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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
______________
For the fiscal year ended: DECEMBER 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 Identificaiton Number
13873 Park Center Road, Suite 490, Herndon, VA 20171
(Address of Principal Executive Offices)
(703) 834-9200
(Registrant's telephone number)
Securities registred pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock par value $.001 Nasdaq Stock Market
per share
Securities registered pursuant to Section 12(g) of the Act: NONE
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
---------- ----------
State by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the Common Stock held by non-affiliates of the
registrant on March 25, 1997, was approximately $19,322,729.
The number of shares of the registrant's Common Stock outstanding on March 25,
1997 was 11,230,064.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of World Airways, Inc.'s Notice of Annual Stockholder's Meeting and
Proxy Statement, to be filed within 120 days after the end of the registrant's
fiscal year, are incorporated into Part III of this Report.
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1
WORLD AIRWAYS, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
- ------
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 9
Item 3. Legal Proceedings....................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..................... 9
PART II
- -------
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 12
Item 6. Selected Financial Data................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 14
Item 8. Financial Statements and Supplementary Data............................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................ 57
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant...................... 57
Item 11. Executive Compensation.................................................. 58
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 58
Item 13. Certain Relationships and Related Transactions.......................... 58
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 59
2
PART I
ITEM 1. BUSINESS
- -----------------
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. At December 31, 1996, WorldCorp and MHS Berhad ("MHS")
owned 61.3% and 17.6%, respectively, of the outstanding common stock of World
Airways. The balance was publicly traded.
On March 14, 1997, World Airways announced that Charles W. Pollard departed
as President and Chief Executive Officer. Pursuant to the Company's bylaws, T.
Coleman Andrews, III, Chairman of the Board, will act as President on an interim
basis pending the hiring of a new CEO.
The managements of WorldCorp and World Airways are currently exploring ways
to maximize value for the shareholders of each company. WorldCorp is currently
evaluating the feasibility of a disposition of its interest in World Airways
through a secondary offering or a sale to a third party. There can be no
assurances, however, that any such transactions will ultimately be consummated.
In addition, World Airways recently announced its intention to purchase up to
one million shares of its publicly-traded Common Stock pursuant to open market
transactions. As of March 1, 1997, World Airways has purchased 770,000 shares
of its Common Stock for an aggregate cost of $7.8 million. World Airways does
not intend to purchase any additional shares at this time.
The Private Securities Litigation Reform Act of 1995 (the "Act") was recently
passed by Congress. The Company desires to take advantage of the "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 reliance on key customers, 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 1997 and beyond to differ materially from those expressed in
any forward looking statements made by, or on behalf of, the Company.
The principal executive offices of World Airways are located at Washington
Dulles International Airport in The Hallmark Building, 13873 Park Center Road,
Herndon, Virginia 20171. World Airways' telephone number is (703) 834-9200.
OVERVIEW
World Airways is a leading global provider of long-range passenger and cargo
air transportation outsourcing services to major international airlines under
fixed rate, multi-year contracts. Airline operations account for 100% of the
Company's operating revenue and operating income. The Company's passenger and
freight operations employ 13 wide-body aircraft which are operated under
contracts, primarily with Pacific Rim airlines. These contracts generally
require the Company to supply aircraft, crew, maintenance and insurance ("ACMI"
or "wet lease"), while the Company's customers are responsible for a large
portion of the other operating costs, including fuel. World Airways' airline
customers have determined that outsourcing a portion of their wide-body
passenger and cargo requirements can be less expensive, and offer greater
operational and financial flexibility, than purchasing new aircraft and
additional spare parts required for such aircraft. World Airways also leads a
contractor teaming arrangement that is the largest single supplier of commercial
aircraft to the United States Air Force's Air Mobility Command ("U.S. Air Force"
or "USAF").
In July 1996, World Airways restructured its business to focus on the growing
and profitable ACMI contract services. As such, the Company ceased all
scheduled passenger and scheduled charter services as of October 27, 1996,
taking a one-time charge of $21.0 million (see Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A")).
3
World Airways' operating philosophy is to build on its existing ACMI
contracts to achieve a strong platform for future growth. World Airways
concentrates on ACMI contracts because such contracts shift yield, load factor
and cost risks to the customer. The customer bears the risk of filling the
aircraft with passengers or cargo and assumes a large portion of the operating
expenses, including fuel. World Airways maximizes profitability by combining
its multi-year ACMI contracts with short term, higher-yielding ACMI agreements
which meet the peak seasonal requirements of its customers. The Company
responds opportunistically to rapidly changing market conditions by maintaining
a flexible fleet of aircraft that can be deployed in a variety of
configurations.
World Airways focuses its marketing efforts on the Pacific Rim, where rapid
economic development drives demand for the Company's services. The Company
believes that its modern fleet of long-range medium-density wide-body MD-11 and
DC10-30 aircraft are ideally suited to the Pacific Rim market. World Airways'
aircraft permit its customers to serve less dense international routes where a
Boeing 747 would provide excess capacity. World Airways has operated in the
Pacific Rim almost since its inception, and believes that it has developed the
ability to serve this market well.
World Airways substantially increases its potential customer base by being
able to serve both passenger and cargo customers. The Company flies passenger,
cargo and passenger/cargo convertible aircraft that the Company believes permit
the Company to target emerging opportunities. World Airways has been providing
safe, reliable ACMI services for almost 50 years. The Company has flown for the
USAF since 1956, for Malaysian Airlines System Berhad ("Malaysian Airlines")
since 1981 and for Garuda Indonesia ("Garuda") since 1973.
CUSTOMERS
Over the years, the Company has developed long-term relationships with a
number of major international airlines and with the USAF (see "MD&A -
Customers"). The Company's growth strategy is based, first and foremost, upon
providing the highest level of service to these customers, thereby maintaining
and expanding the amount of business being done through long-term contracts.
These contracts have increased the year-round usage of the Company's aircraft
fleet, reduced the seasonality of the Company's business and contributed to its
recently improved operating performance.
Malaysian Airlines. World Airways has provided wet lease 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. MHS, which owns 17.6% of the Company
as of December 31, 1996, also owns 29.1% of Malaysian Airlines. In late 1994,
the Company entered into a series of multi-year contracts, with expiration dates
ranging from 1997 to 2000, to provide aircraft to Malaysian Airlines. In 1996,
World Airways provided three aircraft for Hadj operations. The Company recently
entered into a new 32-month agreement for year-round operations (including the
Hadj) with Malaysian Airlines whereby the Company will provide two aircraft with
cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed
charter division through May 1999. The Company is currently in preliminary
discussions with Malaysian Airlines regarding a potential eleven-month reduction
in the utilization of one of these aircraft during the 32-month term of the
contract.
Until recently, the Company operated four passenger aircraft for Malaysian
Airlines under the multi-year agreements described above. The contract for two
of the four passenger aircraft for Malaysian Airlines expired in March 1997.
While the Company is deploying these two aircraft in the 1997 Hadj, and will
actively re-market the aircraft thereafter, the Company can provide no assurance
that it will be able to redeploy the two aircraft, beginning June 1997, at price
and utilization levels at least as favorable as under the terms of the Malaysian
Airlines contracts.
The Company originally operated three MD-11 cargo aircraft for Malaysian
Airlines. However, beginning in July, 1996, and as mutually agreed by the
parties, World Airways redeployed two cargo aircraft, which had been operating
under these contracts, into the Philippine Airlines contracts. The Company and
Malaysian Airlines are currently discussing the future redeployment of these
aircraft back into Malaysian Airlines' operations in order to meet the
contract's original obligations. The Company can provide no assurances, however,
that the Company will, in fact, be able to redeploy these two aircraft back into
Malaysian Airlines' operation to meet the contract's original obligations.
Revenues associated with these contractual obligations are included in the
Company's backlog amount included herein.
4
Garuda. The Company has flown for Garuda periodically since 1973 and yearly
------
since 1988. Since 1988, the Company has been one of the largest providers of
passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj
pilgrimage is the world's largest due to the size of Indonesia's Islamic
population. In 1996, approximately 200,000 Indonesians traveled to Jeddah for
the Hadj pilgrimage. During the 1996 Hadj pilgrimage, the Company provided
passenger service to Garuda with seven aircraft, flying approximately 40,000
Indonesians on Company aircraft. Due to the Company's capacity constraint during
the period of Hadj flying, the Company reached an agreement with Garuda to
operate six aircraft during the 1997 pilgrimage.
