding, such as the proper legal interpretation of any provision of this Agreement, the arbitrators shall make separate and distinct findings of all facts material to the disputed question of law to be decided and, on the basis of the facts so found, express their conclusion of the question of law. The facts so found shall be conclusive and binding on the parties, but any legal conclusion reached by the arbitrators from such facts may be submitted by either Employee or Holdings to a court of law for final determination by initiation of a civil action in the manner provided by law. Such action, to be valid, must be commenced within 20 days after receipt of the arbitrators' decision. If no such civil action is commenced within such 20-day period, the legal conclusion reached by the arbitrators shall be conclusive and binding on the parties. Any such civil action shall be submitted, heard and determined solely on the basis of the facts found by the arbitrators. Neither of Employee or Holdings shall, or shall be entitled to, submit any additional or different facts for consideration by the court. In the event any civil action is commenced under this paragraph (b) and if Employee is the party who prevails or substantially prevails (as determined by the court) in such civil action, Employee shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Employee in connection with such action and on appeal. In the event any civil action is commenced under this paragraph (b) and if Holdings is the party who prevails or substantially prevails (as determined by the court) in such civil action, Holdings shall be entitled to recover from Employee all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such action and on appeal. (c) Except as limited by paragraph (b) above, the parties agree that judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Employee is the party who prevails or substantially prevails in such legal proceeding, Employee shall be entitled to recover from Employers all costs, expenses and reasonable attorneys' fees incurred by Employee in connection with such legal proceeding and on appeal. In the event legal proceedings are commenced to enforce the rights awarded in an arbitration proceeding and if Holdings is the party who prevails or substantially prevails in such legal proceeding, Holdings shall be entitled to recover from Employee all costs, expenses and reasonable attorneys' fees incurred by Employers in connection with such legal proceeding and on appeal. (d) Except as provided above, (i) no legal action may be brought by any party with respect to any Dispute and (ii) all Disputes shall be determined only in accordance with the procedures set forth above. -20- 22 ARTICLE VII Miscellaneous 7.1. No Mitigation The provisions of this Agreement are not intended to, nor shall they be construed to, require that Employee mitigate the amount of any payment provided for in this Agreement by seeking or accepting other employment, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Employee as the result of employment by another employer or otherwise. 7.2. Assignability The obligations of Employee hereunder are personal and may not be assigned or delegated by Employee or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. Each Employer shall have the right to assign this Agreement and to delegate all rights, duties and obligations hereunder as provided in Section 7.5. 7.3. Notices All notices and all other communications provided for in the Agreement shall be in writing and shall be sent, delivered or mailed, addressed as follows: (i) if to Employers (or either of them), at Holdings' principal office address or such other address as Holdings may have designated by written notice to Employee for purposes hereof, directed to the attention of the Board with a copy to the Secretary of Holdings and (ii) if to Employee, at his residence address on the records of Holdings or to such other address as he may have designated to Holdings in writing for purposes hereof. Each such notice or other communication shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, except that any notice of change of address shall be effective only upon receipt. 7.4. Severability The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 7.5. Successors; Binding Agreement (a) Each Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of such Employer, by agreement in form and substance reasonably acceptable to Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent -21- 23 that such Employer would be required to perform it if no such succession had taken place. As used herein, (i) the term "Holdings" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law and (ii) the term "AWA" shall include any successor to its business and/or assets as aforesaid which executes and delivers the Agreement provided for in this Section 7.5 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Employee hereunder shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die while any amounts would be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to Employee's estate. (c) This Agreement and all rights of the Constituent Companies hereunder shall inure to the benefit of and be enforceable by the Constituent Companies and their respective successors and assigns. 