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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q/A
NO. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7815
TRANS WORLD AIRLINES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1145889
- ------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
ONE CITY CENTRE
515 N. SIXTH STREET
ST. LOUIS, MISSOURI 63101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(314) 589-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 / /
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
OUTSTANDING AS OF
CLASS AUGUST 1, 1996
------------------------ -----------------
Common Stock, par value 38,794,820
$0.01 per share
In addition, as of August 1, 1996 there were 6,400,006 shares of Employee
Preferred Stock outstanding.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements made in this Form 10-Q relating to plans, conditions,
objectives and economic performance go beyond historical information and may
provide an indication of future results. To that extent, they are forward-
looking statements within the meaning of Section 21E of the Exchange Act, and
each of them is therefore subject to risks, uncertainties, and assumptions that
could cause actual results to differ from those in the forward-looking
statement. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Some of the
uncertainties that might adversely impact TWA's future results of operations
include, but are not limited to, those described below.
During the early 1990s, the Company experienced significant losses. Factors
contributing to these losses included, among other things, excess financial
leverage; adverse publicity associated with the Company's financial
difficulties; excessive labor costs; the continuing impact of a relatively weak
economy, which resulted in weak air travel demand; and domestic pricing
policies of other airlines, which decreased industry revenue yields and
generated intense competition.
As a result of these losses, TWA underwent two separate Chapter 11
reorganizations, the first in 1992-93 and the second in 1995. In connection
with the '95 Reorganization, TWA has applied fresh start reporting in
accordance with SOP 90-7, which has resulted in the creation of a new reporting
entity for accounting purposes and the Company's assets and liabilities being
adjusted to reflect fair values on the effective date of the '95
Reorganization. A description of the adjustments to the financial statements
arising from the consummation of the '95 Reorganization and the application of
fresh start reporting is contained in Note 17 to the 1995 Consolidated
Financial Statements. For accounting purposes, the effective date of the '95
Reorganization is deemed to be September 1, 1995. Because of the application of
fresh start reporting, the financial statements for periods after the '95
Reorganization are not comparable in all respects to the financial statements
for periods prior to the reorganization.
As discussed below under ``--Liquidity and Capital Resources,'' pursuant to
the '95 Reorganization and the Company's current business strategy, the Company
has improved its financial condition and operating performance by, among other
things, reducing labor and other operating and financing costs, rescheduling
debt payments, recapitalizing the Company's equity securities and certain of
its debt, revising the Company's route structure to capitalize further on its
strength in St. Louis and developing enhanced marketing systems. Pursuant to
the '95 Reorganization, the Company eliminated approximately $500 million in
face amount (approximately $300 million book value) of debt from its balance
sheet. In addition, the maturity of the Icahn Loans was extended from January
8, 1995 to January 8, 2001, and the Company negotiated an aggregate of $91
million of aircraft lease and conditional sale agreement deferrals for various
periods of time, with a weighted average life of approximately two years.
GENERAL
The airline industry is cyclical in nature. The demand for air
transportation is closely related to general U.S. and worldwide economic
conditions. The Company's operating results are also significantly affected by
competitive factors in the airline industry. Significant variations in annual
operating revenues and operating expenses have been experienced historically by
TWA and are expected to continue in the future. Numerous uncertainties
concerning the level of revenues and expenses always exist and it is not
possible to predict the potential impact of such uncertainties upon TWA's
results of operations. Among the uncertainties that might adversely impact
TWA's future results of operations are: (i) competitive pricing and scheduling
initiatives; (ii) the availability and cost of capital; (iii) increases in fuel
and other operating costs; (iv) insufficient levels of air passenger traffic
resulting from, among other things, war, threat of war, terrorism or changes in
the economy; (v) governmental limitations on the ability of TWA to service
certain airports and/or foreign markets; (vi) regulatory requirements requiring
additional capital expenditures and (vii) the possible reduction in yield due
to a discount ticket program entered into by the Company with Karabu
Corporation (``Karabu''), a Delaware corporation controlled by Mr. Carl C.
Icahn, in connection with the '95 Reorganization. See ``--Liquidity and Capital
Resources--Contingencies.''
