## Facts

- In late 1990, America West Airlines, Inc. (America West), a public company, suffered significant losses that severely strained its liquidity.
- America West had multiple debt agreements containing a covenant that limited the company’s debt-to-net-worth ratio; a breach could permit creditors to demand immediate repayment.
- America West and its creditors amended the covenant to allow America West to obtain additional financing.
- In November 1990, America West defaulted on the amended ratio covenant, giving creditors the option to accelerate the debt.
- In mid-January 1991, creditors waived the November 1990 default and amended the covenant again.
- At a board meeting after the January waiver, management expressed concern about the company’s ability to comply with the amended covenant going forward.
- In early February 1991, America West defaulted again on the amended covenant, again creating the possibility of acceleration.
- In late March 1991, creditors again waived the default and amended the covenant again.
- In its 1990 Form 10‑K, America West disclosed the November 1990 default and stated that the default had been waived and that America West expected to comply with the amended covenant going forward.
- The 1990 Form 10‑K did not disclose America West’s liquidity concerns or the uncertainty surrounding ongoing compliance with the covenant in light of the repeated defaults and reliance on waivers.
- The Securities and Exchange Commission instituted an enforcement proceeding alleging that the company’s disclosure failures violated SEC reporting requirements.

## Issues

1. Whether America West’s 1990 Form 10‑K was materially misleading because it disclosed a past covenant default and waiver while omitting then-known liquidity problems and uncertainty about future covenant compliance.
2. Whether repeated covenant defaults and dependence on creditor waivers were required disclosures because they created a material risk of debt acceleration and affected the company’s liquidity outlook.
3. Whether the omission of known trends and uncertainties about liquidity and capital resources violated Exchange Act periodic reporting and related SEC disclosure rules.

## Decision

- The SEC found that America West’s 1990 Form 10‑K did not provide a complete and accurate picture of the company’s financial condition because it omitted material information about liquidity strain and the uncertainty created by repeated covenant defaults and waivers.
- The SEC determined that disclosing only the November 1990 default and waiver—while stating that the company expected to comply going forward—was misleading given management’s contemporaneous concerns and the subsequent defaults and waivers.
- The SEC concluded that the company’s disclosure failures violated the federal securities law reporting framework governing periodic reports.
- The SEC issued an Accounting and Auditing Enforcement Release reflecting its findings and ordering remedial relief aimed at improving future compliance and disclosure.

## Legal Principles

- Periodic reports filed under Exchange Act Section 13(a) must contain the information required by SEC rules and must not omit material facts needed to make the statements made not misleading.
- When a company knows of conditions that materially affect, or are reasonably likely to materially affect, liquidity or capital resources, it must disclose those known uncertainties rather than presenting an unduly reassuring picture.
- Covenant compliance problems that create a realistic possibility of default-related remedies (including acceleration) can be material because they directly affect liquidity and the company’s ability to meet obligations.
- Materiality is evaluated from the standpoint of a reasonable investor; for a company under severe liquidity pressure, information bearing on access to financing and the risk of accelerated repayment is likely to alter the total mix of information.

## Conclusion

In re America West Airlines, Inc. involved an SEC enforcement proceeding focusing on whether America West’s 1990 Form 10‑K misled investors by reporting a covenant default and waiver and projecting future compliance while omitting known liquidity strain and uncertainty arising from repeated covenant breaches and reliance on creditor waivers, and the SEC concluded that these omissions violated periodic reporting disclosure requirements.


In re America West Airlines, Inc., Accounting and Auditing Enforcement Release No. 562 [1991-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 74,022 (May 12, 1994)