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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the Quarter ended: MARCH 31, 1996 Commission File Number 0-26582
WORLD AIRWAYS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-1358276
(State of incorporation) (I.R.S. Employer Identification Number)
13873 Park Center Road, Suite 490, Herndon, VA 22071
(Address of Principal Executive Offices)
(703) 834-9209
(Registrant's telephone number)
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
---------- -----------
The number of shares of the registrant's Common Stock outstanding on May 1, 1996
was 12,000,064.
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WORLD AIRWAYS, INC.
MARCH 1996, QUARTERLY REPORT ON FORM 10Q
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets, March 31, 1996 and December 31, 1995.. 3
Condensed Statements of Operations,
Three Months Ended March 31, 1996 and 1995...................... 5
Condensed Statement of Changes in Common Stockholders' Equity,
Three months ended March 31, 1996............................... 6
Condensed Statements of Cash Flows,
Three months ended March 31, 1996 and 1995...................... 7
Notes to Condensed Financial Statements......................... 8
Exhibit 11, Calculations of Loss Per Common Share............... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 20
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ITEM 1. FINANCIAL STATEMENTS
WORLD AIRWAYS, INC.
CONDENSED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
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(Unaudited)
March 31, December 31,
1996 1995
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CURRENT ASSETS
Cash and cash equivalents, including restricted
cash of $924 at March 31, 1996 and
$619 at December 31, 1995 $ 13,562 $ 25,271
Restricted short-term investments 909 909
Trade accounts receivable, less allowance for
doubtful accounts of $358 at March 31, 1996
and $258 at December 31, 1995 13,394 15,472
Other receivables 3,398 3,314
Prepaid expenses and other current assets 8,072 9,882
Assets held for sale 700 700
-------- --------
Total current assets 40,035 55,548
-------- --------
ASSETS HELD FOR SALE 2,151 2,308
EQUIPMENT AND PROPERTY
Flight and other equipment 68,622 54,460
Equipment under capital leases 11,466 11,466
-------- --------
80,088 65,926
Less accumulated depreciation and amortization 14,862 13,497
-------- --------
Net equipment and property 65,226 52,429
-------- --------
LONG-TERM OPERATING DEPOSITS 16,188 16,157
OTHER ASSETS AND DEFERRED CHARGES, NET 3,809 4,253
-------- --------
TOTAL ASSETS $127,409 $130,695
======== ========
</TABLE>
(Continued)
3
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WORLD AIRWAYS, INC.
CONDENSED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
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(Unaudited)
March 31, December 31,
1996 1995
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CURRENT LIABILITIES
Notes payable $ 5,046 $ 6,764
Current maturities of long-term obligations 8,797 9,398
Deferred aircraft rent 350 533
Accounts payable 19,097 15,278
Unearned revenue 3,965 10,417
Air traffic liability 2,517 2,332
Accrued maintenance in excess of reserves paid 11,569 8,919
Accrued salaries and wages 10,247 8,716
Accrued taxes 2,346 1,485
Due to affiliate 574 405
Other accrued liabilities 151 184
-------- --------
Total current liabilities 64,659 64,431
-------- --------
LONG-TERM OBLIGATIONS 24,564 20,417
OTHER LIABILITIES
Deferred gain from sale-leaseback transactions,
net of accumulated amortization of $18,307 at
March 31, 1996 and $18,041 at December 31, 1995 7,045 7,310
Accrued maintenance in excess of reserves paid 3,628 3,579
Accrued postretirement benefits 2,612 2,596
Other liabilities 2,448 2,022
-------- --------
Total other liabilities 15,733 15,507
-------- --------
TOTAL LIABILITIES 104,956 100,355
-------- --------
COMMON STOCKHOLDERS' EQUITY
Common stock, $.001 par value (20,000,000 shares
authorized, 12,000,064 shares issued and outstanding)
at March 31, 1996 and at December 31, 1995 12 12
Additional paid-in capital 42,299 42,312
Contributed capital 3,000 3,000
Accumulated deficit (22,858) (14,984)
-------- --------
Total common stockholders' equity 22,453 30,340
-------- --------
TOTAL LIABILITIES AND COMMON
STOCKHOLDERS' EQUITY $127,409 $130,695
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
4
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WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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1996 1995
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OPERATING REVENUES
Flight operations $70,678 $39,358
Flight operations subcontracted
to other carriers 664 693
Other 196 486
------- -------
Total operating revenues 71,538 40,537
------- -------
OPERATING EXPENSES
Flight 24,294 12,896
Maintenance 15,624 8,013
Aircraft costs 19,928 13,522
Fuel 6,915 3,070
Flight operations subcontracted
to other carriers 1,061 667
Promotions, sales and commissions 2,444 19
Depreciation and amortization 1,983 986
General and administrative 6,801 4,438
------- -------
Total operating expenses 79,050 43,611
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OPERATING LOSS (7,512) (3,074)
------- -------
OTHER INCOME (EXPENSE)
Interest expense (721) (877)
Interest income 321 114
Other, net 38 37
------- -------
Total other expense (362) (726)
------- -------
LOSS BEFORE INCOME TAXES (7,874) (3,800)
INCOME TAX EXPENSE (BENEFIT) -- --
------- -------
NET LOSS $(7,874) $(3,800)
======= =======
NET LOSS PER COMMON EQUIVALENT
SHARE $ (0.66) $ (0.38)
======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 12,000 10,126
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements
5
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WORLD AIRWAYS, INC.
CONDENSED STATEMENT OF CHANGES
IN COMMON STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
(UNAUDITED)
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Total
Additional Common
Common Paid-in Contributed Accumulated Stockholders'
Stock Capital Capital Deficit Equity
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BALANCE AT
DECEMBER 31, 1995 $12 $42,312 $3,000 $(14,984) $30,340
Costs relating to the sale
of common stock in
public offering -- (13) -- -- (13)
Net loss -- -- -- (7,874) (7,874)
------ ---------- ----------- ----------- -------
BALANCE AT
MARCH 31, 1996 $12 $42,299 $3,000 $(22,858) $22,453
====== ========== =========== =========== =======
</TABLE>
See accompanying Notes to Condensed Financial Statements
6
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WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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1996 1995
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 25,271 $ 4,054
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (7,874) (3,800)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Depreciation and amortization 1,983 986
Deferred gain recognition (266) (266)
Deferred aircraft rent payments, net -- 153
Gain on sale of property and equipment -- (33)
Other -- 31
Changes in certain assets and liabilities net of
effects of non-cash transactions:
Decrease in accounts receivable 1,994 2,481
Decrease in restricted short-term investments -- 6
Decrease (increase) in deposits, prepaid expenses
and other assets 682 (2,256)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 6,013 (544)
(Decrease) increase in unearned revenue (6,452) 10,799
Increase in air traffic liability 185 --
-------- -------
Net cash provided (used) by operating activities (3,735) 7,557
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to equipment and property (3,198) (3,311)
Proceeds from disposals of equipment and property 157 305
-------- -------
Net cash used by investing activities (3,041) (3,006)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in line of credit borrowing
arrangement, net (473) (2,260)
Issuance of debt 197 4,779
Repayment of debt (4,644) (4,761)
Costs relating to sale of stock (13) --
-------- -------
Net cash used by financing activities (4,933) (2,242)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,709) 2,309
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,562 $ 6,363
======== =======
</TABLE>
See accompanying Notes to Condensed Financial Statements
7
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WORLD AIRWAYS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed balance sheet of World Airways, Inc. ("World Airways" or the
"Company") as of March 31, 1996, the related condensed statements of
operations for the three month periods ended March 31, 1996 and 1995, the
condensed statement of changes in common stockholders' equity for the three
months ended March 31, 1996, and the condensed statements of cash flows for
the three months ended March 31, 1996 and 1995 are unaudited. In the opinion
of management, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted only of
normal recurring items. Interim results are not necessarily indicative of
results for a full year.
