##### 



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: June 30, 2004
or
 [   ] 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 AIRWAYS, INC.  DELAWARE
(State or other jurisdiction
of incorporation or organization)
    
    94-1358276
(I.R.S. Employer
Identification Number)
 The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of Principal Executive Offices) (770) 632-8000
(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
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ] No
[X] The number of shares of the registrants Common Stock outstanding on July
31, 2004 was 12,957,186.




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##### 



WORLD AIRWAYS, INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets, June 30, 2004 (Unaudited)
and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations (Unaudited),
Three Months Ended June 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Operations (Unaudited),
Six Months Ended June 30, 2004 and 2003
    
    
    6Condensed Consolidated Statement of Changes in Stockholders Equity
(Deficiency) (Unaudited), Six months ended June 30, 2004
    
    
    7Condensed Consolidated Statements of Cash Flows (Unaudited),
Six months ended June 30, 2004 and 2003
    
    
    8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 2. Legal Proceedings
    
    
    19Item 4. Submission of Matters to a Vote of Securities Holders
    
    
    20Item 6. Exhibits and Reports on Form 8-K
    
    
    21EX-3.2 AMENDED AND RESTATED BYLAWS EFFECTIVE MAY 6, 2004EX-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 CFOEX-99.1 AMENDED & RESTATED EMPLOYMENT AGREEMENT/ ADDISONEX-99.2 EMPLOYMENT AGREEMENT/ BINNSEX-99.3 SECOND AMENDED & RESTATED EMPLOYMENT AGREEMENT/ DUARTEEX-99.4 FIRST AMENDED & RESTATED EMPLOYMENT AGREEMENT/ MACKINNEYEX-99.5 FOURTH AMENDED & RESTATED EMPLOYMENT AGREEMENT/ MARTINEZEX-99.6 EMPLOYMENT AGREEMENT/ MCDONALD
  2




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##### 



ITEM 1. FINANCIAL STATEMENTS
 WORLD AIRWAYS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 ASSETS
(in thousands)
(unaudited) June 30,
    
    December 31,2004
    
    2003CURRENT ASSETSCash and cash equivalents
    
    $
    20,557
    
    
    $
    30,535Restricted cash
    
    
    4,578
    
    
    
    23,290Total cash and cash equivalents
    
    
    25,135
    
    
    
    53,825Accounts receivable, less allowance for doubtful
accounts of $187 at June 30, 2004 and $196 at
December 31, 2003
    
    
    46,474
    
    
    
    31,446Prepaid expenses and other current assets
    
    
    5,927
    
    
    
    7,721Total current assets
    
    
    77,536
    
    
    
    92,992EQUIPMENT AND PROPERTYFlight and other equipment
    
    
    85,487
    
    
    
    86,346Less: accumulated depreciation and amortization
    
    
    48,819
    
    
    
    47,382Net equipment and property
    
    
    36,668
    
    
    
    38,964LONG-TERM OPERATING DEPOSITS
    
    
    17,369
    
    
    
    17,664OTHER ASSETS AND DEFERRED CHARGES, NET
    
    
    7,100
    
    
    
    7,681TOTAL ASSETS
    
    $
    138,673
    
    
    $
    157,301
 (Continued) 3




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##### 



WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued) LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
(in thousands except share amounts)
(unaudited) June 30,
    
    December 31,2004
    
    2003CURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    
    
    
    $
    18,000Accounts payable
    
    
    29,031
    
    
    
    28,167Accrued rent
    
    
    3,583
    
    
    
    9,881Unearned revenue
    
    
    3,960
    
    
    
    3,546Accrued maintenance
    
    
    2,944
    
    
    
    2,791Accrued salaries and wages
    
    
    15,345
    
    
    
    16,957Accrued taxes
    
    
    2,503
    
    
    
    2,581Other accrued liabilities
    
    
    1,491
    
    
    
    2,506Total current liabilities
    
    
    58,857
    
    
    
    84,429Long-term debt, net of current maturities
    
    
    57,041
    
    
    
    57,177Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $3,703 at June 30,
2004 and $3,137 at December 31, 2003
    
    
    2,211
    
    
    
    2,777Accrued post-retirement benefits
    
    
    3,583
    
    
    
    3,583Deferred aircraft and building rent
    
    
    10,569
    
    
    
    16,008TOTAL LIABILITIES
    
    
    132,261
    
    
    
    163,974STOCKHOLDERS EQUITY (DEFICIENCY)Preferred stock, $.001 par value (5,000,000 shares authorized;
no shares issued or outstanding)
    
    
    
    
    
    
    Common stock, $.001 par value (100,000,000 shares authorized;
14,011,229 shares issued and 12,929,986 shares outstanding at
June 30, 2004; 12,502,441 shares issued and 11,421,198
outstanding at December 31, 2003)
    
    
    14
    
    
    
    13Additional paid-in capital
    
    
    33,873
    
    
    
    31,233Accumulated deficit
    
    
    (14,618
    )
    
    
    (25,062
    )Treasury stock, at cost (1,081,243 shares at June 30, 2004 and
December 31, 2003)
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity (deficiency)
    
    
    6,412
    
    
    
    (6,673
    )COMMITMENTS AND CONTINGENCIESTOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
    
    $
    138,673
    
    
    $
    157,301
 See accompanying Notes to Condensed Consolidated Financial Statements 4




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##### 



WORLD AIRWAYS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended June 30, 2004 and 2003
 (in thousands except per share data)
 (unaudited)
 2004
    
    2003OPERATING REVENUESFlight operations
    
    $
    114,707
    
    
    $
    116,014Other
    
    
    353
    
    
    
    617Total operating revenues
    
    
    115,060
    
    
    
    116,631OPERATING EXPENSESFlight
    
    
    37,705
    
    
    
    35,541Maintenance
    
    
    20,032
    
    
    
    19,463Aircraft costs
    
    
    17,426
    
    
    
    20,852Fuel
    
    
    16,363
    
    
    
    18,624Flight operations subcontracted to other carriers
    
    
    81
    
    
    
    133Commissions
    
    
    4,831
    
    
    
    3,889Depreciation and amortization
    
    
    1,274
    
    
    
    1,309Sales, general and administrative
    
    
    12,960
    
    
    
    9,000Total operating expenses
    
    
    110,672
    
    
    
    108,811OPERATING INCOME
    
    
    4,388
    
    
    
    7,820OTHER INCOME (EXPENSE)Interest expense
    
    
    (880
    )
    
    
    (1,168
    )Interest income
    
    
    125
    
    
    
