-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SYhgeqZsYhshmOPIZb0G1WsKu8LN74Yns6ckFpkIsjOIEh69CTQAvLCCHUdhqR0j noGDnOmI3KRMQc0OLqXr2g== 0001068800-00-000192.txt : 20000516 0001068800-00-000192.hdr.sgml : 20000516 ACCESSION NUMBER: 0001068800-00-000192 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANS WORLD AIRLINES INC /NEW/ CENTRAL INDEX KEY: 0000278327 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 431145889 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07815 FILM NUMBER: 632508 BUSINESS ADDRESS: STREET 1: ONE CITY CENTRE STREET 2: 515 N SIXTH ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3145893000 MAIL ADDRESS: STREET 1: ONE CITY CENTRE STREET 2: 515 N 6TH ST CITY: ST LOUIS STATE: MO ZIP: 63101 10-Q 1 TWA FORM 10-Q ======================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-7815 TRANS WORLD AIRLINES, INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1145889 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE CITY CENTRE 515 N. SIXTH STREET ST. LOUIS, MISSOURI 63101 (Address of principal executive offices, including zip code) (314) 589-3000 (Registrant's telephone number, including area code) -------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AS OF CLASS APRIL 28, 2000 ----------------------- ----------------- Common Stock, par value $0.01 per share 66,440,286 ======================================================================== PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------------- 2000 1999 --------- -------- Operating revenues: Passenger $ 732,619 $686,442 Freight and mail 24,404 25,264 All other 51,973 52,882 --------- -------- Total 808,996 764,588 --------- -------- Operating expenses: Salaries, wages and benefits 332,150 308,841 Aircraft fuel and oil 140,464 72,617 Passenger sales commissions 31,228 44,605 Aircraft maintenance materials and repairs 25,521 38,292 Depreciation and amortization 33,127 37,315 Aircraft rent 132,527 90,347 Other rent and landing fees 48,877 46,995 All other 169,023 163,162 --------- -------- Total 912,917 802,174 --------- -------- Operating loss (103,921) (37,586) --------- -------- Other charges (credits): Interest expense 24,557 24,961 Interest and investment income (2,135) (3,173) Disposition of assets, gains and losses-net (2,275) (2,010) Other charges and credits-net (29,630) (31,302) --------- -------- Total (9,483) (11,524) --------- -------- Loss before income taxes and cumulative effect of accounting change (94,438) (26,062) Income tax benefits (31,159) (4,504) --------- -------- Loss before cumulative effect of accounting change (63,279) (21,558) Cumulative effect of accounting change (12,844) - --------- -------- Net loss (76,123) (21,558) Preferred stock dividend requirements 5,416 5,863 --------- -------- Loss applicable to common shares $ (81,539) $(27,421) ========= ======== Basic and diluted earnings per share amounts: Loss before cumulative effect of accounting change $ (0.98) $ (0.42) Cumulative effect of accounting change (0.18) - --------- -------- Net loss $ (1.16) $ (0.42) ========= ======== See notes to consolidated financial statements
1 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
ASSETS MARCH 31, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents $ 165,162 $ 180,443 Receivables, less allowance for doubtful accounts, $13,503 in 2000 and $13,534 in 1999 236,564 155,070 Spare parts, materials and supplies, less allowance for obsolescence, $17,424 in 2000 and $17,512 in 1999 101,282 101,179 Prepaid expenses and other 99,001 53,197 ---------- ---------- Total 602,009 489,889 ---------- ---------- Property: Property owned: Flight equipment 336,795 433,710 Prepayments on flight equipment 64,815 45,810 Land, buildings and improvements 76,603 77,021 Other property and equipment 91,541 90,115 ---------- ---------- Total property owned 569,754 646,656 Less accumulated depreciation 167,898 161,153 ---------- ---------- Property owned-net 401,856 485,503 ---------- ---------- Property held under capital leases: Flight equipment 175,344 176,094 Land, buildings and improvements 52,418 50,321 Other property held under capital leases 7,563 7,096 ---------- ---------- Total property held under capital leases 235,325 233,511 Less accumulated amortization 134,991 127,845 ---------- ---------- Property held under capital leases-net 100,334 105,666 ---------- ---------- Total property-net 502,190 591,169 ---------- ---------- Investments and other assets: Investments in affiliated companies 93,305 82,901 Investments, receivables and other 140,785 133,973 Routes, gates and slots-net 178,131 181,983 Reorganization value in excess of amounts allocable to identifiable assets-net 646,779 657,267 ---------- ---------- Total 1,059,000 1,056,124 ---------- ---------- $2,163,199 $2,137,182 ========== ========== See notes to consolidated financial statements
2 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) MARCH 31, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) Current liabilities: Current maturities of long-term debt $ 171,869 $ 67,080 Current obligations under capital leases 39,677 38,664 Advance ticket sales 303,032 198,722 Accounts payable, principally trade 316,917 263,624 Accounts payable to affiliated companies 5,819 6,250 Accrued expenses: Employee compensation and vacations earned 140,711 149,701 Contributions to retirement and pension trusts 21,288 15,165 Interest on debt and capital leases 13,546 14,235 Taxes 14,684 12,111 Other accrued expenses 214,077 195,340 ---------- ---------- Total accrued expenses 404,306 386,552 ---------- ---------- Total 1,241,620 960,892 ---------- ---------- Long-term liabilities and deferred credits: Long-term debt, less current maturities 426,705 600,909 Obligations under capital leases, less current obligations 117,413 127,143 Postretirement benefits other than pensions 504,572 502,097 Noncurrent pension liabilities 17,347 17,572 Other noncurrent liabilities and deferred credits 101,871 99,479 ---------- ---------- Total 1,167,908 1,347,200 ---------- ---------- Shareholders' equity (deficiency): 8% cumulative convertible exchangeable preferred stock, $50 liquidation preference; 3,869 shares issued and outstanding 39 39 9 1/4% cumulative convertible exchangeable preferred stock, $50 liquidation preference; shares issued and outstanding: 13 17 2000-1,338; 1999-1,725 Employee preferred stock, $0.01 liquidation preference; special voting rights; shares issued and outstanding: 2000-6,633; 1999-6,712 66 67 Common stock, $0.01 par value; shares issued and outstanding: 2000-63,079; 1999-59,966 631 600 Additional paid-in capital 728,716 728,038 Accumulated deficit (975,794) (899,671) ---------- ---------- Total (246,329) (170,910) ---------- ---------- $2,163,199 $2,137,182 ========== ========== See notes to consolidated financial statements
3 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------------------- 2000 1999 -------- -------- Cash flows from operating activities: Net loss $(76,123) $(21,558) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 33,127 37,315 Amortization of discount and expense on debt 1,569 1,450 Amortization of deferred (gains) losses on sale and leaseback of certain aircraft and engines (380) (3,094) Equity in undistributed earnings of affiliates not consolidated (10,600) (9,371) Net gains on disposition of assets (2,275) (2,010) Change in operating assets and liabilities: Decrease (increase) in: Receivables (81,494) (62,000) Inventories (373) 1,559 Prepaid expenses and other current assets (45,804) (45,383) Other assets (5,981) (6,122) Increase (decrease) in: Accounts payable and accrued expenses 63,816 34,777 Advance ticket sales 104,310 89,010 Other noncurrent liabilities and deferred credits 11,330 (5,092) -------- -------- Net cash provided (used) (8,878) 9,481 -------- -------- Cash flows from investing activities: Proceeds from sales of property 6,213 5,946 Capital expenditures, including aircraft predelivery deposits (18,746) (39,632) Return of predelivery deposits related to leased aircraft - 4,711 Net increase in investments, receivables and other (1,846) (2,750) -------- -------- Net cash used (14,379) (31,725) -------- -------- Cash flows from financing activities: Proceeds from sale and leaseback of certain aircraft and engines 94,409 1,874 Repayments on long-term debt and capital lease obligations (86,433) (15,390) Cash dividends paid on preferred stock - (5,863) Net proceeds from exercise of warrants and options - 371 -------- -------- Net cash provided (used) 7,976 (19,008) -------- -------- Net decrease in cash and cash equivalents (15,281) (41,252) Cash and cash equivalents at beginning of period 180,443 252,408 -------- -------- Cash and cash equivalents at end of period $165,162 $211,156 ======== ======== See notes to consolidated financial statements
4 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (AMOUNTS IN THOUSANDS) (UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION THREE MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ------- ------- Cash paid during the period for: Interest $21,802 $21,256 ======= ======= Income taxes $ 8 $ 5 ======= ======= Information about noncash operating, investing and financing activities: Promissory notes issued to finance aircraft acquisition $ - $10,248 ======= ======= Promissory notes issued to finance aircraft predelivery payments $ 8,444 $ 8,582 ======= ======= Property acquired and obligations recorded under new capital lease transactions $ 530 $ - ======= =======
