##### 



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: September 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) Not Applicable
(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report) 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
November 1, 2004 was 15,931,905.




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##### 



WORLD AIRWAYS, INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS PagePART I - FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets (Unaudited),
September 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations (Unaudited),
Three Months Ended September 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Operations (Unaudited),
Nine Months Ended September 30, 2004 and 2003
    
    
    6Condensed Consolidated Statement of Changes in Stockholders Equity
(Deficiency) (Unaudited),Nine months ended September 30, 2004
    
    
    7Condensed Consolidated Statements of Cash Flows (Unaudited),
Nine months ended September 30, 2004 and 2003
    
    
    8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II - OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 6. Exhibits
    
    
    22
 2




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##### 



ITEM 1. FINANCIAL STATEMENTS
WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
(in thousands)
(unaudited) September 30,
    
    December 31,2004
    
    2003CURRENT ASSETSCash and cash equivalents
    
    $
    46,994
    
    
    $
    30,535Restricted cash
    
    
    5,377
    
    
    
    23,290Accounts receivable, less allowance for doubtful accounts
of $262 at September 30, 2004 and $196 at
December 31, 2003
    
    
    37,329
    
    
    
    31,446Prepaid expenses and other current assets
    
    
    6,054
    
    
    
    7,721Total current assets
    
    
    95,754
    
    
    
    92,992EQUIPMENT AND PROPERTYFlight and other equipment
    
    
    84,204
    
    
    
    86,346Less: accumulated depreciation and amortization
    
    
    49,981
    
    
    
    47,382Net equipment and property
    
    
    34,223
    
    
    
    38,964LONG-TERM OPERATING DEPOSITS
    
    
    18,045
    
    
    
    17,664OTHER ASSETS AND DEFERRED CHARGES, NET
    
    
    6,417
    
    
    
    7,681TOTAL ASSETS
    
    $
    154,439
    
    
    $
    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) September 30,
    
    December 31,2004
    
    2003Current maturities of long-term debt
    
    $
    
    
    
    $
    18,000Accounts payable
    
    
    26,590
    
    
    
    28,167Accrued rent
    
    
    6,076
    
    
    
    9,881Unearned revenue
    
    
    4,186
    
    
    
    3,546Accrued maintenance
    
    
    4,158
    
    
    
    2,791Accrued salaries and wages
    
    
    17,027
    
    
    
    16,957Accrued taxes
    
    
    7,890
    
    
    
    2,581Other accrued liabilities
    
    
    1,994
    
    
    
    2,506Total current liabilities
    
    
    67,921
    
    
    
    84,429Long-term debt, net of current maturities
    
    
    54,649
    
    
    
    58,534Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $3,986 at September 30,
2004 and $3,137 at December 31, 2003
    
    
    1,928
    
    
    
    2,777Accrued post-retirement benefits
    
    
    3,583
    
    
    
    3,583Deferred aircraft and building rent
    
    
    8,233
    
    
    
    16,008TOTAL LIABILITIES
    
    
    136,314
    
    
    
    165,331STOCKHOLDERS 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;
16,092,498 shares issued and 15,011,255 shares outstanding at
September 30, 2004; 12,502,441 shares issued and 11,421,198
outstanding at December 31, 2003)
    
    
    16
    
    
    
    13Additional paid-in capital
    
    
    38,530
    
    
    
    29,876Accumulated deficit
    
    
    (7,564
    )
    
    
    (25,062
    )Treasury stock, at cost (1,081,243 shares at September 30, 2004 and
December 31, 2003)
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity (deficiency)
    
    
    18,125
    
    
    
    (8,030
    )COMMITMENTS AND CONTINGENCIESTOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
    
    $
    154,439
    
    
    $
    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 September 30, 2004 and 2003
(in thousands except per share data)
(unaudited) 2004
    
    2003OPERATING REVENUESFlight operations
    
    $
    128,573
    
    
    $
    111,038Other
    
    
    602
    
    
    
    1,256Total operating revenues
    
    
    129,175
    
    
    
    112,294OPERATING EXPENSESFlight
    
    
    40,600
    
    
    
    35,889Maintenance
    
    
    19,295
    
    
    
    14,368Aircraft costs
    
    
    19,498
    
    
    
    20,979Fuel
    
    
    17,603
    
    
    
    18,020Flight operations subcontracted to other carriers
    
    
    
    
    
    
    428Commissions
    
    
    5,667
    
    
    
    4,679Depreciation and amortization
    
    
    1,258
    
    
    
    1,259Sales, general and administrative
    
    
    11,490
    
    
    
    10,798Total operating expenses
    
    
    115,411
    
    
    