Philippine Airlines. In May 1996, the Company entered into a new ACMI
-------------------
contract with Philippine Airlines, thereby further expanding its presence in the
Pacific Rim. The Company presently operates four MD-11 passenger aircraft for
Philippine Airlines under an agreement, with high minimum monthly utilization
levels. The Company, however, has recently received a written communication from
Philippine Airlines in which the airline contends that its leases for all four
aircraft expire on November 15, 1997. The Company believes that this position
is contrary to the understanding of the parties that each of the MD-11s are to
be leased by Philippine Airlines for a period of 18 months from delivery of each
aircraft. The parties are currently discussing the length of the lease term for
these aircraft. The Company can provide no assurances, however, that Philippine
Airlines will agree to lease any of the four MD-11 passenger aircraft beyond
November 15, 1997, or that the Company will be able to secure other business at
as favorable price and utilization levels.
Also, subsequent to year-end, at Philippine Airlines' request, the Company
agreed to a payment plan with respect to Philippine Airlines' wet lease
obligations for several months beginning in March 1997. Although Phillipine
Airlines is current on this payment plan to date, if Philippine Airlines
defaults on this payment plan, or fails to meet its monthly aircraft lease
obligations, this development, if not offset by other business, would have a
material adverse effect on the cash flows, financial condition and results of
operation of World Airways.
U.S. Air Force. The Company has provided international air transportation to
--------------
the U.S. Air Force since 1956. The overall downsizing of the U.S. military,
combined with a need to respond quickly to the growing number of global regional
conflicts places a premium on the mobility of the U.S. armed forces. This is
reflected in the stable size over the past several years of the USAF's
procurement of commercial airlift services. Although the Company's agreements
with the USAF provide for full service contracts with certain minimum
performance requirements, the Company has risks similar to an ACMI agreement
because the USAF agreements are cost-plus contracts at attractive rates.
The USAF awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and type of aircraft such carriers make
available to CRAF. The Company utilizes such teaming arrangements to maximize
the value of potential awards. The Company leads a contractor teaming
arrangement that enjoys a 44% market share of the USAF's overall commercial
airlift requirement. During a period in which the U.S. military downsized
substantially, the Company's portion of the fixed USAF award increased from
$15.6 million for the government's 1992-93 fiscal year, to $52.8 million for the
government's 1996-97 fiscal year.
The current annual contract commenced on October 1, 1996 and expires on
September 30, 1997. 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 and ad hoc basis as needs arise. Due to the utilization
of a significant number of the Company's aircraft under multi-year contracts 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 the U.S. Air Force's 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.
Although the Company's customers bear the financial risk of filling the
Company's aircraft with passengers or cargo, the Company can be affected
adversely if its customers are unable to operate the Company's aircraft
profitably, or if one or more of the Company's customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, the Company can be adversely affected by
receiving delayed or partial payments or by receiving customer demands for rate
and utilization reductions, flight cancellations, and/or early termination of
their agreements.
5
As a result of these and other contracts, the Company had an overall contract
backlog at December 31, 1996 of $468.0 million, compared to $462.0 million at
December 31, 1995. Approximately $253.5 million of the backlog relates to 1997
operations. The Company's backlog for each contract is determined by
multiplying the minimum number of block hours (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 destination) guaranteed
under the applicable contract by the specified hourly rate under such contract.
Approximately 60% and 20% of the backlog relates to its multi-year contracts
with Malaysian Airlines and Philippine Airlines, respectively. While the
percentage of its 1997 block hour capacity that is currently under contract
exceeds the comparable percentage in the past several years, the Company still
has substantial uncontracted capacity in the third and fourth quarters of 1997.
In addition, a significant portion of the Company's current contracts expire
near the end of 1997. Although there can be no assurance that it will be
able to secure additional business to reduce this excess capacity, the Company
is actively seeking customers for 1997 and beyond. The Company's financial
results and financial condition would be affected adversely if the Company is
unable to secure additional business to reduce this excess capacity.
The information regarding major customers and foreign revenue is contained in
Note 14 "Major Customers" of the Company's "Notes to Financial Statements" in
Item 8.
Information concerning the classification of products within the air
transportation industry comprising 10% or more of the Company's operating
revenues from continuing operations is presented in the following table (in
millions):
Year Ended December 31,
-----------------------
1996 1995 1994
------- ------ ------
Flight Operations - Passenger $257.6 $168.0 $134.6
Flight Operations - Cargo 39.3 64.6 39.3
COMPETITION
The market for outsourcing air passenger and cargo ACMI services is highly
competitive. Certain of the passenger and cargo air carriers against which the
Company competes possess substantially greater financial resources and more
extensive facilities and equipment than those which are now, or will in the
foreseeable future become, available to the Company. The Company believes that
the most important bases for competition in the ACMI outsourcing business are
the age of the aircraft fleet, the passenger, payload and cubic capacities of
the aircraft, and the price, flexibility, quality and reliability of the air
transportation service provided. Competitors in the ACMI outsourcing market
include MartinAir Holland, Tower Air and American TransAir and all-cargo
carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk,
and scheduled and non-scheduled passenger carriers which have substantial belly
capacity. The ability of the Company to achieve the growth anticipated by its
strategic plan depends upon its success in convincing major international
airlines that outsourcing some portion of their air passenger and cargo business
remains more cost-effective than undertaking passenger or cargo operations with
their own incremental capacity and resources. The allocation of military air
transportation contracts by the USAF is based upon the number and type of
aircraft a carrier, alone or through a teaming arrangement, makes available for
use in times of national emergencies. The formation of competing teaming
arrangements comprised of larger partners than those sponsored by the Company,
an increase by other air carriers in their commitment of aircraft to the
emergency program, or the withdrawal of the Company's current partners, could
adversely affect the size of the USAF contracts, if any, which are awarded to
the Company in future years.
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 due to lower demand for passenger and
cargo services relative to other times of the year. The Company experiences
higher levels of utilization and yields in the second quarter, principally due
to peak demand for commercial passenger services associated with the annual Hadj
pilgrimage. In 1997, the Company's flight operations associated with the Hadj
pilgrimage will occur from March 15 to May 20. Because the Islamic calendar is a
lunar-based calendar, the Hadj pilgrimage occurs approximately 10 to 12 days
earlier each year relative to the Western (Gregorian) calendar. As a result,
revenues resulting from future Hadj pilgrimage contracts will continue to shift
from the second quarter to the first quarter over
6
the next several years. World Airways believes that its contracts with
Malaysian Airlines and the USAF should lessen the effect of these seasonal
factors.
The quarterly financial data is contained in Note 17 "Unaudited Quarterly
Results" of the Company's "Notes to Financial Statements" in Item 8.
NEW MD-11ER AIRCRAFT
In 1996, World Airways entered into two 24-year leases with McDonnell Douglas
to operate a new extended-range model of the McDonnell Douglas MD-11 (see "MD&A
- - Liquidity and Capital Resources - Capital Commitments"). The aircraft, known
as the MD-11ER, is capable of flying nonstop between such cities as Zurich and
Santiago, New York and Johannesburg, and Los Angeles and Shanghai. The
jetliner's increased range is due to a combination of the following:
engineering innovations; aerodynamics improvements that minimize aircraft drag;
major reductions in the airframe weight; significantly increased fuel capacity;
and a higher allowable maximum takeoff weight that provides the heavier fuel
load without loss of payload.
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 have not had a significant impact on the
Company's operations in recent years because, in general, the Company's ACMI
contracts with its customers limit the Company's exposure to increases in fuel
prices. 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.
REGULATORY MATTERS
The Company is subject to government regulation and control under the U.S.
laws and the laws of the various countries which it operates. It is also
governed by bilateral services agreements between the U.S. and the countries to
which the Company provides airline service. The Company is subject to Title 49
of the United States Code (the "Transportation Code"), under which the DOT and
the Federal Aviation Administration (the "FAA") exercise regulatory authority.
Additionally, foreign governments assert jurisdiction over air routes and fares
to and from the U.S., airport operation rights, and facilities access.
