CONFORMED COPY
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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: SEPTEMBER 30, 1999 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 20171
(Address of Principal Executive Offices)
(703) 834-9200
(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 November 9,
1999 was 6,446,416.
- --------------------------------------------------------------------------------
<PAGE>
WORLD AIRWAYS, INC.
SEPTEMBER 30, 1999, QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets, September 30, 1999 and December 31, 1998
Condensed Statements of Operations,
Three Months Ended September 30, 1999 and 1998
Condensed Statements of Operations,
Nine Months Ended September 30, 1999 and 1998
Condensed Statement of Changes in Stockholders' Deficiency,
Nine months ended September 30, 1999
Condensed Statements of Cash Flows,
Nine months ended September 30, 1999 and 1998
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
WORLD AIRWAYS, INC.
CONDENSED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1999 1998
------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents, including restricted
cash of $2,322 at September 30, 1999
and $24 at December 31, 1998 $ 13,228 $ 16,893
Trade accounts receivable, less allowance for
doubtful accounts of $398 at September 30, 1999
and December 31, 1998 11,093 3,285
Other receivables 5,466 2,640
Due from affiliate, less allowance for
doubtful accounts of $1,162 at September 30, 1999
and December 31, 1998 686 1,951
Prepaid expenses and other current assets 3,090 3,580
-------- --------
Total current assets 33,563 28,349
-------- --------
EQUIPMENT AND PROPERTY
Flight and other equipment 89,063 89,878
Equipment under capital leases 10,262 12,266
-------- --------
99,325 102,144
Less: accumulated depreciation and amortization 36,492 33,433
-------- --------
Net equipment and property 62,833 68,711
-------- --------
ASSETS HELD FOR SALE 1,363 1,609
LONG-TERM OPERATING DEPOSITS 15,877 15,855
OTHER ASSETS AND DEFERRED CHARGES, NET 1,443 1,913
-------- --------
TOTAL ASSETS $ 115,079 $ 116,437
======== ========
(Continued)
</TABLE>
<PAGE>
WORLD AIRWAYS, INC.
CONDENSED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(unaudited)
September 30, December 31,
1999 1998
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 8,597 $ 5,213
Current maturities of long-term obligations 6,472 7,710
Accounts payable 19,100 16,494
Unearned revenue 5,001 2,329
Accrued maintenance in excess of reserves paid 5,766 8,928
Accrued salaries and wages 7,574 6,972
Accrued taxes 2,400 2,205
Other accrued liabilities 415 1,480
-------- -------
Total current liabilities 55,325 51,331
-------- -------
LONG-TERM OBLIGATIONS, NET 55,307 67,569
OTHER LIABILITIES
Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $22,005 at September 30,
1999 and $21,212 at December 31, 1998 3,347 4,140
Accrued maintenance in excess of reserves paid 16,027 8,460
Accrued post-retirement benefits 2,907 2,794
Other liabilities 9,577 5,770
-------- --------
Total other liabilities 31,858 21,164
-------- --------
TOTAL LIABILITIES 142,490 140,064
-------- --------
STOCKHOLDERS' DEFICIENCY
Preferred stock, $.001 par value (5,000,000 shares authorized; no shares
issued or outstanding at September 30, 1999
and December 31, 1998) -- --
Common stock, $.001 par value (40,000,000 shares authorized;
12,147,141 shares issued and 6,078,416 outstanding at September 30, 1999;
12,000,064 shares issued and 7,000,064 outstanding at December 31, 1998) 12 12
Additional paid-in capital 43,801 42,522
Contributed capital 3,000 3,000
Accumulated deficit (33,098) (28,434)
Note receivable from WorldCorp, Inc. -- (1,346)
Treasury stock, at cost (6,068,725 shares at September 30,
1999 and 5,000,000 shares at December 31, 1998) (41,126) (39,381)
-------- --------
Total stockholders' deficiency (27,411) (23,627)
-------- --------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 115,079 $ 116,437
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
OPERATING REVENUES
Flight operations $ 67,267 $ 67,301
Other 250 155
-------- --------
Total operating revenues 67,517 67,456
-------- --------
OPERATING EXPENSES
Flight operations 20,522 18,534
Maintenance 13,308 14,101