    93Other, net
    
    
    (714
    )
    
    
    (102
    )Total other expense
    
    
    (1,469
    )
    
    
    (1,177
    )EARNINGS BEFORE INCOME TAXES
    
    
    2,919
    
    
    
    6,643INCOME TAXES
    
    
    350
    
    
    
    250NET EARNINGS
    
    $
    2,569
    
    
    $
    6,393BASIC EARNINGS PER SHARENet earnings
    
    $
    0.22
    
    
    $
    0.58Weighted average shares outstanding
    
    
    11,637
    
    
    
    11,109DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.13
    
    
    $
    0.44Weighted average shares outstanding
    
    
    23,252
    
    
    
    16,472
 See accompanying Notes to Condensed Consolidated Financial Statements 5




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##### 



WORLD AIRWAYS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Six Months Ended June 30, 2004 and 2003
 (in thousands except per share data)
 (unaudited)
 2004
    
    2003OPERATING REVENUESFlight operations
    
    $
    243,726
    
    
    $
    239,291Other
    
    
    918
    
    
    
    983Total operating revenues
    
    
    244,644
    
    
    
    240,274OPERATING EXPENSESFlight
    
    
    78,507
    
    
    
    69,973Maintenance
    
    
    37,888
    
    
    
    42,683Aircraft costs
    
    
    37,097
    
    
    
    42,748Fuel
    
    
    34,565
    
    
    
    39,985Flight operations subcontracted to other carriers
    
    
    1,599
    
    
    
    225Commissions
    
    
    11,131
    
    
    
    8,548Depreciation and amortization
    
    
    2,561
    
    
    
    2,781Sales, general and administrative
    
    
    23,269
    
    
    
    17,848Total operating expenses
    
    
    226,617
    
    
    
    224,791OPERATING INCOME
    
    
    18,027
    
    
    
    15,483OTHER INCOME (EXPENSE)Interest expense
    
    
    (2,044
    )
    
    
    (2,402
    )Interest income
    
    
    247
    
    
    
    190Other, net
    
    
    (1,725
    )
    
    
    (13
    )Total other expense
    
    
    (3,522
    )
    
    
    (2,225
    )EARNINGS BEFORE INCOME TAXES
    
    
    14,505
    
    
    
    13,258INCOME TAXES
    
    
    4,061
    
    
    
    250NET EARNINGS
    
    $
    10,444
    
    
    $
    13,008BASIC EARNINGS PER SHARENet earnings
    
    $
    0.91
    
    
    $
    1.17Weighted average shares outstanding
    
    
    11,536
    
    
    
    11,093DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.47
    
    
    $
    0.91Weighted average shares outstanding
    
    
    23,858
    
    
    
    15,995
 See accompanying Notes to Condensed Consolidated Financial Statements 6




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##### 



WORLD AIRWAYS, INC. 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES
 IN STOCKHOLDERS EQUITY (DEFICIENCY)
 Six Months Ended June 30, 2004
 (in thousands except share amounts)
 (unaudited)
 AdditionalCommon
    
    Paid-in
    
    Accumulated
    
    Treasury Stock,
    
    Total Stockholders'Stock
    
    Capital
    
    Deficit
    
    at Cost
    
    Equity (Deficiency)Balance at December 31, 2003
    
    $
    13
    
    
    $
    31,233
    
    
    $
    (25,062
    )
    
    $
    (12,857
    )
    
    $
    (6,673
    )Amortization of warrants
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    92Exercise of 1,508,788 stock options
    
    
    1
    
    
    
    1,440
    
    
    
    
    
    
    
    
    
    
    
    1,441Tax benefit of stock option exercises
    
    
    
    
    
    
    1,108
    
    
    
    
    
    
    
    
    
    
    
    1,108Net earnings
    
    
    
    
    
    
    
    
    
    
    10,444
    
    
    
    
    
    
    
    10,444Balance at June 30, 2004
    
    $
    14
    
    
    $
    33,873
    
    
    $
    (14,618
    )
    
    $
    (12,857
    )
    
    $
    6,412
 See accompanying Notes to Condensed Consolidated Financial Statements 7




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##### 



WORLD AIRWAYS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended June 30, 2004 and 2003
 (in thousands)
 (unaudited)
 2004
    
    2003CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    $
    53,825
    
    
    $
    21,504CASH FLOWS FROM OPERATING ACTIVITIESNet earnings
    
    
    10,444
    
    
    
    13,008Adjustments to reconcile net earnings to net cashprovided by (used in) operating activities:Depreciation and amortization
    
    
    2,561
    
    
    
    2,781Deferred gain recognition
    
    
    (566
    )
    
    
    (566
    )Loss on sale of property and equipment
    
    
    507
    
    
    
    161Tax benefit of stock option exercises
    
    
    1,108
    
    
    
    Amortization of warrants and debt issuance costs
    
    
    1,008
    
    
    
    155Other
    
    
    77
    
    
    
    (160
    )Provision for doubtful accounts receivable
    
    
    (9
    )
    
    
    32Increase (decrease) in cash and cash equivalents resulting
from changes
in operating assets and liabilities:Accounts receivable
    
    
    (15,019
    )
    
    
    (14,644
    )Deposits, prepaid expenses and other assets
    
    
    2,089
    
    
    
    (535
    )Accounts payable, accrued expenses and other liabilities
    
    
    (6,229
    )
    
    
    (1,948
    )Unearned revenue
    
    
    414
    
    
    
    1,935Net cash provided by (used in) operating activities
    
    
    (3,615
    )
    
    
    219CASH FLOWS FROM INVESTING ACTIVITIESPurchases of equipment and property
    
    
    (778
    )
    
    
    (1,588
    )Proceeds from disposal of equipment and property
    
    
    6
    
    
    
    15Net cash used in investing activities
    
    
    (772
    )
    
    
    (1,573
    )CASH FLOWS FROM FINANCING ACTIVITIESIncrease in line of credit borrowing arrangement, net
    
    
    
    
    
    
    471Repayment of debt
    
    
    (18,000
    )
    
    
    Proceeds from exercise of stock options
    
    
    1,441
    
    
    
    91Payment of debt issuance costs
    
    
    (548
    )
    
    
    Repayment of aircraft rent obligations
    
    
    (7,196
    )
    
    
    (5,963
    )Net cash used in financing activities
    
    
    (24,303
    )
    
    
    (5,401
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (28,690
    )
    
    
    (6,755
    )CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    25,135
    
    
    $
    14,749
 See accompanying Notes to Condensed Consolidated Financial Statements 8




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##### 



WORLD AIRWAYS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
  1.
    
