##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: June 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________ to __________
 Commission File Number 0-26582
 WORLD AIR HOLDINGS, INC.
  DELAWARE
(State or other jurisdiction
of incorporation or organization)
    
    20-2121036
(I.R.S. Employer
Identification Number)
     
  o þ
  o þ




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WORLD AIR HOLDINGS, INC.
 QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
 TABLE OF CONTENTS
  
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets (Unaudited), June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations (Unaudited), Three Months Ended June 30, 2005 and 2004
    
    
    5Condensed Consolidated Statements of Operations (Unaudited), Six Months Ended June 30, 2005 and 2004
    
    
    6Condensed
Consolidated Statement of Changes in Stockholders Equity (Unaudited), Six months ended June 30, 2005
    
    
    7Condensed Consolidated Statements of Cash Flows (Unaudited), Six months ended June 30, 2005 and 2004
    
    
    8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 6.
    
    Exhibits
    
    
    26EX-10.13 EMPLOYMENT AGREEMENT/ MARK M. MCMILLINEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 ASSETS
 (in thousands)
(unaudited)
 June 30,
    
    
    December 31,2005
    
    
    2004CURRENT ASSETSCash and cash equivalents
    
    $
    46,501
    
    
    $
    49,956Restricted cash
    
    
    5,936
    
    
    
    4,926Accounts receivable, less allowance for doubtful accounts
of $186 at June 30, 2005 and $209 at December 31, 2004
    
    
    55,662
    
    
    
    52,382Prepaid expenses and other current assets
    
    
    11,173
    
    
    
    8,335Deferred tax assets
    
    
    6,203
    
    
    
    6,685Total current assets
    
    
    125,475
    
    
    
    122,284EQUIPMENT AND PROPERTYFlight and other equipment
    
    
    90,034
    
    
    
    84,514Less: accumulated depreciation and amortization
    
    
    54,078
    
    
    
    51,321Net equipment and property
    
    
    35,956
    
    
    
    33,193GOODWILL AND OTHER INTANGIBLE ASSETSGoodwill
    
    
    21,602
    
    
    
    Other intangible assets, net of accumulated amortization of
$192 at June 30, 2005
    
    
    7,903
    
    
    
    Net goodwill and other intangible assets
    
    
    29,505
    
    
    
    LONG-TERM DEPOSITS
    
    
    23,015
    
    
    
    18,237OTHER ASSETS AND DEFERRED CHARGES, NET OF ACCUMULATED
AMORTIZATION OF $2,817 AT JUNE 30, 2005 AND $2,019 AT
DECEMBER 31, 2004
    
    
    5,040
    
    
    
    5,603TOTAL ASSETS
    
    $
    218,991
    
    
    $
    179,317
  3




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (continued)
 LIABILITIES AND STOCKHOLDERS EQUITY
 (in thousands except
share amounts)(unaudited)
 June 30,
    
    
    December 31,2005
    
    
    2004CURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    11,000
    
    
    $
    6,000Accounts payable
    
    
    39,127
    
    
    
    35,482Current portion of accrued rent
    
    
    5,550
    
    
    
    5,489Current portion of deferred rent
    
    
    
    
    
    
    3,242Unearned revenue
    
    
    25,757
    
    
    
    6,293Accrued maintenance
    
    
    5,650
    
    
    
    4,179Accrued salaries, wages and profit sharing
    
    
    17,785
    
    
    
    20,463Accrued taxes
    
    
    6,246
    
    
    
    8,482Other accrued liabilities
    
    
    7,057
    
    
    
    1,861Total current liabilities
    
    
    118,172
    
    
    
    91,491Long-term debt, net of current maturities
    
    
    19,000
    
    
    
    43,879Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $4,654 at June 30, 2005
and $4,269 at December 31, 2004
    
    
    1,260
    
    
    
    1,645Accrued post-retirement benefits
    
    
    4,331
    
    
    
    4,081Accrued and deferred rent, net of current portion
    
    
    3,028
    
    
    
    5,615Deferred income taxes
    
    
    5,077
    
    
    
    2,208TOTAL LIABILITIES
    
    
    150,868
    
    
    
    148,919STOCKHOLDERS EQUITYPreferred stock, $.001 par value (5,000,000 shares authorized;
no shares issued or outstanding)
    
    
    
    
    
    
    Common stock, $.001 par value (100,000,000 shares authorized;
24,864,995 shares issued and 23,783,752 shares outstanding at
June 30, 2005; 17,430,023 shares issued and 16,348,780 shares
outstanding at December 31, 2004)
    
    
    25
    
    
    
    18Additional paid-in capital
    
    
    66,636
    
    
    
    42,712Retained earnings
    
    
    14,609
    
    
    
    525Deferred stock-based compensation
    
    
    (290
    )Treasury
stock, at cost (1,081,243 shares at June 30, 2005 and
December 31, 2004)
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity
    
    
    68,123
    
    
    
    30,398COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    218,991
    
    
    $
    179,317
  4




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30, 2005 and 2004
 (in thousands except per share data)
(unaudited)
 2005
    
    
    2004REVENUESFlight operations
    
    $
    171,976
    
    
    $
    114,707Other
    
    
    622
    
    
    
    353Total revenues
    
    
    172,598
    
    
    
    115,060OPERATING EXPENSESFlight
    
    
    48,722
    
    
    
    37,705Maintenance
    
    
    27,829
    
    
    
    20,032Aircraft costs
    
    
    27,738
    
    
    
    17,426Fuel
    
    
    32,105
    
    
    
    16,363Flight operations subcontracted to other carriers
    
    
    1,120
    
    
    
    81Commissions
    
    
    7,702
    
    
    
    4,831Depreciation and amortization
    
    
    1,736
    
    
    
    1,274Sales, general and administrative
    
    
    17,442
    
    
    
    12,960Total operating expenses
    
    
    164,394
    
    
    
    110,672OPERATING INCOME
    
    
    8,204
    
    
    
    4,388OTHER INCOME (EXPENSE)Interest expense
    
    
    (1,142
    )
    
    
    (1,247
    )Interest income
    
    
    241
    
    
    
    125Other, net
    
    
    (245
    )
    
    
    (347
    )Total other income (expense)
    
    
    (1,146
    )
    