ACCOUNTING POLICY For purposes of the Statements of Consolidated Cash Flows, TWA considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. See notes to consolidated financial statements 5 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Trans World Airlines, Inc. ("TWA" or the "Company") and its subsidiaries. The results of Worldspan, L.P. ("Worldspan"), a 26.315% owned affiliate, are recorded under the equity method and are included in the Statements of Consolidated Operations in Other Charges (Credits). The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission but do not include all information and footnotes required by generally accepted accounting principles pursuant to such rules and regulations. The consolidated financial statements include all adjustments, which are of a normal recurring nature and are necessary, in the opinion of management, for a fair presentation of the results for these interim periods. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The consolidated balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements at that date. Certain amounts previously reported have been reclassified to conform with the current presentation. The consolidated financial results on an interim basis are not necessarily indicative of future financial results on either an interim or annual basis. TWA's air transportation business has historically experienced seasonal changes with the second and third quarters of the calendar year generally producing better operating results than the first and fourth quarters, although operational adjustments with the intent of reducing the level of seasonality have been, and continue to be, implemented. Accordingly, the results for the three months ended March 31, 2000 should not be read as indicators of results for the full year. 2. INCOME TAXES The income tax benefits recorded for the three months ended March 31, 2000 and 1999 reflect quarterly effective tax rates and an expectation of full year pre-tax profits. Considering the high level of non-deductible expenses in relation to expected annual income (which results in both a high effective tax rate and the potential for significant changes in the effective rate from relatively small changes in pretax income levels), the income tax benefits recorded for the first quarter of 2000 and 1999 were based upon the allocable portion of certain non-deductible expenses, primarily amortization of reorganization value in excess of amounts allocable to identifiable assets, and statutory tax rates. 6 3. LOSS PER SHARE In computing the loss applicable to common shares for the three months ended March 31, 2000 and 1999, the net loss has been increased by dividend requirements on the 8% Cumulative Convertible Exchangeable Preferred Stock (the "8% Preferred Stock") and the 9 1/4% Cumulative Convertible Exchangeable Preferred Stock (the "9 1/4% Preferred Stock"). In computing the related net loss per share, the loss applicable to common shares has been divided by the aggregate average number of outstanding shares of common stock (63.6 million and 58.0 million for the three months ended March 31, 2000 and 1999, respectively) including 3.0 million shares to be issued to IAM-represented employees as discussed in Note 8, and employee preferred stock (6.7 million and 7.6 million for the three months ended March 31, 2000 and 1999, respectively) which, with the exception of certain special voting rights, is the functional equivalent of common stock. Diluted earnings per share are the same as basic earnings per share for the periods presented as the impact of stock options, warrants or potential issuances of additional common stock or employee preferred stock in the three month periods ended March 31, 2000 and 1999 would have been anti- dilutive. 4. PROPERTY AND DISPOSITION OF ASSETS The Company has included in Investments, Receivables and Other the net book value of its grounded L-1011 and B-747 aircraft as such aircraft have been retired from service and are currently held for sale. These aircraft were valued at $9.3 million and $27.5 million at March 31, 2000 and 1999, respectively. During the three months ended March 31, 2000 and 1999, disposition of assets resulted in net gains of $2.3 million and $2.0 million, respectively. The net gains in the first three months of 2000 related to the sale of 11 spare B-767 and B-727 engines. In 1999, the recorded gains related primarily to the sale of TWA's investment in SATO Travel, a company which provides ticketing services ("SATO"). 5. SEGMENT REPORTING TWA operates one segment, that of air transportation. However, that segment is analyzed and reported in two primary geographic areas, Domestic (including Canada and the Caribbean) and International (the Atlantic division as reported to the Department of Transportation). Information related to revenues generated from operations within those geographic areas is presented below. Quarters Ended March 31, ----------------------- 2000 1999 ------ ------ Operating Revenues (in millions): Domestic $745.4 $690.1 International 63.6 74.5 ------ ------ Total $809.0 $764.6 ====== ====== TWA identifies revenues to each division based on a proration methodology of revenues generated to specific flight segments and the division in which the flight segment operates. A major portion of the Company's long-lived assets consists of its flight equipment (aircraft), which are not assigned to a specific geographic area but rather are flown across geographic boundaries. 7 6. SALE OF EQUANT SHARES TWA is a long-term member of the Societe Internationale de Telecommunications Aeronautiques ("SITA"), a worldwide provider of communication services to the aviation industry. In February 1999, members of SITA divested a portion of their shares in Equant N.V. ("Equant"), a telecommunication network company, through a secondary offering. As a member of SITA, TWA indirectly participated in the partial sale of its holdings in Equant in February 1999 and December 1999; in March 2000 TWA sold its remaining interest in Equant to a third party, resulting in reported gains and receipts of cash of approximately $21.3 million, $10.7 million and $16.7 million, respectively. 7. CONTINGENCIES There has not been any significant change in the status of the contingencies reflected in the notes to consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 which, among other matters, described various contingencies and other legal actions against TWA, except as discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8. LABOR AGREEMENTS As a result of contracts which became effective August 1, 1999 between TWA and the International Association of Machinists and Aerospace Workers ("IAM"), TWA agreed to pay increases over the next 18 months that will result in wages for TWA's ground employees and flight attendants improving by the end of the term of the contract to averages ranging from 86.5% to 91.0% of industry average as determined by wage rates in contracts in effect as of June 1999. Additionally, TWA agreed to distribute 3,500,000 shares of TWA common stock to these employees. In October 1999, 500,000 shares were distributed to IAM-represented flight attendants in a manner determined by the IAM. The remaining 3,000,000 shares will be distributed in a manner determined by the IAM to IAM-represented employees on the following dates: July 31, 2000 - 1,000,000 shares, January 31, 2001 - 1,000,000 shares, January 31, 2002 - - 1,000,000 shares. In conjunction with these contracts, TWA and the IAM-represented employees agreed to withdraw all pending litigation including contempt proceedings. Additionally, all outstanding grievances regarding scope, work jurisdiction, outsourcing and compensation were withdrawn. IAM- represented flight attendant employees agreed to a payment of $25.0 million in settlement of these disputed matters, to be distributed in a manner directed by the IAM. On August 31, 1999, $11.0 million was distributed. The remaining payments will occur on the following dates: August 1, 2000--$11.0 million, August 1, 2001--$3.0 million. Similarly, in settlement of these disputed matters, IAM-represented ground employees will receive $10.0 million to be distributed in a manner directed by the IAM by no later than the following dates: November 2, 2001 - $5.0 million, and August 1, 2002 - $5.0 million. 8 9. ACCOUNTING FOR SALES OF AVIATOR MILES In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Although SAB 101 does not change existing accounting rules on revenue recognition, certain changes in accounting to apply the guidance in SAB 101 may be accounted for as a change in accounting principle. Effective January 1, 2000, the Company changed its method of accounting for the sale of Aviator miles to business partners. Previously, TWA and most other major airlines accounted for the proceeds received from the sale of affinity miles as revenue during the month of sale, net of the estimated incremental cost of providing future air travel. Under the new accounting method, that portion of the revenue from the sale of miles which is estimated to reflect the fair value of future transportation to be provided will be deferred and recognized in income when the transportation is provided. The remaining portion of the sale proceeds will continue to be recognized at the time of sale as other revenue. The Company believes the new method results in better matching of revenue with the period in which travel services are provided. The cumulative effect of this change resulted in a charge to earnings of $12.8 million in the first quarter of 2000. Prior period financial statements have not been restated. If the newly adopted policy had been applied in the prior year, the impact on net income would have been immaterial. 