The condensed financial statements and notes are presented as required by
Form 10-Q and do not contain certain information included in the Company's
annual financial statements and notes. These financial statements should be
read in conjunction with the financial statements and the notes included in
the Company's Form 10-K for the year ended December 31, 1995.
2. In November 1995, the Company signed a letter of intent with the
manufacturer to lease two MD-11ER aircraft to be delivered in the first
quarter of 1996. The agreement was completed in March 1996. Under the
agreement, the Company leased each aircraft for a term of 24 years with an
option to return the aircraft after a seven year period with certain fixed
termination fees. As part of the agreement, $1.2 million in deposits
previously paid to the manufacturer in 1992 was applied towards these two
aircraft. In addition, the Company received spare parts financing from the
lessor of $9.0 million of which $3.0 million was made available with the
delivery of each aircraft, and the remaining $3.0 million will be made
available in December 1996. As of May 10, 1996, none of these amounts had
been received. Finally, the Company agreed to assume an existing lease of two
additional MD-11 freighter aircraft for 20 years, beginning in 1999, in the
event that the other lessee terminates its lease with the manufacturer at
that time.
3. The Company purchased a spare engine which was delivered in March 1996 for
approximately $8.0 million. The Company entered into an agreement with the
engine's manufacturer to finance 80% of the purchase price over a seven-year
term. The Company made payments of $1.2 million and $0.4 million towards
this purchase in September 1995 and January 1996, respectively.
4. For a discussion of commitments and contingencies see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Other Matters".
5. On January 1, 1996, the Company adopted Financial Accounting Standards
Board Statements of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of ("Statement 121") and No. 123, Accounting for Stock-based Compensation
("Statement 123"). Statement 121 requires that the Company review its long-
lived assets for impairment whenever events or circumstances indicate that
the carrying amount of an asset may not be recoverable. To the extent that
the future undiscounted net cash flows expected to be generated from an asset
are less than the carrying amount of the asset, an impairment loss will be
recognized based on the difference between the asset's carrying amount and
its fair market value. The adoption of Statement 121 had no impact on the
accompanying financial statements.
Statement 123 recommends, but does not require, the adoption of a fair
value based method of accounting for stock-based compensation to employees,
including common stock options. The Company has elected to continue recording
stock-based compensation to employees under the intrinsic value method of
accounting for stock-based compensation to employees as permitted by
Statement 123. Certain pro forma disclosures will be included in the
Company's Form 10-K for the year ending December 31, 1996 as if the fair
value based method had been adopted.
8
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EXHIBIT 11
WORLD AIRWAYS, INC.
CALCULATIONS OF LOSS PER COMMON SHARE
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
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1996 1995
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Net loss applicable to common stock $ (7,874) $ (3,800)
=========== ===========
Weighted average common shares outstanding 12,000,064 10,000,064
Weighted average options and warrants treated
as common stock equivalents -- 126,390
----------- -----------
Primary and fully diluted number of shares $12,000,064 $10,126,454
=========== ===========
Primary and fully diluted net loss per
share of common stock $(0.66) $(0.38)
</TABLE>
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below relates to the operations of World Airways, Inc.
("World Airways" or "the Company") as reflected in its financial statements.
World Airways was organized in March 1948 and became a wholly owned subsidiary
of WorldCorp, Inc. ("WorldCorp") in a holding company reorganization in 1987.
In February 1994, pursuant to an October 1993 agreement, WorldCorp sold 24.9% of
its ownership to MHS Berhad ("MHS"), a Malaysian aviation company. Effective
December 31, 1994, WorldCorp increased its ownership in the Company to 80.1%
through the purchase of 5% of World Airways common stock held by MHS. In
October 1995, the Company completed an initial public offering in which
2,000,000 shares were issued and sold by the Company and 900,000 shares were
sold by WorldCorp. WorldCorp and MHS Berhad ("MHS") currently own 59.3% and
16.6%, respectively, of the outstanding common stock of World Airways. The
balance is publicly traded.
The managements of WorldCorp and World Airways are currently exploring ways to
maximize value for the shareholders of each company, including actively
exploring the feasibility of employee initiatives to purchase a substantial
portion of WorldCorp's ownership position in World Airways. In addition to
employee initiatives, WorldCorp is evaluating the feasibility of a spinoff of
its interest in World Airways or a disposition to a third party. There can be
no assurances, however, that any such transactions will ultimately be
consummated.
The Private Securities Litigation Reform Act of 1995 (the "Act") was recently
passed by Congress. The Company desires to take advantage of the new "safe
harbor" provisions of the Act. Therefore, this report contains forward looking
statements that are subject to risks and uncertainties, including, but not
limited to, the impact of competitive products, product demand and market
acceptance risks, reliance on key strategic alliances, fluctuations in operating
results and other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission, including risk factors disclosed in the
Company's Form 10-K for the fiscal year ended December 31, 1995. These risks
could cause the Company's actual results for 1996 and beyond to differ
materially from those expressed in any forward looking statements made by, or on
behalf of, the Company.
OVERVIEW
GENERAL
The Company earns revenue primarily from four distinct markets within the air
transportation industry: passenger and cargo services to major international air
carriers; passenger and cargo services, on a scheduled and ad hoc basis, to the
U.S. Government; international tour operators in leisure passenger markets; and
scheduled passenger/cargo service (which, beginning in May 1996, will include
scheduled charters to leisure passenger markets on a seasonal basis).
With the exception of scheduled passenger/cargo service, the Company generally
charges customers on a block hour basis rather than a per seat or per pound
basis. "Block hours" are defined as the elapsed time computed from the moment
the aircraft first moves under its own power at the point of origin to the time
it comes to rest at its final destination. The Company provides most services
under two types of contracts: basic contracts and full service contracts.
Under basic contracts, the Company provides the aircraft, cockpit crew,
maintenance and insurance and the customer provides all other operating services
and bears all other operating expenses, including fuel and fuel servicing,
marketing costs associated with obtaining passengers and/or cargo, airport
passenger and cargo handling fees, landing fees, cabin crews, catering, ground
handling and aircraft push-back and de-icing services. Under full service
contracts, the Company provides fuel, catering, ground handling, cabin crew and
all related support services as well. Accordingly, the Company generally
charges a lower rate per block hour for basic contracts than full service
contracts, although it does not necessarily earn a lower profit. Because of
shifts in the mix between full service contracts and basic contracts,
fluctuations in revenues are not necessarily indicative of volume trends or
profitability. It is important, therefore, to measure the Company's business
volume by block hours flown and to measure profitability by operating income per
block hour.
As is common in the air transportation industry, the Company has relatively
high fixed aircraft costs. While the Company believes that the lease rates on
its MD-11 aircraft are favorable relative to lease rates of other MD-11
operators, the Company's MD-11 aircraft have higher lease costs (although lower
operating costs) than its DC10-30
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aircraft. Therefore, achieving high average daily utilization of its aircraft
(particularly its MD-11 aircraft) at attractive yields are two of the most
critical factors to the Company's financial results. In addition to fixed
aircraft costs, a portion of the Company's labor costs are fixed due to monthly
minimum guarantees to cockpit crewmembers and flight attendants.
