##### Table of Contents



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




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##### 



WORLD AIR HOLDINGS, INC.
 QUARTERLY REPORT ON FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets (Unaudited), September 30, 2005 and December 31, 2004
    
    3Condensed Consolidated Statements of Operations (Unaudited), Three Months Ended September 30, 2005 and 2004
    
    5Condensed Consolidated Statements of Operations (Unaudited), Nine Months Ended September 30, 2005 and 2004
    
    6Condensed Consolidated Statement of Changes in Stockholders Equity (Unaudited), Nine months ended September 30, 2005
    
    7Condensed Consolidated Statements of Cash Flows (Unaudited), Nine months ended September 30, 2005 and 2004
    
    8Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    27Item 4.
    
    Controls and Procedures
    
    28PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    31Item 6.
    
    Exhibits
    
    31SIGNATURES
    
    32EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE INTERIM CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE INTERIM CFO
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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 
 WORLD AIR HOLDINGS, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 ASSETS
(in thousands)
(unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004CURRENT ASSETSCash and cash equivalents
    
    $
    38,378
    
    
    $
    16,306Restricted cash
    
    
    5,577
    
    
    
    4,926Short-term investments
    
    
    30,000
    
    
    
    33,650Accounts receivable, less allowance for doubtful accounts
of $455 at September 30, 2005 and $209 at December 31, 2004
    
    
    49,495
    
    
    
    52,382Prepaid expenses and other current assets
    
    
    14,034
    
    
    
    8,335Deferred tax assets
    
    
    9,417
    
    
    
    6,685Total current assets
    
    
    146,901
    
    
    
    122,284EQUIPMENT AND PROPERTYFlight and other equipment
    
    
    81,813
    
    
    
    84,514Less: accumulated depreciation and amortization
    
    
    47,047
    
    
    
    51,321Net equipment and property
    
    
    34,766
    
    
    
    33,193GOODWILL AND OTHER INTANGIBLE ASSETSGoodwill
    
    
    21,883
    
    
    
    Other intangible assets, net of accumulated amortization of
$466 at September 30, 2005
    
    
    7,629
    
    
    
    Net goodwill and other intangible assets
    
    
    29,512
    
    
    
    LONG-TERM DEPOSITS
    
    
    23,348
    
    
    
    18,237OTHER ASSETS AND DEFERRED CHARGES, NET OF ACCUMULATED
AMORTIZATION OF $3,432 AT SEPTEMBER 30, 2005 AND $2,019 AT
DECEMBER 31, 2004
    
    
    4,474
    
    
    
    5,603TOTAL ASSETS
    
    $
    239,001
    
    
    $
    179,317
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WORLD AIR HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
 LIABILITIES AND STOCKHOLDERS EQUITY
(in thousands except share amounts)
 (unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004CURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    30,000
    
    
    $
    6,000Accounts payable
    
    
    33,022
    
    
    
    35,482Current portion of accrued rent
    
    
    4,875
    
    
    
    5,489Current portion of deferred rent
    
    
    111
    
    
    
    3,242Unearned revenue
    
    
    15,220
    
    
    
    6,293Accrued maintenance
    
    
    9,233
    
    
    
    4,179Accrued salaries, wages and profit sharing
    
    
    21,866
    
    
    
    20,463Accrued taxes
    
    
    8,144
    
    
    
    8,482Other accrued liabilities
    
    
    22,415
    
    
    
    1,861Total current liabilities
    
    
    144,886
    
    
    
    91,491Long-term debt, net of current maturities
    
    
    
    
    
    
    43,879Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $4,755 at September 30, 2005
and $4,269 at December 31, 2004
    
    
    1,158
    
    
    
    1,645Accrued post-retirement benefits
    
    
    5,081
    
    
    
    4,081Accrued and deferred rent, net of current portion
    
    
    7,705
    
    
    
    5,615Deferred income taxes
    
    
    4,970
    
    
    
    2,208TOTAL LIABILITIES
    
    
    163,800
    
    
    
    148,919STOCKHOLDERS EQUITYPreferred stock, $.001 par value (5,000,000 shares authorized;
no shares issued or outstanding)
    
    
    
    
    
    
    Common stock, $.001 par value (100,000,000 shares authorized;
24,874,495 shares issued and 23,793,252 shares outstanding at
September 30, 2005; 17,430,023 shares issued and 16,348,780 shares
outstanding at December 31, 2004)
    
    
    25
    
    
    
    18Additional paid-in capital
    
    
    66,905
    
    
    
    42,712Retained earnings
    
    
    21,399
    
    
    
    525Deferred stock-based compensation
    
    
    (271
    )
    
    
    Treasury stock, at cost (1,081,243 shares at September 30, 2005
and December 31, 2004)
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity
    
    
    75,201
    
    
    
    30,398COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    239,001
    
    
    $
    179,317
  4




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended September 30, 2005 and 2004
(in thousands except per share data) 
(unaudited)
 2005
    
    
    2004REVENUESFlight operations
    
    $
    216,703
    
    
    $
    128,573Other
    
    
    477
    
    
    
    602Total revenues
    
    
    217,180
    
    
    
    129,175OPERATING EXPENSESFlight
    
    
    62,532
    
    
    
    40,600Maintenance
    
    
    27,018
    
    
    
    19,295Aircraft costs
    
    
    31,368
    
    
    
    19,498Fuel
    
    
    42,063
    
    
    
    17,603Flight operations subcontracted to other carriers
    
    
    339
    
    
    
    Commissions
    
    
    8,165
    
    
    
    5,667Depreciation and amortization
    
    
    1,872
    
    
    
    1,258Sales, general and administrative
    
    
    21,088
    
    
    
    11,490Legal
expense   California matter
    
    
    12,500
    
    
    
    Total operating expenses
    
    
    206,945
    
    
    
    115,411OPERATING INCOME
    
    
    10,235
    
    
    
    13,764OTHER INCOME (EXPENSE)Interest expense
    
    
    (1,217
    )
    
    
    (1,114
    )Interest income
    
    
    400
    
    
    
    141Other, net
    
    
    (575
    )
    
    
    (252
    )Total other income (expense)
    
    
    (1,392
    )
    
    
    (1,225
    )EARNINGS BEFORE INCOME TAX EXPENSE
    
    
    8,843
    
    
    
    12,539INCOME TAX EXPENSE
    
    
    3,373
    
    
    
    5,485NET EARNINGS
    
    $
    5,470
    
    
    $
    7,054BASIC EARNINGS PER SHARENet earnings
    
    $
    0.23
    
    
    $
    0.54Weighted average shares outstanding
    
    
    23,789
    
    
    
    12,956DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.20
    
    
    $
    0.31Weighted average shares outstanding
    
    
    27,072
    
    
    
