##### 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: March 31, 2006
 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)
 
 
   þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ




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##### 



WORLD AIR HOLDINGS, INC.
 QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets (Unaudited), March 31, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Income (Unaudited), Three Months Ended March 31, 2006 and 2005
    
    
    5Consolidated Statement of Changes in Stockholders Equity (Unaudited), Three Months Ended March 31, 2006
    
    
    6Consolidated Statements of Cash Flows (Unaudited), Three Months ended March 31, 2006 and 2005
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II  OTHER INFORMATION
    
    
    20Item 1. Legal Proceedings
    
    
    20Item 6. Exhibits
    
    
    20SIGNATURES
    
    
    21EX-31.1 SECTION 302, CERTIFICATION OF THE CEOEX-31.2 SECTION 302, CERTIFICATION OF THE CFOEX-32.1 SECTION 906, CERTIFICATION OF THE CEOEX-32.2 SECTION 906, CERTIFICATION OF THE CFO
  2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
WORLD AIR HOLDINGS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data)
 (unaudited
 March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    44,065
    
    
    $
    46,202Restricted cash
    
    
    3,007
    
    
    
    6,262Short-term investments
    
    
    829
    
    
    
    827Trade accounts receivable, less allowance for doubtful accounts of $1,693
at March 31, 2006 and $1,643 at December 31, 2005
    
    
    47,942
    
    
    
    57,235Other receivables
    
    
    21,037
    
    
    
    21,564Prepaid expenses and other current assets
    
    
    16,457
    
    
    
    20,246Deferred income taxes
    
    
    5,037
    
    
    
    3,846Total current assets
    
    
    138,374
    
    
    
    156,182Equipment and propertyFlight and other equipment
    
    
    82,769
    
    
    
    81,206Less: accumulated depreciation and amortization
    
    
    48,477
    
    
    
    47,480Net equipment and property
    
    
    34,292
    
    
    
    33,726Goodwill and other intangible assetsGoodwill
    
    
    25,370
    
    
    
    25,370Other intangible assets, net of accumulated amortization of $1,014 at
March 31, 2006 and $740 at December 31, 2005
    
    
    7,081
    
    
    
    7,355Net goodwill and other intangible assets
    
    
    32,451
    
    
    
    32,725Long-term deposits
    
    
    28,961
    
    
    
    28,298Other assets and deferred charges, net of accumulated amortization of $3,558
at December 31, 2005
    
    
    6,638
    
    
    
    9,715Total assets
    
    $
    240,716
    
    
    $
    260,646
 3




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 March 31,
    
    
    December 31,2006
    
    
    2005LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    
    
    
    $
    24,000Accounts payable
    
    
    45,012
    
    
    
    50,757Current portion of accrued rent
    
    
    7,967
    
    
    
    4,700Current portion of deferred rent
    
    
    2,477
    
    
    
    2,455Unearned revenue
    
    
    17,517
    
    
    
    16,512Accrued maintenance
    
    
    12,532
    
    
    
    9,739Accrued salaries, wages and profit sharing
    
    
    26,872
    
    
    
    25,576Accrued taxes
    
    
    7,323
    
    
    
    5,534Other accrued liabilities
    
    
    8,281
    
    
    
    8,727Total current liabilities
    
    
    127,981
    
    
    
    148,000Deferred gain from sale-leaseback transactions, net of accumulated
amortization of $4,958 at March 31, 2006 and $4,857
at December 31, 2005
    
    
    549
    
    
    
    650Accrued post-retirement benefits
    
    
    7,320
    
    
    
    6,995Accrued and deferred rent, net of current portion
    
    
    10,477
    
    
    
    14,551Deferred income taxes
    
    
    3,689
    
    
    
    3,612Total liabilities
    
    
    150,016
    
    
    
    173,808Stockholders 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;
25,048,745 shares issued and 23,967,502 shares outstanding at
March 31, 2006; 25,002,645 shares issued and 23,921,402 shares
outstanding at December 31, 2005)
    
    
    25
    
    
    
    25Additional paid-in capital
    
    
    67,837
    
    
    
    67,770Retained earnings
    
    
    35,695
    
    
    
    32,153Deferred stock-based compensation
    
    
    
    
    
    
    (253
    )Treasury stock, at cost (1,081,243 shares at March 31, 2006 and
December 31, 2005)
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity
    
    
    90,700
    
    
    
    86,838Commitments and contingencies
    
    
    
    
    
    
    Total liabilities and stockholders equity
    
    $
    240,716
    
    
    $
    260,646
  4




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WORLD AIR HOLDINGS, INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 and 2005
(in thousands, except per share data)
 (unaudited)
 2006
    
