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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-26582

World Airways, Inc.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(g) of the Act:

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

      Indicate by check mark whether the registrant is an accelerated filer (as described in Exchange Act Rule 12b-2).     Yes o          No þ

      Aggregate market value of Common Stock held by non-affiliates as of June 30, 2003 was approximately $20,204,000.

      As of the close of business on March 3, 2004, 11,446,598 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of World Airways, Inc.’s Notice of Annual Stockholder’s Meeting and Proxy Statement, to be filed within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Report.

WORLD AIRWAYS, INC.

TABLE OF CONTENTS

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PART I

      World Airways, Inc. (“World Airways” or the “Company”) was organized in March 1948 and is a U.S. certificated air carrier. Airline operations account for 100% of the Company’s operating revenue. World Airways provides long-range passenger and cargo charter and wet lease air transportation, serving the U.S. Government, international passenger and cargo air carriers, tour operators, international freight forwarders and cruise ship companies. As of December 31, 2003, the Company operated eleven MD-11 and seven DC-10-30 aircraft. The principal executive offices of World Airways are located in The HLH Building, 101 World Drive, Peachtree City, Georgia 30269 and the Company’s telephone number is (770) 632-8000.

      The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). This report contains forward looking statements that are subject to risks and uncertainties including, but not limited to, those set forth under “Risk Factors” below or detailed from time to time in the Company’s periodic reports filed with the Securities and Exchange Commission (which reports are available from the Company upon request). These various risks and uncertainties may cause the Company’s actual results to differ materially from those expressed in any of the forward looking statements made by, or on behalf of, the Company in this report.

Available Information

      The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available free of charge under the Investor Relations page on its website, www.worldairways.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. In addition, the Company’s Code of Ethics for Chief Executive and Senior Financial Officers, which applies to the Company’s principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, is posted on the Company’s website. The Company intends to disclose any amendments to, or waivers of, this Code of Ethics on its website.

Recent Developments

      The Company’s cockpit crewmembers are represented by the International Brotherhood of Teamsters (the “Teamsters”) and are subject to a collective bargaining agreement that became amendable June 30, 2003. In December 2003, the Company announced that it would begin negotiations with the cockpit crewmembers in January 2004. It was also announced that the Teamsters had requested mediation services from the National Mediation Board (the “NMB”). Following three days of negotiations 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.

      In February 2004, the Company announced that its Chairman and Chief Executive Officer (“CEO”), Hollis L. Harris gave notice to the board of directors of his plan to retire from the Company. Effective April 1, 2004, Mr. Harris will give up the title of CEO and he will retire from the board of directors at the Company’s May 6, 2004 annual meeting of stockholders. General Ronald R. Fogleman will be named non-executive Chairman of the board effective at the May 6, 2004 annual meeting of stockholders. The Company intends to retain Mr. Harris as a consultant for a period of up to two years. Randy J. Martinez, President and Chief Operating Officer, will become President and Chief Executive Officer and Jeffrey L. MacKinney, Senior Vice President of Planning and Corporate Development, will become Chief Operating Officer, both effective April 1, 2004. Mr. Martinez will also become a member of the board of directors to fill the unexpired term of Dato’ Wan Malek Ibrahim on April 1, 2004.

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      In the first quarter of 2004, the Company returned to its lessor one of its DC-10-30 freighter aircraft. The term of the lease agreement for another DC-10 freighter aircraft has expired. The Company is currently negotiating with the lessor regarding various issues relating to the return of this aircraft and expects to resolve them during the second quarter of 2004. Under the terms of the lease, the Company has continued to pay rent on a month-to-month basis on this aircraft until its return is accepted by the lessor.

      In a February 6, 2004 press release, the Company announced its intention to introduce two Boeing 767-300ER passenger aircraft to its fleet in the fourth quarter of 2004. These new aircraft are intended to replace two DC-10-30 passenger aircraft that will be returned to their lessor at scheduled lease termination dates in the second half of 2004. Following an extensive review of the Boeing 767 market, the Company has identified several B767-300ER aircraft that meet its technical and financial requirements. However, because these particular aircraft are not available until the first half of 2005, the Company has elected to defer this introduction until the first part of 2005. The Company anticipates executing commitment letters for these aircraft during the second quarter of 2004.

      On December 30, 2003, the Company completed a major financial restructuring under which it (a) closed a $30.0 million term loan facility (the “ATSB Loan”) backed by a $27.0 million guarantee issued by the Air Transportation Stabilization Board (“ATSB”); (b) issued $25.5 million principal amount of 8.0% Convertible Senior Subordinated Debentures due 2009 (the “New Debentures”) in exchange for $22.5 million principal amount of the Company’s then existing 8.0% Convertible Senior Subordinated Debentures due 2004 (the “Old Debentures”) and $3.0 million cash; (c) called for redemption the remaining balance of $18.0 million of the Old Debentures; and (d) terminated the Wells Fargo Foothill, Inc. Loan and Security Agreement (the “Foothill Facility”). As additional compensation for the federal loan guarantee, the Company issued to the ATSB warrants to purchase an aggregate of 2,378,233 shares of Common Stock. As a condition of the ATSB Loan, the Company was required to exit the Foothill Facility prior to the contractual term. As a result, the Company was required to pay an early termination fee to Wells Fargo Foothill, Inc., including expenses, of $1.3 million. The ATSB Loan agreement contains a number of financial and negative covenants that the Company must observe throughout the term of the ATSB Loan. The $18.0 million principal amount of the remaining Old Debentures was redeemed on January 28, 2004. See Note 7 in the “Notes to Consolidated Financial Statements” in Item 8 for additional information.

Ownership

      At December 31, 2003, Naluri Berhad, a Malaysian aviation company, owned 10.7% of the outstanding Common Stock of World Airways and the balance was widely held.

Overview & Operating Environment

      World Airways focuses its marketing efforts on the United States Air Force (“USAF”) Air Mobility Command (“AMC”), freight operators, freight forwarders, cruise ship companies, tour operators and international airlines. The Company increases its potential customer base by being able to serve both passenger and cargo customers with its passenger and cargo aircraft. The Company can respond to rapidly changing market conditions and requirements because its fleet of passenger aircraft can be deployed in a variety of configurations.

      The Company’s operating philosophy is to build on its existing relationships to achieve a strong platform for future growth while at the same time expanding its commercial passenger and cargo business. The Company’s strategy is based, first and foremost, upon providing the highest level of service to its customers, thereby maintaining and expanding the amount of business being done with existing customers.

      Historically most of the Company’s contracts have required the Company to supply aircraft, crew, maintenance, and insurance (“ACMI” or “wet lease”) and the Company’s customers were responsible for other operating costs, including fuel. In recent years the Company has increased its operations under “full service” contracts whereby, in addition to ACMI costs, the Company is responsible for most other costs associated with flight operations including landing fees, ground handling and fuel. The Company attempts to maximize profitability by entering into both ACMI contracts and full service agreements that meet the

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      Although the Company’s customers bear the financial risk of utilizing the aircraft, the Company can be affected adversely if its customers are unable to operate the aircraft profitably, or if one or more of the Company’s customers experience a material adverse change in their market demand, financial condition or results of operations. Under these circumstances, the Company could be adversely affected by customer demands for rate and utilization reductions, flight cancellations, or early termination of their agreements.

      Similar to other air transportation companies, the Company’s business is seasonal. During the early part of the first quarter, the Company typically experiences lower levels of utilization and revenue per block hour (“yield”) due to lower demand relative to other times of the year. The Company experiences higher levels of utilization and yield mid-year associated with leisure travel demand during the peak summer vacation season. During the fall, the cargo market typically increases as the Christmas season approaches.

      The market for ACMI and full service charter business is highly competitive. Certain air carriers that the Company competes with have substantially greater financial resources and more extensive facilities and equipment than the Company. The Company believes that the most important bases for competition in the charter business include the range as well as passenger and payload capacities of the aircraft, in addition to the price, flexibility, quality and reliability of the air transportation service provided. Competitors in the passenger charter market include North American Airlines, Omni Air International, Miami Air and American Trans Air and in the cargo charter market include cargo carriers Atlas Air (including Polar Air Cargo), Gemini Air Cargo, Evergreen, Centurion Air Cargo, as well as scheduled and non-scheduled passenger carriers that have substantial belly capacity. The ability of the Company to compete depends, in part, upon its success in convincing customers that outsourcing a portion of their business is cost-effective.

      The Company operates in a challenging business environment. The air transportation industry is highly sensitive to general economic conditions. Since a substantial portion of passenger airline travel (both business and personal) is discretionary, the industry tends to experience adverse financial results during general economic downturns and can be adversely affected by unexpected global political developments. The financial results of air cargo carriers are also adversely affected by general economic downturns that result in reduced demand for air cargo transportation.

      Passenger revenue from USAF contracts is based on “available seat miles”, which are defined as the number of miles an aircraft flies multiplied by the number of seats available on the aircraft. Cargo revenue from USAF contracts is based on “ton miles”, which is defined as the number of miles an aircraft flies multiplied by the number of tons available on the aircraft. The Company generally charges customers other than the USAF on a block hour basis rather than on a per seat, per pound or seat mile basis. ”Block hours” are defined as the elapsed time from the moment wheel blocks are removed from the aircraft at the point of origin to the time when the wheel blocks are again put in place at the aircraft’s destination. The Company generally charges a lower rate per block hour for ACMI contracts than for full service contracts, although it does not necessarily earn a lower profit.

      Due to the high fixed costs of leasing and maintaining aircraft and costs for cockpit crewmembers and flight attendants, the Company’s aircraft must have high utilization in order for the Company to operate profitably. Although World Airways’ preferred strategy is to enter into long-term contracts with customers, the terms of existing customer contracts are shorter than the terms of the Company’s lease obligations with respect to its aircraft. There is no assurance that the Company will be able to enter into additional contracts with new or existing customers or that it will be able to obtain enough additional business to fully utilize each aircraft. World Airways’ financial position and results of operations could be materially adversely affected by periods of low aircraft utilization and yields.