    
    (1,469
    )EARNINGS BEFORE INCOME TAX EXPENSE
    
    
    7,058
    
    
    
    2,919INCOME TAX EXPENSE
    
    
    2,872
    
    
    
    350NET EARNINGS
    
    $
    4,186
    
    
    $
    2,569BASIC EARNINGS PER SHARENet earnings
    
    $
    0.18
    
    
    $
    0.22Weighted average shares outstanding
    
    
    23,600
    
    
    
    11,637FULLY DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.16
    
    
    $
    0.12Weighted average shares outstanding
    
    
    26,671
    
    
    
    23,252
  5




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Six Months Ended June 30, 2005 and 2004
 (in thousands except per share data)
(unaudited)
 2005
    
    
    2004REVENUESFlight operations
    
    $
    330,996
    
    
    $
    243,726Other
    
    
    1,151
    
    
    
    918Total revenues
    
    
    332,147
    
    
    
    244,644OPERATING EXPENSESFlight
    
    
    93,891
    
    
    
    78,507Maintenance
    
    
    52,784
    
    
    
    37,888Aircraft costs
    
    
    48,667
    
    
    
    37,097Fuel
    
    
    62,576
    
    
    
    34,565Flight operations subcontracted to other carriers
    
    
    1,628
    
    
    
    1,599Commissions
    
    
    16,561
    
    
    
    11,131Depreciation and amortization
    
    
    3,191
    
    
    
    2,561Sales, general and administrative
    
    
    27,467
    
    
    
    23,269Total operating expenses
    
    
    306,765
    
    
    
    226,617OPERATING INCOME
    
    
    25,382
    
    
    
    18,027OTHER INCOME (EXPENSE)Interest expense
    
    
    (2,127
    )
    
    
    (2,789
    )Interest income
    
    
    510
    
    
    
    247Other, net
    
    
    (448
    )
    
    
    (980
    )Total other income (expense)
    
    
    (2,065
    )
    
    
    (3,522
    )EARNINGS BEFORE INCOME TAX EXPENSE
    
    
    23,317
    
    
    
    14,505INCOME TAX EXPENSE
    
    
    9,233
    
    
    
    4,061NET EARNINGS
    
    $
    14,084
    
    
    $
    10,444BASIC EARNINGS PER SHARENet earnings
    
    $
    0.66
    
    
    $
    0.91Weighted average shares outstanding
    
    
    21,325
    
    
    
    11,536FULLY DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.54
    
    
    $
    0.46Weighted average shares outstanding
    
    
    26,510
    
    
    
    23,858
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WORLD AIR HOLDINGS, INC.
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES  IN STOCKHOLDERS EQUITY
 Six months Ended June 30, 2005  (in thousands except share amounts)  (unaudited)
 Additional
    
    
    
    
    
    
    Deferred
    
    
    Treasury
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Stock-based
    
    
    Stock,
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    at Cost
    
    
    EquityBalances at December 31,
2004
    
    $
    18
    
    
    $
    42,712
    
    
    $
    525
    
    
    $
    
    
    
    $
    (12,857
    )
    
    $
    30,398Amortization of warrants
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76Exercise of 698,325
stock options
    
    
    
    
    
    
    1,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,635Exercise of warrants for
1,076,345 shares
    
    
    1
    
    
    
    2,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Issuance of 5,660,302
shares for convertible
debt
    
    
    6
    
    
    
    18,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,125Tax benefit of stock
option exercises
    
    
    
    
    
    
    1,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,292Awards of deferred
stock-based compensation
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    (303
    )
    
    
    
    
    
    
    Amortization of deferred
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13Net earnings and
comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    14,084
    
    
    
    
    
    
    
    
    
    
    
    14,084Balances at June 30, 2005
    
    $
    25
    
    
    $
    66,636
    
    
    $
    14,609
    
    
    $
    (290
    )
    
    $
    (12,857
    )
    
    $
    68,123
  7




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30, 2005 and 2004
 (in thousands)
(unaudited)
 2005
    
    
    2004CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    $
    49,956
    
    
    $
    30,535CASH FLOWS FROM OPERATING ACTIVITIESNet earnings
    
    
    14,084
    
    
    
    10,444Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,191
    
    
    
    2,561Deferred gain recognition
    
    
    (385
    )
    
    
    (566
    )Loss on disposals of equipment and property
    
    
    160
    
    
    
    507Tax benefit of stock option exercises
    
    
    1,292
    
    
    
    1,108Amortization of warrants and debt issuance costs
    
    
    853
    
    
    
    1,008Deferred income taxes
    
    
    (1,122
    )
    
    
    Provision for doubtful accounts
    
    
    (48
    )
    
    
    (9
    )Other
    
    
    1
    
    
    
    77Changes in operating assets and liabilities, exclusive of acquisitions:Accounts receivable
    
    
    9,312
    
    
    
    (15,019
    )Restricted cash
    
    
    1,362
    
    
    
    712Deposits, prepaid expenses and other assets
    
    
    629
    
    
    
    2,089Accounts payable, accrued expenses and other liabilities
    
    
    (14,710
    )
    
    
    (6,229
    )Unearned revenue
    
    
    10,013
    
    
    
    414Net cash provided by (used in) operating activities
    
    
    24,632
    
    
    
    (2,903
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of equipment and property
    
    
    (4,363
    )
    
    
    (778
    )Proceeds from disposals of equipment and property
    
    
    27
    
    
    
    6Acquisition of North American, less cash acquired
    
    
    (26,173
    )
    
    
    Net cash used in investing activities
    
    
    (30,509
    )
    
    
    (772
    )CASH FLOWS FROM FINANCING ACTIVITIESDecrease in restricted cash due to repayment of debt
    
    
    
    
    
    
    18,000Repayment of debt
    
    
    
    
    
    
    (18,000
    )Proceeds from exercise of stock options
    
    
    1,635
    
    
    
    1,441Proceeds from exercise of warrants
    
    
    2,500
    
    
    
    Payment of debt issuance costs
    
    
    
    
    
    
    (548
    )Repayment of aircraft rent obligations
    
    
    (1,713
    )
    
    
    (7,196
    )Net cash provided by (used in) financing activities
    
    
    2,422
    
    
    
    (6,303
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,455
    )
    
    
    (9,978
    )CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    46,501
    
    
    $
    20,557SUPPLEMENTAL INFORMATION:Interest paid
    
    $
    750
    
    
    $
    1,888Income taxes paid
    
    $
    11,763
    
    
    $
    2,988Non-cash Financing Activities:Conversion of the Companys convertible senior subordinated debentures to common stock
    
    $
    18,125
    
    
    $
    
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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1.
    
