<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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 JULY 31, 1998
----------------------- -----------------
Common Stock, par value
$0.01 per share 57,178,516
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
For the Three Months and Six Months Ended June 30, 1998 and 1997
(Amounts in Thousands Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $789,343 $740,205 $1,465,786 $1,412,050
Freight and mail 25,624 31,318 53,068 62,807
All other 68,569 72,919 130,071 131,891
-------- -------- ---------- ----------
Total 883,536 844,442 1,648,925 1,606,748
-------- -------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 304,754 302,508 602,538 617,816
Earned stock compensation 20 1,793 26,522 3,073
Aircraft fuel and oil 88,559 117,329 180,987 247,275
Passenger sales commissions 58,733 65,423 110,273 122,994
Aircraft maintenance materials and repairs 35,381 38,386 70,042 82,129
Depreciation and amortization 39,499 36,761 78,680 75,531
Operating lease rentals 110,986 88,587 214,892 174,410
Passenger food and beverages 24,973 19,407 46,545 39,859
All other 175,083 168,316 341,605 337,215
-------- -------- ---------- ----------
Total 837,988 838,510 1,672,084 1,700,302
-------- -------- ---------- ----------
Operating income (loss) 45,548 5,932 (23,159) (93,554)
-------- -------- ---------- ----------
Other charges (credits):
Interest expense 32,247 29,717 62,462 58,114
Interest and investment income (6,344) (3,067) (11,043) (6,018)
Disposition of assets, gains and losses-net (11,810) (3,030) (18,807) (12,380)
Other charges and credits-net (18,584) (7,427) (26,252) (17,816)
-------- -------- ---------- ----------
Total (4,491) 16,193 6,360 21,900
-------- -------- ---------- ----------
Income (loss) before income taxes and extraordinary items 50,039 (10,261) (29,519) (115,454)
Provision (credit) for income taxes 25,289 1,734 (129) (33,427)
-------- -------- ---------- ----------
Income (loss) before extraordinary items 24,750 (11,995) (29,390) (82,027)
Extraordinary items, net of income taxes (5,256) (2,405) (6,636) (3,937)
-------- -------- ---------- ----------
Net income (loss) 19,494 (14,400) (36,026) (85,964)
Preferred stock dividend requirements 5,863 3,869 11,726 7,738
-------- -------- ---------- ----------
Income (loss) applicable to common shares $ 13,631 $(18,269) $ (47,752) $ (93,702)
======== ======== ========== ==========
Basic earnings per share amounts:
Earnings (loss) before extraordinary items $ .33 $ (.31) $ (.71) $ (1.80)
Extraordinary items (.09) (.05) (.11) (.08)
-------- -------- ---------- ----------
Net income (loss) $ .24 $ (.36) $ (.82) $ (1.88)
======== ======== ========== ==========
Diluted earnings per share amounts:
Earnings (loss) before extraordinary items $ .28 $ (.31) $ (.71) $ (1.80)
Extraordinary items (.07) (.05) (.11) (.08)
-------- -------- ---------- ----------
Net income (loss) $ .21 $ (.36) $ (.82) $ (1.88)
======== ======== ========== ==========
See notes to consolidated financial statements
</TABLE>
1
<PAGE> 3
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(Amounts in Thousands)
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
----------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 374,516 $ 237,765
Receivables, less allowance for doubtful accounts,
$10,287 in 1998 and $9,334 in 1997 228,909 176,333
Spare parts, materials and supplies, less allowance for
obsolescence, $20,005 in 1998 and $19,176 in 1997 99,270 96,108
Prepaid expenses and other 137,576 122,751
---------- ----------
Total 840,271 632,957
---------- ----------
Property:
Property owned:
Flight equipment 500,948 569,063
Prepayments on flight equipment 32,121 15,431
Land, buildings and improvements 66,864 62,854
Other property and equipment 67,062 64,131
---------- ----------
Total property owned 666,995 711,479
Less accumulated depreciation 112,846 114,921
---------- ----------
Property owned-net 554,149 596,558
---------- ----------
Property held under capital leases:
Flight equipment 177,594 166,358
Land, buildings and improvements 49,431 49,443
Other property and equipment 9,063 7,704
---------- ----------
Total property held under capital leases 236,088 223,505
Less accumulated amortization 89,898 78,298
---------- ----------
Property held under capital leases-net 146,190 145,207
---------- ----------
Total property-net 700,339 741,765
---------- ----------
Investments and other assets:
Investments in affiliated companies 123,981 117,293
Investments, receivables and other 173,705 162,969
Routes, gates and slots-net 367,007 377,691
Reorganization value in excess of amounts allocable to identifiable
assets-net 720,197 741,173
---------- ----------
Total 1,384,890 1,399,126
---------- ----------
$2,925,500 $2,773,848
========== ==========
<CAPTION>
See notes to consolidated financial statements
2
<PAGE> 4
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
(Amounts in Thousands Except Per Share Amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1998 1997
----------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 117,443 $ 51,392
Current obligations under capital leases 37,655 37,068
Advance ticket sales 297,404 223,197
Accounts payable, principally trade 271,117 250,551
Accounts payable to affiliated companies 6,842 6,261
Accrued expenses:
Employee compensation and vacations earned 146,655 119,572
Contributions to retirement and pension trusts 12,241 13,469
Interest on debt and capital leases 35,796 32,018
Taxes 15,040 14,146
Other accrued expenses 163,578 189,271
---------- ----------
Total accrued expenses 373,310 368,476
---------- ----------
Total 1,103,771 936,945
---------- ----------
Long-term liabilities and deferred credits:
Long-term debt, less current maturities 758,169 736,540
Obligations under capital leases, less current obligations 179,065 182,922
Postretirement benefits other than pensions 492,309 485,787
Noncurrent pension liabilities 30,036 30,011
Other noncurrent liabilities and deferred credits 140,863 133,359
---------- ----------
Total 1,600,442 1,568,619
---------- ----------
Shareholder's equity:
8% cumulative convertible exchangeable preferred stock,
$50 liquidation preference; 3,869 shares issued and outstanding 39 39
9 1/4% cumulative convertible exchangeable preferred stock,
$50 liquidation preference; 1,725 shares issued and outstanding 17 17
Employee preferred stock, $0.01 liquidation preference;
special voting rights; shares issued and outstanding:
1998-5,731; 1997-6,472 57 65
Common stock, $0.01 par value; shares issued and outstanding:
1998-52,313; 1997-51,393 523 514
Additional paid-in capital 682,465 693,437
Accumulated deficit (461,814) (425,788)
---------- ----------
Total 221,287 268,284
---------- ----------
$2,925,500 $2,773,848
========== ==========
See notes to consolidated financial statements
</TABLE>
3
<PAGE> 5
<TABLE>
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(Amounts in Thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(36,026) $(85,964)
Adjustments to reconcile net loss to net cash used by operating activities:
Employee earned stock compensation 26,522 3,073
Depreciation and amortization 78,680 75,531
Amortization of discount and expense on debt 6,128 7,398
Extraordinary loss on extinguishment of debt 6,636 3,937
Interest paid in common stock - 4,125
Equity in undistributed earnings of affiliates not consolidated (6,780) (8,846)
Revenue from Icahn ticket program (75,167) (56,048)
Net (gains) losses on disposition of assets (18,807) (12,380)
Change in operating assets and liabilities:
Decrease (increase) in:
Receivables (46,365) (22,096)
Inventories (4,268) 7,685
Prepaid expenses and other current assets (4,105) (62,076)
Other assets (7,257) (11,133)
Increase (decrease) in:
Accounts payable and accrued expenses 7,732 28,143
Advance ticket sales 63,603 74,853
Other noncurrent liabilities and deferred credits (14,254) (17,759)
-------- --------
Net cash used (23,728) (71,557)
-------- --------
Cash flows from investing activities:
Proceeds from sales of property 29,928 17,175
Capital expenditures, including aircraft pre-delivery deposits (48,907) (33,340)
Return of pre-delivery deposits related to leased aircraft - 10,740
Net decrease in investments, receivables and other 18,616 7,198
-------- --------
Net cash provided (used) (363) 1,773
-------- --------
Cash flows from financing activities:
Net proceeds from long-term debt and warrants issued 144,938 47,175
Proceeds from sale and leaseback of certain aircraft and engines 160,176 12,000
Repayments on long-term debt and capital lease obligations (133,245) (66,352)
Refund due to retirement of 1967 bonds - 5,318
Cash dividends paid on preferred stock (12,014) (7,738)
Net proceeds from exercise of warrants and options 987 444
-------- --------
Net cash (used) provided 160,842 (9,153)
-------- --------
Net increase (decrease) in cash and cash equivalents 136,751 (78,937)
Cash and cash equivalents at beginning of period 237,765 181,586
-------- --------
Cash and cash equivalents at end of period $374,516 $102,649
======== ========
<CAPTION>
See notes to consolidated financial statements
4
<PAGE> 6
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(Amounts in Thousands)
(Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended
June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash paid during the period for:
Interest $ 51,148 $ 42,866
======== ========
Income taxes $ 9 $ 76
======== ========
Information about noncash operating, investing and financing activities:
Promissory notes issued to finance aircraft acquisition $100,822 $ 74,668
======== ========
Promissory notes issued to finance aircraft predelivery payments $ 8,516 $ 3,071
======== ========
Aircraft held for sale reclassified from property to investments,
receivables and other $ 17,470 $ -
======== ========
Property acquired and obligations recorded under new capital lease
transactions $ 16,406 $ 619
======== ========
Exchange of long-term debt for common stock:
Debt canceled including accrued interest, net of unamortized discount $ - $ 25,528
======== ========
Common Stock issued, at fair value $ - $ 29,465
======== ========
Extraordinary loss $ - $ 3,937
======== ========
</TABLE>
ACCOUNTING POLICY
For purposes of the Statements of Consolidated Cash Flows, TWA considers
all highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
See notes to consolidated financial statements
5
<PAGE> 7
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Trans
World Airlines, Inc. ("TWA" or the "Company") and its subsidiaries. The
results of Worldspan, L.P. ("Worldspan"), a 25% owned affiliate, are recorded
under the equity method and are included in the Statements of Consolidated
Operations in Other Charges (Credits).
The unaudited consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission") but do not include all
information and footnotes required by generally accepted accounting
principles pursuant to such rules and regulations. The consolidated
financial statements include all adjustments, which are of a normal recurring
nature and are necessary, in the opinion of management, for a fair
presentation of the results for these interim periods. These consolidated
financial statements and related notes should be read in conjunction with the
consolidated financial statements and related notes contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The consolidated balance sheet at December 31, 1997 has been derived from the
audited consolidated financial statements at that date. Certain amounts
previously reported have been reclassified to conform with the current
presentation.
The consolidated financial results on an interim basis are not
necessarily indicative of future financial results on either an interim or
annual basis. TWA's air transportation business has historically experienced
seasonal changes with the second and third quarters of the calendar year
producing substantially better operating results than the first and fourth
quarters, although operational adjustments with the intent of reducing the
level of seasonality have been, and continue to be, implemented.
Accordingly, the results for the three months and six months ended June 30,
1998 should not be read as indicators of future results for the full year.