Aircraft rent and insurance 18,128 21,115
Fuel 7,297 3,469
Flight operations subcontracted to other carriers 589 (222)
Commissions 1,999 2,124
Depreciation and amortization 1,948 1,978
Sales, general and administrative 5,630 5,525
-------- --------
Total operating expenses 69,421 66,624
-------- --------
OPERATING INCOME (LOSS) (1,904) 832
-------- --------
OTHER INCOME (EXPENSE)
Interest expense (1,552) (1,756)
Interest income 266 132
Other, net 65 (615)
-------- --------
Total other expense (1,221) (2,239)
-------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES (3,125) (1,407)
INCOME TAX EXPENSE -- (90)
-------- --------
NET EARNINGS (LOSS) $ (3,125) $ (1,497)
======== ========
BASIC EARNINGS (LOSS) PER SHARE: $ (0.47) $ (0.21)
======== ========
DILUTED EARNINGS (LOSS) PER SHARE: $ (0.47) $ (0.21)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,584 7,018
======== ========
Diluted 6,584 7,018
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
OPERATING REVENUES
Flight operations $ 199,742 $ 207,944
Other 593 363
-------- --------
Total operating revenues 200,335 208,307
-------- --------
OPERATING EXPENSES
Flight operations 59,091 53,744
Maintenance 39,202 44,741
Aircraft rent and insurance 57,764 63,735
Fuel 18,041 14,871
Flight operations subcontracted to other carriers 2,650 856
Commissions 5,780 7,401
Depreciation and amortization 5,942 6,442
Sales, general and administrative 17,683 18,462
------- --------
Total operating expenses 206,153 210,252
------- --------
OPERATING LOSS (5,818) (1,945)
------- --------
OTHER INCOME (EXPENSE)
Interest expense (4,866) (5,642)
Interest income 739 614
Other, net 1,020 (584)
------- --------
Total other expense (3,107) (5,612)
------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (8,925) (7,557)
INCOME TAX EXPENSE -- (90)
------- --------
NET EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM (8,925) (7,647)
EXTRAORDINARY ITEM - GAIN ON RETIREMENT OF DEBT 4,176 --
------- --------
NET EARNINGS (LOSS) $ (4,749) $ (7,647)
======= ========
BASIC EARNINGS (LOSS) PER SHARE:
Earnings (loss) before extraordinary item $ (1.29) $ (1.06)
Extraordinary item 0.61 --
------- --------
Net earnings (loss) $ (0.68) $ (1.06)
======= ========
DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (loss) before extraordinary item $ (1.29) $ (1.06)
Extraordinary item 0.61 --
------- --------
Net earnings (loss) $ (0.68) $ (1.06)
======= ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 6,894 7,215
======== ========
Diluted 6,894 7,215
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF CHANGES
IN STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Note
Additional Receivable Treasury Total
Common Paid-in Contributed Accumulated from Stock, Stockholders'
Stock Capital Capital Deficit WorldCorp at Cost Deficiency
------- --------- ----------- ----------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1998 $ 12 $ 42,522 $ 3,000 $ (28,434) $(1,346) $(39,381) $ (23,627)
8% Debentures converted into
Common Stock -- 1,207 -- -- -- -- 1,207
Exercise of 10,000 stock options -- 10 -- -- -- -- 10
Amortization of warrants -- 62 -- -- -- -- 62
Settlement of Note Receivable
from WorldCorp -- -- -- 85 1,346 (1,745) (314)
Net Loss - -- -- (4,749) -- -- (4,749)
------- -------- -------- -------- ------- ------- --------
BALANCE AT
SEPTEMBER 30, 1999 $ 12 $ 43,801 $ 3,000 $ (33,098) $ -- $(41,126) $ (27,411)
====== ======= ======= ======== ======= ======= ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
( IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD $ 16,893 $ 25,887
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) (4,749) (7,647)
Adjustments to reconcile net earning (loss) to cash
provided (used) by operating activities:
Extraordinary gain on retirement of debt (4,176) --
Depreciation and amortization 5,942 6,442
Deferred gain recognition (793) (792)
Provision for losses on accounts receivable -- 1,772
Other (30) 895
Changes in certain assets and liabilities net
of effects of non-cash transactions:
Decrease (increase) in accounts receivable (9,369) 5,654
Decrease in deposits, prepaid expenses
and other assets 468 4,365
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 10,677 (6,596)
