##### 



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: March 31, 2004
or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission File Number 0-26582 WORLD AIRWAYS, INC.  DELAWARE
    
    94-1358276(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of Principal Executive Offices) (770) 632-8000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x    No  o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes   o    No  x The number of shares of the registrants Common Stock outstanding on April
30, 2004 was 11,488,898.




---



##### 



WORLD AIRWAYS, INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets, March 31, 2004 (Unaudited)
and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations (Unaudited),
Three Months Ended March 31, 2004 and 2003
    
    
    5Condensed Consolidated Statement of Changes in Stockholders Equity
(Deficiency) (Unaudited), Three months ended March 31, 2004
    
    
    6Condensed Consolidated Statements of Cash Flows (Unaudited),
Three months ended March 31, 2004 and 2003
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations.
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    15PART II  OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    15
  2




---



##### 



ITEM 1. FINANCIAL STATEMENTS 
 WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 ASSETS
(in thousands)
(unaudited) March 31,
    
    December 31,2004
    
    2003CURRENT ASSETSCash and cash equivalents
    
    $
    41,913
    
    
    $
    30,535Restricted cash
    
    
    4,688
    
    
    
    23,290Total cash and cash equivalents
    
    
    46,601
    
    
    
    53,825Accounts receivable, less allowance for doubtful
accounts of $1,037 at March 31, 2004 and $196 at
December 31, 2003
    
    
    37,500
    
    
    
    31,446Prepaid expenses and other current assets
    
    
    6,650
    
    
    
    7,721Total current assets
    
    
    90,751
    
    
    
    92,992EQUIPMENT AND PROPERTYFlight and other equipment
    
    
    85,558
    
    
    
    86,346Less: accumulated depreciation and amortization
    
    
    47,735
    
    
    
    47,382Net equipment and property
    
    
    37,823
    
    
    
    38,964LONG-TERM OPERATING DEPOSITS
    
    
    16,977
    
    
    
    17,664OTHER ASSETS AND DEFERRED CHARGES, NET
    
    
    7,697
    
    
    
    7,681TOTAL ASSETS
    
    $
    153,248
    
    
    $
    157,301
 (Continued) 3




---



##### 



WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued) LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
(in thousands except share amounts)
(unaudited) March 31,
    
    December 31,2004
    
    2003CURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    
    
    
    $
    18,000Accounts payable
    
    
    28,176
    
    
    
    28,167Accrued rent
    
    
    10,898
    
    
    
    9,881Unearned revenue
    
    
    4,372
    
    
    
    3,546Accrued maintenance
    
    
    3,414
    
    
    
    2,791Accrued salaries and wages
    
    
    19,251
    
    
    
    16,957Accrued taxes
    
    
    6,670
    
    
    
    2,581Other accrued liabilities
    
    
    2,669
    
    
    
    2,506Total current liabilities
    
    
    75,450
    
    
    
    84,429Long-term debt, net of current maturities
    
    
    57,109
    
    
    
    57,177Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $3,420 at March 31,
2004 and $3,137 at December 31, 2003
    
    
    2,494
    
    
    
    2,777Accrued post-retirement benefits
    
    
    3,583
    
    
    
    3,583Deferred rent
    
    
    13,332
    
    
    
    16,008TOTAL LIABILITIES
    
    
    151,968
    
    
    
    163,974STOCKHOLDERS EQUITY (DEFICIENCY)Preferred stock, $.001 par value (5,000,000 shares authorized;
no shares issued or outstanding)
    
    
    
    
    
    
    Common stock, $.001 par value (100,000,000 shares authorized;
12,542,441 shares issued and 11,461,198 shares outstanding at
March 31, 2004; 12,502,441 shares issued and 11,421,198
outstanding at December 31, 2003)
    
    
    13
    
    
    
    13Additional paid-in capital
    
    
    31,311
    
    
    
    31,233Accumulated deficit
    
    
    (17,187
    )
    
    
    (25,062
    )Treasury stock, at cost (1,081,243 shares at March 31, 2004 and
December 31, 2003)
    
    
    (12,857
    )
    
    
    (12,857
    )Total stockholders equity (deficiency)
    
    
    1,280
    
    
    
    (6,673
    )COMMITMENTS AND CONTINGENCIESTOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
    