    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, 2004 are not necessarily indicative of the
results to be expected for the year ending December 31, 2004.The Condensed Consolidated Balance Sheet for December 31, 2003 is
derived from the audited Consolidated Financial Statements included in
the Companys 2003 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 Airways Annual
Report on Form 10-K for the year ended December 31, 2003.2. Earnings per ShareThe following table sets forth the computations of basic and diluted
earnings per share (in thousands except per share data): 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
    
    
    367
    
    
    
    7,983Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    2,936
    
    
    
    23,252
    
    
    $
    0.13
 Three Months Ended June 30, 2003Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    6,393
    
    
    
    11,109
    
    
    $
    0.58Effect of Dilutive SecuritiesOptions
    
    
    
    
    
    
    8078% convertible debentures
    
    
    809
    
    
    
    4,556Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    7,202
    
    
    
    16,472
    
    
    $
    0.44
 9




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##### 



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
    
    
    809
    
    
    
    8,294Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    11,253
    
    
    
    23,858
    
    
    $
    0.47
 Six Months Ended June 30, 2003Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    13,008
    
    
    
    11,093
    
    
    $
    1.17Effect of Dilutive SecuritiesOptions
    
    
    
    
    
    
    3468% convertible debentures
    
    
    1,608
    
    
    
    4,556Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    14,616
    
    
    
    15,995
    
    
    $
    0.91
  3.
    
    Accounting for Stock-Based CompensationAt June 30, 2004, the Company had three stock-based compensation
plans. 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 is reflected in net
earnings, as all options granted under those plans 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 30,2004
    
    2003
    
    2004
    
    2003Net earnings, as reported
    
    $
    2,569
    
    
    $
    6,393
    
    
    $
    10,444
    
    
    $
    13,008Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (361
    )
    
    
    (214
    )
    
    
    (485
    )
    
    
    (590
    )Pro forma net earnings
    
    $
    2,208
    
    
    $
    6,179
    
    
    $
    9,959
    
    
    $
    12,418Earnings per shareBasic as reported
    
    $
    0.22
    
    
    $
    0.58
    
    
    $
    0.91
    
    
    $
    1.17Basic  pro forma
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    0.86
    
    
    $
    1.12Diluted as reported
    
    $
    0.13
    
    
    $
    0.44
    
    
    $
    0.47
    
    
    $
    0.91Diluted  pro forma
    
    $
    0.11
    
    
    $
    0.42
    
    
    $
    0.45
    
    
    $
    0.88
 10




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##### 



The per share weighted-average fair value of stock options granted
during the second quarter of 2004 was $3.59 (no stock options were
granted during the second quarter of 2003) and for the first six
months of 2004 and 2003 was $3.59 and $0.77, respectively, 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 30,2004
    
    2003
    
    2004
    
    2003Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    3.0
    %
    
    
    3.8
    %
    
    
    3.0
    %Expected life (in years)
    
    
    4.9
    
    
    
    5.5
    
    
    
    4.9
    
    
    
    5.5Risk-free volatility
    
    
    80
    %
    
    
    132
    %
    
    
    80
    %
    
    
    132
    %
  4.
    
    Sub-lease ObligationThe Company is obligated under an operating lease for office space at
its former headquarters in Herndon, Virginia, through April 2006. The
Company received rental income, sufficient to offset its lease expense
through March 2002, after which time no rental income was received
except for a total of $0.4 million received in the fourth quarter of
2003 and the first quarter of 2004. The Company is currently seeking
a new sub-lessee for this office space. The Company reassessed the
accrued liability at the end of the second quarter and determined,
based on updated information, that the liability should be adjusted to
$1.5 million. The fair value of the liability was determined based on
the remaining lease rentals, reduced by estimated sublease rentals
that can be reasonably obtained for the property. The liability is
included in other accrued liabilities on the accompanying consolidated
balance sheets. The Companys total remaining obligation at June 30,
2004 under the lease was $2.9 million.If the Company is not successful in finding a suitable sub-lessee in
the anticipated time or if the sublease rentals from a new sub-lessee
are less than anticipated, the Company will be required to recognize
an additional liability for these costs. This liability will be
adjusted for changes, if any, resulting from revisions to estimated
cash flows, measured using the credit-adjusted risk-free rate of 8%
that was initially used to measure the liability.5.
    
    Union NegotiationsThe Companys cockpit crewmembers, who constitute approximately 29% of
the Companys 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 reconvened negotiations with the Teamsters during the
second quarter of 2004, under the auspices of the National Mediation
Board.6.
    
    TM Travel Services, Inc.The Company entered into a contract with TM Travel Services, Inc. (TM
Travel) in September 2003, to provide air services between Honolulu,
Hawaii, and Las Vegas, Nevada. From the inception of the program, TM
Travel did not meet its financial obligations to the Company on a
timely basis. In March 2004, the Company and TM Travel entered into an
agreement that would have enabled TM Travel to become current in its
payments. However, TM Travel failed to make any of these rescheduled
payments. Further, the Company was advised by the Department of
Transportation (DOT) that it was not going to renew TM Travels
public charter prospectus beyond May 2, 2004. The DOT required World
Airways to operate all scheduled flights through that date. In the
first and second quarters of 2004, the Company recorded $0.8 million
and $1.7 million, respectively, in bad debt expense related to TM
Travel. In connection with this program, the Company issued a $1.0
million letter of credit, which was cash collateralized and is part of
the Companys restricted cash on the accompanying consolidated balance
sheets. This letter of credit was provided to an insurance company to
support surety bonds issued to the DOT and the State of Hawaii. These
bonds were necessary for TM Travel to qualify as a public charter
operator. No monies were drawn from the two surety bonds, and they
expired in July 2004. The Company believes that the letter of credit
should be cancelled in the third quarter of 2004. 11




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##### 



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: Quarter Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    95
    
    
    $
    78
    
    
    $
    190
    
    
    $
    156Interest cost
    
    
    61
    
    
    
    59
    
    
    
    122
    
    
    
    118Net amortized loss
    
    
    3
    
    
    
    3
    
    
    
    6
    
    
    
    6Net periodic post-retirement benefit cost
    
    $
    159
    
    
    $
    140
    
    
    $
    318
    
    
    $
    280
  The Company still anticipates to contribute approximately $230,000 to
fund its health care obligations in 2004, as was previously disclosed
in its financial statements for the year ended December 31, 2003. As
of June 30, 2004, $90,000 of contributions have been made.  8.
    