      Factors that affect the Company’s ability to achieve high utilization of its aircraft include the compatibility of the Company’s aircraft with customer needs and the Company’s ability to react on short notice to customer requirements (which can be unpredictable due to changes in traffic rights, aircraft delivery schedules and aircraft maintenance requirements). Other factors that affect the Company include domestic

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      The Company has unsold capacity in the second quarter of 2004 and beyond; however, historically it has been successful in obtaining additional business to utilize some or all of its available capacity. Although there can be no assurance that it will be able to secure additional business to utilize unsold capacity, the Company is actively seeking additional business for 2004 and beyond.

Customers

      The Company is highly dependent on revenues from the USAF and the loss of the USAF as a customer would have a material adverse effect on the Company. The Company’s principal customers, and the percent of revenues from those customers, for the last three years were as follows:

      USAF. The Company has provided air transportation services, principally on an international basis, to the USAF since 1956. In exchange for requiring pledges of aircraft to the Civil Reserve Air Fleet (“CRAF”) for use in times of national emergency, the USAF grants awards to CRAF participants for peacetime transportation of personnel and cargo.

      The USAF awards points to air carriers acting alone or through teaming arrangements in proportion to the number and type of aircraft made available to CRAF. The Company utilizes teaming arrangements to maximize the value of potential awards. The USAF grants fixed awards for transportation to CRAF participants. These “fixed” awards provide for known and determinable amounts of revenue to be received during the contract period, which runs from October 1st to September 30th, in exchange for air transportation services. In addition, CRAF participants may be awarded additional revenue during the contract period for air transportation services required beyond those specified in the fixed awards. The Company refers to this additional revenue as “expansion” revenue. The following table shows the original contract awards (in millions) which include fixed and an expansion estimate for 2003 and 2002, and run from October 1st to September 30th. The actual revenue from the USAF for each of the Company’s last three fiscal years is shown below the contract award amounts.

      Differences in the composition of the teaming arrangements, aircraft used to support the contract and a smaller long-term expansion budget led to the difference in the contract value for the Company between 2003 and 2002.

      The original contract award for the year beginning October 1, 2003 and ending September 30, 2004 is $125.8 million for fixed flying. The USAF did not incorporate long-term expansion flying into the contract for fiscal year 2004. The Company also will receive additional expansion business during the fiscal year 2004 contract period for less predictable flying and other short notice requirements.

      In February 2003, the Secretary of Defense gave authority to the commander, U.S. Transportation Command (USTRANSCOM), to activate Stage I of the CRAF to provide the Department of Defense

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      The authority to activate CRAF Stage I involved 22 U.S. airline companies and their 78 commercial aircraft — 47 passenger aircraft and 31 wide-body cargo aircraft. While the authority was for all 78 commercial aircraft in the CRAF Stage I program, the USTRANSCOM commander only activated 47 passenger aircraft. U.S. military airlift aircraft and CRAF volunteered commercial cargo aircraft were sufficient to meet the cargo airlift requirements.

      The Company had three MD-11 passenger aircraft activated under CRAF Stage I. The Company also had one MD-11 cargo aircraft under Stage I, but it was not activated. The activation became effective February 9, 2003 and lasted through and including June 17, 2003 for a total of 129 days.

      Revenue generated from the USAF under the CRAF activation during 2003 was $41.0 million. Revenue from the USAF will continue to be a significant portion of total revenues for the Company in 2004, however, the Company cannot determine how future military spending budgets, airlift requirements, national security considerations and balanced CRAF and teaming arrangements will combine to affect future business with the USAF.

      Menlo. The Company has provided an MD-11F freighter aircraft to Menlo Worldwide (formerly Emery Air Freight Corporation) since October 1998. The program for the aircraft, which has been extended through December 2004, primarily operates five days per week flying round trip between Dayton, Ohio, and Brussels, Belgium. The Company provided additional ad hoc cargo service with its DC-10-30 freighter aircraft for Menlo during fiscal 2003.

      Sonair. In November 2000, the Company began operating regular private charter air service for Sonair, a subsidiary of Angola’s National Oil Company, SONANGOL, in support of Angola’s developing petroleum industry. Initial service was provided between Houston, Texas, and Luanda, Angola, twice a week. In January 2003, the Company began flying a third weekly flight for Sonair between Houston, Texas, and Malabo, Equatorial Guinea. In July 2003, the Company announced an extension of the Sonair agreement to June 2004 that resulted in total 2003 revenues in excess of $27.0 million. The new contract extension also includes two one-year renewal options that could further extend the relationship to June 2006 and provide a total of $85 million in revenue over the three-year term.

      Garuda. The Company has flown for Garuda periodically since 1973. The Company operated three aircraft for Garuda during the 2001 Hadj pilgrimage. The Company did not provide Hadj airlift services in 2003 or 2002 because of weakened demand and various security considerations due to the September 11, 2001 events. The Company does not have plans to provide this service in the foreseeable future.

      Information concerning the classification of the Company’s revenues comprising 10% or more of total operating revenues is presented in the following table (in millions):

Backlog

      The Company had contract backlog of $158.4 million and $154.5 million at December 31, 2003 and 2002, respectively. Approximately 75% of the backlog at December 31, 2003 relates to the Company’s contract with the USAF, and the entire $158.4 million of backlog relates to air transportation services for 2004. See Note 12 of the Company’s “Notes to Consolidated Financial Statements” in Item 8 for additional information regarding major customers and foreign source revenue.

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Maintenance

      Airframe and engine maintenance costs, which account for most of the Company’s maintenance expenses, typically increase as the aircraft fleet ages. The Company outsources major airframe maintenance and engine work to several suppliers. The Company has agreements expiring in 2005 with Delta Air Lines for off-wing maintenance on the Pratt & Whitney 4462 engines that power its MD-11 aircraft, and repair of MD-11 aircraft and its components. The Company also has maintenance agreements with Triumph Air Repair (“Triumph”) for the repair of auxiliary power units on the MD-11 and DC-10-30 aircraft. The agreements with Triumph will expire in 2004 and 2005, respectively. The Company has a maintenance agreement with Honeywell for wheel and brake repairs on both aircraft types that will expire in 2006. In addition, the Company has a landing gear overhaul/exchange program with McDonnell Douglas/ Boeing that expires after all landing gear listed in the contract will have been overhauled, which should be in the first quarter of 2004.

Aviation Fuel

      The Company incurs fuel expenses for full-service flights provided to customers. Certain full service contracts contain terms that limit the Company’s exposure to increases in fuel prices. However, the terms of such contracts are renewed annually and take estimated market prices for fuel for the period under contract into consideration. Both the cost and availability of aviation fuel are subject to many economic and political factors and events occurring throughout the world and remain subject to various unpredictable economic and market factors that affect the supply of all petroleum products. Fluctuations in the price of fuel have not had a significant impact on the Company’s operations because, in general, the Company’s contracts with its customers that cover 96% of fuel purchased limit the Company’s exposure to increases in fuel prices. Substantial increases in the price or the unavailability of aviation fuel could have a material adverse effect on the Company.

      The Company’s primary sources of aviation fuel are major oil companies at commercial airports and from United States military organizations at military bases. The Company’s current fuel purchasing policy consists of the purchase of fuel within seven days in advance of all flights based on current prices set by individual suppliers. The Company annually solicits quotes for prices of aviation fuel from a group of suppliers at each location. The Company does not purchase fuel under long-term contracts nor does the Company enter into futures or fuel swap contracts.

Regulatory Matters

      Since it was founded in 1948, the Company has been authorized to engage in commercial air transportation by the Department of Transportation (“DOT”) or its predecessor agencies. The Company is currently authorized to engage in scheduled and charter air transportation to provide combination (persons, property and mail) and all-cargo services between all points in the U.S., its territories and possessions. It also holds worldwide charter authority for both combination and all-cargo operations. In addition, the Company is authorized to conduct scheduled combination services to the foreign points listed in its DOT certificate. The Company also holds certificates of authority to engage in scheduled all-cargo services to a limited number of foreign destinations. The Company does not currently operate any scheduled services on its own behalf.

      The Company is subject to the jurisdiction of the Federal Aviation Administration (“FAA”) with respect to aircraft maintenance, flight operations, equipment, aircraft noise, ground facilities, dispatch, communications, training, weather observation, flight time, crew qualifications, aircraft registration and other matters affecting air safety. The FAA requires air carriers to obtain an operating certificate and operations specifications authorizing the carriers to operate to particular airports on approved international routes using specified equipment. These certificates and specifications are subject to amendment, suspension, revocation, or termination by the FAA. In addition, all of the Company’s aircraft must have and maintain certificates of airworthiness issued or approved by the FAA. The Company currently holds an FAA air carrier operating certificate and operations specifications under Part 121 of the Federal Aviation Regulations. The FAA has the

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      The Company believes it is in compliance in all material respects with all requirements necessary to maintain in good standing its operating authority granted by the DOT and its air carrier operating certificate issued by the FAA. A modification, suspension, or revocation of any of the Company’s DOT or FAA authorizations or certificates could have a material adverse effect upon the Company. The Company also is subject to state and local laws and regulations at locations where it operates and the regulations of various local authorities, which operate the airports it serves. Certain airport operations have adopted local regulations that, among other things, impose curfews and noise abatement regulations. While the Company believes it is currently in compliance in all material respects with all appropriate standards and has all required licenses and authorities, any material non-compliance by the Company therewith or the revocation or suspension of licenses or authorities could have a material adverse effect on the Company.

      In 2000, the FAA issued an Airworthiness Directive (“AD”) that will require the replacement of insulation blankets on the Company’s MD-11 aircraft by June 2005. The Company has begun replacement of the affected insulation blankets on MD-11 aircraft. This is being accomplished in phases, during scheduled maintenance work, to minimize the impact on operational availability. The Company presently estimates the cost of replacement, including labor and material, will total approximately $0.5 million per aircraft and approximately 31% of this work was complete as of December 31, 2003.

      In March 2001, the FAA issued a rule that requires the Company to install enhanced ground proximity warning systems in its aircraft by March 2005. The Company currently estimates that the cost of such installation will be approximately $77,000 per MD-11 aircraft and $129,000 per DC-10-30 aircraft. In October 2001, the FAA also issued an AD that requires the Company to modify the engine thrust reversers on its DC-10-30 aircraft by October 1, 2006 and will cost approximately $0.5 million per aircraft. In response to the events of September 11th, the FAA issued Special Federal Aviation Regulation (“SFAR”) 92 in October 2001 regarding general aircraft and cockpit security. The Company has complied with SFAR 92 by installing new cockpit doors on all its passenger aircraft. Three cargo aircraft are operating under SFAR 92 guidelines with the required restraint bars and new cockpit doors are to be installed in the first quarter of 2004. There may be other aircraft modifications that may be required in the future under the SFAR.