CUSTOMERS
The Company's business relies heavily on its contracts with Malaysian Airline
System Berhad ("Malaysian Airlines"), P.T. Garuda Indonesia ("Garuda") and the
U.S. Air Force's Air Mobility Command ("AMC"). These customers provided
approximately 39%, 10%, and 20%, respectively, of the Company's revenues and
46%, 10%, and 13%, respectively, of the total block hours during 1995. The
Malaysian Airlines and AMC contracts provided approximately 39% and 24%,
respectively, of the Company's revenues and 47% and 15%, respectively, of total
block hours in the first quarter of 1996. Operations under the Garuda Hadj
contract coincided with the commencement of Hadj operations late in the first
quarter.
World Airways has provided service to Malaysian Airlines since 1981, providing
wet lease services for Malaysian Airlines' scheduled passenger and cargo
operations as well as transporting passengers for the annual Hadj pilgrimage.
In 1995, World Airways provided three aircraft for Hadj operations and will
provide three aircraft in 1996. The current five-year Hadj contract with
Malaysian Airlines expires after the 1996 Hadj. The Company is currently in
negotiations with Malaysian Airlines regarding future Hadj operations.
As a means of improving aircraft utilization, the Company has entered into a
series of multi-year contracts, with expiration dates running from 1997 through
2000, to provide basic services to Malaysian Airlines. One contract provides for
the Company's operation of three MD-11 freighter aircraft for a five-year period
for a combined guaranteed minimum of 1,200 hours per month (except when an
aircraft is in scheduled maintenance). The lease for one of the aircraft
commenced in June 1994, and the leases for the other two aircraft commenced in
June and July 1995. A second contract provides for each of two of the Company's
MD-11 passenger aircraft to operate a guaranteed minimum of 320 hours per month
from October 1994 through March 1997. For 1995 and the first quarter of 1996,
29% and 34%, respectively, of the Company's revenues and 37% and 42%,
respectively, of the Company's block hours flown resulted from these multi-year
contracts with Malaysian Airlines. As a result of these contracts, the Company
expects that the percentage of its total revenue generated from Malaysian
Airlines in 1996 will continue to increase over historical levels.
The Company has provided international air transportation to the U.S. Air
Force since 1956. As compensation for pledges of aircraft to the Civil Reserve
Air Fleet ("CRAF") for use in times of national emergency, the U.S. Air Force
awards contracts to CRAF participants for peacetime transportation of personnel
and cargo. The U.S. Air Force awards points to air carriers acting alone or
through teaming arrangements in proportion to the number and type of aircraft
that the carriers make available to CRAF. As a result of the Company's
increasingly effective use of teaming arrangements, the Company's fixed awards
have grown in recent years and the Company has the largest U.S. Air Force fixed
award under the CRAF program for the U.S. Government's 1995-96 fiscal year. The
current annual contract commenced on October 1, 1995 and expires on September
30, 1996. These contracts provide for a fixed level of scheduled business from
the U.S. Air Force with opportunities for additional short-term expansion
business on an ad hoc basis as needs arise. The Company's fixed award for the
current contract is $55.4 million compared to the $33.9 million fixed award for
the prior contract. Due to the utilization of a significant number of the
Company's aircraft under multi-year contracts with Malaysian Airlines and other
contractual commitments, it is unlikely that the Company will be able to accept
all of the available expansion business. Although overall Defense Department
spending is being reduced, the level of U.S. Air Force contract awards has
remained relatively constant in recent years. World Airways, however, cannot
determine how future cuts in military spending may affect future operations with
the U.S. Air Force.
World Airways has provided wet lease services to Garuda since 1973 (operating
under an annual Hadj contract since 1988). The Company operated five aircraft
in the 1995 Garuda Hadj and will operate seven aircraft in the 1996 Hadj.
As a result of these and other contracts, the Company had an overall contract
backlog at March 31, 1996 of $430.4 million. The Company's backlog for each
contract is determined by multiplying the minimum number of block hours
guaranteed under the applicable contract by the specified hourly rate under such
contract. Approximately
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76% of the backlog (including substantially all of the backlog beginning in
1997) relates to the multi-year contracts with Malaysian Airlines. The loss of
any of these contracts or a substantial reduction in business from any of these
key customers, if not replaced, would have a material adverse effect on the
Company's financial condition and results of operations.
SEASONALITY
Historically, the Company's business has been significantly affected by
seasonal factors. During the first quarter, the Company typically experiences
lower levels of utilization and yields as demand for passenger and cargo
services is lower relative to other times of the year. The Company experiences
higher levels of utilization in the second quarter, principally due to peak
demand for commercial passenger services associated with the annual Hadj
pilgrimage. During 1995, the Company's flight operations associated with the
Hadj pilgrimage occurred from April 1 to June 8. Because the Hadj occurs
approximately 10 to 12 days earlier each year, revenues resulting from future
Hadj contracts will begin to shift from the second quarter to the first quarter
over the next several years. In recent years, soft demand and weakening yields
in worldwide passenger markets adversely affected the Company's results in the
third quarter. Fourth quarter utilization depends primarily on the demand for
air cargo services in connection with the shipment of merchandise in advance of
the U.S. holiday season. The Company believes that its multi-year contracts with
Malaysian Airlines and an increase in peak European summer tourist travel
occurring in the third quarter should lessen the effect of these seasonal
factors.
AVIATION FUEL
The Company's source of aviation fuel is primarily from major oil companies,
under annual delivery contracts, at often frequented commercial locations, and
from United States military organizations at military bases. The Company's
current fuel purchasing policy consists of the purchase of fuel within seven
days in advance of all flights based on current prices set by individual
suppliers. More than one supplier is under contract at several locations. The
Company purchases no fuel under long-term contracts nor does the Company enter
into futures or fuel swap contracts.
The air transportation industry in general is affected by the price and
availability of aviation fuel. Both the cost and availability of aviation fuel
are subject to many economic and political factors and events occurring
throughout the world and remain subject to the various unpredictable economic
and market factors that affect the supply of all petroleum products.
Fluctuations in the price of fuel has not had a significant impact on the
Company's operations in recent years. The Company's exposure to fuel risk is
limited because (i) under the terms of the Company's basic contracts, the
customer is responsible for providing fuel, (ii) under the terms of its full
service contracts with the U.S. Government, the Company is reimbursed for the
cost of fuel it provides, and (iii) under the Company's charter contracts, the
Company is reimbursed for fuel price increases in excess of 5% of the price
agreed upon in the contract, subject to a 10% cap. However, a substantial
increase in the price or the unavailability of aviation fuel could have a
material adverse effect on the air transportation industry in general and the
financial condition and results of operations of the Company, primarily within
its scheduled passenger/cargo service operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Total block hours increased 3,721 hours, or 54%, to 10,634 hours in the first
quarter of 1996 from 6,913 hours in the comparable 1995 period, with an average
of 11.6 available aircraft per day in 1996 compared to 8.4 in 1995. Average
daily utilization (block hours flown per day per aircraft) increased to 10.1
hours in 1996 from 9.2 hours in 1995. In the first quarter of 1996, basic
contracts accounted for 66% of total block hours, down from 74% in 1995.