    106,420OPERATING INCOME
    
    
    13,764
    
    
    
    5,874OTHER INCOME (EXPENSE)Interest expense
    
    
    (1,114
    )
    
    
    (1,135
    )Interest income
    
    
    141
    
    
    
    92Other, net
    
    
    (252
    )
    
    
    11Total other expense
    
    
    (1,225
    )
    
    
    (1,032
    )EARNINGS BEFORE INCOME TAXES
    
    
    12,539
    
    
    
    4,842INCOME TAXES
    
    
    5,485
    
    
    
    3,398NET EARNINGS
    
    $
    7,054
    
    
    $
    1,444BASIC EARNINGS PER SHARENet earnings
    
    $
    0.54
    
    
    $
    0.13Weighted average shares outstanding
    
    
    12,956
    
    
    
    11,290DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.31
    
    
    $
    0.11Weighted average shares outstanding
    
    
    23,674
    
    
    
    18,630
 See accompanying Notes to Condensed Consolidated Financial Statements 5




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##### 



WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2004 and 2003
(in thousands except per share data)
(unaudited) 2004
    
    2003OPERATING REVENUESFlight operations
    
    $
    372,299
    
    
    $
    350,329Other
    
    
    1,520
    
    
    
    2,239Total operating revenues
    
    
    373,819
    
    
    
    352,568OPERATING EXPENSESFlight
    
    
    119,107
    
    
    
    105,862Maintenance
    
    
    57,183
    
    
    
    57,051Aircraft costs
    
    
    56,595
    
    
    
    63,727Fuel
    
    
    52,168
    
    
    
    58,005Flight operations subcontracted to other carriers
    
    
    1,599
    
    
    
    653Commissions
    
    
    16,798
    
    
    
    13,227Depreciation and amortization
    
    
    3,819
    
    
    
    4,040Sales, general and administrative
    
    
    34,759
    
    
    
    28,646Total operating expenses
    
    
    342,028
    
    
    
    331,211OPERATING INCOME
    
    
    31,791
    
    
    
    21,357OTHER INCOME (EXPENSE)Interest expense
    
    
    (3,903
    )
    
    
    (3,537
    )Interest income
    
    
    388
    
    
    
    282Other, net
    
    
    (1,232
    )
    
    
    (2
    )Total other expense
    
    
    (4,747
    )
    
    
    (3,257
    )EARNINGS BEFORE INCOME TAXES
    
    
    27,044
    
    
    
    18,100INCOME TAXES
    
    
    9,546
    
    
    
    3,648NET EARNINGS
    
    $
    17,498
    
    
    $
    14,452BASIC EARNINGS PER SHARENet earnings
    
    $
    1.46
    
    
    $
    1.30Weighted average shares outstanding
    
    
    12,013
    
    
    
    11,159DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.78
    
    
    $
    0.92Weighted average shares outstanding
    
    
    23,802
    
    
    
    17,309
 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)
Nine Months Ended September 30, 2004
(in thousands except share amounts)
(unaudited) AdditionalCommon
    
    Paid-in
    
    Accumulated
    
    Treasury Stock, at
    Total StockholdersStock
    
    Capital
    
    Deficit
    
    Cost
    Equity (Deficiency)Balance at December 31, 2003
    
    $
    13
    
    
    $
    29,876
    
    
    $
    (25,062
    )
    
    $
    (12,857
    )
    
    
    (8,030
    )Amortization of warrants
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    138Exercise of 1,573,688 stock options
    
    
    1
    
    
    
    1,496
    
    
    
    
    
    
    
    
    
    
    
    1,497Exercise of warrants for 1,021,994
shares
    
    
    1
    
    
    
    2,499
    
    
    
    
    
    
    
    
    
    
    
    2,500Issuance of 994,375 shares for
convertible debt
    
    
    1
    
    
    
    3,302
    
    
    
    
    
    
    
    
    
    
    
    3,303Tax benefit of stock option exercises
    
    
    
    
    
    
    1,219
    
    
    
    
    
    
    
    
    
    
    
    1,219Net earnings
    
    
    
    
    
    
    
    
    
    
    17,498
    
    
    
    
    
    
    
    17,498Balance at September 30, 2004
    
    $
    16
    
    
    $
    38,530
    
    
    $
    (7,564
    )
    
    $
    (12,857
    )
    
    $
    18,125
 See accompanying Notes to Condensed Consolidated Financial Statements 7




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##### 



WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
(in thousands)
(unaudited) 2004
    
    2003CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    $
    30,535
    
    
    $
    20,839CASH FLOWS FROM OPERATING ACTIVITIESNet earnings
    
    
    17,498
    
    
    