      In the fall of 2003, the FAA issued an AD that requires the replacement of the ring case located in the compressor area of the Company’s MD-11 engines. The Company presently estimates that it will incur approximately $0.3 million per engine, subject to further negotiations with the engine manufacturer related to cost-sharing for this AD. This work must be accomplished by June 30, 2009.

      Due to increased airport security needs as a result of the September 11th events and the potential for future terrorist attacks, Congress enacted in November 2001 the Aviation and Transportation Security Act (the “Security Act”) which established the Transportation Security Administration (the “TSA”) within the DOT. Consistent with the Security Act, the TSA imposed a security service fee, effective February 1, 2002, in the amount of $2.50 per enplanement on passengers of domestic and foreign air carriers in air transportation, foreign air transportation, and intrastate air transportation originating at airports in the United States. The passengers are not charged for more than two enplanements per one-way trip or four enplanements per round trip. Beginning in 2002, the Company also has to remit an additional $330,000 annually through 2004 to cover TSA’s aviation security infrastructure fees. This additional fee was imposed on air carriers because current passenger fees were insufficient to cover TSA’s costs of providing civil aviation security services. The air carriers must remit these imposed fees monthly to the TSA by the last calendar day of the following month. From June 2003 through September 2003, the TSA suspended all airlines’ requirement to remit both the per passenger fee and the monthly infrastructure fee.

      Additional laws and regulations have been considered from time to time which could significantly increase the cost of airline operations by imposing additional requirements or restrictions on operations. Laws and regulations have been considered from time to time that would prohibit or restrict the ownership and transfer of airline routes. There is no assurance that laws and regulations currently enacted or enacted in the future will not adversely affect the Company’s ability to maintain its current level of operations.

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      Several aspects of airline operations are subject to regulation or oversight by Federal agencies other than the DOT or FAA. For instance, labor relations in the air transportation industry are generally regulated under the Railway Labor Act, which vests in the National Mediation Board certain regulatory powers with respect to disputes between airlines and labor unions arising under collective bargaining agreements. In addition, the Company is subject to the jurisdiction of other governmental entities, including (i) the Federal Communications Commission (“FCC”) regarding its use of radio facilities pursuant to the Federal Communications Act of 1934, as amended, (ii) the Commerce Department, the Customs Service, the Immigration and Naturalization Service, and the Animal and Plant Health Inspection Service of the Department of Agriculture regarding the Company’s international operations, (iii) the Environmental Protection Agency (the “EPA”) regarding compliance with standards for aircraft exhaust emissions, and (iv) the Department of Justice regarding certain merger and acquisition transactions. The Company believes it is in substantial compliance with all applicable regulatory requirements.

      The Company’s international operations are generally governed by a network of bilateral civil air transport agreements providing for the exchange of traffic rights between governments which then select and designate air carriers authorized to exercise such rights. In the absence of a bilateral agreement, such international air services are governed by principles of comity and reciprocity. Bilateral provisions pertaining to the wet lease services in which the Company is engaged vary considerably depending on the particular country. Most bilateral agreements into which the U.S. has entered permit either country to terminate the agreement with one year’s notification to the other. In the event a bilateral agreement is terminated, international air service between the affected countries is governed by the principles of comity and reciprocity.

      Pursuant to federal law, no more than 25% of the voting interest in the Company may be owned or controlled by foreign citizens. In addition, under existing precedent and policy, actual control must reside in U.S. citizens. As a matter of regulatory policy, the DOT has stated that it would not permit aggregate equity ownership of a domestic air carrier by foreign citizens in an amount in excess of 49%. The Company believes it fully complies as of the date hereof with U.S. citizen ownership requirements.

      Due to its participation in the CRAF program of the USAF, the Company is subject to inspections by the military approximately every two years as a condition of retaining its eligibility to perform military charter flights. The last such inspection was undertaken in 2003 and the Company met the requirements for continued participation in the CRAF program. The USAF may terminate its contract with the Company if the Company fails to pass such inspection or otherwise fails to maintain satisfactory performance levels, if the Company loses its airworthiness certificate or if the aircraft pledged to the contracts lose their U.S. registry or are leased to unapproved carriers.

Employees

      As of December 31, 2003, the Company had 1,241 full time equivalent employees classified as follows:

      The Company’s cockpit crewmembers are represented by the Teamsters and are subject to a collective bargaining agreement that became amendable June 30, 2003. In December 2003, the Company announced that it would begin negotiations with the cockpit crewmembers in January 2004. It was also announced that the Teamsters had requested mediation services from the NMB. Following three days of negotiations 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

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      On September 2, 2003, the Company’s flight attendants, who are also represented by the Teamsters, ratified a new three-year collective bargaining agreement that has a new amendable date of August 31, 2006. The agreement includes pay increases and other benefit changes requested by the flight attendants, while providing the Company work-rule changes in support of its financial goals.

      The Company’s aircraft dispatchers, who are represented by the Transport Workers Union (“TWU”), are subject to a collective bargaining agreement that became amendable December 31, 2003. Fewer than 15 Company employees are covered by this collective bargaining agreement. The Company and the TWU commenced formal negotiations in January 2004.

      The Company is unable to predict whether any of its employees not currently represented by a labor union will elect to be represented by a labor union or collective bargaining unit. The Company is not aware of any parties or group of employees who have indicated any intent of petitioning for such an election. The election by such employees of representation in such an organization could result in employee compensation and working condition demands that could have a material adverse effect on the financial results of the Company.

Risk Factors

      The Company cautions the reader that the risk factors discussed below may not be exhaustive. The Company operates in a continually changing business environment and new risk factors emerge from time to time. The Company cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on the Company’s business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed in any forward-looking statement.

      At December 31, 2003, the Company had $57.2 million of long-term debt outstanding, including $30.0 million outstanding under the ATSB Loan and $25.5 million aggregate principal amount of the New Debentures. In addition, the Company has significant long-term obligations relating to operating leases in connection with its aircraft and spare engines and its leased real property. At December 31, 2003, these obligations totaled $286.3 million through 2008 and $248.7 million thereafter.

      As a result of the Company’s high financial leverage:

	•	The Company does not have the ability to obtain additional financing. The Company’s indebtedness outstanding under the ATSB Loan is secured by substantially all of its assets. In addition, the ATSB Loan contains restrictive provisions which require prepayments in the event that the Company sells any significant assets, receives proceeds from future borrowings from other sources and issuances of certain securities, or receives net proceeds from insurance and condemnation.
	•	The Company’s ability to fund general corporate requirements, including capital expenditures, may be impaired. The Company has substantial obligations to pay principal and interest on its debt and other recurring fixed costs. Further, the Company may be required to prepay portions of the ATSB Loan under various circumstances. Accordingly, the Company may have to use its working capital to fund such payments and other recurring fixed costs instead of funding general corporate requirements.
	•	The Company’s ability to respond to competitive developments and adverse economic conditions may be limited. Without the 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.

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      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 loan agreement governing the ATSB Loan, the Company is subject to certain covenants pursuant to which the Company must satisfy various financial covenants requiring it to maintain a certain amount of unrestricted cash or cash equivalents and to comply with certain financial ratios.

      In addition, the ATSB Loan agreement also contains a number of negative covenants, including, but not limited to, restrictions on:

	•	granting additional liens on the Company’s property or making significant investments;
	•	paying dividends, redeeming capital stock, repricing outstanding stock options or repaying indebtedness other than the ATSB Loan;
	•	liquidating, winding up, dissolving or engaging in certain acquisitions or certain sale-leaseback transactions;
	•	engaging in certain transactions with affiliates or certain asset sales;
	•	engaging in any business unrelated to the Company’s existing business;
	•	consolidating, merging with or into another entity or selling substantially all of the Company’s assets unless certain conditions are satisfied; and
	•	amending the terms of agreements relating to the Company’s other indebtedness for borrowed money or granting any additional negative pledges.

      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 these requirements, its obligations under the ATSB Loan and its operating leases may be accelerated. The Company cannot assure its stockholders that it would be able to 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 as well as the value of the Company’s Common Stock.

      Under the ATSB Loan, $27.0 million of the Company’s indebtedness bears interest at fluctuating interest rates based on the lender’s weighted average cost of issuing commercial paper, and if the loan is assigned to a third party, will bear interest based on the London interbank offered rate (“LIBOR”). The balance of the Company’s indebtedness under the ATSB Loan bears interest at fluctuating rates based on LIBOR. LIBOR rates tend to fluctuate based on general economic conditions, general interest rates, including the prime rate, and the supply of and demand for commercial paper or for credit in the London interbank market. The Company has not hedged its interest rate exposure and, accordingly, the Company’s interest expense for any particular period may fluctuate based on LIBOR rates. To the extent these rates increase, the Company’s interest expense will increase, in which event the Company may have difficulties making interest payments and funding its other fixed costs and its available cash flow for general corporate requirements may be adversely affected.

      The Company is highly dependent on revenues from the U.S. Air Force. Revenues from USAF represented 74.7% and 72.2% of the Company’s total revenues for the years ended December 31, 2003 and 2002, respectively. The Company provides transportation services to the USAF under annual contracts. If the Company loses these contracts with the USAF, or if the USAF reduces substantially the amount of business it

11

      Non-military customers who have contracted with the Company may cancel or default on their contracts, and the Company may not be able to obtain other business to cover the resulting loss in revenues. For the year ended December 31, 2003, the Company’s five largest non-military customers accounted for approximately 20.2% of its total operating revenues. If these customers cancel or default on their obligations and the Company is not able to obtain other business, its financial position could be materially adversely affected.

      Due to the high fixed costs of leasing and maintaining the Company’s aircraft and costs for cockpit crew members and flight attendants, each of the Company’s aircraft must have high utilization in order for the Company to operate profitably. Although the Company’s preferred strategy is to enter into long-term contracts with its customers, the terms of the Company’s existing customer contracts are in most cases substantially shorter than the terms of the Company’s lease obligations with respect to its aircraft. The Company cannot provide assurance that it will be able to enter into additional contracts with new or existing customers or that the Company will be able to obtain enough additional business to fully utilize each aircraft. The Company’s financial position and results of operations could be materially adversely affected by periods of low aircraft utilization and yields.