Total operating revenues increased $31.0 million, or 77%, to $71.5 million in
the first quarter of 1996 from $40.5 million in 1995. The Company recognized a
net loss of $7.9 million in the first quarter of 1996 compared to a net loss of
$3.8 million in the comparable 1995 period. Factors impacting 1996 results
included operating losses of approximately $4.4 million on its New York - Tel
Aviv scheduled service route as well as planned up-front non-recurring crew
training expenses of approximately $2.5 million primarily related to the
introduction of four aircraft in March. In response to the substantial
operating losses generated from its Tel Aviv route since commencing service
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in July 1995, the Company has taken steps to improve its yield and load factor
performance including the reduction of its weekly frequencies to Tel Aviv from
three to two until this summer's peak tourist season and, more importantly, the
formation of a strategic alliance with Continental Airlines (see "Recent Trends
and Development - Growth Opportunities").
Operating Revenues. Revenues from flight operations increased $31.3 million,
------------------
or 79%, to $70.7 million in the first quarter of 1996 from $39.4 million in
1995. This increase was primarily attributable to an increase in military
flying and an increase in revenues generated from the multi-year contracts with
Malaysian Airlines. In addition, the Company realized an increase in revenues
associated with services to certain international carriers and from scheduled
service operations to Tel Aviv which commenced in July 1995.
Operating Expenses. Total operating expenses increased $35.5 million, or 81%,
------------------
in the first quarter of 1996 to $79.1 million from $43.6 million in 1995.
Flight operations expenses include all expenses related directly to the
operation of the aircraft other than aircraft cost, fuel and maintenance. Also
included are expenses related to flight dispatch and flight operations
administration. Flight operations expenses increased $11.4 million, or 88%, in
1996 to $24.3 million from $12.9 million in 1995. This increase resulted
primarily from an increase in block hours flown, higher costs associated with
scheduled service operations to Tel Aviv, and higher crew costs and up-front
training expenses in connection with the integration of additional aircraft into
the fleet in 1995 and 1996.
Maintenance expenses increased $7.6 million, or 95%, in 1996 to $15.6 million
from $8.0 million in 1995. This increase resulted primarily from the
integration of additional aircraft into the fleet and a corresponding increase
in block hours flown.
Aircraft costs increased $6.4 million, or 47%, in 1996 to $19.9 million from
$13.5 million in 1995. This increase was primarily due to the lease of two MD-
11ER aircraft in the first quarter of 1996 and the lease of incremental DC10-30
aircraft which began in the second and fourth quarters of 1995, partially offset
by the return of two DC10-30 aircraft to the lessor in the third quarter of
1995.
Fuel expenses increased $3.8 million, or 123%, in 1996 to $6.9 million from
$3.1 million in 1995. This increase is due primarily from an increase in fuel
uplifted for military and scheduled service operations. Although the Company's
exposure to fuel risk is limited (see "Overview - Aviation Fuel"), recent
increases in aircraft fuel costs could have an affect on the future financial
condition and results of operations of the Company, primarily within the
Company's scheduled passenger/cargo service operations.
Promotions, sales and commissions were $2.4 million in 1996 compared to a
relatively insignificant amount in the first quarter of 1995. This increase
resulted primarily from commissions paid in connection with scheduled service
operations to Tel Aviv which commenced in 1995 and an increase in teaming
arrangement commissions associated with the larger fixed-award contract received
from the U.S. Air Force beginning October 1995.
Depreciation and amortization increased $1.0 million, or 100%, in 1996 to $2.0
million from $1.0 million in 1995. This increase resulted primarily from an
increase in spare parts required to support the additional MD-11 aircraft and
incremental DC10-30 aircraft described above as well as the amortization of
certain aircraft integration costs and other deferred costs.
General and administrative expenses increased $2.4 million, or 55%, in 1996 to
$6.8 million from $4.4 million in 1995. This increase was primarily due to
personnel necessary for scheduled service operations, additional marketing
personnel, and an increase in certain legal and professional fees.
Other Income (Expense). Other expenses decreased $0.3 million, or 43%, in
----------------------
1996 from 1995 primarily due to additional interest income earned as a result of
higher cash balances over the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged. The Company incurred substantial debt and
lease commitments during the past three years in connection with its acquisition
of MD-11 aircraft and related spare parts. The Company has
13
<PAGE>
historically financed its working capital and capital expenditure requirements
out of cash flow from operating activities, public and private sales of its
common stock, secured borrowings, and other financings from banks and other
lenders.
In October 1995, the Company completed an initial public offering (the
"Offering") of 2,900,000 shares of the Company's common stock. Of the 2,900,000
shares sold, 2,000,000 shares were issued and sold by the Company and 900,000
shares were sold by WorldCorp, the Company's majority shareholder. As a result
of this offering, World Airways and WorldCorp received approximately $22.8
million and $10.2 million in net proceeds, respectively.
The Company's cash and cash equivalents at March 31, 1996 and December 31,
1995 were $13.6 million and $25.3 million, respectively. At March 31, 1996 the
Company's current assets were $40.0 million and current liabilities were $64.7
million. The Company believes that the combination of the financings consummated
to date, income from operations and the additional financings described below
will be sufficient to allow the Company to meet its operating and capital
requirements for at least the next twelve months.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating activities used $3.7 million in cash for the quarter ended March 31,
1996 compared to providing $7.6 million of cash in the comparable period in
1995. This decrease in cash in 1996 resulted primarily from an increase in
operating loss over 1995 and a decrease in unearned revenue, partially offset by
an increase in accounts payable during 1996 over 1995.
CASH FLOWS FROM INVESTING ACTIVITIES
Investing activities used $3.0 million in cash for the quarters ended March
31, 1996 and March 31, 1995. In the first quarter of 1996, cash was used
primarily for the purchase of rotable spare parts required for the integration
of two MD-11 aircraft and incremental DC-10 aircraft.
CASH FLOWS FROM FINANCING ACTIVITIES
Financing activities used $4.9 million in cash for the quarter ended March 31,
1996 compared to using $2.2 million in the comparable period in 1995. This
decrease in cash resulted primarily from a decrease in the Company's net
borrowings in 1996 over 1995.
CAPITAL COMMITMENTS
In October 1992 and January 1993, the Company signed a series of agreements to
lease seven new MD-11 aircraft for initial lease terms of two to five years,
renewable for up to 10 years (and in the case of one aircraft, for 13 years) by
the Company with increasing rent costs. As of March 1995, the Company had taken
delivery of all seven aircraft, consisting of four passenger MD-11 aircraft, one
freighter MD-11, and two passenger/cargo convertible MD-11s. As part of the
lease agreements, the Company was assigned purchase options for four additional
MD-11 aircraft. In 1992, the Company made non-refundable deposits of $1.2
million toward the option aircraft.
In March 1996, the Company signed an agreement with the manufacturer to lease
two MD-11ER aircraft. Under the agreement, the Company leased each aircraft for
a term of 24 years with an option to return the aircraft after a seven year
period with certain fixed termination fees. As part of the agreement, the
above-mentioned deposits were applied towards the deposits required on these two
aircraft. In addition, the Company agreed to assume an existing lease of two
additional MD-11 freighter aircraft for 20 years, beginning in 1999, in the
event that the existing lessee terminates its lease with the manufacturer at
that time.
World Airways maintains six long-term DC10-30 aircraft leases with terms
expiring in 1998, 2003, and two each in 1997 and 1999.
As of March 31, 1996, annual minimum payments required under the Company's
aircraft and lease obligations totaled $70.2 million for the remainder of 1996,
including the two MD-11ER aircraft and the two DC10-30 aircraft leased in March
1996.