10. SUBSEQUENT EVENT The Federal Aviation Administration has designated John F. Kennedy International Airport ("JFK") and LaGuardia Airport ("LaGuardia") in New York, Chicago O'Hare International Airport ("O'Hare") and Ronald Reagan Washington National Airport ("Reagan National") as "high density traffic airports" and has limited the number of departure and arrival slots at those airports. Currently, such slots may be voluntarily sold or transferred between carriers. In May 2000, the Aviation Investment and Reform Act for the 21st Century ("Air 21") was enacted changing the restrictions on slots at these airports. At O'Hare, this legislation alters the usage of slots immediately and entirely eliminates slot restrictions at the airport effective July 2, 2002. The legislation eliminates slot restrictions at JFK and LaGuardia effective January 2, 2007. The legislation increases slightly the slots available at Reagan National. The Company will perform an evaluation in the second quarter in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The assessment could result in the recording of an impairment charge for the amount that the carrying value of the slots exceeds the fair value of the slots, the acceleration of amortization over the remaining useful life, or some combination thereof. At March 31, 2000, the net book value of slots at JFK and LaGuardia, O'Hare, and Reagan National was $43.3 million, $5.1 million and $25.4 million, respectively. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made below relating to plans, conditions, objectives, and economic performance go beyond historical information and may provide an indication of future financial condition or results of operations. To that extent, they are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and each is subject to risks, uncertainties and assumptions that could cause actual results to differ from those in the forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In any event, these forward- looking statements speak only as of their dates, and the Company undertakes no obligation to update or revise any of them whether as a result of new information, future events or otherwise. GENERAL TWA operates in a highly competitive, capital-intensive industry. The Company competes with one or more major airlines on most of its routes (including all routes between major cities). The airline industry has consolidated as a result of mergers and liquidations and more recently through alliances, and further consolidation may occur in the future. This consolidation has, among other things, enabled certain of the Company's major competitors to expand their international operations and increase their domestic market presence, thereby strengthening their overall operations, by transporting passengers connecting with or otherwise traveling on the alliance carriers. Such alliances could further intensify the competitive environment. The rapid growth of regional jet airline affiliates represents a significant competitive challenge for TWA due to its reliance on through-hub passenger traffic. A small regional jet can now offer direct service in markets that previously were served only by through- hub service. Although TWA has signed agreements with two regional jet airlines, TWA's current labor agreements limit the number of regional jets that TWA may utilize. TWA began regional jet service in the first quarter of 2000 through one of its code share partners. These issues represent a competitive challenge for the Company, which has higher operating costs than many regional carriers and fewer financial resources than many of its major competitors. Small fluctuations in revenue per available seat mile ("RASM") and cost per available seat mile ("CASM") can significantly affect TWA's financial results. The Company has experienced significant operating losses on an annual basis since the early 1990s, except in 1995 when the Company's combined operating profit was $25.1 million. TWA expects the airline industry will remain extremely competitive for the foreseeable future. The Company continues to focus on implementing several strategic initiatives to improve operational reliability, schedule integrity and overall product quality in order to attract higher-yield passengers and enhance overall productivity. Key initiatives currently in progress include: * modernizing its fleet; * reducing costs and improving productivity; * implementing revenue-enhancing marketing initiatives and schedule realignments to attract higher-yield travelers; * implementing employee-related initiatives to reinforce TWA's focus on operational performance; 10 * optimizing TWA's route structure through the opening of "focus cities" and the use of regional jet feed into TWA's system; and * better coordinating of commuter feed, turbo prop products and schedules. TWA faces a number of uncertainties that may adversely affect its future results of operations, including: * insufficient levels of air passenger traffic resulting from, among other things, war, threat of war, terrorism or changes in the economy; * governmental limitations on the ability of TWA to service certain airports and/or foreign markets; * regulatory requirements necessitating additional capital or operating expenditures; * pricing and scheduling initiatives by competitors; * the availability and cost of capital; * increases in fuel and other operating costs; and * the adverse effects on yield of the continued implementation of a discount ticket program between TWA and Karabu. TWA is unable to predict the potential effect of any of these uncertainties upon its future results of operations. Labor Costs Wage rates for most of TWA's employees have increased recently as a result of several events. A new collective bargaining agreement between TWA and its pilots became effective September 1, 1998. As part of the new contract, TWA agreed to pay increases over four years that will result in wages for TWA's pilots improving in 2002 to 90% of the industry average as determined by wage rates in contracts in effect as of August 1998. The contract also provides for significant work rule improvements for pilots in certain areas while also granting TWA flexibility and improvements necessary to enhance its competitive position. Under the contract, TWA agreed to distribute either one million shares of TWA's common stock or $11 million in cash to its pilots, in four equal quarterly payments commencing in 1999. TWA had the option to make each quarterly payment in shares or in cash. The Company made a quarterly distribution of 250,000 shares each of common stock in April, August and November 1999 and February 2000. TWA and the IAM reached agreement on new contracts for TWA flight attendant and ground employees, which became effective August 1, 1999 and become amendable on January 31, 2001. TWA agreed to salary increases over the term of the agreement that will result in wage improvements of 11.5% to 18.25% for TWA's ground employees and flight attendants such that by the amendable date of the contract their wages will average from 86.5% to 91.0% of industry average as determined by wage rates in contracts in effect as of June 1999. Additionally, TWA has agreed to distribute 3,500,000 shares of TWA common stock to these employees. On October 7, 1999, 500,000 shares were distributed to IAM-represented flight attendants in a manner determined by the IAM. The remaining 3,000,000 shares will be distributed in a manner determined by the IAM to IAM-represented employees as follows: July 31, 2000 - 1,000,000 shares, January 31, 2001 - - 1,000,000 shares, January 31, 2002 - 1,000,000 shares. 11 In conjunction with these contracts, TWA and the IAM-represented employees agreed to withdraw all litigation pending as of August 1999 including contempt proceedings. Additionally, all outstanding grievances regarding scope, work jurisdiction, outsourcing and compensation were withdrawn as of that date. IAM-represented flight attendant employees agreed to a payment of $25.0 million to be distributed in a manner directed by the IAM. On August 31, 1999, $11.0 million was distributed. The remaining payments will occur on the following dates: August 1, 2000 - $11.0 million, August 1, 2001 - $3.0 million. Similarly, in settlement of these disputed matters, IAM- represented ground employees will receive $10.0 million to be distributed in a manner directed by the IAM by no later than the following dates: November 2, 2001 - $5.0 million, and August 1, 2002 - $5.0 million. Pursuant to the labor agreements TWA entered into in 1992, TWA agreed to pay to employees represented by the IAM a cash bonus for the amount by which overtime incurred from September 1992 through August 1995 was reduced below specified thresholds. This amount was to be offset by the failure of medical savings to meet certain specified levels during the period for the same employees. TWA and the IAM came to agreement on this obligation which was payable in three equal annual installments. Two installments have been made through March 31, 2000. The remaining obligation