    14,452Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,819
    
    
    
    4,040Deferred gain recognition
    
    
    (849
    )
    
    
    (849
    )Charges related to impairment of property and equipment
    
    
    1,500
    
    
    
    Loss on sale of property and equipment
    
    
    598
    
    
    
    188Tax benefit of stock option exercises
    
    
    1,219
    
    
    
    Amortization of warrants and debt issuance costs
    
    
    1,521
    
    
    
    Other
    
    
    (160
    )
    
    
    614Provision for doubtful accounts receivable
    
    
    66
    
    
    
    83Increase (decrease) in cash and cash equivalents resulting
from changes
in operating assets and liabilities:Accounts receivable
    
    
    (5,949
    )
    
    
    (4,289
    )Restricted Cash
    
    
    (87
    )
    
    
    (1,085
    )Deposits, prepaid expenses and other assets
    
    
    1,286
    
    
    
    (1,977
    )Accounts payable, accrued expenses and other liabilities
    
    
    273
    
    
    
    808Unearned revenue
    
    
    640
    
    
    
    1,897Net cash provided by operating activities
    
    
    21,375
    
    
    
    13,882CASH FLOWS FROM INVESTING ACTIVITIESPurchases of equipment and property
    
    
    (1,205
    )
    
    
    (1,762
    )Proceeds from disposal of equipment and property
    
    
    29
    
    
    
    18Net cash used in investing activities
    
    
    (1,176
    )
    
    
    (1,744
    )CASH FLOWS FROM FINANCING ACTIVITIESDecrease in line of credit borrowing arrangement, net
    
    
    
    
    
    
    (223
    )Decrease in restricted cash due to repayment of debt
    
    
    18,000
    
    
    
    Repayment of debt
    
    
    (18,000
    )
    
    
    Proceeds from exercise of stock options
    
    
    1,497
    
    
    
    280Proceeds from exercise of warrants
    
    
    2,500
    
    
    
    Payment of debt issuance costs
    
    
    (541
    )
    
    
    Repayment of aircraft rent obligations
    
    
    (7,196
    )
    
    
    (8,418
    )Net cash used in financing activities
    
    
    (3,740
    )
    
    
    (8,361
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    16,459
    
    
    
    3,777CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    46,994
    
    
    $
    24,616
 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 nine
months ended September 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 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.  
    
    Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair
value of each class of financial instruments at December 31, 2003. Cash and cash equivalents; restricted cash; accounts receivable;
accounts payable; and accrued expenses The carrying value approximates fair value because of the short
maturity of these financial instruments. Long-term Debt On December 30, 2003, the Company called for redemption $18.0
million of its then outstanding 8.0% Convertible Senior
Subordinated Debentures due in 2004 (the Old Debentures), with
a redemption date of January 28, 2004. The $18.0 million carrying
value of these Old Debentures is the principal amount thereof,
and approximates the fair value of these financial instruments
because of the short period of time to the date fixed for
redemption. The Company closed on its $30.0 million term loan facility on
December 30, 2003. Because the term loan closed one day before
the Consolidated Balance Sheet date, the carrying value of the
term loan (the principal amount thereof) approximates fair value. Note 7 to the Consolidated Financial Statements in Form 10-K
contains information about the carrying value and fair value
determination with respect to the Companys $25.5 million
aggregate principal amount of 8.0% Convertible Senior
Subordinated Debentures due in 2009 (the New Debentures). These
New Debentures were recorded at their estimated fair market value
of $28.5 million at the time of issuance on December 31, 2003.   Long-term
Operating Deposits Long-term
operating deposits of $18.0 million at September 30, 2004 consisted of
aircraft and engine (flight equipment) deposits of
$17.6 million and building
and miscellaneous deposits of $0.4 million. At December 31,
2003, long-term operating deposits of $17.7 million consisted of
aircraft and engine deposits of $16.2 million and building and
miscellaneous deposits of $1.5 million.  2.
    