2. INCOME TAXES
The income tax provisions/benefits recorded for the three and six month
periods ended June 30, 1998 and 1997 reflect quarterly effective tax rates
and management's current expectation of full year 1998 pre-tax profits.
Considering the high level of non-deductible expenses in relation to expected
annual income (which results in both a high effective tax rate and the
potential for significant changes in the effective rate from relatively small
changes in pretax income levels), the income tax provisions/benefits recorded
for the first two quarters of 1998 and 1997 were based upon the allocable
portion of certain non-deductible expenses, primarily amortization of
reorganization value in excess of amounts allocable to identifiable assets,
and statutory tax rates.
3. EXTRAORDINARY ITEMS
In the six months ended June 30, 1998 the Company recorded extraordinary
non-cash charges of $6.6 million related to the early extinguishment of a
portion of the promissory notes issued to the Pension Benefit Guaranty
Corporation (the "PBGC Notes") as a result of Karabu Corp. ("Karabu"), a
company controlled by Carl Icahn, applying approximately $68.9 million in
ticket proceeds as prepayments on the PBGC Notes.
6
<PAGE> 8
Additional prepayments could arise from the election of Karabu to apply future
ticket proceeds to a reduction of the PBGC Notes. Such prepayments would
result in extraordinary non-cash charges related to the early extinguishment of
debt.
In the six months ended June 30, 1997 the Company continued a series of
privately negotiated exchanges with a significant holder of its 12% Senior
Secured Reset Notes which resulted in the return to the Company of $27.3
million in 12% Senior Secured Reset Notes and approximately $742,900 in
accrued interest thereon in exchange for the issuance of approximately 3.9
million shares of Common Stock. As a result of the exchange of the 12%
Senior Secured Reset Notes, the Company recorded an extraordinary non-cash
charge of $3.9 million in the first six months of 1997 representing the
difference between the fair value of the common stock issued (based upon the
trading price of the Company's common stock on the dates of the exchanges)
and the carrying value of the 12% Senior Secured Reset Notes retired. During
December 1997, the Company prepaid the remaining 12% Senior Secured Reset
Notes.
4. INCOME (LOSS) PER SHARE
The income applicable to common shares for the three months and the loss
applicable to common shares for the six months ended June 30, 1998 have been
decreased/(increased) by dividend requirements on the 8% Cumulative
Convertible Exchangeable Preferred Stock (the "8% Preferred Stock") and the 9
1/4% Cumulative Convertible Exchangeable Preferred Stock (the "9 1/4%
Preferred Stock"). In computing the related basic earnings/(loss) per share,
the amounts applicable to common shares have been divided by the aggregate
average number of outstanding shares of Common Stock (52.1 million and 51.9
million for the three months and six months ended June 30, 1998,
respectively) and Employee Preferred Stock (5.9 million and 6.1 million for
the three months and six months ended June 30, 1998 respectively) which, with
the exception of certain special voting rights, is the functional equivalent
of Common Stock. Diluted earnings per share amounts for the three months
ended June 30, 1998 give effect to potential issuances of common stock under
stock options, warrants and employee compensation programs and the conversion
of preferred stock and convertible debt, when the effect is dilutive. No
effect has been given to stock options, warrants or potential issuances of
additional Common Stock or Employee Preferred Stock in diluted earnings per
share amounts in the six month period ended June 30, 1998 as their impact
would have been anti-dilutive.
The loss applicable to common shares for the three months and six months
ended June 30, 1997 was similarly computed with the net loss being increased
by dividend requirements on the 8% Preferred Stock. In computing the related
basic earnings per share, the loss applicable to common shares was divided by
the aggregate average number of outstanding shares of Common Stock (44.8
million and 44.0 million for the three months and six months ended June 30,
1997, respectively) and Employee Preferred Stock (6.1 million and 5.9 million
for the three months and six months ended June 30, 1997, respectively). No
effect was given to stock options, warrants or potential issuances of
additional Common Stock or Employee Preferred Stock in diluted earnings per
share amounts as the impact would have been anti-dilutive.
5. PROPERTY AND DISPOSITION OF ASSETS
As of June 30, 1998, the Company had reclassified the net book value of
its remaining owned L-1011 and B-747 aircraft fleet to Investments, Receivables
and Other as such assets have been retired from service and are currently
held for sale. The net book value of such reclassified assets was
approximately $17.1 million.
7
<PAGE> 9
During the six months ended June 30, 1998 and 1997, disposition of
assets resulted in net gains of $18.8 million and $12.4 million,
respectively. The gains recorded in the first six months of 1998 primarily
related to the sale of B-747 and L-1011 aircraft and engines and other
surplus engines which had been retired from the Company's active service.
During the first six months of 1997, the gains recorded were in connection
with the sale of three gates at Newark International Airport and the sale of
spare flight equipment, aircraft, engines and other miscellaneous property.
6. RECENT FINANCINGS
On June 16, 1998, the Company consummated a private placement of $14.5
million aggregate principal amount of 10 1/4% Senior Secured Notes due 2003
(the "10 1/4% Secured Notes") and $13.0 million principal amount of 10 1/4%
Mandatory Conversion Equity Notes due 1999 (the "10 1/4% Equity Notes"). The
Company did not receive any cash proceeds from these transactions but rather
delivered the 10 1/4% Secured Notes and the 10 1/4% Equity Notes in payment for
one Boeing 767-231 ETOPS airframe and two associated engines, which had an
aggregate purchase price of $27.5 million and was previously leased to the
Company. On July 13, 1998 the 10 1/4% Equity Notes were converted into
1,225,719 shares of common stock. Upon termination of the operating lease,
the Company received $1.5 million relating to a security deposit previously
held by the lessor.
On April 21, 1998, the Company consummated a private placement of $43.2
million aggregate principal amount of 11 3/8% Senior Secured Notes due 2003
(the "11 3/8% Secured Notes") and $31.8 million principal amount of Mandatory
Conversion Equity Notes due 1999 (the "April Equity Notes"). The Company did
not receive any cash proceeds from these transactions but rather delivered
the 11 3/8% Secured Notes and the April Equity Notes in payment for three
Boeing 767-231 ETOPS airframes and six associated engines, which had an
aggregate purchase price of $75.0 million and were previously leased to the
Company. On July 7, 1998 the April Equity Notes were converted into
3,290,901 shares of common stock. Upon termination of the operating leases
for the aircraft, the Company received approximately $6.0 million relating to
security and maintenance deposits previously held by the aircraft lessor.
7. CONTINGENCIES
There has not been any significant change in the status of the
contingencies reflected in the Notes to consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which, among other matters, described various
contingencies and other legal actions against TWA, except as discussed in
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Part II. Item 1. Legal Proceedings and the following
paragraph.
In May 1998, the U.S. Supreme Court refused to hear an appeal of a
decision reversing a 1991 judgment against TWA in an action brought by
Travellers International A.G. and its parent company, Windsor Inc.
(collectively, "Travellers"). Accordingly, a cash undertaking previously
posted by TWA of $13.7 million was returned to TWA in June 1998 and recorded
as a credit included in "Other charges and credits-net" in the Statements of
Consolidated Operations for the three months and six months ended June 30,
1998. After deduction of $3.3 million for reimbursement of certain
administrative costs previously incurred by TWA, $10.4 million received
pursuant to this proceeding was applied in July 1998 to reduce the PBGC Notes
pursuant to a pre-existing agreement.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements made below relating to plans, conditions,
objectives, and economic performance go beyond historical information and may
provide an indication of future financial condition or results of operations.
To that extent, they are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and each is subject to risks, uncertainties and assumptions that could
cause actual results to differ from those in the forward-looking statements.
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. In any event, these
forward-looking statements speak only as of their dates, and the Company
undertakes no obligation to update or revise any of them whether as a result
of new information, future events or otherwise.
In late 1996, the Company began implementing certain strategic
initiatives in response to a significant deterioration in the Company's
operating performance and financial condition during the second half of 1996.
This deterioration was primarily caused by (i) an overly aggressive expansion
of TWA's capacity and planned flight schedule, particularly during the 1996
summer season, which forced the Company to rely disproportionately on
lower-yield feed traffic and bulk ticket sales to fill the increased capacity
of its system; (ii) the delayed delivery of four older B-747s intended to
increase capacity for incremental international operations during the summer
of 1996; and (iii) unexpected maintenance delays due to the capacity
increase, higher levels of scheduled narrow-body heavy maintenance and
increased contract maintenance performed for third parties. These factors
caused excessive levels of flight cancellations, poor on-time performance,
increased pilot training costs and higher maintenance expenditures and
adversely affected the Company's yields and unit costs. In addition, the
crash of TWA Flight 800 on July 17, 1996 distracted management's attention
from core operating issues and led to lost bookings and revenues.
The primary focus of the Company's new strategic initiatives
commencing in late 1996 and continuing throughout 1997 was to reestablish
TWA's operational reliability and schedule integrity and overall product
quality in order to attract higher-yield passengers and enhance overall
productivity. These improvements were viewed as key towards improving the
Company's financial results. As the initial steps in implementing this
strategy, the Company temporarily reduced its flight schedule during the
first quarter of 1997 to match more closely aircraft available for active
service. The Company also worked to reduce the number of aircraft in
maintenance backlog by increasing overtime and utilizing maintenance capacity
made available by the termination of an unprofitable aircraft maintenance
contract with the U.S. government. Other key initiatives which TWA began
implementing in late 1996 included: (i) acceleration of the Company's fleet
renewal plan; (ii) a restructuring of TWA's operations at JFK; (iii) a focus
on improving productivity; (iv) implementation of a series of
revenue-enhancing marketing initiatives; and (v) implementation of a number
of employee-related initiatives to reinforce the Company's focus on
operational performance.
TWA has significantly enhanced its operational reliability and
schedule integrity since the beginning of 1997. In the first six months of
1998, TWA continued the progress of 1997 in a number of key operational and
financial areas, including load factor growth, revenue improvement and better
efficiency through the renewal of its fleet. While scheduled system capacity
for the first six months of 1998 decreased from the same period of 1997 as
the result of the retirement of TWA's L-1011 and B-747 widebody jets, the
number of revenue flight segments operated increased 2.5% during the same
period. System-wide scheduled traffic also increased by 3.4% as measured in
Revenue Passenger Miles (RPMs) resulting in a load factor improvement of 4.1
points to 72.3% in the first six months of 1998.
9
<PAGE> 11
GENERAL
The airline industry operates in an intensely competitive
environment. The industry is also cyclical due to, among other things, a
close relationship of yields and traffic to general U.S. and worldwide
economic conditions. Small fluctuations in revenue per available seat mile
("RASM") and cost per available seat mile ("CASM") can have a significant
impact on the Company's financial results. The Company has experienced
significant losses (excluding extraordinary items) on an annual basis since
the early 1990s, except in 1995 when the Company's combined operating profit
was $25.1 million. The airline industry has consolidated in recent years as
a result of mergers, alliances and liquidations, and further consolidation
may occur in the future. This consolidation has, among other things, enabled
certain of the Company's major competitors to expand their international
operations and increase their domestic market presence. The emergence and
growth of low cost, low fare carriers in domestic markets represents an
intense competitive challenge for the Company, which has higher operating
costs than many of such low fare carriers and fewer financial resources than
many of its major competitors. In many cases, such low cost carriers have
initiated or triggered price discounting. Additionally, many of the major
U.S. carriers have announced plans for alliances with other major U.S.
carriers. Such alliances could further intensify the competitive
environment.