Increase in unearned revenue 2,672 3,970
-------- --------
Net cash provided (used) by operating activities 642 8,063
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to equipment and property (1,227) (2,543)
Proceeds from disposal of equipment and property 1,561 565
-------- --------
Net cash provided (used) by investing activities 334 (1,978)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in line of credit borrowing arrangement, net 3,384 --
Repayment of debt (8,035) (12,498)
Proceeds from exercise of stock options 10 --
Purchase of World Airways common stock, at cost -- (6,174)
Debt issuance costs -- (90)
Loan to WorldCorp, Inc., net -- (1,751)
-------- --------
Net cash provided (used) by financing activities (4,641) (20,513)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,665) (14,428)
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,228 $ 11,459
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements
<PAGE>
WORLD AIRWAYS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Management believes that all adjustments necessary for a fair statement of
results have been included in the Condensed Financial Statements for the
interim periods presented, which are unaudited. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and the results
of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999.
These interim period Condensed Financial Statements and accompanying
footnotes should be read in conjuction with the Financial Statements
contained in World Airways' Annual Report on Form 10-K for the year ended
December 31, 1998.
2. Loss per share for the three and nine months ended September 30, 1999 and
1998 are computed as follows (in thousands except per-share data):
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999
-------------------------------------------------
Earnings (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
<S> <C> <C> <C>
Basic EPS before extraordinary item
Net earnings (loss) $ (3,125) 6,584 $ (0.47)
=========
Effect of Dilutive Securities
Options -- --
8% convertible debentures -- --
--------- --------
Diluted EPS before extraordinary item
Net earnings (loss) $ (3,125) 6,584 $ (0.47)
========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1998
-------------------------------------------------
Earnings (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ------------- -----------
<S> <C> <C> <C>
Basic EPS
Net earnings (loss) $ (1,497) 7,018 $ (0.21)
=========
Effect of Dilutive Securities
Options -- --
8% convertible debentures -- --
------- --------
Diluted EPS
Net earnings (loss) $ (1,497) 7,018 $ (0.21)
======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
-------------------------------------------------
Earnings (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
----------- ----------- ---------
<S> <C> <C> <C>
Basic EPS before extraordinary item
Net earnings (loss) $ (8,925) 6,894 $ (1.29)
=========
Effect of Dilutive Securities
Options -- --
8% convertible debentures -- --
------- ------
Diluted EPS before extraordinary item
Net earnings (loss) $ (8,925) 6,894 $ (1.29)
======= ====== =========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
-------------------------------------------------
Earnings (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
-------------- ----------- -----------
<S> <C> <C> <C>
Basic EPS
Net earnings (loss) $ (7,647) 7,215 $ (1.06)
========
Effect of Dilutive Securities
Options -- --
8% convertible debentures -- --
------- ------
Diluted EPS
Net earnings (loss) $ (7,647) 7,215 $ (1.06)
======= ===== ========
</TABLE>
3. Capital Stock
In April 1999, $1,220,000 of the Company's 8% Convertible Senior Subordinated
Debentures (the "Debentures") were converted into 137,077 shares of Common
Stock. In August 1999 the Company also concluded an agreement with WorldCorp,
Inc. ("WorldCorp") to settle a secured loan and other amounts totaling
approximately $1.8 million that WorldCorp owed the Company when WorldCorp filed
for bankruptcy protection in February 1999. WorldCorp returned 1,068,725 shares
of the Company's Common Stock it owned in exchange for forgiveness of the
amounts owed. The agreement was approved by the Bankruptcy Court overseeing
WorldCorp's bankruptcy proceedings.