    Earnings per Share The following table sets forth the computations of basic and diluted
earnings per share (in thousands except per share data): Three Months Ended September 30, 2004Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    7,054
    
    
    
    12,956
    
    
    $
    0.54
 9




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##### 



Three Months Ended September 30, 2004Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountEffect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,608Options
    
    
    
    
    
    
    1,2358% convertible debentures
    
    
    329
    
    
    
    7,875Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    7,383
    
    
    
    23,674
    
    
    $
    0.31
 Three Months Ended September 30, 2003Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    1,444
    
    
    
    11,290
    
    
    $
    0.13Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    282Options
    
    
    
    
    
    
    2,5028% convertible debentures
    
    
    519
    
    
    
    4,556Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    1,963
    
    
    
    18,630
    
    
    $
    0.11
 Nine Months Ended September 30, 2004Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    17,498
    
    
    
    12,013
    
    
    $
    1.46Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,719Options
    
    
    
    
    
    
    1,9178% convertible debentures
    
    
    1,060
    
    
    
    8,153Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    18,558
    
    
    
    23,802
    
    
    $
    0.78
 Nine Months Ended September 30, 2003Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    14,452
    
    
    
    11,159
    
    
    $
    1.30Effect of Dilutive SecuritiesOptions
    
    
    
    
    
    
    1,5948% convertible debentures
    
    
    1,541
    
    
    
    4,556Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    15,993
    
    
    
    17,309
    
    
    $
    0.92
 10




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##### 



3.
    
    Accounting for Stock-Based Compensation At September 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 for the quarter and the nine months ended September 30, 2004
and 2003, as all options granted during those periods had an exercise
price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net
earnings and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation (in thousands,
except per share data): Quarter Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net earnings, as reported
    
    $
    7,054
    
    
    $
    1,444
    
    
    $
    17,498
    
    
    $
    14,452Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of
related tax effects
    
    
    (183
    )
    
    
    (117
    )
    
    
    (619
    )
    
    
    (415
    )Pro forma net earnings
    
    $
    6,871
    
    
    $
    1,327
    
    
    $
    16,879
    
    
    $
    14,037Earnings per shareBasic as reported
    
    $
    0.54
    
    
    $
    0.13
    
    
    $
    1.46
    
    
    $
    1.30Basic  pro forma
    
    $
    0.53
    
    
    $
    0.12
    
    
    $
    1.41
    
    
    $
    1.26Diluted as reported
    
    $
    0.31
    
    
    $
    0.11
    
    
    $
    0.78
    
    
    $
    0.92Diluted  pro forma
    
    $
    0.30
    
    
    $
    0.10
    
    
    $
    0.75
    
    
    $
    0.90
 The per share weighted-average fair value of stock options granted
during the third quarter of 2003 was $2.83 (no stock options were
granted during the third quarter of 2004) and for the first nine
months of 2004 and 2003 was $3.59 and $0.97, respectively, on the date
of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: Quarter Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    3.9
    %
    
    
    3.3
    %
    
    
    3.8
    %
    
    
    3.1
    %Expected life (in years)
    
    
    4.7
    
    
    
    5.3
    
    
    
    4.7
    
    
    
    5.3Risk-free volatility
    
    
    82
    %
    
    
    112
    %
    
    
    82
    %
    
    
    112
    %
  4.
    
    Sub-lease Obligation The 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 third quarter and determined,
based on updated information, that the liability should be adjusted to
$1.4 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 cash obligation at
September 30, 2004 under the lease was $2.5 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. 11




---



##### 



5.
    
    Union NegotiationsThe Companys cockpit crewmembers, who constitute approximately 28% 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 continued negotiations with the Teamsters during the third
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 first quarter of 2005.  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 nine months
ended September 30 is as follows: Quarter Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    95
    
    
    $
    78
    
    
    $
    285
    
    
    $
    234Interest cost
    
    
    61
    
    
    
    59
    
    
    
    183
    
    
    
    177Net amortized loss
    
    
    3
    
    
    
    3
    
    
    
    9
    
    
    
    9Net periodic post-retirement
benefit cost
    
    $
    159
    
    
    $
    140
    
    
    $
    477
    
    
    $
    420
 The Company
anticipates that it will contribute approximately $115,000 to fund
its health care obligations in 2004. As of September 30, 2004,
$91,000 of contributions have been made.  8.
    
    Convertible Senior Subordinated DebenturesIn the December 31, 2003 Consolidated Balance Sheet included in the
Companys 2003 Form 10-K, the Company recorded a beneficial
conversion feature of $1.4 million in connection with the issuance of
new 8.0% Convertible Senior Subordinated Debentures (the New
Debentures) as a reduction to long-term debt. This amount was
calculated as the excess of the fair value of the common stock of
$3.37 per share over the stated conversion price of $3.20 per share,
multiplied by the 7,982,813 shares to be issued if all New Debentures
were converted. The Company has subsequently determined that the
stated conversion price in the New Debentures agreement should have
been adjusted to an effective conversion price, which is $3.57 per
share rather than the stated conversion price of the New Debentures.
This amount was calculated by taking the recorded $28,534,000 fair
value of the New Debentures divided by 7,982,813 shares. Therefore,
the conversion feature was not in the money and no beneficial
conversion feature existed. Management has determined that this did
not cause the Companys Consolidated Financial Statements for the
year ended December 31, 2003, or the quarters ended March 31, 2004 12