of $9.1 million representing the third and final installment is payable on September 1, 2000 and is reflected as a liability in the consolidated financial statements. TWA also entered into agreements subsequent to the 1992 labor agreements that provide for an adjustment to existing salary rates of certain labor-represented employees based on the amount of the cash bonus for overtime to the employees represented by the IAM as described in the previous paragraph. These adjustments equated to a 4.814% increase which management made effective for all employee groups on September 1, 1998, except for pilots whose contract provided for separate increases also effective September 1, 1998. Non-contract employees of TWA additionally received a 3% increase in salary effective September 1, 1999. On October 1, 1999, a merit pay plan was put into effect which increased non-contract employee wages an average of approximately 5%. The officers of TWA did not receive either the 1998 or 1999 increases. TWA's agreements with employees could result in significant non- cash charges to future operating results. Shares granted or purchased at a discount under the Employee Stock Incentive Plan ("ESIP") will generally result in a charge equal to the fair market value of shares granted and the discount for shares purchased at the time these shares are earned or purchased. As a result of the first two target prices being realized on February 17, 1998, and March 4, 1998, respectively, the Company issued an additional 2,377,084 shares on July 15, 1998, to satisfy the 1997 and 1998 ESIP grant amounts. In connection with such issuance, TWA recorded an aggregate non-cash charge in the first quarter of 1998 in the amount of $26.5 million. An aggregate non-cash charge of $1.0 million was recorded in the third quarter of 1998 to reflect the actual number of shares issued on July 15, 1998. If the ESIP's remaining target prices (ranging from $13.10 to $17.72) for TWA common stock are realized, the minimum aggregate non-cash charge for the years 1999 to 2002 will be approximately $104.8 million based upon these target prices and the number of shares of common stock and employee preferred stock outstanding at December 31, 1999. The non-cash charge for any year, however, could be substantially higher if the then market price of TWA common stock exceeds the target prices. TWA believes it is essential to improve employee productivity as an offset to any wage increases and will continue to explore other ways to control and/or reduce operating expenses. While TWA experienced wage rate increases, it also generated 3.3% more ASMs with 4.2% fewer employees in 1999. On a unit cost basis (salaries, wages and benefits per ASM excluding costs associated with contract ratification), there was no increase year over year reflecting an overall productivity improvement in this category. However, there can be no assurance that the Company will be successful in sustaining such productivity improvements or achieving unit cost reductions. It is essential that the Company's labor costs remain favorable in comparison to its largest competitors. 12 TWA's passenger traffic data, for scheduled passengers only, is shown in the table below for the indicated periods:
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31, ------------------------ ------------------------------------------- 2000 1999 1999 1998 1997 ------ ------ ------- ------- ------- NORTH AMERICA Passenger revenues ($ millions) $ 681 $ 627 $ 2,690 $ 2,579 $ 2,526 Revenue passenger miles (millions) 5,331 4,899 22,129 20,132 19,737 Available seat miles (millions) 8,019 7,163 30,517 28,796 29,341 Passenger load factor 66.5% 68.4% 72.5% 69.9% 67.3% Passenger yield (cents) 12.76 cents 12.81 cents 12.15 cents 12.81 cents 12.80 cents Passenger revenue per available seat mile (cents) 8.49 cents 8.76 cents 8.81 cents 8.96 cents 8.61 cents INTERNATIONAL Passenger revenues ($ millions) $ 52 $ 59 $ 294 $ 333 $ 412 Revenue passenger miles (millions) 690 821 3,881 4,290 5,363 Available seat miles (millions) 995 1,134 5,071 5,657 7,093 Passenger load factor 69.4% 72.3% 76.5% 75.8% 75.6% Passenger yield (cents) 7.55 cents 7.20 cents 7.58 cents 7.78 cents 7.68 cents Passenger revenue per available seat mile (cents) 5.24 cents 5.20 cents 5.80 cents 5.90 cents 5.81 cents TOTAL SYSTEM Passenger revenues ($ millions) $ 733 $ 686 $ 2,984 $ 2,912 $ 2,938 Revenue passenger miles (millions) 6,021 5,720 26,010 24,422 25,100 Available seat miles (millions) 9,014 8,297 35,588 34,453 36,434 Passenger load factor 66.8% 68.9% 73.1% 70.9% 68.9% Passenger yield (cents) 12.17 cents 12.00 cents 11.47 cents 11.93 cents 11.70 cents Passenger revenue per available seat mile (cents) 8.13 cents 8.27 cents 8.38 cents 8.45 cents 8.06 cents Operating cost per available seat mile (cents) 9.99 cents 9.51 cents 9.50 cents 9.31 cents 8.99 cents Average daily utilization per aircraft (hours) 9.65 9.34 9.67 9.77 9.38 Aircraft in fleet being operated at end of period 185 186 183 185 185 - ------ Excludes subsidiary companies. Certain revenue and unit revenue information previously reported has been reclassified to conform with the current presentation. The number of scheduled miles flown by revenue passengers. The number of seats available for passengers multiplied by the number of scheduled miles those seats are flown. Revenue passenger miles divided by available seat miles. Passenger revenue per revenue passenger mile. Passenger revenue divided by scheduled available seat miles. Operating expenses, excluding special charges, other nonrecurring charges and subsidiaries, divided by total available seat miles. The average block hours flown per day in revenue service per aircraft.
13 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1999 During the first quarter of 2000, TWA reported an operating loss of $103.9 million compared to a first quarter 1999 operating loss of $37.6 million, an unfavorable change of $66.3 million. The Company reported a first quarter 2000 pre-tax loss of $94.4 million, which was an increase of $68.3 million from the 1999 pre-tax loss of $26.1 million. The net loss of $76.1 million in the first quarter of 2000 represented a $54.5 million increase over the net loss of $21.6 million in the first quarter of 1999. The net loss for the first quarter of 2000 included a charge of $12.8 million for the cumulative effect of accounting change related to a change in method of accounting for the sale of Aviator miles to business partners in the Company's frequent flyer program. Total operating revenues were $809.0 million in the first quarter of 2000, a $44.4 million increase from operating revenues of $764.6 million for the comparable period of 1999. Passenger revenue for the first quarter of $732.6 million improved $46.2 million over passenger revenue of $686.4 million in the first quarter of 1999 largely due to more efficient utilization of its revitalized fleet and changes in its route structure. In the first quarter of 2000, the Company introduced the first regional jets into its route structure through code-sharing agreements that contributed to both the increase in passenger revenue and the $2.0 million increase in all other revenues. System-wide capacity, as measured by scheduled ASMs, increased 8.6% in the first quarter of 2000 over the comparable period of 1999. Domestic ASMs increased 12.0% while international ASMs decreased 12.3%. Revenue passenger miles (RPMs) in scheduled service for the quarter were 6,021 million compared with 5,720 million RPMs in the first quarter of 1999 representing a 5.3% increase. The system passenger load factor decreased 2.1 percentage points in the first quarter of 2000 versus the same period in 1999 to 66.8% from 68.9% resulting from a greater increase in ASMs than RPMs. System yield increased 0.9% to 12.17 cents in the first quarter of 2000 compared to 12.00 cents in 1999 reflecting improvements in domestic front cabin yield partly in response to increased marketing efforts in support of TWA's special FirstUp fare. RASM decreased year over year to 8.13 cents in the first quarter of 2000 from 8.27 cents in the first quarter of 1999. Since March 1999, TWA has taken delivery of 40 new aircraft of which 36 aircraft were delivered in 1999 and four aircraft were delivered in the first quarter of 2000. Operating expenses per available seat mile (CASM) increased 5.0% to 9.99 cents from 9.51 cents for the first quarter of 1999. The CASM increase was heavily impacted by increased fuel costs, the increase in aircraft rental expense resulting from the replacement of older aircraft with new modern equipment and increased labor costs associated with new collective bargaining agreements. Operating expenses increased $110.7 million during the first quarter of 2000 to $912.9 million from $802.2 million during the first quarter of 1999, representing a net change in the following expense groups: * Salaries, wages and benefits were $332.2 million during the first quarter of 2000 compared to $308.9 million during the first quarter of 1999, an increase of $23.3 million. The average number of full-time equivalent employees decreased 2.4% to 20,661 in the first quarter of 2000 versus 21,167 in the first quarter of 1999. This headcount reduction was more than offset by the August 1, 1999 salary increase to IAM-represented employees, a September 1, 1999 increase in pilot salary as provided in their current contract, and a 3% salary increase granted to non-contract employees effective September 1, 1999. On October 1, 1999, a merit pay plan was put into effect which increased non-contract employee wages an average of approximately 5%. Additionally, TWA's first quarter 2000 costs for its group insurance plans contributed $2.8 million to the overall increase when compared to the first quarter of 1999 primarily reflecting increased costs of medical and prescription benefits in 2000. 