    23,674
  5




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WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Nine Months Ended September 30, 2005 and 2004
(in thousands except per share data) 
(unaudited)
 2005
    
    
    2004REVENUESFlight operations
    
    $
    546,814
    
    
    $
    372,299Other
    
    
    1,797
    
    
    
    1,520Total revenues
    
    
    548,611
    
    
    
    373,819OPERATING EXPENSESFlight
    
    
    156,283
    
    
    
    119,107Maintenance
    
    
    77,713
    
    
    
    57,183Aircraft costs
    
    
    79,567
    
    
    
    56,595Fuel
    
    
    103,872
    
    
    
    52,168Flight operations subcontracted to other carriers
    
    
    2,064
    
    
    
    1,599Commissions
    
    
    24,726
    
    
    
    16,798Depreciation and amortization
    
    
    5,292
    
    
    
    3,819Sales, general and administrative
    
    
    48,392
    
    
    
    34,759Legal expense  California matter
    
    
    12,500
    
    
    
    Total operating expenses
    
    
    510,409
    
    
    
    342,028OPERATING INCOME
    
    
    38,202
    
    
    
    31,791OTHER INCOME (EXPENSE)Interest expense
    
    
    (3,344
    )
    
    
    (3,903
    )Interest income
    
    
    910
    
    
    
    388Other, net
    
    
    (1,801
    )
    
    
    (1,232
    )Total other income (expense)
    
    
    (4,235
    )
    
    
    (4,747
    )EARNINGS BEFORE INCOME TAX EXPENSE
    
    
    33,967
    
    
    
    27,044INCOME TAX EXPENSE
    
    
    13,093
    
    
    
    9,546NET EARNINGS
    
    $
    20,874
    
    
    $
    17,498BASIC EARNINGS PER SHARENet earnings
    
    $
    0.94
    
    
    $
    1.46Weighted average shares outstanding
    
    
    22,155
    
    
    
    12,013DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.79
    
    
    $
    0.77Weighted average shares outstanding
    
    
    26,734
    
    
    
    23,802
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WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY
 Nine Months Ended September 30, 2005
(in thousands except share amounts)
(unaudited)
 Additional
    
    
    
    
    
    
    Deferred
    
    
    Treasury
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Stock-based
    
    
    Stock,
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    at Cost
    
    
    EquityBalances at December
31, 2004
    
    $
    18
    
    
    $
    42,712
    
    
    $
    525
    
    
    $
    
    
    
    $
    (12,857
    )
    
    $
    30,398Amortization of warrants
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109Exercise of 707,825
stock options
    
    
    
    
    
    
    1,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,649Exercise of warrants
for 1,076,345 shares
    
    
    1
    
    
    
    2,499
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500Issuance of 5,660,302
shares upon conversion
of debt
    
    
    6
    
    
    
    18,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,125Tax benefit of stock
option exercises
    
    
    
    
    
    
    1,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,338Stock-based
compensation-accelerated
vesting
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176Award of deferred
stock-based
compensation
    
    
    
    
    
    
    303
    
    
    
    
    
    
    
    (303
    )
    
    
    
    
    
    
    Amortization of
deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    32Net earnings and
comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    20,874
    
    
    
    
    
    
    
    
    
    
    
    20,874Balances at September
30, 2005
    
    $
    25
    
    
    $
    66,905
    
    
    $
    21,399
    
    
    $
    (271
    )
    
    $
    (12,857
    )
    
    $
    75,201
  7




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##### Table of Contents



WORLD AIR HOLDINGS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30, 2005 and 2004
(in thousands)  (unaudited)
 2005
    
    
    2004CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    $
    16,306
    
    
    $
    16,535CASH FLOWS FROM OPERATING ACTIVITIESNet earnings
    
    
    20,874
    
    
    
    17,498Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,292
    
    
    
    3,819Deferred gain recognition
    
    
    (486
    )
    
    
    (849
    )Charges related to impairment of property and equipment
    
    
    
    
    
    
    1,500Loss on disposals of equipment and property
    
    
    951
    
    
    
    598Tax benefit of stock option exercises
    
    
    1,338
    
    
    
    1,219Amortization of warrants and debt issuance costs
    
    
    1,413
    
    
    
    1,521Deferred income taxes
    
    
    (2,494
    )
    
    
    Provision for doubtful accounts
    
    
    228
    
    
    
    66Legal expense
    
    
    12,500
    
    
    
    Other
    
    
    778
    
    
    
    (160
    )Changes in operating assets and liabilities, exclusive of acquisitions:Accounts receivable
    
    
    15,510
    
    
    
    (5,949
    )Restricted cash
    
    
    1,721
    
    
    
    (87
    )Deposits, prepaid expenses and other assets
    
    
    (3,589
    )
    
    
    1,286Accounts payable, accrued expenses and other liabilities
    
    
    (6,933
    )
    
    
    273Unearned revenue
    
    
    (524
    )
    
    
    640Net cash provided by operating activities
    
    
    46,579
    
    
    
    21,375CASH FLOWS FROM INVESTING ACTIVITIESPurchases of equipment and property
    
    
    (5,669
    )
    
    
    (1,205
    )Net
(purchases) and sales of short term investments
    
    
    3,650
    
    
    
    (17,025
    )Proceeds from disposals of equipment and property
    
    
    27
    
    
    
    29Acquisition of North American, less cash acquired
    
    
    (24,951
    )
    
    
    Net cash used in investing activities
    
    
    (26,943
    )
    
    
    (18,201
    )CASH FLOWS FROM FINANCING ACTIVITIESDecrease in restricted cash due to repayment of debt
    
    
    
    
    
    
    18,000Repayment of debt
    
    
    
    
    
    
    (18,000
    )Proceeds from exercise of stock options
    
    
    1,649
    
    
    
    1,497Proceeds from exercise of warrants
    
    
    2,500
    
    
    
    2,500Payment of debt issuance costs
    
    
    
    
    
    
    (541
    )Repayment of aircraft rent obligations
    
    
    (1,713
    )
    
    
    (7,196
    )Net cash provided by (used in) financing activities
    
    
    2,436
    
    
    
    (3,740
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    22,072
    
    
    
    (566
    )CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    38,378
    
    
    $
    15,969SUPPLEMENTAL INFORMATION:Interest paid
    
    $
    750
    
    
    $
    1,945Income taxes paid
    
    $
    14,902
    
    
    $
    3,085Non-cash
investing activities:Adjustment to North American
purchase price for excess distributions made to seller for tax
payments, as provided in the Stock Purchase Agreement
    
    $
    2,567
    
    
    $
    Non-cash financing activities:Conversion of the Companys convertible senior
subordinated debentures to common stock
    
    $
    18,125
    
    
    $
    
  8




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WORLD AIR HOLDINGS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1.
    