      The Company may incur substantial losses in the event of an aircraft accident. These losses may include the repair or replacement of a damaged aircraft, and the consequent temporary or permanent loss of the aircraft from service, loss of business due to negative publicity, as well as claims of injured passengers and other persons for destroyed cargo.

      The Company is required by contractual obligations with lessors, the DOT, and company policy to carry liability insurance on each of its aircraft. The Company currently maintains liability insurance for passengers and third party damages, excluding those caused by war or terrorist attacks, in the amount of $1.5 billion. In addition, the Company currently maintains liability insurance for passenger liability and third party damages caused by war or terrorist attacks in the amount of $1.5 billion per occurrence with an annual aggregate limit of $3.0 billion provided by the U.S. Government.

      Although the Company believes its insurance coverage is adequate, it cannot provide assurance that the amount of its insurance coverage will not change or that the Company will not be forced to bear substantial losses from accidents. Substantial claims resulting from an accident could have a material adverse effect on the Company’s business, operations and financial results and could seriously inhibit customer acceptance of its services.

      The Company is subject to the jurisdiction of the FAA, with respect to aircraft maintenance and other matters affecting air safety. Manufacturer Service Bulletins and FAA Airworthiness Directives could cause aircraft operators to be subject to extensive aircraft examinations and could require aircraft to undergo structural inspections and modifications. It is possible that Manufacturer Service Bulletins or Airworthiness Directives applicable to the types of aircraft or engines included in the Company’s fleet could be issued in the future. The Company cannot currently estimate the cost of compliance with new Manufacturer Service

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      The Company has agreements with contractors, including other airlines, to provide certain facilities and services required for its operations, including all of the Company’s off-wing engine maintenance and most airframe maintenance. The Company also has agreements with contractors to provide security, ground handling and personnel training. The failure of these contractors to provide essential services that are not otherwise entirely within the Company’s control could have a material adverse effect on its financial condition and results of operations.

      The Company’s flight attendants are represented by the Teamsters. On September 3, 2003, the Company’s flight attendants ratified a collective bargaining agreement proposed in July 2003 to extend the flight attendants collective bargaining agreement until August 31, 2006 and to allow for pay increases and other benefit changes requested by the flight attendants. On January 16, 2004, the Company reached a three-year tentative agreement with the Teamsters covering the Company’s cockpit crewmembers. The updated agreement called for work rule changes and wage increases. On February 27, 2004, the Company received a notification that the tentative agreement was not ratified by a majority of the Teamsters’ members. The Company will reconvene negotiations with the Teamsters at a later date. The Company is unable to predict whether any of its employees not currently represented by a labor union, such as its maintenance personnel, will elect to be represented by a labor union or collective bargaining unit. The election of such employees for union representation could result in employee compensation and working condition demands that could have a material adverse effect on the Company’s financial condition and results of operations. The Company is also unable to predict whether its flight attendants will choose to renew their collective bargaining agreement in 2006.

      The Company is subject to government regulation and control under the laws of the United States and the various other countries in which it operates. The Company is also governed by bilateral air transport services agreements between the U.S. and the countries to which the Company provides airline services. The Company is subject to Title 49 of the United States Code under which the DOT and the FAA exercise regulatory authority. Additionally, foreign governments assert jurisdiction over air routes and fares to and from the U.S., airport operation rights and facilities access. Due to the Company’s participation in the Civil Reserve Air Fleet, it is subject to inspections approximately every two years by the USAF as a condition to retaining the Company’s eligibility to provide military charter flights. The USAF may terminate its contract with the Company if the Company fails to pass such inspection or otherwise fails to maintain satisfactory performance levels.

      The Company periodically receives correspondence from the FAA with respect to minor noncompliance matters. While the Company believes that it is currently in compliance in all material respects with all appropriate FAA standards and has obtained all required licenses and authorities, any material non-compliance with such standards or the revocation or suspension of licenses or authorities could have a material adverse effect on the Company’s financial condition and results of operations.

      The air transportation industry is heavily regulated. Both federal and state governments from time to time propose laws and regulations that impose additional requirements and restrictions on air transportation

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      The market for outsourcing air passenger and cargo ACMI (aircraft, crew, maintenance and insurance) services and full service charter business is highly competitive. Certain of the passenger and cargo air carriers against which the Company competes possess substantially greater financial resources and more extensive facilities and equipment than those which are now, or will in the foreseeable future become, available to the Company. The Company believes that the most important bases for competition in the ACMI outsourcing business are the age of the aircraft fleet, the passenger, payload and cubic capacities of the aircraft, and the price, flexibility, quality and reliability of the air transportation services provided. The Company’s competitors in the passenger charter market include North American Airlines, Omni Air International, Miami Air and American Trans Air and in the cargo charter market include cargo carriers Atlas Air (including Polar Air Cargo), Gemini Air Cargo, Evergreen and Centurion Air Cargo, as well as scheduled and non-scheduled passenger carriers that have substantial belly capacity. The Company’s ability to continue to grow depends upon its success in convincing major international airlines that outsourcing some portion of their air passenger and cargo business remains more cost-effective than undertaking passenger or cargo operations with their own incremental capacity and resources. The allocation of military air transportation contracts by the USAF is based upon the number and type of aircraft a carrier, alone or through a teaming arrangement, makes available for use in times of national emergencies. The formation of competing teaming arrangements comprised of larger partners than those sponsored by the Company, an increase by other air carriers in their commitment of aircraft to the emergency program, or the withdrawal of the Company’s current partners, could adversely affect the size of the USAF contracts which may be awarded to the Company in future years.

      Many of the Company’s executive officers are key to the management of the Company’s business and operations. The Company’s future success depends on its ability to retain these officers and other capable managers. Although the Company believes that it could replace key personnel given adequate prior notice, the unexpected departure of key executive officers could cause substantial disruption to the Company’s business and operations. In addition, the Company may not be able to retain and recruit talented personnel without incurring substantial costs.

      The air travel business historically fluctuates on a seasonal basis and in response to general economic conditions. Due to the greater demand for air and leisure travel during the summer months, revenues in the airline industry in the second and third quarters of the year tend to be greater than revenues in the first and fourth quarters of the year. In addition, the airline industry is highly susceptible to unforeseen events that

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      The terrorist attacks of September 11, 2001 have had, and continue to have, a wide-ranging negative impact on the air transportation industry because they resulted in, among other things:

	•	a reduction in the demand for travel;
	•	an increase in costs due to enhanced security measures and government directives in response to the terrorist attacks;
	•	an increase in the cost of aviation insurance in general, and the cost and availability of coverage for acts of war, terrorism, hijacking, sabotage and similar acts of peril in particular; and
	•	the other risks discussed in this Annual Report.

      The terrorist attacks of September 11, 2001 resulted in staggering losses to the insurance industry. These losses resulted in a significant increase in the Company’s insurance premiums, which has negatively impacted its financial results, and could lead to future increases in its insurance premiums. In addition, these losses caused general instability in the insurance industry that could adversely affect some of the Company’s existing insurance carriers or its ability to obtain future insurance coverage. To the extent that the Company’s existing insurance carriers are unable to provide the insurance coverage contracted for, its insurance costs may further increase.

      Moreover, since September 11, 2001, the Company and others in the airline industry have been unable to obtain third party war risk, terrorism, hull and liability insurance at reasonable rates from the commercial insurance market and have been obtaining this insurance through a special program administered by the FAA. The Emergency Wartime Supplemental Appropriations Act extended this insurance protection until August 2004. Should the federal insurance program terminate, the Company would likely face a material increase in the cost of such insurance. Because of competitive pressures in the Company’s industry, the Company’s ability to pass these additional costs to customers would be limited and the increased costs could be material to its financial condition.

      At December 31, 2003, there were outstanding warrants to purchase an aggregate of 4,378,223 shares of the Company’s common stock. In addition, the Company has outstanding $25.5 million aggregate principal amount of the New Debentures. All of the shares subject to the Company’s outstanding warrants and the New Debentures have been or will be registered for resale under the Securities Act, and, therefore, may be sold in the public market. Any sales in the public market of common stock issued upon the exercise of warrants or upon the conversion of the New Debentures could adversely affect prevailing market prices of the Company’s common stock. In addition, the existence of the warrants and the New Debentures may encourage short selling by market participants because exercise of the warrants or conversion of the New Debentures could depress the price of the Company’s Common Stock.

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      The Company’s Common Stock is listed for trading on the Nasdaq SmallCap Market (“Nasdaq”), under the symbol “WLDA.” In order to continue to be listed on Nasdaq, however, the Company must meet certain criteria, including one of the following:

	•	maintaining $2,500,000 in stockholders’ equity;
	•	having a market capitalization of at least $35,000,000; or
	•	generating annual net income of $500,000.

In addition, the minimum bid price of the Company’s Common Stock must be at least $1.00 per share. The potential dilution resulting from the exercise of warrants issued to the ATSB in connection with the ATSB Loan, as well as other events beyond the Company’s control, could cause the per share market price of the Company’s Common Stock to drop below the minimum bid price of $1.00 per share. As of December 31, 2003, the Company did not satisfy the requirement for stockholders equity. The failure to meet Nasdaq’s maintenance criteria may result in the delisting of the Company’s Common Stock from Nasdaq. As a result of such delisting, the Company’s stockholders could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company’s Common Stock.

      The market price of the Company’s Common Stock has been subject to significant fluctuations in response to the Company’s operating results and other factors. The market price of the shares of the Company’s Common Stock has varied significantly and may be volatile depending on news announcements and changes in general market conditions. In particular, news announcements regarding quarterly results of operations, competitive developments, litigation or governmental regulatory actions impacting the Company may adversely affect the price of the Company’s Common Stock. In addition, the sale of a substantial number of shares of Common Stock in a short period of time could adversely affect the market price of the Common Stock. Also, the stock market has from time to time experienced extreme price and volume volatility. These fluctuations may be unrelated to the operating performance of particular companies whose shares are traded. Market fluctuations may adversely affect the market price of the Company’s Common Stock. The Company cannot assure its stockholders that the market price of its Common Stock will not decline in the future.