On July 17, 1996, TWA Flight 800 crashed shortly after departure from JFK
en route to Paris, France. There were no survivors among the 230 passengers and
crew members aboard the Boeing 747 aircraft. The Company is cooperating fully
with all federal, state and local regulatory and investigatory agencies to
ascertain the cause of the crash. TWA is unable to predict the amount of
claims, if any, relating to the crash which may ultimately be made against
the Company and how those claims might be resolved. TWA maintains substantial
insurance coverage and, at this time, management has no reason to believe
that such insurance coverage will not be sufficient to cover any claims
arising from the crash. Therefore, TWA believes that the resolution of any
claims will not have a material adverse
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effect on its financial condition or results of operations. The Company is
unable to predict the extent of any adverse effect on its revenues, yields or
results of operations which may result from the public perception of the crash
of Flight 800. Due to, among other things, management's need to devote its
attention to providing assistance to the families of passengers and crew
members of Flight 800, as well as cooperating in the investigation of the
crash, the Company has decided to delay its proposed offering of 8,000,000
shares of Common Stock pursuant to a Registration Statement on Form S-3 (Reg.
No. 333-05691) previously filed with the Commission on June 11, 1996.
The Company's operating results for any interim period are not necessarily
indicative of those for the entire year due to seasonal fluctuations. First and
fourth quarter operating results typically reflect operating and net losses,
while second and third quarter results have historically been more favorable
for the Company and others in the airline industry due to increased leisure
travel during the spring and summer months.
TWA has no unused credit lines and must satisfy substantially all of its
working capital and capital expenditure requirements from cash provided by
operating activities or from external capital sources or from the sale of
assets. TWA has relatively few non-strategic assets which it could monetize,
substantially all of such assets being subject to various liens and security
interests which would restrict and/or limit the ability of TWA to realize any
significant proceeds from the sale thereof. To the extent that the Company's
access to capital is constrained, the Company may not be able to make certain
capital expenditures or implement certain other aspects of its strategic plan,
and the Company may therefore be unable to achieve the full benefits expected
therefrom.
During 1994, the Company entered into labor agreements with the three
unions which together represent a majority of the Company's employees (the
``'94 Labor Agreements'') and which substantially reduced the Company's labor
costs. The '94 Labor Agreements will become amendable in the latter half of
1997. While the Company cannot predict the precise wage rates that will be in
effect at such time (since such rates will be determined by subsequent events),
the wage rates then in effect will likely increase. However, management
believes that it is essential that the Company's labor costs remain favorable
in comparison to its largest competitors. The Company will seek to continue to
improve employee productivity and will continue to explore other ways to
control and/or reduce operating expenses. Additionally, the Company will seek
to continue improving its market share as compared with its competitors by
continuing to modify its flight schedule and route structure and by continuing
to increase customer preference based on TWA's improved product quality.
The Company's ability to continue to improve its financial position and
meet its financial obligations will depend upon a variety of factors,
including: improved operating results, favorable domestic and international
airfare pricing environments, absence of adverse general economic conditions,
continued operating cost controls, and the Company's ability to attract new
capital. No assurance can be given that the Company will be successful in
generating the operating results required for future viability.
TWA's passenger traffic data, for scheduled passengers only and excluding
Trans World Express, Inc. a wholly-owned subsidiary of the Company that
provided a commuter feed service to the Company's New York hub prior to
November, 1995, are shown in the table below for the indicated periods<F1>:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ ------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
TOTAL SYSTEM
Revenue passenger miles (millions)<F2>......................... 22,664 24,906 24,902 11,610 12,879
Available seat miles (millions)<F3>............................ 35,678 39,191 37,905 18,007 19,258
Passenger load factor <F4>..................................... 63.5% 63.5% 65.7% 64.5% 66.9%
Passenger yield (cents)<F5>.................................... 11.35cent 11.31cent 11.39cent 11.38cent 11.78cent
Passenger revenue per available seat mile (cents)<F6>.......... 7.21cent 7.19cent 7.48cent 7.34cent 7.88cent
Operating cost per available seat mile (cents)<F7>............. 8.89cent 8.27cent 8.12cent 8.34cent 8.76cent
Average daily utilization per aircraft (hours)<F8>............. 9.23 9.30 9.45 9.28 9.78
Aircraft in fleet being operated at end of period.............. 186 185 188 184 187
<FN>
- --------
<F1> Excludes subsidiary companies.
<F2> The number of scheduled miles flown by revenue passengers.
<F3> The number of seats available for passengers multiplied by the number of
scheduled miles those seats are flown.
<F4> Revenue passenger miles divided by available seat miles.
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<F5> Passenger revenue per revenue passenger mile.