7.6. Tax Withholdings Each Employer shall withhold from all payments hereunder all applicable taxes (federal, state or other) which it is required to withhold therefrom unless Employee has otherwise paid to such Employer the amount of such taxes. 7.7. Amendments and Waivers No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No such instrument shall be binding on the Company unless signed by the Chairman or such other Person as may be specifically authorized by the Board. No waiver by any party hereto at any time of any breach by any other party hereto of, or in compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 7.8. Entire Agreement This Agreement is an integration of the parties agreement and no agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. -22- 24 7.9. Governing Law THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ARIZONA WITHOUT REGARD TO ITS CONFLICT OF LAWS PROVISION. 7.10. Counterparts This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 7.11. Remedies Cumulative No right, power or remedy granted under this Agreement is intended to be exclusive, but each shall be cumulative and in addition to any other rights, powers or remedies referred to in this Agreement or otherwise available at law or in equity. 7.12. Joint and Several Liability The obligations of Employers hereunder shall be joint and several. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. AMERICA WEST HOLDINGS CORPORATION By: /s/ William A. Franke ---------------------------------------- William A. Franke Chairman of the Board and Chief Executive Officer AMERICA WEST AIRLINES, INC. By: /s/ William A. Franke ---------------------------------------- William A. Franke Chairman of the Board /s/ Richard R. Goodmanson ------------------------------------------- Richard R. Goodmanson -23- EX-11.1 6 COMPUTATION OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11.1 2 AMERICA WEST HOLDINGS CORPORATION COMPUTATION OF NET INCOME PER COMMON SHARE (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
| PREDECESSOR REORGANIZED COMPANY | COMPANY ----------------------------------------- | ------------ PERIOD FROM | PERIOD FROM YEAR ENDED DECEMBER 31, AUGUST 26 TO | JANUARY 1 TO DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ------------ ------------ ------------- | ------------ | PRIMARY EARNINGS PER SHARE | Computation for Statements of Income: | Income (loss) before extraordinary items ............................. $ 9,610 $ 54,770 $ 7,846 | $ (203,268) Adjustments for interest on debt reduction .............................. 474 1,487 -- | 2,584 Preferred stock dividend requirement .................................... -- -- -- | -- ----------- ----------- ----------- | ----------- Income (loss) applicable to common stock before extraordinary items ..... 10,084 56,257 7,846 | (200,684) Extraordinary items, net ................................................ (1,105) (984) -- | 257,660 ----------- ----------- ----------- | ----------- Income applicable to common stock ....................................... $ 8,979 $ 55,273 $ 7,846 | $ 56,976 =========== =========== =========== | =========== Weighted average number of common shares outstanding .................... 44,895,406 45,177,291 45,126,899 | 25,470,671 Assumed exercise of stock options and warrants (a) ...................... 2,739,868 2,488,216 -- | 3,079,258 ----------- ----------- ----------- | ----------- Weighted average number of common shares outstanding as adjusted ........ 47,635,274 47,665,507 45,126,899 | 28,549,929 =========== =========== =========== | =========== Primary earnings per common share: | Income (loss) before extraordinary items ............................. $ 0.21 $ 1.18 $ .17 | $ (7.03) Extraordinary items .................................................. (.02) (.02) -- | 9.02 ----------- ----------- ----------- | ----------- Net income ........................................................... $ 0.19 $ 1.16 $ .17 | $ 1.99 =========== =========== =========== | =========== Computation of primary earnings per share--antidilutive calculation | under modified treasury stock method submitted in accordance with | Regulation S-K Item 601(b)(11) | Income before extraordinary items ....................................... $ 7,846 | Preferred stock dividend requirement .................................... -- | Interest adjustment net of taxes ........................................ 870 | ----------- | Income applicable to common stock before extraordinary items ............ 8,716 | Extraordinary items, tax benefit ........................................ -- | ----------- | Income applicable to common stock ....................................... $ 8,716 | =========== | Weighted average number of common shares outstanding .................... 45,126,899 | Assumes exercise of stock options and warrants .......................... 2,011,352 | ----------- | Weighted average number of common shares as adjusted .................... 47,138,251 | =========== | Primary earnings per common share: | Income before ........................................................ $ .18 | Extraordinary items .................................................. -- | ----------- | Net income (b) ....................................................... $ .18 | =========== | FULLY DILUTED EARNINGS PER SHARE | Computation for Statements of Income: | Income (loss) before extraordinary items ............................. $ 9,610 $ 54,770 $ 7,846 | $ (203,268) Adjustment for interest on debt reduction ............................ 