    Basis of PresentationThe unaudited Condensed Consolidated Financial Statements include the accounts of World Air
Holdings, Inc. (World Air Holdings or the Company) and its wholly-owned subsidiaries, World
Airways, Inc. (World Airways), North American Airlines, Inc. (North American) and World
Risk Solutions, Ltd. (World Risk Solutions). World Airways Parts Company LLC is a
wholly-owned subsidiary of World Airways. The Company acquired North American, a privately held
airline based in Jamaica, New York, on April 27, 2005. All significant inter-company accounts
and transactions have been eliminated.Subject to the disclosures in Item 4 below, management believes that all adjustments necessary
for a fair statement of results have been included in the unaudited Condensed Consolidated
Financial Statements for the interim periods presented. The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and the results of operations for the
six months ended June 30, 2005 are not necessarily indicative of the results to be expected for
the year ending December 31, 2005. As a result of the circumstances set forth in Item 4 below,
our independent auditor was unable to complete its review of the Companys consolidated
financial statements as of and for the three months and six months ended June
30, 2005.The Condensed Consolidated Balance Sheet for December 31, 2004 is derived from the Consolidated
Financial Statements included in the Companys 2004 Form 10-K. These interim period Condensed
Consolidated Financial Statements and accompanying footnotes should be read in conjunction with
the Consolidated Financial Statements contained in World Air Holdings Annual Report on Form
10-K for the year ended December 31, 2004.Certain items in prior year financial statements included herein have been reclassified to
conform to the 2005 financial statement presentation2.
    
    Long-Term Operating DepositsLong-term operating deposits of $23.0 million at June 30, 2005 consisted of aircraft and engine
(flight equipment) deposits of $22.3 million and building and miscellaneous deposits of $0.7
million. At December 31, 2004, long-term operating deposits of $18.2 million consisted of
aircraft and engine deposits of $17.8 million and building and miscellaneous deposits of $0.4
million.3.
    
    Earnings per ShareBasic earnings per share are computed by dividing net
earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share include the effects of common
equivalent shares outstanding during the period. The following table sets forth the computation
of basic and diluted earnings per share (in thousands except per share data):
 Three Months Ended June 30, 2005Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    4,186
    
    
    
    23,600
    
    
    $
    0.18Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,685Options
    
    
    
    
    
    
    1,376Restricted
stock
    
    
    
    
    
    
    10Fully Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    4,186
    
    
    
    26,671
    
    
    $
    0.16
 9




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Three Months Ended June 30, 2004Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    2,569
    
    
    
    11,637
    
    
    $
    0.22Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,544Options
    
    
    
    
    
    
    2,0888% convertible debentures
    
    
    323
    
    
    
    7,983Profit sharing
    
    
    (123
    )
    
    
    Amortization of debt issuance costs
    
    
    50
    
    
    
    Aircraft lease restructuring fees
    
    
    (68
    )
    
    
    Fully Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    2,751
    
    
    
    23,252
    
    
    $
    0.12
 Six Months Ended June 30, 2005Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    14,084
    
    
    
    21,325
    
    
    $
    0.66Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,715Options
    
    
    
    
    
    
    1,451Restricted
stock
    
    
    
    
    
    
    48% convertible debentures
    
    
    162
    
    
    
    2,015Profit sharing
    
    
    
    
    
    
    Amortization of debt issuance costs
    
    
    35
    
    
    
    Aircraft lease restructuring fees
    
    
    (13
    )
    
    
    Fully Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    14,268
    
    
    
    26,510
    
    
    $
    0.54
 Six Months Ended June 30, 2004Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    10,444
    
    
    
    11,536
    
    
    $
    0.91Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,760Options
    
    
    
    
    
    
    2,2688% convertible debentures
    
    
    717
    
    
    
    8,294Profit sharing
    
    
    (179
    )
    
    
    Amortization of debt issuance costs
    
    
    92
    
    
    
    Aircraft lease restructuring fees
    
    
    (57
    )
    
    
    Fully Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    11,017
    
    
    
    23,858
    
    
    $
    0.46
 10




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##### Table of Contents



As noted within the Companys 2004 Form 10-K, the Company amended its fully diluted EPS
calculation for the years ended December 31, 2004 and 2003, and for certain quarters within those years. The following table
shows the effect of the revision on previously reported fully diluted EPS calculations for the
quarter and six months ended June 30, 2004.
 Fully Diluted EPS
 Quarter Ended June 30, 2004
    
    Six Months Ended June 30, 2004As previously reported
    
    
    0.13
    
    
    
    0.47Revised
    
    
    0.12
    
    
    
    0.46Variance
    
    
    (0.01
    )
    
    
    (0.01
    )
 4.
    
    Accounting for Stock-Based CompensationAt June 30, 2005, the Company had three stock-based compensation plans. The 1995 Stock
Incentive Plan was amended in May 2004 to allow for various forms of equity awards including
restricted stock. In the second quarter of 2005, the Company issued 50,000 shares of restricted
stock which vests over four years. The Company accounts for those plans under the recognition
and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. No
stock-based compensation cost related to stock options is
reflected in net earnings for the quarter and six months ended June 30, 2005, as all options
granted during those periods had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on net earnings
and earnings per share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in
thousands, except per share data):
 Quarter Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net earnings, as reported
    
    $
    4,186
    
    
    $
    2,569
    
    
    $
    14,084
    
    
    $
    10,444Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (138
    )
    
    
    (361
    )
    
    
    (326
    )
    
    
    (485
    )Pro forma net earnings
    
    $
    4,048
    
    
    $
    2,208
    
    
    $
    13,758
    
    
    $
    9,959Earnings per shareBasic  as reported
    
    $
    0.18
    
    
    $
    0.22
    
    
    $
    0.66
    
    
    $
    0.91Basic  pro forma
    
    $
    0.17
    
    
    $
    0.19
    
    
    $
    0.65
    
    
    $
    0.86Fully Diluted
 as reported
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.54
    
    
    $
    0.46Fully Diluted  pro forma
    
    $
    0.15
    
    
    $
    0.10
    
    
    $
    0.53
    
    
    $
    0.44
 The per share weighted-average fair value of stock options granted during the second
quarter of 2004 was $2.35 and first six months of 2004 was $2.37 (no stock options were granted
during the second quarter or first six months of 2005) on the date of grant using the Black
Scholes option-pricing model with the following weighted-average assumptions:
 Quarter Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    3.5
    %
    
    
    3.9
    %
    
    
    3.5
    %
    
    
    3.8
    %Expected life (in years)
    
    
    4.2
    
    
    
    4.9
    
    
    
    4.2
    
    
    
    4.9Risk-free volatility
    
    
    71
    %
    
    
    80
    %
    
    
    71
    %
    
    
    80
    %
 5.
    