14
<PAGE>
In August 1995, the Company amended its aircraft spare parts facility under
the Credit Agreement to provide for a variable rate borrowing of $10.5 million.
Approximately $2.5 million of this facility was used to pay off the previously
outstanding balance of the spare parts loan facility and $0.8 million was used
to purchase additional spare parts for MD-11s required during the remainder of
1995. The balance of this loan facility was used to increase cash balances which
were drawn down during the first half of 1995 to purchase MD-11 spare parts.
In September 1995, the Company agreed to purchase a spare engine which was
delivered in March 1996. The engine cost approximately $8.0 million. The Company
entered into an agreement with the engine's manufacturer to finance 80% of the
purchase price over a seven-year term. The Company made payments of $1.2
million and $0.4 million towards this purchase in September 1995 and January
1996, respectively.
As discussed above, the Company signed an agreement for the lease of two MD-
11ER aircraft beginning in the first quarter of 1996 to provide additional
capacity for growth opportunities. As part of the agreement for the MD-11
aircraft, the Company received spare parts financing from the lessor of $9.0
million of which $3.0 million was made available with the delivery of each
aircraft, and the remaining $3.0 million will be made available in December
1996. As of May 10, 1996, none of these amounts had been received. In January
1996, the Company agreed to purchase an additional engine and received a
commitment from the engine manufacturer to finance 85% of its purchase price
over a seven-year term with an interest rate to be fixed at the time of
delivery.
The Company's fixed assets increased approximately $14.1 million during the
first quarter of 1996. The majority of this amount relates to assets which were
financed in the first quarter or will be financed subsequent to March 31, 1996.
In addition, the Company incurred approximately $2.1 million in leasehold
improvements on certain aircraft for which the cash will be expended in the
second quarter of 1996. The Company anticipates that its total capital
expenditures in 1996, which include the two spare engines, will approximate
$28.0 million. As discussed above, the Company will receive approximately $22.6
million in financing, of which $6.5 million was received during the first
quarter of 1996. The remaining balance will be funded from its operating cash
flow and available cash balances. In March 1996, the Credit Agreement was
amended to increase the limit on capital expenditures by the Company to no more
than $35.0 million and $25.0 million in 1996 and 1997, respectively.
In March 1996, the Company received regulatory authority to provide scheduled
passenger and cargo service between Newark and South Africa beginning in the
second quarter of 1996. In addition, World Airways is currently seeking
authority to provide scheduled passenger and cargo service between the U.S. and
West Africa (as a traffic stop on its South Africa route). The Company
anticipates that it will incur approximately $1.0 million in start-up costs in
connection with this operation and will fund such start-up costs from its
operating cash flow.
As of March 31, 1996, the Company held approximately $2.9 million (at book
value) of aircraft spare parts currently available for sale.
FINANCING DEVELOPMENTS
In October 1995, the Company completed an initial public offering pursuant to
which World Airways and WorldCorp received approximately $22.8 million and $10.2
million in net proceeds, respectively. World Airways used its proceeds to
increase cash reserves.
In 1993, the Company entered into the Credit Agreement, which included a $12.0
million spare parts loan and an $8.0 million revolving line of credit
collateralized by certain receivables, inventory, equipment, and general
intangibles. The Company is prohibited from granting a security interest in such
collateral to anyone other than BNY Financial Corporation. Approximately $10.8
million of the proceeds from this borrowing was used to retire existing
obligations. This agreement contains certain covenants related to the Company's
financial condition and operating results. During 1995, the Company extended the
credit facility's term to 1998. In March 1996, the Company amended this
agreement to adjust certain covenants beginning in the first quarter of 1996.
Under the terms of the amended Credit Agreement, the Company is not permitted to
(i) incur indebtedness in excess of $25.0 million (excluding capital leases),
(ii) declare, pay, or make any dividend or distribution in any six month period
which aggregate in excess of the lesser of $4.5 million or 50% of net income for
the previous six months, (iii) declare or pay dividends if after giving effect
to such dividends the Company's cash or cash equivalents would be less than $7.5
million or (iv) make capital expenditures in 1996 and 1997 of more than $35.0
million and $25.0 million, respectively, or in any subsequent year of more than
$15.0 million. The Company must also maintain a certain
15
<PAGE>
quarterly net worth and net income (loss) requirements. No assurances can be
given that the Company will continue to meet these revised covenants or, if
necessary, obtain the required waivers. In addition, the Company amended the
aircraft spare parts facility under the Credit Agreement to provide for a
variable rate spare parts loan of $10.5 million. As of March 31, 1996, $1.3
million of the $8.0 million portion of the credit facility collateralized by
receivables was utilized, with $2.9 million capacity currently available, and
$7.0 million of the $10.5 million spare parts loan was outstanding.
As discussed above, in September 1995 the Company entered into an agreement
with a lessor to purchase a spare engine, previously under lease, for $5.5
million. The Company paid $0.5 million upon closing and signed a note for the
$5.0 million balance. The note bears interest at a rate of 7.25% and is payable
over a 40-month period at $69,000 a month, with the balance of $3.3 million due
on January 29, 1999. In addition, the Company purchased an additional spare
engine which was delivered in March 1996. The engine cost approximately $8.0
million. The Company entered into an agreement with the engine's manufacturer to
finance 80% of the purchase price over a seven-year term. The Company made
payments of $1.2 million and $0.4 million towards this purchase in September
1995 and January 1996, respectively.
RECENT TRENDS AND DEVELOPMENTS
Operating Losses. While the Company was profitable each year from 1987
----------------
through 1992 and in 1995, the Company sustained operating losses in 1993 and
1994 of $7.3 million and $5.2 million, respectively, and net losses of $9.0
million in each of these two years. During the first three months of 1996,
World Airways sustained an operating loss of $7.5 million and a net loss of $7.9
million during its traditionally weakest quarter. While the Company expects to
be profitable for the full year, there can be no assurance that the Company will
be able to maintain profitability for 1996 and future years.
Growth Opportunities. In the scheduled charter market, the Company has
--------------------
identified what it believes is a significant opportunity to increase revenues
and profits by serving potentially profitable leisure passenger markets between
the U.S. and Europe. In the scheduled charter business, the Company sells less-
than-planeload blocks of seats to international tour operators and markets
remaining seats through computer reservations systems. Based on the successful
experience of European carriers, the Company will assume some load factor risk
with the objective of capturing improved yields. In addition, because the
Company will set the schedule instead of a tour operator, the Company will be
able to schedule its aircraft more efficiently and increase the hourly
utilization of its fleet. This strategy gives the Company more control within
the charter distribution channel and a stronger commercial position in this
market than it would have in the full plane-load charter business. For the 1996
leisure market season, the Company has developed schedules and is marketing
capacity to tour operators with particular emphasis on the markets between the
U.S. and Germany, Switzerland, Ireland, and the United Kingdom. Although the
Company believes that scheduled charters may improve utilization and yields in
the leisure passenger market for the reasons described above, scheduled charters
do increase the Company's load factor and yield risks and the Company has no
prior experience operating scheduled charters. The Company, therefore, can
provide no assurances that it will be able to operate scheduled charters
profitably.