    Legal Proceedings A claim has been filed in the
19th Civil Court District Court,
Frankfurt, Germany, against the Company by a tour operator seeking
approximately $4.2 million in compensation related to the cancellation
of a summer program in 1996. The court determined that the Company was
75% responsible for the cancellation of the program and scheduled a
hearing on damages for October 22, 2004. The Company expects its counsel
to meet with plaintiffs counsel prior to this hearing to discuss the
extent to which plaintiff may be able to establish damages, if any. The
Company believes it has substantial defenses to this action, although no
assurance can be given of the eventual outcome of this litigation.
Because of the uncertain outcome of this action, no amounts have been
accrued in the consolidated financial statements. 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 17
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 17 named in the lawsuit, 243
other agencies and companies that were prior tenants at MIA (potentially
responsible parties or PRPs), including World Airways, were issued
letters advising 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 point
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. This process is
ongoing and the potential exposure of World Airways has yet to be
determined. In January and February 2004, seven purported class action complaints
(four 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, and one in the United States District Court for the Northern
District of Illinois) and four individual complaints (one in the United
States District Court for the Southern District of New York, one small
claims action in New York, one small claims action in New Jersey, and
one small claims action filed in California) were filed against the
Company arising out of the discontinuance of charter flights upon the
expiration of the Companys obligation to provide services under an air
services agreement. 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). The Companys 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 the
Companys 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. The Companys insurance
carrier has responded and assumed the defense of these cases. During
March 2004, Ritetime filed a Demand to Arbitrate in Peachtree City,
Georgia, and subsequently the Company responded and filed a
counterclaim. The Company believes that the allegations against it are
without merit and intends to vigorously defend itself in these lawsuits,
although it cannot give any assurance that these lawsuits will not have
a material adverse effect on the Companys financial condition, results
of operations or liquidity. The Department of Transportation (DOT) is
investigating this matter and the Company is negotiating the terms of a
settlement with the DOT, without however admitting or denying any
allegations, which settlement the Company believes will not be material
to the Companys financial condition, results of operations or
liquidity. 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 the Company in connection with its purchase in December 2003 of
$22,545,000 aggregate amount of 8% Convertible Senior Subordinated
Debentures due 2004 (the Old Debentures) in exchange for a like amount
of newly-issued 8% Convertible Senior Subordinated Debentures due 2009
(the New 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 Old Debentures and that the Company breached
the terms of the indenture governing the Old Debentures by purchasing
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 New Debentures and the Old Debentures held by the
plaintiffs and interest lost by the plaintiffs on the Old Debentures
through maturity on August 26, 2004 as well as costs and reasonable
attorney fees. The Company believes that this claim is without merit and
intends to defend itself vigorously in this lawsuit, although it cannot
give any assurance that this litigation will not have a material adverse
effect on the Companys financial condition, results of operation or
liquidity. In February 2004, the Company made a self-disclosure to the Federal
Aviation Administration (FAA) concerning aircraft record
irregularities discovered upon preparing for the return of two DC-10-30
aircraft. The Company subsequently received a letter from the FAA
opening an investigation into a possible violation of the Code of
Federal Regulations. The Company has complied with all requests of the
FAA and is waiting to receive notification of the FAAs findings. At the
present time, the Company cannot determine what impact, if any, the
FAAs findings will have on the Company operationally or financially. In addition, World Airways is party to routine litigation and
administrative proceedings incidental to its business, none of which is
believed by the Company to be likely to have a material adverse effect
on the financial condition, results of operations or liquidity of the
Company. 12




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##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Part I, Item 2 of this report should be read in conjunction with Part
II, Item 7 of World Airways, Inc. (World Airways or the Company)
Annual Report on Form 10-K for the year ended December 31, 2003. The
information contained herein is not a comprehensive management overview
and analysis of the financial condition and results of operations of the
Company, but rather updates disclosures made in the aforementioned
filing. The Company desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (the Act).
Therefore, this report contains forward looking statements that are
subject to risks and uncertainties, including, but not limited to, the
reliance on key strategic alliances, fluctuations in operating results
and other risks detailed from time to time in the Companys filings with
the Securities and Exchange Commission (the Commission). These risks
could cause the Companys actual results for 2004 and beyond to differ
materially from those expressed in any forward looking statements made
by, or on behalf of, the Company. The Financial Accounting Standards Board (FASB) issued a revised FASB
Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest
Entities, which took effect in the first quarter of 2004. The Company
currently does not have any interests in variable interest entities or
special interest entities. OVERVIEW General For the second quarter of 2004, the Companys operating income was $4.4
million compared to $7.8 million for the same period in 2003. During
the quarter, there were several substantial charges totaling $3.5
million, partially offset by two credits totaling $1.8 million,
resulting in a net $1.7 million negative effect on operating income.
These items included:  
    
    $1.7 million of bad debt expense related to TM Travel
Services, Inc. (TM Travel);
    
    $0.9 million of personnel costs primarily associated with
contractual obligations arising from the retirement of the
Companys former Chairman/CEO on May 6;
    
    $0.9 million of medical costs, including
$0.4 million of medical claims paid in the second quarter of
2004 related to seven large claims;
    
    $1.3 million credit to record aircraft insurance recoveries
related to repair costs that were previously expensed but now
determined to be collectible; and
    
    $0.5 million credit for the reduction in the accrued liability
associated with costs of exiting the Companys former office
space in Herndon, Virginia. For the second quarter of 2004, the Companys net earnings were $2.6
million compared to $6.4 million for the same period in 2003. The following table provides statistical data, used by management in
evaluating the operating performance of the Company, for the quarters
ended June 30, 2004 and 2003. Quarter Ended June 30,2004
    
    2003Block hours:Full service passenger
    
    
    6,163
    
    
    
    56
    %
    
    
    4,467
    
    
    
    41
    %Full service cargo
    
    
    386
    
    
    
    3
    %
    
    
    3,659
    
    
    
    34
    %ACMI passenger
    
    
    1,184
    
    
    
    11
    %
    
    
    1,110
    
    
    
    10
    %ACMI cargo
    
    
    3,072
    
    
    
    28
    %
    
    
    1,399
    
    
    
    13
    %Miscellaneous
    
    
    207
    
    
    
    2
    %
    
    
    247
    
    
    
    2
    %Total
    
    
    11,012
    
    
    
    100
    %
    
    
    10,882
    
    
    
    100
    %Operating aircraft at quarter-end
    
    
    
    16
    
    
    
    
    
    17Average aircraft per day
    
    
    
    16.0
    
    
    
    
    