    Virginia Lease ObligationThe Company is obligated under an operating lease for office space at its former headquarters
in Herndon, Virginia, through April 2006. The Company had a liability balance of $1.1 million
at December 31, 2004. During the first quarter of 2005, the Company reviewed market conditions
and determined that an additional net $0.6 million should be added to the liability. This
resulted in a $1.7 million balance at March 31, 2005, which was the present value of the total
remaining cash obligation under
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this lease. At the end of the second quarter, market conditions were the same which resulted in a liability of
$1.3 million at June 30, 2005. The liability is included within other accrued liabilities on
the accompanying Condensed Consolidated Balance Sheets at June 30, 2005.6.
    
    Union NegotiationsWorld Airways cockpit crewmembers, who constitute approximately 29% of its employees and are
represented by the International Brotherhood of Teamsters (the Teamsters), are subject to a
collective bargaining agreement that became amendable June 30, 2003. The Company continued
negotiations with the Teamsters during the second quarter of 2005, under the auspices of the
National Mediation Board (NMB).World Airways aircraft dispatchers, who are represented by the Transport Workers Union (TWU),
are subject to a collective bargaining agreement that became amendable December 31, 2003. Fewer
than 15 World Airways employees are subject to this collective bargaining agreement. The
Company continued negotiations with the TWU during the second quarter of 2005.The NMB certified the Teamsters to represent North Americans cockpit crewmembers on January 16,
2004 (approximately 130 employees). North American and the Teamsters commenced negotiations for
their first collective bargaining agreement on April 6, 2004 and have met on a number of
occasions. Though representatives from North American and the Teamsters continue to negotiate
the terms of a comprehensive final agreement under the auspicious of the NMB, no collective
bargaining agreement has yet been reached.On July 26, 2005, the NMB authorized a union election (the Teamsters) among North Americans
flight attendants. The NMB mailed to the home address of each eligible voter a set of Telephone
Electronic Voting instructions on August 10, 2005. The NMB will count the votes on August 31,
2005 at the NMBs offices in Washington, D.C.7.
    
    Post-Retirement Health Care Benefits PlanWorld Airways cockpit crewmembers and eligible dependents are covered by a post-retirement
health care benefits plan. A summary of the net periodic post-retirement benefit costs for the
three and six months ended June 30 is as follows (in thousands):
 Quarter Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    192
    
    
    $
    95
    
    
    $
    384
    
    
    $
    190Interest cost
    
    
    111
    
    
    
    61
    
    
    
    222
    
    
    
    122Net amortized loss
    
    
    70
    
    
    
    3
    
    
    
    141
    
    
    
    6Net periodic post-retirement benefit cost
    
    $
    373
    
    
    $
    159
    
    
    $
    747
    
    
    $
    318
 The Company anticipates that it will contribute approximately $146,000 to fund its health
care obligations in 2005. As of June 30, 2005, $73,000 of contributions have been made.8.
    
    Other Comprehensive Income (Loss)The Company reports other comprehensive income in its Consolidated Statement of Changes in
Stockholders Equity. For the quarters and six months ending June 30, 2005 and 2004, there
were no items of other comprehensive income or loss for the Company.9.
    
    Segment ReportingBeginning in the second quarter of 2005, the Company has two reportable segments: World
Airways and North American. The Company operates and manages these companies as two distinct
airlines, and prepares separate financial statements for each entity which are reviewed by
senior management at World Air Holdings as well as the chief operating officer and other
management at the operating company level. Financial information for the quarter and six
months ended June 30, 2005 by reporting segment is set forth below (in thousands). North
Americans financial results have been included from April 28, 2005, the day following the
acquisition, to June 30, 2005.
 12




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##### Table of Contents



Quarter Ended June 30, 2005World Airways
    
    North American
    
    All Other
    
    TotalTotal revenues
    
    $
    140,089
    
    
    $
    32,509
    
    
    $
    
    
    
    $
    172,598Operating
income (loss)
    
    $
    11,220
    
    
    $
    (3,321
    )
    
    $
    305
    
    
    $
    8,204Net income (loss)
    
    $
    6,164
    
    
    $
    (2,185
    )
    
    $
    207
    
    
    $
    4,186Total assets
    
    $
    149,334
    
    
    $
    64,618
    
    
    $
    5,039
    
    
    $
    218,991Total block hours
    
    
    13,969
    
    
    
    3,928
    
    
    
    
    
    
    
    17,897
 Six Month Ended June 30, 2005World Airways
    
    North American
    
    All Other
    
    TotalTotal revenues
    
    $
    299,638
    
    
    $
    32,509
    
    
    $
    
    
    
    $
    332,147Operating
income (loss)
    
    $
    27,882
    
    
    $
    (3,321
    )
    
    $
    821
    
    
    $
    25,382Net income (loss)
    
    $
    15,883
    
    
    $
    (2,185
    )
    
    $
    386
    
    
    $
    14,084Total assets
    
    $
    149,334
    
    
    $
    64,618
    
    
    $
    5,039
    
    
    $
    218,991Total block hours
    
    
    27,084
    
    
    
    3,928
    
    
    
    
    
    
    
    31,012
 10.
    