In the scheduled passenger business, the Company will consider entering only
those markets that it believes (i) are well suited to the competitive advantages
of the Company's long-range, wide-body aircraft, (ii) have prospects for rapid
growth, and (iii) have barriers to entry. After determining that the market
between New York and Tel Aviv met these criteria, the Company commenced
scheduled passenger service in this market in July 1995 with three weekly round
trips. In March 1996, the Company reduced its weekly frequencies from three to
two until the summer peak tourist season. In addition, the Company recently
received regulatory authority to provide scheduled passenger and cargo service
between the United States and South Africa beginning in the second quarter of
1996. The Company is currently seeking to provide scheduled passenger and cargo
service between the United States and West Africa (as a traffic stop on its
South Africa route). No assurances can be given that the Company will receive
this authority.
While the Company has achieved a 71% cumulative load factor on the Tel Aviv
route as of April 1996, yields have been significantly lower than expected due
to price sensitive, high commission traffic originating in the New York area and
the lack of a marketing relationship with a major U.S. carrier to feed the
Company's New York departures. As a result of these factors, the Company has
sustained substantial operating losses on this route since commencing scheduled
service to Tel Aviv in July 1995. In response to these issues, the Company has
taken steps to improve its yield and load factor performance. First, as
discussed above, the Company reduced its weekly
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<PAGE>
frequencies to Tel Aviv from three to two until this summer's peak tourist
season. Second, and more importantly, the Company has formed a strategic
alliance with Continental Airlines ("Continental"). This agreement with
Continental includes codesharing, joint marketing, and participation in
Continental's computer reservation system and OnePass frequent flyer program.
The Company's international passengers will connect through Continental's Newark
International Airport ("Newark") hub to major U.S. cities as well as Canada and
Mexico. Continental's passengers will connect directly on the Company's
international destinations including Israel, Ireland, and South Africa. In
conjunction with this alliance, the Company will begin flying from Newark in
June 1996. Although the Company hopes that its strategic alliance with
Continental will improve financial results on the Company's scheduled passenger
routes, including but not limited to the Company's Tel Aviv route, no assurances
can be given that the Company will be able to operate its scheduled passenger
routes profitably even with the Continental alliance.
Maintenance. The Company outsources major airframe maintenance and power
-----------
plant work to several suppliers. The Company has a 10-year contract ending in
August 2003 with United Technologies Corporation's Pratt & Whitney Group ("Pratt
and Whitney") for all off-wing maintenance on the PW 4462 engines that power its
MD-11 aircraft. Under this contract, the manufacturer agreed to provide such
maintenance services at a cost not to exceed a specified rate per hour during
the term of the contract. The specified rate per hour is subject to annual
escalation, and increases substantially in 1998. Accordingly, while the Company
believes the terms of this agreement will result in lower engine maintenance
costs than it otherwise would incur during the first five years of the
agreement, these costs will increase substantially during the last seven years
of the agreement.
The Company's maintenance costs associated with the MD-11 aircraft and PW 4462
engines have been significantly reduced due in part to manufacturer guarantees
and warranties, which guarantees and warranties began to expire in 1995 and will
fully expire by 1998. Therefore, the Company expects that maintenance expense
will increase as these guarantees and warranties expire.
OTHER MATTERS
LEGAL AND ADMINISTRATIVE PROCEEDINGS
The Company and WorldCorp (the "World Defendants") are defendants in
litigation brought by the Committee of Unsecured Creditors of Washington
Bancorporation (the "Committee") in August 1992, captioned Washington
Bancorporation v. Boster, et. al., Adv. Proc. 92-0133 (Bankr. D.D.C.) (the
"Boster Litigation"). The complaint asserts that the World Defendants received
preferential transfers or fraudulent conveyances from Washington Bancorporation
when the World Defendants received payment at maturity on May 4, 1990 of
Washington Bancorporation commercial paper purchased on May 3, 1990. Washington
Bancorporation filed for relief under the Federal Bankruptcy Code on August 1,
1990. The Committee seeks recovery of approximately $4.8 million from the
Company and approximately $2.0 million from WorldCorp, which are alleged to be
the amounts paid to each of the Company and WorldCorp by Washington
Bancorporation. On the motion of the World Defendants, among others, the Boster
Litigation was removed from the Bankruptcy Court to the District Court for the
District of Columbia on May 10, 1993. The World Defendants filed a motion to
dismiss the Boster Litigation as it pertains to them on June 9, 1993, and intend
to vigorously contest liability. On September 20, 1995, the District Court for
the District of Columbia granted the motion to dismiss filed by the World
Defendants with respect to three of the four counts alleged in the litigation,
but declined to grant a motion to dismiss the remaining claim regarding
fraudulent transfers. The District Court's ruling is subject to appeal in
certain cases. The World Defendants filed a summary motion with respect to the
remaining claim on October 19, 1995, which remains pending. In any event, the
Company believes it has substantial defenses to this action, although no
assurance can be given of the eventual outcome of this litigation. Depending
upon the timing of the resolution of this claim, if the Committee were
successful in recovering the full amount claimed, the resolution could have a
material adverse effect on the Company's financial condition and results of
operations.
In addition, the Company is party to routine litigation and administrative
proceedings incidental to its business, none of which is believed by the Company
to be likely to have a material adverse effect on the financial condition of the
Company.
EMPLOYEES
The Company's cockpit crew members, who are represented by the International
Brotherhood of Teamsters (the
17
<PAGE>
"Teamsters"), are subject to a four-year collective bargaining agreement that
will become amendable in June 1998.
The Company's flight attendants are also represented by the Teamsters under a
collective bargaining agreement that became amendable in 1992. The parties
exchanged their opening contract proposals in 1992 and have had numerous
contract negotiation sessions. In December 1994, the Company and the Teamsters
jointly requested the assistance of a federal mediator to facilitate
negotiations. After several mediated sessions, the National Mediation Board
(the "NMB") mediator recommended that the NMB release the parties to pursue
"direct" (i.e., non-mediated) negotiations with the flight attendants. The
Company and the Teamsters agreed and direct negotiations continue. The outcome
of the negotiations with the flight attendants cannot be determined at this
time. The inability to reach an agreement upon terms favorable to the Company
could have a material adverse effect on the Company. The Company's flight
attendants continue to challenge the use of foreign flight attendant crews on
the Company's flights for Malaysian Airlines and Garuda Indonesia which has
historically been the Company's operating procedure. The Company is
contractually obligated to permit its Southeast Asian customers to deploy their
own flight attendants. While the Company intends to contest this matter
vigorously in an upcoming arbitration, an unfavorable ruling for the Company
could have a material adverse effect on the Company.
The Company's aircraft dispatchers are represented by the Transport Workers
Union (the "TWU"). This contract became amendable on June 30, 1993. In May 1995,
the parties reached agreement with respect to a new four-year contract. This
contract was ratified on February 7, 1996. Fewer than 12 Company employees are
covered by this collective bargaining agreement.
The Company is unable to predict whether any of its employees not currently
represented by a labor union, such as the Company's maintenance personnel, will
elect to be represented by a labor union or collective bargaining unit. The
election by such employees of representation in such an organization could
result in employee compensation and working condition demands that could have a
material adverse effect on the financial results of the Company.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends or distributions on
its common stock since the payment of a distribution to WorldCorp in 1992. Any
future decision concerning the payment of dividends on the common stock will
depend upon the results of operations, financial condition and capital
expenditure plans of the Company, as well as such other factors as the Board of
Directors, in its sole discretion, may consider relevant.