Subsequent to September 1999 the Company acquired $2.5 million of its
outstanding 8% Convertible Debentures, including accrued interest, for a
combination payment of approximately $230,000 cash and the issuance of 368,000
shares of Common Stock from Treasury Stock. The Company will recognize an
extraordinary gain of approximately $1.9 million on the transaction in the
fourth quarter of 1999. In May 1999, the Company acquired $5.7 million of the
Debentures for cash at a 75% discount and recognized an extraordinary gain of
$4.2 million in the second quarter.
As of November 9, 1999 WorldCorp and Naluri Berhad ("Naluri") beneficially
owned 38.5% and 18.9%, respectively, of the Company's Common Stock, with the
balance publicly traded. The Company understands that WorldCorp may file a plan
of liquidation in its bankruptcy proceedings in the near future. The Company
cannot determine what effect that plan my have on its operations or financial
condition.
In connection with amendments to lease agreements for the Company's fleet of
MD-11 aircraft the Company has agreed to issue warrants to the leasing companies
to acquire an aggregate of 2,000,000 shares of Common Stock for $2.50 per share.
The agreements contain anti-dilution provisions and will expire in 2004.
The Company has reached a tentative agreement with the Company's cockpit
crewmembers, who are represented by the International Brotherhood of Teamsters (
the "Teamsters"). The new five-year agreement, which was submitted to the full
membership for approval in November 1999, will expire in 2003 and replaces the
previous one that became amendable in July 1998. The proposed agreement provides
for a salary exchange program to reduce wages beginning January 1, 2000 for up
to 18 months. Under the proposed program, up to 10% of the crewmembers' wages
would be exchanged for the issuance of Company Common Stock. It is anticipated
that the salary exchange program will apply to other employees whose annual base
compensation exceeds $25,000. The reduction will apply to all management and
non-management personnel. The Company must negotiate agreements with its
unionized flight attendants and dispatchers before the salary exchange program
will apply to them.
4. Commitments and Contingencies
The Federal Aviation Administration ("FAA") has issued a notice of proposed
rulemaking concerning an Airworthiness Directive ("AD") that will require the
replacement of insulation blankets in the Company's fleet of aircraft. It is
expected the FAA will issue a final AD early in 2000 that will require the
replacement of the blankets to be accomplished within four years. The Company
presently estimates that the costs of the replacements, including material,
labor and out-of- service costs will total approximately $4.9 million per
aircraft. The Company has not yet determined how the cost of replacing the
blankets will be financed, however, the ultimate resolution of this matter could
have a material adverse effect on the Company's financial condition and results
of operations.
The Company faces arbitration and a demand for yet to be determined damages
resulting from threatened legal action by a foreign company claiming that the
Company improperly terminated an aircraft services agreement with that foreign
company. The Company also has agreed to mediation, but faces arbitration as a
result of a continuing dispute over the cancellation of a charter program with
another company. The Company does not believe the resolution of these matters
will have a material adverse effect on the Company's financial condition or
results of operations.
The Company's flight attendants have filed a grievance challenging the use of
foreign flight attendant crews on wet leased flights performed during the 1999
Hadj. The Company is discussing a possible settlement of this and other
outstanding grievances. However, the issue may not be settled and may be
submitted to an arbitrator whose decision could have a material adverse impact
on the financial condition or results of operations of the Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Part I, Item 2 of this report should be read in conjunction with Part II, Item 7
of World Airways, Inc. ("World Airways" or "the Company") Annual Report on Form
10-K for the year ended December 31, 1998. The information contained herein is
not a comprehensive management overview and analysis of the financial condition
and results of operations of the Company, but rather updates disclosures made in
the aforementioned filing.
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Therefore, this
report contains forward looking statements that are subject to risks and
uncertainties, including, but not limited to, the 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.
These risks could cause the Company's actual results for 1999 and beyond to
differ materially from those expressed in any forward looking statements made
by, or on behalf of, the Company.