    $
    153,248
    
    
    $
    157,301
 See accompanying Notes to Condensed Consolidated Financial Statements 4




---



##### 



WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
(in thousands except per share data)
(unaudited) 2004
    
    2003OPERATING REVENUESFlight operations
    
    $
    129,019
    
    
    $
    123,277Other
    
    
    565
    
    
    
    366Total operating revenues
    
    
    129,584
    
    
    
    123,643OPERATING EXPENSESFlight
    
    
    40,802
    
    
    
    34,432Maintenance
    
    
    17,856
    
    
    
    23,220Aircraft costs
    
    
    19,671
    
    
    
    21,896Fuel
    
    
    18,202
    
    
    
    21,361Flight operations subcontracted to other carriers
    
    
    1,518
    
    
    
    92Commissions
    
    
    6,300
    
    
    
    4,659Depreciation and amortization
    
    
    1,287
    
    
    
    1,472Sales, general and administrative
    
    
    10,309
    
    
    
    8,848Total operating expenses
    
    
    115,945
    
    
    
    115,980OPERATING INCOME
    
    
    13,639
    
    
    
    7,663OTHER INCOME (EXPENSE)Interest expense
    
    
    (1,164
    )
    
    
    (1,234
    )Interest income
    
    
    122
    
    
    
    97Other, net
    
    
    (1,011
    )
    
    
    89Total other expense
    
    
    (2,053
    )
    
    
    (1,048
    )EARNINGS BEFORE INCOME TAXES
    
    
    11,586
    
    
    
    6,615INCOME TAXES
    
    
    3,711
    
    
    
    NET EARNINGS
    
    $
    7,875
    
    
    $
    6,615BASIC EARNINGS PER SHARENet earnings
    
    $
    0.69
    
    
    $
    0.60Weighted average shares outstanding
    
    
    11,448
    
    
    
    11,078DILUTED EARNINGS PER SHARENet earnings
    
    $
    0.34
    
    
    $
    0.47Weighted average shares outstanding
    
    
    24,434
    
    
    
    15,750
 See accompanying Notes to Condensed Consolidated Financial Statements 5




---



##### 



WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS EQUITY (DEFICIENCY)
Three Months Ended March 31, 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
    
    
    $
    31,233
    
    
    $
    (25,062
    )
    
    $
    (12,857
    )
    
    $
    (6,673
    )Amortization of warrants
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46Exercise of 344,100 stock options
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32Net earnings
    
    
    
    
    
    
    
    
    
    
    7,875
    
    
    
    
    
    
    
    7,875Balance at March 31, 2004
    
    $
    13
    
    
    $
    31,311
    
    
    $
    (17,187
    )
    
    $
    (12,857
    )
    
    $
    1,280
 See accompanying Notes to Condensed Consolidated Financial Statements 6




---



##### 



WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
(in thousands)
(unaudited) 2004
    
    2003CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    $
    53,825
    
    
    $
    21,504CASH FLOWS FROM OPERATING ACTIVITIESNet earnings
    
    
    7,875
    
    
    
    6,615Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,287
    
    
    
    1,472Deferred gain recognition
    
    
    (283
    )
    
    
    (283
    )Loss on sale of property and equipment
    
    
    311
    
    
    
    21Other
    
    
    461
    
    
    
    (75
    )Provision for doubtful accounts receivable
    
    
    841
    
    
    
    Increase (decrease) in cash and cash equivalents resulting
from changes
in operating assets and liabilities:Accounts receivable
    
    
    (6,895
    )
    
    
    (10,178
    )Deposits, prepaid expenses and other assets
    
    
    1,758
    
    
    
    (1,182
    )Accounts payable, accrued expenses and other liabilities
    
    
    5,519
    
    
    
    3,987Unearned revenue
    
    
    826
    
    
    
    2,253Net cash provided by operating activities
    
    
    11,700
    
    
    
    2,630CASH FLOWS FROM INVESTING ACTIVITIESPurchases of equipment and property
    
    
    (459
    )
    
    
    (1,122
    )Proceeds from disposal of equipment and property
    
    
    2
    
    
    
    28Net cash used in investing activities
    
    
    (457
    )
    
    
    (1,094
    )CASH FLOWS FROM FINANCING ACTIVITIESDecrease in line of credit borrowing arrangement, net
    
    
    
    
    