    Basis of PresentationThe unaudited Condensed Consolidated Financial Statements include the accounts of World Air
Holdings, Inc. (World Air Holdings or the Company), and its wholly-owned subsidiaries,
World Airways, Inc. (World Airways), North American Airlines, Inc. (North American), and
World Risk Solutions, Ltd. (World Risk Solutions). World Airways Parts Company LLC is a
wholly-owned subsidiary of World Airways. The Company acquired North American, a privately held
airline based in Jamaica, New York, on April 27, 2005. All significant inter-company accounts
and transactions have been eliminated.Management believes that all adjustments necessary to present fairly the financial position of
World Air Holdings, Inc. as of September 30, 2005 and the results of operations for the
respective three and nine months ended September 30, 2005 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, 2005 are not necessarily indicative of
the results to be expected for the year ending December 31, 2005.The Condensed Consolidated Balance Sheet for December 31, 2004 is derived from the Consolidated
Financial Statements included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2004 (the 2004 10-K). These interim period Condensed Consolidated Financial
Statements and accompanying footnotes should be read in conjunction with the Consolidated
Financial Statements contained in the 2004 Form 10-K.Certain items in prior year financial statements included herein have been reclassified to
conform to the 2005 financial statement presentation. The Company reclassified its investment
in auction rate securities as short-term investments. These auction rate securities, for
which interest rates reset in less than 90 days (7 days to 30 days) but the maturity date is
greater than 90 days, were included in cash and cash equivalents before the reclassification.
In the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30,
2005 and 2004, changes in the amounts of Short-term investments are classified as cash flows
from investing activities. The Company considers these Short-term investments as trading
securities and accounts for any realized and unrealized gains and
losses through the statement of operations.2.
    
    Long-Term Operating DepositsLong-term operating deposits of $23.3 million at September 30, 2005 consisted of aircraft and
engine (flight equipment) deposits of $22.3 million and building and miscellaneous deposits of
$1.0 million. At December 31, 2004, long-term operating deposits of $18.2 million consisted of
aircraft and engine deposits of $17.8 million and building and miscellaneous deposits of $0.4
million.3.
    
    Earnings per ShareBasic earnings per share are computed by dividing net
earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share include the effects of common
equivalent shares outstanding during the period. The following table sets forth the computation
of basic and diluted earnings per share (in thousands except per share data):
 Three Months Ended September 30, 2005Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    5,470
    
    
    
    23,789
    
    
    $
    0.23Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,807Options
    
    
    
    
    
    
    1,459Restricted stock
    
    
    
    
    
    
    17Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    5,470
    
    
    
    27,072
    
    
    $
    0.20
 9




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##### Table of Contents



Three Months Ended September 30, 2004Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    7,054
    
    
    
    12,956
    
    
    $
    0.54Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,608Options
    
    
    
    
    
    
    1,2358% convertible debentures
    
    
    323
    
    
    
    7,875Profit sharing
    
    
    (29
    )
    
    
    Amortization of debt issuance costs
    
    
    50
    
    
    
    Aircraft lease restructuring fees
    
    
    (92
    )
    
    
    Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    7,306
    
    
    
    23,674
    
    
    $
    0.31
 Nine Months Ended September 30, 2005Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    20,874
    
    
    
    22,155
    
    
    $
    0.94Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,763Options
    
    
    
    
    
    
    1,472Restricted stock
    
    
    
    
    
    
    88% convertible debentures
    
    
    162
    
    
    
    1,336Amortization of debt issuance costs
    
    
    35
    
    
    
    Aircraft lease restructuring fees
    
    
    (13
    )
    
    
    Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    21,058
    
    
    
    26,734
    
    
    $
    0.79
 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
    
    
    1,040
    
    
    
    8,153Profit sharing
    
    
    (69
    )
    
    
    Amortization of debt issuance costs
    
    
    143
    
    
    
    Aircraft lease restructuring fees
    
    
    (193
    )
    
    
    Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    18,419
    
    
    
    23,802
    
    
    $
    0.77
 10




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##### Table of Contents



Diluted EPS
 Quarter Ended
    
    
    Nine Months EndedSeptember 30, 2004
    
    
    September 30, 2004As previously reported
    
    $
    0.31
    
    
    $
    0.78Revised
    
    
    0.31
    
    
    
    0.77Variance
    
    $
    
    
    
    $
    (0.01
    )
 4.
    
    Accounting for Stock-Based CompensationAt September 30, 2005, the Company had three stock-based compensation plans. The 1995 Stock
Incentive Plan was amended in May 2004 to allow for various forms of equity awards including
restricted stock. In the second quarter of 2005, the Company issued 50,000 shares of restricted
stock which vest over four years. In February 2006, the employment of the employee who
received the restricted stock grant terminated and the grant was cancelled effective on the
date of termination. The Company accounts for these plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based compensation cost
related to stock options is reflected in net earnings for the quarter and nine months ended
September 30, 2005 as all options granted during those periods
had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (the FASB) Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based compensation (in thousands, except per share data):
 Quarter Ended,
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net earnings, as reported
    
    $
    5,470
    
    
    $
    7,054
    
    
    $
    20,874
    
    
    $
    17,498Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (103
    )
    
    
    (183
    )
    
    
    (434
    )
    
    
    (619
    )Pro forma net earnings
    
    $
    5,367
    
    
    $
    6,871
    
    
    $
    20,440
    
    
    $
    16,879Earnings per shareBasic  as reported
    
    $
    0.23
    
    
    $
    0.54
    
    
    $
    0.94
    
    
    $
    1.46Basic  pro forma
    
    $
    0.23
    
    
    $
    0.53
    
    
    $
    0.92
    
    
    $
    1.41Diluted
 as reported
    
    $
    0.20
    
    
    $
    0.31
    
    
    $
    0.79
    
    
    $
    0.77Diluted  pro forma
    
    $
    0.20
    
    
    $
    0.30
    
    
    $
    0.77
    
    
    $
    0.75
 11




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##### Table of Contents



Quarter Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    3.5
    %
    
    
    3.9
    %
    
    
    3.5
    %
    
    
    3.8
    %Expected life (in years)
    
    
    4.2
    
    
    
    4.7
    
    
    
    4.2
    
    
    
    4.7Risk-free volatility
    
    
    48
    %
    
    
    82
    %
    
    
    48
    %
    
    
    82
    %
 5.
    