In connection with TWA's '95 Reorganization, the Company entered
into new three-year labor agreements (the "'94 Labor Agreements"), which
became amendable after August 31, 1997. Negotiations on a new collective
bargaining agreement with the International Association of Machinists and
Aerospace Workers ("IAM") with regard to the flight attendants commenced in
July 1997 and are currently ongoing. At the request of the IAM, a mediator
was appointed on March 27, 1998 in connection with the negotiations on the
collective bargaining agreements covering flight attendants. Negotiations
regarding the Company's ground employees represented by the IAM commenced in
February 1997 and are currently ongoing. At the request of the IAM, a
mediator was appointed on August 6, 1997 in connection with the negotiations
on the collective bargaining agreement covering the ground employees.
Negotiations on a new collective bargaining agreement with the Air Line
Pilots Association, International ("ALPA") commenced in June 1997 and
resulted in a tentative agreement on July 11, 1998, which is subject to
ratification by the pilots union membership. While wage rates currently in
effect will likely increase for all employee groups, 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 as an offset to any wage increases and will continue to
explore other ways to control and/or reduce operating expenses. There can be
no assurance that the Company will be successful in obtaining such
productivity improvements or unit costs reductions. In the opinion of
management, the Company's financial resources are not as great as those of
most of its competitors, and therefore, any substantial increase in its labor
costs as a result of any new labor agreements or any cessation or disruption
of operations due to any strike or work action could be particularly damaging
to the Company.
There are a number of uncertainties relating to agreements with
employees of the Company, the resolution of which could result in significant
non-cash charges to the Company's future operating results. Shares granted
or purchased at a discount under the Employee Stock Incentive Program (the
"ESIP") will generally result in a charge equal to the fair market value of
shares granted plus the discount for shares purchased at the time when such
shares are earned. On February 17, 1998, the first target price of $11.00
was realized and therefore a grant was made on July 15, 1998 in an amount
sufficient to increase the employee ownership by 2.0% based on the then
outstanding amount of Common Stock and Employee Preferred Stock. In
addition, on March 4, 1998, the average market price of the Company's Common
Stock over a 30-day period exceeded the $12.10 target price necessary to earn
the 1998 grant. As a result, on July 15, 1998, the Company made an
additional contribution to the relevant employee trusts based on the then
outstanding amount of its Common Stock and Employee Preferred Stock in an
amount sufficient to increase the employee ownership by 1.5%. Based on the
number of outstanding shares of Common Stock and Employee Preferred Stock at
July 15, 1998, the aggregate contribution pursuant to the 1997 and 1998
grants was
10
<PAGE> 12
2,377,084 shares. As a result of the grants earned in 1998, an aggregate
non-cash charge was recorded in the first quarter of 1998 in the amount of
$26.5 million in connection with such issuance. In addition, an aggregate
non-cash charge of $1.0 million will be recorded in the third quarter of 1998
to reflect the actual number of shares issued on July 15, 1998. If the
remaining ESIP's target prices for the Common Stock are realized, the minimum
aggregate charge for the years 1999 to 2002 (the 1997 and 1998 target prices
having been met) would be approximately $102.6 million based upon such target
prices and the number of shares of Common Stock and Employee Preferred Stock
outstanding at July 15, 1998. The charge for any year, however, could be
substantially higher if the then market price of the Common Stock exceeds
certain target prices.
Pursuant to the '92 Labor Agreements, the Company agreed, beginning in
September 1998, to pay to employees represented by the IAM a cash bonus for the
amount by which overtime incurred by the IAM from September 1992 through August
1995 was reduced below specified thresholds. This amount is to be offset by
the amount by which medical savings during the period for the same employees
did not meet certain specified levels of savings. The obligation is payable in
three equal annual installments beginning in September 1998. The Company and the
IAM have agreed that the net overtime bonus owed to the IAM is $25.5 million
which amount has previously been provided for and reflected as a liability in
the Consolidated Financial Statements. TWA also entered into agreements which
provide for an adjustment to existing salary rates of certain labor-represented
employees based on the amount of the cash bonus for overtime to the employees
represented by the IAM as described in this paragraph. Management intends that
the 4.814% salary adjustments will be part of any percentage increase that
would be incorporated in contract amendments currently being negotiated.
In addition, in connection with certain wage scale adjustments
afforded to non-contract employees, employees previously represented by the
Independent Federation of Flight Attendants ("IFFA") have asserted and won an
arbitration ruling with respect to the comparability of wage concessions made
in 1994 that, if sustained, would require that the Company provide additional
compensation to such employees. The Company estimates that at December 31,
1997 such additional compensation that would be payable pursuant to the
arbitration ruling would be approximately $12.0 million. The Company denies
any such obligation and is pursuing an appeal of the arbitration ruling and
of a court award affirming the ruling. Effective September 1, 1997, the
Company also reduced the overall compensation and benefits package for
non-contract employees to offset, in the Company's view, any claims by such
employees previously represented by IFFA for any retroactive or prospective
wage increases. As such, no liability has been recorded by the Company.
In connection with the '95 Reorganization, the Company entered into
a letter agreement with employees represented by ALPA whereby if the
Company's flight schedule, as measured by block hours, did not exceed certain
thresholds in 1996 and 1997, a defined cash payment would be made to ALPA.
The defined thresholds were exceeded during the measurement periods through
December 31, 1996 and no amount was therefore owed to ALPA as of that date.
The Company's aggregate obligation for 1997 under the agreement was
approximately $9.5 million. The Company made payments of $2.6 million in
January 1998 and $6.9 million in April 1998.
Due to the greater demand for air travel during the summer months,
airline industry revenues for the third quarter of the year are generally
significantly greater than revenues in the first and fourth quarters of the
year and moderately greater than revenues in the second quarter of the year.
In the past, given the Company's historical dependence on summer leisure
travel, TWA's results of operations have been particularly sensitive to such
seasonality. While the Company, through an acceleration of its fleet renewal
program and, among other things, the restructuring of its JFK operations,
anticipates that the deseasonalization of operations affected thereby will
reduce
11
<PAGE> 13
quarter to quarter fluctuations in the future, there can be no assurance that
the reduction of seasonal fluctuations in financial operating results will be
realized.
The Company's results of operations have also been impacted by
numerous other factors that are not necessarily seasonal. 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 necessitating
additional capital expenditures; (vii) the outcome of certain ongoing labor
negotiations; and (viii) the reduction in yield due to the continued
implementation of a discount ticket program entered into by the Company with
Karabu in connection with the '95 Reorganization on the terms currently
applied by Karabu (which terms are, in the opinion of the Company,
inconsistent with and in violation of the agreement governing such program).
(See "Part II, Item 1. Legal Proceedings.") The Company is unable to predict
the potential impact of any of such uncertainties upon its future results of
operations.
Management believes that the Company benefited from the expiration
on December 31, 1995 of the Ticket Tax, which imposed certain taxes including
a 10% air passenger tax on tickets for domestic flights, a 6.25% air cargo
tax and a $6 per person international departure tax. The Ticket Tax was
reinstated on August 27, 1996 and expired again on December 31, 1996. At the
end of February 1997, the Ticket Tax was reinstated effective March 7, 1997
through September 30, 1997. Congress passed tax legislation reimposing and
significantly modifying the Ticket Tax, effective October 1, 1997. The
legislation includes the imposition of new excise tax and significant fee tax
formulas over a multiple year period, an increase in the international
departure tax, the imposition of a new arrivals tax, and the extension of the
Ticket Tax to cover items such as the sale of frequent flier miles.
Management believes that the imposition and modification of the Ticket Tax
have a negative impact on the Company, although neither the amount of such
negative impact nor the benefit previously realized by its expiration can be
precisely determined. However, management believes that the recent tax
legislation and any other increases of the Ticket Tax will result in higher
costs to the Company and/or, if passed on to consumers in the form of
increased ticket prices, might have an adverse effect on passenger traffic,
revenue and/or margins.
The Company's ability to continue to improve its financial position
and meet its financial obligations will depend upon a variety of factors,
including but not limited to: significantly improved operating results,
favorable domestic and international airfare pricing environments, the cost
of aircraft fuel, absence of adverse general economic conditions, more
effective operating cost controls and efficiencies, the Company's ability to
achieve higher revenue yields, the Company's ability to finance or lease
suitable replacement aircraft at reasonable rates and the Company's ability
to attract new capital and maintain adequate liquidity. No assurance can be
given that the Company will be successful in generating the operating results
or attracting new capital required for future viability.
12
<PAGE> 14
TWA's passenger traffic data, for scheduled passengers only and
excluding Trans World Express, Inc. ("TWE"), 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>
Three Months Ended Six Months Ended
June 30, June 30, Year Ended December 31,
------------------ ------------------- ---------------------------------
1998 1997 1998 1997 1997 1996 1995
------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL SYSTEM
Passenger revenues (millions) $ 789 $ 740 $ 1,466 $ 1,412 $ 2,924 $ 3,078 $ 2,836
Revenue passenger miles (millions)<F2> 6,703 6,383 12,468 12,057 25,100 27,111 24,902
Available seat miles (millions)<F3> 8,788 9,143 17,256 17,682 36,434 40,594 37,905
Passenger load factor<F4> 76.3% 69.8% 72.3% 68.2% 68.9% 66.8% 65.7%
Passenger yield (cents)<F5> 11.78 cents 11.60 cents 11.76 cents 11.71 cents 11.65 cents 11.35 cents 11.39 cents
Passenger revenue per available seat
miles (cents)<F6> 8.98 cents 8.10 cents 8.49 cents 7.99 cents 8.03 cents 7.58 cents 7.48 cents
Operating cost per available seat mile
(cents)<F7> 9.30 cents 8.92 cents 9.33 cents 9.39 cents 8.98 cents 8.76 cents 8.12 cents
Average daily utilization per aircraft
(hours)<F8> 10.08 9.41 9.94 9.18 9.38 9.63 9.45
Aircraft in service at end of period 183 190 183 190 185 192 188
<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.
<F5> Passenger revenue divided by revenue passenger miles.
<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, 1998 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1997
For the second quarter of 1998, TWA reported an operating profit of
$45.5 million, a $39.6 million improvement over the second quarter 1997
operating profit of $5.9 million. TWA also reported a second quarter 1998
pre-tax profit of $50.0 million, which was an improvement of $60.3 million
over the 1997 pre-tax loss of $10.3 million. The Company's yield (passenger
revenue per RPM) for the second quarter of 1998 increased 1.6% to 11.78 cents
versus 11.60 cents for the comparable prior year period. In part due to
improved load factors, the Company's RASM increased 10.9% to 8.98 cents
versus 8.10 cents for the comparable prior year period. The Company's CASM
increased 4.3% to 9.30 cents for the quarter from 8.92 cents in the same
period of 1997.
In the second quarter 1998, total operating revenues of $883.5
million were $39.1 million (4.6%) greater than $844.4 million for the
comparable 1997 period. This increase occurred primarily in scheduled
passenger revenues ($49.1 million). Offsetting decreases were experienced in
cargo revenue ($5.7 million) primarily due to reduced widebody capacity and
decreased mail volume and revenue from contract maintenance ($3.9 million)
resulting from the termination of an unprofitable contract with the U.S.
government.