    17.0Average daily utilization
    
    
    
    7.6
    
    
    
    
    
    7.0(block hours flown per day per aircraft)
 13




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##### 



For the first six months of 2004, the Companys operating income was
$18.0 million compared to $15.5 million for the same period in 2003,
while the Companys net earnings were $10.4 million compared to $13.0
million. The Company recorded income tax expense of $4.1 million in the
first six months of 2004, compared to $0.3 million for the comparable
period of last year. The Company utilized all of its unrestricted
federal net operating loss carry-forwards in 2003. The following table provides statistical data, used by management in
evaluating the operating performance of the Company, for the six months
ended June 30, 2004 and 2003. Six Months Ended June 30,2004
    
    2003Block hours:Full service passenger
    
    
    13,728
    
    
    
    61
    %
    
    
    10,646
    
    
    
    47
    %Full service cargo
    
    
    668
    
    
    
    3
    %
    
    
    6,643
    
    
    
    29
    %ACMI passenger
    
    
    2,370
    
    
    
    11
    %
    
    
    2,164
    
    
    
    9
    %ACMI cargo
    
    
    5,085
    
    
    
    23
    %
    
    
    2,987
    
    
    
    13
    %Miscellaneous
    
    
    490
    
    
    
    2
    %
    
    
    498
    
    
    
    2
    %Total
    
    
    22,341
    
    
    
    100
    %
    
    
    22,938
    
    
    
    100
    %Operating aircraft at quarter-end
    
    
    
    16
    
    
    
    
    
    17Average aircraft per day
    
    
    
    16.0
    
    
    
    
    
    16.5Average daily utilization
    
    
    
    7.7
    
    
    
    
    
    7.7(block hours flown per day per aircraft)
 For 2004, the Company expects to:  
    
    be profitable for a third consecutive year;
    
    further diversify the revenue mix by adding more commercial customers;
    
    on a per block hour basis, hold flat or reduce major
cost categories (flight, maintenance, fuel and aircraft
costs); and
    
    work on concluding a new collective bargaining agreement
with its pilots. Significant Customer Relationships The Company is highly dependent on revenues from the U.S. Air Force
(USAF). The loss of the USAF as a customer would have a material adverse
effect on the Company. The Companys largest customers, and the percent of
revenues from those customers, for the quarter and six months ended June
30, 2004 and 2003, are as follows: Quarter Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003USAF
    
    
    76.3
    %
    
    
    74.0
    %
    
    
    79.9
    %
    
    
    80.0
    %Sonair Serviceo Aereo (Sonair)
    
    
    6.1
    %
    
    
    6.0
    %
    
    
    5.7
    %
    
    
    5.6
    %Menlo Worldwide (Menlo, formerly
Emery Air Freight Corporation)
    
    
    5.2
    %
    
    
    6.0
    %
    
    
    4.3
    %
    
    
    5.6
    %
 RESULTS OF OPERATIONS Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Operating Revenues. Revenues from operations decreased $1.5 million, or
1.3%, to $115.1 million in the second quarter of 2004 from $116.6
million in the second quarter of 2003. The Company reported significant
growth in military passenger flying for the USAF, offset by reductions
in military cargo revenues for the USAF and commercial cargo
full-service flying. Two key variables that impact the amount of
operating revenues are listed below: Quarter Ended June 30,2004
    
    2003
    
    Difference
    
    % ChangeTotal block hours
    
    
    11,012
    
    
    
    10,882
    
    
    
    130
    
    
    
    1.2
    %Yield per block hour
    
    $
    10,448
    
    
    $
    10,718
    
    
    $
    (270
    )
    
    
    -2.5
    %
 14




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##### 



Operating Expenses. Total operating expenses increased $1.9 million to
$110.7 million for the second quarter of 2004, compared to $108.8
million for the comparable quarter in 2003. Below is information on the
Companys operating expense per block hour: Quarter Ended June 30,2004
    
    2003
    
    Difference
    
    % ChangeOperating expense per block hour
    
    $
    10,050
    
    
    $
    9,999
    
    
    $
    (51
    )
    
    
    -0.5
    %
 Flight expenses include all costs related directly to the operation of
the aircraft other than maintenance, aircraft rent, insurance and fuel.
Also included are expenses related to flight dispatch and flight
operations administration. Flight operations expenses increased $2.2
million, or 6.1%, to $37.7 million in the second quarter of 2004
compared to $35.5 million in the same period of 2003. Flight costs were
higher primarily due to increases in the following areas:  
    
    $2.8 million in flight attendant costs;
    
    $0.7 million in catering costs; and
    
    $0.4 million in additional medical claims paid or accrued for crewmembers. These increases were offset by:  
    
    $1.0 lower communication costs due to a reduction in flying over European airspace; and
    
    $0.5 million reclassification of ground service
representative travel costs out of SG&A into flight costs in
the
second quarter of 2003. The higher flight attendant and catering costs are directly attributable
to higher full-service passenger block hours. Maintenance expenses increased $0.5 million, or 2.9%, to $20.0 million
in the second quarter of 2004 compared to $19.5 million in the same
period of 2003. In the second quarter of 2004, the Company had higher
scheduled engine and thrust reverser overhauls, partially offset by the
$1.3 million credit for aircraft insurance recoveries related to repair
costs that were previously expensed. Aircraft costs, which include aircraft rent and insurance, decreased
$3.5 million, or 16.4%, to $17.4 million in the second quarter of 2004
compared to $20.9 million in the second quarter of 2003. This decrease
was due to the restructuring of several MD-11 leases, as well as the
return of two expensive DC-10 cargo aircraft in the first half of 2004.
This decrease was partially offset by aircraft rents associated with two
additional MD-11 passenger aircraft. One aircraft was added at the end
of the first quarter of 2003, and the other was added later in the year;
both are under power-by-the-hour operating leases. Fuel expenses decreased $2.2 million, or 12.1%, to $16.4 million in the
second quarter of 2004 from $18.6 million in the second quarter of 2003.
The decrease was primarily due to the lower military cargo block hours,
compared to the previous year, coupled with the fact that military cargo
hours are contractually set at a higher rate per gallon. Fluctuations in
the price of fuel did not have a significant impact in the second
quarter of 2004 because the Companys contracts with its customers
covered 97% of fuel purchased and thereby limited the Companys exposure
to increases in fuel prices. Commissions increased $0.9 million to $4.8 million in the second quarter
of 2004, compared to $3.9 million in the second quarter of 2003. In the
second quarter of 2003, the Company was not required to pay commissions
on USAF missions flown under the Civil Reserve Air Fleet (CRAF)
activation order. Sales, general and administrative expenses (SG&A) increased $4.0
million, or 44.0%, to $13.0 million in the second quarter of 2004
compared to $9.0 million in the same quarter of 2003. The increase was
primarily due to:  
    