    
    2005Operating revenuesFlight operations
    
    $
    215,867
    
    
    $
    159,020Other
    
    
    386
    
    
    
    529Total operating revenues
    
    
    216,253
    
    
    
    159,549Operating expensesFlight
    
    
    61,415
    
    
    
    45,169Maintenance
    
    
    30,434
    
    
    
    24,955Aircraft costs
    
    
    29,261
    
    
    
    20,929Fuel
    
    
    49,329
    
    
    
    30,471Flight operations subcontracted to other carriers
    
    
    2,106
    
    
    
    508Commissions
    
    
    10,965
    
    
    
    8,859Depreciation and amortization
    
    
    1,671
    
    
    
    1,455Sales, general and administrative
    
    
    21,626
    
    
    
    10,025Total operating expenses
    
    
    206,807
    
    
    
    142,371Operating income
    
    
    9,446
    
    
    
    17,178Other income (expense)Interest expense
    
    
    (3,573
    )
    
    
    (985
    )Interest income
    
    
    339
    
    
    
    269Other, net
    
    
    (114
    )
    
    
    (203
    )Total other income (expense)
    
    
    (3,348
    )
    
    
    (919
    )Earnings before income tax expense
    
    
    6,098
    
    
    
    16,259Income tax expense
    
    
    2,556
    
    
    
    6,361Net earnings
    
    $
    3,542
    
    
    $
    9,898Basic earnings per shareNet earnings
    
    $
    0.15
    
    
    $
    0.52Weighted average shares outstanding
    
    
    23,938
    
    
    
    19,024Diluted earnings per shareNet earnings
    
    $
    0.13
    
    
    $
    0.38Weighted average shares outstanding
    
    
    26,569
    
    
    
    26,236
  5




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS EQUITY
(in thousands)
(unaudited)
 Additional
    
    
    
    
    
    
    Deferred
    
    
    Treasury
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Stock-Based
    
    
    Stock, at
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    Cost
    
    
    EquityBalances at
December 31, 2005
    
    $
    25
    
    
    $
    67,770
    
    
    $
    32,153
    
    
    $
    (253
    )
    
    $
    (12,857
    )
    
    $
    86,838Exercise of 46,100
stock options
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166Excess tax benefit of
stock option
exercises
    
    
    
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59Amortization of
warrants
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34Stock-based
compensation
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Reversal of award
of deferred
stock-based
compensation
    
    
    
    
    
    
    (303
    )
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    Amortization of
deferred
stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    (50
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    3,542
    
    
    
    
    
    
    
    
    
    
    
    3,542Balances at
March 31, 2006
    
    $
    25
    
    
    $
    67,837
    
    
    $
    35,695
    
    
    $
    
    
    
    $
    (12,857
    )
    
    $
    90,700
  6




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(in thousands)
(unaudited)
 2006
    
    
    2005Cash and cash equivalents at beginning of year
    
    $
    46,202
    
    
    $
    16,306Cash flow from operating activitiesNet earnings
    
    
    3,542
    
    
    
    9,898Adjustments to reconcile net earnings to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,671
    
    
    
    1,455Deferred gain recognition
    
    
    (101
    )
    
    
    (283
    )Loss on disposals of equipment and property
    
    
    114
    
    
    
    32Tax benefit of stock option exercises
    
    
    
    
    
    
    910Amortization of warrants and debt issuance costs
    
    
    2,701
    
    
    
    455Deferred income taxes
    
    
    (1,168
    )
    
    
    709Provision for doubtful accounts
    
    
    50
    
    
    
    Stock-based compensation
    
    
    111
    
    
    
    Other
    
    
    35
    
    
    
    (43
    )Changes in operating assets and liabilities, exclusive of
acquisitions:Trade and
other receivables
    
    
    9,720
    
    
    
    5,775Restricted cash
    
    
    3,255
    
    
    
    766Deposits, prepaid expenses and other assets
    
    
    3,555
    
    
    
    1,516Accounts payable, accrued expenses and other liabilities
    
    
    (773
    )
    
    
    570Unearned revenue
    
    
    1,005
    
    
    
    2,437Net cash provided by operating activities
    
    
    23,717
    
    
    
    24,197Cash flows from investing activitiesPurchases of equipment and property
    
    
    (2,238
    )
    
    
    (987
    )Net purchases of short term investments
    
    
    (2
    )
    
    
    (22,125
    )Proceeds from disposals of equipment and property
    
    
    161
    
    
    
    Net cash used in investing activities
    
    
    (2,079
    )
    
    
    (23,112
    )Cash flows from financing activitiesRepayment of debt
    
    
    (24,000
    )
    