      Certain provisions of Delaware law and the Company’s Certificate of Incorporation and Bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Certain of these provisions allow the Company to issue preferred stock with rights senior to those of the Common Stock without any further vote or action by the holders of Common Stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of the Company’s Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Company’s Common Stock. In addition, the Company’s Certificate of Incorporation provides for its board of directors to be divided into three classes of directors serving staggered three-year terms. Classification of the Company’s board of directors expands the time required to change the composition of a majority of directors and may tend to discourage an acquisition proposal for the Company.

      Because the Company is a U.S. certificated flag carrier, under applicable regulatory restrictions, no more than 25% of the Company’s voting stock may be owned or controlled, directly or indirectly, by persons who are

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Flight Equipment

      As of December 31, 2003, the Company’s operating fleet consisted of eleven MD-11 and seven DC-10-30 aircraft, all of which are operated under operating leases. The MD-11 fleet includes eight passenger aircraft (four of which are long-range versions) and three freighter aircraft. The DC-10-30 fleet includes four freighter aircraft and three passenger aircraft. One DC-10-30 freighter aircraft was returned to its lessor in the first quarter of 2004, and a second DC-10 freighter is expected to be returned to its lessor in the second quarter of 2004.

      At December 31, 2003, the Company’s operating fleet consisted of the following:

Notes

      As indicated above, one DC-10 aircraft was returned to its lessor in the first quarter of 2004 and the other DC-10 is expected to be returned to its lessor in the second quarter of 2004. In addition, the lease term for three DC-10 aircraft expire in the second half of 2004, and the remaining two expire in 2008.

      The lease terms for five of the MD-11 aircraft expire throughout 2005 and 2006, and three expire in 2008. The three leases that expire in 2008 previously had lease terms that would have expired in 2005, but were extended in conjunction with the closing of the ATSB Loan which occurred on December 30, 2003. The three remaining MD-11 aircraft leases were amended in the first quarter of 2004, and include changes to the lease expiration dates of the aircraft. The term for one aircraft will expire in January 2006, and may be automatically extended for a one-year period depending on the market price of the Company’s Common Stock during a specified time period. If the lease is extended, there is a further provision that would allow for a second automatic one-year extension through January 2008, which is also dependent on the market price of the Company’s Common Stock during a specified period of time. If at any time during the term of the lease, the Company’s Common Stock is no longer traded publicly, the lease term for this aircraft is automatically extended to expire in January 2008. The remaining two MD-11 leases, which were also restructured in the first quarter of 2004, will now expire in either 2011 or 2012, depending on the Company’s ability to meet certain financial conditions.

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Ground Facilities

      The Company leases office space in Peachtree City, Georgia, for its corporate headquarters and substantially all of the administrative employees of the Company. The Company is also obligated under a lease for office space in Herndon, Virginia, the location of its former headquarters. See Note 8 in the “Notes to Consolidated Financial Statements” in Item 8 for additional information.

      Also, the Company leases office and warehouse space in Los Angeles, California; Morrow, Peachtree City, Tyrone and Atlanta, Georgia; Baltimore, Maryland; Las Vegas, Nevada; Jamaica, New York; Dayton, Ohio; Houston, Texas; Norfolk, Virginia; Seattle, Washington; and Frankfurt, Germany. Additional small office and maintenance material storage space is leased at often frequented airports to provide administrative and maintenance support for commercial and military contracts.

      A claim has been filed in the 19th Civil Court District Court, Frankfurt, Germany, against the Company by a tour operator seeking approximately $4.2 million in compensation related to the cancellation of a summer program in 1996. The Company believes it has substantial defenses to this action, although no assurance can be given of the eventual outcome of this litigation. Because of the uncertain outcome of this action, no amounts have been accrued in the consolidated financial statements.

      Miami-Dade County is currently investigating and remediating various environmental conditions at the Miami International Airport (MIA). During the second quarter of 2001, the County filed a lawsuit against 17 defendants, which does not currently include World Airways, in an attempt to recover its past and future clean-up costs. This claim has been filed in the Florida Circuit Court for the 11th Judicial District in Dade County Florida. In addition to the 17 named in the lawsuit, 243 other agencies and companies that were prior tenants at MIA (potentially responsible parties or “PRP’s”), including World Airways, were issued letters advising of the lawsuit and indicating that any PRP’s could be named as additional defendants in the future depending upon a determination as to the levels of contamination and the extent to which any PRP may have contributed to any alleged contamination. At this point certain PRP’s, including World Airways, have joined a joint defense group to respond to the County’s inquiries and investigation of the PRP’s. This group is conducting preliminary investigations of the site in question to determine each PRP’s potential exposure. This process is ongoing and the potential exposure of World Airways has yet to be determined.

      In January and February 2004, seven purported class action complaints (four 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, and one in the United States District Court for the Northern District of Illinois) and four individual complaints (one in the United States District Court for the Southern District of New York, one small claims action in New York, one small claims action in New Jersey, and one small claims action in California) were filed against the Company arising out of the discontinuance of charter flights upon the expiration of the Company’s obligation to provide services under an air services agreement. The Company had operated the charter flights between cities in the United States and Lagos, Nigeria for Ritetime Aviation and Travel Services, Inc. (“Ritetime”). The Company’s obligation to perform air services for Ritetime ended with the last chartered flight on December 30, 2003. From the allegations made by the various plaintiffs, it appears that Ritetime continued to sell tickets for flights purportedly scheduled to depart after the expiration of the Company’s contractual obligations for air services. The plaintiffs purport to act for themselves and on behalf of other persons who held tickets issued by Ritetime for the non-contracted flights. Ritetime is also named as a defendant in each of these lawsuits. The plaintiffs seek compensatory, punitive and/or treble damages and costs and expenses, including attorneys fees, based on various legal theories including breach of contract, fraud, negligent misrepresentation, unjust enrichment, illegal/excess tax and violations of U.S. federal laws and regulations governing air transportation and of the Federal Racketeer Influenced and Corrupt Organization Statute. The Company is cooperating with the DOT in its inquiry concerning this matter. During March 2004, Ritetime filed a Demand to Arbitrate in Peachtree City, Georgia, and subsequently the Company responded and filed a counterclaim. The Company believes that the allegations against it are without merit and intends to vigorously defend itself in these lawsuits, although it

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      On January 9, 2004, Whitebox Convertible Arbitrage Partners, L.P. and Pandora Select Partners, L.P. filed a complaint in the United States District Court for the District of Minnesota alleging breach of contract by the Company in connection with its purchase in December 2003 of $22,545,000 aggregate amount of 8% Convertible Senior Subordinated Debentures due 2004 (the “Old Debentures”) in exchange for a like amount of newly-issued 8% Convertible Senior Subordinated Debentures due 2009 (the “New Debentures”). The plaintiffs in this lawsuit allege that they have held at all relevant times $2,530,000 and $780,000 principal amount, respectively, of Old Debentures and that the Company breached the terms of the indenture governing the Old Debentures by purchasing Old Debentures from a selected group of holders rather than from holders determined by lot or from all holders on a pro rata basis. The plaintiffs are seeking damages in an amount equal to the difference in value between the New Debentures and the Old Debentures held by the plaintiffs and interest lost by the plaintiffs on the Old Debentures through maturity on August 26, 2004 as well as costs and reasonable attorney fees. The Company believes that this claim is without merit and intends to defend itself vigorously in this lawsuit, although it cannot give any assurance that this litigation will not have a material adverse effect on the Company’s financial condition or results of operation.

      In February 2004, the Company made a self-disclosure to the Federal Aviation Administration (“FAA”) concerning aircraft record irregularities discovered upon preparing for the return of two DC-10-30 aircraft. The Company subsequently received a letter from the FAA opening an investigation into a possible violation of the Code of Federal Regulations. The Company has complied with all requests of the FAA and is waiting to receive notification of the FAA’s findings. At the present time, the Company cannot determine what impact, if any, the FAA’s findings will have on the Company operationally or financially.

      In addition, World Airways is party to routine litigation and administrative proceedings incidental to its business, none of which is believed by the Company to be likely to have a material adverse effect on the financial condition and results of operations of the Company.

      On December 15, 2003, the Company held a special meeting of stockholders to consider and vote upon the following proposals:

	(a) to approve the issuance of $25.5 million aggregate principal amount of 8.0% Convertible Senior Subordinated Debentures due 2009 (the “New Debentures”) in exchange for $22.5 million principal amount of the Company’s outstanding 8.0% Convertible Senior Subordinated Debentures due 2004 (the “Old Debentures”) and $3.0 million in cash; and
	(b) to approve the issuance of warrants to the Air Transportation Stabilization Board (the “ATSB”) to purchase shares of the Company’s Common Stock in connection with a federal guarantee of $27.0 million to support a $30.0 million term loan facility.

      The following table reflects the votes with respect to each matter voted upon at the special meeting:

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PART II

      The Company’s Common Stock currently trades on the Nasdaq SmallCap Market of The Nasdaq-Amex Market Group^SM under the symbol: “WLDA”. The high and low bid prices of the Company’s Common Stock, as reported by Nasdaq, for each quarter in the last two fiscal years are as follows:

      The Company has not declared or paid any cash dividends or distributions on its Common Stock since 1992. The Company currently intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Any future decision concerning the payment of dividends on its Common Stock will depend upon the results of operations, financial condition, capital expenditure plans of the Company, provisions of certain financing instruments as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant. In December 2003, the Company entered into a $30 million term loan agreement that restricts the Company’s ability to pay dividends or purchase treasury stock. In addition, the indentures governing the New Debentures provide that the Company may not pay any cash dividend or make any other cash payment or distribution to the holders of Common Stock until the date when all the New Debentures have been converted into Common Stock. (See Note 7 of the Company’s “Notes to Consolidated Financial Statements” in Item 8).

      The approximate number of shareholders of record at December 31, 2003 was 554, which does not include those shareholders who hold shares in street name accounts.

Recent Sales of Unregistered Securities

      During the quarter ended December 31, 2003, the Company issued the securities described below in transactions that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

      On December 30, 2003, the Company issued $25.5 million aggregate principal amount of the New Debentures in exchange for $22.5 million aggregate principal amount of the Company’s then outstanding Old Debentures and $3.0 million in cash. The New Debentures accrue interest at the rate of 8.0% per annum, are convertible into the Company’s Common Stock at $3.20 per share, and mature on December 30, 2009.