    $1.7 million of bad debt expense associated with air
services provided to TM Travel (see Note 6 of Notes to the
Condensed Consolidated Financial Statements);
    
    $0.9 million of personnel costs primarily associated
with contractual obligations arising from the retirement of
the Companys former Chairman/CEO on May 6;
    
    $0.5 million reclassification of ground service
representative travel costs out of SG&A into flight costs in
the second quarter of 2003;
    
    $0.5 million in additional medical claims paid or
accrued for administrative employees; and
    
    $0.4 million higher professional and legal fees. These increases were partially offset by the $0.5 million credit
associated with a reduction in the accrued liability related to costs of
exiting the former office space in Herndon, Virginia. The remainder of
the variance is spread over a number of different account categories. 15




---



##### 



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30,
2003 Operating Revenues. Revenues from operations increased $4.3 million, or
1.8%, to $244.6 million in 2004 from $240.3 million in 2003. The Company
reported significant growth in military passenger flying for the USAF,
offset by reductions in military cargo revenues for the USAF and
commercial cargo full-service flying. Two key variables that impact the
amount of operating revenues are listed below: Six Months Ended June 30,2004
    
    2003
    
    Difference
    
    % ChangeTotal block hours
    
    
    22,341
    
    
    
    22,938
    
    
    
    (597
    )
    
    
    -2.6
    %Yield per block hour
    
    $
    10,950
    
    
    $
    10,475
    
    
    $
    475
    
    
    
    4.5
    %
 Operating Expenses. Total operating expenses increased $1.8 million to
$226.6 million in 2004, compared to $224.8 million for the comparable
period in 2003. Below is information on the Companys operating expense
per block hour: Six Months Ended June 30,2004
    
    2003
    
    Difference
    
    % ChangeOperating expense per block hour
    
    $
    10,144
    
    
    $
    9,800
    
    
    $
    (344
    )
    
    
    -3.5
    %
 Flight expenses include all costs related directly to the operation of
the aircraft other than maintenance, aircraft rent, insurance and fuel.
Also included are expenses related to flight dispatch and flight
operations administration. Flight operations expenses increased $8.5
million, or 12.2%, to $78.5 million in the first six months of 2004
compared to $70.0 million in the same period of 2003. Flight costs were
higher primarily due to increases in the following areas:  
    
    $5.7 million in flight attendant costs;
    
    $2.0 million in cockpit crew costs;
    
    $1.5 million in catering costs; and
    
    $0.4 million in additional medical claims paid or accrued for crewmembers. These increases were offset by $1.0 lower communication costs due to a
reduction in flying over European airspace.
The higher cockpit, flight attendant and catering costs are directly
attributable to increased military and full-service passenger flights.
In addition, there were pilot and flight attendant headcount increases
in 2004 compared to 2003. Maintenance expenses decreased $4.8 million, or 11.2%, to $37.9 million
in 2004 compared to $42.7 million in the same period of 2003. In the
first half of 2004, the Company had decreases in the following areas:  
    
    $4.0 million in MD-11 engine overhaul expense;
    
    $1.3 million credit for aircraft insurance
recoveries related to repair costs that were previously
expensed;
    
    $1.1 million in MD-11 landing gear overhaul expense; and
    
    $1.0 million in lower aircraft parts rental. These decreases were partially offset by higher expenses related to:  
    
    $0.7 million in mechanics wages and personnel costs;
    
    $0.6 million for engine changes; and
    
    $0.5 million for thrust reverser overhauls. Aircraft costs, which include aircraft rent and insurance, decreased
$5.6 million, or 13.2%, to $37.1 million in 2004 compared to $42.7
million in the same period of 2003. This decrease was due to the
restructuring of several MD-11 leases, as well as the return of two
expensive DC-10 cargo aircraft in the first half of 2004. This decrease
was partially offset by aircraft rents associated with two additional
MD-11 passenger aircraft. One aircraft was added at the end of the first
quarter of 2003, and the other was added later in the year; both are
under power-by-the-hour operating leases. Fuel expenses decreased $5.4 million, or 13.6%, to $34.6 million in 2004
from $40.0 million in 2003. The decrease was primarily due to the lower
military cargo block hours, compared to the previous year, coupled with
the fact that military cargo hours are contractually set at a higher
rate per gallon. Fluctuations in the price of fuel did not have a
significant impact in the first half of 2004 because the Companys
contracts with its customers covered 96% of fuel purchased and thereby
limited the Companys exposure to increases in fuel prices. Commissions increased $2.6 million to $11.1 million in 2004, compared to
$8.5 million in the same period of 2003. In 16




---



##### 



the first half of 2003, the Company was not required to pay commissions
on USAF missions flown under the CRAF activation order. SG&A increased $5.5 million, or 30.4%, to $23.3 million in the first six
months of 2004 compared to $17.8 million in the same period of 2003. The
increase was primarily due to:  
    
    $2.5 million of bad debt expense associated with air
services provided to TM Travel (see Note 6 of Notes to the
Condensed Consolidated Financial Statements);
    
    $1.7 million higher wages and benefits due to:  -
    
    July 2003 salary increases;-
    
    increased headcount;-
    
    a workers compensation accrual adjustment; and-
    
    additional medical claims paid or accrued for administrative employees.  
    
    $0.9 million of personnel costs primarily associated
with contractual obligations arising from the retirement of
the Companys former Chairman/CEO on May 6; and
    
