WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26582
WORLD AIRWAYS, INC.
| DELAWARE (State or other jurisdiction of incorporation or organization) |
94-1358276 (I.R.S. Employer Identification Number) |
The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of Principal Executive Offices)
(770) 632-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of the registrant’s Common Stock outstanding on July 31, 2004 was 12,957,186.
WORLD AIRWAYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
TABLE OF CONTENTS
2
ASSETS
(in thousands)
(unaudited)
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 20,557 | $ | 30,535 | ||||
Restricted cash |
4,578 | 23,290 | ||||||
Total cash and cash equivalents |
25,135 | 53,825 | ||||||
Accounts receivable, less allowance for doubtful
accounts of $187 at June 30, 2004 and $196 at
December 31, 2003 |
46,474 | 31,446 | ||||||
Prepaid expenses and other current assets |
5,927 | 7,721 | ||||||
Total current assets |
77,536 | 92,992 | ||||||
EQUIPMENT AND PROPERTY |
||||||||
Flight and other equipment |
85,487 | 86,346 | ||||||
Less: accumulated depreciation and amortization |
48,819 | 47,382 | ||||||
Net equipment and property |
36,668 | 38,964 | ||||||
LONG-TERM OPERATING DEPOSITS |
17,369 | 17,664 | ||||||
OTHER ASSETS AND DEFERRED CHARGES, NET |
7,100 | 7,681 | ||||||
TOTAL ASSETS |
$ | 138,673 | $ | 157,301 | ||||
(Continued)
3
WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
(in thousands except share amounts)
(unaudited)
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
CURRENT LIABILITIES |
||||||||
Current maturities of long-term debt |
$ | — | $ | 18,000 | ||||
Accounts payable |
29,031 | 28,167 | ||||||
Accrued rent |
3,583 | 9,881 | ||||||
Unearned revenue |
3,960 | 3,546 | ||||||
Accrued maintenance |
2,944 | 2,791 | ||||||
Accrued salaries and wages |
15,345 | 16,957 | ||||||
Accrued taxes |
2,503 | 2,581 | ||||||
Other accrued liabilities |
1,491 | 2,506 | ||||||
Total current liabilities |
58,857 | 84,429 | ||||||
Long-term debt, net of current maturities |
57,041 | 57,177 | ||||||
Deferred gain from sale-leaseback transactions, net of
accumulated amortization of $3,703 at June 30,
2004 and $3,137 at December 31, 2003 |
2,211 | 2,777 | ||||||
Accrued post-retirement benefits |
3,583 | 3,583 | ||||||
Deferred aircraft and building rent |
10,569 | 16,008 | ||||||
TOTAL LIABILITIES |
132,261 | 163,974 | ||||||
STOCKHOLDERS’ EQUITY (DEFICIENCY) |
||||||||
Preferred stock, $.001 par value (5,000,000 shares authorized;
no shares issued or outstanding) |
— | — | ||||||
Common stock, $.001 par value (100,000,000 shares authorized;
14,011,229 shares issued and 12,929,986 shares outstanding at
June 30, 2004; 12,502,441 shares issued and 11,421,198
outstanding at December 31, 2003) |
14 | 13 | ||||||
Additional paid-in capital |
33,873 | 31,233 | ||||||
Accumulated deficit |
(14,618 | ) | (25,062 | ) | ||||
Treasury stock, at cost (1,081,243 shares at June 30, 2004 and
December 31, 2003) |
(12,857 | ) | (12,857 | ) | ||||
Total stockholders’ equity (deficiency) |
6,412 | (6,673 | ) | |||||
COMMITMENTS AND CONTINGENCIES |
||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) |
$ | 138,673 | $ | 157,301 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
WORLD AIRWAYS, INC.