      On December 30, 2003, in connection with the closing of the ATSB Loan and as additional compensation for the loan guarantee, the Company issued to the ATSB a series of warrants (collectively, the “ATSB Warrants”) to purchase in the aggregate 2,378,223 shares of the Company’s Common Stock. The ATSB Warrants consist of the following: (a) warrants to purchase 1,269,022 shares of Common Stock, exercisable at $0.78 per share through December 30, 2008; (b) warrants to purchase 886,979 shares of Common Stock, exercisable at $3.20 per share through December 30, 2009; (c) warrants to purchase 111,111 shares of

20

      The New Debentures were issued without registration in reliance on the exemption from registration provided in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The ATSB Warrants were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act. The New Debentures and the ATSB Warrants were issued in transactions not involving any public offering. The acquirers of the New Debentures and the ATSB Warrants were provided access to all material information about the Company which they requested and all information necessary to verify such information, and were afforded access to management of the Company in connection with these transactions. Each acquirer of New Debentures and ATSB Warrants represented to the Company that it acquired such securities for investment and not with a view towards distribution. All certificates or agreements representing the New Debentures or the ATSB Warrants bear restrictive legends to the effect that the securities represented by such certificates or agreements have not been registered under the Securities Act and may not be transferred or otherwise disposed of in the absence of an effective registration statement under the Securities Act or applicable state securities law, unless an exemption from registration is available.

21

      The following selected financial data are derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto.

      At December 31, 2003, the Company had $53.8 million of cash and cash equivalents, of which $23.3 million was restricted. This was due to $18.8 million required to pay the principal and interest on the convertible debentures called for redemption on December 30, 2003 (which was paid on January 28, 2004),

22

      Effective January 1, 2000, the Company changed its method of accounting for certain aircraft maintenance costs from the accrual method of accounting to the direct expense method. Under the new accounting method, maintenance costs are recognized as expense as maintenance services are performed and as flight hours are flown for nonrefundable maintenance payments required by lease agreements.

      Management’s Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the operations of World Airways as reflected in its consolidated financial statements.

Critical Accounting Policies

      The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

      Critical accounting policies are those that are both most important to the portrayal of the Company’s financial condition and results and that require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

      The following is an explanation of the Company’s critical accounting policies, the judgments and uncertainties affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

      The Company’s maintenance costs are prone to greater fluctuations from year to year under the direct expense method of accounting as opposed to the accrual method of accounting, which was used prior to the change in accounting effective January 1, 2000. Under the direct expense method, costs are recognized as maintenance services are performed and as nonrefundable maintenance payments required by lease agreements and maintenance contracts with outside maintenance providers become due.

      The Company’s aircraft are maintained by outside maintenance providers. In certain cases, aircraft maintenance costs are covered by maintenance “reserve” payments made to the lessors of the Company’s aircraft. In these cases, the Company is required to set aside funds to cover future maintenance work. This is done by remitting these non-refundable amounts to the lessors each month. After qualifying maintenance is performed and paid for, the Company is reimbursed for amounts paid from the funds held by the lessors. The result of this arrangement is that the Company recognizes maintenance costs each month based on the amount of the maintenance reserves required to be paid to its lessors (usually based on a rate per hour flown). In other cases, maintenance work does not qualify for reimbursement from lessor reserves. This may be due to the type of maintenance performed or whether the aircraft component being maintained is covered by a lease agreement.

      For maintenance that is not covered by lessor reserves, the Company recognizes the costs when maintenance services are performed. Therefore, these maintenance costs will fluctuate from period to period as scheduled maintenance work comes due or in the event unscheduled maintenance work must be performed.

      It is also important to note that aggregate maintenance reserves paid to each of the Company’s lessors may not be sufficient to cover actual maintenance costs incurred. In these cases, the Company incurs the cost of any shortfall when the maintenance services are performed and the costs are determinable.

23

      The Company is obligated under an operating lease for office space at its former headquarters in Herndon, Virginia through April 2006. The Company’s total obligation at December 31, 2003 under the lease was $3.7 million. The Company received rental income, sufficient to offset its lease expense through March 2002, after which time no rental income was received except $0.4 million in 2003. The Company is currently seeking a new sub-lessee for this office space.

      The Company recognized a $1.7 million liability at December 31, 2002 for costs that will continue to be incurred, without economic benefit to the Company, over the remaining term of its lease of this office space. During 2003, the Company used $1.4 million of the accrual, reviewed its estimates and assumptions on a quarterly basis, and determined that an additional $1.7 million should be added to the accrual, resulting in a $2.0 million balance at December 31, 2003. The liability at December 31, 2003 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 sheet and the cost is included in sales, general and administrative on the accompanying consolidated statement of operations.

      Management was required to make significant estimates and assumptions in determining this liability. These included an estimated eight-month period, starting January 1, 2004, in which the Company will not obtain any sublease rentals while seeking a sub-lessee and an estimated 54 percent discount that will be provided to a suitable sub-lessee from the Company’s current monthly lease rentals. These assumptions were determined based on current market conditions for commercial office space in Herndon, Virginia and the metropolitan Washington, D.C. area.

      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.

      In November 2003, the Company agreed to convert the total amount due from the previous sub-lessee into equity, and received 5.1 million shares of common stock of the sub-lessee. This investment is not currently reflected on the Consolidated Balance Sheets.

      The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent that the future undiscounted net cash flows expected to be generated from an asset are less than the carrying amount of the asset, an impairment loss will be recognized based on the difference between the asset’s carrying amount and its estimated fair market value.

Overview and Results of Operations

      The Company’s net earnings were $15.3 million for the year ended December 31, 2003, as compared to $2.0 million for the year ended December 31, 2002 and a net loss of $26.0 million for the year ended December 31, 2001.

      Our results for each of these years were impacted by various transactions which are described below:

	•	Recording a loss on debt extinguishment of $3.0 million due to the issuance, on December 30, 2003, of $25.5 million principal amount of the Company’s Convertible Senior Subordinated Debentures due 2009 (the “New Debentures”) in exchange for $22.5 million principal amount of then outstanding 8%

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		existing Convertible Senior Subordinated Debentures due 2004 (the “Old Debentures”) and $3.0 million in cash. This represents the difference between the fair value of the New Debentures and the carrying amount of the Old Debentures extinguished.
	•	Recording $1.9 million of bad debt expense associated with air services provided to Ritetime Aviation Services.
	•	Recording a $1.7 million liability for estimated losses based on contractual lease costs (reduced by estimated sub-lease rentals) that will continue to be incurred for the remaining term of the Company’s lease agreement for office space at its former headquarters in Herndon, Virginia.
	•	Fees and expenses of $1.3 million paid due to termination of the Wells Fargo Foothill, Inc. loan facility (“Foothill loan facility”).
	•	A $0.5 million write-off of deferred issuance fees related to the Foothill loan facility.

	•	Recording a $2.0 million liability to the federal government for the return in 2003 of a portion of the grant funds received under the Air Transportation Safety and System Stabilization Act (the “Stabilization Act”).
	•	Recording a $1.7 million liability for estimated losses based on contractual lease costs (reduced by estimated sub-lease rentals) that will continue to be incurred for the remaining term of the Company’s lease agreement for office space at its former headquarters in Herndon, Virginia.
	•	Recording an $0.8 million receivable due from a lessor related to unused maintenance reserves.

	•	Recording the benefit of a $5.1 million grant received from the federal government under the Stabilization Act.

      The Company’s net earnings for 2003 increased significantly from 2002, due to the increase in operating revenue year over year, offset primarily by increases in flight expenses, fuel, maintenance costs, sales, general and administrative expenses and income taxes.

      The following table provides statistical data, used by management in evaluating the operating performance of the Company, for the years ended December 31, 2003, 2002, and 2001:

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      In 2003, the Company achieved profitability for the second consecutive year, and built a strong foundation for 2004 and the years ahead. The Company accomplished the following in 2003:

	•	Increased block hours by 15.8%.
	•	Increased revenue per block hour by 6.6%, with operating expense rising 2.1%.
	•	Further diversified revenue mix by adding new passenger customers and building the cargo business.
	•	Initiated steps to reduce aircraft costs through use of power-by-the-hour arrangements and restructuring of existing leases.
	•	Finalized a new union contract with its flight attendants.
	•	Completed a major restructuring of its debt. These transactions improved the Company’s balance sheet and now provide a foundation for the Company’s future working capital needs and growth plans. The following occurred on December 30, 2003:

	•	A $30.0 million term loan facility (the “ATSB Loan”) with a final maturity in 2008 was closed, of which $27.0 million is guaranteed by the Air Transportation Stabilization Board (the “ATSB”) and $3.0 million by a third party.
	•	$25.5 million of New Debentures were issued in exchange for $22.5 million of the Company’s then outstanding Old Debentures and $3.0 million cash.
	•	The remaining balance of $18.0 million principal amount of the Old Debentures was called for redemption and redeemed on January 28, 2004.
	•	The Foothill loan facility was terminated.

      For 2004, the Company expects to achieve the following:

	•	Profitability for a third consecutive year.
	•	Further diversification of revenue mix by adding more commercial customers, while continuing to provide excellent service to the Company’s largest customer, the U.S. military.
	•	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.
	•	Continue to seek aircraft lease cost reductions, with two of the Company’s most expensive DC-10 freighters having been returned in the first half of 2004.
	•	Initiate plans to introduce Boeing 767 aircraft to the fleet in 2005 to replace two older DC-10-30 passenger aircraft that are more costly to operate.
	•	Complete the executive succession plan announced in February 2004.

Results of Operations

      Operating Revenues. Operating revenues increased $90.4 million, or 23.5%, to $474.9 million in 2003 from $384.5 million in 2002. The higher operating revenue was primarily attributable to a $77.1 million increase in flying under the contract with the USAF, as well as an increase of $21.7 million in commercial passenger flying. These increases were offset by lower commercial cargo revenue of $11.5 million. Two key variables that impact the amount of operating revenues are listed below:

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      The yield per block hour increased on average due to a greater percentage of full service flights.

      Operating Expenses. Total operating expenses increased to $446.4 million in 2003 from $377.4 million in 2002. Below is information on the Company’s operating expense per block hour:

      Flight expenses include all expenses 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 expenses increased $27.6 million, or 23.8%, in 2003 to $143.6 million from $116.0 million in 2002. Flight costs were higher primarily due to increases in the following areas:

	•	$9.8 million in cockpit crew costs;
	•	$7.3 million in flight attendant costs;
	•	$6.1 million in flight communication costs; and
	•	$2.2 million in landing/security/handling fees.