<F6> Passenger revenue divided by available seat miles.
<F7> Operating expenses, excluding special charges, earned stock compensation
and other nonrecurring charges, divided by available seat miles.
<F8> The average block hours flown per day in revenue service per aircraft.
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1995
Total operating revenues of $965.8 million for the second quarter of 1996
were $105.3 million or 12.2% more than the comparable 1995 period, primarily
because of a $93.3 million or 12.5% increase in passenger revenue and an $8.1
million increase in contract revenue.
Capacity and traffic increased in the second quarter of 1996 from the
comparable period of 1995. System capacity as measured by Available Seat Miles
(``ASMs'') increased by 8.0% during the second quarter of 1996 as compared to
the same period of 1995 reflecting increases in both international and domestic
capacity. Passenger traffic volume, as measured by total Revenue Passenger
Miles (``RPMs'') in scheduled service, increased 12.7% as compared to the same
period of 1995. Passenger load factor for the quarter ended June 30, 1996 was
69.8% compared to 66.9% in the same period of 1995. TWA's yield per passenger
mile for the second quarter of 1996 increased by 1.4% over the comparable 1995
period to 11.93 cents from 11.76 cents.
Operating expenses of $903.8 million in the second quarter of 1996 were
$97.7 million or 12.1% more than the operating expenses of $806.1 million in
the second quarter of 1995, due primarily to the following changes:
* Salaries, wages and benefits of $309.4 million for the second quarter of
1996 were $28.6 million or 10.2% more than the second quarter of 1995,
primarily due to an increase in the average number of employees. The
Company had 24,554 employees at June 30, 1996 as compared to 22,574 at
June 30, 1995.
* Aircraft fuel and oil expense of $141.1 million was $29.5 million higher
than in the second quarter of 1995, primarily due to increases in the
amount of fuel used due to an increase in ASMs and utilization, an
increase in the price of fuel, and the expiration in October 1995 of the
airlines' exemption from paying fuel taxes of 4.3 cents per gallon.
* Aircraft maintenance materials and repairs of $57.2 million in the second
quarter of 1996 represented an increase of $17.0 million or 42.3%
compared to the second quarter of 1995, primarily as a result of a 8.0%
increase in capacity as measured by total ASMs, increased repair work
performed by the Company for other air carriers and third parties, and
maintenance work to prepare the fleet for the peak summer months.
* Operating lease rentals of $74.5 million in the second quarter of 1996
were $6.3 million or 9.2% more than the second quarter of 1995, primarily
due to a net addition of 4 leased aircraft from the prior year.
* All other operating expenses of $181.4 million in the second quarter of
1996 increased by $15.3 million or 9.2% over the second quarter of 1995
primarily because of the increase in capacity and passenger traffic.
As a result of the above, operating income of $62.0 million for the second
quarter of 1996 was $7.6 million greater than the operating income of $54.4
million for the second quarter of 1995.
Other charges (credits) were a net charge of $16.0 million in the second
quarter of 1996 as compared to $49.3 million in the second quarter of 1995.
This favorable change of $33.4 million was primarily due to a $23.9 million
decrease in interest expense resulting from the '95 Reorganization, and an
increase in other credits--net of $7.5 million, primarily as a result of
$4 million in restructuring expenses in the second quarter of 1995 and a
$3.1 million improvement in the company's share of the earnings of
Worldspan.
A tax provision of $20.8 million was recorded in the second quarter 1996 as
compared to a tax credit of $117,000 recorded in the second quarter of 1995.
The Company presently expects that its full year 1996 results will require a
provision for income taxes. Accordingly, the tax provision recorded in the
second quarter, together with the tax benefit recorded in the first quarter,
reflects management's current estimate of the annual effective tax rate. The
amortization of excess reorganization value and certain other items which are
not deductible for income tax purposes are expected to result in an effective
tax rate for financial reporting purposes in 1996 that is significantly greater
than the current U.S. corporate statutory rate of 35 percent.
Net income of $25.3 million for the second quarter of 1996 was an
improvement of $20.1 million over net income of $5.2 million for the second
quarter of 1995.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1995
Total operating revenues of $1,748.2 million for the six months ended June
30, 1996 were $195.4 million or 12.6% more than the comparable 1995 period,
primarily because of a $175.8 million or 13.1% increase in passenger revenue
and a $10.6 million increase in contract revenue.
