WORLD AIRWAYS INC /DE/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 0-26582

WORLD AIRWAYS, INC.

(Exact Name of Registrant as Specified in its Charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		94-1358276 (I.R.S. Employer Identification Number)

The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of Principal Executive Offices)

(770) 632-8000
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ( X ) No ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ( ) No ( X )

The number of shares of the registrant’s Common Stock outstanding on November 1, 2004 was 15,931,905.

WORLD AIRWAYS, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS


	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited), September 30, 2004 and December 31, 2003		3
Condensed Consolidated Statements of Operations (Unaudited), Three Months Ended September 30, 2004 and 2003		5
Condensed Consolidated Statements of Operations (Unaudited), Nine Months Ended September 30, 2004 and 2003		6
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficiency) (Unaudited),
Nine months ended September 30, 2004		7
Condensed Consolidated Statements of Cash Flows (Unaudited), Nine months ended September 30, 2004 and 2003		8
Notes to Condensed Consolidated Financial Statements		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures about Market Risk		21
Item 4. Controls and Procedures		21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		21
Item 6. Exhibits		22

ITEM 1. FINANCIAL STATEMENTS
WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
(in thousands)
(unaudited)


	September 30,		December 31,
	2004		2003
CURRENT ASSETS
Cash and cash equivalents	$	46,994	$	30,535
Restricted cash		5,377		23,290
Accounts receivable, less allowance for doubtful accounts of $262 at September 30, 2004 and $196 at December 31, 2003		37,329		31,446
Prepaid expenses and other current assets		6,054		7,721

Total current assets		95,754		92,992

EQUIPMENT AND PROPERTY
Flight and other equipment		84,204		86,346
Less: accumulated depreciation and amortization		49,981		47,382

Net equipment and property		34,223		38,964

LONG-TERM OPERATING DEPOSITS		18,045		17,664
OTHER ASSETS AND DEFERRED CHARGES, NET		6,417		7,681

TOTAL ASSETS	$	154,439	$	157,301


			(Continued)

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
(in thousands except share amounts)
(unaudited)


	September 30,			December 31,
	2004			2003
Current maturities of long-term debt	$	—		$	18,000
Accounts payable		26,590			28,167
Accrued rent		6,076			9,881
Unearned revenue		4,186			3,546
Accrued maintenance		4,158			2,791
Accrued salaries and wages		17,027			16,957
Accrued taxes		7,890			2,581
Other accrued liabilities		1,994			2,506

Total current liabilities		67,921			84,429

Long-term debt, net of current maturities		54,649			58,534
Deferred gain from sale-leaseback transactions, net of accumulated amortization of $3,986 at September 30, 2004 and $3,137 at December 31, 2003		1,928			2,777
Accrued post-retirement benefits		3,583			3,583
Deferred aircraft and building rent		8,233			16,008

TOTAL LIABILITIES		136,314			165,331

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; 16,092,498 shares issued and 15,011,255 shares outstanding at September 30, 2004; 12,502,441 shares issued and 11,421,198 outstanding at December 31, 2003)		16			13
Additional paid-in capital		38,530			29,876
Accumulated deficit		(7,564	)		(25,062	)
Treasury stock, at cost (1,081,243 shares at September 30, 2004 and December 31, 2003)		(12,857	)		(12,857	)

Total stockholders’ equity (deficiency)		18,125			(8,030	)

COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)	$	154,439		$	157,301

See accompanying Notes to Condensed Consolidated Financial Statements

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2004 and 2003
(in thousands except per share data)
(unaudited)


	2004			2003
OPERATING REVENUES
Flight operations	$	128,573		$	111,038
Other		602			1,256

Total operating revenues		129,175			112,294

OPERATING EXPENSES
Flight		40,600			35,889
Maintenance		19,295			14,368
Aircraft costs		19,498			20,979
Fuel		17,603			18,020
Flight operations subcontracted to other carriers		—			428
Commissions		5,667			4,679
Depreciation and amortization		1,258			1,259
Sales, general and administrative		11,490			10,798

Total operating expenses		115,411			106,420

OPERATING INCOME		13,764			5,874
OTHER INCOME (EXPENSE)
Interest expense		(1,114	)		(1,135	)
Interest income		141			92
Other, net		(252	)		11

Total other expense		(1,225	)		(1,032	)

EARNINGS BEFORE INCOME TAXES		12,539			4,842
INCOME TAXES		5,485			3,398

NET EARNINGS	$	7,054		$	1,444

BASIC EARNINGS PER SHARE
Net earnings	$	0.54		$	0.13

Weighted average shares outstanding		12,956			11,290
DILUTED EARNINGS PER SHARE
Net earnings	$	0.31		$	0.11