      These higher costs are directly attributable to increased flying for the USAF as well as more full-service flights in 2003 compared to 2002. Flight expenses in 2003 also included $3.7 million for a crew profit sharing bonus as stipulated in the union contracts, compared to $0.6 million in 2002.

      Maintenance expenses increased $15.9 million, or 26.6%, in 2003 to $75.5 million from $59.6 million in 2002. The Company had increases in the following areas:

	•	$3.7 million in maintenance reserves paid to the lessors of the Company’s aircraft;
	•	$3.1 million in component repairs;
	•	$2.9 million in airframe checks and landing gear repairs; and
	•	$2.7 million in materials expense.

      Much of this increase is due to the 15.8% increase in block hours flown, the timing of scheduled maintenance checks as well as supporting two additional aircraft that were added to the fleet during 2003.

      Aircraft costs decreased $1.3 million, or 1.6%, in 2003 to $85.5 million from $86.8 million in 2002. This decrease was due to the purchase of a leased DC-10-30 aircraft in December 2002 for airframe and engine parts, offset by higher aircraft rent expense due to more block hours flown and additional aircraft in 2003.

      Fuel expenses increased $18.6 million, or 32.2%, in 2003 to $76.5 million from $57.9 million in 2002. This increase was due to more full-service block hours being flown, together with higher per-gallon costs. However, fluctuations in price of fuel did not had a significant impact in 2003 on the Company’s operations because, in general, the Company’s contracts with its customers cover 96% of fuel purchased and thereby limit the Company’s exposure to increases in fuel prices.

      Sales, general and administrative expenses increased $7.5 million, or 23.1%, to $40.2 million in 2003 from $32.6 million in 2002. The increase in 2003 was primarily attributable to the following:

	•	$2.4 million higher accrual for profit sharing payments to administrative employees;
	•	$1.9 million of bad debt expense related to air services provided to Ritetime Aviation and Travel Services;
	•	$1.8 million (net) of higher wages, fringe benefits, and payroll taxes; and
	•	$0.8 million of higher outside service and professional fees.

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      Other Expense/Net. Total other expense, net increased by $4.2 million in 2003 compared with 2002. This increase was primarily due to the following:

	•	Recording a loss on debt extinguishment of $3.0 million due to the restructuring of the Company’s convertible senior subordinated debentures. This represents the difference between the fair value of the New Debentures and the carrying amount of the Old Debentures extinguished.
	•	Fees and expenses of $1.3 million paid due to termination of the Foothill loan facility.
	•	Write-off of $0.5 million of deferred issuance fees related to the Foothill loan facility.

      Operating Revenues. Operating revenues increased $66.6 million, or 21.0%, to $384.5 million in 2002 from $317.9 million in 2001. The higher operating revenue was primarily attributable to a $73.8 million increase in flying under the contract with the USAF, as well as an increase of $30.3 million in commercial cargo flying. These increases were offset by lower commercial passenger revenue of $37.2 million. Total block hours increased 14% in 2002 and the yield per block hour increased on average due to a greater percentage of full service flights.

      Operating Expenses. Total operating expenses increased to $377.4 million in 2002 from $338.6 million in 2001. Total operating expenses for 2002 included non-routine transactions that had an impact on the financial results as follows:

	•	Recording a $2.0 million liability to the federal government for the return in 2003 of a portion of the grant funds received under the Stabilization Act.
	•	Recording a $1.7 million liability for estimated losses based upon contractual lease costs (reduced by estimated sub-lease rentals) that will continue to be incurred for the remaining term of the Company’s lease agreement for office space at its former headquarters in Herndon, Virginia.
	•	Recording a $0.8 million receivable due from a lessor related to unused maintenance reserves.

      Operating expenses in 2001 were reduced by a $5.1 million grant received under the Stabilization Act, to help offset losses resulting from the terrorist attacks on the United States.

      Flight expenses include all expenses 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 expenses increased $10.0 million, or 9.4%, in 2002 to $116.0 million from $106.0 million in 2001. This increase resulted primarily from an increase of $2.9 million in landing/ security/handling fees, $2.3 million in flight communication costs, $1.7 million in catering costs and $1.7 million in passenger expenses. These higher costs are directly attributable to increased flying for the USAF as well as more full-service flights in 2002 compared to 2001. In addition, flight expenses in 2002 also include $0.6 million for a crew profit sharing bonus as stipulated in the union contracts.

      Maintenance expenses decreased $4.0 million, or 6.2%, in 2002 to $59.6 million from $63.6 million in 2001. The Company benefited from expense reductions in the following areas:

	•	$1.5 million in thrust reverser repairs/overhauls;
	•	$1.0 million in landing gear repair expense;
	•	$1.3 million in component repairs; and
	•	$1.0 million in maintenance travel/personnel expenses.

      These decreases were offset by a $0.8 million increase in auxiliary power unit repairs for both MD-11 and DC-10-30 aircraft.

      Aircraft costs increased $9.2 million, or 11.9%, to $86.8 million in 2002 from $77.6 million in 2001. This was primarily due to the increase in the number of average aircraft to 15.8 in 2002 from 12.9 in 2001, as well

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      Fuel expenses increased $16.9 million, or 41.3%, in 2002 to $57.9 million from $41.0 million in 2001. This increase was due to more full-service block hours being flown, together with higher per-gallon costs. The Company is generally able to pass fuel cost increases through to its customers.

      Commissions increased by $1.3 million to $15.8 million in 2002 from $14.5 million in 2001. This was principally a result of the increase in AMC business in 2002 offset by a decrease in the commission rate on this AMC business.

      Depreciation and amortization decreased by $1.4 million to $4.5 million in 2002 from $5.9 million in 2001, primarily due to the sale-leaseback of four owned engines in June 2001. These engines were no longer depreciated in 2002.

      Subcontract flying costs increased $1.2 million to $2.1 million in 2002 from $0.9 million in 2001. The higher costs in 2002 resulted from outsourcing flights due to aircraft being out of service for maintenance.

      Sales, general and administrative expenses decreased $1.5 million, or 4.4%, to $32.6 million in 2002 from $34.1 million in 2001. The decrease in 2002 was primarily attributable to higher wages, travel/personnel expenses and outside services in 2001 associated with the Company’s relocation of its headquarters from Virginia to Georgia as well as additional expense related to the allowance for doubtful accounts receivable. The benefit of these decreases in 2002 was offset by a $1.7 million accrual for estimated losses associated with the Company’s sub-lease of office space in Herndon, Virginia.

      Other Expense/ Net. Total other expense, net decreased by $0.2 million in 2002 compared with 2001. This decrease was primarily due to prepayment penalties incurred due to the early repayment of debt in connection with a sale-leaseback of two owned engines in June 2001. This was offset by higher capital gain/loss expense related to fixed assets in 2002.

Liquidity and Capital Resources

      At December 31, 2003, the Company had $53.8 million of cash and cash equivalents, compared to $21.5 million at December 31, 2002. The December 31, 2003 cash balance included $23.3 million of restricted cash, which consisted of $18.8 million required to pay the principal and interest on the convertible debentures called for redemption on December 30, 2003, $3.4 million as collateral for letters of credit, and $1.1 million of prepayments from customers for flights that are scheduled to be flown within 30 days of the balance sheet date.

      World Airways is highly leveraged. At December 31, 2003, World Airways’ current assets were $93.0 million, which included the $18.8 million of restricted cash set aside to redeem the Old Debentures called for redemption in December 2003. The Company’s current liabilities were $84.4 million, which included current maturities of long-term debt of $18.0 million representing the principal amount of Old Debentures that were redeemed on January 28, 2004. As of December 31, 2003, the Company had a $30.0 million term loan, payable in three annual principal payments of $6.0 million commencing December 2005 and a final payment of $12.0 million due in December 2008. The Company also had outstanding long-term debt of $27.2 million, consisting of the New Debentures, which has a principal amount of $25.5 million and is due December 2009. In addition, the Company has significant long-term obligations relating to operating leases for aircraft and spare engines.

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      The following table presents aggregated information about the Company’s contractual obligations at December 31, 2003:

      Two MD-11 leases, which at December 31, 2003 had expiration dates in 2021, were restructured in the first quarter of 2004 and have new lease terms that will expire in either 2011 or 2012, depending on the Company’s ability to meet certain financial conditions. The reduction in the lease terms for these two aircraft will lower the Company’s operating lease contractual obligations by approximately $180 million, which is not reflected in the table above.

      In prior years, the Company paid amounts less than its contractual aircraft rent obligations in order to conserve cash. The Company continued to recognize expense for the full amount of its contractual rent payments due. The accrual for unpaid contractual rent obligations was $8.9 million and $17.0 million at December 31, 2003 and 2002, respectively. This accrual is included as accrued rent in the current liabilities section of the Consolidated Balance Sheet. The Company’s aircraft lessors agreed to amended terms of the aircraft lease agreements to provide for the repayment of the unpaid contractual rent obligations. The amended lease terms on leases for which the Company is still obligated to repay rent as of December 31, 2003, provide for repayment of contractual rent obligations based on a percentage of profits in future years. In 2004, the Company will be repaying $7.2 million of this liability based on 2003 net earnings.

      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 the ATSB Loan is secured by substantially all of the Company’s assets. In addition, the ATSB Loan contains restrictive provisions which 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. 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 its 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. In addition, the ATSB Loan agreement also contains a number of negative covenants, including, but not limited to, restrictions on:

	•	Granting additional liens on its property or making significant investments;

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	•	Paying dividends, redeeming capital stock, repricing outstanding stock options or repaying indebtedness other than the ATSB Loan;
	•	Liquidating, winding up, dissolving or engaging in certain acquisitions or certain sale-leaseback transactions;
	•	Engaging in certain transactions with affiliates or certain asset sales;
	•	Engaging in any business unrelated to the Company’s existing business;
	•	Consolidating, merging with or into another entity or selling substantially all of its assets unless certain conditions are satisfied; and
	•	Amending the terms of agreements relating to its indebtedness for borrowed money or granting any additional negative pledges.

      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 the 2003 profit sharing bonus of approximately $6.6 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.