The Company has periodically received correspondence from the FAA with
respect to minor noncompliance matters. Most recently, as the FAA has increased
its scrutiny of U.S. airlines, the Company was assessed a preliminary fine of
$810,000 in connection with certain minor security violations by ground handling
crews contracted by the Company for services at foreign airport locations. In
each of these instances, the Company was in compliance with international
regulations, but not the more stringent U.S. requirements. The Company has
taken steps to comply with the U.S. requirements and believes that any fines
ultimately imposed by the FAA will not have a material adverse effect on the
financial condition or results of operations of the Company. The Company is
subject to the Transportation Code, under which the DOT and the FAA exercise
regulatory authority. Generally, the FAA has regulatory jurisdiction over
flight operations, including equipment, personnel, maintenance and other safety
matters. To assure compliance with its operational standards, the FAA requires
air carriers to obtain operating, airworthiness and other certificates, which
may be suspended or revoked for cause. The FAA also conducts safety audits and
has the power to impose fines and other sanctions for violations of airline
safety regulations. The DOT maintains authority over international aviation,
subject to review by the President of the U.S. and has jurisdiction over unfair
trade practices and consumer protection policies on domestic and international
routes and fares.
7
Additionally, foreign governments assert jurisdiction over air routes and fares
to and from the U.S., airport operation rights and facilities access.
The Company is subject to the jurisdiction of the FAA with respect to
aircraft maintenance and operations, including flight operations, equipment,
aircraft noise, ground facilities, dispatch, communications, training weather
observation, flight time, crew qualifications, aircraft registration and other
matters affecting air safety. The FAA requires each air carrier to obtain an
operating certificate and operations specifications authorizing the carrier to
operate to particular airports on approved international routes using specified
equipment. These certificates and specifications are subject to amendment,
suspension, revocation or termination by the FAA. In addition, all of the
Company's aircraft must have and maintain certificates of airworthiness issued
or approved by the FAA. The Company currently holds an FAA air carrier
operating certificate and operations specifications under Part 121 of the
Federal Aviation Regulations. The FAA has the authority to suspend temporarily
or revoke permanently the authority of the Company or its licensed personnel for
failure to comply with regulations promulgated by the FAA and to assess civil
penalties for such failures.
Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft fleet must comply with certain Stage 3 noise restrictions
by certain specified deadlines. All of the Company's aircraft currently meet
the Stage 3 noise reduction requirement, which is currently the most stringent
FAA noise requirement. FAA regulations require compliance with the Traffic
Alert and Collision Avoidance System ("TCAS"), approved airborne windshear
warning system and aging aircraft regulations.
Additional laws and regulations have been proposed from time to time which
could significantly increase the cost of airline operations by imposing
additional requirements or restrictions on operations. Laws and regulations
have been considered from time to time that would prohibit or restrict the
ownership and transfer of airline routes or slots. There is no assurance that
laws and regulations currently enacted or enacted in the future will not
adversely affect the Company's ability to maintain its current level of
operating results.
Several aspects of airline operations are subject to regulation or oversight
by Federal agencies other than the DOT or FAA. For instance, labor relations in
the air transportation industry are generally regulated under the Railway Labor
Act, which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements. In addition, the Company is subject to the jurisdiction
of other governmental entities, including (i) the FCC regarding its use of radio
facilities pursuant to the Federal Communications Act of 1934, as amended, (ii)
the Commerce Department, the Customs Service, the Immigration and Naturalization
Service, and the Animal and Plant Health Inspection Service of the Department of
Agriculture regarding the Company's international operations, (iii) the
Environmental Protection Agency (the "EPA") regarding compliance with standards
for aircraft exhaust emissions and (iv) the Department of Justice regarding
certain merger and acquisition transactions. The EPA regulates operations,
including air carrier operations, which affect the quality of air in the U.S.
The Company has made all necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke emissions standards issued by the EPA.
The Company's international operations are generally governed by the network
of bilateral civil air transport agreements providing for the exchange of
traffic rights between governments which then select and designate air carriers
authorized to exercise such rights. In the absence of a bilateral agreement,
such international air services are governed by principles of comity and
reciprocity. Bilateral provisions pertaining to the charter services in which
the Company is primarily engaged vary considerably depending on the particular
country. Most bilateral agreements into which the U.S. has entered permit
either country to terminate the agreement with one year's notification to the
other. In the event a bilateral agreement is terminated, international air
service between the affected countries is governed by the principles of comity
and reciprocity.
Certain airports served by the Company are subject to slot allocations
administered by the governments of the countries in which such airports are
located or by coordinating committees comprising airline representatives. A
"slot" is an authorization to take off or land at the designated airport within
a specified time window. In the past, the Company has generally been successful
in obtaining the slots it needs in order to conduct planned operations. There
can be no assurance, however, that it will be able to do so in the future
because, among other factors, government policies regulating the distribution of
slots, both in the U.S., and in foreign countries, are subject to change.
8
Pursuant to federal law, no more than 25% of the voting interest in the
Company may be owned or controlled by foreign citizens. In addition, under
existing precedent and policy, actual control must reside in U.S. citizens. As
a matter of regulatory policy, the DOT has stated that it would not permit
aggregate equity ownership of a domestic air carrier by foreign citizens in an
amount in excess of 49%. The Company fully complies as of the date hereof with
these U.S. citizen ownership requirements.
Due to its participation in CRAF, the Company is subject to inspections
approximately every two years by the military as a condition of retaining its
eligibility to perform military charter flights. The last such inspection was
undertaken in 1996 and the next is anticipated to occur in 1998. As a result of
such inspections, the Company has been required to implement measures, such as
the establishment of a crew resource management course, beyond those required by
the DOT, FAA and other government agencies. The USAF may terminate its contract
with the Company if the Company fails to pass such inspection or otherwise fails
to maintain satisfactory performance levels, if the Company loses its
airworthiness certificate or if the aircraft pledged to the contracts lose their
U.S. registry or are leased to unapproved carriers.
The Company believes it is in compliance in all material respects with all
requirements necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate issued by the FAA.
A modification, suspension or revocation of any of the Company's DOT or FAA
authorizations or certificates could have a material adverse effect upon the
Company. The Company also is subject to state and local laws and regulations at
locations where it operates and the regulations of various local authorities
which operate the airports it serves. Certain airport operations have adopted
local regulations which, among other things, impose curfews and noise abatement
regulations. While the Company believes it is currently in compliance in all
material respects with all appropriate standards and has all required licenses
and authorities, any material non-compliance by the Company therewith or the
revocation or suspension of licenses or authorities could have a material
adverse effect on the Company.
EMPLOYEES
As of March 1, 1997, the Company had 726 full time employees classified as
follows:
Number of
Classification Full-Time Employees
----------- -------------------
Management............................... 9
Administrative and Operations............ 324
Cockpit Crew (including pilots).......... 323
Flight Attendants (active)............... 70
---
Total Employees........................ 726
===
The Company's cockpit crew members, who are represented by the International
Brotherhood of Teamsters (the "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. In June 1996, the Company
signed a new four year labor agreement with the Teamsters which provides for
retroactive pay increases for the flight attendants and work rule flexibility
and lengthened duty time rules for the Company. The agreement was ratified by
the flight attendants in August 1996. The Company's flight attendants
challenged 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
arbitrator in this matter recently denied the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that the Company's contract with its flight attendants requires the
Company to first actively seek profitable business opportunities that require
using the Company's flight attendants, before the Company may accept wet lease
business opportunities that use the flight attendants of the Company's
customers. The Company can provide no assurances as to how the imposition of
this requirement will affect the Company's financial condition and results of
operations.
9
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 of such employees for 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.
10
ITEM 2. PROPERTIES
- -------------------
FLIGHT EQUIPMENT
At December 31, 1996, the Company's aggregate operating fleet consisted of
thirteen leased aircraft as follows (see Note 11 "Long-Term Obligations" of the
Company's "Notes to Financial Statements" in Item 8):
Capacity
-------------------------------------
Aircraft /(a)/ Passenger (seats)/(b)/ Cargo (Tons) Total /(c)/
--------------------------- ---------------------- ------------- ------------
McDonnell Douglas MD-11 409 -- 4
McDonnell Douglas MD-11F -- 95 1
McDonnell Douglas MD-11CF 410 90 2
McDonnell Douglas MD-11ER 409 -- 2
McDonnell Douglas DC10-30 350 -- 3
McDonnell Douglas DC10-30CF 380 65 1
--
Total 13
==
Notes
-----
(a) "F" aircraft are freighters, "CF" are convertible freighters and may
operate in either passenger or freight configurations. "ER" aircraft
maintain extended-range capabilities. Aircraft with no letter
designation are passenger-only aircraft.
(b) Based on standard operating configurations. Other configurations are
occasionally used.
(c) Lease terms expire between 1997 and 2020 (assuming exercise of all lease
extensions).