    
    Proceeds from exercise of stock options
    
    
    166
    
    
    
    516Proceeds from exercise of warrants
    
    
    
    
    
    
    2,500Excess tax benefit from employees stock-based compensation plan
    
    
    59
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (23,775
    )
    
    
    3,016Net increase (decrease) in cash and cash equivalents
    
    
    (2,137
    )
    
    
    4,101Cash and cash equivalents at end of period
    
    $
    44,065
    
    
    $
    20,407Supplemental information:Interest paid
    
    $
    363
    
    
    $
    401Income taxes paid
    
    $
    39
    
    
    $
    4,590Conversion of the Companys convertible senior subordinated
debentures to common stock
    
    $
    
    
    
    $
    18,113
  7




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WORLD AIR HOLDINGS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Basis of Presentation
   Form
10-K.
  2. Segment Reporting
  Three Months Ended March 31, 2006World AirHoldings, WorldWorld
    
    North
    
    Risk Solutions, andAirways
    
    American
    
    Eliminations
    
    TotalTotal
operating revenues
    
    $
    158,382
    
    
    $
    58,098
    
    
    $
    (227
    )
    
    $
    216,253Total
operating expenses
    
    $
    148,633
    
    
    $
    57,786
    
    
    $
    388
    
    
    $
    206,807Operating income
(loss)
    
    $
    9,749
    
    
    $
    312
    
    
    $
    (615
    )
    
    $
    9,446Total assets
    
    $
    159,800
    
    
    $
    78,062
    
    
    $
    2,854
    
    
    $
    240,716Total block hours
    
    
    14,772
    
    
    
    5,836
    
    
    
    
    
    
    
    20,608
  8




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##### Table of Contents



3. Long-Term Operating Deposits
  4. Earnings per Share
  Three Months Ended March 31, 2006Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to
common stockholders
    
    $
    3,542
    
    
    
    23,938
    
    
    $
    0.15Effect of dilutive securitiesWarrants
    
    
    
    
    
    
    1,735Options
    
    
    
    
    
    
    889Restricted shares
    
    
    
    
    
    
    7Diluted EPSEarnings available to common
shareholders plus assumed
conversion
    
    $
    3,542
    
    
    
    26,569
    
    
    $
    0.13
 Three Months Ended March 31, 2005Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common
stockholders
    
    $
    9,898
    
    
    
    19,024
    
    
    $
    0.52Effect of dilutive securitiesWarrants
    
    
    
    
    
    
    2,190Options
    
    
    
    
    
    
    9698% convertible debentures
    
    
    163
    
    
    
    4,053Profit sharing
    
    
    (13
    )
    
    
    Amortization of debt issuance cost
    
    
    35
    
    
    
    Aircraft lease restructuring fees
    
    
    (28
    )
    
    
    Diluted EPSEarnings available to common
shareholders plus assumed
conversion
    
    $
    10,055
    
    
    
    26,236
    
    
    $
    0.38
 5. Long-term Debt
  9




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##### Table of Contents



6. Lease Obligations
    7. Accounting for Stock-Based Compensation
   Share-Based Payments
 Accounting for Stock Issued to Employees )
 10




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##### Table of Contents



Accounting for Stock-Based Compensation
 Three Months EndedMarch 31, 2005Net earnings, as reported
    
    $
    9,898Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (185
    )Pro forma net earnings
    
    $
    9,713Earnings per shareBasic  as reported
    
    $
    0.52Basic  pro forma
    
    $
    0.51Diluted  as reported
    
    $
    0.38Diluted  pro forma
    
    $
    0.37
    11




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##### Table of Contents



Weighted AverageNumber of
    
    
    Weighted
    
    
    Remaining
    
    
    AggregateOptions
    
    
    Average
    
    
    Contractual Term
    
    
    Intrinsic Value(in thousands)
    
    
    Exercise Price
    
    
    (in years)
    
    
    (in thousands)Outstanding at December
31, 2005
    
    
    1,728
    
    
    $
    2.25Granted
    
    
    
    
    
    
    Exercised
    
    
    (46
    )
    
    $
    3.61Forfeited
    
    
    (22
    )
    
    $
    1.42Outstanding at March 31, 2006
    
    
    1,660
    
    
    $
    2.23
    
    
    
    4.3
    
    
    $
    12,606Exercisable at March 31, 2006
    
    
    1,243
    
    
    $
    1.69
    
    
    
    3.7
    
    
    $
    10,109
    8. North American Acquisition
 Business Combinations
  Quarter EndedMarch 31, 2005Total
operating revenues
    