Capacity and traffic increased in the six months ended June 30, 1996 from
the comparable period of 1995. System capacity as measured by ASMs increased by
7.0% during the six months ended June 30, 1996 as compared to the same period
of 1995 reflecting increases in both international and domestic capacity.
Passenger traffic volume, as measured by total RPMs in scheduled service,
increased 10.9% as compared to the same period of 1995. Passenger load factor
for the six months ended June 30, 1996 was 66.9% compared to 64.5% in the same
period of 1995. TWA's yield per passenger mile for the six months ended June
30, 1996 increased by 3.5% over the comparable 1995 period to 11.78 cents from
11.38 cents.
Operating expenses of $1,740.4 million for the six months ended June 30,
1996 were $165.7 million or 10.5% more than the operating expenses of $1,574.7
million in the same period of 1995, due primarily to the following changes:
* Salaries, wages and benefits of $605.8 million for the six months ended
June 30, 1996 were $43.2 million or 7.7% more than the same period in
1995, primarily due to an increase in the average number of employees.
The Company had 24,554 employees at June 30, 1996 as compared to 22,574
at June 30, 1995.
* Earned stock compensation of $5.0 million for the six months ended June
30, 1996 represents the non-cash compensation charge recorded to reflect
the expense associated with the distribution of shares of stock on behalf
of employees as part of the '95 Reorganization. Additional non-cash
charges may be recorded in 1996 and will be recorded in 1997, depending
on the market price of the Common Stock.
* Aircraft fuel and oil expense of $270.5 million was $57.2 million higher
than in the corresponding period of 1995, primarily due to an increase in
the volume of fuel used due to an increase in utilization and ASMs, an
increase in the average cost of fuel and the expiration of the airlines'
exemption effective October 1, 1995 from paying fuel taxes.
* Aircraft maintenance materials and repairs of $105 million for the six
months ended June 30, 1996 represented an increase of $29.2 million or
38.6% compared to the comparable period in 1995, primarily as a result of
a 6.9% increase in capacity as measured by total ASMs, increased repair
work performed by the Company for other air carriers and third parties,
and maintenance work to prepare the fleet for the peak summer months.
* Operating lease rentals of $144.8 million for the six months ended June
30, 1996 were $7.1 million or 5.2% more than the corresponding period in
1995, primarily due to a net increase in leased aircraft of 4 planes.
* All other operating expenses of $340.1 million for the six months ended
June 30, 1996 increased by $18.6 million or 5.8% over the corresponding
period in 1995 primarily because of the increase in capacity and
passenger traffic.
As a result of the above, operating income of $7.8 million for the six
months ended June 30, 1996 improved $29.7 million from the operating loss of
$21.9 million for the six months ended June 30, 1995.
Other charges (credits) were a net charge of $36.1 million for the six
months ended June 30, 1996 as compared to $95.8 million in the corresponding
period in 1995. This favorable change of $59.8 million was primarily due to a
$42.3 million decrease in interest expense resulting from the '95
Reorganization, an increase in interest and investment income of $4.6 million
due primarily to an increase in the funds available for investment, and an
increase in other credits--net of $12.5 million, primarily as a result of
$7 million in restructuring expenses in the first half of 1995, a
$3.8 million improvement in the company's share of the earnings of
Worldspan and, $2.5 million credit to reflect a litigation settlement
in the first quarter of 1996.
A tax credit of $16.4 million was recorded for the six months ended June
30, 1996 as compared to a tax credit of $75,000 recorded in the corresponding
period of 1995. As the Company presently expects that its full year 1996
results will require a provision for income taxes, the tax credit recorded for
the six months ended June 30 reflects management's current estimate of the
annual effective tax rate. The amortization of excess reorganization value and
certain other items which are not deductible for income tax purposes are
expected to result in an effective tax rate for financial reporting purposes in
1996 that is significantly greater than the current U.S. corporate statutory
rate of 35 percent.
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Net loss of $11.8 million for the six months ended June 30, 1996 was an
improvement of $105.8 million over the net loss of $117.6 million for the
corresponding period of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following is a discussion of the impact of significant factors
affecting TWA's liquidity position and capital resources.
Liquidity
The Company's consolidated cash and cash equivalents at June 30, 1996 of
$304.4 million was approximately the same as the December 31, 1995 balance of
$304.3 million. Net cash provided from operating activities was $92.0 million
for the six months ended June 30, 1996 while $94.7 million was provided in
the comparable 1995 period. Net investing activities used $88.3 million more
cash for the six months ended June 30, 1996 than the comparable 1995 period
due primarily to increased capital expenditures and noncurrent investments
and receivables. Net financing activities provided $24.0 million of cash
in 1996 while using $44.4 million of cash in 1995, an increase of
$68.4 million.