GROUND FACILITIES
The Company leases office space located near Washington Dulles International
Airport which houses its corporate headquarters and substantially all of the
administrative employees of the Company. In addition, the Company leases
additional office and warehouse space in Wilmington, Delaware; Philadelphia,
Pennsylvania; New York, New York; Los Angeles, California; Kuala Lumpur,
Malaysia; Yakota, Japan; and Frankfurt, Germany. Additional small offices and
maintenance material storage space are leased at often frequented airports to
provide administrative and maintenance support for commercial and military
contracts.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
For a description of the Company's current legal proceedings, see Note 16,
"Commitments and Contingencies" of the Company's "Notes to Financial Statements"
in Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK & RELATED SECURITY HOLDER
- -----------------------------------------------------------------------
MATTERS
-------
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market/SM/ under the symbol: WLDA. The high and low sales prices of
the Company's common stock, as reported on the Nasdaq National Market, for each
quarter following the Company's October 1995 initial public offering are as
follows:
Common Stock
---------------------
High Low
------------ ------
1996
----
Fourth Quarter 11 1/8 6 5/8
Third Quarter 7 3/4 4 3/4
Second Quarter 11 1/4 6 3/4
First Quarter 11 1/8 6
1995
----
Fourth Quarter 12 3/4 9
Third Quarter N/A N/A
Second Quarter N/A N/A
First Quarter N/A N/A
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 61.3% of the Company's common stock as of December 31,
1996, is subject to the provisions of an indenture expiring in 2004, which
causes the Company not to pay dividends upon the occurrence of any events of
default by WorldCorp under such indenture.
The approximate number of shareholders of record at March 14, 1997 is 55, and
does not include those shareholders who hold shares in street name accounts.
12
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
WORLD AIRWAYS, INC.
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
RESULTS OF OPERATIONS:
- ----------------------
Operating revenues $309,587 $242,386 $180,715 $178,736 $180,293
Operating expenses 287,942 226,488 185,916/(1)/ 186,065/(2)/ 173,028
Operating income (loss) 21,645 15,898 (5,201) (7,329) 7,265/(3)
Earnings (loss) from continuing
operations before income
taxes and change in
accounting principle 19,032 14,748 (9,027) (8,985) 8,654
Earnings (loss) from continuing
operations before change
in accounting principle 18,353 14,146 (9,001) (9,048) 8,418
Discontinued operations (32,375) (5,250) -- -- --
Cumulative effect of change in
accounting principle -- -- -- -- (1,973)
Net earnings (loss) (14,022) 8,896 (9,001) (9,048) 6,445
Weighted average common stock and
common equivalent shares outstanding/(4)/ 11,806 10,572 9,939 9,000 9,000
Primary and fully diluted earnings
(loss) per common share:
Continuing operations $ 1.55 $ 1.34 $(0.91) $ (1.01) $0.94
Discontinued operations (2.74) (0.50) -- -- --
Change in accounting principle -- -- -- -- (0.22)
Net earnings (loss) (1.19) 0.84 (0.91) (1.01) 0.72
Cash dividends -- -- -- -- 2.16
FINANCIAL POSITION:
- -------------------
Cash and restricted short-term
investments $ 8,075 $ 26,180 $ 4,722 $ 11,746 $ 12,958
Total assets 131,491 130,695 78,051 88,512 66,486
Notes payable and long-term obligations
including current maturities 50,538 37,112 33,826 42,256 13,076
Common stockholders' equity (deficit) 8,362 30,340 (1,367) (7,756) 1,292
Dividends -- -- -- -- 19,445
- -----------------------
(1) Operating expenses in 1994 include a $4.2 million reversal of excess accrued
maintenance reserves associated with the expiration of three DC10-30
aircraft leases during 1994.
(2) Operating expenses in 1993 include $2.3 million of termination fees related
to the early return of three DC10-30 aircraft.
(3) Operating income in 1992 includes $4.1 million related to settlement of
contract claims with the U.S. Government related to Operation Desert
Shield/Desert Storm.
(4) All share and per share data for the periods presented have been restated to
reflect the 1-for-88,737 stock split which was effectuated in February 1994.
13
ITEM 7. 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. At December 31, 1996, WorldCorp and MHS Berhad ("MHS") owned
61.3% and 17.6%, respectively, of the outstanding common stock of World Airways.
The balance was publicly traded.
On March 14, 1997, World Airways announced that Charles W. Pollard departed
as President and Chief Executive Officer. Pursuant to the Company's bylaws, T.
Coleman Andrews, III, Chairman of the Board, will act as President on an interim
basis pending the hiring of a new CEO.
The managements of WorldCorp and World Airways are currently exploring ways
to maximize value for the shareholders of each company. WorldCorp is currently
evaluating the feasibility of a disposition of its interest in World Airways
through a secondary offering or to a third party. There can be no assurances,
however, that any such transactions will ultimately be consummated. In
addition, World Airways recently announced its intention to purchase up to one
million shares of its publicly-traded Common Stock pursuant to open market
transactions. As of February 28, 1997, World Airways has purchased 770,000
shares of its Common Stock for an aggregate cost of $7.8 million. World Airways
does not intend to purchase any additional shares at this time.
The Private Securities Litigation Reform Act of 1995 (the "Act") was recently
passed by Congress. The Company desires to take advantage of the "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 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 1997 and beyond to differ materially from those expressed in
any forward looking statements made by, or on behalf of, the Company.
OVERVIEW
GENERAL
World Airways is a leading global provider of long-range passenger and cargo
air transportation outsourcing services to major international airlines under
fixed rate, multi-year contracts. The Company's passenger and freight
operations employ 13 wide-body aircraft which are currently operated under
contracts, primarily with Pacific Rim airlines. These contracts generally
require the Company to supply aircraft, crew, maintenance and insurance ("ACMI"
or "wet lease"), while the Company's customers are responsible for a large
portion of the other operating expenses, including fuel. World Airways'
airline customers have determined that outsourcing a portion of their wide-body
passenger and cargo requirements can be less expensive, and offer greater
operational and financial flexibility, than purchasing new aircraft and
additional spare parts required for such aircraft. World Airways also leads a
contractor teaming arrangement that is the largest single supplier of commercial
airlift services to the United States Air Force's Air Mobility Command ("U.S.
Air Force" or "USAF").
In July 1996, World Airways restructured its business to focus on the growing
and profitable ACMI contract services. As such, the Company ceased all scheduled
passenger and scheduled charter services as of October 27, 1996, taking a one-
time charge of $21.0 million (see "Discontinuation of Scheduled Service
Operations").
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
14
under two types of contracts: wet lease contracts and full service contracts.
Under wet lease 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 wet lease 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 wet lease 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 aircraft. Therefore, achieving high average
daily utilization of its aircraft (particularly its MD-11 aircraft) at
attractive yields are important 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
Historically, the Company's business has relied heavily on its contracts with
Malaysian Airline System Berhad ("Malaysian Airlines"), P.T. Garuda Indonesia
("Garuda") and the U.S. Air Force. These customers provided approximately 34%,
13%, and 25%, respectively, of the Company's revenues and 42%, 14%, and 17%,
respectively, of total block hours from continuing operations during 1996. For
1995, these customers provided approximately 42%, 11%, and 21%, respectively, of
the Company's revenues and 48%, 11%, and 13%, respectively, of total block hours
from continuing operations. In 1996, the Company commenced operations for
Philippine Airlines, Inc. ("Philippine Airlines") providing four MD-11 aircraft
under year-round wet lease contracts. These operations provided approximately
15% and 17% of the Company's revenues and block hours from continuing
operations, respectively, during 1996. The Company expects that the agreement
with Philippine Airlines will continue to have a substantial impact on its
revenues and block hours in 1997.
Malaysian Airlines. World Airways has provided wet lease services 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. MHS, which owns 17.6% of the Company
as of December 31, 1996, also owns 29.1% of Malaysian Airlines. In late 1994,
the Company entered into a series of multi-year contracts, with expiration dates
ranging from 1997 to 2000, to provide aircraft to Malaysian Airlines. In 1996,
World Airways provided three aircraft for Hadj operations. The Company recently
entered into a new 32-month agreement for year-round operations (including the
Hadj) with Malaysian Airlines whereby the Company will provide two aircraft with
cockpit crews, maintenance and insurance to Malaysian Airlines' newly-formed
charter division through May 1999. The Company is currently in preliminary
discussions with Malaysian Airlines regarding a potential eleven-month reduction
in the utilization of one of these aircraft during the 32-month term of the
contract.