System-wide capacity, measured by scheduled available seat miles
("ASMs"), decreased by 3.9% during the second quarter of 1998 (representing
decreases in domestic and international ASMs of 1.1% and 14.9%, respectively)
from the comparable period of 1997. The decrease in capacity was primarily
attributed to the ongoing replacement of B-747 and L-1011 aircraft with
smaller B-767 and B-757 aircraft and the elimination of unprofitable
international routes. The retirement of the last B-747 aircraft from TWA's
fleet occurred in February 1998, completing the retirement of the older
widebody jets. The number of revenue flight segments operated increased 0.3%
in the second quarter of 1998 compared to 1997. Passenger traffic volume, as
measured by total RPMs in scheduled service, for the three months ended June
30, 1998 increased 5.0%. Passenger load factors were
13
<PAGE> 15
76.3% in the second quarter of 1998 compared to 69.8% in the same period of
1997, an improvement of 6.5 percentage points year over year.
Operating expenses of $838.0 million in the second quarter of 1998
decreased $0.5 million (0.1%) from operating expenses of $838.5 million in
the second quarter of 1997, representing a net change in the following
expense groups:
* Salary, wages and benefits of $304.8 million for the second quarter
of 1998 were $2.2 million (0.7%) greater than the same period in
1997, primarily due to increased overtime costs to support
operational requirements and an increase in certain employee
benefits primarily post-retirement medical benefits. The Company
had an average of 22,228 full-time equivalent employees in the
second quarter of 1998 as compared to 23,850 in the second quarter
of 1997.
* Earned stock compensation charges were $20,000 for the second
quarter of 1998 compared to $1.8 million for the second quarter of
1997. The 1997 charge is related to the three month allocation of
shares to the pilots' ESOP, which became fully allocated in 1997.
* Aircraft fuel and oil expense of $88.6 million for the second
quarter of 1998 was $28.7 million (24.5%) less than the expense of
$117.3 million for the second quarter of 1997. Approximately $22.3
million of the decrease was due to a reduction in the average cost
of fuel from 63.8 cents per gallon in the second quarter of 1997 to
51.0 cents per gallon in the second quarter of 1998. The remaining
$6.4 million decrease was due to the reduction in gallons consumed
(173.8 million gallons in the second quarter of 1998 compared to
184.0 million gallons in the second quarter of 1997) resulting from
the replacement of B-747, L-1011 and B-727 aircraft with more fuel
efficient B-757, B-767 and MD-80 aircraft and the elimination of
unprofitable international routes.
* Passenger sales commission expense of $58.7 million for the second
quarter of 1998 was $6.7 million (10.2%) less than the comparable
period in 1997 primarily due to reductions in commissionable sales
of approximately 3.8%, due in part to an increase in electronic
ticketing and a reduction in average commission rates of
approximately 24.4% due to base commission rate decreases in October
1997 and the imposition of a commission cap in May 1998.
* Aircraft maintenance material and repairs expense of $35.4 million
for the second quarter of 1998 represented a decrease of $3.0
million (7.8%) from $38.4 million for the same period of 1997. The
decrease was primarily the result of higher levels of maintenance on
narrow-body aircraft during the second quarter of 1997, reduced
material usage on wide-body aircraft and engines in 1998 due to the
retirement of the B-747 and L-1011 fleets and a reduction in
unprofitable contract maintenance work performed on both government
and commercial aircraft and engines and the effect of adding new
lower maintenance B-757, B-767 and MD-80 aircraft to the fleet.
* Depreciation and amortization expense increased $2.7 million (7.3%)
to $39.5 million in the second quarter of 1998 compared to $36.8
million in the same period of 1997. A $4.6 million increase in
aircraft depreciation (primarily for B-757 and B-767 fleet additions
and DC-9 engine hushkitting) was partially offset by reduced
depreciation, amortization and obsolescence provided for the retired
B-747 and L-1011 fleets and ground property and equipment.
* Operating lease rentals of $111.0 million for the second quarter of
1998 were $22.4 million (25.3%) more than the rentals of $88.6
million for the second quarter of 1997. Reflecting TWA's continuing
fleet renewal program, the increase was primarily due to an increase
in the average number of leased
14
<PAGE> 16
aircraft to 160 in the second quarter of 1998 from an average of 136
in the comparable period of 1997, and higher lease rates
attributable primarily to the addition of B-757 and MD-80/83
aircraft to the fleet in replacement of TWA's L-1011 and B-747
widebody aircraft and B-727 aircraft retired from its active fleet.
* Passenger food and beverage expense of $25.0 million during the
second quarter of 1998 represented an increase of $5.6 million
(28.7%) from $19.4 million during the second quarter of 1997. The
increase was related to a significant increase in first class
enplaned passengers (48.4%) and associated improved menu offerings
primarily in TWA's domestic First Class ("Trans World First") and
international business ("Trans World One") services partially offset
by a slight decrease in coach enplaned passengers of 4.3%.
All other operating expenses of $175.1 million during the second
quarter of 1998 increased by $6.8 million (4.0%) from $168.3 million during
the second quarter of 1997. Expenses increased in several categories
including travel agency computerized reservation system fees ($4.3 million)
and legal fees and expenses ($2.6 million).
Other charges (credits) were a net credit of $4.5 million for the
second quarter of 1998 as compared to a net charge of $16.2 million for the
same period in 1997. Interest expense increased $2.5 million in the second
quarter of 1998 over the second quarter of 1997 as a result of the issuance
of new debt in the fourth quarter of 1997 and the first six months of 1998,
which was partially offset by a decrease in certain debt retired in 1997.
Interest income increased by $3.3 million in the second quarter of 1998
primarily as a result of increased levels of invested funds. Net gains from
the disposition of assets were $11.8 million in the second quarter of 1998 as
compared to $3.0 million in the same period of 1997. The net gains were
related primarily to the sale of certain retired, widebody aircraft, engines
and other surplus equipment. Other charges and credits-net improved by $11.2
million to a net credit of $18.6 million for the second quarter of 1998 from
a net credit of $7.4 million for the second quarter of 1997. In May 1998,
the U.S. Supreme Court refused to hear an appeal of a decision reversing a
1991 judgment against TWA in an action brought by Travellers International
A.G. and its parent company, Windsor Inc. (collectively, "Travellers").
Accordingly, a cash undertaking previously posted by TWA of $13.7 million was
returned to TWA in June 1998 and recorded as a credit in the second quarter.
After a deduction of $3.3 million for reimbursement of certain administrative
costs previously incurred by TWA, $10.4 million received pursuant to this
proceeding was applied in July 1998 to reduce the PBGC Notes pursuant to a
pre-existing agreement.
A tax provision of $25.3 million was recorded in the second quarter
of 1998 compared to a provision of $1.7 million recorded in the second
quarter of 1997 (see Note 2 to Consolidated Financial Statements).
As a result of the above, the Company's operating profit of $45.5
million for the three months ended June 30, 1998 improved $39.6 million from
the operating profit of $5.9 million for the second quarter of 1997. The
Company had net income of $19.5 million for the second quarter of 1998
compared to a net loss of $14.4 million for the second quarter of 1997. The
second quarter 1998 net income included a $5.3 million non-cash extraordinary
loss versus a $2.4 million non-cash extraordinary loss in the second quarter
of 1997 related to the early extinguishment of debt.
15
<PAGE> 17
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1997
For the first six months of 1998, TWA reported an operating loss of
$23.2 million and a pre-tax loss of $29.5 million including a non-cash
operating expense of $26.5 million relating to a distribution made in July
1998 of TWA common stock to employee stock plans pursuant to the ESIP. These
results compare to an operating loss of $93.6 million and a pre-tax loss of
$115.5 million in the first six months of 1997. Excluding the effects of the
non-cash ESIP charge in 1998 and 1997, the six months 1998 operating profit
was $3.4 million, a $93.8 million improvement over the comparable prior year
operating loss of $90.5 million. After the effect of the same exclusion, the
pre-tax loss of $3.0 million in the first six months of 1998 improved $109.4
million over the 1997 pre-tax loss of $112.4 million. In part due to
improved load factors, the Company's yield (passenger revenue per RPM) for
the first six months of 1998 increased 0.4% to 11.76 cents versus 11.71 cents
for the comparable prior year period. RASM increased 6.3% to 8.49 cents
versus 7.99 cents for the comparable prior year period. The Company's CASM
improved 0.6% to 9.33 cents for the six months from 9.39 cents in the same
period of 1997.
In the first six months of 1998, total operating revenues of
$1,648.9 million were $42.2 million (2.6%) greater than the $1,606.7 million
for the comparable 1997 period. This increase occurred primarily in
scheduled passenger revenues ($53.7 million) and charter revenue ($3.2
million). Offsetting decreases were experienced in cargo revenue ($9.7
million) primarily due to reduced widebody capacity and decreased mail
volume and contract maintenance revenue ($5.9 million) due to the termination
of an unprofitable contract with the U.S. government.
System-wide capacity, measured by scheduled ASMs, decreased by 2.4%
during the first six months of 1998 (representing decreases in domestic and
international ASMs of 0.3% and 11.4%, respectively) from the comparable
period of 1997. The decrease in capacity was primarily attributed to the
ongoing replacement of B-747 and L-1011 aircraft with smaller B-767 and B-757
aircraft and the elimination of unprofitable international routes. The
retirement of the last B-747 aircraft from TWA's fleet occurred in February
1998, completing the retirement of the older widebody jets. The number of
revenue flight segments operated increased 2.5% in the first six months of
1998 compared to 1997. Passenger traffic volume, as measured by total RPMs
in scheduled service, for the six months ended June 30, 1998 increased 3.4%.
Passenger load factors were 72.3% in the first six months of 1998 compared to
68.2% in the same period of 1997.
Operating expenses of $1,672.1 million in the first six months of
1998 decreased $28.2 million (1.7%) from operating expenses of $1,700.3
million in the first six months of 1997, representing a net change in the
following expense groups:
* Salary, wages and benefits of $602.5 million for the first six
months of 1998 were $15.3 million (2.5%) less than the same
period in 1997, primarily due to lower staffing levels in the
1998 period. The Company had an average of 22,220 full-time
equivalent employees in the first six months of 1998 as
compared to 24,159 in the first six months of 1997.
* Earned stock compensation charges of $26.5 million for the
first six months of 1998 versus $3.1 million for the first six
months of 1997 in each case represent 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. The 1998 charge is related to
incentive shares issued in July 1998 under the ESIP relative to
the achievement of certain common stock target prices in
February and March 1998. The 1997 charge is related to the six
month allocation of shares to the pilots' ESOP, which became
fully allocated in 1997.
16
<PAGE> 18
* Aircraft fuel and oil expense of $181.0 million for the first
six months of 1998 was $66.3 million (26.8%) less than the
expense of $247.3 million for the first six months of 1997.
Approximately $53.0 million of the decrease was due to a
reduction in the average cost of fuel from 68.8 cents per
gallon in the first six months of 1997 to 53.3 cents per gallon
in the first six months of 1998. The remaining $13.3 million
decrease was due to the reduction in gallons consumed (340.1
million gallons in the first six months of 1998 compared to
359.5 million gallons in the first six months of 1997)
resulting from the replacement of B-747, L-1011 and B-727
aircraft with more fuel efficient B-757, B-767 and MD-80
aircraft and the elimination of unprofitable international
routes.