The net increase in cash provided by financing activities was primarily due
to the sale of 3,869,000 shares of 8% Preferred Stock for net proceeds to the
Company of $186.2 million. On April 26, 1996, $84.9 million of such net
proceeds were used to redeem the Company's 12% Preferred Stock.
Like its principal competitors, TWA typically operates with a working
capital deficiency, which was $177.8 million at June 30, 1996, an increase of
$66.2 million from the deficiency at December 31, 1995 of $111.6 million.
Pursuant to the '95 Reorganization, the Company issued 600,000 ticket
vouchers, each with a face value of $50.00, which may be used for a discount of
up to 50% off the cost of a TWA airline ticket for transportation on TWA
(``Ticket Vouchers''). Pursuant to certain agreements, the Company repurchased
236,000 Ticket Vouchers at an aggregate cost of $8.4 million in late 1995 and
the first half of 1996.
The Company elected to pay interest, due February 1, 1996, on its 12%
Senior Secured Reset Notes, in shares of Common Stock. The amount of such
interest, including the premium required for non-cash settlement, aggregated
approximately $11.3 million, and resulted in the issuance of approximately 1.1
million shares of Common Stock. The Company has elected to pay interest due in
August 1996 in cash and may elect to pay interest due in February 1997 in cash
or through the issuance of additional shares of Common Stock. Interest due
after February 1997 must be paid in cash. The Company elected to pay dividends
due February 1, 1996 on its 12% Preferred Stock for the period from November 1,
1995 to and including January 31, 1996, in the amount of approximately $3.3
million, or 317,145 shares of Common Stock. As discussed above, the 12%
Preferred Stock was redeemed in full on April 26, 1996.
Contingencies
On June 14, 1995, the Company signed an agreement (the ``Extension and
Consent Agreement'') with Karabu pursuant to which the term of the financing of
up to $200 million provided to TWA by Karabu in connection with the '93
Reorganization (``the Icahn Loans'') was extended from January 8, 1995 to
January 8, 2001. Karabu and certain other affiliates of Mr. Icahn (the ``Icahn
Entities'') consented to certain modifications to certain
promissory notes issued to a settlement trust on behalf of the Pension Benefit
and Guaranty Corporation (the ``PBGC'') in connection with the '93
Reorganization (the ``PBGC Notes'') and the Icahn Entities agreed to refrain
from exercising the right during 1995 to terminate certain pension plans
covering employees of the Company as to which Mr. Icahn and the Icahn Entities
assumed certain obligations in the '93 Reorganization. Any such termination
would not increase the obligations of TWA on the PBGC Notes or other
obligations of TWA to Mr. Icahn, the Icahn Entities or the PBGC. Collateral for
the Icahn Loans includes a number of aircraft, engines and related equipment,
along with substantially all of the Company's receivables. At June 30, 1996,
the outstanding balance of the Icahn Loans was approximately $162 million
(excluding approximately $6.7 million in accrued and unpaid interest). The
notes evidencing the Icahn Loans have been pledged by Mr. Icahn and certain
affiliated entities as security for certain obligations of the Icahn Entities
to the PBGC and/or in respect of funding obligations on the Company's pre-'93
Reorganization pension plans.
On June 14, 1995, in consideration of, among other things, the extension of
the Icahn Loans, TWA and Karabu entered into the eight-year Ticket Agreement.
There are two categories of tickets under the Ticket Agreement: (1) ``Domestic
Consolidator Tickets'', which are subject to a cap of $610 million, based on
the full retail price of the tickets ($120 million in the first 15 months and
$70 million per year for seven consecutive years through the term of
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the Ticket Agreement) and (2) ``System Tickets,'' which are not subject to any
cap throughout the term of the Ticket Agreement. Domestic Consolidator Tickets
sold under the Ticket Agreement are limited to certain origin/destination
city markets in which TWA has less than a 5% market share, except for the New
York market, which has a 10% market share limit. These restricted markets will
be reviewed from time to time to determine any change in TWA's market share,
and other markets may be designated as necessary. The Ticket Agreement provides
that no ticket may be included with an origin or destination of St. Louis, nor
may any ticket include flights on other carriers. Tickets sold by Karabu
pursuant to the Ticket Agreement are required to be at fares specified in the
Ticket Agreement, net to TWA, and exclusive of tax.