Until recently, the Company operated four passenger aircraft for Malaysian
Airlines under the multi-year agreements described above. The contract for two
of the four passenger aircraft for Malaysian Airlines expired in March 1997.
While the Company is deploying these two aircraft in the 1997 Hadj, and will
actively re-market the aircraft thereafter, the Company can provide no assurance
that it will be able to redeploy the two aircraft, beginning June 1997, at price
and utilization levels at least as favorable as under the terms of the Malaysian
Airlines contracts.
The Company originally operated three MD-11 cargo aircraft for Malaysian
Airlines. However, beginning in July, 1996, and as mutually agreed by the
parties, World Airways redeployed two cargo aircraft, which had been operating
under these contracts, into the Philippine Airlines contract. The Company and
Malaysian Airlines are currently discussing the future redeployment of these
aircraft back into Malaysian Airlines' operations in order to meet the
contracts' original obligations. The Company can provide no assurances, however,
that the Company will, in fact, be able to redeploy these two aircraft back into
Malaysian Airlines' operation to meet the contracts' original obligations.
Revenues associated with these contractual obligations are included in the
Company's backlog amount included herein.
15
Garuda. The Company has flown for Garuda periodically since 1973 and yearly
------
since 1988. Since 1988, the Company has been one of the largest providers of
passenger services to Indonesia for the Hadj pilgrimage. The Indonesian Hadj
pilgrimage is the world's largest due to the size of Indonesia's Islamic
population. In 1996, approximately 200,000 Indonesians traveled to Jeddah for
the Hadj pilgrimage. During the 1996 Hadj pilgrimage, the Company provided
passenger service to Garuda with seven aircraft, flying approximately 40,000
Indonesians on Company aircraft. Due to the Company's capacity constraint during
the period of Hadj flying, the Company reached an agreement with Garuda to
operate six aircraft during the 1997 pilgrimage.
Philippine Airlines. In May 1996, the Company entered into a new ACMI
-------------------
contract with Philippine Airlines, thereby further expanding its presence in the
Pacific Rim. The Company presently operates four MD-11 passenger aircraft for
Philippine Airlines under an agreement, with high minimum monthly utilization
levels. The Company, however, has recently received a written communication from
Philippine Airlines in which the airline contends that its leases for all four
aircraft expire on November 15, 1997. The Company believes that this position
is contrary to the understanding of the parties that each of the MD-11s are to
be leased by Philippine Airlines for a period of 18 months from delivery of each
aircraft. The parties are currently discussing the length of the lease term for
these aircraft. The Company can provide no assurances, however, that Philippine
Airlines will agree to lease any of the four MD-11 passenger aircraft beyond
November 15, 1997, or that the Company will be able to secure other business at
as favorable price and utilization levels.
Also, subsequent to year-end, at Philippine Airlines' request, the Company
agreed to a payment plan with respect to Philippine Airlines' wet lease
obligations for several months beginning in March 1997. Although Philippine
Airlines is current on this payment plan to date, if Philippine Airlines
defaults on this payment plan, or fails to meet its monthly aircraft lease
obligations, this development, if not offset by other business, would have a
material adverse effect on the cash flows, financial condition and results of
operation of World Airways.
U.S. Air Force. The Company has provided international air transportation to
--------------
the U.S. Air Force since 1956. The overall downsizing of the U.S. military,
combined with a need to respond quickly to the growing number of global regional
conflicts places a premium on the mobility of the U.S. armed forces. This is
reflected in the stable size over the past several years of the USAF's
procurement of commercial airlift services. Although the Company's agreements
with the USAF provide for full service contracts with certain minimum
performance requirements, the Company has risks similar to an ACMI agreement
because the USAF agreements are cost-plus contracts at attractive rates.
The USAF awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and type of aircraft such carriers make
available to CRAF. The Company utilizes such teaming arrangements to maximize
the value of potential awards. The Company leads a contractor teaming
arrangement that enjoys a 44% market share of the USAF's overall commercial
airlift requirement. During a period in which the U.S. military downsized
substantially, the Company's portion of the fixed USAF award increased from
$15.6 million for the government's 1992-93 fiscal year, to $52.8 million for the
government's 1996-97 fiscal year.
The current annual contract commenced on October 1, 1996 and expires on
September 30, 1997. 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 and ad hoc basis as needs arise. Due to the utilization
------
of a significant number of the Company's aircraft under multi-year contracts 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 the U.S. Air Forces 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.
Although the Company's customers bear the financial risk of filling the
Company's aircraft with passengers or cargo, the Company can be affected
adversely if its customers are unable to operate the Company's aircraft
profitably, or if one or more of the Company's customers experience a material
adverse change in their market demand, financial condition or results of
operations. Under these circumstances, the Company can be adversely affected by
receiving delayed or partial payments or by receiving customer demands for rate
and utilization reductions, flight cancellations, and/or early termination of
their agreements.
16
As a result of these and other contracts, the Company had an overall contract
backlog at December 31, 1996 of $468.0 million, compared to $462.0 million at
December 31, 1995. Approximately $253.5 million of the backlog relates to 1997
operations. The Company's backlog for each contract is determined by
multiplying the minimum number of block hours (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 destination) guaranteed
under the applicable contract by the specified hourly rate under such contract.
Approximately 60% and 20% of the backlog relates to its contracts with Malaysian
Airlines and Philippine Airlines, respectively. While the percentage of its 1997
block hour capacity that is currently under contract exceeds the comparable
percentage in the past several years, the Company still has substantial
uncontracted capacity in the third and fourth quarters of 1997. In addition, a
significant portion of the Company's current contracts expire near the end of
1997. Although there can be no assurance that it will be able to secure
additional business to reduce this excess capacity, the Company is actively
seeking customers for 1997 and beyond. The Company's financial results and
financial condition would be affected adversely if the Company is unable to
secure additional business to reduce this excess capacity.
The information regarding major customers and foreign revenue is contained in
Note 14 "Major Customers" of the Company's "Notes to Financial Statements" in
Item 8.
COMPETITION
The market for outsourcing air passenger and cargo ACMI services is highly
competitive. Certain of the passenger and cargo air carriers against which the
Company competes possess substantially greater financial resources and more
extensive facilities and equipment than those which are now, or will in the
foreseeable future become, available to the Company. The Company believes that
the most important bases for competition in the ACMI outsourcing business are
the age of the aircraft fleet, the passenger, payload and cubic capacities of
the aircraft, and the price, flexibility, quality and reliability of the air
transportation service provided. Competitors in the ACMI outsourcing market
include MartinAir Holland, Tower Air and American TransAir and all-cargo
carriers, such as Atlas Air, Gemini Air Cargo, Polar Air Cargo and Kitty Hawk,
and scheduled and non-scheduled passenger carriers which have substantial belly
capacity. The ability of the Company to achieve the growth anticipated by its
strategic plan depends upon its success in convincing major international
airlines that outsourcing some portion of their air passenger and cargo business
remains more cost-effective than undertaking passenger or cargo operations with
their own incremental capacity and resources. The allocation of military air
transportation contracts by the USAF is based upon the number and type of
aircraft a carrier, alone or through a teaming arrangement, makes available for
use in times of national emergencies. The formation of competing teaming
arrangements comprised of larger partners than those sponsored by the Company,
an increase by other air carriers in their commitment of aircraft to the
emergency program, or the withdrawal of the Company's current partners, could
adversely affect the size of the USAF contracts, if any, which are awarded to
the Company in future years.
CYCLICAL NATURE OF AIR CARRIER BUSINESS
The Company operates in a challenging business environment. The air
transportation industry is highly sensitive to general economic conditions.
Since a substantial portion of passenger airline travel (both business and
personal) is discretionary, the industry tends to experience severe adverse
financial results during general economic downturns and can be adversely
affected by unexpected global political developments. The financial results of
air cargo carriers are also adversely affected by general economic downturns due
to the reduced demand for air cargo transportation. In 1993 and 1994, the
combination of a generally weak global economy and the depressed state of the
air transportation industry adversely affected the Company's operating
performance. Although the Company recently has experienced a growth in demand,
such that block hours flown from continuing operations increased in 1996 by 23%
over 1995, there can be no assurance that this level of growth will continue.