171 851 870 | 2,520 Preferred stock dividend requirement ................................. -- -- -- | -- ----------- ----------- ----------- | ----------- Income (loss) applicable to common stock before extraordinary items .. 9,781 55,621 8,716 | (200,748) Extraordinary items .................................................. (1,105) (984) -- | 257,660 ----------- ----------- ----------- | ----------- Net income ........................................................... $ 8,676 $ 54,637 $ 8,716 | $ 56,912 =========== =========== =========== | =========== Weighted average number of common shares outstanding ................. 44,895,406 45,177,291 45,126,899 | 25,470,671 Assumed exercise of stock options and warrants (a) ................... 3,049,100 2,488,216 2,011,352 | 3,079,258 ----------- ----------- ----------- | ----------- Weighted average number of common shares outstanding as adjusted ..... 47,944,506 47,665,507 47,138,251 | 28,549,929 =========== =========== =========== | =========== Fully diluted earnings per common share: | Income (loss) before extraordinary items ............................. $ 0.20 $ 1.17 $ .18 | $ (7.03) Extraordinary items .................................................. (.02) (.02) -- | 9.02 ----------- ----------- ----------- | ----------- Net income ........................................................... $ 0.18 $ 1.15 $ .18(b)| $ 1.99 =========== =========== =========== | =========== Additional Fully Diluted Computation: | Additional adjustment to net income as adjusted per fully | diluted computation above ........................................ | Income (loss) before extraordinary items as adjusted per fully | diluted computation above ........................................ $ 9,610 $ 54,770 $ 7,846 | $ (203,268) Add--Interest on 7.75% subordinated debentures, net of taxes ......... -- | -- Add--Interest on 7.5% subordinated debentures, net of taxes .......... -- | -- Add--Interest on 11.5% subordinated debentures, net of taxes ......... -- | --
3
| PREDECESSOR REORGANIZED COMPANY | COMPANY ------------------------------------------|------------ PERIOD FROM | PERIOD FROM YEAR ENDED DECEMBER 31, AUGUST 26 TO | JANUARY 1 TO DECEMBER 31, | AUGUST 25, 1996 1995 1994 | 1994 ------------ ------------ --------------| ------------ | FULLY DILUTED EARNINGS PER SHARE | Add interest on debt reduction, net of taxes .......................... 837 851 870 | 2,520 ----------- ----------- ----------- | ----------- Income (loss) before extraordinary items as adjusted .................. 10,447 55,621 8,716 | (200,748) Extraordinary items, net .............................................. (1,105) (984) -- | 257,660 ----------- ----------- ----------- | ----------- Net income ............................................................ $ 9,342 $ 54,637 $ 8,716 | $ 56,912 =========== =========== =========== | =========== Additional adjustment to weighted average number of shares | outstanding ....................................................... -- -- -- | -- Weighted average number of shares outstanding as adjusted per fully | diluted computation above ......................................... 47,944,506 47,665,507 47,138,251 | 28,549,929 Additional dilutive effect of outstanding options and warrants ........ 434,376 -- -- | -- Additional dilutive effect of assumed conversion of preferred stock: | Series A 9.75% ........................................................ -- -- -- | -- Series B 10.5% ........................................................ -- -- -- | -- Series C 9.75% ........................................................ -- -- -- | 73,099 Additional dilutive effect of assumed conversion of 7.75% subordinated | debenture ............................................................. -- -- -- | 2,257,558 Additional dilutive effect of assumed conversion of 7.5% subordinated | debenture ............................................................. -- -- -- | 2,264,932 Additional dilutive effect of assumed conversion of 11.5% subordinated | debenture ............................................................. -- -- -- | 7,306,865 ----------- ----------- ----------- | ----------- Weighted average number of common shares outstanding as adjusted ......... 48,378,882 47,665,507 47,138,251 | 40,452,383 =========== =========== =========== |=========== Fully diluted earnings per common share: | Income (loss) before extraordinary items .............................. $ .21 $ 1.17 $ .18 | $ (4.96) Extraordinary items, net .............................................. (.02) (.02) -- | 6.37 ----------- ----------- ----------- | ----------- Net income ............................................................ $ .19 $ 1.15 $ .18(b)| $ 1.41 =========== =========== =========== | ===========
- --------------- (a) The stock options and warrants are included only in the periods in which they are dilutive. (b) The calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an antidilutive result. EX-27.1 7 FINANCIAL DATA SCHEDULE FOR AWA.
5 0000706270 AMERICA WEST AIRLINES, INC. 1 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 137,499 39,131 109,306 3,091 21,423 351,813 777,647 163,718 1,597,677 522,720 330,148 0 0 0 622,780 1,597,677 0 1,739,526 0 1,670,860 0 2,950 46,866 34,493 24,883 9,610 0 1,105 0 8,505 .00 .00
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