    North American AcquisitionOn April 27, 2005, the Company acquired North American, a privately held airline based in
Jamaica, New York, for approximately $35 million in cash which was financed from our existing
cash and investments. In addition, the Company has expended approximately $2.2 million for
transaction costs, consisting primarily of financial advisory, legal and accounting fees. These
transaction costs consisted of $1.4 million capitalized as part of the purchase price and $0.8
million expensed in the second quarter of 2005. In addition, there
was a $1.3 million subsequent reduction in the purchase price based on terms of
the purchase contract. North American provides passenger service to
tour operators, selected scheduled service markets and the USAF. This acquisition will help the
Company diversify its product mix as well its customer base. North American currently has three
Boeing 767 and five Boeing 757 aircraft, which will complement the service provided by World
Airways with its larger wide-body aircraft. North American will maintain its operational
headquarters at John F. Kennedy International Airport in New York, with World Airways and World
Air Holdings continuing to be based in Peachtree City, Georgia.The Company commenced the consolidation of North American on April 28, 2005 and the acquisition
was accounted for using the purchase method of accounting in accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations.The following
summarized the estimated total purchase price for North American (in thousands):
 Cash consideration
    
    $
    34,750Direct acquisition costs
    
    
    1,408Adjustment to purchase price
    
    
    (1,345
    )$
    34,813
 Under the purchase method of accounting, the total purchase price is allocated to North
Americans net tangible and intangible assets based upon their estimated fair value as of the
date of the acquisition with any amount paid in excess of the fair value of the net assets
recorded as goodwill. Based upon the purchase price and review of the net assets acquired and
liabilities assumed, the estimated purchase price allocation is as follows:
 Fair Value of NetAssets AcquiredCash
    
    $
    8,640Restricted
cash
    
    
    2,372Accounts receivable
    
    
    12,529Prepaid expenses and deferred tax assets
    
    
    1,835Equipment and property, net
    
    
    1,586Long-term deposits and other assets
    
    
    5,936Intangible assets acquired:ETOPS* program added value
    
    
    4,680Aircraft leases at market rates in excess of rental rates
    
    
    2,840Trademark
    
    
    575Goodwill
    
    
    21,602Total assets acquired
    
    
    62,595Total accounts payable and accrued liabilities
    
    
    (27,782
    )Net assets acquired
    
    $
    34,813
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*     ETOPS  Extended range two engine operationsThe fair values of identifiable tangible and intangible
assets were determined with the
assistance of American Appraisal Associates, Inc., an independent third-party appraiser.
Estimated goodwill of $21.6 million has been recorded and represents the excess of the purchase price
over the fair value of the tangible and other intangible assets acquired less the liabilities
assumed. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and
intangible assets with indefinite useful lives are not amortized, but are tested for impairment
at least annually or as circumstances indicate their value may no longer be recoverable.Supplemental unaudited pro forma information reflecting the acquisition of North American as if
it occurred on April 1, 2005 and April 1, 2004 as well as
January 1, 2005 and January 1, 2004, is as follows (in thousands, except per share
amounts):
 Quarter Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Total revenues
    
    $
    189,545
    
    
    $
    163,251
    
    
    $
    408,566
    
    
    $
    347,422Net earnings
    
    $
    2,014
    
    
    $
    2,417
    
    
    $
    19,024
    
    
    $
    7,832Basic earnings per shareNet earnings
    
    $
    0.09
    
    
    $
    0.21
    
    
    $
    0.89
    
    
    $
    0.68Weighted average shares outstanding
    
    
    23,600
    
    
    
    11,637
    
    
    
    21,325
    
    
    
    11,536Fully diluted earnings per shareNet earnings
    
    $
    0.08
    
    
    $
    0.11
    
    
    $
    0.72
    
    
    $
    0.35Weighted average shares outstanding
    
    
    26,671
    
    
    
    23,252
    
    
    $
    26,510
    
    
    $
    23,858
 The above pro forma results include adjustments for the amortization of intangibles,
adjustments to depreciation to reflect the new basis and depreciable
lives for equipment and property, and lost interest
income/additional interest expense to reflect the cash payments related to the purchase of
North American.11.
    