    Lease ObligationsThe Company is obligated under an operating lease for office space at its former headquarters
in Herndon, Virginia, through April 2006. The Company had a liability balance of $1.1 million
at December 31, 2004. During the first quarter of 2005, the Company reviewed market conditions
and determined that an additional $0.6 million should be added to the liability. This
resulted in a $1.7 million balance at March 31, 2005, which was the present value of the total
remaining cash obligation under this lease. At the end of the second and third quarter, market
conditions were the same, which resulted in a liability of $1.3 million and $0.9 million at
June 30, 2005 and September 30, 2005, respectively. The liability is included within other
accrued liabilities on the accompanying Condensed Consolidated Balance Sheets at September 30,
2005.North American leases office space pursuant to the terms of a noncancellable operating lease
that expired on September 30, 2005. North American continues to occupy this facility on a
month-to-month basis while it is reviewing its long-term facilities requirements.In September 2005, Delta Air Lines, Inc. filed for bankruptcy protection in the United States
Bankruptcy Court and rejected and terminated its subleases with World Airways on three MD-11 aircraft. In October 2005, World Airways signed a forbearance agreement
with the Indenture Trustee to prevent the repossession of the aircraft until November 30, 2005.
Subsequently, the lease term was extended to February 28, 2006. The lease payments prior to
the bankruptcy were based on block hours flown, while the maximum lease payment during the
interim period is $0.3 million per aircraft. The Company continues to negotiate long-term
lease agreements with the new owners of the aircraft.In December 2005, the Company announced it had signed a letter of intent to lease three Boeing
747-400 (B747) Special Freighter aircraft and one Boeing 767-300ER (B767) passenger aircraft.
Deliveries are planned for June 2008, November 2008, May 2009 and December 2006, respectively.
The three B747 aircraft will be converted from passenger configuration to freighters prior to
delivery and will be leased under seven-year terms. The final lease agreement is subject to
approval by the lessors board of directors. The B767 will have an initial lease term of three
years. Additionally, the Company has signed a two-year extension on a Boeing 757-200ER lease
for North American that was scheduled to expire in May 2006. The Company plans to convert an
MD-11 passenger aircraft to a freighter configuration during 2006 with a new seven year lease
on the freighter to begin in October 2006.Future minimum lease payments for the aircraft leases described above, are as follows (in
thousands):
 2006
    
    $
    3,4622007
    
    
    15,8422008
    
    
    20,5222009
    
    
    35,7612010
    
    
    32,820Thereafter
    
    
    143,463Total
    
    $
    251,870
  12




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##### Table of Contents



6.
    
    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 (in thousands):
 Quarter Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Service cost
    
    $
    192
    
    
    $
    95
    
    
    $
    576
    
    
    $
    285Interest cost
    
    
    111
    
    
    
    61
    
    
    
    334
    
    
    
    183Net amortized loss
    
    
    70
    
    
    
    3
    
    
    
    211
    
    
    
    9Net periodic post-retirement benefit cost
    
    $
    373
    
    
    $
    159
    
    
    $
    1,121
    
    
    $
    477
 The Company anticipates that it will contribute approximately $200,000 to fund its health
care obligations in 2005. As of September 30, 2005, $150,000 of contributions have been made.7.
    
    Other Comprehensive Income (Loss)The Company reports other comprehensive income in its Consolidated Statement of Changes in
Stockholders Equity. For the three and nine month periods ending September 30, 2005 and 2004,
there were no items of other comprehensive income or loss for the Company.8.
    
    Segment ReportingThe Company has two reportable segments: World Airways and North American. The Company
operates and manages these companies as two distinct operating segments, and prepares separate
financial statements for each segment that are reviewed by senior management at World Air
Holdings, as well as the chief operating officer and other management at the operating company
level. Financial information for the three and nine month periods ended September 30, 2005 by
reporting segment is set forth below (in thousands). North Americans financial results for
the nine months ended September 30, 2005 have been included from April 28, 2005, the date
following the acquisition of North American, to September 30, 2005.
 Quarter Ended September 30, 2005World Airways
    
    North American
    

World
Air
Holdings and
World Risk
Solutions
    
    TotalTotal revenues
    
    $
    152,478
    
    
    $
    64,644
    
    
    $
    58
    
    
    $
    217,180Operating income (loss)
    
    $
    19,593
    
    
    $
    (10,013
    )
    
    $
    655
    
    
    $
    10,235Net income (loss)
    
    $
    11,433
    
    
    $
    (6,332
    )
    
    $
    369
    
    
    $
    5,470Total assets
    
    $
    155,812
    
    
    $
    79,862
    
    
    $
    3,327
    
    
    $
    239,001Total block hours
    
    
    15,578
    
    
    
    7,012
    
    
    
    
    
    
    
    22,590
 Nine Months Ended September 30, 2005World Airways
    
    North American
    

World
Air
Holdings and
World Risk
Solutions
    
    TotalTotal revenues
    
    $
    452,285
    
    
    $
    96,268
    
    
    $
    58
    
    
    $
    548,611Operating
income (loss)
    
    $
    48,644
    
    
    $
    (11,918
    )
    
    $
    1,476
    
    
    $
    38,202Net income (loss)
    
    $
    27,548
    
    
    $
    (7,675
    )
    
    $
    1,001
    
    
    $
    20,874Total assets
    
    $
    155,812
    
    
    $
    79,862
    
    
    $
    3,327
    
    
    $
    239,001Total block hours
    
    
    42,660
    
    
    
    10,940
    
    
    
    
    
    
    
    53,600
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##### Table of Contents



For the three month period ended September 30, 2005 and for the
period from acquisition through September 30, 2005, the USAF provided 56.5 percent and 55.5
percent of North
Americans revenues, respectively.As of September 1, 2005, North American discontinued its scheduled service between Oakland and
Hawaii and, therefore, on October 1, 2005 North American closed its Oakland base. Certain
immaterial costs were incurred to close office locations, move equipment, facilitate employee
relocations and accommodate passengers affected by the discontinuance of service. Refunds were
issued to all passengers holding tickets for flights after September 1, 2005 and the aircraft
were reassigned to more profitable military business.9.
    
    North American AcquisitionOn April 27, 2005, the Company acquired North American, a privately-held airline based in
Jamaica, New York, for approximately $35 million in cash which was funded from internal
resources. In addition, the Company has expended approximately $4.0 million for on-going costs
related to the acquisition, consisting primarily of financial advisory, legal and accounting
fees. These costs consisted of $1.4 million capitalized as part of the purchase price and $2.6
million expensed in the second and third quarter of 2005 including accounting and consulting
fees. In addition, there was a $2.6 million subsequent reduction in the purchase price based on
terms of the purchase contract. North American provides passenger service to tour operators,
selected scheduled service markets and USAF. This
acquisition has helped the Company diversify its product mix as well as its customer base.
North American currently has three Boeing 767 and five Boeing 757 aircraft, which complements
the service provided by World Airways with its larger wide-body aircraft. North American
maintains its operational headquarters at John F. Kennedy International Airport in New York,
with World Airways and World Air Holdings continuing to be based in Peachtree City, Georgia.The Company commenced the consolidation of North American on April 28, 2005 and the acquisition
was accounted for using the purchase method of accounting in accordance with Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations.The following
summarizes the total purchase price for North American (in thousands):
 Cash consideration
    