Under the terms of a shareholders agreement among the Company, WorldCorp, and
MHS, the Company has agreed to declare and distribute all dividends properly
payable, subject to the requirements of law and general overall financial
prudence. The Credit Agreement with BNY Financial Corporation (as amended
through September 1995, the "Credit Agreement") contains restrictions on the
Company's ability to pay dividends on the common stock. The Credit Agreement
provides that the Company shall not declare, pay or make any dividends or
distributions in any six-month period which aggregate in excess of the lesser of
$4.5 million or 50% of the Company's net income for the previous six months and
requires that the Company have a cash balance of not less than $7.5 million
after giving effect to such dividend or distribution. Additionally, WorldCorp,
which owns approximately 59.3% of the Company's common stock, is subject to the
provisions of an indenture expiring in 2004 under which it is obligated to cause
the Company not to pay dividends upon the occurrence of any events of default by
WorldCorp under such indenture. Further, under the indenture terminating in
1997, WorldCorp has agreed to cause the companies not to pay dividends unless
WorldCorp has a positive adjusted net worth (as defined therein). As of May 1,
1996, WorldCorp's adjusted net worth was negative and under the indenture
terminating in 1997 WorldCorp is, therefore, obligated to cause World Airways
not to pay dividends.
INCOME AND OTHER TAXES
In August 1991, 5.7 million shares of WorldCorp common stock were sold by a
group of existing shareholders. This transaction constituted an ownership change
of WorldCorp (and thus of the Company) as defined under Section 382 of the Code
(the "1991 Ownership Change"). The 1991 Ownership Change subjected WorldCorp to
an annual limitation in 1991 and future years in the use of net operating losses
("NOLs") that were available to WorldCorp (and thus allocable to the Company) on
the date on which the 1991 Ownership Change occurred. As of December 31, 1995,
the Company had NOLs for federal income tax purposes of $100.4 million which, if
not utilized to offset taxable income in future periods, will expire from 1997
to 2009. Of this amount, $62.0 million is subject to a $6.9
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<PAGE>
million annual limitation resulting from the 1991 Ownership Change. The
remaining $38.4 million was generated after the 1991 Ownership Change and,
therefore, is not currently subject to annual limitation.
Use of the Company's net operating loss carryforwards in future years could be
further limited if an Ownership Change were to occur in the future. While the
Company believes that the sale of common stock in its initial public offering
(the "Offering") did not cause an Ownership Change, the application of the Code
in this area is subject to interpretation by the Internal Revenue Service.
Also, any future transactions in the Company's or WorldCorp's stock could cause
an Ownership Change. In the event that more than approximately $5.0 million of
the outstanding convertible debentures of WorldCorp are converted into WorldCorp
common stock, the Company believes an Ownership Change will occur.
There can be no assurance that the operations of the Company will generate
taxable income in future years so as to allow the Company to realize a tax
benefit from its NOLs. The NOLs are subject to examination by the IRS and, thus,
are subject to adjustment or disallowance resulting from any such IRS
examination. In addition to the change in ownership that might occur upon the
conversion of the WorldCorp debentures, additional ownership changes of the
Company may occur in the future and may result in the imposition of a lower
annual limitation on the Company's NOLs existing at the time of any such
ownership change.
The valuation allowance for deferred tax assets as of December 31, 1995 was
$39.5 million. The Company's estimate of the required valuation allowance is
based on a number of factors, including historical operating results. The
Company generated net earnings for the year ended 1995 as compared to losses in
both 1994 and 1993. If the Company generates net earnings in 1996, it is
possible that a change in the estimate of the required valuation allowance will
occur in the near term, and could differ materially from the amount recorded at
December 31, 1995.
INFLATION
The Company believes that inflation has not had a material effect on the
Company's revenues during the past three years.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
No. Description
- --- -----------
<S> <C>
1.1 Form of Underwriting Agreement to be entered into among the Company, Incorporated
WorldCorp, Inc. and the Underwriters. By Reference
3.1 Amended and Restated Certificate of Incorporation. Incorporated
By Reference
3.2 Amended and Restated Bylaws. Incorporated
By Reference
4.1 Article IV of the Company's Amended and Restated Certificate of Incorporated
Incorporation, incorporated by reference to Exhibit 3.1 filed herewith, and By Reference
Section 6 of the Company's Bylaws, incorporated by reference to Exhibit
3.2 filed herewith.
5.1 Opinion of Hunton & Williams. Incorporated
By Reference
10.1 The Company's 1995 Stock Option Plan. Incorporated
By Reference
10.2 Form of Directors' Indemnification Agreement. Incorporated
By Reference
10.3 Employment Agreement between the Company and Charles W. Pollard, Incorporated
dated as of January 1, 1995. By Reference
10.4 Amendment No. 1 to the Employment Agreement between the Company Incorporated
and Charles W. Pollard, dated as of May 31, 1995. By Reference
10.5 Stock Option Agreement between the Company and Charles W. Pollard, Incorporated
dated as of January 1, 1995. By Reference
10.6 Amendment No. 1 to the Stock Option Agreement between the Company Incorporated
and Charles W. Pollard, dated as of May 31, 1995. By Reference
10.7 Agreement between the Company and Flight Attendants represented by Incorporated
International Brotherhood of Teamsters. (Filed as Exhibit 10.67 to By Reference
WorldCorp, Inc.'s Form S-3 Registration Statement (Commission File No.
91998) filed on December 10, 1987 and incorporated herein by reference.)
10.8 Office Lease--The Hallmark Building dated as of September 20, 1989 Incorporated
between the Company and GT Renaissance Centre Limited Partnership. By Reference
(Filed as Exhibit 10.38 to WorldCorp, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1989 and incorporated herein by
reference.)
10.9 Aircraft Lease Agreement for Aircraft Serial Number 48518 dated as of Incorporated
September 30, 1992 between the Company and International Lease Finance By Reference
Corporation. (Filed as Exhibit 10.38 to WorldCorp, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference.)
10.10 Amendment No. 1 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48518 dated as of November 1992 between the Company and International By Reference
Lease Finance Corporation. (Filed as Exhibit 10.68 to WorldCorp, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
and incorporated herein by reference.)
</TABLE>
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<TABLE>
<S> <C>
10.11 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48518 dated as of March 8, 1993 between the Company and International By Reference
Lease Financial Corporation. (Filed as Exhibit 10.69 to WorldCorp, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
and incorporated herein by reference.)
10.12 Aircraft Lease Agreement for Aircraft Serial Number 48519 dated as of Incorporated
September 30, 1992 between the Company and International Lease Finance By Reference
Corporation. (Filed as Exhibit 10.39 to WorldCorp, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference.)
10.13 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48519 dated as of April 23, 1993 between the Company and International By Reference
Lease Finance Corporation.
10.14 Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48519 dated as of April 1993 between the Company and International By Reference
Lease Finance.
10.15 Aircraft Lease Agreement for Aircraft Serial Number 48437 dated as of Incorporated
September 30, 1992 between the Company and International Lease Finance By Reference
Corporation. (Filed as Exhibit 10.40 to WorldCorp, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference.)
10.16 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48437 dated as of March 31, 1993 between the Company and International By Reference
Lease Finance Corporation. (Filed as Exhibit 10.73 to WorldCorp, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
and incorporated herein by reference.)
10.17 Amendment No. 3 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48437 dated as of April 15, 1993 between the Company and International By Reference
Lease Finance Corporation. (Filed as Exhibit 10.74 to WorldCorp, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
and incorporated herein by reference.)