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 due to lower demand for passenger and
cargo services relative to other times of the year. The Company experiences
higher levels of utilization and yields in the second quarter, principally due
to peak demand for commercial passenger services associated with the annual Hadj
pilgrimage. In 1997, the Company's flight operations associated with the Hadj
pilgrimage will occur
17
from March 15 to May 20. Because the Islamic calendar is a lunar-based calendar,
the Hadj pilgrimage occurs approximately 10 to 12 days earlier each year
relative to the Western (Gregorian) calendar. As a result, revenues resulting
from future Hadj pilgrimage contracts will continue to shift from the second
quarter to the first quarter over the next several years. World Airways
believes that its contracts with Malaysian Airlines and the USAF should lessen
the effect of these seasonal factors.
GEOGRAPHIC CONCENTRATION
The Company derives a significant percentage of its revenues and block hours
from its operations in the Pacific Rim region. While the Company believes the
Pacific Rim region is a growth market for air transportation, any economic
decline or any military or political disturbance in this area may interfere with
the Company's ability to provide service in this area and could have a material
adverse effect on the financial condition or results of operations of the
Company.
UTILIZATION OF AIRCRAFT
Due to the large capital costs of leasing and maintaining the Company's
aircraft, each of the Company's aircraft must have high utilization at
attractive rates in order for the Company to operate profitably. Although the
Company's strategy is to enter into long-term contracts with its customers, the
terms of the Company's existing customer contracts are substantially shorter
than the terms of the Company's lease obligations with respect to the aircraft.
There can be no assurance that the Company will be able to enter into additional
contracts with new or existing customers or that it will be able to obtain
enough additional business to fully utilize each aircraft. The Company's
financial results could be materially adversely affected even by relatively
brief periods of low aircraft utilization and yields. In order to maximize
aircraft utilization, the Company does not intend to acquire new aircraft unless
such aircraft would be necessary to service existing needs or the Company has
obtained additional ACMI contracts for the aircraft to service. The Company is
seeking to obtain additional ACMI contracts with new and existing customers, to
which such new aircraft would be dedicated when placed in service, but the
Company can provide no assurance that it will obtain new ACMI contracts or that
existing ACMI contracts will be renewed or extended.
MAINTENANCE
Engine maintenance accounts for most of the Company's annual maintenance
expenses. Typically, the hourly cost of engine maintenance increases as the
aircraft ages. The Company outsources major airframe maintenance and power
plant work to several suppliers. The Company has a 10-year contract expiring in
August 2003 with United Technologies Corporation's Pratt & Whitney Group 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 specified rates per hour during the term of the
contract. 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 began to expire in 1995 and which will fully
expire by 1998. In addition, the specified rates per hour are subject to annual
escalation, increasing substantially in 1998. Accordingly, while the Company
believes the terms of this agreement have resulted in lower engine maintenance
costs than it otherwise would incur, engine maintenance costs will increase
substantially during the last five years of the agreement. The Company will
begin to accrue these increased expenses in 1997. Therefore, the Company expects
that maintenance expenses will continue to increase during the remainder of the
term of the contract as the Company's aircraft fleet ages.
OPERATING LOSSES
While the Company generated operating income each year from 1987 through 1992
and in 1995, it 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. For the year ended December 31, 1996, the Company incurred a net loss of
$14.0 million, which resulted from operating losses incurred in the Company's
scheduled service operations, which were discontinued in 1996, and the related
estimated loss on disposal. Earnings from continuing operations were $18.4
million for 1996. There can be no assurance that the Company will be able to
generate operating income in 1997 or future years.
18
CONTROL BY WORLDCORP; POTENTIAL CONFLICTS OF INTEREST
As of December 31, 1996, WorldCorp owned approximately 61.3% of the Company's
outstanding common stock. WorldCorp is a holding company that owns majority
positions in two companies: InteliData Technologies Corporation ("InteliData")
and the Company. WorldCorp is highly leveraged and therefore requires
substantial funds to cover debt service each year. As a holding company, all of
WorldCorp's funds are generated through its subsidiaries, neither of which is
expected to pay dividends in the foreseeable future. As a result of WorldCorp's
cash requirements, it may be required to sell additional shares of the Company's
common stock from time to time, and such sales, or the threat of such sales,
could have a material adverse affect on the market price on the Company's common
stock. The Company's ability to pay dividends is subject to certain
restrictions contained within a WorldCorp indenture (see "Other Matters
- - Dividend Policy"). Except as limited by contractual arrangements with MHS,
WorldCorp also is in a position to control the outcome of substantially all
issues submitted to the Company's stockholders, including the election of all of
the Company's Board of Directors, adoption of amendments to the Company's
Certificate of Incorporation, and approval of mergers. Under Delaware law,
WorldCorp may approve certain actions by written consent without a meeting of
the stockholders of the Company. In addition, the Company's Board of Directors
has eight members, one of whom, T. Coleman Andrews, III, is President, Chief
Executive Officer and a director of WorldCorp.
The managements of WorldCorp and World Airways are currently exploring ways
to maximize value for the shareholders of each company. WorldCorp is currently
evaluating the feasibility of a disposition of its interest in World Airways
through a secondary offering or a sale to a third party. There can be no
assurances, however, that any such transactions will ultimately be consummated.
In addition, World Airways recently announced its intention to purchase up to
one million shares of its publicly-traded Common Stock pursuant to open market
transactions. As of February 28, 1997, World Airways has purchased 770,000
shares of its Common Stock pursuant to such purchases for an aggregate cost of
$7.8 million. World Airways does not intend to purchase any additional shares
at this time.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total block hours increased 13,183 hours, or 35%, to 50,525 hours in 1996
from 37,342 hours in 1995, with an average of 14.1 available aircraft per day in
1996 compared to 10.3 in 1995. Average daily utilization (block hours flown per
day per aircraft) decreased to 9.8 hours in 1996 from 9.9 hours in 1995. In
1996, the Company continued to obtain a higher percentage of its revenues under
wet lease contracts as opposed to full service contracts. In 1996, wet lease
contracts accounted for 68% of total block hours, consistent with 70% in 1995.
Total operating revenues increased $67.2 million, or 28%, to $309.6 million in
1996 from $242.4 million in 1995.
Continuing Operations
- ---------------------
Block hours from continuing operations increased 8,269 hours, or 23%, to
43,897 hours in 1996 from 35,628 hours in 1995.
Operating Revenues. Revenues from flight operations increased $64.3 million,
------------------
or 28%, to $296.9 million in 1996 from $232.6 million in 1995. This increase
was primarily attributable to an increase in military flying and an increase in
revenues generated from its 1996 Hadj operations and services to certain
international carriers, partially offset by a decrease in cargo operations
resulting from a shift in the mix of business during 1996.
Operating Expenses. Total operating expenses increased $61.4 million, or
------------------
27%, in the 1996 to $287.9 million from $226.5 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 $5.9 million, or 9%, in
1996 to $71.1 million from $65.2 million in 1995. This increase resulted
primarily from an increase in block hours flown and higher crew costs and up-
front training expenses in connection with the integration of additional
aircraft into the fleet. These increases were
19
partially offset by a decrease in accrued profit sharing expenses. In 1995, the
Company accrued profit sharing expenses as a result of earnings experienced
during that period. No such accrual is necessary in 1996 as a result of losses
from the discontinuation of scheduled service operations. In addition, the
Company expects that its training costs will increase in 1997 as a result of
crewmember attrition.
Maintenance expenses increased $18.7 million, or 45%, in 1996 to $60.5
million from $41.8 million in 1995. This increase resulted primarily from the
integration of additional aircraft into the fleet and a corresponding increase
in block hours flown. In addition, the Company experienced an increase in costs
associated with the MD-11 aircraft and related engines as a result of certain
manufacturer guarantees and warranties which began to expire in 1995 and will
fully expire by 1998. As discussed previously, the Company expects its
maintenance expense to increase in 1997 due to escalations in the specified
rates per hour under the Company's maintenance agreement.
Aircraft costs increased $17.9 million, or 27%, in 1996 to $85.2 million from
$67.3 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 and the first
quarter of 1996, partially offset by the return of two DC10-30 aircraft to the
lessor in the third quarter of 1995.
Fuel expenses increased $2.6 million, or 16%, in 1996 to $19.3 million from
$16.7 million in 1995. This increase is due primarily to an increase in fuel
utilized in connection with its military operations and a slight increase in
price per gallon.
Promotions, sales and commissions increased $4.2 million in 1996 to $6.2
million from $2.0 million in 1995. This increase resulted primarily from
commissions paid in connection with the new Philippine Airlines contract 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 $1.9 million, or 31%, in 1996 to $8.0
million from $6.1 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.
General and administrative expenses increased $6.5 million, or 36%, in 1996
to $24.7 million from $18.2 million in 1995. This increase was primarily due to
the hiring of additional administrative personnel necessary to support the
growth in the Company's core business and an increase in certain legal and
professional fees.