| 2004 |
2003 |
|||||||
OPERATING REVENUES |
||||||||
Flight operations |
$ | 114,707 | $ | 116,014 | ||||
Other |
353 | 617 | ||||||
Total operating revenues |
115,060 | 116,631 | ||||||
OPERATING EXPENSES |
||||||||
Flight |
37,705 | 35,541 | ||||||
Maintenance |
20,032 | 19,463 | ||||||
Aircraft costs |
17,426 | 20,852 | ||||||
Fuel |
16,363 | 18,624 | ||||||
Flight operations subcontracted to other carriers |
81 | 133 | ||||||
Commissions |
4,831 | 3,889 | ||||||
Depreciation and amortization |
1,274 | 1,309 | ||||||
Sales, general and administrative |
12,960 | 9,000 | ||||||
Total operating expenses |
110,672 | 108,811 | ||||||
OPERATING INCOME |
4,388 | 7,820 | ||||||
OTHER INCOME (EXPENSE) |
||||||||
Interest expense |
(880 | ) | (1,168 | ) | ||||
Interest income |
125 | 93 | ||||||
Other, net |
(714 | ) | (102 | ) | ||||
Total other expense |
(1,469 | ) | (1,177 | ) | ||||
EARNINGS BEFORE INCOME TAXES |
2,919 | 6,643 | ||||||
INCOME TAXES |
350 | 250 | ||||||
NET EARNINGS |
$ | 2,569 | $ | 6,393 | ||||
BASIC EARNINGS PER SHARE |
||||||||
Net earnings |
$ | 0.22 | $ | 0.58 | ||||
Weighted average shares outstanding |
11,637 | 11,109 | ||||||
DILUTED EARNINGS PER SHARE |
||||||||
Net earnings |
$ | 0.13 | $ | 0.44 | ||||
Weighted average shares outstanding |
23,252 | 16,472 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
WORLD AIRWAYS, INC.
| 2004 |
2003 |
|||||||
OPERATING REVENUES |
||||||||
Flight operations |
$ | 243,726 | $ | 239,291 | ||||
Other |
918 | 983 | ||||||
Total operating revenues |
244,644 | 240,274 | ||||||
OPERATING EXPENSES |
||||||||
Flight |
78,507 | 69,973 | ||||||
Maintenance |
37,888 | 42,683 | ||||||
Aircraft costs |
37,097 | 42,748 | ||||||
Fuel |
34,565 | 39,985 | ||||||
Flight operations subcontracted to other carriers |
1,599 | 225 | ||||||
Commissions |
11,131 | 8,548 | ||||||
Depreciation and amortization |
2,561 | 2,781 | ||||||
Sales, general and administrative |
23,269 | 17,848 | ||||||
Total operating expenses |
226,617 | 224,791 | ||||||
OPERATING INCOME |
18,027 | 15,483 | ||||||
OTHER INCOME (EXPENSE) |
||||||||
Interest expense |
(2,044 | ) | (2,402 | ) | ||||
Interest income |
247 | 190 | ||||||
Other, net |
(1,725 | ) | (13 | ) | ||||
Total other expense |
(3,522 | ) | (2,225 | ) | ||||
EARNINGS BEFORE INCOME TAXES |
14,505 | 13,258 | ||||||
INCOME TAXES |
4,061 | 250 | ||||||
NET EARNINGS |
$ | 10,444 | $ | 13,008 | ||||
BASIC EARNINGS PER SHARE |
||||||||
Net earnings |
$ | 0.91 | $ | 1.17 | ||||
Weighted average shares outstanding |
11,536 | 11,093 | ||||||
DILUTED EARNINGS PER SHARE |
||||||||
Net earnings |
$ | 0.47 | $ | 0.91 | ||||
Weighted average shares outstanding |
23,858 | 15,995 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
6
WORLD AIRWAYS, INC.
| Additional | ||||||||||||||||||||
| Common | Paid-in | Accumulated | Treasury Stock, | Total Stockholders' | ||||||||||||||||
| Stock |
Capital |
Deficit |
at Cost |
Equity (Deficiency) |
||||||||||||||||
Balance at December 31, 2003 |
$ | 13 | $ | 31,233 | $ | (25,062 | ) | $ | (12,857 | ) | $ | (6,673 | ) | |||||||
Amortization of warrants |
— | 92 | — | — | 92 | |||||||||||||||
Exercise of 1,508,788 stock options |
1 | 1,440 | — | — | 1,441 | |||||||||||||||
Tax benefit of stock option exercises |
— | 1,108 | — | — | 1,108 | |||||||||||||||
Net earnings |
— | — | 10,444 | — | 10,444 | |||||||||||||||
Balance at June 30, 2004 |
$ | 14 | $ | 33,873 | $ | (14,618 | ) | $ | (12,857 | ) | $ | 6,412 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
7
WORLD AIRWAYS, INC.