    $
    34,750Direct acquisition costs
    
    
    1,408Adjustment to distribution made to Seller to
cover tax payments as provided in Stock
Purchase Agreement
    
    
    (2,567
    )$
    33,591
  Fair Value of NetAssets AcquiredCash and cash equivalents
    
    $
    8,640Restricted cash
    
    
    2,372Other current assets
    
    
    16,239Equipment and property, net
    
    
    1,498Long-term deposits and other assets
    
    
    5,931Intangible assets acquired:ETOPS * program added value
    
    
    4,680Aircraft leases at market rates in excess of rental rates
    
    
    2,840Trademark
    
    
    575Goodwill
    
    
    21,883Total assets acquired
    
    
    64,658Liabilities
assumed:Accounts payable and accrued liabilities
    
    
    (29,155
    )Deferred tax liabilities
    
    
    (1,912
    )Net assets acquired
    
    $
    33,591
 14




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##### Table of Contents



*
    
    ETOPS  Extended range two engine operations Goodwill and Other Intangible Assets
  Nine Months Ended September 30,2005
    
    2004Total revenues
    
    $
    624,571
    
    
    $
    476,597Net earnings
    
    $
    23,468
    
    
    $
    14,886Basic earnings per shareNet earnings
    
    $
    1.06
    
    
    $
    1.24Weighted average shares outstanding
    
    
    22,155
    
    
    
    12,013Fully diluted earnings per shareNet earnings
    
    $
    0.88
    
    
    $
    0.66Weighted average shares outstanding
    
    
    26,734
    
    
    
    23,802
 The above pro forma results include adjustments for the amortization of intangibles,
adjustments to depreciation to reflect the new basis and depreciable lives for equipment and
property, and lost interest income/additional interest expense to reflect the impact of the
cash payments related to the purchase of North American.In August 2005, the Company implemented a profit sharing plan at North American. The related
expense in the third quarter of 2005 is approximately $0.3 million.10.
    
    Legal Proceedings World Airways, Inc.Union Negotiations/Litigation.World Airways Cockpit Crewmembers: World Airways and the International Brotherhood of
Teamsters (the IBT) have been negotiating the terms of a new collective bargaining agreement
under the auspices of the National Mediation Board (the NMB) since the amendable date of the
existing agreement expired on June 30, 2003. After the IBT rejected a tentative agreement in
March 2004, World Airways continued negotiations under the auspices of the NMB. Following a
number of largely unsuccessful mediation sessions, World Airways on November 8, 2005 delivered
its best and final offer to the IBT, which was promptly rejected the following day and both
sides formally requested a release from mediation from the NMB. World Airways final
proposal included a one-time signing bonus, annual pay increases over three years, profit
sharing, major improvements in working conditions and further improvements in most of the
sections of the contract under mediation. On December 15, 2005, the NMB issued a letter to
both parties offering binding arbitration. Both parties rejected the arbitration, thus
initiating a 30-day cooling off period that began on December 28, 2005 and ended at midnight
on January 27, 2006. During the cooling-off period the parties continued negotiations, with
the Company offering furlough protection and improved quality of life provisions to its
proposal. This proposal was rejected by the IBT negotiating committee several hours after the
30 day cooling-off period had expired and the IBT thereafter declared a general strike on
January 28, 2006 against all World Airways commercial passenger and cargo flights (the
current contract prohibits World Airways pilots from interrupting U.S. military flying).
Despite the strike, World Airways and the IBT continued negotiations and finally reached a
Tentative Agreement at midday on Sunday, February 6, 2006. The Tentative Agreement includes a
one time signing bonus, which the Company
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##### Table of Contents



estimates as a cash payout
of $2.6 million, which would be charged to expense when the
tentative agreement is approved by the pilots. The IBT
will submit the substantive terms of the Tentative Agreement for a vote by World Airways
pilots and has suspended all job actions pending the outcome of that vote. While the Company
expects a majority of the World Airways pilots to ratify the Tentative Agreement, in the event
the pilots reject the Tentative Agreement the Company cannot determine the impact that a
prolonged
strike may have on its financial condition, results of operations and liquidity, but the
impact could be material.In early 2005, the IBT filed a grievance against World Airways on behalf of one cockpit
crewmember. The arbitration started on August 15, 2005 and at the request of the IBT was
adjourned until December. A second hearing was held on December 8 and 9, 2005. The Company
is waiting for the arbitrators decision. The issue presented is whether a DC-10 cockpit
crewmember, once he or she reaches the mandatory retirement age of 60, can exercise his or her
seniority to displace another employee holding a second officer or flight engineer position
under the terms of the current collective bargaining agreement. There are a number of cockpit
crewmembers and second officers or flight engineers who could be affected between now and the
planned elimination of World Airways DC-10 fleet and if an adverse decision is rendered
against World Airways, significant training and/or severance costs could be incurred.
Although World Airways has vigorously defended itself, the Company cannot determine what
impact, if any, this matter may have on its financial condition, results of operations or
liquidity.General Litigation.Miami-Dade County is currently investigating and remediating various environmental conditions
at the Miami International Airport (MIA). During the second quarter of 2001, the County
filed a lawsuit against a number of defendants, which does not currently include World
Airways, in an attempt to recover its past and future clean-up costs. This claim has been
filed in the Florida Circuit Court for the 11th Judicial District in Dade County Florida. In
addition to the defendants named in the lawsuit, several hundred other agencies and companies
that were prior tenants at MIA (potentially responsible parties, or PRPs), including World
Airways, were issued letters advising them of the lawsuit and indicating that any PRPs could
be named as additional defendants in the future depending upon a determination as to the
levels of contamination and the extent to which any PRP may have contributed to any alleged
contamination. At this time, certain PRPs, including World Airways, have joined a joint
defense group to respond to the Countys inquiries and investigation of the PRPs. This group
is conducting preliminary investigations of the site in question to determine each PRPs
potential exposure. At this time, the Company cannot determine the impact, if any, this matter
will have on its financial condition, results of operations or liquidity.In January 2004, ten purported class action complaints (six in the United States District
Court for the Eastern District of New York, one in the United States District Court for the
Southern District of New York, one in the Superior Court of DeKalb County, Georgia, one in the
United States District Court for the Northern District of New Jersey and one in the United
States District Court for the Northern District of Illinois) and four individual complaints
(all in the United States District Court for the Eastern District of New York), and thirteen
small claims actions (one in California, three in New Jersey, one in Georgia and eight in New
York) were filed against the Company arising out of the discontinuance of charter flights upon
the expiration of World Airways obligation to provide services under an air services
agreement. Seven of the eight small claims actions in New York were settled for a total of
$14,000 (or $2,000 per plaintiff). The purported class action cases were consolidated for
discovery purposes into the Eastern District of New York. The Company had operated the charter
flights between cities in the United States and Lagos, Nigeria for Ritetime Aviation and
Travel Services, Inc. (Ritetime). World Airways obligation to perform air services for
Ritetime ended with the last chartered flight on December 30, 2003. From the allegations made
by the various plaintiffs, it appears that Ritetime continued to sell tickets to passengers
for flights purportedly scheduled to depart after the expiration of World Airways contractual
obligations for air services. The plaintiffs purport to act for themselves and on behalf of
other persons who held tickets issued by Ritetime for the non-contracted flights. Ritetime is
also named as a defendant in each of these lawsuits. The plaintiffs seek compensatory,
punitive and/or treble damages and costs and expenses, including attorneys fees, based on
various legal theories including breach of contract, fraud, negligent misrepresentation,
unjust enrichment, illegal/excess tax and violations of U.S. federal laws and regulations
governing air transportation and of the Federal Racketeer Influenced and Corrupt Organization
Statute. World Airways insurance carrier has responded and assumed the defense of these
cases and agreed to conditionally defend and indemnify World Airways on the costs of
litigation and any resulting judgment. In March 2004, Ritetime filed a Demand to Arbitrate in
Peachtree City, Georgia, and subsequently World Airways responded and filed a counterclaim.
The matter was heard in October 2004, and the arbitrator awarded World Airways $2.2 million
against Ritetime, plus indemnification on all judgments, fees and expenses incurred by World
Airways in the Ritetime litigation. However, it is doubtful that
Ritetime has assets to pay
the award and no receivable has been recorded. On January 30, 2006, the United States
District
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##### Table of Contents



