American Airlines 2007 Annual Report Download - page 33

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The Credit Facility contains a covenant (the Liquidity Covenant) requiring American to maintain, as defined,
unrestricted cash, unencumbered short term investments and amounts available for drawing under committed
revolving credit facilities of not less than $1.25 billion for each quarterly period through the life of the Credit
Facility. In addition, the Credit Facility contains a covenant (the EBITDAR Covenant) requiring AMR to maintain a
ratio of cash flow (defined as consolidated net income, before interest expense (less capitalized interest), income
taxes, depreciation and amortization and rentals, adjusted for certain gains or losses and non-cash items) to fixed
charges (comprising interest expense (less capitalized interest) and rentals). The required ratio was 1.40 to 1.00
for the four quarter period ending December 31, 2007 and will increase to 1.50 to 1.00 for the four quarter period
ending June 30, 2009. AMR and American were in compliance with the Liquidity Covenant and the EBITDAR
covenant as of December 31, 2007 and expect to be able to continue to comply with these covenants. However,
given fuel prices that are high by historical standards and the volatility of fuel prices and revenues, it is difficult to
assess whether AMR and American will, in fact, be able to continue to comply with these covenants, and there
are no assurances that AMR and American will be able to do so. Failure to comply with these covenants would
result in a default under the Credit Facility which - - if the Company did not take steps to obtain a waiver of, or
otherwise mitigate, the default - - could result in a default under a significant amount of the Company’s other debt
and lease obligations and otherwise have a material adverse impact on the Company. See Note 6 for further
information regarding the Credit Facility.
Cash Flow Activity The Company’s cash flow from operating activities during the year ended December 31,
2007 generated $1.9 billion.
Capital expenditures during 2007 were $714 million and primarily included aircraft modifications and the cost of
improvements at JFK. Substantially all of the Company’s construction costs at JFK are being reimbursed through
a fund established from a previous financing transaction. See Note 6 to the consolidated financial statements for
additional information.
The Company also reduced long-term debt by $2.3 billion including prepayment of approximately $1 billion in debt
instruments.
During the first quarter of 2007, the Company issued and sold 13 million shares of its common stock. The
Company realized $497 million from the equity sale.
During the third quarter of 2007, the Company sold its interests in ARINC, Incorporated (“ARINC”), a military and
aviation communications company. The Company received $192 million in proceeds for its interest in ARINC,
$138 million of which was recognized as a gain.
In the past, the Company has from time to time refinanced, redeemed or repurchased its debt and taken other
steps to reduce its debt or lease obligations or otherwise improve its balance sheet. Going forward, depending
on market conditions, its cash positions and other considerations, the Company may continue to take such
actions.
Compensation As described in Note 9 to the consolidated financial statements, during 2006 and January 2007,
the AMR Board of Directors approved the amendment and restatement of all of the outstanding performance
share plans, the related performance share agreements and deferred share agreements that required settlement
in cash. The plans were amended to permit settlement in cash and/or stock; however, the amendments did not
impact the fair value of the awards under the plans. These changes were made in connection with a grievance
filed in 2006 by the Company’s three labor unions in which they argued that the entirely cash settlement of the
2003-2005 Performance Unit Plan may be contrary to a component of the Company’s 2003 Annual Incentive
Program agreement with the unions.
On January 15, 2008, the Compensation Committee of the Board of Directors of AMR approved the 2008 Annual
Incentive Plan (AIP) for American. All U.S. based employees of American are eligible to participate in the AIP.
The AIP is American's annual bonus plan and provides for the payment of awards in the event certain financial
and/or customer service metrics are satisfied.
Working Capital AMR (principally American) historically operates with a working capital deficit, as do most
other airline companies. In addition, the Company has historically relied heavily on external financing to fund
capital expenditures. More recently, the Company has also relied on external financing to fund operating losses,
employee pension obligations and debt maturities.