| 2004 |
2003 |
|||||||
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD |
$ | 53,825 | $ | 21,504 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net earnings |
10,444 | 13,008 | ||||||
Adjustments to reconcile net earnings to net cash |
||||||||
provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
2,561 | 2,781 | ||||||
Deferred gain recognition |
(566 | ) | (566 | ) | ||||
Loss on sale of property and equipment |
507 | 161 | ||||||
Tax benefit of stock option exercises |
1,108 | — | ||||||
Amortization of warrants and debt issuance costs |
1,008 | 155 | ||||||
Other |
77 | (160 | ) | |||||
Provision for doubtful accounts receivable |
(9 | ) | 32 | |||||
Increase (decrease) in cash and cash equivalents resulting
from changes
in operating assets and liabilities: |
||||||||
Accounts receivable |
(15,019 | ) | (14,644 | ) | ||||
Deposits, prepaid expenses and other assets |
2,089 | (535 | ) | |||||
Accounts payable, accrued expenses and other liabilities |
(6,229 | ) | (1,948 | ) | ||||
Unearned revenue |
414 | 1,935 | ||||||
Net cash provided by (used in) operating activities |
(3,615 | ) | 219 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of equipment and property |
(778 | ) | (1,588 | ) | ||||
Proceeds from disposal of equipment and property |
6 | 15 | ||||||
Net cash used in investing activities |
(772 | ) | (1,573 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Increase in line of credit borrowing arrangement, net |
— | 471 | ||||||
Repayment of debt |
(18,000 | ) | — | |||||
Proceeds from exercise of stock options |
1,441 | 91 | ||||||
Payment of debt issuance costs |
(548 | ) | — | |||||
Repayment of aircraft rent obligations |
(7,196 | ) | (5,963 | ) | ||||
Net cash used in financing activities |
(24,303 | ) | (5,401 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(28,690 | ) | (6,755 | ) | ||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 25,135 | $ | 14,749 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
8
WORLD AIRWAYS, INC.
| 1. | Management believes that all adjustments necessary for a fair statement of results have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the results of operations for the six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. | |||
| The Condensed Consolidated Balance Sheet for December 31, 2003 is derived from the audited Consolidated Financial Statements included in the Company’s 2003 Form 10-K. | ||||
| These interim period Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Consolidated Financial Statements contained in World Airways’ Annual Report on Form 10-K for the year ended December 31, 2003. | ||||
| 2. Earnings per Share | ||||
| The following table sets forth the computations of basic and diluted earnings per share (in thousands except per share data): | ||||
| Three Months Ended June 30, 2004 |
||||||||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) |
(Denominator) |
Amount |
||||||||||
Basic EPS |
||||||||||||
Earnings available to common stockholders |
$ | 2,569 | 11,637 | $ | 0.22 | |||||||
Effect of Dilutive Securities |
||||||||||||
Warrants |
— | 1,544 | ||||||||||
Options |
— | 2,088 | ||||||||||
8% convertible debentures |
367 | 7,983 | ||||||||||
Diluted EPS |
||||||||||||
Earnings available to common stockholders
plus assumed conversions |
$ | 2,936 | 23,252 | $ | 0.13 | |||||||
| Three Months Ended June 30, 2003 |
||||||||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) |
(Denominator) |
Amount |
||||||||||
Basic EPS |
||||||||||||
Earnings available to common stockholders |
$ | 6,393 | 11,109 | $ | 0.58 | |||||||
Effect of Dilutive Securities |
||||||||||||
Options |
— | 807 | ||||||||||
8% convertible debentures |
809 | 4,556 | ||||||||||
Diluted EPS |
||||||||||||
Earnings available to common stockholders
plus assumed conversions |
$ | 7,202 | 16,472 | $ | 0.44 | |||||||
9
| Six Months Ended June 30, 2004 |