Tickets sold by the Company to Karabu pursuant to the Ticket Agreement are
priced at levels intended to approximate current competitive discount fares
available in the airline industry. The purchase price for the tickets purchased
by Karabu are required to either, at Karabu's option, be retained by Karabu and
the amount so retained credited as prepayments against the outstanding balance
of the Icahn Loans, or be paid over by Karabu to a settlement trust established
in connection with the '93 Reorganization for TWA's account as prepayments on
certain promissory notes issued to the PBGC in satisfaction of the PBGC Notes.
As of June 30, 1996, $77.8 million of System Tickets (representing proceeds of
$40.8 million to TWA) had been sold by the Icahn Entities while no Domestic
Consolidator Tickets had been sold. Approximately $27.3 million of such
proceeds had been applied to the principal balance of the Icahn Loans, while no
proceeds had been applied to the PBGC Notes.
No commissions will be paid by TWA for tickets sold under the Ticket
Agreement, and TWA believes that under the applicable provisions of the Ticket
Agreement, Karabu may not market or sell such tickets through travel agents.
Karabu, however, has been marketing tickets through travel agents to the
general public. TWA has demanded that Karabu cease doing so, and Karabu has
stated that it disagrees with the Company's interpretation concerning sales
through travel agents. The Company informed Karabu that if it did not cease
sales through travel agents, the Company would enforce its rights under the
Ticket Agreement by legal action. In December 1995, the Company filed a lawsuit
against Karabu, Mr. Icahn and affiliated companies seeking damages and to
enjoin further violations. Mr. Icahn countered, threatening to attempt to
declare a default on the Icahn Loans on a variety of claims related to his
various interpretations of a security agreement under which the receivables and
certain flight equipment securing the Icahn Loans are pledged (the ``Karabu
Security Agreement'') as well as with respect to alleged violations of the
Ticket Agreement by the Company. A violation of the Ticket Agreement by the
Company would result in a cross-default under the Icahn Loans. Mr. Icahn also
alleged independent violations of the Icahn Loans, including, among other
things, that the Company has not been maintaining, in accordance with the terms
of the Karabu Security Agreement, certain aircraft which TWA has retired from
service and stored and which are pledged as security for the Icahn Loans. To
endeavor to eliminate this issue from the various disputes with Mr. Icahn, the
Company has deposited an amount equal to the appraised fair market value with
the State Street Bank and Trust Company of Connecticut, N.A., as security
trustee under the Karabu Security Agreement (the ``Security Trustee''),
and requested the release of the liens on such aircraft. To date, the
Security Trustee has not released such liens. In addition, Mr. Icahn has
asserted that the approval of the Security Trustee is required for any
modification to the FAA-approved maintenance program affecting aircraft pledged
as security under the Karabu Security Agreement. The parties negotiated a
series of standstill agreements pursuant to which TWA's original lawsuit was
withdrawn, while the Company and Mr. Icahn endeavored to negotiate a settlement
of their differences and respective claims. The final extension of such a
standstill expired on March 20, 1996.
On March 20, 1996, TWA was named as a defendant in a complaint (the ``Icahn
Complaint'') filed by the Icahn Entities; in addition, the Company filed a
petition (the ``TWA Petition'') commencing a lawsuit against Mr. Icahn, Karabu
and certain other entities affiliated with Mr. Icahn (the ``Icahn
Defendants''). The Company intends to press its claims under the TWA Petition
vigorously and believes it has meritorious defenses to the claims asserted in
the Icahn Complaint. If Karabu's interpretation of the Ticket Agreement
regarding sales of discount tickets by the Icahn Defendants to the general
public through travel agents was determined by a court or otherwise to be
correct and the Company did not otherwise take appropriate action to mitigate
the effect of such sales, the Company could suffer significant loss of revenue
so as to reduce overall passenger yields on a continuing basis during the term
of the Ticket Agreement. In addition, any default by the Company under the
Ticket Agreement or directly on the Icahn Loans which would result in an
acceleration of the Icahn Loans would result in a cross-default to
substantially all of the Company's other indebtedness and leases and otherwise
have a material adverse effect on the Company.