    $0.6 million higher professional fees. These increases were partially offset by the $0.5 million credit
associated with a reduction in the accrued liability related to costs of
exiting the former office space in Herndon, Virginia. The remainder of
the variance is spread over a number of different account categories. The Company recorded $4.1 million of income tax expense in the first six
months of 2004, compared to $0.3 million in the same period of 2003. The
Company utilized all of its unrestricted federal net operating loss
carry-forwards in 2003. The Companys current estimated annual effective tax
rate for 2004 is approximately 28.0%, and this rate differs from
statutory rates due primarily to utilization of net operating loss
carry-forwards and a corresponding reduction in the deferred tax asset
valuation allowance. The Company had used an estimated effective tax rate of 32.0%
for the first quarter. LIQUIDITY AND CAPITAL RESOURCES The Company is highly leveraged. At June 30, 2004, the Companys
current assets were $77.5 million and its current liabilities were $58.9
million. The ratio of the Companys current assets to its current
liabilities (current ratio) was 1.3:1. The June 30, 2004 cash balance was $25.1 million, of which $4.6 million
was restricted, due to $3.7 million for letters of credit that had to be
collateralized and $0.9 million of prepayments from customers for
flights that are scheduled to be flown within 30 days of the balance
sheet date. Included in the restricted cash balance is a $1.0 million
letter of credit which was issued on behalf of TM Travel and provided to
an insurance company to support surety bonds issued to the Department of
Transportation (DOT) and the State of Hawaii. The DOT advised the
Company that it was not going to renew TM Travels public charter
prospectus beyond May 2, 2004. The surety bonds had been necessary for
TM Travel to qualify as a public charter operator. No monies were drawn
from the two surety bonds, and they expired in July 2004. The Company
believes that the letter of credit should be cancelled in the third
quarter of 2004. See Note 6 of Notes to the Condensed Consolidated
Financial Statements. In the second quarter of 2004, two significant items impacted the Companys cash:  
    
    a $7.2 million repayment of contractual aircraft rent obligations to a lessor (see paragraph below); and  
    
    a $6.4 million payment to employees for profit sharing related to the 2003 financial results. The Company has significant long-term obligations relating
to operating leases for aircraft and spare engines. In 2002 and 2001,
the Company paid amounts less than its original contractual aircraft
rent obligations under agreements with its lessors that amended the
terms of the original aircraft lease agreements to provide for the
repayment of the unpaid contractual rent obligations. At June 30, 2004,
the accrual for unpaid contractual aircraft rent obligations was $1.7
million and is included as accrued rent in the current liabilities
section of the Consolidated Balance Sheets. During the second quarter of
2004, the Company repaid approximately $7.2 million of this liability
based on 2003 net earnings. The remaining balance of this obligation
will be repaid based on a percentage of profits in future years. Due to its high financial leverage, the Company has the following
restrictions:  
    
    The Company is greatly limited in its ability to obtain
additional financing. Its indebtedness outstanding under its $30.0
million term loan supported by a $27.0 million guarantee issued by
the Air Transportation Stabilization Board (the ATSB Loan) is
secured by substantially all of the Companys assets. In addition,
the ATSB Loan 17




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contains restrictive provisions that require prepayments in the
event the Company sells any significant assets, receives proceeds
from future borrowings from other sources or issuances of certain
securities, or receives net proceeds from insurance or condemnation.
    
    The Companys ability to fund general corporate requirements,
including capital expenditures, may be impaired. The Company has
substantial obligations to pay principal and interest on its debt
and other recurring fixed costs. Further, the Company may be
required to prepay portions of the ATSB Loan under various
circumstances. Accordingly, the Company may have to use its
working capital to fund such payments and other recurring fixed
costs instead of funding general corporate requirements.
    
    The Companys ability to respond to competitive developments
and adverse conditions may be limited. With a restricted ability
to obtain additional financing and with substantial fixed costs,
the Company may not be able to fund the capital expenditures
required to keep it competitive or to withstand prolonged adverse
economic conditions. The ATSB Loan and the operating leases relating to some of the Companys
aircraft contain restrictive covenants that impose significant operating
and financial restrictions on the Company. Under the agreement governing
the ATSB Loan, the Company is subject to certain covenants pursuant to
which it must satisfy various financial requirements to maintain a
certain amount of unrestricted cash or cash equivalents and to comply
with certain financial ratios as well as certain negative covenants. These restrictions and requirements may limit the Companys financial and
operating flexibility. In addition, if the Company fails to comply with
these restrictions or to satisfy the related covenant requirements, its
obligations under the ATSB Loan and its operating leases may be
accelerated. The Company cannot provide assurance that it could satisfy
all of these obligations upon acceleration. The failure to satisfy these
obligations would materially adversely affect the Companys business,
operations, financial results and liquidity. Although there can be no assurances, World Airways believes that the
combination of its existing contracts and additional business, that it
expects to obtain, along with its existing cash, and financing
arrangements, will be sufficient to allow the Company to meet its cash
requirements related to operating and capital requirements for 2004 and
2005. Cash Flows from Operating Activities Operating activities used $3.6 million in cash during the six months
ended June 30, 2004 compared to providing $0.2 million for the comparable
2003 period. The cash used in the 2004 period principally reflects the
$10.4 million net earnings offset by a $15.0 million increase in accounts
receivable, less a $3.7 million decrease in cash due to changes in other
operating assets and liabilities, and net non-cash statement of
operations charges of $4.7 million. The cash provided in the 2003 period
principally reflects the $13.0 million net earnings, offset by a $14.6
million increase in accounts receivable, less a $0.5 million decrease in
cash due to changes in other operating assets and liabilities, and net
non-cash statement of operations charges of $2.4 million. Cash Flows from Investing Activities Investing activities used $0.7 million in the first six months of 2004
compared to using $1.6 million in the comparable period of 2003. In both
2004 and 2003, cash was used for the purchase of rotable spare parts and
other fixed assets. The Companys capital expenditures for 2004 are expected to be
approximately $3.0 million, principally for the purchase of aircraft
related assets, which it expects to finance from working capital. Cash Flows from Financing Activities Financing activities used $24.3 million in cash for the six months ended
June 30, 2004, which was primarily due to the $18.0 million used to pay
the principal on the convertible bonds that were called on December 30,
2003, and redeemed on January 28, 2004 and $7.2 million for the
repayment of contractual aircraft rent obligations to a lessor. For the
six months ended June 30, 2003, financing activities used $5.4 million,
which was primarily due to the repayment of contractual aircraft rent
obligations of $6.0 million offset by a $0.5 million increase in the
amount owed under the Loan and Security Agreement with Wells Fargo
Foothill, Inc. 18