    Legal Proceedings- World Airways, Inc.Union Negotiations/Litigation.World Airways Cockpit Crewmembers. World Airways and the Teamsters have been negotiating
the terms of a new collective bargaining agreement under the auspices of the NMB since the
amendable date of the existing agreement expired on June 30, 2003. Negotiations are ongoing
and representatives from both World Airways and the Teamsters are scheduled to meet again with
the mediator on August 23, 2005.In early 2005, the Teamsters filed a grievance against World Airways on behalf of one cockpit
crewmember, which is now set for arbitration on August 15, 2005. The issue presented is
whether a DC-10 cockpit crewmember, once he or she reaches the mandatory retirement age of 60,
can exercise his or her seniority to displace another employee holding a second officer or
flight engineer position under the terms of the current collective bargaining agreement.
There are a number of cockpit crewmembers and second officers or flight engineers who could be
affected between now and the planned elimination of World Airways DC-10 fleet and if an
adverse decision is rendered against World Airways, significant training and/or severance
costs could be incurred. Although World Airways intends to vigorously defend itself, the
Company cannot determine the impact, if any, this matter will have on its financial condition,
results of operations or liquidity.
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World Airways Flight Attendants. The Teamsters also represent World Airways flight
attendants (approximately 45% of World Airways employees). On September 2, 2003, a new
collective bargaining agreement was ratified, with an amendable date of August 31, 2006. The
agreement included pay increases and other benefit changes requested by the flight attendants
while providing World Airways with work-rule changes in support of its financial goals. In
1994, World Airways flight attendants argued that World Airways violated the ''scope clause
of the present collective bargaining agreement by using foreign flight attendant crews on the
World Airways flights for Garuda, Indonesia, which had historically been World Airways
operating procedure. In contracts with certain customers, World Airways is obligated to
permit its customers to deploy their own flight attendants. While the arbitrator in this
matter in 1997 denied the Teamsters request for back pay to affected flight attendants for
flying relating to the 1994 Hadj, the arbitrator also concluded that the collective bargaining
agreement requires World Airways to first actively seek profitable business opportunities that
require using World Airways flight attendants, before World Airways may accept wet lease
business opportunities that use the flight attendants of World Airways customers. Since
1997, the flight attendants have filed a number of similar ''scope clause grievances with
respect to other wet lease contracts. Although World Airways intends to vigorously defend
itself, an adverse decision on one or more of the grievances could have a material adverse
impact on its financial condition, results of operations or liquidity.General Litigation.Miami-Dade County is currently investigating and remediating various environmental conditions
at the Miami International Airport (MIA). During the second quarter of 2001, the County
filed a lawsuit against a number of defendants, which does not currently include World
Airways, in an attempt to recover its past and future clean-up costs. This claim has been
filed in the Florida Circuit Court for the 11th Judicial District in Dade County Florida. In
addition to the defendants named in the lawsuit, several hundred other agencies and companies
that were prior tenants at MIA (potentially responsible parties, or PRPs), including World
Airways, were issued letters advising them of the lawsuit and indicating that any PRPs could
be named as additional defendants in the future depending upon a determination as to the
levels of contamination and the extent to which any PRP may have contributed to any alleged
contamination. At this time, certain PRPs, including World Airways, have joined a joint
defense group to respond to the Countys inquiries and investigation of the PRPs. This group
is conducting preliminary investigations of the site in question to determine each PRPs
potential exposure. At this time, the Company cannot determine the impact, if any, this matter
will have on its financial condition, results of operations or liquidity.In January 2004, ten purported class action complaints (six in the United States District
Court for the Eastern District of New York, one in the United States District Court for the
Southern District of New York, one in the Superior Court of DeKalb County, Georgia, one in the
United States District Court for the Northern District of New Jersey and one in the United
States District Court for the Northern District of Illinois) and four individual complaints
(all in the United States District Court for the Eastern District of New York), and thirteen
small claims actions (one in California, three in New Jersey, one in Georgia and eight in New
York) were filed against the Company arising out of the discontinuance of charter flights upon
the expiration of World Airways obligation to provide services under an air services
agreement. Seven of the eight small claims actions in New York were settled for a total of
$14,000 (or $2,000 per plaintiff). The purported class action cases were consolidated for
discovery purposes into the Eastern District of New York. The Company had operated the charter
flights between cities in the United States and Lagos, Nigeria for Ritetime Aviation and
Travel Services, Inc. (Ritetime). World Airways obligation to perform air services for
Ritetime ended with the last chartered flight on December 30, 2003. From the allegations made
by the various plaintiffs, it appears that Ritetime continued to sell tickets to passengers
for flights purportedly scheduled to depart after the expiration of World Airways contractual
obligations for air services. The plaintiffs purport to act for themselves and on behalf of
other persons who held tickets issued by Ritetime for the non-contracted flights. Ritetime is
also named as a defendant in each of these lawsuits. The plaintiffs seek compensatory,
punitive and/or treble damages and costs and expenses, including attorneys fees, based on
various legal theories including breach of contract, fraud, negligent misrepresentation,
unjust enrichment, illegal/excess tax and violations of U.S. federal laws and regulations
governing air transportation and of the Federal Racketeer Influenced and Corrupt Organization
Statute. World Airways insurance carrier has responded and assumed the defense of these
cases and agreed to conditionally indemnify World Airways on the costs of litigation and any
resulting judgment. In March 2004, Ritetime filed a Demand to Arbitrate in Peachtree City,
Georgia, and subsequently World Airways responded and filed a counterclaim. The matter was
heard in October 2004, and the arbitrator awarded World Airways $2.2 million against Ritetime,
plus indemnification on all judgments, fees and expenses incurred by World Airways in the
Ritetime litigation. However, it is doubtful that Ritetime has assets
to pay the award and no receivable has been recorded. World
Airways insurance carrier has conditionally agreed to indemnify World Airways. In the event
this insurance coverage is rescinded, the Company cannot determine the impact, if any, this
matter will have on its financial condition, results of operations or liquidity. The previously reported enforcement action initiated by the Department of
Transportation against World Airways has been resolved on terms mutually acceptable to both
parties; World Airways denied any allegations of regulatory noncompliance.
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##### Table of Contents