    
    (3,351
    )Repayment of debt
    
    
    (18,000
    )
    
    
    Proceeds from exercise of stock options
    
    
    32
    
    
    
    Payment of debt issuance costs
    
    
    (499
    )
    
    
    Repayment of aircraft rent obligations
    
    
    
    
    
    
    (2,861
    )Net cash used in financing activities
    
    
    (18,467
    )
    
    
    (6,212
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (7,224
    )
    
    
    (4,676
    )CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    46,601
    
    
    $
    16,828
 See accompanying Notes to Condensed Consolidated Financial Statements 7




---



##### 



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 three
months ended March 31, 2004 are not necessarily indicative of the
results to be expected for the year ending December 31, 2004.The Condensed Consolidated Balance Sheet for December 31, 2003 is
derived from the audited Consolidated Financial Statements included in
the Companys 2003 Form 10-K.These interim period Condensed Consolidated Financial Statements and
accompanying footnotes should be read in conjunction with the
Consolidated Financial Statements contained in World Airways Annual
Report on Form 10-K for the year ended December 31, 2003.2.
    
    Earnings per ShareThe following table sets forth the computations of basic and diluted
earnings per share (in thousands except per share data): Three Months Ended March 31, 2004Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    7,875
    
    
    
    11,448
    
    
    $
    0.69Effect of Dilutive SecuritiesWarrants
    
    
    
    
    
    
    1,946Options
    
    
    
    
    
    
    2,4358% convertible debentures
    
    
    422
    
    
    
    8,605Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    8,297
    
    
    
    24,434
    
    
    $
    0.34
 Three Months Ended March 31, 2003Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPSEarnings available to common stockholders
    
    $
    6,615
    
    
    
    11,078
    
    
    $
    0.60Effect of Dilutive SecuritiesOptions
    
    
    
    
    
    
    1168% convertible debentures
    
    
    800
    
    
    
    4,556Diluted EPSEarnings available to common stockholders
plus assumed conversions
    
    $
    7,415
    
    
    
    15,750
    
    
    $
    0.47
 8




---



##### 





|3. |  | Accounting for Stock-Based Compensation
|-- |  | ---------------------------------------

At March 31, 2004, the Company had three stock-based compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based compensation cost is reflected in net
earnings, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net
earnings and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation (in thousands,
except per share data): Quarter Ended March 31,2004
    
    2003Net earnings, as reported
    
    $
    7,875
    
    
    $
    6,615Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects
    
    
    (110
    )
    
    
    (374
    )Pro forma net earnings
    
    
    7,765
    
    
    
    6,241Earnings per shareBasic as reported
    
    $
    0.69
    
    
    $
    0.60Basic  pro forma
    
    $
    0.68
    
    
    $
    0.56Diluted as reported
    
    $
    0.34
    
    
    $
    0.47Diluted  pro forma
    
    $
    0.34
    
    
    $
    0.45
 The per share weighted-average fair value of stock options granted
during the first quarters of 2004 and 2003 was $4.06 and $0.77,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: Quarter Ended March 31,2004
    
    2003Expected dividend yield
    
    
    0
    %
    
    
    0
    %Risk-free interest rate
    
    
    3.0
    %
    
    
    3.0
    %Expected life (in years)
    
    
    4.9
    
    
    
    5.5Expected volatility
    
    
    91
    %
    
    
    142
    %
  4.
    
    Sub-lease ObligationThe Company is obligated under an operating lease for office space at
its former headquarters in Herndon, Virginia, through April 2006. The
Company received rental income, sufficient to offset its lease expense
through March 2002, after which time no rental income was received
except for a total of $0.4 million received in the fourth quarter of
2003 and the first quarter of 2004. The Company is currently seeking
a new sub-lessee for this office space. During the first quarter of
2004, the Company used $0.4 million of the accrual, reviewed its
estimates and assumptions at March 31, 2004, and determined that an
additional $0.4 million should be added to the accrual, resulting in a
$2.0 million balance at March 31, 2004. The fair value of the
liability was determined based on the remaining lease rentals, reduced
by estimated sublease rentals that can be reasonably obtained for the
property. The liability is included in other accrued liabilities on
the accompanying consolidated balance sheets. The Companys total
remaining obligation at March 31, 2004 under the lease was $3.3
million.If the Company is not successful in finding a suitable sub-lessee in
the anticipated time or if the sublease rentals from a new sub-lessee
are less than anticipated, the Company will be required to recognize
an additional liability for these costs. This liability will be
adjusted for changes, if any, resulting from revisions to estimated
cash flows, measured using the credit-adjusted risk-free rate of 8%
that was initially used to measure the liability.5.
    