Court entered an order certifying a single class. No trial date has yet been
scheduled. In the event the aforesaid insurance coverage is rescinded, the Company cannot
determine the impact, if any, this matter will have on its financial condition, results of
operations or liquidity.On January 9, 2004, Whitebox Convertible Arbitrage Partners, L.P. and Pandora Select Partners,
L.P. filed a complaint in the United States District Court for the District of Minnesota
alleging breach of contract by World Airways in connection with its exchange in December 2003
of $22,545,000 aggregate amount of 8.0% Convertible Senior Subordinated Debentures due 2004
(the Old Debentures) for a like amount of the newly-issued Debentures. On May 10, 2004, by
order of the United States District Court for the District of Minnesota, this matter was
transferred to the United States District Court for the Northern District of Georgia. The
plaintiffs in this lawsuit allege that they have held at all relevant times $2,530,000 and
$780,000 principal amount, respectively, of the Old Debentures and that World Airways breached
the terms of the indenture governing the Old Debentures by purchasing the Old Debentures from
a selected group of holders rather than from holders determined by lot or from all holders on
a pro rata basis. The plaintiffs are seeking damages in an amount equal to the difference in
value between the new Debentures and the Old Debentures held by the plaintiffs and the
interest lost by the plaintiffs on the Old Debentures through maturity on August 26, 2004 as
well as costs and reasonable attorney fees. World Airways believes that this claim is without
merit and intends to defend itself vigorously in this lawsuit, although the Company cannot
give any assurance that this litigation will not have a material adverse effect on its
financial condition, results of operation or liquidity.On May 27, 2004 a ground handler contracted by China Airlines, Ltd. (China Airlines) under
the terms of a wet lease with World Airways, tail tipped one of World Airways MD-11 freighter
aircraft while unloading cargo in Los Angeles. The aircraft sustained significant damages in
excess of $1.7 million and was out of service for over a one-month period. In February 2005,
China Airlines instituted an arbitration proceeding against World Airways seeking to recover
$1.7 million in prepaid rental fees during the period the aircraft was out of service (three
days in May, 2004 and the entire month of June, 2004) and World Airways thereafter filed a
counterclaim against China Airlines (with notice to, and in coordination with, its own
insurance carriers) for $1.7 million in damages to the aircraft. The arbitration was held
during mid-November, 2005 and a decision was issued on January 18, 2006 in which the
arbitrator decided that World Airways and China Airlines were equally responsible for the
incident and both are to bear the associated costs equally. The Company had previously
recorded an estimated liability of $0.7 million for this matter
and the net impact of the arbitrators decision recorded in the third quarter was a
reduction in revenues of approximately $0.1 million recorded in the third quarter of 2006.In February 2004, World Airways made a self-disclosure to the Federal Aviation Administration
(FAA) concerning aircraft record irregularities discovered upon preparing for the return of
two leased DC-10-30 aircraft. World Airways subsequently received a letter from the FAA
opening an investigation into a possible violation of the Code of Federal Regulations. World
Airways has complied with all requests of the FAA and is waiting to receive notification of
the FAAs findings. At this time, the Company cannot determine what impact, if any, the FAAs
findings could have on its financial condition, results of operations or liquidity. North American Airlines, Inc.Union Negotiations/Litigation.North Americans Cockpit Crewmembers: The NMB certified the IBT to represent North Americans
cockpit crewmembers on January 16, 2004 (approximately 130 employees). North American and the
IBT commenced negotiations for their first collective bargaining agreement on April 6, 2004 and
have met on numerous occasions. Though representatives from North American and the IBT
continue to negotiate the terms of a comprehensive final agreement under the auspices of the
NMB, no collective bargaining agreement has yet been reached.For competitive and economic reasons, North American, effective as of January 1, 2005 and
February 1, 2005, unilaterally reduced cockpit crewmember wages and other benefits in addition
to modifying certain work rules. The IBT thereafter filed suit against North American in the
United States District Court for the Northern District of California (San Francisco Division)
seeking, among other things, a preliminary injunction against North American arguing that
managements unilateral wage and benefits reductions during contract negotiations were
discriminatory and in violation of the status quo provisions of the Railway Labor Act. At
the conclusion of a hearing held on July 27 and 28, 2005 the judge
instructed both sides to submit legal briefs on or before August 22, 2005. Subsequently, the
judge issued a written decision in North Americans favor ruling that the Railway Labor Act
allows North American to take unilateral actions with its cockpit crewmember group during labor
negotiations without a first, final or tentative collective
bargaining agreement in place. The IBT has appealed to the Ninth Circuit Court of Appeals and North American will continue to
vigorously
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##### Table of Contents