14 * Aircraft fuel and oil expense of $140.5 million for the first quarter of 2000 was $67.9 million greater than $72.6 million recorded in the first quarter of 1999 due to an increase in the average cost per gallon to 87.8 cents in 2000 from 45.0 cents in 1999. * Passenger sales commission expense of $31.2 million in the first quarter of 2000 was $13.4 million less than the expense recorded in the first quarter of 1999 primarily due to a 12% decrease in the percentage of the commissionable tickets sold and a 3% reduction in the commission rate cap in October 1999. * Aircraft maintenance material and repairs expense of $25.5 million for the first quarter of 2000 represents a decrease of $12.8 million from $38.3 million during the same period of 1999. The primary factor contributing to this decrease was a reduction in engine material requirements and the effect of adding new lower maintenance B-757, B-767 and MD-80 aircraft to the fleet. * Depreciation and amortization expense decreased $4.2 million to $33.1 million in the first quarter of 2000 from $37.3 million in the first quarter of 1999. The decrease resulted primarily from the sale and leaseback of five B-767 aircraft and the sale of eleven DC-9 engines and one B-727 aircraft in 1999. * Aircraft lease rentals increased $42.2 million to $132.5 million in the first quarter of 2000 from $90.3 million in the first quarter of 1999. This increase includes rentals on 38 new aircraft delivered since the end of the first quarter 1999, in addition to the sale and leaseback of B-767 and B-757 aircraft as part of TWA's aggressive fleet renewal plan. * Other rent and landing fees were $48.9 million in the first quarter of 2000 versus $47.0 million in the first quarter of 1999, an increase of $1.9 million. Increases were experienced in landing fees of $1.2 million and space rentals at certain airports and ground equipment rentals of $0.7 million in the 2000 first quarter over 1999. * All other operating expenses of $169.0 million in the first quarter of 2000 were $5.8 million more than the $163.2 million recorded in the first quarter of 1999, primarily represented by increases in computerized reservation system fees ($2.9 million) and expenses related to the Trans World Express regional jet code-sharing agreement ($2.6 million). Other charges (credits) were a net credit of $9.5 million during the first quarter of 2000 compared to a net credit of $11.5 million for the first quarter of 1999. Interest expense decreased $0.4 million in the first quarter of 2000 from the same period in 1999 as a result of the retirement of the Worldspan note in November 1999. Interest and investment income decreased $1.0 million in the first quarter of 2000 primarily due to a decrease in the level of invested funds. Net gains from the disposition of assets were $2.3 million and $2.0 million during the first quarters of 2000 and 1999, respectively. The net gains in the first quarter of 2000 included the sale of 11 spare B-767 and B-727 engines. The net gains in 1999 included the sale of TWA's investment in SATO. Other charges and credits - net decreased $1.7 million in the first quarter of 2000 compared to the first quarter of 1999 primarily due to the first quarter 2000 gain from the sale of TWA's remaining holdings in Equant which was less than a similar gain recorded in the first quarter of 1999. A tax benefit of $31.1 million was recorded in the first quarter of 2000 compared to a benefit of $4.5 million in the first quarter of 1999 (see Note 2 to Consolidated Financial Statements). 15 In December 1999, the Securities and Exchange Commission issued SAB No. 101, "Revenue Recognition in Financial Statements", which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. Although SAB 101 does not change existing accounting rules on revenue recognition, certain changes in accounting to apply the guidance in SAB 101 may be accounted for as a change in accounting principle. Effective January 1, 2000, the Company changed its method of accounting for the sale of Aviator miles to business partners. Previously, TWA and most other major airlines accounted for the proceeds received from the sale of affinity miles as revenue during the month of sale, net of the estimated incremental cost of providing future air travel. Under the new accounting method, that portion of the revenue from the sale of miles which is estimated to reflect the fair value of future transportation to be provided will be deferred and recognized in income when the transportation is provided. The remaining portion of the sale proceeds will continue to be recognized at the time of sale as other revenue. The Company believes the new method results in better matching of revenue with the period in which travel services are provided. The cumulative effect of this change resulted in a charge to earnings of $12.8 million in the first quarter of 2000. Prior period financial statements have not been restated. If the newly adopted policy had been applied in the prior year, the impact on net income would have been immaterial. The Company had a net loss of $76.1 million in the first quarter of 2000 compared to a net loss of $21.6 million in the same period of 1999. LIQUIDITY AND CAPITAL RESOURCES The following is a discussion of the impact of significant factors affecting TWA's liquidity position and capital resources. These comments should be read in conjunction with, and are qualified in their entirety by, the Consolidated Financial Statements and Notes thereto. Liquidity The Company's consolidated cash and cash equivalents balance at March 31, 2000 was $165.2 million, a $15.2 million decrease from the December 31, 1999 balance of $180.4 million. This reduction in the Company's cash balances resulted primarily from TWA's net losses caused in part by, among other factors, softness in traffic attributed to Y2K fears and increased fuel costs, both which impacted the fourth quarter of 1999 and which carried over to the earlier part of the first quarter 2000 financial performance. Although financial results improved during the second and third months of the quarter, the effects of these factors are reflected in the overall first quarter 2000 earnings. Operating activities used $8.9 million in cash in the first three months of 2000 versus cash provided of $9.5 million in 1999. TWA participated in a sale of its partial holdings in Equant in the first quarter of 1999 and in the first quarter of 2000 sold its remaining interest in Equant to a third party, resulting in reported gains and receipts of cash of approximately $21.3 million and $16.7 million, respectively. There was an improvement of $15.3 million in the cash provided by advance ticket sales, offset by an increase of $19.5 million in receivables. An improvement of $29.0 million in the cash provided by trade accounts payable and accrued expenses is primarily due to the timing of payments of certain obligations in the comparative periods. Cash used by investing activities decreased to $14.4 million in the first three months of 2000 versus $31.7 million in the first three months of 1999. Capital expenditures (including aircraft predelivery deposits) during the first three months of 2000 amounted to $18.7 million. This compared to $12.5 million during the first three months of 1999 after excluding cash used to purchase one B-767-200 aircraft and related engines for $27.1 million. Asset sales during both periods were primarily limited to retired, widebody aircraft, engines and other 16 surplus equipment. Additionally, approximately $4.7 million was provided in 1999 primarily due to the return of predelivery deposits relating to one new B-757-200 aircraft delivered in the first quarter of 1999, which was immediately sold to and leased back under an operating lease from the aircraft lessor. Cash provided by financing activities was $8.0 million in the first three months of 2000 versus cash used of $19.0 million in the same period of 1999. Proceeds from the sale and leaseback of certain aircraft were $94.4 million in the first three months of 2000 relating to the sale and leaseback of two B-757 aircraft versus $1.9 million in the comparable period in 1999. Repayments of long-term debt and capital lease obligations were $86.4 million in the first quarter of 2000, including $72.6 million of debt associated with the two B-757 aircraft sold and leased back, compared to $15.4 million in the first quarter of 1999. Cash dividends of $5.9 million on preferred stock were paid in the first quarter 1999, however, the Board of Directors determined not to declare the payment of the dividend on either issue of preferred stock in the first quarter of 2000. The Company's ability to improve its operating results and financial position will depend on a variety of factors, several of which are described below, and some of which are outside of management's control. The Company will face higher full year labor costs in 2000 as a result of new labor contracts entered into in 1999 and