* Passenger sales commission expense of $110.3 million for the
first six months of 1998 was $12.7 million (10.3%) less than
the $123.0 million for the comparable period in 1997 primarily
due to reductions in commissionable sales of approximately
4.4%, due in part to an increase in electronic ticketing, and a
reduction in average commission rates of approximately 23.0%,
resulting from a reduction in base commission rates in October
1997 and a commission cap implemented in May 1998.
* Aircraft maintenance material and repairs expense of $70.0
million for the first six months of 1998 represented a decrease
of $12.1 million (14.7%) from $82.1 million for the same period
of 1997. The decrease was primarily the result of higher
levels of maintenance on narrow-body aircraft during the first
six months of 1997, reduced material usage on wide-body
aircraft and engines in 1998 due to the retirement of the B-747
and L-1011 fleets and a reduction in unprofitable contract
maintenance work performed on both government and commercial
aircraft and engines and the effect of adding new lower
maintenance B-757, B-767 and MD-80 aircraft to the fleet.
* Depreciation and amortization expense increased $3.2 million
(4.2%) in the first six months of 1998 to $78.7 million
compared to $75.5 million in the same period of 1997. A $6.6
million increase in depreciation of aircraft (primarily for B-
757 and B-767 fleet additions and DC-9 engine hushkitting) was
partially offset by reduced depreciation, amortization and
obsolescence provided for the B-747 and L-1011 fleets, which
were retired.
* Operating lease rentals of $214.9 million for the first six
months of 1998 were $40.5 million (23.2%) more than the rentals
of $174.4 million for the first six months of 1997. Reflecting
TWA's continuing fleet renewal program, the increase was
primarily due to an increase in the average number of leased
aircraft to 155 in the first six months of 1998 from 134 in the
comparable period of 1997, and higher lease rates attributable
primarily to the addition of B-757 and MD-80/83 aircraft to the
fleet in replacement of TWA's L-1011 and B-747 widebody
aircraft retired from its active fleet.
* Passenger food and beverage expense of $46.5 million during the
first six months of 1998 represented an increase of $6.7
million (16.8%) from $39.9 million during the first six months
of 1997. The increase was related to a significant increase in
first class enplaned passengers (50.3%) and associated improved
menu offerings primarily in TWA's domestic First Class ("Trans
World First") and international business ("Trans World One")
services partially offset by a slight decrease in coach
enplaned passengers of 4.7%.
All other operating expenses of $341.6 million during the first six
months of 1998 increased by $4.4 million (1.3%) from $337.2 million during
the first six months of 1997. Expenses increased in several categories
including travel agency computerized reservation system fees ($7.3 million),
legal fees and expenses ($3.9 million) and advertising ($3.7 million).
Offsetting decreases occurred as a result of lower insurance premiums and
uninsured losses ($4.5 million), ground maintenance materials and other
supplies ($2.9 million) and expenses related to TWA's subsidiary Getaway
Vacations ($2.9 million).
17
<PAGE> 19
Other charges (credits) were a net charge of $6.4 million for the
first six months of 1998 as compared to $21.9 million for the same period in
1997. Interest expense increased $4.3 million in the first six months of
1998 over the first six months of 1997 as a result of the issuance of new
debt in the fourth quarter of 1997 and the first six months of 1998, which
was partially offset by a decrease in certain debt retired in 1997. Interest
income increased by $5.0 million in the first six months of 1998 primarily as
a result of increased levels of invested funds. Net gains from the
disposition of assets were $18.8 million in the first six months of 1998 as
compared to $12.4 million in the same period of 1997. The 1998 net gains
primarily included the sale of certain retired, widebody aircraft, engines
and other surplus equipment while the net gain in 1997 related to the sale of
three gates at Newark International Airport and spare flight equipment.
Other charges and credits-net improved by $8.4 million to a net credit of
$26.3 million for the first six months of 1998 from a net credit of $17.8
million for the first six months of 1997. In May 1998, the U.S. Supreme
Court refused to hear an appeal of a decision reversing a 1991 judgment
against TWA in an action brought by Travellers. Accordingly, a cash
undertaking previously posted by TWA of $13.7 million was returned to TWA in
June 1998 and recorded as a credit in the second quarter. After deduction of
$3.3 million for reimbursement of certain administrative costs previously
incurred by TWA, $10.4 million received pursuant to this proceeding was
applied in July 1998 to reduce the PBGC Notes pursuant to a pre-existing
agreement.
A tax benefit of $129,000 was recorded in the first six months of
1998 compared to a benefit of $33.4 million recorded in the first six months
of 1997 (see Note 2 to Consolidated Financial Statements).
As a result of the above and excluding the effect of the non-cash
ESIP charges, the Company's operating profit of $3.4 million for the six
months ended June 30, 1998 improved $93.8 million from the operating loss of
$90.5 million for the first six months of 1997. Giving effect to the same
exclusion, the Company had a net loss of $19.8 million for the first six
months of 1998 compared to a net loss of $84.1 million for the first six
months of 1997. The net loss recorded in the first six months of 1998
included a $11.7 million non-cash extraordinary loss versus a $7.7 million
non-cash extraordinary loss in the first six months of 1997 related to the
early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
The following is a discussion of the impact of significant factors
affecting TWA's liquidity position and capital resources. These comments
should be read in conjunction with, and are qualified in their entirety by,
the Consolidated Financial Statements and Notes thereto.
Liquidity
The Company's consolidated cash and cash equivalents balance at June
30, 1998 was $374.5 million, a $136.7 million increase from the December 31,
1997 balance of $237.8 million. The net increase in cash and cash
equivalents during the first six months of 1998 was due, in large part, to
cash provided by financing activities of $160.8 million in 1998 versus cash
used of $9.2 million in 1997. Sources of cash generated by financing
activities included proceeds from the sale of notes of $144.9 million and
from the sale and leaseback of certain aircraft and engines ($160.2 million)
in the first six months of 1998 and proceeds from notes and warrants issued
of $47.2 million in 1997. These proceeds were partially offset by the
repayment of long-term debt and capital lease obligations of $133.2 million
in 1998 versus $66.4 million in 1997. Cash used by operating activities was
$23.7 million in the first six months of 1998 versus $71.6 million in 1997;
this improvement primarily reflects the improvement in 1998 operating
results.
18
<PAGE> 20
Net discounted sales from tickets sold under the Karabu Ticket
Agreement are excluded from cash flows from operating activities as the
related amounts are applied as a reduction of certain loans provided by
Karabu (the "Icahn Loans") and the PBGC Notes. During the first six months
of 1998, $68.9 million has been applied as a reduction of the PBGC Notes. In
the same period of 1997, the proceeds applied as reductions of the Icahn
Loans were $53.7 million. On December 30, 1997, the Company repaid the
outstanding balance of the Icahn Loans out of the proceeds of the Receivables
Securitization Offering. As a result, the purchase price of the tickets
purchased by Karabu will be paid, at Karabu's election, either to the
settlement trust for prepayment of the PBGC Notes or to TWA directly.
Cash used by investing activities was $363,000 in the first six
months of 1998 compared to cash provided of $1.8 million in 1997. Components
of this net change include an increase in capital expenditures (including
aircraft pre-delivery payments) to $48.9 million in the first six months of
1998 versus $33.3 million in 1997. Additionally, gross proceeds from assets
sold during the first six months of 1998 were $29.9 million primarily from
the sale of retired, widebody aircraft, engines and other surplus equipment,
while 1997 proceeds of $17.2 million represented $10.0 million for three
gates at Newark International Airport and $7.2 million from the sale of spare
flight equipment. Cash provided by financing activities and cash used in
investing activities exclude a total of $102.5 million principal amount of
notes issued by TWA in the first six months of 1998 as consideration for the
purchase of aircraft.
Capital Resources
TWA generally must satisfy all of its working capital expenditure
requirements from cash provided by operating activities, from external
capital sources or from the sale of assets. TWA currently has assets with an
approximate appraised value of $90.0 million free and clear of liens and
encumbrances. A substantial portion of TWA's assets have been pledged to
secure various issues of outstanding indebtedness of the Company. To the
extent that the pledged assets are sold, the applicable financing agreements
generally require the sale proceeds to be applied to repay the corresponding
indebtedness. To the extent that the Company's access to capital is
constrained, the Company may not be able to make certain capital expenditures
or to continue to implement certain other aspects of its strategic plan, and
the Company may therefore be unable to achieve the full benefits expected
therefrom.
Commitments
In February 1996, TWA executed definitive agreements providing for
the operating lease of 10 new B757 aircraft, all of which have been
delivered. These aircraft have an initial lease term of 10 years. Although
individual aircraft rentals escalate over the term of the leases, aggregate
rental obligations are estimated to average approximately $59 million per
annum over the lease terms. The Company also entered into an agreement in
February 1996 with Boeing for the purchase of ten 757-231 aircraft and
related engines, spare parts and equipment for an aggregate purchase price of
approximately $500 million. The agreement also provides for the purchase of
up to ten additional aircraft. As of June 30, 1998, TWA had taken delivery
of five purchased aircraft and had five on firm order. Furthermore, to the
extent TWA exercises its options for additional aircraft, the Company will
have the right to an equal number of additional option aircraft. Four of the
five aircraft already delivered were originally manufacturer financed and one
was leased. Two of the manufacturer financed aircraft were sold to, and
leased back from, an aircraft lessor in June 1998; the third and fourth
aircraft were sold to and leased back from the same aircraft lessor in a
similar transaction in July 1998. TWA has obtained commitments for debt
financing for approximately 80% of the total costs associated with the
acquisition of four of the remaining five aircraft which have not been
delivered and obtained commitments for 100% lease financing of the total costs
of the remaining fifth and final of such aircraft. Such commitments are
subject to, among other things, so-called material adverse change clauses which
make the availability of such debt and lease financing dependent upon the
financial condition of the Company.
19
<PAGE> 21
TWA has entered into agreements with AVSA, S.A.R.L. and Rolls-Royce
plc relating to the purchase of ten A330-300 twin-engine wide body aircraft
and related engines, spare parts and equipment for an aggregate purchase
price of approximately $1.0 billion. The agreements, as amended, require the
delivery of the aircraft in 2001 and 2002 and provide for the purchase of up
to ten additional aircraft. TWA has not yet made arrangements for the
permanent financing of the purchases subject to the agreements. In the event
of cancellation, predelivery payments of approximately $18 million would be
subject to forfeiture.
The Company has entered into an agreement to acquire from the
manufacturer 15 new MD-83s to be financed by long-term leases. The agreement
provides for delivery of the aircraft between the second quarter of 1997 and
the first quarter of 1999. As of June 30, 1998, the Company has taken
delivery of seven of the MD-83 aircraft and expects to take delivery of six
additional planes during 1998 and two additional planes in 1999.
In April 1998, the Company entered into an agreement to acquire 24
new MD-83 aircraft from the manufacturer with deliveries in 1999. The
Company has obtained commitments for long-term debt and lease financing for
such aircraft.