defend itself; the Company, however, cannot give any assurance that an adverse
result in this litigation will not have a material adverse effect on its financial condition,
results of operations, or liquidity.North Americans Flight Attendants: On July 26, 2005, the NMB authorized a union election (the
IBT) among North Americans flight attendants. On August 31, 2005 a majority of flight
attendants voted for IBT representation and North
American and the IBT will commence negotiations for their first collective bargaining
agreement.General Litigation.North American, along with certain unrelated entities, is a defendant in litigation brought in
the Dominican Republic for, among other things, breach of contract. The lawsuit is subject to
the laws of the Dominican Republic. As of December 31, 2004, the plaintiff had successfully
petitioned the applicable court and was awarded a judgment that resulted in the embargoing of
certain of North Americans peso-denominated funds in the Dominican Republic. Accordingly,
approximately $969,000 was embargoed and is not controlled by North American. The litigation
is in discovery, and the outcome at this time is not determinable, therefore the Company has
not recorded any accrual for this matter. Although North American believes that the
litigation is without merit, and intends to vigorously contest the claims, North American
cannot give any assurance that the funds will be released. At this time, the Company cannot
determine the impact, if any, this matter will have on its financial condition, results of
operations or liquidity.North American is a party to a legal action brought in New York by a former pilot for various
causes of action, including wrongful termination. The matter is currently in discovery and the
parties continue to explore settlement. North American is unable to predict the outcome of
this issue at this time and, therefore, no provision has been reflected in the accompanying
financial statements. North American believes that this claim is without merit and intends to
defend itself vigorously in the lawsuit, although at this time the Company cannot give
assurance that this litigation will not have a material adverse effect on its financial
condition, results of operations or liquidity.North American is a defendant in a legal action brought by a former pilot for various causes of
action, including wrongful termination. This case went to trial in November 2005 in
California. In December 2005, the jury returned a verdict in favor of the plaintiff awarding
him approximately $5.6 million in actual compensatory damages and $7.0 million in punitive
damages. The jurys verdict and its calculation of damages were unexpected and are subject to
review by the trial judge which could result in the verdict being confirmed, set aside or
modified before any appeal of a judgment is necessary. North American had previously accrued
$0.2 million on this matter and, using its best estimates and advice of counsel, has provided
for an additional liability in the amount of $12.5 million in the third quarter of 2005.  The action
is subject to post-trial motions seeking to overturn or reduce the
award and North American intends to appeal the judgment if the
results of the post-trial motions are unsatisfactory or if an
acceptable settlement cannot be reached with the plaintiff. Should an appeal be necessary, North American will be required to post a fully collateralized
appeal bond for one and one-half times the amount of the court approved verdict, which
could have a material impact on the financial condition, results of operations and liquidity of
the Company.In addition, the Company is party to routine litigation and administrative proceedings
incidental to its business, none of which the Company believes is likely to have a material
adverse effect on its financial condition, results of operations or liquidity.11.
    
    Recently Issued Accounting StandardsIn December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)), Share-Based
Payment.This Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of
the award (with limited exceptions). That cost will be recognized over the period during which
an employee is required to provide service in exchange for the award  the requisite service
period (usually the vesting period). No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. Employee share purchase plans will not
result in recognition of compensation cost if certain conditions are met. A public entity will
initially measure the cost of employee services received in exchange for an award of liability
instruments based on its current fair value; the fair value of that award will be subsequently
recalculated at each reporting date through the settlement date. Changes in fair value during
the requisite service period will be recognized as compensation cost over that period. As of
their respective required effective date, all public entities will apply this Statement using a
modified version of prospective application. Under that transition method, compensation cost is
recognized on or after the required effective date for the portion of outstanding awards for
which the requisite service has not yet been rendered, based on the grant-date fair value of
those awards calculated under SFAS No. 123(R) for either recognition or pro forma disclosures.
For periods before the required effective date, entities may elect to apply a modified version
of retrospective application under
 18




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##### Table of Contents



which financial statements for prior periods are adjusted on
a basis consistent with the pro forma disclosures required for those periods by Statement
123(R). The Company has not completed evaluating the impact of SFAS No. 123(R), but does not
expect any material impact on its consolidated results of operations, financial condition or
liquidity. On April 14, 2005, the U.S. Securities and Exchange Commission (the SEC) announced
a deferral of the effective date of SFAS No. 123(R) until the first annual period beginning
after June 15, 2005.12.
    
    Subsequent EventsIn September 2005, Delta Air Lines, Inc. (Delta) filed for bankruptcy protection in the United
States Bankruptcy Court. Delta provided engine and component maintenance services for the
Companys MD-11 fleet under various agreements. Due to the bankruptcy filing, some of these
agreements were terminated. In December 2005, the Company and Delta signed a memorandum of
understanding relating to on-going maintenance services to be provided to the Company for the
next two years. This agreement must be approved by the unsecured creditors committee in
Deltas Chapter 11 Bankruptcy case, and if required, the Bankruptcy Court.On September 27, 2005, the Company was notified by the NASDAQ staff that the Companys
securities would be delisted from The NASDAQ Stock Market unless the Company requested a
hearing to discuss certain violations of Marketplace rules. The Company requested a hearing
which was held on November 3, 2005. On November 22, 2005, the NASDAQ Listing Qualifications
Panel granted the Companys request for continued listing
subject to the Company becoming
current with respect to its reporting obligations to the SEC by December 15, 2005. The Company
requested and was granted additional extensions through February 20, 2006.During the third quarter of 2005, the Company obtained waivers of violations of covenants under
the Air Transportation Stabilization Board (the ATSB) Loan related to the failure to timely
file an amended Current Report on Form 8-K/A to provide 2004 audited results for North
American, for filing the second quarter Form 10-Q without a completed review by the independent
auditors and for failing to file the third quarter Form 10-Q timely. The amended Current Report
on Form 8-K/A providing 2004 audited results for North American was subsequently filed on
October 20, 2005. The waiver for these violations expires on March 15, 2006. The Company also
obtained a waiver of its earlier violation of an investment limitation, which is now in
compliance with the requirements of the ATSB Loan. At
September 30, 2005, the Company is in violation of certain
covenants and has
been unable to obtain a waiver of this violation. As a result, the
Company has reclassified long-term debt obligations from non-current
to current liabilities in the Condensed Consolidated Balance Sheets at
September 30, 2005.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
   OVERVIEW
 General
   19




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##### Table of Contents



Three Months Ended September 30,2005
    
    2004Block hours:Full service passenger
    
    
    6,894
    
    
    
    44
    %
    
    
    6,950
    
    
    
    55
    %ACMI * passenger
    
    
    1,171
    
    
    
    8
    %
    
    
    1,376
    
    
    
    11
    %Full service cargo
    
    
    
    
    
    
    0
    %
    
    
    29
    
    
    
    0
    %ACMI * cargo
    
    
    7,362
    
    
    
    47
    %
    
    
    4,100
    
    
    
    32
    %Miscellaneous
    
    
    151
    
    
    
    1
    %
    
    
    316
    
    
    
    2
    %Total
    
    
    15,578
    
    
    
    100
    %
    
    
    12,771
    
    
    
    100
    %Operating aircraft at quarter-end
    
    
    17
    
    
    
    
    
    
    
    16Average available aircraft per day
    
    
    17.0
    
    
    
    
    
    
    
    16.0Average daily utilization
    
    
    10.0
    
    
    
    
    
    
    