scheduled increases in 2000 offset, in part, by an anticipated reduction in head count achieved primarily through attrition. In addition, jet fuel costs have recently increased substantially. The Company has not hedged the costs of any of its future fuel requirements and accordingly, until such prices abate or unless the fuel surcharge previously imposed by the Company is sufficient to cover such higher costs, such additional costs will adversely affect its operating results. Due to seasonal factors, the Company has historically suffered its greatest losses and the Company's cash balances during the first quarter of each year are typically lower than in other periods. The Company's ability to maintain adequate liquidity to assure viability will depend on its ability to improve its operating results by generating increased revenues and controlling costs or, if insufficient, on its ability to attract new capital and, if necessary, sell or finance assets such as its interest in Worldspan. Capital Resources TWA has no unused credit lines and must satisfy all of its working capital and capital expenditure requirements from cash provided by operating activities, from external borrowings or from sales of assets. Substantially all of TWA's strategic assets, including its owned aircraft, ground equipment, gates and slots have been pledged to secure various issues of outstanding indebtedness of the Company. Sales of such assets which are not replaced would, under the terms of the applicable financing agreements, generally require payment of the proceeds from such dispositions or payment of the indebtedness secured thereby. TWA has relatively few non-strategic assets which it could monetize, many of such assets being subject to various liens and security interests which would restrict and/or limit the ability of TWA to realize any significant proceeds from the sale thereof. The Company believes that its 26.315% interest in Worldspan has substantial value, net of certain encumbrances. The Company is currently considering various alternatives to monetize this asset. Should the Company require additional liquidity and be unable to monetize its holdings in Worldspan in a timely manner and should its access to capital from outside sources be constrained, the Company may not be able to make certain capital expenditures or implement certain other aspects of its strategic plan, and the Company may therefore be unable to achieve the full benefits expected therefrom. This could adversely affect TWA's operations and future viability. 17 The outstanding balance of the Company's 9.8% Airline Receivable Asset Backed Notes, aggregating $100 million, mature beginning in January 2001 and would require repayment within 60 days unless their maturity date is extended or is refinanced. The Company intends to extend or refinance this obligation, although no assurance can be given that it will be successful in this regard. However, these Asset Backed Notes are secured by collateral with an average value in 1999 of over $175 million which the Company believes should be sufficient to allow such financing. Commitments Since 1996, TWA has entered into agreements with the manufacturer and various operating lessors to acquire a total of 27 B-757 aircraft. As of March 31, 2000, TWA has taken delivery of all 27 of the B-757 aircraft with the final aircraft under these agreements delivered in January 2000. All 27 of the B-757 aircraft are leased by TWA. The Company entered into an agreement for an operating lease for one additional B-767-300ER aircraft which is scheduled for delivery in May 2000. In December 1998, TWA signed letters of intent to acquire 125 new Boeing and Airbus aircraft and options for an additional 125 Boeing and Airbus aircraft. TWA finalized the terms of the purchase orders for 50 B-717-200 aircraft in June of 1999 and the terms of options for an additional 50 B-717-200 aircraft and definitive agreements were signed at that time. Financing agreements on these B-717-200 aircraft were also finalized in June of 1999. The first B-717-200 aircraft was delivered in February 2000 and the second aircraft in April 2000. During the remainder of 2000, TWA expects to take delivery of 13 of these aircraft. In December 1999, TWA finalized the terms of the purchase orders for 38 A318 aircraft and the terms of options for an additional 75 "A320 Family" aircraft and definitive agreements were signed at that time. Predelivery payments were made by TWA in December 1999 and January 2000 for A318 aircraft, totaling approximately $8.9 million; no further predelivery payments will be required until 2002. Financing agreements on these aircraft were also finalized in December of 1999. Deliveries of the firm 38 aircraft are scheduled to commence in 2004. Terms and conditions of the lease of the remaining 12 A318 aircraft announced in December 1998 are subject to further negotiation and the signing of definitive agreements with an operating lessor. Finalizing of orders for the remaining 25 "A320 Family" aircraft is currently under negotiation. TWA anticipates that it will be required to pay approximately $7.0 million in predelivery payments for these aircraft in 2000. These aircraft would primarily replace B-727, DC-9 and MD-80 aircraft currently in TWA's fleet. Both the B-717 and the Airbus 318 and "A320 Family" financing commitments are subject to a "material adverse change" clause. Those provisions are comparable to those contained in prior agreements for the acquisition of B-757 and MD-80 aircraft. Such provisions generally allow the manufacturer to withdraw the financing commitment on one or more undelivered aircraft in the event there is a material adverse change in the financial condition of TWA which would adversely affect TWA's ability to perform under the purchase order, financing documentation or any related transaction. In the event Boeing or Airbus withdraws its financing commitment with respect to one or more of the aircraft, TWA has a comparable right to terminate the purchase order for those aircraft. In April 1999, TWA sold and leased back four B-767-200 aircraft and completed a sale/leaseback in July 1999 of a fifth such aircraft. These five B-767-200 aircraft will be replaced with three B-767-300 aircraft from the same aircraft lessor. As of March 31, 1999, three B-767-200 aircraft had been returned and three B-767-300 aircraft have been leased. A fourth B-767-200 aircraft was returned on May 1, 2000. The fifth B-767-200 aircraft will be returned later in 2000. In connection with this transaction, the Company purchased $28.8 million 18 total principal amount of its outstanding 11 3/8% Senior Secured Notes due April 15, 2003 and all of its outstanding 10 1/4% Senior Secured Notes due June 15, 2003 which totaled $14.5 million. Certain Other Capital Requirements TWA generally does not commit to expenditures for facilities and equipment, other than aircraft, before purchase and, therefore, no such significant commitments exist at the present time. TWA's ability to finance these expenditures will depend in part on TWA's financial condition at the time of the proposed expenditure. Restructuring Liabilities At December 31, 1998, TWA established a provision related to the restructuring of its international operations and the closure of the Los Angeles Reservation Office. The Company recorded a special charge of approximately $17.6 million primarily related to employee severance liabilities. During 1999, the Company incurred approximately $4.2 million of expenditures related to these provisions. Management's initial estimates of the 1998 restructuring costs were reduced by $6.8 million due to international regulatory involvement which precluded the Company from carrying out its original restructuring plan. The Company continues to expect severance costs of $6.2 million to be paid to the affected respective employees during the second quarter of 2000 due to these changes in operations. During 1999, however, the plans related to restructuring international operations were overtaken by the serious deterioration in performance on the JFK to Madrid, Barcelona, and Rome routes. In the fourth quarter of 1999, the decision was made by the Board of Directors to close these three routes. TWA established a provision related to these closures of approximately $91.6 million which included $79.3 million write-off of the value of the routes, and $12.3 million primarily related to government-mandated employee severance for approximately 200 operational, management and administrative employees. The Company expects these severance costs to be paid during 2000. The 1998 special charges include:
ACCRUAL AT PAID THROUGH ACCRUAL AT DECEMBER 31, 1999 MARCH 31, 2000 MARCH 31, 2000 ----------------- -------------- -------------- Severance $6.6 $0.4 $6.2 Other costs - - - ----------------- -------------- -------------- $6.6 $0.4 $6.2 ================= ============== ==============
The 1999 special charges include:
AMOUNT ACCRUAL AT PAID THROUGH ACCRUAL AT DECEMBER 31, 1999 MARCH 31, 2000 MARCH 31, 2000 ----------------- -------------- -------------- Severance $11.4 $ - $11.4 Other costs 0.9 - 0.9 ----------------- -------------- -------------- $12.3 $ - $12.3 ================= ============== ==============