---



##### 



and June 30, 2004, taken as a whole, to be materially misleading.The balance sheet impact of the correction has been recorded as a
retroactive reclassification to reduce additional paid-in-capital and
increase long-term debt by $1.4 million on the December 31, 2003
Condensed Consolidated Balance Sheets included herein. Further, the
Condensed Consolidated Statement of Operations for the quarter ended
September 30, 2004 includes an adjustment to reduce interest expense
by $112,000, which represents the cumulative impact of this
correction. Management does not believe that the impact of this
correction is material to the quarter ended September
30, 2004.  9.
    
    Term Loan Guarantee FeesOn December 30, 2003, the Company closed on a $30.0 million term loan
of which $27.0 million is guaranteed by the Air Transportation
Stabilization Board (ATSB) and $3.0 million is guaranteed by a
third party. The Company is required to pay semi-annual guarantee
fees to the ATSB and the third party, as was previously disclosed in
its financial statements for the year ended December 31, 2003. The
Company previously recorded the guarantee fee expense to Other, net
within the Condensed Consolidated Statement of Operations. The
Company has reclassified the guarantee fee expense to interest
expense within the Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2004.  10.
    
    Legal ProceedingsA 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 is 75% responsible for the cancellation of the program. A
hearing on damages, initially set for October 22, 2004, has been
postponed until early 2005 by mutual consent of the parties. The
Companys counsel met with plaintiffs counsel in September 2004 to
discuss the extent to which plaintiff may be able to establish
damages, if any. Those discussions are ongoing. The Company believes
it has substantial defenses to this action, although no assurance can
be given of the eventual outcome of this litigation. The Company
reserved $0.8 million for this litigation in the third quarter 2004,
based on documentation of expenses for displaced passengers. However,
because the process is ongoing, the total potential exposure to World
Airways cannot yet be determined.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 parties 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 2004, ten purported class action complaints (six in the
United States District Court for the Eastern District of New York,
one in the United States District Court for the Southern District of
New York, one in the Superior Court of DeKalb County, Georgia, one in
the United States District Court for the Northern District of New
Jersey and one in the United States District Court for the Northern
District of Illinois) and three individual complaints (all in the
United States District Court for the Eastern District of New York),
and twelve small claims actions (one in California, two in New
Jersey, one in Georgia and eight in New York) were filed against the
Company arising out of the discontinuance of charter flights upon the
expiration of the Companys obligation to provide services under an
air services agreement. Seven of the eight small claims actions in
New York were settled for a total of $14,000 (or $2,000 per
plaintiff). The purported class action cases were consolidated for
discovery purposes into the Eastern District of New York. The Company
had operated the charter flights between cities in the United States
and Lagos, Nigeria for Ritetime Aviation and Travel Services, Inc.
(Ritetime). 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 13




---



##### 



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 and conditional indemnification. 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.On August 15, 2004, Seymour Licht filed suit in the court of Chancery
of the State of Delaware alleging that the Company violated Delaware
laws by counting his abstention votes on his proxy at the Companys
2004 Annual Shareholders Meeting as a no. He seeks to set the 2004
elections aside and to force the Company to hold new elections. The
Company believes that this claim is without merit and intends to
vigorously defend itself 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 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. 14




---



##### 



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. OVERVIEW General For the third quarter of 2004, the Companys operating income was $13.8
million compared to $5.9 million for the same period in 2003, an
improvement of $7.9 million. Net earnings for the 2004 third quarter
were $7.1 million compared to $1.4 million for the third quarter of
2003, an increase of $5.7 million. The following table provides statistical data, used by management in
evaluating the operating performance of the Company, for the quarters
ended September 30, 2004 and 2003. Quarter Ended September 30,2004
    
    2003Block hours:Full service passenger
    
    
    6,950
    
    
    
    55
    %
    
    
    5,842
    
    
    
    59
    %Full service cargo
    
    
    29
    
    
    
    0
    %
    
    
    1,440
    
    
    
    14
    %ACMI passenger
    
    
    1,376
    
    
    
    11
    %
    
    
    1,140
    
    
    
    11
    %ACMI cargo
    
    
    4,100
    
    
    
    32
    %
    
    
    1,359
    
    
    
    14
    %Miscellaneous
    
    
    316
    
    
    
    2
    %
    
    
    214
    
    
    
    2
    %Total
    
    
    12,771
    
    
    
    100
    %
    
    
    9,995
    
    
    