OVERVIEW
GENERAL
For the third quarter ended September 30, 1999, the Company's operating revenues
were $67.5 million, the operating loss was $1.9 million and the net loss was
$3.1 million. The loss per share was $0.47 for both basic and diluted earnings
per share ("EPS") computed on an average of 6.6 million shares. For the
comparable period in 1998 the operating revenues were also $67.5 million
producing operating income of $0.8 million and a net loss of $1.5 million. In
1998 the basic and diluted EPS was a loss of $0.21 based on an average of 7.0
million shares.
For the first nine months of 1999, the Company's operating revenues were $200.3
million, the operating loss was $5.8 million and the net loss before an
extraordinary gain of $4.2 million on the retirement of debt was $8.9 million.
The loss per share before the extraordinary gain was $1.29 for both basic and
diluted EPS based on 6.9 million average shares. The net loss was $4.7 million
and the basic and diluted loss per share for the nine months was $0.68.
For the comparable period in 1998 the operating revenues were $208.3 million,
the operating loss was $1.9 million, the net loss was $7.6 million and the basic
and diluted EPS was a loss of $1.06 based on 7.2 million average shares.
SIGNIFICANT CUSTOMER RELATIONSHIPS
During the first nine months of 1999, the Company's business relied heavily on
its contracts with the U.S. Air Force's ("USAF") Air Mobility Command ("AMC")
and Malaysian Airline System Berhad ("MAS"). In 1999 these customers provided
approximately 51% and 12%, respectively, of the Company's revenues and 35% and
13%, respectively, of block hours flown. In 1998 these customers provided
approximately 42% and 18%, respectively, of the Company's revenues and 27% and
20%, respectively, of block hours flown.
In October 1999, the Company gave MAS a Notice of Default under an agreement
between the companies. The agreement provided that the Company would operate two
MD-11 aircraft for MAS through September 2000. MAS has stated it will vigorously
defend its position that all of its obligations under the agreement ceased on
September 30, 1999. As a result of the dispute the Company is marketing the
aircraft to other customers and to the extent it is successful in doing so does
not expect that the dispute will have any material adverse effect on its results
of operations. The company has not included any future revenues from MAS for the
aircraft in the contract backlog disclosed below.
Also in October 1999, the Company announced that it agreed to a three-year
extension of a July 1999 agreement to provide air services to Renaissance
Cruises. The Company currently operates one aircraft for Renaissance and will
add a second and third aircraft to operate for them in April and June 2000. The
revenue related to the contract extension is included in the contract backlog
disclosed below.
As a result of its contracts with Renaissance Cruises, the USAF and other
customers, the Company had a contract backlog at September 30, 1999 of $402
million, compared to $259 million at September 30, 1998. Approximately $48
million of the backlog relates to operations during the remainder of 1999.
Approximately 75% and 7% of the backlog relates to its contracts with
Renaissance Cruises and the USAF, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Total block hours decreased 784 hours, or 8.1%, to 8,929 hours in the third
quarter of 1999 from 9,713 hours in 1998, with an average of 10.0 available
aircraft during in 1999 compared to an average of 12 in 1998. Average daily
utilization (block hours flown per day per aircraft) was 9.7 hours in 1999 and
8.8 hours in 1998. In 1999 wet lease, or ACMI, contracts accounted for 56% of
the block hours, a decrease from 69% in 1998. The decrease in ACMI hours
reflects a decrease in passenger flying partially offset by an increase in cargo
flying. Passenger ACMI flying decreased principally due to a reduction in Hadj
flying in 1999. Cargo ACMI flying increased as a result of the efforts initiated
in 1998 to increase cargo business. In 1999 full service flying accounted for
43% of the block hours, an increase from 30% in 1998, because of more flying for
the USAF.
Operating Revenues. Revenues from flight operations were essentially unchanged
in 1999 as compared to 1998, totaling $67.3 million in both periods.
Operating Expenses. Total operating expenses increased $2.8 million, or 4.2%, in
1999 to $69.4 million from $66.6 million in 1998.
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 $2.0 million, or 10.7%, in
1999. This increase resulted primarily from an increase in full service flying
which necessitated the employment of additional flight attendants that increased
costs by approximately $1.4 million. A reduction in pilots generated cost
reductions of approximately $0.9 million. The increase in full service flying in
1999 also resulted in increased costs for passenger food, air to ground
communications and aircraft handling costs.