On June 6, 1996, Karabu forwarded a letter to TWA advising the Company of
Karabu's possible intention to instruct the PBGC to require the Security
Trustee to give a 30 day default notice to TWA in respect of certain alleged
instances of non-compliance by TWA with the provisions of the Karabu Security
Agreement relating to, among other
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things, four Boeing 727-100 aircraft which are no longer being flown by TWA in
active service and changes by TWA to the FAA-approved scheduled maintenance of
such aircraft and other aircraft pledged under the Karabu Security Agreement
without obtaining approval of the Security Trustee. Karabu also forwarded with
such letter a draft of a proposed complaint which it threatened to file for a
declaratory judgment that Karabu would be entitled to instruct the PBGC to
require the Security Trustee to give TWA such notice of default. The complaint
was filed in a New York state court and was served on TWA on June 28, 1996, and
was voluntarily dismissed with prejudice on July 18, 1996.
On June 26, 1996, Karabu formally requested the PBGC to instruct the
Security Trustee to give TWA a notice of default under the Karabu Security
Agreement. On June 27, 1996, the PBGC declined to so instruct the Security
Trustee, advising Karabu that the PBGC did not believe TWA was in default and,
even if a default were determined to exist, any such default would be technical
only and Karabu would not be harmed by such a default.
On June 28, 1996, Karabu brought an action against the PBGC in the United
States District Court for the Southern District of New York, seeking a
declaratory judgment for the purpose of determining Karabu's rights with
respect to the Karabu Security Agreement.
The impact of future ticket sales by Icahn Affiliates on the Company's
results of operations, being dependent upon, among other things, the timing
thereof, cannot be predicted at this time.
Commitments
At June 30, 1996, TWA's 1996 capital expenditures were anticipated to total
approximately $120 million, including approximately $75 million for flight
equipment related expenditures (e.g., progress payments for aircraft and the
purchase of aircraft engines and parts). In February 1996, TWA executed
definitive agreements providing for the operating lease of 10 new Boeing 757
aircraft to be delivered in 1996 and 1997, with deliveries commencing in July
1996. Although individual aircraft rentals escalate over the term of the
leases, aggregate rental obligations are estimated to average approximately $51
million per annum over the lease terms after all 10 aircraft have been
delivered. These aircraft have an initial lease term of 10 years. The Company
took delivery of the first Boeing 757 aircraft on July 22, 1996. The Company
also entered into an agreement in February 1996 with Boeing for the purchase of
10 new Boeing 757 aircraft with deliveries in February 1997 through May 1999.
Under this agreement, the Company also acquired the right, subject to certain
conditions, to purchase up to 20 additional Boeing 757 aircraft. The estimated
purchase price for the firm order aircraft and related spare parts and
equipment is $550 million including an estimate for the price escalation
factor. The Company has secured financing commitments from the engine and
airframe manufacturers for approximately $420 million of the purchase price of
the aircraft and related spare parts and equipment.
In July, 1996, the Company announced an agreement to acquire five new
McDonnell Douglas MD-83s. The long-term leasing arrangement provides for
delivery of the aircraft in the second half of 1997. In addition TWA has the
option to acquire up to ten additional leased MD-83s for delivery between June
1998 and April 1999.
TWA's operating strategy contemplates a capacity increase in 1996 of
approximately 7% as measured by total ASMs, through, among other things, (i)
the acquisition of four additional used Boeing 747s (including two that were
delivered through July 8, 1996), 12 additional new or used MD-80s/83s
(including two that were delivered in April 1996) and three new Boeing 757s,
(ii) an increase in seating density across TWA's fleet and (iii) more efficient
use of existing equipment. This capacity increase is measured net of the
capacity decrease resulting from aircraft retirements. Agreements have not been
entered into with respect to all of such additional MD-80/83 aircraft, and the
Company's ability to obtain aircraft on acceptable financing terms is not
certain. Market conditions or the inability to obtain acceptable financing
could cause the Company to modify its current plans. No assurance can be given
that if TWA acquires additional aircraft, any such acquisitions, together with
the related obligations to make rental payments or repay any indebtedness
incurred in connection therewith, will ultimately be profitable and positively
affect the Company's relative market share.
To comply with the December 31, 1996 interim requirement under the Noise
Act, the Company plans to retrofit, by means of engine hush-kits, 28 of its
DC-9 aircraft. The aggregate cost of these hush-kits is estimated to be $49
million. The Company is exploring various financing options to fund the
majority of such expenditure, including an extension of the current leases at
increased rental rates. As of June 30, 1996, the Company had purchased thirteen
hush-kits for $22.1 million with internal funds. There is another agreement
providing for the financing of the huskitting of an additional 14 DC-9-30 and
DC-9-50 aircraft currently leased by TWA. The aggregate cost of such hushkits
would approximate $27 million.