Weighted average shares outstanding		23,674			18,630

See accompanying Notes to Condensed Consolidated Financial Statements

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2004 and 2003
(in thousands except per share data)
(unaudited)


	2004			2003
OPERATING REVENUES
Flight operations	$	372,299		$	350,329
Other		1,520			2,239

Total operating revenues		373,819			352,568

OPERATING EXPENSES
Flight		119,107			105,862
Maintenance		57,183			57,051
Aircraft costs		56,595			63,727
Fuel		52,168			58,005
Flight operations subcontracted to other carriers		1,599			653
Commissions		16,798			13,227
Depreciation and amortization		3,819			4,040
Sales, general and administrative		34,759			28,646

Total operating expenses		342,028			331,211

OPERATING INCOME		31,791			21,357
OTHER INCOME (EXPENSE)
Interest expense		(3,903	)		(3,537	)
Interest income		388			282
Other, net		(1,232	)		(2	)

Total other expense		(4,747	)		(3,257	)

EARNINGS BEFORE INCOME TAXES		27,044			18,100
INCOME TAXES		9,546			3,648

NET EARNINGS	$	17,498		$	14,452

BASIC EARNINGS PER SHARE
Net earnings	$	1.46		$	1.30

Weighted average shares outstanding		12,013			11,159
DILUTED EARNINGS PER SHARE
Net earnings	$	0.78		$	0.92

Weighted average shares outstanding		23,802			17,309

See accompanying Notes to Condensed Consolidated Financial Statements

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS’ EQUITY (DEFICIENCY)
Nine Months Ended September 30, 2004
(in thousands except share amounts)
(unaudited)


			Additional
	Common		Paid-in		Accumulated			Treasury Stock, at			Total Stockholders’
	Stock		Capital		Deficit			Cost			Equity (Deficiency)
Balance at December 31, 2003	$	13	$	29,876	$	(25,062	)	$	(12,857	)			(8,030	)
Amortization of warrants		—		138		—			—				138
Exercise of 1,573,688 stock options		1		1,496		—			—				1,497
Exercise of warrants for 1,021,994 shares		1		2,499		—			—				2,500
Issuance of 994,375 shares for convertible debt		1		3,302		—			—				3,303
Tax benefit of stock option exercises		—		1,219		—			—				1,219
Net earnings		—		—		17,498			—				17,498

Balance at September 30, 2004	$	16	$	38,530	$	(7,564	)	$	(12,857	)		$	18,125

See accompanying Notes to Condensed Consolidated Financial Statements

WORLD AIRWAYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2004 and 2003
(in thousands)
(unaudited)


	2004			2003
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	$	30,535		$	20,839
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings		17,498			14,452
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		3,819			4,040
Deferred gain recognition		(849	)		(849	)
Charges related to impairment of property and equipment		1,500			—
Loss on sale of property and equipment		598			188
Tax benefit of stock option exercises		1,219			—
Amortization of warrants and debt issuance costs		1,521			—
Other		(160	)		614
Provision for doubtful accounts receivable		66			83
Increase (decrease) in cash and cash equivalents resulting from changes in operating assets and liabilities:
Accounts receivable		(5,949	)		(4,289	)
Restricted Cash		(87	)		(1,085	)
Deposits, prepaid expenses and other assets		1,286			(1,977	)
Accounts payable, accrued expenses and other liabilities		273			808
Unearned revenue		640			1,897

Net cash provided by operating activities		21,375			13,882

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment and property		(1,205	)		(1,762	)
Proceeds from disposal of equipment and property		29			18

Net cash used in investing activities		(1,176	)		(1,744	)

CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in line of credit borrowing arrangement, net		—			(223	)
Decrease in restricted cash due to repayment of debt		18,000			—
Repayment of debt		(18,000	)		—
Proceeds from exercise of stock options		1,497			280
Proceeds from exercise of warrants		2,500			—
Payment of debt issuance costs		(541	)		—
Repayment of aircraft rent obligations		(7,196	)		(8,418	)

Net cash used in financing activities		(3,740	)		(8,361	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		16,459			3,777

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	46,994		$	24,616

See accompanying Notes to Condensed Consolidated Financial Statements

WORLD AIRWAYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Management believes that all adjustments necessary for a fair statement of results have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.

The Condensed Consolidated Balance Sheet for December 31, 2003 is derived from the Consolidated Financial Statements included in the Company’s 2003 Form 10-K.

These interim period Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Consolidated Financial Statements contained in World Airways’ Annual Report on Form 10-K for the year ended December 31, 2003.

• Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 2003.