Maintenance expenses decreased $0.8 million, or 5.6%, in 1999. This decrease
principally reflects the 8.1% decrease in block hours flown.
Aircraft rent and insurance costs decreased $3.0 million, or 14.1%, in 1999.
This decrease resulted primarily from decreases in rent expense for the
Company's MD-11 aircraft negotiated with the aircraft lessors in 1998 and the
return of two DC-10-30 aircraft prior to the third quarter.
Fuel expenses showed an increase of $3.8 million in the third quarter of 1999 as
compared to the third quarter of 1998. This reflects an increase in the number
of gallons of fuel consumed as a result of an increase in full service flying
and a credit of approximately $2.4 million in the 1998 third quarter. The
credit, which was for earlier periods in the year, had no effect on operating
income. Year over year consumption increased 34.4%.
Non-operating income and expense, net improved by $1.0 million in 1999 primarily
because of a $0.2 million reduction in interest on lower average debt and in
1998 there was a $0.5 million charge related to assets held for sale.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Total block hours decreased 1,470 hours, or 5.4%, to 25,957 hours in the first
nine months of 1999 from 27,427 hours in 1998, with an average of 11.2 available
aircraft in 1999 and 12.0 available aircraft in 1998. Average daily utilization
(block hours flown per day per aircraft) was 8.5 hours in 1999 and 8.4 hours in
1998. In 1999 wet lease, or ACMI, contracts accounted for 60% of the block
hours, a decrease from 70% in 1998. The decrease in ACMI hours reflects a
decrease in passenger flying partially offset by an increase in cargo flying.
Passenger ACMI flying decreased principally due to the end of a contract with
Philippine Air Lines ("PAL") in the first quarter of 1998 and a reduction in
Hadj flying in 1999. Cargo ACMI flying increased as a result of the efforts
initiated in 1998 to increase cargo business. In 1999 full service flying
accounted for 38% of the block hours, an increase from 28% in 1998, primarily
because of more flying for the USAF.
Operating Revenues. Revenues from flight operations decreased $8.2 million, or
3.9%, to $199.7 million in 1999 from $207.9 million in 1998. This decrease is
primarily due to the 5.4% decrease in block hours flown in 1999 that was
partially offset by an increase in the average yield, or average revenue per
block hour, due to an increase in full service flying.
Operating Expenses. Total operating expenses decreased $4.1 million, or 1.9%, in
1999 to $206.2 million from $210.3 million in 1998.
Flight operations expenses increased $5.3 million, or 9.9%, in 1999. This
increase resulted primarily from an increase in full service flying which
necessitated the employment of additional flight attendants that increased costs
by approximately $4.5 million. A reduction in the number of pilots generated
cost reductions of approximately $2.5 million. Increased full service flying
resulted in increased costs for passenger food, air to ground communications and
aircraft handling.
Maintenance expenses decreased $5.5 million, or 12.4%, in 1999. This decrease
principally reflects the 5.4% decrease in block hours flown and an additional
maintenance accrual of $1.4 million relating to an engine overhaul in the first
half of 1998.
Aircraft rent and insurance costs decreased $6.0 million, or 9.4%, in 1999. This
decrease resulted primarily from decreases in rent expense for the Company's
MD-11 aircraft negotiated with the aircraft lessors in 1998 as well as the
reduction in the average number of aircraft available.
Fuel expenses increased $3.1 million, or 21.3%, in 1999 due to a 26.8% increase
in the number of gallons of fuel consumed that more than offset a 5.4% reduction
in the average cost of fuel per gallon.
Commissions decreased $1.6 million in 1999, or 21.9%, principally as a result of
commissions being paid for Hadj flying and PAL flying in 1998 that were not paid
in 1999.