On January 9, 2004, Whitebox Convertible Arbitrage Partners, L.P. and Pandora Select Partners,
L.P. filed a complaint in the United States District Court for the District of Minnesota
alleging breach of contract by World Airways in connection with its exchange in December 2003
of $22,545,000 aggregate amount of the Old Debentures for a like amount of the newly-issued
Debentures. On May 10, 2004, by order of the United States District Court for the District of
Minnesota, this matter was transferred to the United States District Court for the Northern District of Georgia. The
plaintiffs in this lawsuit allege that they have held at all relevant times $2,530,000 and
$780,000 principal amount, respectively, of the Old Debentures and that World Airways breached
the terms of the indenture governing the Old Debentures by purchasing the Old Debentures from
a selected group of holders rather than from holders determined by lot or from all holders on
a pro rata basis. The plaintiffs are seeking damages in an amount equal to the difference in
value between the Debentures and the Old Debentures held by the plaintiffs and the interest
lost by the plaintiffs on the Old Debentures through maturity on August 26, 2004 as well as
costs and reasonable attorney fees. World Airways believes that this claim is without merit
and intends to defend itself vigorously in this lawsuit, although the Company cannot give any
assurance that this litigation will not have a material adverse effect on its financial
condition, results of operation or liquidity.On May 27, 2004 a ground handler contracted by China Airlines, Ltd. (China Airlines) under
the terms of a wet lease with World Airways, tail tipped one of World Airways MD-11 freighter
aircraft while unloading cargo in Los Angeles. The aircraft sustained significant damages in
excess of $1.7 million and was out of service for over a one-month period. In February 2005,
China Airlines instituted an arbitration proceeding against World Airways seeking to recover
$1,690,172 in prepaid rental fees during the period the aircraft was out of service ($150,172
for three days in May, 2004 and $1,540,000 for the entire month of June, 2004) and World
Airways thereafter filed a counterclaim against China Airlines (with notice to, and in
coordination with, its own insurance carriers) for $1.7 million in damages to the aircraft.
Under the terms of the wet lease, China Airlines was expressly responsible for loading and
unloading all cargo although China Airlines is expected to argue that World Airways was
obligated to provide a loadmaster to supervise that process. World Airways intends to defend
itself vigorously, although the Company cannot at this time give any assurance that this
arbitration will not have a material adverse effect on its financial condition, results of
operation or liquidity.In February 2004, World Airways made a self-disclosure to the Federal Aviation Administration
(FAA) concerning aircraft record irregularities discovered upon preparing for the return of
two leased DC-10-30 aircraft. World Airways subsequently received a letter from the FAA
opening an investigation into a possible violation of the Code of Federal Regulations. World
Airways has complied with all requests of the FAA and is waiting to receive notification of
the FAAs findings. At this time, the Company cannot determine what impact, if any, the FAAs
findings could have on its financial condition, results of operations or liquidity.- North American Airlines, Inc.Union Negotiations/Litigation.North Americans Cockpit Crewmembers. The NMB certified the Teamsters to represent North
Americans cockpit crewmembers on January 16, 2004 (approximately 130 employees). North
American and the Teamsters commenced negotiations for their first collective bargaining
agreement on April 6, 2004 and have met on numerous occasions. Though representatives from
North American and the Teamsters continue to negotiate the terms of a comprehensive final
agreement under the auspicious of the NMB, no collective bargaining agreement has yet been
reached.For competitive and economic reasons, North American effective as of January 1, 2005 and
February 1, 2005, unilaterally reduced cockpit crewmember wages and other benefits in addition
to modifying certain work rules. The Teamsters thereafter filed suit against North American in
the United States District Court for the Northern District of California (San Francisco
Division) seeking, among other things, a preliminary injunction against North American arguing
that managements unilateral wage and benefits reductions during contract negotiations were
discriminatory and in violation of the status quo provisions of the Railway Labor Act. A
hearing was held on July 27 and 28, 2005 whereupon the judge instructed both sides to submit
legal briefs to the court on or before August 22, 2005. North American believes that it can
satisfactorily demonstrate to the court the competitive and economic necessities required under
the Railway Labor Act to justify its unilateral actions with its cockpit crewmember group
during labor negotiations without a first collective bargaining agreement in place and will
defend itself vigorously; the Company, however, cannot give any assurance that an adverse
result in this litigation will not have a material adverse effect on its financial condition,
results of operations, or liquidity.North Americans Flight Attendants. On July 26, 2005, the NMB authorized a union election
(the Teamsters) among North Americans flight attendants. The Teamsters mailed to the home
address of each eligible voter a set of Telephone Electronic Voting instructions on August 10,
2005. The NMB will count the votes on August 31, 2005 at the NMBs offices in Washington, D.C.
North American plans to initiate a vigorous campaign within the confines of the Railway Labor
Act to educate its flight attendants on the reasons why they are in a better position without
the Teamsters representation.
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General Litigation.North American, along with certain unrelated entities, is a defendant in litigation brought in
the Dominican Republic for, among other things, breach of contract. The lawsuit is subject to
the laws of the Dominican Republic. As of December 31, 2004, the plaintiff had successfully
petitioned the applicable court and was awarded a judgment that resulted in the embargoing of
certain of North Americans peso-denominated funds in the Dominican Republic. Accordingly,
approximately $969,000 was frozen and is not controlled by North American. The litigation
is in discovery, and the outcome at this time is not determinable although North American
believes that the litigation is without merit, and intends to vigorously contest the claims.
North American cannot give any assurance that the funds will be released. At this time, the
Company cannot determine the impact, if any, this matter will have on its financial condition,
results of operations or liquidity.North American is a party to separate actions brought by two former pilots for various causes
of action, including wrongful termination. The first matter in New York is currently in
discovery and the parties continue to explore settlement. The second matter in California was
set for jury trial in July of this year but was rescheduled for November 2005 as the plaintiff
offered to participate in non-binding mediation. North American is unable to predict the
outcome of the New York matter at this time and, therefore, no provision has been reflected in
the accompanying financial statements. North American has accrued $200,000 on the California
matter representing the costs of trial. North American believes that both claims are without
merit and intends to defend itself vigorously in both lawsuits, although at this time the
Company cannot give assurance that this litigation will not have a material adverse effect on
its financial condition, results of operations or liquidity.In addition, the Company is party to routine litigation and administrative proceedings
incidental to its business, none of which the Company believes is likely to have a material
adverse effect on its financial condition, results of operations or liquidity.12.
    
    Recently Issued Accounting StandardsIn December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)), Share-Based
Payment.This Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of
the award (with limited exceptions). That cost will be recognized over the period during which
an employee is required to provide service in exchange for the award  the requisite service
period (usually the vesting period). No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. Employee share purchase plans will not
result in recognition of compensation cost if certain conditions are met. A public entity will
initially measure the cost of employee services received in exchange for an award of liability
instruments based on its current fair value; the fair value of that
award will be recalculated
subsequently at each reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over that period. As of
their respective required effective date, all public entities will apply this Statement using a
modified version of prospective application. Under that transition method, compensation cost is
recognized on or after the required effective date for the portion of outstanding awards for
which the requisite service has not yet been rendered, based on the grant-date fair value of
those awards calculated under SFAS No. 123(R) for either recognition or pro forma disclosures.
For periods before the required effective date, entities may elect to apply a modified version
of retrospective application under which financial statements for prior periods are adjusted on
a basis consistent with the pro forma disclosures required for those periods by Statement
123(R). The Company has not completed evaluating the impact of the SFAS No. 123(R), but does
not expect any material impact on its consolidated results of operations, financial condition
or liquidity. On April 14, 2005, the U.S. Securities and Exchange Commission (the SEC)
announced a deferral of the effective date of SFAS No. 123(R) until the first annual period
beginning after June 15, 2005.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  17




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##### Table of Contents



OVERVIEW
 General
   Quarter Ended June 30,2005
    
    
    2004Block hours:Full service passenger
    
    
    6,415
    
    
    
    46
    %
    
    
    6,163
    
    
    
    56
    %ACMI* passenger
    
    
    1,606
    
    
    
    12
    %
    
    
    1,184
    
    
    
    11
    %Full service cargo
    
    
    19
    
    
    
    0
    %
    
    
    386
    
    
    
    3
    %ACMI* cargo
    
    
    5,748
    
    
    
    41
    %
    
    
    3,072
    
    
    
    28
    %Miscellaneous
    
    
    181
    
    
    
    1
    %
    
    
    207
    
    
    
    2
    %Total
    
    
    13,969
    
    
    
    100
    %
    
    
    11,012
    
    
    
    100
    %Operating aircraft at quarter-end
    
    17
    
    16Average available aircraft per day
    
    16.6
    
    16.0Average daily utilization
    
    9.3
    
    7.6(block hours flown per day per aircraft)
   Quarter Ended June 30,2005Block hours:Full service passenger
    