    8.7(block hours flown per day per aircraft)
 
 *
    
    ACMI contracts are those where the Company provides the aircraft, crew, maintenance
and insurance.  Three Months Ended September 30,2005Block hours:Full service passenger
    
    
    2,664
    
    
    
    38
    %ACMI * passenger
    
    
    2,338
    
    
    
    33
    %Scheduled passenger
    
    
    2,001
    
    
    
    29
    %Miscellaneous
    
    
    9
    
    
    
    0
    %Total
    
    
    7,012
    
    
    
    100
    %Operating aircraft at quarter-end
    
    
    8Average available aircraft per day
    
    
    8.0Average daily utilization
    
    
    9.5(block hours flown per day per aircraft)
   Nine Months Ended September 30,2005
    
    2004Block hours:Full service passenger
    
    
    21,387
    
    
    
    50
    %
    
    
    20,678
    
    
    
    59
    %ACMI * passenger
    
    
    3,845
    
    
    
    9
    %
    
    
    3,746
    
    
    
    11
    %Full service cargo
    
    
    19
    
    
    
    0
    %
    
    
    697
    
    
    
    2
    %ACMI * cargo
    
    
    16,882
    
    
    
    40
    %
    
    
    9,184
    
    
    
    26
    %Miscellaneous
    
    
    527
    
    
    
    1
    %
    
    
    807
    
    
    
    2
    %Total
    
    
    42,660
    
    
    
    100
    %
    
    
    35,112
    
    
    
    100
    %Operating aircraft at September 30
    
    
    17
    
    
    
    
    
    
    
    16Average available aircraft per day
    
    
    16.4
    
    
    
    
    
    
    
    16.0Average daily utilization
    
    
    9.5
    
    
    
    
    
    
    
    8.0(block hours flown per day per aircraft)
 20




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##### Table of Contents



Period Ended September 30,2005Block hours:Full service passenger
    
    
    4,567
    
    
    
    42
    %ACMI * passenger
    
    
    2,975
    
    
    
    27
    %Scheduled passenger
    
    
    3,355
    
    
    
    31
    %Miscellaneous
    
    
    43
    
    
    
    0
    %Total
    
    
    10,940
    
    
    
    100
    %Operating aircraft at September 30
    
    
    8Average available aircraft per day
    
    
    8.0Average daily utilization
    
    
    8.8(block hours flown per day per aircraft)
  
    
    continued working to diversify the commercial revenue mix by adding profitable
customers, while continuing to provide excellent service to all of the Companys
customers;
    
    continued to actively manage the Companys major cost categories;
    
    worked on concluding an agreement with World Airways cockpit crewmembers as well as
a new collective bargaining agreement with North Americans cockpit crewmembers and
flight attendants;
    
    managed fleet plans to meet customer needs; and
    
    began implementing organizational changes including the restructuring of the North
American finance organization, synergy enhancements and financial reporting
standardization related to the acquisition of North American Airlines.
 Significant Customer Relationships
  World Airways
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004USAF
    
    
    70.7
    %
    
    
    75.2
    %
    
    
    76.6
    %
    
    
    78.0
    %Eva Airways
    
    
    8.5
    %
    
    
    3.8
    %
    
    
    6.4
    %
    
    
    3.3
    %Air Canada
    
    
    6.9
    %
    
    
    
    %
    
    
    3.1
    %
    
    
    
    %Sonair Serviceo Aereo
    
    
    4.6
    %
    
    
    5.3
    %
    
    
    4.6
    %
    
    
    5.6
    %United Parcel Service (formerly Menlo Worldwide)
    
    
    3.6
    %
    
    
    5.9
    %
    
    
    3.4
    %
    
    
    4.7
    %China Airlines
    
    
    
    %
    
    
    3.2
    %
    
    
    1.4
    %
    
    
    1.7
    %
 21




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##### Table of Contents



North American
 For theThree Months
    
    Period April 28,Ended
    
    2005 throughSeptember 30,
    
    September 30,2005
    
    2005USAF
    
    
    56.5
    %
    
    
    55.5
    %Scheduled service
    
    
    24.6
    %
    
    
    23.4
    %Sun Trips
    
    
    3.0
    %
    
    
    2.5
    %GWV Vacations
    
    
    1.5
    %
    
    
    2.7
    %Air Jamaica
    
    
    1.0
    %
    
    
    1.9
    %
 RESULTS OF OPERATIONS
 Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
   Revenues
 World Airways
 Three Months Ended September 30,2005
    
    2004
    
    Change
    
    % ChangeTotal block hours
    
    
    15,578
    
    
    
    12,771
    
    
    
    2,807
    
    
    
    22.0
    %Revenue per block hour
    
    $
    9,788
    
    
    $
    10,115
    
    
    $
    (327
    )
    
    
    (3.2
    )%
 North American
 Three Months Ended September 30,2005Total block hours
    
    
    7,012Revenue per block hour
    
    $
    9,219
 Operating Expenses
 World Airways
 Three Months Ended September 30,2005
    
    2004
    
    Change
    
    % ChangeOperating expense per block hour
    
    $
    8,530
    
    
    $
    9,037
    
    
    $
    (507
    )
    
    
    (5.6
    )%
 22




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##### Table of Contents



North American
 Three Months Ended September 30,2005Operating expense per block hour
    
    $
    10,647
        Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
  Revenues
 23




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World Airways
 Nine Months Ended September 30,2005
    
    2004
    
    Change
    
    % ChangeTotal block hours
    
    
    42,660
    
    
    
    35,112
    
    
    
    7,548
    
    
    
    21.5
    %Revenue per block hour
    
    $
    10,602
    
    
    $
    10,647
    
    
    $
    (45
    )
    
    
    (0
    )%
 North American
 Period Ended September 30,2005Total block hours
    
    
    10,940Revenue per block hour
    
    $
    8,800
 Operating Expenses
 World Airways
 Nine Months Ended September 30,2005
    
    2004
    
    Change
    
    % ChangeOperating expense per block hour
    
    $
    9,462
    
    
    $
    9,741
    
    
    $
    (279
    )
    
    
    (2.9
    )%
 North American
 Period Ended September 30,2005Operating expense per block hour
    
    $
    9,889
      24




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
      25




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.
      26




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##### Table of Contents



Cash Flows from Operating Activities
  Cash Flows from Investing Activities
   Cash Flows from Financing Activities
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Aircraft
fuel:
 27




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 (a) Restatement of Previous Filings
     (b) Evaluation of Disclosure Controls and Procedures
   28




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29




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##### Table of Contents



(c) Changes in internal controls
  30




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PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 6. EXHIBITS
 No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a) to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Interim Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  31




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SIGNATURES
   WORLD AIR HOLDINGS, INC.By:
    
    /s/ Virginia G. ClarkVirginia G. ClarkInterim Chief Financial Officer