10.18 Aircraft Lease Agreement for Aircraft Serial Number 48633 dated as of Incorporated
September 30, 1992 between the Company and International Lease Finance By Reference
Corporation. (Filed as Exhibit 10.41 to WorldCorp, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference.)
10.19 Aircraft Lease Agreement for Aircraft Serial Number 48631 dated as of Incorporated
September 30, 1992 between the Company and International Lease Finance By Reference
Corporation. (Filed as Exhibit 10.42 to WorldCorp, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference.)
10.20 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48631 dated as of April 28, 1995 between the Company and International By Reference
Lease Finance Corporation.
10.21 Aircraft Lease Agreement for Aircraft Serial Number 48632 dated as of Incorporated
September 30, 1992 between the Company and International Lease Finance By Reference
Corporation. (Filed as Exhibit 10.43 to WorldCorp, Inc.'s Annual Report
on Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference.)
</TABLE>
21
<PAGE>
<TABLE>
<S> <C>
10.22 Amendment No. 2 to Aircraft Lease Agreement for Aircraft Serial Number Incorporated
48632 dated as of April 28, 1995 between the Company and International By Reference
Lease Finance Corporation.
10.23 Accounts Receivable Management and Security Agreement dated as of Incorporated
December 7, 1993 between the Company and BNY Financial Corporation. By Reference
(Filed as Exhibit 10.46 to WorldCorp, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 and incorporated herein by
reference.)
10.24 Amendment (No. 1) to the Accounts Receivable Management and Security Incorporated
Agreement between the Company and BNY Financial Corporation dated By Reference
March 15, 1995 and effective as of January 1, 1995.
10.25 Amendment No. 2 to the Accounts Receivable Management and Security Incorporated
Agreement between the Company and BNY Financial Corporation dated By Reference
August 1995.
10.26 Long Term Aircraft Charter Agreement dated August 20, 1986 between the Incorporated
Company and Malaysian Airline System Berhad (Filed as Exhibit 10.79 to By Reference
WorldCorp's Annual Report on Form 10-K for the year ended December
31, 1986).
10.27 Amendment dated April 10, 1991 to the Long Term Aircraft Charter Incorporated
Agreement dated August 20, 1986 between the Company and Malaysian By Reference
Airline System Berhad.
10.28 Stock Purchase Agreement by and among the Company, WorldCorp, Inc., Incorporated
and Malaysian Helicopter Services Berhad dated as of October 30, 1993. By Reference
(Filed as Exhibit 10.87 to WorldCorp, Inc.'s Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 and incorporated herein by
reference.)
10.29 Stock Registration Rights Agreement between the Company and Malaysian Incorporated
Helicopter Services Berhad dated as of October 30, 1993. (Filed as Exhibit By Reference
10.88 to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 and incorporated herein by reference.)
10.30 Shareholders Agreement between Malaysian Helicopter Services Berhad, Incorporated
WorldCorp, Inc. and the Company, dated as of February 3, 1994. (Filed By Reference
as Exhibit 10.89 to WorldCorp, Inc.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and incorporated herein by
reference.)
10.31 Amendment No. 1 to Shareholders Agreement dated as of February 28, Incorporated
1994, among WorldCorp, the Company and Malaysian Helicopter Services By Reference
Berhad. (Filed as Exhibit 10.90 to WorldCorp Inc.'s Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and incorporated
herein by reference.)
10.32 Agreement between the Company and the International Brotherhood of Incorporated
Teamsters representing the Cockpit Crewmembers employed by the By Reference
Company dated August 15, 1994-June 30, 1998. (Filed as Exhibit 10.98 to
WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference.)
10.33 Aircraft Services Agreement dated September 26, 1994 by and between the Incorporated
Company and Malaysian Airline System Berhad. (Filed as Exhibit 10.101 By Reference
to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.)
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
10.34 Freighter Services Agreement dated October 6, 1994 by and between the Incorporated
Company and Malaysian Airline System Berhad. (Filed as Exhibit 10.102 By Reference
to WorldCorp, Inc.'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.)
10.35 Amendment No. 1 to Passenger Aircraft Services and Freighter Services Incorporated
Agreement dated December 31, 1994 by and between the Company and By Reference
Malaysian Airline System Berhad. (Filed as Exhibit 10.107 to WorldCorp,
Inc.'s Annual Report on Form 10-K for the fiscal year ended December
31, 1994 and incorporated herein by reference.)
10.36 Amendment No. 2 to the Aircraft Services and Freighter Services Incorporated
Agreements by and between the Company and Malaysian Airline System By Reference
Berhad, dated February 9, 1995.
10.37 Amendment No. 3 to the Freighter Services Agreement by and between the Incorporated
Company and Malaysian Airline System Berhad dated May, 1995. By Reference
10.38 1995 U.S. Air Force Contract F11626-94-D0027 dated October 1, 1994 Incorporated
between the Company and Air Mobility Command. (Filed as Exhibit By Reference
10.103 to WorldCorp, Inc.'s Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1994 and incorporated herein by reference.)
10.39 FY1996 Contractor Team Agreement among the Company, Continental Incorporated
Airlines, Inc., Emery Worldwide Airlines, Inc., Evergreen International By Reference
Airlines, Inc., Miami Air International, Inc., Northwest Airlines, Inc. and
Rich International Airways, Inc. dated April 3, 1995.
10.40 Lease agreement for Aircraft Serial Number 48485 dated as of January 15, Incorporated
1991 between the Company and First Security National Bank of Utah, By Reference
N.A. (Filed as Exhibit 10.65 to WorldCorp, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1991 and incorporated herein
by reference).
10.41 Maintenance Agreement between Malaysian Airline System Berhad and the Incorporated
Company dated March 1, 1995. By Reference
10.42 Form of Master Services Agreement between the Company and Incorporated
WorldCorp, Inc. By Reference
10.43 1996 U.S. Air Force Contract dated October 1, 1995 between the Incorporated
Company and Air Mobility Command. By Reference
10.44 Amendment No. 3 to the Accounts Receivable Management and Security Incorporated
Agreement between the Company and BNY Financial Corporation dated as By Reference
of September 28, 1995.
10.45 Amendment No. 4 to the Accounts Receivable Management and Security Incorporated
Agreement between the Company and BNY Financial Corporation dated as By Reference
of September 28, 1995.
10.46 Form of Non-Employee Directors' Stock Option Plan. Incorporated
By Reference
11 Computation of earnings (loss) per share. Filed
Herewith
27 Financial Data Schedule for the year ended December 31, 1995 Filed
Herewith
</TABLE>
(b) Reports on Form 8-K
None.
23
<PAGE>
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.
WORLD AIRWAYS, INC.
By: /s/ Michael E. Savage
---------------------
(Michael E. Savage)
Chief Financial Officer
Date: May 14, 1996
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from World
Airways and is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,562
<SECURITIES> 0
<RECEIVABLES> 13,752
<ALLOWANCES> 358
<INVENTORY> 0
<CURRENT-ASSETS> 40,035
<PP&E> 80,088
<DEPRECIATION> 14,862
<TOTAL-ASSETS> 127,409
<CURRENT-LIABILITIES> 64,659
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 22,441
<TOTAL-LIABILITY-AND-EQUITY> 127,409
<SALES> 0
<TOTAL-REVENUES> 71,538
<CGS> 0
<TOTAL-COSTS> 79,050
<OTHER-EXPENSES> 362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 721
<INCOME-PRETAX> (7,874)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,874)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,874)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> 0
</TABLE>