TWA elected to comply with the transition requirements of the Noise
Act by adopting the Stage 2 aircraft phase-out/retrofit option, which
requires that 50% of its base level (December 1990) Stage 2 fleet be
phased-out/retrofitted by December 31, 1996. To comply with the 1996
requirement, the Company has retrofitted, by means of engine hush-kits, 30 of
its DC-9 aircraft at an aggregate cost of approximately $55.5 million, most
of which was financed by lessors with repayments being facilitated through
increased rental rates or lease term extensions. TWA intends to comply with
the transition requirements for December 31, 1998 by having 75% of its fleet
meet Stage 3 requirements through the grounding of older Stage 2 aircraft in
combination with the acquisition of Stage 3 aircraft. By December 31, 1999,
100% of the fleet must meet Stage 3 requirements.
In April 1998, the Company acquired three Boeing 767-231 ETOPS
airframes and six accompanying engines which the Company previously leased in
exchange for the issuance of (i) $43.2 million aggregate principal amount of
the 11 3/8% Secured Notes, and (ii) $31.8 million aggregate principal amount
of the April Equity Notes, which had a second priority security interest in
the aircraft. On July 7, 1998 the April Equity Notes were converted into
3,290,901 shares of Common Stock.
In June 1998, the Company acquired an additional Boeing 767-231
ETOPS airframe and two accompanying engines which the Company previously
leased in exchange for the issuance of (i) $14.5 million aggregate principal
amount of the 10 1/4% Secured Notes, and (ii) $13.0 million aggregate principal
amount of the 10 1/4% Equity Notes, which had a second priority security
interest in the aircraft. On July 13, 1998 the 10 1/4% Equity Notes were
converted into 1,225,719 shares of Common Stock.
Certain Other Capital Requirements
Expenditures for facilities and equipment, other than aircraft,
generally are not committed prior to purchase and, therefore, no such
significant commitments exist at the present time. TWA's ability to finance
such expenditures will depend in part on TWA's financial condition at the
time of commitment.
The Company utilizes software and related computer technologies
essential to its operations that use two digits rather than four to specify
the year, which will result in a date recognition problem in the year 2000
and thereafter unless modified.
20
<PAGE> 22
The Company has completed an assessment to determine the changes
needed to make its computer systems, internal operating systems and equipment
year 2000 compliant and has developed a plan to implement such changes. The
Company currently expects that it will complete the necessary changes and
testing in mid-1999. The Company estimates that the total cost to complete
the remediation of its systems would be approximately $18.0 million, which is
twenty-five percent of the Company's total annual Information Technology
("IT") budget. As of June 30, 1998, the Company estimates that approximately
20% of the cost to complete the remediation of its computer systems have been
incurred to date. As of June 30, 1998, approximately 50% of the programs have
been remediated and it is estimated that by year-end 80% will be completed. The
assessments for the non-information technology related systems have been done
and the cost estimates have yet to be completed. The Company expects these
costs to be contained within the current operating expenses. The costs of the
Company's year 2000 project and the date on which it will be completed are
based on management's best estimates and include assumptions regarding third
party modification plans. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from
those anticipated.
The Company is also reviewing software which was purchased from
outside vendors and is evaluating its reliance on other third parties (e.g.
the Federal Aviation Administration, the Department of Transportation,
airport authorities, data providers and suppliers) to determine and minimize
the extent to which its operations may be dependent on such third parties to
remediate the year 2000 issues in their systems. TWA has been informed that all
mission critical systems from either internal, outside vendors or third
parties have been identified, the necessary changes have been assessed and are
in the process of being remediated. To insure further completeness, TWA will
establish an independent testing process to insure reliability. In addition,
contingency backup plans will be reviewed for each mission critical system,
with the emphasis on passenger safety and then business continuity. Further,
the Company has been actively participating in the industry reviews led by
the Air Transport Association (ATA) and the International Air Transport
Association (IATA). The Company's business, operating results and financial
condition could be materially adversely affected by the failure of its
systems or those of other parties to operate properly beyond 1999.
Availability of NOLs
The Company estimates that it had, for federal income tax purposes,
net operating loss carryforwards ("NOLs") amounting to approximately $855
million at December 31, 1997. Such NOLs expire in 2008 through 2012 if not
utilized before then to offset taxable income. Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations issued
thereunder impose limitations on the ability of corporations to use NOLs if
the corporation experiences a more than 50% change in ownership during
certain periods. Changes in ownership in future periods could substantially
restrict the Company's ability to utilize its tax net operating loss
carryforwards. The Company believes that no such ownership change has
occurred subsequent to the '95 Reorganization. There can be no assurance,
however, that such an ownership change will not occur in the future. In
addition, the NOLs are subject to examination by the IRS and, thus, are
subject to adjustment or disallowance resulting from any such IRS
examination. For financial reporting purposes, the tax benefits from
substantially all of the tax net operating loss carryforwards will, to the
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.
21
<PAGE> 23
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting standards
for derivative instruments and all hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities at their
fair values. Accounting for changes in the fair value of a derivative
depends on its designation and effectiveness. For derivatives that qualify
as effective hedges, the change in fair value will have no impact on earnings
until the hedged item affects earnings. For derivatives that are not
designated as hedging instruments, or for the ineffective portion of a
hedging instrument, the change in fair value will affect current period
earnings. The Company will adopt Statement No. 133 during its first quarter
of fiscal 2000 and does not believe that it will have a significant effect on
its results of operations or cash flows.
22
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ICAHN LITIGATION
On March 20, 1996, the Company filed a Petition (the "TWA Petition")
in the Circuit Court for St. Louis County, Missouri, commencing a lawsuit
against Carl Icahn, Karabu and certain other entities affiliated with Icahn
(collectively, the "Icahn Defendants"). The TWA Petition alleged that the
Icahn Defendants are violating the Karabu Ticket Agreement and otherwise
tortiously interfering with the Company's business expectancy and contractual
relationships, by among other things, marketing and selling tickets purchased
under the Ticket Agreement to the general public. The TWA Petition sought a
declaratory judgment finding that the Icahn Defendants have violated the Ticket
Agreement, and also sought liquidated, compensatory and punitive damages, in
addition to the Company's costs and attorney's fees. The trial of this case
was completed in January 1998. On May 7, 1998 the court denied the TWA
Petition and dismissed the Icahn Defendants' counterclaims. No damages were
assessed in respect of either plaintiff's or defendants' petitions.
The court's ruling could have an adverse effect on TWA's revenue,
which could be significant, but the impact of which will depend on a number of
factors including yield, load factors and whether any resulting incremental
sales by the Icahn Defendants will be to passengers that would not otherwise
have flown on TWA. The Icahn Defendants moved to amend or modify the court's
ruling to include a declaratory judgment that the Icahn Defendants are
permitted to sell tickets to any person for any purpose, which could include
use by the purchaser's family members or friends. TWA opposed this motion and
requested that the court clarify the ruling to limit its scope consistent with
the reasoning set forth in the decision, specifically that the person
purchasing the ticket must use the ticket (with certain enumerated exceptions)
and may not purchase a ticket for any other person. The court denied both
motions on June 25, 1998. TWA has appealed the denial of its motion for
clarification and the court's original ruling.
On August 11, 1997, Karabu and another entity controlled by Mr. Icahn
filed suit against six senior officers of the Company in New York state court
seeking damages and other relief and alleging tortious interference with
prospective economic advantage based on alleged violations of the Karabu
Ticket Agreement. The defendants removed this case to the United States
District Court for the Southern District of New York and moved to dismiss the
case on the grounds of lack of personal jurisdiction, res judicata and failure
to state a claim. On August 3, 1998, the court dismissed plaintiffs' claims
for lack of personal jurisdiction over the defendants.
On October 15, 1997, Karabu filed suit in New York Supreme Court, New
York County, seeking a declaratory judgment that even if TWA were to pay in
full the outstanding balance due on the Icahn Loans, Karabu would have no
obligation to release any portion of its lien on TWA's accounts receivable
and/or aircraft and engine collateral so long as the TWA Petition in the
Missouri lawsuit is pending or in the event that TWA is awarded damages as a
result of the TWA Petition. By stipulation of the parties in December 1997,
this claim was dismissed with prejudice. On November 12, 1997, however, Karabu
had amended its complaint to add a claim alleging that TWA had failed to make
the appropriate payment to the PBGC in June 1997. On April 16, 1998, Karabu
withdrew its complaint.
OTHER ACTIONS
On May 31, 1998, the U.S. Environmental Protection Agency ("EPA")
filed an administrative complaint seeking civil penalties as well as other
relief requiring TWA to take remedial procedures at
<PAGE> 25
TWA's overhaul base in Kansas City, Missouri, alleging violations resulting
from TWA's past hazardous waste disposal and related environmental practices.
Simultaneously, TWA became a party to a consent agreement and a consent order
with the EPA pursuant to which TWA paid a civil penalty of $100,000 and agreed
to implement a schedule of remedial and corrective actions and to perform
environmental audits at TWA's major maintenance facilities. This consent
agreement and consent order were terminated on July 24, 1998. In September
1989, TWA and the EPA signed an administrative order of consent, which required
TWA to conduct extensive investigations at or near the overhaul base and to
recommend remedial action alternatives. TWA completed its investigations and
on February 17, 1996, submitted a Corrective Measures Study ("CMS") to the
Missouri Department of Natural Resources ("MDNR") and the EPA. On August 19,
1997 the MDNR and the EPA approved the CMS. On February 27, 1998 MDNR notified
TWA of the EPA's preliminary decision to issue a hazardous waste post-closure
permit for TWA's maintenance facility, subject to public comment. Upon final
approval of the permit, an additional order will be issued and the required
corrective actions implemented. TWA presently estimates the cost of the
corrective action activities under the existing and anticipated orders to be
approximately $7 million, a majority of which represents costs associated with
long-term groundwater monitoring and maintenance of the remedial systems.
Although the Company believes adequate reserves have been provided for all
known environmental contingencies, it is possible that additional reserves
might be required in the future which could have a material adverse effect
on the results of operations or financial condition of the Company. However,
the Company believes that the ultimate resolution of known environmental
contingencies should not have a material adverse effect on its financial
position or results of operations based on the Company's knowledge of similar
environmental sites.