||||||||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) |
(Denominator) |
Amount |
||||||||||
Basic EPS |
||||||||||||
Earnings available to common stockholders |
$ | 10,444 | 11,536 | $ | 0.91 | |||||||
Effect of Dilutive Securities |
||||||||||||
Warrants |
— | 1,760 | ||||||||||
Options |
— | 2,268 | ||||||||||
8% convertible debentures |
809 | 8,294 | ||||||||||
Diluted EPS |
||||||||||||
Earnings available to common stockholders
plus assumed conversions |
$ | 11,253 | 23,858 | $ | 0.47 | |||||||
| Six Months Ended June 30, 2003 |
||||||||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) |
(Denominator) |
Amount |
||||||||||
Basic EPS |
||||||||||||
Earnings available to common stockholders |
$ | 13,008 | 11,093 | $ | 1.17 | |||||||
Effect of Dilutive Securities |
||||||||||||
Options |
— | 346 | ||||||||||
8% convertible debentures |
1,608 | 4,556 | ||||||||||
Diluted EPS |
||||||||||||
Earnings available to common stockholders
plus assumed conversions |
$ | 14,616 | 15,995 | $ | 0.91 | |||||||
| 3. | Accounting for Stock-Based Compensation | |||
| At June 30, 2004, the Company had three stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in thousands, except per share data): | ||||
| Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net earnings, as reported |
$ | 2,569 | $ | 6,393 | $ | 10,444 | $ | 13,008 | ||||||||
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax effects |
(361 | ) | (214 | ) | (485 | ) | (590 | ) | ||||||||
Pro forma net earnings |
$ | 2,208 | $ | 6,179 | $ | 9,959 | $ | 12,418 | ||||||||
Earnings per share |
||||||||||||||||
Basic —as reported |
$ | 0.22 | $ | 0.58 | $ | 0.91 | $ | 1.17 | ||||||||
Basic — pro forma |
$ | 0.19 | $ | 0.56 | $ | 0.86 | $ | 1.12 | ||||||||
Diluted —as reported |
$ | 0.13 | $ | 0.44 | $ | 0.47 | $ | 0.91 | ||||||||
Diluted — pro forma |
$ | 0.11 | $ | 0.42 | $ | 0.45 | $ | 0.88 | ||||||||
10
| The per share weighted-average fair value of stock options granted during the second quarter of 2004 was $3.59 (no stock options were granted during the second quarter of 2003) and for the first six months of 2004 and 2003 was $3.59 and $0.77, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: |
| Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Expected dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Risk-free interest rate |
3.9 | % | 3.0 | % | 3.8 | % | 3.0 | % | ||||||||
Expected life (in years) |
4.9 | 5.5 | 4.9 | 5.5 | ||||||||||||
Risk-free volatility |
80 | % | 132 | % | 80 | % | 132 | % | ||||||||
| 4. | Sub-lease Obligation | |||
| The Company is obligated under an operating lease for office space at its former headquarters in Herndon, Virginia, through April 2006. The Company received rental income, sufficient to offset its lease expense through March 2002, after which time no rental income was received except for a total of $0.4 million received in the fourth quarter of 2003 and the first quarter of 2004. The Company is currently seeking a new sub-lessee for this office space. The Company reassessed the accrued liability at the end of the second quarter and determined, based on updated information, that the liability should be adjusted to $1.5 million. The fair value of the liability was determined based on the remaining lease rentals, reduced by estimated sublease rentals that can be reasonably obtained for the property. The liability is included in other accrued liabilities on the accompanying consolidated balance sheets. The Company’s total remaining obligation at June 30, 2004 under the lease was $2.9 million. | ||||
| If the Company is not successful in finding a suitable sub-lessee in the anticipated time or if the sublease rentals from a new sub-lessee are less than anticipated, the Company will be required to recognize an additional liability for these costs. This liability will be adjusted for changes, if any, resulting from revisions to estimated cash flo | ||||