Discontinued Operations
- -----------------------
For its scheduled service operations, the Company commenced service between
Tel Aviv and New York in July 1995 and commenced service between the United
States and South Africa in June 1996. In addition, the Company commenced
scheduled charter operations between the United States and Germany, Switzerland,
Ireland, and the United Kingdom in May 1996. The Company, however, was unable
to operate these scheduled service operations profitably.
In July 1996, the Company announced its decision to exit its scheduled
service operations by October 1996 and focus its operations on its core
business: operating aircraft under contracts with international carriers, the
U.S. Government, and international tour operators. Consistent with this
decision, World Airways ceased all scheduled operations as of October 27, 1996.
As a result, the Company's scheduled service operations were reflected as
discontinued operations as of June 30, 1996, and prior period results have been
restated to reflect scheduled service operations as discontinued operations.
Loss from discontinued operations (net of income tax effect) approximated $11.7
million for the year ended December 31, 1996. In addition, an estimated loss on
disposal of $21.0 million (net of income tax effect) which was recorded as of
June 30, 1996, included the following: $13.6 million for estimated operating
losses during the phase-out period; a $2.6 million estimated loss to be incurred
in connection with sub-leasing DC-10 aircraft which will not be utilized in the
Company's operations subsequent to the phase-out of scheduled service
operations; a $2.3 million writeoff of related leasehold improvements; and $2.0
million for passenger reprotection expenses. The Company incurred approximately
$18.9 million of these costs during the six months ended December 31, 1996 and
the Company believes that its remaining accrual for estimated losses on disposal
will be adequate to meet the remaining costs to be incurred during the phase-out
period. In connection with the discontinuance of the Company's scheduled service
operations, the Company is subject to claims by various third
20
parties and may be subject to further claims in the future (see "Other Matters -
Legal and Administrative Procedures").
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total block hours increased 10,885 hours, or 41%, to 37,342 hours in 1995
from 26,457 hours in 1994, with an average of 10.3 available aircraft per day in
1995 compared to 8.2 in 1994. Average daily utilization (block hours flown per
day per aircraft) increased to 9.9 hours in 1995 from 8.8 hours in 1994. In
1995, the Company continued to obtain a higher percentage of its revenues under
wet lease contracts as opposed to full service contracts. In 1995, wet lease
contracts accounted for 70% of total block hours, up from 63% in 1994. Total
operating revenues increased $78.8 million, or 44%, to $259.5 million in 1995
from $180.7 million in 1994.
Continuing Operations
- ---------------------
Block hours from continuing operations increased 9,171 hours, or 35%, to
35,628 hours in 1995 from 26,457 hours in 1994.
Operating Revenues. Revenues from flight operations increased $58.7 million,
------------------
or 34%, to $232.6 million in 1995 from $173.9 million in 1994. This increase
was primarily attributable to a $58.4 million increase in revenues generated
from the new multi-year contracts with Malaysian Airlines. Average daily
utilization for these contracts was 11.2 hours in 1995. In addition, the
Company realized an increase in revenues associated with services to certain
international carriers. Partially offsetting these increases was a decrease in
revenues associated with the 1995 summer charter programs to Europe.
Revenues from flight operations subcontracted to other carriers increased
$3.2 million for 1995 to $8.6 million from $5.4 million in 1994. This increase
resulted primarily from the Company's need to subcontract certain flights to
other carriers due to peak airlift requirements for the 1995 Hadj pilgrimage.
This increase was partially offset by the subservice of certain contracts in the
fourth quarter of 1994 primarily to make aircraft capacity available for the
commencement of operations under the Company's multi-year contracts with
Malaysian Airlines.
Operating Expenses. Total operating expenses increased $40.6 million, or
------------------
22%, in 1995 to $226.5 million from $185.9 million in 1994.
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 $7.4 million, or 13%, in
1995 to $65.2 million from $57.8 million in 1994. This increase resulted
primarily from the following: an increase in block hours flown; higher cockpit
crew levels associated with the integration of additional aircraft into the
fleet in 1995; and an increase in accruals under the Company's profit sharing
plans for its crewmembers during 1995. These factors were partially offset by a
shift from full service to basic contracts.
Maintenance expenses increased $15.6 million, or 60%, in 1995 to $41.8
million from $26.2 million in 1994. This increase resulted primarily from a
non-recurring 1994 reversal of $4.2 million of excess reserves associated with
the expiration of three DC10-30 aircraft leases and the increase in block hours
flown in 1995 and lower costs associated with reduced maintenance requirements
of new MD-11 aircraft and the guarantees and warranties received from the engine
and aircraft manufacturers of the MD-11 aircraft and related engines, which
guaranties and warranties began to expire in 1995.
Aircraft costs increased $13.4 million, or 25%, in 1995 to $67.3 million from
$53.9 million in 1994. This increase was primarily due to the lease of two
additional MD-11 convertible aircraft in the first quarter of 1995 and the
short-term lease of incremental DC10-30 aircraft which began in the fourth
quarter of 1994 and second quarter of 1995, partially offset by the return of
three lower-cost DC10-30 aircraft to the lessor in the third quarter of 1994.
Fuel expenses decreased $0.2 million in 1995 to $16.7 million from $16.9
million in 1994. This decrease is due primarily from a shift from full service
to basic contracts in 1995 under which the Company is not responsible for fuel,
partially offset by an increase in fuel uplifted for military and scheduled
service operations.
21
Promotions, sales and commissions increased $0.9 million in 1995 to $2.0
million from $1.1 million in 1994. This increase resulted primarily from an
increase in joint venture commissions associated with the larger fixed-award
contract received from the U.S. Air Force beginning October 1995.
Depreciation and amortization increased $2.1 million, or 53%, in 1995 to $6.1
million from $4.0 million in 1994. 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 MD-11 aircraft integration costs and other deferred costs.
General and administrative expenses decreased $2.3 million, or 11%, in 1995
to $18.2 million from $20.5 million in 1994. This decrease was primarily due to
a decrease in certain legal and professional fees, partially offset by the
hiring of additional marketing personnel.
Other Income (Expense). Other expenses decreased $2.6 million, or 68%, in
----------------------
1995 from 1994 primarily due to a $0.7 million loss on the sale of a DC10 engine
by the Company in 1994. In addition, the Company recognized a $0.8 million gain
in 1995 resulting from a settlement with the lessor relating to the return of
two DC10 aircraft in 1993.
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. At December 31, 1996, the Company
had total long-term indebtedness of approximately $30.1 million and notes
payable and current maturities of long-term obligations of $20.4 million. In
addition, the Company has significant future long-term obligations under
aircraft lease obligations relating to its aircraft. The Company has
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. The degree to which the Company is leveraged could have important
consequences to holders of Common Stock, including the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or other purposes may be limited;
(ii) the Company's degree of leverage and related debt service obligations, as
well as its obligations under operating leases for aircraft, may make it more
vulnerable than some of its competitors in a prolonged economic downturn; and
(iii) the Company's financial position may restrict its ability to pursue new
business opportunities and limit its flexibility in responding to changing
business conditions.
The Company's cash and cash equivalents at December 31, 1996 and December 31,
1995 were $7.0 million and $25.3 million, respectively. As is common in the
airline industry, the Company operates with a working capital deficit. At
December 31, 1996 the Company's current assets were $44.4 million and current
liabilities were $74.0 million. The Company believes that the combination of
the financings consummated to date, income from continuing operations and the
additional financings described below will be sufficient to allow the Company to
meet its cash requirements related to the remaining phase-out of its
discontinued operations and the operating and capital requirements for its
continuing operations for the next twelve months.
In 1996, the Company instituted a program to purchase up to one million
shares of its publicly-traded Common Stock pursuant to open market transactions.
As of March 1, 1997, the Company had purchased 770,000 shares of its Common
Stock at an aggregate cost of approximately $7.8 million pursuant to such
purchases. The Company does not intend to repurchase any additional shares at
this time.
CASH FLOWS FROM OPERATING ACTIVITIES
Operating activities used $1.5 million in cash for the year ended December
31, 1996 compared to providing $18.7 million of cash in the comparable period in
1995. This decrease in cash in 1996 resulted primarily from an increase in
losses from discontinued operations and the loss on disposal of discontinued
operations, an increase in accounts receivable, and a decrease in unearned
revenue, partially offset by an increase in accounts payable, accrued expenses,
and other liabilities.