    100
    %Operating aircraft at
quarter-end
    
    
    16
    
    
    17Average aircraft per day
    
    
    16.0
    
    
    17.0Average daily utilization
    
    
    8.7
    
    
    6.4(block hours flown per day
per aircraft)
 For the first nine months of 2004, the Companys operating income was
$31.8 million compared to $21.4 million for the same period in 2003,
while the Companys net earnings were $17.5 million compared to $14.5
million. The Company recorded income tax expense of $9.5 million in the
first nine months of 2004, compared to $3.6 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 nine months
ended September 30, 2004 and 2003. 15




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##### 



Nine Months Ended September 30,2004
    
    2003Block hours:Full service passenger
    
    
    20,678
    
    
    
    59
    %
    
    
    16,491
    
    
    
    50
    %Full service cargo
    
    
    697
    
    
    
    2
    %
    
    
    8,084
    
    
    
    25
    %ACMI passenger
    
    
    3,746
    
    
    
    11
    %
    
    
    3,304
    
    
    
    10
    %ACMI cargo
    
    
    9,184
    
    
    
    26
    %
    
    
    4,347
    
    
    
    13
    %Miscellaneous
    
    
    807
    
    
    
    2
    %
    
    
    707
    
    
    
    2
    %Total
    
    
    35,112
    
    
    
    100
    %
    
    
    32,933
    
    
    
    100
    %Operating aircraft
at quarter-end
    
    
    16
    
    
    17Average aircraft per day
    
    
    16.0
    
    
    16.7Average daily utilization
    
    
    8.0
    
    
    7.2(block hours flown per
day per aircraft)
 For 2004, the Company expects to:  
    
    be profitable in the fourth quarter and 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 nine months ended
September 30, 2004 and 2003, are as follows: Quarter Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003USAF
    
    
    75.2
    %
    
    
    70.8
    %
    
    
    78.0
    %
    
    
    77.0
    %Ritetime Aviation and Travel Services
    
    
    
    %
    
    
    8.8
    %
    
    
    
    %
    
    
    3.4
    %Sonair Serviceo Aereo
    
    
    5.3
    %
    
    
    6.4
    %
    
    
    5.6
    %
    
    
    5.9
    %Menlo Worldwide (formerly Emery Air
Freight Corporation)
    
    
    5.9
    %
    
    
    5.8
    %
    
    
    4.7
    %
    
    
    5.6
    %Eva Airways
    
    
    3.8
    %
    
    
    
    %
    
    
    3.3
    %
    
    
    
    %
 RESULTS OF OPERATIONS Three Months Ended September 30, 2004 Compared to Three Months Ended
September 30, 2003 Operating Revenues. Revenues from operations increased $16.9 million,
or 15.0%, to $129.2 million in the third quarter of 2004 from $112.3
million in the third quarter of 2003. The Company reported significant
growth in military passenger flying for the USAF as well as commercial
cargo ACMI flying, offset by reductions in military cargo revenues for
the USAF and commercial passenger full-service flying. Two key variables
that impact the amount of operating revenues are listed below: Quarter Ended September 30,2004
    
    2003
    
    Difference
    
    % ChangeTotal block hours
    
    
    12,771
    
    
    
    9,995
    
    
    
    2,776
    
    
    
    27.8
    %Yield per block hour
    
    $
    10,115
    
    
    $
    11,235
    
    
    $
    (1,120
    )
    
    
    -10.0
    %
 Operating Expenses. Total operating expenses increased $9.0 million to
$115.4 million for the third quarter of 2004, compared to $106.4 million
for the comparable quarter in 2003. Below is information on the
Companys operating expense per block hour: 16




---



##### 



Quarter Ended September 30,2004
    
    2003
    
    Difference
    
    % ChangeOperating expense per block hour
    
    $
    9,037
    
    
    $
    10,647
    
    
    $
    1,610
    
    
    
    15.1
    %
 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 $4.7
million, or 13.1%, to $40.6 million in the third quarter of 2004
compared to $35.9 million in the same period of 2003. Flight costs were
higher primarily due to increases in the following areas:  
    
    $3.5 million in pilot and flight attendant costs;
    