Cash and cash equivalents; restricted cash; accounts receivable; accounts payable; and accrued expenses

The carrying value approximates fair value because of the short maturity of these financial instruments.

Long-term Debt

On December 30, 2003, the Company called for redemption $18.0 million of its then outstanding 8.0% Convertible Senior Subordinated Debentures due in 2004 (the “Old Debentures”), with a redemption date of January 28, 2004. The $18.0 million carrying value of these Old Debentures is the principal amount thereof, and approximates the fair value of these financial instruments because of the short period of time to the date fixed for redemption.

The Company closed on its $30.0 million term loan facility on December 30, 2003. Because the term loan closed one day before the Consolidated Balance Sheet date, the carrying value of the term loan (the principal amount thereof) approximates fair value.

Note 7 to the Consolidated Financial Statements in Form 10-K contains information about the carrying value and fair value determination with respect to the Company’s $25.5 million aggregate principal amount of 8.0% Convertible Senior Subordinated Debentures due in 2009 (the “New Debentures”). These New Debentures were recorded at their estimated fair market value of $28.5 million at the time of issuance on December 31, 2003.

• Long-term Operating Deposits

Long-term operating deposits of $18.0 million at September 30, 2004 consisted of aircraft and engine (flight equipment) deposits of $17.6 million and building and miscellaneous deposits of $0.4 million. At December 31, 2003, long-term operating deposits of $17.7 million consisted of aircraft and engine deposits of $16.2 million and building and miscellaneous deposits of $1.5 million.

2. Earnings per Share

The following table sets forth the computations of basic and diluted earnings per share (in thousands except per share data):

Three Months Ended September 30, 2004

Earnings

Shares

Per Share

(Numerator)

(Denominator)

Amount

Basic EPS

Earnings available to common stockholders

7,054

12,956

0.54


	Three Months Ended September 30, 2004
	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Effect of Dilutive Securities
Warrants		—		1,608
Options		—		1,235
8% convertible debentures		329		7,875

Diluted EPS
Earnings available to common stockholders plus assumed conversions	$	7,383		23,674	$	0.31


	Three Months Ended September 30, 2003
	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS
Earnings available to common stockholders	$	1,444		11,290	$	0.13

Effect of Dilutive Securities
Warrants		—		282
Options		—		2,502
8% convertible debentures		519		4,556

Diluted EPS
Earnings available to common stockholders plus assumed conversions	$	1,963		18,630	$	0.11


	Nine Months Ended September 30, 2004
	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS
Earnings available to common stockholders	$	17,498		12,013	$	1.46

Effect of Dilutive Securities
Warrants		—		1,719
Options		—		1,917
8% convertible debentures		1,060		8,153

Diluted EPS
Earnings available to common stockholders plus assumed conversions	$	18,558		23,802	$	0.78


	Nine Months Ended September 30, 2003
	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic EPS
Earnings available to common stockholders	$	14,452		11,159	$	1.30

Effect of Dilutive Securities
Options		—		1,594
8% convertible debentures		1,541		4,556

Diluted EPS
Earnings available to common stockholders plus assumed conversions	$	15,993		17,309	$	0.92

3. Accounting for Stock-Based Compensation

At September 30, 2004, the Company had three stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net earnings for the quarter and the nine months ended September 30, 2004 and 2003, as all options granted during those periods had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in thousands, except per share data):


	Quarter Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net earnings, as reported	$	7,054		$	1,444		$	17,498		$	14,452
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(183	)		(117	)		(619	)		(415	)

Pro forma net earnings	$	6,871		$	1,327		$	16,879		$	14,037

Earnings per share
Basic —as reported	$	0.54		$	0.13		$	1.46		$	1.30
Basic — pro forma	$	0.53		$	0.12		$	1.41		$	1.26
Diluted —as reported	$	0.31		$	0.11		$	0.78		$	0.92
Diluted — pro forma	$	0.30		$	0.10		$	0.75		$	0.90

The per share weighted-average fair value of stock options granted during the third quarter of 2003 was $2.83 (no stock options were granted during the third quarter of 2004) and for the first nine months of 2004 and 2003 was $3.59 and $0.97, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:


	Quarter Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Expected dividend yield		0	%		0	%		0	%		0	%
Risk-free interest rate		3.9	%		3.3	%		3.8	%		3.1	%

1.		Management believes that all adjustments necessary for a fair statement of results have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.

		The Condensed Consolidated Balance Sheet for December 31, 2003 is derived from the Consolidated Financial Statements included in the Company’s 2003 Form 10-K.

		These interim period Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Consolidated Financial Statements contained in World Airways’ Annual Report on Form 10-K for the year ended December 31, 2003.