    Union NegotiationsThe Companys cockpit crewmembers, who constitute approximately 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.
In December 2003, the Company announced that it would begin 9




---



##### 



negotiations with the cockpit crewmembers in January 2004. It also
announced that the Teamsters had requested mediation services from the
National Mediation Board. In January 2004, the Company and
representatives of the Teamsters reached a tentative agreement for a
contract extension. However, on February 27, 2004, the Company
received notification that the tentative agreement was not ratified by
a majority of the Teamsters membership. The Company will reconvene
negotiations with the Teamsters at a later date, which has not yet
been determined.6.
    
    Corporate HeadquartersIn March 2004, the company that owned the building containing World
Airways corporate headquarters, of which World Airways former
Chairman and CEO is a principal, sold the building to a real estate
investment trust. In conjunction with this transaction, the Company
executed a new 15-year lease that provides for reduced rental rates
and increased flexibility for expansion. Before approving the terms of
the new lease, the Companys Board of Directors retained both an
independent outside law firm to provide a comparative analysis as well
as a national commercial real estate firm to independently verify that
the new lease terms did not have a material incremental financial
impact on the Company.7.
    
    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. For the
first quarter of 2004, the Company provided $0.8 million in bad debt
expense related to TM Travel. In the second quarter of 2004, the
Company will provide an additional $1.7 million in bad debt expense
related to revenues generated in the second quarter from this program.
In connection with this program, the Company issued a letter of
credit, totaling $1.0 million, which was provided to an insurance
company to support two 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. These bonds are currently subject to any
passenger refunds not paid by TM Travel, and will terminate in the
first half of July 2004. No provision for loss has been recorded in
the Companys Condensed Consolidated Financial Statements for any loss
that the Company might incur related to these bonds.8.
    
    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 is as follows: 2004
    
    2003Service cost
    
    $
    93
    
    
    $
    78Interest cost
    
    
    71
    
    
    
    59Net amortized gain
    
    
    4
    
    
    
    3Net periodic post-retirement benefit cost
    
    $
    168
    
    
    $
    140
  The Company still anticipates to contribute approximately $230,000 to
fund its health care obligations in 2004, as was previously disclosed
in its financial statements for the year ended December 31, 2003. As
of March 31, 2004, $22,175 of contributions has been made. 10




---



##### 



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Part I, Item 2 of this report should be read in conjunction with Part
II, Item 7 of World Airways, Inc. (World Airways or the Company)
Annual Report on Form 10-K for the year ended December 31, 2003. The
information contained herein is not a comprehensive management overview
and analysis of the financial condition and results of operations of the
Company, but rather updates disclosures made in the aforementioned
filing. The Company desires to take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 (the Act).
Therefore, this report contains forward looking statements that are
subject to risks and uncertainties, including, but not limited to, the
reliance on key strategic alliances, fluctuations in operating results
and other risks detailed from time to time in the Companys filings with
the Securities and Exchange Commission (the Commission). These risks
could cause the Companys actual results for 2004 and beyond to differ
materially from those expressed in any forward looking statements made
by, or on behalf of, the Company. The Financial Accounting Standards Board (FASB) issued a revised FASB
Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest
Entities, which took effect in the first quarter of 2004. The Company
currently does not have any interests in variable interest entities or
special interest entities. OVERVIEW General For the first quarter of 2004, the Companys earnings before income
taxes were $11.6 million compared to $6.6 million for the same period in
2003. The Company recorded income tax expense of $3.7 million in the
first quarter of 2004, compared to no income tax expense for the
comparable period of last year. The Company utilized all of its
unrestricted federal net operating loss carry-forwards in 2003. For the
first quarter of 2004, the Companys net earnings were $7.9 million
compared to $6.6 million for 2003. The following table provides statistical data, used by management in
evaluating the operating performance of the Company, for the quarters
ended March 31, 2004 and 2003. Quarter Ended March 31,2004
    
    2003Block hours:Full service passenger
    
    
    7,565
    
    
    
    67
    %
    
    
    6,178
    
    
    