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TWA has purchase agreements (collectively, the ``AVSA Agreement'') for the
purchase of 10 A330 aircraft with AVSA, S.A.R.L. (``AVSA''), a subsidiary of
Airbus Industries G.I.E., and has options to acquire an additional 10 aircraft.
The current delivery schedule calls for the 10 firm aircraft to be delivered
during the period from April 1999 to September 2000. Additionally, delivery
dates for the option aircraft have been rescheduled to commence in December
1999 and extend through April 2001, subject to TWA's exercise thereof. Based on
an assumed 5% annual price escalation, the Company estimates the aggregate
costs of the firm orders to be approximately $1 billion. In connection with the
AVSA Agreement, TWA is required to issue promissory notes to AVSA, to finance
purchase deposits, in the aggregate principal amount of $21.4 million over the
months of April, May, June, July and September of 1996; however, AVSA and TWA
have agreed to a deferral of this obligation until October 1996, which
obligation has previously been deferred twice. If not further deferred, the
Company would also be required to make certain cash predelivery payments,
beginning in October of 1996 aggregating approximately $29.8 million in the
fourth quarter of 1996. TWA has not yet made arrangements for the permanent
financing of the A330 aircraft ordered pursuant to the AVSA Agreement.
TWA has also entered into agreements (collectively, the ``Equipment
Agreement'') with Rolls-Royce plc (``Rolls Royce'') relating to the purchase of
Rolls Royce engines, modules, and spare parts at the time of the purchase of,
and to support, the A330 aircraft described above. TWA's promissory note to
Rolls Royce, in the principal amount of $27.4 million, could be subject to
prepayment in the event of cancellation of the Equipment Agreement.
The Company's management currently estimates that it will generate
sufficient resources to fund its operations and meet its debt obligations
during 1996. While the Company is seeking financing for certain of its planned
capital expenditures, a substantial portion of such expenditures are expected
to utilize internally generated funds.
Availability of NOLs
Based on recent analyses, the Company presently estimates that it has, for
federal income tax purposes, net operating loss carryforwards (``NOLs'')
amounting to approximately $400 million, which expire in 2008 through 2010 if
not utilized before then to offset taxable income. The determination of the
amount of such NOLs involves numerous complex issues which may be subject to
differing interpretations. Such NOLs are subject to examination by the Internal
Revenue Service (the ``IRS''), and, thus, are subject to adjustment or
dissallowance resulting from any such IRS examination. Section 382 of the
Internal Revenue Code of 1986, as amended, and regulations issued thereunder,
impose limitations on the ability of corporations to use NOLs, if the
corporation experiences a more than 50% change in ownership during certain
periods. As a result of such a change in ownership caused by the '95
Reorganization, utilization of the Company's NOLs will, depending upon certain
elections to be made by the Company, be either substantially restricted (to
aproximately $14 million per year) or reduced (by approximately $45 million) in
future periods. Any future ownership change may result in the imposition of a
significantly lower annual limitation on the Company's utilization of NOLs and
extend the period over which any benefits are realized therefrom. Moreover, if
the Company elects to reduce its NOLs rather than to apply the estimated $14
million anual limitation described above, and if another ownership change were
to occur during the two-year period following the '95 Reorganization, the
annual limitation on the Company's utilization of its existing NOLs would be
reduced to zero. There can be no assurance that an ownership change will not
occur in the future. For financial reporting purposes, the tax benefits from
substantially all of the tax net operating loss carryforwards will, to the
extent realized in future periods, have no impact on the Company's operating
results, but instead be applied to reduce reorganization value in excess of
amounts allocable to identifiable assets.
Impact of Recently Issued Accounting Standards
On January 1, 1996, TWA adopted Statement of Financial Accounting Standards
No. 123, ``Accounting for Stock-Based Compensation (``SFAS No. 123''). TWA
elected to continue to apply the intrinsic value based method for recognizing
compensation expense for stock-based employee compensation plans. Therefore,
the adoption of SFAS 123 had no impact on the Company's results of operations
or financial position.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS WORLD AIRLINES, INC.
Dated: August 16, 1996 By: /s/ JODY A. RUTH
---------------------------------
Jody A. Ruth
Vice President and Controller
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