    $
    218,562Net earnings
    
    $
    13,905Basic earnings per share
    
    $
    0.73Weighted average shares outstanding
    
    
    19,024Fully diluted earnings per share
    
    $
    0.52Weighted average shares outstanding
    
    
    26,786
  9. Post-Retirement Health Care Benefits Plan
  Three MonthsEnded March 31,2006
    
    
    2005Service cost
    
    $
    192
    
    
    $
    107Interest cost on accumulated post-retirement benefit obligation
    
    
    111
    
    
    
    69Amortization of prior service cost
    
    
    3
    
    
    
    Net amortized loss
    
    
    19
    
    
    
    4Net periodic post-retirement benefit cost
    
    $
    325
    
    
    $
    180
  12




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10. Major Customers and Products
  Quarter Ended March 31,World Airways
    
    2006
    
    2005U.S. Air Force (USAF) Air Mobility Command
    
    $
    125.0
    
    
    $
    134.5
 Quarter EndedNorth American
    
    March 31, 2006U.S. Air Force (USAF) Air Mobility Command
    
    $
    38.0
  Quarter Ended March 31,World Airways
    
    2006
    
    2005Passenger Charter Operations
    
    $
    130.8
    
    
    $
    143.8Cargo Charter Operations
    
    $
    26.9
    
    
    $
    15.2
  Quarter EndedNorth American
    
    March 31, 2006Passenger Charter Operations
    
    $
    48.7Passenger Scheduled Service
    
    $
    9.2
 11.
Commitments and Contingencies
 Union Negotiations and Litigation:
 World Airways Cockpit Crewmembers:
 World Airways Flight Attendant s :
 13




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##### Table of Contents



North Americans Cockpit Crewmembers:
  North Americans Flight Attendants:
 Other Litigation:
    12. Recently Issued Accounting Standards
 Accounting Changes and Error Corrections, .
 Accounting for Uncertainty in Income Taxes
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   14




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OVERVIEW
 General
   Quarter Ended March 31,World Airways
    
    2006
    
    2005Block hours
    
    
    14,772
    
    
    
    13,116Operating aircraft at quarter end
    
    
    17
    
    
    
    15Average available aircraft per day
    
    
    17
    
    
    
    15.7Average daily utilization (block hours flown per day per aircraft)
    
    
    9.7
    
    
    
    9.3
  Quarter EndedNorth American
    
    March 31, 2006Block hours
    
    
    5,836Operating aircraft at quarter end
    
    
    9Average available aircraft per day
    
    
    8.1Average daily utilization (block hours flown per day per aircraft)
    
    
    8.0
 RESULTS OF OPERATIONS
 Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
  Operating Revenues .
   Quarter EndedMarch 31,
    
    Increase/World Airways
    
    2006
    
    2005
    
    (Decrease)
    
    % ChangeTotal block hours
    
    
    14,772
    
    
    
    13,116
    
    
    
    1,656
    
    
    
    12.6
    %Total operating revenues per block hour
    
    $
    10,722
    
    
    $
    12,165
    
    
    
    ($1,443
    )
    
    
    (11.9
    )%
 15




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##### Table of Contents



Quarter EndedNorth American
    
    March 31, 2006Total block hours
    
    
    5,836Total operating revenues per block hour
    
    $
    9,955
 Operating Expenses
 Quarter EndedMarch 31,
    
    Increase/World Airways
    
    2006
    
    2005
    
    (Decrease)
    
    % ChangeTotal operating expenses per block hour
    
    $
    10,062
    
    
    $
    10,855
    
    
    
    ($793
    )
    
    
    (7.3
    %)
  Quarter EndedNorth American
    
    March 31, 2006Total operating expenses per block hour
    
    $
    9,902
 Flight Operations
  Maintenance
  Aircraft Rent and Insurance
  Fuel
  16




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Flight Operations Subcontracted to Other Carriers
  Commissions
  Sales, General and Administrative
  Other Income (Expense)
  LIQUIDITY AND CAPITAL RESOURCES
   Cash Flows from Operating Activities
  Cash Flows from Investing Activities
  Cash Flows from Financing Activities
   17




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Description of Certain Indebtedness
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Quantitative and Qualitative Disclosures About Market Risk
 Aircraft fuel:
 Interest rates:
 Foreign currency exchange rate risks
 
 ITEM 4. CONTROLS AND PROCEDURES
 A. Disclosure Controls and Procedures
 Controls and Procedures
 18




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B. Changes in Internal Control Over Financial Reporting
   C. Inherent Limitations of Any Control System
  19




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##### Table of Contents



PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 6. EXHIBITS
 No.
    
    Description31.1
    
    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 of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES
   WORLD AIR HOLDINGS, INC.By:
    /s/ Michael W. ToweMichael W. ToweChief Financial Officer 21