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Part I, Item 3, of this report should be read in conjunction with Part
II, Item 7a of the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. The information contained herein is not a
quantitative and qualitative discussion about market risk the Company
faces, but rather updates disclosures made in the aforementioned filing. World Airways continues to have no material exposure to market risks. 
 ITEM 4. CONTROLS AND PROCEDURES The Companys management, with participation of the Companys Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Companys disclosure
controls and procedures as of the end of the quarter ended June 30,
2004. Based on that evaluation, (i) the Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls
and procedures as of the end of the quarter ended June 30, 2004 have
been designed and are functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company
in reports filed under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods
specified in the Commissions rules and forms, and (ii) no changes in
the Companys internal control over financial reporting were identified
as having occurred during the quarter ended June 30, 2004, that
have materially affected or are reasonably likely to materially affect the
Companys internal controls over financial reporting. The Company
believes that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. 
 PART II 
 ITEM 2. LEGAL PROCEEDINGS A claim has been filed in the
19th Civil Court District Court,
Frankfurt, Germany, against the Company by a tour operator seeking
approximately $4.2 million in compensation related to the cancellation
of a summer program in 1996. The court determined that the Company was
75% responsible for the cancellation of the program and scheduled a
hearing on damages for October 22, 2004. The Company expects its counsel
to meet with plaintiffs counsel prior to this hearing to discuss the
extent to which plaintiff may be able to establish damages, if any. The
Company believes it has substantial defenses to this action, although no
assurance can be given of the eventual outcome of this litigation.
Because of the uncertain outcome of this action, no amounts have been
accrued in the consolidated financial statements. 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 17
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 17 named in the lawsuit, 243
other agencies and companies that were prior tenants at MIA (potentially
responsible parties or PRPs), including World Airways, were issued
letters advising 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 point
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. This process is
ongoing and the potential exposure of World Airways has yet to be
determined. In January and February 2004, seven purported class action complaints
(four 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, and one in the United States District Court for the Northern
District of Illinois) and four individual complaints (one in the United
States District Court for the Southern District of New York, one small
claims action in New York, one small claims action in New Jersey, and
one small claims action filed in California) were filed against the
Company arising out of the discontinuance of charter flights upon the
expiration of the Companys obligation to provide services under an air
services agreement. The purported class action cases were 19




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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). The Companys 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 the
Companys 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. The Companys insurance
carrier has responded and assumed the defense of these cases. During
March 2004, Ritetime filed a Demand to Arbitrate in Peachtree City,
Georgia, and subsequently the Company responded and filed a
counterclaim. The Company believes that the allegations against it are
without merit and intends to vigorously defend itself in these lawsuits,
although it cannot give any assurance that these lawsuits will not have
a material adverse effect on the Companys financial condition, results
of operations or liquidity. The Department of Transportation (DOT) is
investigating this matter and the Company is negotiating the terms of a
settlement with the DOT, without however admitting or denying any
allegations, which settlement the Company believes will not be material
to the Companys financial condition, results of operations or
liquidity. 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 the Company in connection with its purchase in December 2003 of
$22,545,000 aggregate amount of 8% Convertible Senior Subordinated
Debentures due 2004 (the Old Debentures) in exchange for a like amount
of newly-issued 8% Convertible Senior Subordinated Debentures due 2009
(the New 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 Old Debentures and that the Company breached
the terms of the indenture governing the Old Debentures by purchasing
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 New Debentures and the Old Debentures held by the
plaintiffs and interest lost by the plaintiffs on the Old Debentures
through maturity on August 26, 2004 as well as costs and reasonable
attorney fees. The Company believes that this claim is without merit and
intends to defend itself vigorously in this lawsuit, although it cannot
give any assurance that this litigation will not have a material adverse
effect on the Companys financial condition, results of operation or
liquidity. In February 2004, the Company made a self-disclosure to the Federal
Aviation Administration (FAA) concerning aircraft record
irregularities discovered upon preparing for the return of two DC-10-30
aircraft. The Company subsequently received a letter from the FAA
opening an investigation into a possible violation of the Code of
Federal Regulations. The Company has complied with all requests of the
FAA and is waiting to receive notification of the FAAs findings. At the
present time, the Company cannot determine what impact, if any, the
FAAs findings will have on the Company operationally or financially. In addition, World Airways is party to routine litigation and
administrative proceedings incidental to its business, none of which is
believed by the Company to be likely to have a material adverse effect
on the financial condition, results of operations or liquidity of the
Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 2004 Annual Meeting of Shareholders of World Airways, Inc. was held
on May 6, 2004. A total of 9,220,666 shares were present or represented
by proxy at the meeting. They represented approximately 71% of the
Companys outstanding shares. 20




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The individuals named below were elected to a three-year term as Class
III Directors: Name
    
    Votes Received
    
    Votes WithheldA. Scott Andrews
    
    
    8,879,987
    
    
    
    340,679Joel H. Cowan
    
    
    9,139,963
    
    
    
    80,703Randy J. Martinez
    
    
    9,111,874
    
    
    
    108,792
 Daniel J. Altobello, John E. Ellington, General Ronald R. Fogleman,
Russell L. Ray, Jr., and Peter M. Sontag continued as Directors of the
Company as of June 30, 2004. The World Airways, Inc. Amended and Restated 1995 Stock Incentive Plan
was ratified, with 1,844,110 voting for, 1,439,818 shares voting
against, 66,182 shares abstaining and 5,870,556 broker non-votes. The selection of KPMG LLP as the independent certified public
accountants and auditor for the Company for the year ending December 31,
2004 was ratified, with 9,138,705 shares voting for, 60,864 shares
voting against and 21,097 shares abstaining. 
 ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K (a) Exhibits No.
    
    Description3.2
    
    Amended and Restated Bylaws
effective May 6, 2004.31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    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 2002.99.1
    
    Amended and Restated Employment Agreement, dated as of May 6, 2004, by and between the Company
and Charles H. J. Addison.99.2
    
    Employment Agreement, dated as of April 26, 2004, by and between the Company and Robert R. Binns.99.3
    
    Second Amended and Restated Employment Agreement, dated as of May
6, 2004, by and between the Company and Gilberto M. Duarte, Jr.99.4
    
    First Amended and Restated Employment Agreement, dated as of April
1, 2004, by and between the Company and Jeffrey L. MacKinney.99.5
    
    Fourth Amended and Restated Employment, dated as of April 1, 2004,
by and between the Company and Randy J. Martinez.99.6
    
    Employment Agreement, dated as of May 3, 2004, by and between the
Company and Charles P. McDonald.
 21




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(b) Reports on Form 8-K  1.
    
    The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on April 7, 2004 in
connection with a press release issued on April 5, 2004,
announcing that it had signed a new cargo contract with China
Airlines.2.
    
    The Company furnished a Current Report on Form 8-K
with the Securities and Exchange Commission on May 6, 2004
in connection with a press release issued on May 5, 2004,
announcing its financial results for the first quarter ended
March 31, 2004. * * * * * * * * * * * * * * * 22




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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. Date: August 13, 2004 WORLD AIRWAYS, INC.By:
    /s/ Gilberto M. Duarte, Jr.Gilberto M. Duarte, Jr.Principal Accounting and Financial Officer