19 Availability of NOLs TWA estimates that it had, for federal income tax purposes, net operating loss carryforwards ("NOLs") amounting to approximately $1,128 million at December 31, 1999. Such NOLs expire in 2008 through 2019 if not utilized before then to offset taxable income. Section 382 of the Internal Revenue Code of 1986, as amended, and regulations issued thereunder impose limitations on the ability of corporations to use NOLs if the corporation experiences a more than 50% change in ownership during certain periods. Changes in ownership in future periods could substantially restrict the Company's ability to utilize its tax net operating loss carryforwards. The Company believes that no such ownership change has occurred subsequent to the 1995 reorganization. There can be no assurance, however, that such an ownership change will not occur in the future. In addition, the NOLs are subject to examination by the Internal Revenue Service ("IRS") and, thus, are subject to adjustment or disallowance resulting from any such IRS examination. For financial reporting purposes, the tax benefits related to the utilization of the tax net operating loss carryforwards generated prior to the 1995 reorganization of approximately $491 million will, to the extent realized in future periods, have no impact on the Company's operating results, but instead be applied to reduce reorganization value in excess of amounts allocable to identifiable assets. Slot Restrictions The Federal Aviation Administration has designated John F. Kennedy International Airport ("JFK") and LaGuardia Airport ("LaGuardia") in New York, Chicago O'Hare International Airport ("O'Hare") and Ronald Reagan Washington National Airport ("Reagan National") as "high density traffic airports" and has limited the number of departure and arrival slots at those airports. Currently, such slots may be voluntarily sold or transferred between carriers. In May 2000, the Aviation Investment and Reform Act for the 21st Century ("Air 21") was enacted changing the restrictions on slots at these airports. At O'Hare, this legislation alters the usage of slots immediately and entirely eliminates slot restrictions at the airport effective July 2, 2002. The legislation eliminates slot restrictions at JFK and LaGuardia effective January 2, 2007. The legislation increases slightly the slots available at Reagan National. The Company will perform an evaluation in the second quarter in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The assessment could result in the recording of an impairment charge for the amount that the carrying value of the slots exceeds the fair value of the slots, the acceleration of amortization over the remaining useful life, or some combination thereof. At March 31, 2000, the net book value of slots at JFK and LaGuardia, O'Hare, and Reagan National was $43.3 million, $5.1 million and $25.4 million, respectively. 20 New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments and all hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities at their fair values. Accounting for changes in the fair value of a derivative depends on its designation and effectiveness. For derivatives that qualify as effective hedges, the change in fair value will have no impact on earnings until the hedged item affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value will affect current period earnings. With the deferral of the effective date of Statement No. 133, the Company will adopt this standard during its first quarter of fiscal 2001 and does not presently believe that it will have a significant effect on its results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The risk inherent in the Company's market risk sensitive instruments and positions is the potential loss arising from adverse changes in those factors. TWA is susceptible to certain risks related to changes in the cost of jet fuel, changes in interest rates and foreign currency exchange rate fluctuations. The Company does not purchase or hold any derivative financial instruments for trading purposes. Aircraft Fuel Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Jet fuel and oil consumed in the first three months of 2000 represented approximately 15.4% of TWA's operating expenses. TWA endeavors to acquire jet fuel at the lowest prevailing prices possible. TWA's earnings are affected by changes in the price and availability of aircraft fuel. The Company hedges its exposure to jet fuel price market risk only on a limited basis. The fair value of outstanding derivative commodity instruments (primarily commodity swap agreements) related to the Company's jet fuel price market risk during the first three months of 2000 and at March 31, 1999 was immaterial. A one cent change in the average cost of jet fuel would impact TWA's aircraft fuel expense by approximately $6.4 million per year, based upon consumption in the first three months of 2000. 21 Interest Rates Airline operators are also inherently capital intensive, as the vast majority of assets are aircraft, which are long lived. TWA's exposure to market risk associated with changes in interest rates relates primarily to its debt obligations. The Company does not have significant exposure to changes in cash flows resulting from changes in interest rates as substantially all its long-term debt carries fixed rates of interest. The nature of fixed rate obligations does expose the Company to the risk of changes in the fair value of these instruments. The Company has outstanding debt of $599 million, net of unamortized discounts and including current maturities at March 31, 2000. The contractual maturities of long term debt and the associated average interest rates are as follows: CONTRACTUAL AMOUNTS WEIGHTED AVERAGE MATURITY DATE IN THOUSANDS INTEREST RATE ------------- ------------ ---------------- 2000 $ 60,079 9.00% 2001 155,359 9.55% 2002 64,975 11.63% 2003 31,618 10.72% 2004 141,975 11.55% Thereafter 154,120 11.07% Foreign Currency Exchange Rates Airline operators who fly internationally are exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses. While international operations generated 7.9% of TWA's operating revenues in the first three months of 2000, a substantial portion of these related ticket sales are denominated in U.S. dollars. Additionally, no single foreign currency is a material portion of that amount. The Company does not have significant exposure to fluctuations in these currency rates because of the short-term nature of maturities of receivables and payables related to these operations. The Company has not undertaken additional actions to cover this currency risk and does not engage in any other currency risk management activity. 22 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION The Company's Board of Directors did not declare the dividend payments on either the 8% Preferred Stock or the 9 1/4% Preferred Stock which were due on March 15, 2000, in the amount of $3.9 million and $1.5 million, respectively. If the dividends on the 8% and 9 1/4% Preferred Stock were to continue in arrears and if the arrears were to aggregate in an amount equal to at least six quarterly dividends on either issue, the holders of the 8% Preferred Stock and the 9 1/4% Preferred Stock voting separately as a class without regard to the series, will be entitled to elect at the next annual or special meeting of the shareholders of the Company, two directors to serve until all dividends accumulated and unpaid have been paid or declared and funds set aside to provide for payment in full. The Board of Directors has determined not to declare the payment of the dividend due on June 15, 2000 on either issue of Preferred Stock. 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 2.1 - Joint Plan of Reorganization, dated May 12, 1995 (Appendix B to the Registrant's Registration Statement on Form S-4, Registration Number 33-84944, as amended) 2.2 - Modification to Joint Plan of Reorganization, dated July 14, 1995 and Supplemental Modifications to Joint Plan of Reorganization dated August 2, 1995 (Exhibit 2.5 to 6/95 10-Q) 2.3 - Findings of Fact, Conclusions of Law and Order Confirming Modified Joint Plan of Reorganization, dated August 4, 1995, with Exhibits A-B attached (Exhibit 2.6 to 6/95 10-Q) 2.4 - Final Decree, dated December 28, 1995, related to the 1995 Reorganization (Exhibit 2.7 to 12/31/95 Form 10-K) 3(i) - Third Amended and Restated Certificate of Incorporation of the Registrant (Exhibit 3(i) to the Registrant's Registration Statement on Form S-4, Registration Number 333-26645) 3(ii) - Amended and Restated By-Laws of Trans World Airlines, Inc., effective September 28, 1999 (Exhibit 3(ii) to 9/99 10-Q) 4.1 - Voting Trust Agreement, dated November 3, 1993, between TWA and LaSalle National Trust, N.A. as trustee (Exhibit 4.3 to 9/93 10-Q) 4.2 - IAM Trans World Employees' Stock Ownership Plan and related Trust Agreement, dated August 31, 1993, between TWA, the IAM Plan Trustee Committee and the IAM Trustee (Exhibit to 9/93 10-Q) 4.3 - IFFA Trans World Employees' Stock Ownership Plan and related Trust Agreement, dated August 31, 1993, between TWA, the IFFA Plan Trustee Committee and the IFFA Trustee (Exhibit 4.5 to 9/93 10-Q) 4.4 - Trans World Airlines, Inc. Employee Stock Ownership Plan, dated August 31, 1993, First Amendment thereto, dated October 31, 1993, and related Trust Agreement, dated August 31, 1993, between TWA and the ESOP Trustee (Exhibit 4.6 to 9/93 10-Q) 4.5 - ALPA Stock Trust, dated August 31, 1993, between TWA and the ALPA Trustee (Exhibit 4.7 to 9/93 10-Q) 4.6 - Stockholders Agreement, dated November 3, 1993, among