On October 22, 1991, judgment in the amount of $12,336,127 was
entered against TWA in an action in the United States District Court for
the Southern District of New York by Travellers International A.G. and its
parent company, Windsor, Inc. (collectively, "Travellers"). The action
commenced in 1987, as subsequently amended, sought damages from TWA in excess
of $60 million as a result of TWA's alleged breach of its contract with
Travellers for the planning and operation of Getaway Vacations. In order to
obtain a stay of judgment pending appeal, TWA posted a cash undertaking of
$13,693,101. In connection with the '93 Reorganization, TWA sought to have the
matter ultimately determined by the Bankruptcy Court and claimed that the
cash undertaking constituted a preference payment. Following prolonged
litigation with respect to jurisdiction, the United States Supreme Court
determined that the entire matter should be addressed by the bankruptcy
court, and in February 1994, the bankruptcy court determined the matter in
a manner favorable to TWA. Upon appeal, the District Court affirmed in part
and reversed in part the bankruptcy court's decision. On January 20, 1998, the
Court of Appeals for the Third Circuit reversed the District Court and
affirmed the findings of the bankruptcy court. Travellers sought reconsideration
by the Third Circuit which reconsideration was denied. In May 1998, the United
States Supreme Court denied a writ of certiorari in the case. The cash
undertaking previously posted by TWA was returned to TWA in June 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED SECURITIES
In April 1998, the Company issued in a private placement $31.8 million
principal amount of Mandatory Conversion Equity Notes due 1999 (the "April
Equity Notes") to the owners of three used Boeing 767-231 ETOPS aircraft and six
associated engines (the "April Aircraft") and to Lazard Freres & Co. ("Lazard")
as partial consideration for the purchase of the April Aircraft. Lazard acted
as placement agent for the transaction, which was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act") pursuant to
Section 4(2) of the Act. The April Equity Notes were convertible into shares
of Common Stock of the Company. On July 6, 1998, a registration statement on
Form S-3 (Reg. No. 333-56991) with respect to offers and sales of shares of
the restricted Common Stock
<PAGE> 26
to be issued upon conversion of the April Equity Notes became effective. On
July 7, 1998, the April Equity Notes were converted into 3,290,901 shares of
restricted Common Stock at a price of 95% of the average of the closing price
of the Common Stock on the American Stock Exchange for the 20 consecutive
trading days prior to conversion, which price equaled $9.663.
In June 1998, the Company issued in a private placement $13.0
million principal amount of Mandatory Conversion Equity Notes due 1999 (the
"10 1/4% Equity Notes") to the owners of one used Boeing 767-231 ETOPS
aircraft and two associated engines (collectively, the "June Aircraft") as
partial consideration for the purchase of the June Aircraft. The transaction
was exempt from the registration requirements of the Act pursuant to Section
4(2) of the Act. The 10 1/4% Equity Notes were convertible into shares of
Common Stock of the Company. On July 10, 1998, a registration statement on
Form S-3 (Reg. No. 333-58481) with respect to offers and sales of shares of
the restricted Common Stock to be issued upon conversion of the 10 1/4%
Equity Notes became effective. On July 13, 1998 the 10 1/4% Equity Notes
were converted into 1,225,719 shares of restricted Common Stock at the
closing price of the Common Stock on the American Stock Exchange on the day
prior to conversion, which price equaled $10.6875, plus interest of $7.6875
per $1,000 face amount of the 10 1/4% Equity Notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of TWA was held on May 19, 1998.
The following matters were considered and acted upon at the Annual Meeting:
1. The election of five Class I and five Class II Directors of the
Company for terms ending with the 1999 Annual Meeting of Stockholders and until
their successors are elected and qualified.
The following individuals were elected Directors by the holders of
the Company's Common Stock, with the number of votes cast for and withheld from
each individual shown opposite their names:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
- ---- --- --------
<S> <C> <C>
John W. Bachmann 43,160,984 537,958
William F. Compton 43,142,690 556,252
Eugene P. Conese 43,203,502 495,440
Gerald L. Gitner 43,136,128 562,814
Myron Kaplan 43,209,966 488,976
Merrill A. McPeak 43,271,732 427,210
Blanche M. Touhill 43,265,398 433,544
</TABLE>
<PAGE> 27
The following individuals were elected Directors by the holders of the
Company's Employee Preferred Stock with the number of votes cast for and
withheld from each individual shown opposite their names:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
IAM Preferred Stock:
- --------------------
William O'Driscoll 3,191,758 0
ALPA Preferred Stock:
- --------------------
Brent S. Miller 1,865,494 0
Flight Attendant Preferred Stock:
- ---------------------------------
Sherry L. Cooper 962,892 0
</TABLE>
The following individuals' terms of office as a Director of the Company
continued after the Annual Meeting: Edgar M. House, Thomas H. Jacobsen, David
M. Kennedy, Thomas F. Meagher, G. Joseph Reddington.
2. The ratification of the appointment of KPMG Peat Marwick LLP as
independent accountants for the fiscal year ending December 31, 1998. The votes
cast with regard to this proposal were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
49,263,653 257,597 197,806
</TABLE>
ITEM 5. OTHER INFORMATION
The Commission has promulgated new Rules 14a-4c and 14a-5e with
respect to when a Company may exercise discretionary voting authority at an
annual meeting over a shareholder proposal when the shareholder has not
requested that the proposal be included in the proxy statement, i.e., the
shareholder will make the proposal at the meeting. Pursuant to the new rules
and the Company's By-Laws, a stockholder's notice of business to be brought
before an annual meeting must be delivered to or mailed and received at the
principal executive offices of the Company not less than 60 calendar days prior
to the annual meeting in order to eliminate the Company's ability to exercise
discretionary voting authority with respect to a proposal not discussed in the
proxy statement; provided, however, that in the event public announcement of
the date of the annual meeting is not made at least 75 calendar days prior to
the date of the annual meeting, notice of the stockholder to be timely must
be so received not later than the close of business on the tenth calendar day
following the day on which public announcement is first made of the date of the
annual meeting.
Effective August 3, 1998, James R. Jensen has been elected Senior
Vice President, Maintenance and Engineering of the Company.
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<C> <S>
<F*>2.1 - Joint Plan of Reorganization, dated May 12, 1995 (Appendix B
to the Registrant's Registration Statement on Form S-4,
Registration Number 33-84944, as amended)
<F*>2.2 - Modification to Joint Plan of Reorganization, dated
July 14, 1995 and Supplemental Modifications to Joint Plan of
Reorganization dated August 2, 1995 (Exhibit 2.5 to
6/95 10-Q)
<F*>2.3 - Findings of Fact, Conclusions of Law and Order Confirming
Modified Joint Plan of Reorganization, dated August 4, 1995,
with Exhibits A-B attached (Exhibit 2.6 to 6/95 10-Q)
<F*>2.4 - Final Decree, dated December 28, 1995, related to the '95
Reorganization (Exhibit 2.7 to 12/31/95 Form 10-K)
<F*>3(i) - Third Amended and Restated Certificate of Incorporation of
the Registrant (Exhibit 3(i) to the Registrant's Registration
Statement on Form S-4, Registration Number 333-26645)
<F*>3(ii) - Amended and Restated By-Laws of Trans World Airlines, Inc.,
effective May 24, 1996 (Exhibit 3(ii) to 6/96 10-Q)
<F*>4.1 - Voting Trust Agreement, dated November 3, 1993, between TWA
and LaSalle National Trust, N.A. as trustee (Exhibit 4.3 to
9/93 10-Q)
<F*>4.2 - IAM Trans World Employees' Stock Ownership Plan and related
Trust Agreement, dated August 31, 1993, between TWA, the IAM
Plan Trustee Committee and the IAM Trustee (Exhibit to 9/93
10-Q)
<F*>4.3 - IFFA Trans World Employees' Stock Ownership Plan and related
Trust Agreement, dated August 31, 1993, between TWA, the IFFA
Plan Trustee Committee and the IFFA Trustee (Exhibit 4.5 to
9/93 10-Q)
<F*>4.4 - Trans World Airlines, Inc. Employee Stock Ownership Plan,
dated August 31, 1993, First Amendment thereto, dated
October 31, 1993, and related Trust Agreement, dated
August 31, 1993, between TWA and the ESOP Trustee
(Exhibit 4.6 to 9/93 10-Q)
<F*>4.5 - ALPA Stock Trust, dated August 31, 1993, between TWA and the
ALPA Trustee (Exhibit 4.7 to 9/93 10-Q)
<PAGE> 29
<F*>4.6 - Stockholders Agreement, dated November 3, 1993, among TWA,
LaSalle National Trust, N.A., as Voting Trustee and the ALPA
Trustee, IAM Trustee, IFFA Trustee and Other Employee Trustee
(each as defined therein), as amended by the Addendum to
Stockholders dated November 3, 1993 (Exhibit 4.8 to 9/93
10-Q)
<F*>4.7 - Registration Rights Agreement, dated November 3, 1993,
between TWA and the Initial Significant Holders (Exhibit 4.9
to 9/93 10-Q)
<F*>4.8 - Indenture between TWA and Harris Trust and Savings Bank,
dated November 3, 1993 relating to TWA's 8% Senior Secured
Notes Due 2000 (Exhibit 4.11 to 9/93 10-Q)
<F*>4.9 - Indenture between TWA and American National Bank and Trust
Company of Chicago, N.A., dated November 3, 1993 relating to
TWA's 8% Secured Notes Due 2001 (Exhibit 4.12 to 9/93 10-Q)
<F*>4.10 - The TWA Air Line Pilots 1995 Employee Stock Ownership Plan,
effective as of January 1, 1995 (Exhibit 4.12 to 9/95 10-Q)
<F*>4.11 - TWA Air Line Pilots Supplemental Stock Plan, effective
September 1, 1994 (Exhibit 4.13 to 9/95 10-Q)
<F*>4.12 - TWA Air Line Pilots Supplemental Stock Plan Trust, effective
August 23, 1995 (Exhibit 4.14 to 9/95 10-Q)
<F*>4.13 - TWA Air Line Pilots Supplemental Stock Plan Custodial
Agreement, effective August 23, 1995 (Exhibit 4.15 to 9/95
10-Q)
<F*>4.14 - Form of Indenture relating to TWA's 8% Convertible
Subordinated Debentures Due 2006 (Exhibit 4.16 to Registrants
Registration Statement on Form S-3, No. 333-04977)
<F*>4.15 - Indenture dated as of March 31, 1997 between TWA and First
Security Bank, National Association relating to TWA's 12%
Senior Secured Notes due 2002 (Exhibit 4.15 to Registrant's
Registration Statement on Form S-4, No. 333-26645)
<F*>4.16 - Form of 12% Senior Secured Note due 2002 (contained in
Indenture filed as Exhibit 4.15)
<PAGE> 30
<F*>4.17 - Registration Rights Agreement dated as of March 31, 1997
between the Company and the Initial Purchaser relating to the
12% Senior Secured Notes due 2002 and the warrants to
purchase 126.26 shares of TWA Common Stock (Exhibit 4.17 to
Registrant's Registration Statement on Form S-4,
No. 333-26645)
<F*>4.18 - Warrant Agreement dated as of March 31, 1997 between the
Company and American Stock Transfer & Trust Company, as
Warrant Agent, relating to warrants to purchase 126.26 shares
of TWA Common Stock (Exhibit 4.18 to Registrant's
Registration Statement on Form S-4, No. 333-26645)
<F*>4.19 - Form of Indenture relating to TWA's 9 1/4% Convertible
Subordinated Debentures due 2007 (Exhibit 4.19 to
Registrant's Registration Statement on Form S-3,
No. 333-44689)
<F*>4.20 - Registration Rights Agreement dated as of December 2, 1997