    51
    %Full service cargo
    
    
    283
    
    
    
    2
    %
    
    
    2,985
    
    
    
    25
    %ACMI passenger
    
    
    1,186
    
    
    
    11
    %
    
    
    1,054
    
    
    
    9
    %ACMI cargo
    
    
    2,013
    
    
    
    18
    %
    
    
    1,588
    
    
    
    13
    %Miscellaneous
    
    
    281
    
    
    
    2
    %
    
    
    251
    
    
    
    2
    %Total
    
    
    11,328
    
    
    
    100
    %
    
    
    12,056
    
    
    
    100
    %Operating aircraft at quarter-end
    
    16
    
    17Average aircraft per day
    
    16.0
    
    16.1Average daily utilization
(block hours flown per day per aircraft)
    
    7.8
    
    8.3
 For 2004, the Company expects to:  
    
    be profitable for a third consecutive year;  
    
    further diversify the revenue mix by adding more commercial customers;  
    
    on a per block hour basis, hold flat or reduce major
cost categories (flight, maintenance, fuel and aircraft costs);  
    
    work on concluding a new collective bargaining agreement with its pilots; and  
    
    initiate plans to introduce Boeing 767 aircraft to the fleet in 2005. 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
quarters ended March 31, 2004 and 2003, are as follows: 11




---



##### 



Quarter Ended March 31,2004
    
    2003USAF
    
    
    82.7
    %
    
    
    85.6
    %Sonair Serviceo Aereo (Sonair)
    
    
    5.3
    %
    
    
    5.3
    %Menlo Worldwide (Menlo, formerly
Emery Air Freight Corporation )
    
    
    3.4
    %
    
    
    5.2
    %
 RESULTS OF OPERATIONS Three Months Ended March 31, 2004 Compared to Three Months Ended March
31, 2003 Operating Revenues. Revenues from operations increased $6.0 million, or
4.8%, to $129.6 million in the first quarter of 2004 from $123.6
million in the first quarter of 2003. The revenue increase in the first
quarter of 2004 was due principally to significant growth in both
military passenger flying for the USAF and commercial passenger flying.
This increase was partially offset by a reduction in military cargo
revenue for the USAF. Two key variables that impact the amount of
operating revenues are listed below: Quarter Ended March 31,2004
    
    2003
    
    Difference
    
    % ChangeTotal block hours
    
    
    11,328
    
    
    
    12,056
    
    
    
    (728
    )
    
    
    -6.0
    %Yield per block hour
    
    $
    11,439
    
    
    $
    10,256
    
    
    $
    1,183
    
    
    
    11.5
    %
 Operating Expenses. Total operating expenses remained flat at $115.9
million for the first quarter of 2004, compared $116.0 million for the
comparable quarter in 2003. Below is information on the Companys
operating expense per block hour: Quarter Ended March 31,2004
    
    2003
    
    Difference
    
    % ChangeOperating expense per block hour
    
    $
    10,235
    
    
    $
    9,620
    
    
    $
    (614
    )
    
    
    -6.4
    %
 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 $6.4
million, or 18.5%, to $40.8 million in the first quarter of 2004
compared to $34.4 million in the same period of 2003. Flight costs were
higher primarily due to increases in the following areas:  
    
    $2.0 million in cockpit crew costs;  
    
    $2.9 million in flight attendant costs; and  
    
    $0.8 million in catering costs. These higher costs are directly attributable to increased military and
full-service commercial passenger flights, as well as pilot and flight
attendant headcount increases. The first quarter of 2004 included a
higher accrual for contractual profit sharing payments to flight
employees for the 2004 period, compared to the amount accrued in same
quarter of 2003 for that fiscal year. Maintenance expenses decreased $5.4 million, or 23.1%, to $17.9 million
in the first quarter of 2004 compared to $23.2 million in the same
period of 2003. In the first quarter of 2004, the Company had decreases
in the following areas:  
    
    $4.5 million in MD-11 engine overhaul expense;  
    
    $0.8 million in MD-11 landing gear overhaul expense: and  
    
    $0.5 million in aircraft parts rental. Much of this decrease is due to the timing of scheduled maintenance
checks. Aircraft costs, which include aircraft rent and insurance, decreased
$2.2 million, or 10.2%, to $19.7 million in the first quarter of 2004
compared to $21.9 million in the first quarter of 2003. This decrease
was due to the restructuring of several MD-11 leases, as well as the
return of an expensive DC-10 cargo aircraft in the first quarter 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. 12