      Operating activities provided $29.5 million in cash for the year ended December 31, 2003 compared to $4.4 million in 2002. The cash provided in 2003 principally reflects the $15.3 million of earnings, net non-cash income statement charges of $6.6 million, a $3.0 million increase in trade accounts receivable, and a net increase in cash of $10.6 million due to other changes in operating assets and liabilities.

      Investing activities used $2.8 million in cash for the year ended December 31, 2003, compared to using $5.0 million in 2002. In 2003, cash was used to purchase new rotable spare parts, computer equipment, leasehold improvements and other fixed assets. In 2002, cash was used to purchase an existing leased aircraft for spare parts, in addition to rotable parts and other fixed assets.

      Financing activities generated $5.5 million in cash for the year ended December 31, 2003 compared to generating $2.5 million in 2002. Significant items in 2003 were that the Company received $30.0 million from the ATSB guaranteed loan, and used $17.1 of cash to terminate the Foothill credit facility and $8.4 million to repay its deferred aircraft rent obligations. In 2002, the Company deferred aircraft rent obligations of

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      On December 30, 2003, the Company closed on $30.0 million term loan of which $27.0 million (“Tranche A Loan”) is guaranteed by the ATSB and $3.0 million (“Tranche B Loan”) is guaranteed by another third party. The Company’s obligations under the loan agreement are secured by substantially all of the assets of the Company and its subsidiary. The Tranche A Loan bears an interest rate equal to the lender’s weighted average cost of issuing commercial paper plus 0.5% per annum. The Tranche B Loan bears interest at a rate equal to LIBOR plus 1.0% per annum. Interest on the term loan is payable semi-annually on June 12th and December 12th of each year. At December 31, 2003, the blended rate on both Tranches approximated 2%. The Company is required to pay semi-annual guarantee fees commencing on the date of the closing of the term loan (a) to the ATSB at an annual rate of 4.5% of the principal amount of the Tranche A Loan scheduled to be outstanding for the interest periods ending on June 12 and December 12, 2004, increasing by 0.5% each year for subsequent semi-annual interest periods through December 12, 2008; and (b) to the guarantor of the Tranche B Loan at an annual rate of 3.0% of the principal amount of the Tranche B Loan scheduled to be outstanding for the interest periods ending on June 12th and December 12th through December 12, 2008. The principal amount of the term loan will be repaid in three annual installments of $6.0 million each, commencing on December 12, 2005, and a final fourth installment of $12.0 million due on December 12, 2008.

      In addition, on December 30, 2003, the Company issued $25.5 million aggregate principal amount of the New Debentures in exchange for $22.5 million aggregate principal amount of its outstanding Old Debentures and $3.0 million in cash. The Company called the remainder, or $18.0 million aggregate principal amount, of its Old Debentures, and redeemed such Old Debentures on January 28, 2004. Interest on the New Debentures is payable semi-annually on June 30th and December 30th of each year. The New Debentures are convertible, at any time, into the Company’s Common Stock at a conversion price of $3.20 per share, and are not callable for one year. The New Debentures may be called by the Company at 100% of the principal amount after one year if the Company’s Common Stock closes at a price equal to or greater than 200% of the conversion price for 20 of 30 consecutive trading days and after two years if the Common Stock closes for a similar period at a price equal to or greater than 150% of the conversion price. After three years, the Company may call the New Debentures, at any time, at 100% of the principal amount regardless of the stock price.

      On December 30, 2003, in connection with closing the $30.0 million term loan supported by the $27.0 million federal guarantee, the Company terminated its loan facility with Foothill. The Company repaid all borrowings outstanding with Foothill, incurred $1.3 million of fees and expenses connected with the early termination of the loan facility and wrote off $0.5 million of deferred issuance fees. The Company had no current notes payable outstanding at December 31, 2003, but did have $3.3 million of letters of credit outstanding, which were collateralized by $3.4 million of restricted cash. Letters of credit are subject to a fee of 2.75% of the face amounts of the letters of credit issued and outstanding. Subsequent to December 31, 2003, the Company moved its current outstanding letters of credit to Wachovia Bank, N.A. (“Wachovia”). Letters of credit with Wachovia are subject to a fee of 0.75% of the face amounts of the letters of credit issued and outstanding, are collateralized by $3.2 million of restricted cash and their terms are one year or less.

      The FAA has issued and proposed a number of Airworthiness Directives (“ADs”) that will require the Company to make modifications to its aircraft. They are as follows:

	•	the replacement of insulation blankets on the Company’s MD-11 aircraft by June 2005 that is expected to cost approximately $0.5 million per aircraft (approximately 31% of this work has been completed at December 31, 2003);
	•	the installation of enhanced ground proximity warning systems in its aircraft by March 2005 that is expected to cost approximately $77,000 per MD-11 and $129,000 per DC-10-30 aircraft;

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	•	the modification of thrust reversers on the Company’s DC-10-30 aircraft by October 2006 that is estimated to cost approximately $0.5 million per aircraft; and
	•	the replacement of the ring case located in the compressor area of the Company’s MD-11 engines by June 2009 that is expected to cost approximately $0.3 million per engine.

      The Company expects to finance the cost of compliance with ADs through internally generated funds. The estimated total cost of these modifications based on the Company’s current fleet is $9.0 million as of December 31, 2003.

      World Airways’ capital expenditures for 2004, other than the cost of ADs, are currently expected to be approximately $3.0 million, principally for the purchase of aircraft related assets, which it expects to finance from working capital.

      In 1996, in conjunction with leasing two MD-11ER aircraft the Company agreed to assume leases of one or two MD-11F freighter aircraft for the remainder of their 24-year leases (that commenced in November and December 1995), in the event that the existing lessee terminates its leases with the lessor. As of the date hereof, the Company does not know if the existing lessee intends to terminate the existing leases or not. As part of the agreement for the aircraft, the lessor provided spare parts financing of which approximately $1.1 million is still available.

Recently Issued Accounting Standards

      The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised in 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No. 87, 88 and 106 (“SFAS 132R”) in December 2003. SFAS 132R revised employers’ disclosures about pension plans and other postretirement benefit plans by requiring additional disclosures about assets, obligations, cash flows and net periodic benefit costs. SFAS 132R is effective for financial statements issued after December 15, 2003 and for interim periods thereafter. See Note 10 for the Company’s disclosures required under SFAS 132R.

      In December 2003, the FASB issued a revised FASB Interpretation No. 46 (“FIN 46R”), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“VIE”), which was issued in January 2003. The application of this interpretation (or Interpretation 46) is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special interest entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and non-controlling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. The Company currently does not have any interests in variable interest entities or special interest entities.

      FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise was effective as of July 1, 2003. The Company currently does not have any financial instruments that are within the scope of this Statement.

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Other Matters

      The Company believes that neither inflation nor changing prices have had a material effect on the Company’s revenues during the past three years.

      In 2001, the Company relocated its corporate headquarters to Peachtree City, Georgia. Hollis L. Harris, World Airways’ current Chairman and CEO, is a principal in the company that owns the building for which the Company signed a lease for a 15-year term beginning May 1, 2001. The Company’s Board of Directors verified with a nationally recognized tenant brokerage firm that the new lease rate was equivalent to what could be obtained in arm’s length negotiations with an independent party. In addition, the lease rate in Georgia was less than what was being paid in Virginia. Obligations for rent under the lease aggregating $16.1 million at December 31, 2003 are included with future annual minimum lease payments for operating leases in Note 8 to the Consolidated Financial Statements.

      In June 2003, the Georgia Department of Revenue approved the Company’s application for the Georgia Headquarters Job Tax Credit (the “HQC”). The HQC is available for corporate taxpayers (a) establishing or relocating their headquarters to Georgia, (b) investing a minimum of $1 million in certain property, and (c) employing a minimum number of new full-time employees in the State of Georgia that pay at or above a required wage level. This credit may be used for either corporate state income tax or payroll withholding tax. The Company has qualified for $510,000 and $590,000 of tax credits related to 2001 and 2002, respectively. The application for tax credits related to 2003 is in process at this time. If the Company continues to meet the statutory requirements for each year that it is eligible, its total potential net estimated benefit could be in excess of $2.0 million on a pre-tax basis.

      Subsequent to December 31, 2003, the company that owns the building containing World Airways’ corporate headquarters, of which World Airways’ current 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.

      World Airways does not have any material exposure to market risks.

      With respect to interest rate risks at December 31, 2003, interest rates on the Company’s $25.5 million long-term convertible debt obligations due in December 2009 are fixed. Interest rates on the $18.0 million of previously existing convertible debt due in August 2004, which were called for redemption on December 30, 2003, were also fixed. On December 30, 2003, the Company closed on a $30.0 million term loan of which $27.0 million (the “Tranche A Loan”) is guaranteed by the Air Transportation Stabilization Board and $3.0 million (the “Tranche B Loan”) is guaranteed by a third party. The Tranche A Loan bears an interest rate equal to the lender’s weighted average cost of issuing commercial paper plus 0.5% per annum. The Tranche B Loan bears an interest rate equal to LIBOR plus 1.0% per annum. Based on the balance outstanding at December 31, 2003, each 1% change in the interest rate would have increased or decreased the Company’s annual interest cost by approximately $300,000. On December 30, 2003, the Company also terminated its loan facility with Wells Fargo Foothill, Inc. (“Foothill”). The Company had no current notes payable outstanding at December 31, 2003 with Foothill, but did have $3.3 million of letters of credit outstanding, which were collateralized by $3.4 million of restricted cash. Letters of credit are subject to a fee of 2.75% of the face amount of the letters of credit. See Notes 6 and 7 of “Notes to the Consolidated Financial Statements” in Item 8. The Company has not entered into any obligations for trading purposes.

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      With respect to foreign currency exchange rate risks, although some of the Company’s revenues are derived from foreign customers, all revenues and substantially all expenses are denominated in U.S. dollars. The Company maintains minimal balances in foreign bank accounts to facilitate the payment of expenses.

      The Company is not exposed to commodity price risks except with respect to the purchase of aviation fuel. However, fluctuations in the price of fuel have not had a significant impact on the Company’s operations in recent years because, in general, the Company’s contracts with its customers limit the Company’s exposure to increases in fuel prices. The Company does not purchase fuel under long-term contracts or enter into futures or swap contracts at this time.

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WORLD AIRWAYS, INC.

CONSOLIDATED BALANCE SHEETS