    $0.9 million in flight communication costs; and
    
    $0.4 million in catering costs. The higher flight expenses are directly attributable to an overall
increase in total block hours, as well as a 19.2% increase in flight
attendant block hours. Maintenance expenses increased $4.9 million, or 34.3%, to $19.3 million
in the third quarter of 2004 compared to $14.4 million in the same
period of 2003. In the third quarter of 2004, the Company had $2.4
million higher scheduled engine and thrust reverser overhauls and $1.6
million for higher maintenance reserve expenses related to the increase
in block hours. The Company recorded a $1.5 million charge related to
asset impairment of DC-10 aircraft parts. The Company now has surplus
DC-10 aircraft parts caused by a decrease in the Companys fleet of
DC-10s from eight to five aircraft through September 30, 2004. In
addition, another DC-10 aircraft will be returned in the fourth quarter
of 2004 and two DC-10s are planned for return during the first half of
2005. The Company anticipates that the surplus parts will be consigned
for sale at market rates starting in the fourth quarter of 2005. Aircraft costs, which include aircraft rent and insurance, decreased
$1.5 million, or 7.1%, to $19.5 million in the third quarter of 2004
compared to $21.0 million in the third 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 rent associated with an
additional MD-11 passenger aircraft under a power-by-the-hour operating
lease. Fuel expenses decreased $0.4 million, or 2.3%, to $17.6 million in the
third quarter of 2004 from $18.0 million in the third quarter of 2003.
Fuel expense decreased due to less full service, and more ACMI, flying
in the third quarter of 2004 compared to the same period in 2003.
Fluctuations in the price of fuel did not have a significant impact in
the third quarter of 2004 because the Companys contracts with its
customers covered 94% of fuel purchased and thereby limited the
Companys exposure to increases in fuel prices. Commissions increased $1.0 million to $5.7 million in the third quarter
of 2004, compared to $4.7 million in the third quarter of 2003. This
increase was directly related to the higher military revenue in the
third quarter of 2004 compared to the same period in 2003. Sales, general and administrative expenses (SG&A) increased $0.7
million, or 6.4%, to $11.5 million in the third quarter of 2004 compared
to $10.8 million in the same quarter of 2003. The increase was primarily
due to higher wages as well as medical and workerscompensation
insurance expense. The remainder of the variance is spread over a
number of different account categories. Nine Months Ended September 30, 2004 Compared to Nine Months Ended
September 30, 2003 Operating Revenues. Revenues from operations increased $21.2 million,
or 6.0%, to $373.8 million in 2004 from $352.6 million in 2003. The
Company reported significant growth in passenger military flying for the
USAF as well as commercial cargo ACMI flying, offset by reductions in
military cargo revenues for the USAF and commercial cargo and passenger
full-service flying. Two key variables that impact the amount of
operating revenues are listed below: Nine Months Ended September 30,2004
    
    2003
    
    Difference
    
    % ChangeTotal block hours
    
    
    35,112
    
    
    
    32,933
    
    
    
    2,179
    
    
    
    6.6
    %Yield per block hour
    
    $
    10,647
    
    
    $
    10,706
    
    
    $
    (59
    )
    
    
    -0.6
    %
 17




---



##### 



Operating Expenses. Total operating expenses increased $10.8 million to
$342.0 million in 2004, compared to $331.2 million for the comparable
period in 2003. Below is information on the Companys operating expense
per block hour: Nine Months Ended September 30,2004
    
    2003
    
    Difference
    
    % ChangeOperating expense per block hour
    
    $
    9,741
    
    
    $
    10,057
    
    
    $
    316
    
    
    
    3.1
    %
 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 $13.2
million, or 12.5%, to $119.1 million in the first nine months of 2004
compared to $105.9 million in the same period of 2003. Flight costs
were higher primarily due to increases in the following areas:  
    
    $7.7 million in flight attendant costs;
    
    $4.0 million in cockpit crew costs; and
    
    $1.9 million in catering costs. The higher flight costs are directly attributable to increased military
passenger flights. In addition, there were pilot and flight attendant
headcount increases in 2004 compared to 2003. Maintenance expenses stayed level at $57.2 million in 2004 compared to
$57.1 million in the same period of 2003. In the first nine months of
2004, the Company had decreases in the following areas:  
    
    $2.4 million in MD-11 engine overhaul expense;
    
    $1.3 million credit for aircraft insurance
recoveries related to repair costs that were previously
expensed;
    
    $1.3 million in lower aircraft parts rental; and
    
    $1.2 million in MD-11 landing gear overhaul expense. These decreases were offset by higher expenses related to:  
    
    $1.6 million for higher maintenance reserve payments;
    
    $1.5 million for asset impairment related to DC-10 aircraft parts;
    
    $1.3 million in mechanics wages and personnel costs;
    