---



##### 



Fuel expenses decreased $3.2 million, or 14.8%, to $18.2 million in the
first quarter of 2004 from $21.4 million in the first quarter of 2003.
The decrease was primarily due to the lower military cargo block hours,
compared to the previous year, coupled with the fact that military cargo
hours are contractually set at a higher rate per gallon. Fluctuations in
the price of fuel did not have a significant impact in the first quarter
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 $1.6 million to $6.3 million in the first quarter
of 2004, compared to $4.7 million in the first quarter of 2003. In the
first quarter of 2003, the Company was not required to pay commissions
on USAF missions flown during the Civil Reserve Air Fleet (CRAF)
activation. Subcontract flying costs increased $1.4 million in the first quarter of
2004. The increase was due to outsourced flights resulting from aircraft
out of service for maintenance. Sales, general and administrative expenses increased $1.5 million, or
16.5%, to $10.3 million in the first quarter of 2004 compared to $8.8
million in the same quarter of 2003. The increase was primarily due to:  
    
    $0.8 million of bad debt expense associated with air
services provided to TM Travel Services, Inc. (TM Travel)
(see Note 7 of Notes to the Condensed Consolidated
Financial Statements); and  
    
    $0.6 million higher wages and benefits due to:  
    
    July 2003 salary increases;
    
    increased headcount;
    
    a workers compensation accrual adjustment; and
    
    higher profit sharing accrual for the 2004 period. The Company recorded $3.7 million of income tax expense in the first
quarter of 2004. The Company utilized all of its unrestricted federal
net operating loss carry-forwards in 2003. The Companys estimated
annual effective tax rate for the three months ended March 31, 2004, was
32%. This effective rate differs from statutory rates due primarily to
use of deferred tax assets that were previously offset with a valuation
allowance. LIQUIDITY AND CAPITAL RESOURCES The Company is highly leveraged. At March 31, 2004, the Companys
current assets were $90.8 million and its current liabilities were $75.5
million. The ratio of the Companys current assets to its current
liabilities (current ratio) was 1.2:1. The March 31, 2004 cash
balance included $4.7 million of restricted cash, which consisted of
$3.7 million as collateral for letters of credit and $1.0 million of
prepayments from customers for flights which are scheduled to be flown
within 30 days of the balance sheet date. A letter of credit, totaling
$1.0 million, was issued on behalf of TM Travel and provided to an
insurance company to support two 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 were necessary for TM
Travel to qualify as a public charter operator. These bonds are
currently subject to any passenger refunds not paid by TM Travel, and
will terminate in the first half of July 2004. See Note 7 of Notes to
the Condensed Consolidated Financial Statements. In addition, 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 March 31, 2004,
the accrual for unpaid contractual rent obligations was $8.9 million and
is included as accrued rent in the current liabilities section of the
Consolidated Balance Sheet. During the second quarter of 2004, the
Company will repay approximately $7.2 million of this liability based on
2003 net earnings. The remaining $1.7 million of this obligation will
be repaid based on a percentage of profits in future years. Due to its high financial leverage, the Company has the following
restrictions:  
    
    The Company is greatly limited in its ability to obtain
additional financing. Its indebtedness outstanding under its $30.0
million term loan supported by a $27.0 million guarantee issued by
the Air Transportation Stabilization Board (the ATSB Loan) is
secured by substantially all of the Companys assets. In addition,
the ATSB Loan contains restrictive provisions that require
prepayments in the event the Company sells any significant assets,
receives proceeds from future borrowings from other sources or
issuances of certain securities, or receives net proceeds from
insurance or condemnation.  
    
    The Companys ability to fund general corporate requirements,
including capital expenditures, may be impaired. 13




---



##### 



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 and financial results. Other items that will impact cash requirements of the Company in 2004
are:  
    
    The Companys earnings will be fully subject to income taxes,
with the exception of an annual net operating loss carry-forward
benefit of $343,000.  
    