Non-operating income and expense, net improved by $2.5 million in 1999 primarily
because of a $1.0 million gain on the sale of a portion of the Company's
interest in an industry-owned organization, a $0.8 million reduction in interest
expense because of lower average debt outstanding in 1999 and the $0.5 million
charge recorded for assets held for sale in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged. At September 30, 1999 the Company's cash and
cash equivalents totaled $13.2 million and the ratio of the Company's current
assets to its current liabilities ("current ratio") was 0.6:1. Also, as of
September 30, 1999, the Company had outstanding long-term debt and capital
leases of $55.3 million and notes payable and current maturities of long term
obligations of $15.1 million. In addition, the Company has significant long-term
obligations relating to operating leases for aircraft and spare engines.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating activities generated $0.6 million in cash in the nine months ended
September 30, 1999 compared to generating $8.1 million in the comparable period
in 1998. The decrease in 1999 is mainly due to increases of $10.7 million in
accounts payable, accrued expenses and other current liabilities and $2.7
million in unearned revenue that more than offset an increase of $9.4 million in
accounts receivable. The increase in 1998 principally reflects a $5.7 million
decrease in accounts receivable, a $4.4 million decrease in deposits, prepaid
expenses and other assets and a $4.0 increase in unearned revenue that more than
offset a $6.6 million decrease in accounts payable accrued expenses and other
liabilities.
CASH FLOWS FROM INVESTING ACTIVITIES
Investing activities generated $0.3 million in cash in the nine months ended
September 30, 1999, compared to using $2.0 million in the comparable period in
1998. In 1999 proceeds from the disposal of equipment and property of $1.6
million more than offset $1.2 million in purchases. In 1998 $2.5 million of
purchases of rotable spare parts and computer hardware and software more than
exceeded $0.6 million in proceeds from disposals.
CASH FLOWS FROM FINANCING ACTIVITIES
Financing activities used $4.6 million in cash in the nine months ended
September 30, 1999 compared to using $20.5 million in the comparable period in
1998. In 1999 cash was principally used for the net repayment of debt. In 1998,
cash was used to repay $12.5 million of debt, for the purchase of shares of the
Company's common stock for an aggregate cost of $6.2 million and a net loan of
$1.8 million to WorldCorp.
OTHER MATTERS
YEAR 2000
The Company's program to review its computer systems and address the issue of
computer programs and chips being unable to distinguish between the year 1900
and year 2000 continues to progress as planned. The Company now fully expects
that all of its hardware, operating systems and software will either be replaced
or upgraded to be Year 2000 compliant by the end of November 1999. Through
September 30, 1999 the Company's costs have totaled approximately $75,000 and
estimated additional costs to be incurred are approximately $15,000.
The manufacturers of the aircraft and engines and other aircraft components used
by the Company have provided considerable information in which they have assured
the Company that their equipment is Year 2000 compliant. However, the Company is
continuing with its internal efforts to independently verify that its aircraft
are Year 2000 compliant.
World Airways has identified its critical business partners and has requested
Year 2000 readiness statements from them. Statements have been received from a
majority of those requested. The Company has sent out a second notification to
those not initially responding and is following up with phone calls for a 100%
contact rate and verification of Year 2000 compliance.
The International Air Transport Association ("IATA") continues to establish a
database of information on Year 2000 compliance efforts of aviation authorities
and airports worldwide. World Airways is evaluating the degree of access to the
database it will require in conjunction with its worldwide flight activities.
The Company has developed contingency plans in the event some of its flight
activities after 1999 are scheduled into airports or geographical areas that are
not fully compliant and there are concerns about the safety of flight
operations. The Company will continue to monitor development in this area.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Part I, Item 3 of this report should be read in conjunction with Part II, Item
7a of World Airways, Inc. ("World Airways" or "the Company") Annual Report on
Form 10-K for the year ended December 31, 1998. The information contained herein
is not a quantitative and qualitative discussion about market risk the Company
faces, but rather updates disclosures made in the aforementioned filing.
World Airways continues to not have any material exposure to market risks.
<PAGE>
PART II
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
27 Financial data schedule for the quarter ended
September 30, 1999. Filed Herewith
(b) Reports on Form 8-K
None
* * * * * * * * * * * * * *
<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/ Gilberto M. Duarte, Jr.
Principal Accounting and Financial Officer
Date: November 10, 1999
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