    
    1,903
    
    
    
    48
    %ACMI* passenger
    
    
    637
    
    
    
    16
    %Scheduled passenger
    
    
    1,354
    
    
    
    35
    %Miscellaneous
    
    
    34
    
    
    
    1
    %Total
    
    
    3,928
    
    
    
    100
    %Operating aircraft at quarter-end
    
    8Average available aircraft per day
    
    8.0Average daily utilization
    
    7.7(block hours flown per day per aircraft)
 *
    
    ACMI contracts are where North American provides the aircraft, crew, maintenance and insurance.
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##### Table of Contents



Six Months Ended June 30,2005
    
    
    2004Block hours:Full service passenger
    
    
    14,493
    
    
    
    54
    %
    
    
    13,728
    
    
    
    61
    %ACMI* passenger
    
    
    2,674
    
    
    
    10
    %
    
    
    2,370
    
    
    
    11
    %Full service cargo
    
    
    19
    
    
    
    0
    %
    
    
    668
    
    
    
    3
    %ACMI* cargo
    
    
    9,520
    
    
    
    35
    %
    
    
    5,085
    
    
    
    23
    %Miscellaneous
    
    
    378
    
    
    
    1
    %
    
    
    490
    
    
    
    2
    %Total
    
    
    27,084
    
    
    
    100
    %
    
    
    22,341
    
    
    
    100
    %Operating aircraft at quarter-end
    
    17
    
    16Average available aircraft per day
    
    16.2
    
    16.0Average daily utilization
    
    9.3
    
    7.7(block hours flown per day per aircraft)
 *
    
    ACMI contracts are where World Airways provides the aircraft, crew, maintenance and insurance.
  
    
    continue working to diversify the commercial revenue mix by adding profitable
customers, while continuing to provide excellent service to all of the Companys
customers;
    
    continue to actively manage the Companys major cost categories;
    
    work on concluding an agreement with World Airways cockpit crewmembers and
dispatchers as well as a new collective bargaining agreement with North Americans
cockpit crewmembers;
    
    manage fleet plans to meet customer needs; and
    
    complete organizational changes including the restructuring of the North American
finance organization, synergy enhancements and financial reporting standardization
tied to the acquisition of North American Airlines.
 Significant Customer Relationships
  World Airways
 Quarter Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004USAF
    
    
    74.5
    %
    
    
    76.3
    %
    
    
    79.7
    %
    
    
    79.9
    %Eva Airways
    
    
    7.6
    %
    
    
    
    %
    
    
    5.3
    %
    
    
    
    %Sonair Serviceo Aereo
    
    
    5.2
    %
    
    
    6.1
    %
    
    
    4.6
    %
    
    
    5.7
    %United Parcel Service (formerly Menlo Worldwide)
    
    
    3.5
    %
    
    
    5.2
    %
    
    
    3.3
    %
    
    
    4.3
    %Air Canada
    
    
    2.4
    %
    
    
    
    %
    
    
    1.1
    %
    
    
    
    %China
Airlines
    
    
    1.3
    %
    
    
    2.1
    %
    
    
    2.1
    %
    
    
    1.0
    %
 19




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##### Table of Contents



North American
 Quarter Ended June 30,2005USAF
    
    
    56.8
    %Scheduled service
    
    
    20.7
    %GWV Vacations
    
    
    5.2
    %Air Jamaica
    
    
    3.8
    %EirJet
    
    
    2.8
    %CaboVerde Airlines
    
    
    1.8
    %
 RESULTS OF OPERATIONS
 Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004
   Revenues
 World Airways
 Quarter Ended June 30,2005
    
    
    2004
    
    
    Change
    
    
    % ChangeTotal block hours
    
    
    13,969
    
    
    
    11,012
    
    
    
    2,957
    
    
    
    26.9
    %Revenue per block hour
    
    $
    10,029
    
    
    $
    10,448
    
    
    $
    (419
    )
    
    
    -4.0
    %
 North American
 Quarter Ended June 30,2005Total block hours
    
    
    3,928Revenue per block hour
    
    $
    8,276
 Operating
Expenses
 World Airways
 Quarter Ended June 30,2005
    
    2004
    
    Change
    
    % ChangeOperating expense per block hour
    
    $
    9,226
    
    
    $
    10,050
    
    
    $
    (824
    )
    
    
    -8.2
    %
 North American
 Quarter Ended June 30,2005Operating expense per block hour
    
    $
    9,122
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##### Table of Contents



Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
  Revenues
 World Airways
 Six Months Ended June 30,2005
    
    
    2004
    
    
    Change
    
    
    % ChangeTotal block hours
    
    
    27,084
    
    
    
    22,341
    
    
    
    4,743
    
    
    
    21.2
    %Revenue per block hour
    
    $
    11,063
    
    
    $
    10,950
    
    
    $
    113
    
    
    
    1.0
    %
 Operating
Expenses
 21




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##### Table of Contents



World Airways
 Six Months Ended June 30,2005
    
    
    2004
    
    
    Change
    
    
    % ChangeOperating expense per block hour
    
    $
    10,034
    
    
    $
    10,144
    
    
    $
    (110
    )
    
    
    -1.1
    %
       LIQUIDITY AND CAPITAL RESOURCES
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##### Table of Contents



.
    Cash Flows from Operating Activities
  23




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##### Table of Contents



Cash Flows from Investing Activities
   Cash Flows from Financing Activities
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 (a)       Evaluation of Disclosure Controls and Procedures
   24




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##### Table of Contents



(b)       Changes in internal controls
  
 PART II
 
 ITEM 1. LEGAL PROCEEDINGS
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##### Table of Contents



ITEM 6. EXHIBITS
 No.
    
    Description10.13*+
    
    Employment Agreement, dated as of May 5, 2005, by and between World Air Holdings, Inc. and
Mark M. McMillin.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
    
    Incorporated by reference pursuant to Rule 12b-32 of the Exchange Act.+
    
    Management contract or compensatory plan or arrangement
  26




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##### Table of Contents



SIGNATURES
   WORLD AIR HOLDINGS, INC.By:
    /s/ Gilberto M. Duarte, Jr.Gilberto M. Duarte, Jr.Chief Financial Officer