    The Company will be paying 2003 profit sharing bonuses of
approximately $6.5 million to its employees in the first half of
2004. Although there can be no assurances, World Airways believes that the
combination of its existing contracts and additional business which it
expects to obtain, along with its existing cash, and financing
arrangements, will be sufficient to allow the Company to meet its cash
requirements related to operating and capital requirements for 2004. Cash Flows from Operating Activities Operating activities provided $11.7 million in cash during the three
months ended March 31, 2004 compared to providing $2.6 million for the
comparable 2003 period. The cash provided in the 2004 period principally
reflects the $7.9 million net earnings offset by a $6.9 million increase
in accounts receivable, plus an $8.1 million increase in cash due to
changes in other operating assets and liabilities, and net non-cash
statement of operations charges of $2.6 million. The cash provided in the
2003 period principally reflects the $6.6 million net earnings, offset by
a $10.2 million increase in accounts receivable, plus a $5.0 million
increase in cash due to changes in other operating assets and
liabilities, and net non-cash income statement charges of $1.1 million. Cash Flows from Investing Activities Investing activities used $0.5 million in the first three months of 2004
compared to using $1.1 million in the comparable period of 2003. In both
2004 and 2003, cash was used for the purchase of rotable spare parts and
other fixed assets. The Companys capital expenditures for 2004 are expected to be
approximately $3.0 million, principally for the purchase of aircraft
related assets, which it expects to finance from working capital. Cash Flows from Financing Activities Financing activities used $18.5 million in cash for the three months
ended March 31, 2004, which was primarily due to the $18.0 million used
to pay the principal on the convertible bonds that were called on
December 30, 2003, and redeemed on January 28, 2004. For the three
months ended March 31, 2003, financing activities used $6.2 million,
which was primarily due to a reduction in the amount owed under the Loan
and Security Agreement with Wells Fargo Foothill, Inc. of $3.4 million
and deferred aircraft rent payments of $2.9 million. 14




---



##### 



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 March 31,
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 March 31, 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 March 31, 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 6.
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 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 2002.99.1
    
    Lease Agreement dated as of March 26, 2004 between World Airways,
Inc. and World (DE) QRS 15-65, Inc. related to the Companys
headquarters at 101 World Drive, Peachtree City, Georgia 30269.
 (b) Reports on Form 8-K  1.
    
    The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on January 16, 2004 in
connection with a press release issued on January 16, 2004,
announcing that it had reached a tentative agreement with the
International Brotherhood of Teamsters for an extension of an
agreement covering its cockpit crewmembers. 15




---



##### 



2.
    
    The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on January 21, 2004,
announcing the closing of a $30.0 million term loan supported
by a $27.0 million federal guarantee from the Air
Transportation Stabilization Board (the ATSB), the
termination of the Companys existing credit facility with
Wells Fargo Foothill, Inc., the issuance to the ATSB of
warrants to purchase an aggregate of 2,378,223 shares of the
Companys common stock, the issuance of $25.5 million
aggregate principal amount of the Companys new convertible
debentures in exchange for $22.5 million aggregate principal
amount of the Companys existing convertible debentures and
$3.0 million in cash, and the redemption of $18.0 million
aggregate principal amount of the existing debentures.3.
    
    The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on February 3, 2004 in
connection with a press release issued on February 2, 2004,
announcing the extension of an existing contract with Menlo
Worldwide (formerly Emery Worldwide) valued at approximately
$19 million, through December 2004.4.
    
    The Company furnished a Current Report on Form 8-K
to the Securities and Exchange Commission on February 5,
2004 in connection with a press release issued on February 5,
2004, announcing its financial results for the fourth quarter
and the year ended December 31, 2003.5.
    
    The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on February 9, 2004 in
connection with a press release issued on February 6, 2004,
announcing that its Board of Directors had approved a revised
fleet plan as part of the Companys five-year strategic plan.6.
    
    The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on February 18, 2004
in connection with a press release issued on February 18,
2004, announcing the signing of a new one-year agreement with
EVA Airways commencing March 6, 2004.7.
    
    The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on February 19, 2004
in connection with a press release issued on February 19,
2004, announcing the succession plan approved by the Board of
Directors, with the upcoming retirement of Hollis Harris,
Chairman and Chief Executive Officer. * * * * * * * * * * * * * * * 16




---



##### 



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: May 14, 2004WORLD AIRWAYS, INC.By:
    
    /s/ Gilberto M. Duarte, Jr.Gilberto M. Duarte, Jr.Principal Accounting and
Financial Officer