    $1.2 million for thrust reverser overhauls; and
    
    $0.5 million for engine changes. Aircraft costs, which include aircraft rent and insurance, decreased
$7.1 million, or 11.2%, to $56.6 million in 2004 compared to $63.7
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 $5.8 million, or 10.1%, to $52.2 million in 2004
from $58.0 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 nine months of 2004 because the
Companys contracts with its customers covered 95% of fuel purchased and
thereby limited the Companys exposure to increases in fuel prices. Commissions increased $3.6 million, or 27.0%, to $16.8 million in 2004,
compared to $13.2 million in the same period of 2003. This increase was
due to more military flying in 2004. In addition, in 2003, the Company
was not required to pay commissions on USAF missions flown under the
CRAF activation order. SG&A increased $6.2 million, or 21.3%, to $34.8 million in the first
nine months of 2004 compared to $28.6 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);
    
    $2.5 million higher wages and benefits due to:  -
    
    July 2003 salary increases;-
    
    increased headcount;-
    
    higher workers compensation expense; and-
    
    additional medical claims paid or accrued for administrative employees. 18




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
    
    $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
    
    $0.5 million higher professional fees. These increases were partially offset by the $0.6 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 $9.5 million of income tax expense in the first
nine months of 2004, compared to $3.6 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 35.0%, 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 28.0% for the first six months of 2004. LIQUIDITY AND CAPITAL RESOURCES The Company is highly leveraged. At September 30, 2004, the Companys
current assets were $95.8 million and its current liabilities were $67.9
million. The ratio of the Companys current assets to its current
liabilities (current ratio) was 1.4:1. The September 30, 2004 balance of cash and cash equivalents was $47.0
million compared to $30.5 million at December 31, 2003. Restricted cash
was $5.4 million at September 30, 2004, which consisted of $4.7 million
for letters of credit that had to be collateralized and $0.7 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 first quarter of 2005. See Note 6 of
Notes to the Condensed Consolidated Financial Statements. In August 2004, International Lease Finance Corporation (ILFC)
exercised warrants to purchase 1,000,000 shares of Common Stock at $2.50
per share. In addition, the Air Transportation Stabilization Board
(ATSB) exercised its corresponding warrants to purchase 111,111
shares, and pursuant to the net exercise provisions of the warrants,
received 21,994 shares of the Companys Common Stock. In September 2004, a bondholder converted $3,182,000 principal amount of
the Companys 8.0% convertible senior subordinated debentures due
December 2009 (the New Debentures) into 994,375 shares of Common
Stock. Following this conversion, the Company had $22,363,000 principal
amount of debentures remaining outstanding at September 30, 2004. In
November 2004, certain bondholders converted an additional $2,916,000
principal amount of the New Debentures into 911,250 shares of Common
Stock. Following these conversions, the Company has $19,447,000
principal amount of New Debentures remaining outstanding. These
conversions will reduce the Companys interest expense going forward by
$0.5 million annually. 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 September 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 Company anticipates that the remaining
balance of this obligation in the amount of $1.7 million will be repaid
in fiscal 2005. Due to its high financial leverage, the Company has the following
restrictions:  
    
    The Company is 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 contains restrictive provisions that require
prepayments in the event the Company sells any significant assets, 19




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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 through 2005. Cash Flows from Operating Activities Operating activities provided $21.4 million in cash during the nine
months ended September 30, 2004 compared to providing $13.9 million for
the comparable 2003 period. The cash provided in the 2004 period
principally reflects the $17.5 million net earnings, a $2.1 million
increase in cash due to changes in other operating assets and
liabilities, and net non-cash statement of operations charges of $7.7
million, offset by a $5.9 million increase in accounts receivable. The
cash provided in the 2003 period principally reflects the $14.5 million
net earnings, offset by a $4.3 million increase in accounts receivable,
less a $0.4 million decrease in cash due to changes in other operating
assets and liabilities, and net non-cash statement of operations charges
of $4.1 million. Cash Flows from Investing Activities Investing activities used $1.2 million in the first nine months of 2004
compared to using $1.7 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 $2.0 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 $3.7 million in cash for the nine months ended
September 30, 2004, which was primarily due to $7.2 million for the
repayment of contractual aircraft rent obligations to a lessor, offset
by $2.5 million of proceeds related to the exercise of warrants and $1.5
million of proceeds related to the exercise of stock options. For the
nine months ended September 30, 2003, financing activities used $8.4
million, which was primarily due to the repayment of contractual
aircraft rent obligations. 20




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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 September 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 September 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 September 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 1. LEGAL PROCEEDINGS The information required by
this Item is incorporated by reference to Note 10 to the
Condensed Consolidated Financial Statements included elsewhere herein. 21




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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 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.
 * * * * * * * * * * * * * * * 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: November 12, 2004 WORLD AIRWAYS, INC.By:
    /s/ Gilberto M. Duarte, Jr.Gilberto M. Duarte, Jr.Principal Accounting and Financial Officer