TWA, LaSalle National Trust, N.A., as Voting Trustee and the ALPA Trustee, IAM Trustee, IFFA Trustee and Other Employee Trustee (each as defined therein), as amended by the Addendum to Stockholders dated November 3, 1993 (Exhibit 4.8 to 9/93 10-Q) 24 4.7 - Registration Rights Agreement, dated November 3, 1993, between TWA and the Initial Significant Holders (Exhibit 4.9 to 9/93 10-Q) 4.8 - Indenture between TWA and Harris Trust and Savings Bank, dated November 3, 1993 relating to TWA's 8% Senior Secured Notes Due 2000 (Exhibit 4.11 to 9/93 10-Q) 4.9 - Indenture between TWA and American National Bank and Trust Company of Chicago, N.A., dated November 3, 1993 relating to TWA's 8% Secured Notes Due 2001 (Exhibit 4.12 to 9/93 10-Q) 4.10 - The TWA Air Line Pilots 1995 Employee Stock Ownership Plan, effective as of January 1, 1995 (Exhibit 4.12 to 9/95 10-Q) 4.11 - TWA Air Line Pilots Supplemental Stock Plan, effective September 1, 1994 (Exhibit 4.13 to 9/95 10-Q) 4.12 - TWA Air Line Pilots Supplemental Stock Plan Trust, effective August 23, 1995 (Exhibit 4.14 to 9/95 10-Q) 4.13 - TWA Air Line Pilots Supplemental Stock Plan Custodial Agreement, effective August 23, 1995 (Exhibit 4.15 to 9/95 10-Q) 4.14 - Form of Indenture relating to TWA's 8% Convertible Subordinated Debentures Due 2006 (Exhibit 4.16 to Registrants Registration Statement on Form S-3, No. 333-04977) 4.15 - Indenture dated as of March 31, 1997 between TWA and First Security Bank, National Association relating to TWA's 12% Senior Secured Notes due 2002 (Exhibit 4.15 to Registrant's Registration Statement on Form S-4, No. 333-26645) 4.16 - Form of 12% Senior Secured Note due 2002 (contained in Indenture filed as Exhibit 4.15) 4.17 - Registration Rights Agreement dated as of March 31, 1997 between the Company and the Initial Purchaser relating to the 12% Senior Secured Notes due 2002 and the warrants to purchase 126.26 shares of TWA Common Stock (Exhibit 4.17 to Registrant's Registration Statement on Form S-4, No. 333-26645) 4.18 - Warrant Agreement dated as of March 31, 1997 between the Company and American Stock Transfer & Trust Company, as Warrant Agent, relating to warrants to purchase 126.26 shares of TWA Common Stock (Exhibit 4.18 to Registrant's Registration Statement on Form S-4, No. 333-26645) 4.19 - Form of Indenture relating to TWA's 9 1/4% Convertible Subordinated Debentures due 2007 (Exhibit 4.19 to Registrant's Registration Statement on Form S-3, No. 333-44689) 25 4.20 - Registration Rights Agreement dated as of December 2, 1997 between the Company and the Initial Purchasers (Exhibit 4.20 to Registrant's Registration Statement on Form S-3, No. 333- 44689) 4.21 - Indenture dated as of December 9, 1997 by and between TWA and First Security Bank, National Association, as Trustee, relating to TWA's 11 1/2% Senior Secured Notes due 2004 (Exhibit 4.21 to Registrant's Registration Statement on Form S-4, No. 333-44661) 4.22 - Form 11 1/2% Senior Secured Note due 2004 (contained in Indenture filed as Exhibit 4.21) 4.23 - Registration Rights Agreement dated as of December 9, 1997 among the Company and Lazard Freres & Co. LLC and PaineWebber Incorporated, as initial purchasers, relating to TWA's 11 1/2% Senior Secured Notes due 2004 (Exhibit 4.23 to Registrant's Registration Statement on Form S-4, No. 333-44661) 4.24 - Sale and Service Agreement dated as of December 30, 1997 between TWA and Constellation Finance LLC, as purchaser, relating to TWA's receivables (Exhibit 4.24 to Registrant's Registration Statement on Form S-4, No. 333-44661) 4.25 - Registration Rights Agreement dated as of March 3, 1998 between the Company and the Initial Purchaser (Exhibit 4.25 to Registrant's Registration Statement on Form S-4, No. 333-59405) 4.26 - Indenture dated as of March 3, 1998 by and between TWA and First Security Bank, National Association, as Trustee, relating to TWA's 11 3/8% Senior Notes due 2006 (Exhibit 4.26 to Registrant's Registration Statement on Form S-4, No. 333-59405) 4.27 - Aircraft Sale and Note Purchase Agreement dated as of April 9, 1998 among TWA, First Security Bank, National Association, as Owner Trustee and Seven Sixty Seven Leasing, Inc. (Exhibit No. 4.27 to Registrant's Registration Statement on Form S-4, No. 333-59405) 4.28 - Indenture dated as of April 21, 1998 by and between TWA and First Security Bank, National Association, as Trustee, relating to TWA's 11 3/8% Senior Secured Notes due 2003 (Exhibit No. 4.28 to Registrant's Registration Statement on Form S-4, No. 333-59405) 4.29 - Form of 11 3/8% Senior Secured Notes due 2003 (contained as Exhibit 1 to Rule 144A/Regulation S Appendix to Indenture in Exhibit 4.28) 4.30 - Registration Rights Agreement dated as of April 21, 1998 between the Company, Lazard Freres & Co. LLC and First Security Bank, National Association relating to the 11 3/8% Senior Secured Notes Due 2003 (Exhibit 4.31 to Registrant's Registration Statement on Form S-3, No. 333-56991) 26 11 - Statement of computation of per share earnings 18 - Letter from KPMG LLP re change in accounting principle 27 - Financial Data Schedule (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the first quarter of 2000. [FN] - ------------ Incorporated by reference 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANS WORLD AIRLINES, INC. Dated: May 15, 2000 By: /s/ Michael J. Palumbo ------------------------------------ Michael J. Palumbo Executive Vice President and Chief Financial Officer 28 EX-11 2 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31, ------------------------ 2000 1999 -------- -------- EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE: Net loss $(76,123) $(21,558) Cumulative effect of accounting change (12,844) - -------- -------- Loss before cumulative effect of accounting change (63,279) (21,558) Preferred stock dividend requirements (5,416) (5,863) -------- -------- Loss before cumulative effect of accounting change applicable to common for basic earnings per share calculation (68,695) (27,421) Average number of shares of common stock 70,332 65,630 -------- -------- Loss per share $ (0.98) $ (0.42) ======== ======== EARNINGS PER SHARE FROM CUMULATIVE EFFECT OF ACCOUNTING CHANGE: Cumulative effect of accounting change $(12,844) $ - Average number of shares of common stock 70,332 65,630 -------- -------- Loss per share $ (0.18) $ - ======== ======== EARNINGS PER SHARE FROM NET INCOME (LOSS): Net loss $(76,123) $(21,558) Preferred stock dividend requirements (5,416) (5,863) -------- -------- Loss applicable to common shares for basic earnings per share calculation (81,539) (27,421) Average number of shares of common stock 70,332 65,630 -------- -------- Loss per share $ (1.16) $ (0.42) ======== ======== - ----------- Includes 6,686 and 7,641 shares of Employee Preferred Stock for the quarter ended March 31, 2000 and 1999, respectively, which, except for a liquidation preference of $.01 per share and the right to elect a certain number of directors to the Board of Directors, is the functional equivalent of Common Stock. As the effects of including the incremental shares associated with options and warrants and the assumed conversion of the 8% and the 9 1/4% Preferred Stock are antidilutive, diluted earnings per share are equal to basic earnings per share and are not presented in the accompanying condensed statements of consolidated operations for the first quarter of 2000 and 1999.
EX-18 3 LETTER FROM KPMG LLP RE CHANGE IN ACCOUNTING PRINCIPLE Exhibit 18 Trans World Airlines, Inc. St. Louis, Missouri May 15, 2000 Ladies and Gentlemen: We have been furnished with a copy of the Form 10-Q of Trans World Airlines, Inc. (the Company) for the three months ended March 31, 2000, and have read the Company's statements contained in Note 9 to the consolidated financial statements included therein. As stated in Note 9, the Company changed its method of accounting for the sales of mileage credits in the Affinity Miles program from recognizing revenue when the credits are sold to deferring a portion of the revenue attributable to future transportation and recognizing it as passenger revenue when the service is provided. Also, as stated in Note 9, the newly adopted accounting principle is preferable in the circumstances because the Company believes the new method results in a better matching of revenues with the period in which travel services are provided. In accordance with your request, we have reviewed and discussed with officials of the Company the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based. We have not audited any financial statements of the Company as of any date or for any period subsequent to December 31, 1999, nor have we audited the information set forth in the aforementioned Note 9 to the consolidated financial statements; accordingly, we do not express an opinion concerning the factual information contained therein. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company's compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter. Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances. Very truly yours, KPMG LLP EX-27 4 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRANS WORLD AIRLINES, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 165,162 0 250,067 13,503 101,282 602,009 805,079 302,889 2,163,199 1,241,620 544,118 0 118 631 (247,078) 2,163,199 0 808,996 0 912,917 0 779 24,557 (94,438) (31,159) (63,279) 0 0 (12,844) (76,123) (1.16) (1.16)
-----END PRIVACY-ENHANCED MESSAGE-----