between the Company and the Initial Purchasers (Exhibit 4.20
to Registrant's Registration Statement on Form S-3,
No. 333-44689)
<F*>4.21 - Indenture dated as of December 9, 1997 by and between TWA and
First Security Bank, National Association, as Trustee,
relating to TWA's 11 1/2% Senior Secured Notes due 2004
(Exhibit 4.21 to Registrant's Registration Statement on
Form S-4, No. 333-44661)
<F*>4.22 - Form 11 1/2% Senior Secured Note due 2004 (contained in
Indenture filed as Exhibit 4.21)
<F*>4.23 - Registration Rights Agreement dated as of December 9, 1997
among the Company and Lazard Freres & Co. LLC and PaineWebber
Incorporated, as initial purchasers, relating to TWA's 11 1/2%
Senior Secured Notes due 2004 (Exhibit 4.23 to Registrant's
Registration Statement on Form S-4, No. 333-44661)
<F*>4.24 - Sale and Service Agreement dated as of December 30, 1997
between TWA and Constellation Finance LLC, as purchaser,
relating to TWA's receivables (Exhibit 4.24 to Registrant's
Registration Statement on Form S-4, No. 333-44661)
<F*>4.25 - Registration Rights Agreement dated as of March 3, 1998
between the Company and the Initial Purchaser (Exhibit 4.25
to Registrant's Registration Statement on Form S-4,
No. 333-59405)
<PAGE> 31
<F*>4.26 - Indenture dated as of March 3, 1998 by and between TWA and
First Security Bank, National Association, as Trustee,
relating to TWA's 11 3/8% Senior Notes due 2006 (Exhibit 4.26 to
Registrant's Registration Statement on Form S-4,
No. 333-59405)
<F*>4.27 - Aircraft Sale and Note Purchase Agreement dated as of
April 9, 1998 among TWA, First Security Bank, National
Association, as Owner Trustee and Seven Sixty Seven Leasing,
Inc. (Exhibit No. 4.27 to Registrant's Registration Statement
on Form S-4, No. 333-59405)
<F*>4.28 - Indenture dated as of April 21, 1998 by and between TWA and
First Security Bank, National Association, as Trustee,
relating to TWA's 11 3/8% Senior Secured Notes due 2003 (Exhibit
No. 4.28 to Registrant's Registration Statement on Form S-4,
No. 333-59405)
<F*>4.29 - Form of 11 3/8% Senior Secured Notes due 2003 (contained as
Exhibit 1 to Rule 144A/Regulation S Appendix to Indenture in
Exhibit 4.28)
<F*>4.30 - Registration Rights Agreement dated as of April 21, 1998
between the Company, Lazard Freres & Co. LLC and First
Security Bank, National Association relating to the 11 3/8%
Senior Secured Notes Due 2003 (Exhibit 4.31 to Registrant's
Registration Statement on Form S-3, No. 333-56991)
<F*>4.31 - Registration Rights Agreement dated as of April 21, 1998
between the Company, Lazard Ferres & Co. LLC and First
Security Bank, National Association relating to the Mandatory
Conversion Equity Notes Due 1999 (Exhibit 4.32 to
Registrant's Registration Statement on Form S-3,
No. 333-56991)
<F*>4.32 - Indenture dated as of June 16, 1998 by and between TWA and
First Security Bank, National Association, as Trustee,
relating to TWA's 10 1/4% Senior Secured Notes due 2003
<F*>4.33 - Form of 10 1/4% Senior Secured Notes due 2003 (contained as
Exhibit 1 to Rule 144A/Regulation S Appendix to Indenture in
Exhibit 4.34)
<F*>4.34 - Registration Rights Agreement dated as of June 16, 1998
between the Company, Lazard Freres & Co. LLC and First
Security Bank, National Association relating to the 10 1/4%
Senior Secured Notes Due 2003
<F*>4.35 - Registration Rights Agreement dated as of June 16, 1998
between the Company, Lazard Freres & Co. LLC and First
Security Bank, National Association relating to the 10 1/4%
Mandatory Conversion Equity Notes Due 1999
<PAGE> 32
11 - Statement of computation of per share earnings
27 - Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the second quarter 1998
by the Company.
[FN]
- --------------
<F*>Incorporated by reference
<PAGE> 33
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 14, 1998 By: /s/ Michael J. Palumbo
----------------------------------------
Michael J. Palumbo
Senior Vice President and
Chief Financial Officer
<PAGE> 1
<TABLE>
EXHIBIT 11
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<CAPTION>
Three Months Ended
June 30,
-------------------------
1988 1977
------- --------
<S> <C> <C>
ADJUSTMENTS TO NET INCOME (LOSS):
Income (loss) before extraordinary items $24,750 $(11,995)
Preferred stock dividend requirements (5,863) (3,869)
------- --------
Income (loss) before extraordinary items applicable to
common stock for basic earnings per share calculation 18,887 (15,864)
Extraordinary items (5,256) (2,405)
------- --------
Net income (loss) applicable to common stock for basic
earnings per share calculation 13,631 (18,269)
Diluted earnings per share adjustment - dividend requirements
on the 9 1/4% (1998) preferred stock and 8% preferred stock
(1997) assumed to be converted 1,994 3,869
Interest net of taxes on the April Equity Notes 199 -
Interest net of taxes on the 10 1/4% Equity Notes 34 -
------- --------
Net income (loss) applicable to common stock for
diluted earnings per share calculation $15,858 $(14,400)
======= ========
ADJUSTMENTS TO OUTSTANDING SHARES:
Basic earnings per share:
Average number of shares of common stock <F1> 58,003 50,853
Diluted earnings per share adjustments:
Incremental shares associated with the assumed
exercise of options and warrants 2,571 932
Incremental shares associated with the July ESIP
distribution <F2> 2,282 -
Common shares assumed to be issued upon conversion of
the April Equity Notes 2,481 -
Common shares assumed to be issued upon conversion of
the 10 1/4% Equity Notes 214 -
Common shares assumed to be issued upon conversion of
the 9 1/4% preferred stock (1998) <F3> 10,918 9,545
------- --------
Total average number of common and common equivalent
shares used for diluted earnings per share calculation 76,469 61,330
======= ========
PER SHARE AMOUNTS:
Income (loss) before extraordinary items and preferred dividends
Basic $ 0.33 $ (0.31)
Diluted <F3> $ 0.28 $ (0.20)
Net Income (loss)
Basic $ 0.24 $ (0.36)
Diluted <F3> $ 0.21 $ (0.23)
<FN>
- --------------
<F1> Includes 5,869 shares for the three months ended June 30, 1998 and 6,029
shares for the three months ended June 30, 1997, of Employee Preferred
Stock which, except for a liquidation preference of $.01 per share and
the right to elect a certain number of directors to the Board of
Directors, is the functional equivalent of Common Stock.
<F2> Pursuant to an employee stock incentive plan (ESIP or the Plan), the
Company is required to distribute additional shares of Common Stock and
Employee Preferred Stock as a result of the distribution of additional
shares following the effective date of the '95 Reorganization. The
Company distributed 931,604 additional shares in July 1997 and 2.377,084
additional shares in July 1998 under this provision. Additionally, the
ESIP provides that, continuing through 2002, employees may significantly
increase their ownership, through grants or purchases, as set forth in
the Plan. The earnings (loss) per share computations do not give any
effect to future potential issuances of these shares.
<F3> As the effects of including the incremental shares associated with
options and warrants and the assumed conversion of the 8% and the 9 1/4%
Preferred Stock are antidilutive, these amounts are not presented in the
accompanying condensed statements of consolidated operations for 1997.
Additionally, the effect of assuming conversion of the 8% Preferred
Stock for 1998 is antidilutive and, accordingly, it has not been assumed
to be converted for purposes of computing diluted amounts for the
quarter ended June 30, 1998.
</TABLE>
<PAGE> 2
<TABLE>
EXHIBIT 11
TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<CAPTION>
Six Months Ended
June 30,
--------------------------
1988 1997
-------- --------
<S> <C> <C>
ADJUSTMENTS TO NET INCOME (LOSS):
Loss before extraordinary items $(29,390) $(82,027)
Preferred stock dividend requirements (11,726) (7,738)
-------- --------
Loss before extraordinary items applicable to
common stock for basic earnings per share calculation (41,116) (89,765)
Extraordinary items (6,636) (3,937)
-------- --------
Net loss applicable to common stock for basic
earnings per share calculation (47,752) (93,702)
Diluted earnings per share adjustment - dividend requirements
on the 8% and the 9 1/4% preferred stock assumed to be
converted 11,726 7,738
Interest net of taxes on the April Equity Notes 199 -
Interest net of taxes on the 10 1/4% Equity Notes 34 -
-------- --------
Net loss applicable to common stock for
diluted earnings per share calculation $(35,793) $(85,964)
======== ========
ADJUSTMENTS TO OUTSTANDING SHARES:
Basic earnings per share:
Average number of shares of common stock <F1> 57,946 49,945
Diluted earnings per share adjustments:
Incremental shares associated with the assumed
exercise of options and warrants 3,262 1,626
Incremental shares associated with the July ESIP
distribution <F2> 1,521 -
Common shares assumed to be issued upon conversion of
the April Equity Notes 1,247 -
Common shares assumed to be issued upon conversion of
the 10 1/4% Equity Notes 108 -
Common shares assumed to be issued upon conversion of
the 8% (1997 & 1998) and 9 1/4% (1998) preferred stock 20,462 9,545
-------- --------
Total average number of common and common equivalent
shares used for diluted earnings per share calculation 84,546 61,116
======== ========
PER SHARE AMOUNTS:
Loss before extraordinary items and preferred dividends
Basic $ (0.71) $ (1.80)
Diluted <F3> $ (0.34) $ (1.34)
Net loss
Basic $ (0.82) $ (1.88)
Diluted <F3> $ (0.42) $ (1.41)
<FN>
- --------------
<F1> Includes 6,088 shares for the six months ended June 30, 1998 and 5,971
shares for the six months ended June 30, 1997, of Employee Preferred
Stock which, except for a liquidation preference of $.01 per share and
the right to elect a certain number of directors to the Board of
Directors, is the functional equivalent of Common Stock.
<F2> Pursuant to an employee stock incentive plan (ESIP or the Plan), the
Company is required to distribute additional shares of Common Stock and
Employee Preferred Stock as a result of the distribution of additional
shares following the effective date of the '95 Reorganization. The
Company distributed 931,604 additional shares in July 1997 and 2,377,084
additional shares in July 1998 under this provision. Additionally, the
ESIP provides that, continuing through 2002, employees may significantly
increase their ownership, through grants or purchases, as set forth in
the Plan. The earnings (loss) per share computations do not give any
effect to future potential issuances of these shares.
<F3> As the effects of including the incremental shares associated with
options and warrants and the assumed conversion of the 8% and the 9 1/4%
Preferred Stock are antidilutive, these amounts are not presented in the
accompanying condensed statements of consolidated operations for 1997
or 1998.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRANS WORLD AIRLINES, INC.
AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 374,516
<SECURITIES> 0
<RECEIVABLES> 239,196
<ALLOWANCES> 10,287
<INVENTORY> 99,270
<CURRENT-ASSETS> 840,271
<PP&E> 903,083
<DEPRECIATION> 202,744
<TOTAL-ASSETS> 2,925,500
<CURRENT-LIABILITIES> 1,103,771
<BONDS> 937,234
<COMMON> 523
0
113
<OTHER-SE> 220,651
<TOTAL-LIABILITY-AND-EQUITY> 2,925,500
<SALES> 0
<TOTAL-REVENUES> 1,648,925
<CGS> 0
<TOTAL-COSTS> 1,672,084
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,856
<INTEREST-EXPENSE> 62,462
<INCOME-PRETAX> (29,519)
<INCOME-TAX> (129)
<INCOME-CONTINUING> (29,390)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,636
<CHANGES> 0
<NET-INCOME> (36,026)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