22
CASH FLOWS FROM INVESTING ACTIVITIES
Investing activities used $9.1 million in cash for the year ended December
31, 1996, compared to $22.5 million in the comparable period in 1995. In 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 and leasehold
improvements required on one of the DC-10 aircraft obtained in late 1995.
CASH FLOWS FROM FINANCING ACTIVITIES
Financing activities used $7.6 million in cash for the year ended December
31, 1996 compared to providing $25.0 million in the comparable period in 1995.
This decrease in cash resulted primarily from the purchase of shares of the
Company's common stock for an aggregate cost of $7.4 million in 1996, as
compared to proceeds of $22.8 million from the sale of common stock in 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. As of December 31,
1996, annual minimum payments required under the Company's aircraft and lease
obligations totaled $86.2 million for 1997.
As a result of the Company's decision to discontinue scheduled service
operations, the Company reached an agreement with the lessor to terminate the
leases of two DC10-30 aircraft effective December 31, 1996. As of March 31,
1997, World Airways leases one short-term DC10-30 aircraft and four long-term
DC10-30 aircraft with terms expiring in 1999, 2003, and two in 1997.
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 was made available in December 1996.
As of December 31, 1996, approximately $6.4 million 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, which is expected to be during 1997.
The Company's fixed assets increased approximately $17.7 million during 1996.
The majority of this amount relates to assets which were financed. The Company
anticipates that its total capital expenditures in 1997, which
23
includes the spare engine, will approximate $10.2 million of which the Company
will receive approximately $6.1 million in financing. The Company expects that
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.
As of December 31, 1996, the Company held approximately $3.9 million (at book
value) of aircraft spare parts currently available for sale.
FINANCING DEVELOPMENTS
Effective June 30, 1996, the Company amended its Credit Agreement with BNY
Financial Corporation ("BNY") to include the following: a $10.0 million spare
parts loan and an $8.0 million revolving line of credit. This amended Credit
Agreement is collateralized by certain receivables, inventory, and equipment. As
of December 31, 1996, the outstanding balance of the spare parts loan and
revolving line of credit was $7.6 million and $6.8 million, respectively, with
minimal capacity available on the revolving line of credit .
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 quarterly net worth and
net income (loss) requirements. At December 31, 1996, the Company was not in
compliance with one covenant, but obtained a waiver from the financial
institution. This waiver also extended the date that World Airways is required
to pay any outstanding amounts under the line of credit to December 31, 2000.
The aircraft security agreement remains payable in 1999. No assurances can be
given, however, that the Company will meet these covenants prospectively or, if
necessary, obtain the required waivers. In addition, World Airways granted
warrants to BNY in October 1996 to purchase up to 50,000 shares of common stock.
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 at a cost of 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.
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.
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. The
Committee seeks recovery of approximately $4.8 million from World Airways and
approximately $2.0 million from WorldCorp. Under a settlement agreement which
remains subject to certain contingencies, the plaintiff has agreed to dismiss
with prejudice the Boster Litigation against all defendants, including the World
Defendants, with each party to bear its own costs. In that event, the World
Defendants would not have any further liability in the Boster Litigation. On
January 28, 1997, the U.S. District Court conditionally dismissed the Boster
Litigation subject to reinstatement if the settlement is not finalized by May
15, 1997. 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
24
this claim, if the Committee were successful in recovering the full amount
claimed, the resolution could have a material adverse effect on the financial
condition or results of operations of the Company.
The Company has periodically received correspondence from the FAA with
respect to minor noncompliance matters. Most recently, as the FAA has increased
its scrutiny of U.S. airlines, the Company was assessed a preliminary fine of
$810,000 in connection with certain minor security violations by ground handling
crews contracted by the Company for services at foreign airport locations. In
each of these instances, the Company was in compliance with international
regulations, but not the more stringent U.S. requirements. The Company has
taken steps to comply with the U.S. requirements and believes that any fines
ultimately imposed by the FAA will not have a material adverse effect on the
financial condition or results of operations of the Company. The Company
believes the amount of fines it will ultimately be assessed will be below the
preliminary assessment. This estimated amount is included in liabilities in the
accompanying balance sheet at December 31, 1996.
In connection with the discontinuance of the Company's scheduled service
operations, the Company is subject to claims by various third parties and may be
subject to further claims in the future. One claim has been filed in connection
with the Company's discontinuance of scheduled service to South Africa, seeking
approximately $37.8 million in compensatory and punitive damages. 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 plaintiff were successful in recovering
the full amount claimed, the resolution could have a material adverse effect on
the Company's financial condition or 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 "Teamsters"), are subject to a four-year
collective bargaining agreement that will become amendable in July 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. In June 1996, the Company
signed a new four year labor agreement with the Teamsters which provides for
retroactive pay increases for the flight attendants and work rule flexibility
and lengthened duty time rules for the Company. The agreement was ratified by
the flight attendants in August 1996. The Company's flight attendants
challenged 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
arbitrator in this matter recently denied the Union's request for back pay to
affected flight attendants for flying relating to the 1994 Hadj, the arbitrator
concluded that the Company's contract with its flight attendants requires the
Company to first actively seek profitable business opportunities that require
using the Company's flight attendants, before the Company may accept wet lease
business opportunities that use the flight attendants of the Company's
customers. The Company can provide no assurances as to how the imposition of
this requirement will affect the Company's financial condition and results of
operations.
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 in February 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.
25
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 61.3% of the Company's common stock as of December 31,
1996 is subject to the provisions of an indenture, terminating in 2004, which
causes the Company not to pay dividends upon the occurrence of any events of
default by WorldCorp under such indenture.
ESSOP
The Board of Directors of World Airways adopted an Employee Savings and Stock
Ownership Plan (the "Plan") effective October 1, 1996. The Plan is intended to
allow participating employees to share in the growth and prosperity of the
Company, to encourage participants to save on a tax-favored basis, and to
provide participants an opportunity to accumulate capital for their future
economic security.
The Plan is an amendment and continuation of the WorldCorp Employee Savings
and Stock Ownership Plan (the "WorldCorp KSOP"). As a result of various
business developments, the vast majority of the participants in the WorldCorp
KSOP were Company employees. For that reason, the Company and WorldCorp agreed
that the Company should assume WorldCorp's obligation under the WorldCorp KSOP.
In connection with that action, the Trustees exchanged the unallocated shares of
WorldCorp common stock held by the WorldCorp KSOP for a like-value of shares in
Company common stock. World Airways also made a special contribution of $50,000
to the Plan.
The Plan will continue to hold the shares of WorldCorp common stock that were
allocated the participants' accounts before October 1, 1996. No additional
shares of WorldCorp common stock will be allocated under the Plan on or after
that date. Instead, participants will have the opportunity to receive future
allocations of Company common stock.
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, 1996,
the Company had NOLs for federal income tax purposes of $104.7 million which, if
not utilized to offset taxable income in future periods, will expire from 1998
to 2011. Of this amount, $38.1 million is subject to a $6.9 million annual
limitation resulting from the 1991 Ownership Change.
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.
26
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.
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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WORLD AIRWAYS, INC.
BALANCE SHEETS
ASSETS
(IN THOUSANDS)
December 31,
------------------
1996 1995
-------- --------
CURRENT ASSETS
Cash and cash equivalents, including restricted
cash of $338 at December 31, 1996 and
$619 at December 31, 1995 (Note 16) $ 7,028 $ 25,271
Restricted short-term investments (Notes 7 and 16) 1,047 909
Trade accounts receivable, less allowance for
doubtful accounts of $413 at December 31, 1996
and $258 at December 31, 1995 (Notes 10 and 14) 19,427 12,491
Other receivables 4,464 3,314
Due from affiliate, net (Note 5) 4,181 2,981
Prepaid expenses and other current assets (Note 8) 7,778 9,882
Assets held for sale (Notes 9 and 11) 500 700
-------- --------
Total current assets 44,425 55,548
-------- --------
ASSETS HELD FOR SALE (Notes 9 and 11) 3,426 2,308
EQUIPMENT AND PROPERTY (Notes 9 and 11)
Flight and other equipment 72,089 54,460
Equipment under capital leases 11,466 11,466
-------- --------
83,555 65,926
Less: accumulated depreciation and amortization 18,553 13,497
-------- --------
Net equipment and property 65,002 52,429
-------- --------
LONG-TERM OPERATING DEPOSITS (Note 11) 15,951 16,157
OTHER ASSETS AND DEFERRED CHARGES,
NET (Notes 5 and 8)