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SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
 
or
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                         
 
Commission File Number 0-26582
 
 
WORLD AIRWAYS, INC.
(Exact name of registrant as specified in its charter)
 
 
DELAWARE
   
94-1358276
(State or other jurisdiction
   
(I.R.S. Employer
of incorporation or organization)
   
Identification Number)
 
 
The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of Principal Executive Offices)
 
(770) 632-8000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes         X             No                    
 
The number of shares of the registrant’s Common Stock outstanding on September 30, 2002 was 11,077,098.
 

Table of Contents
WORLD AIRWAYS, INC.
 
SEPTEMBER 30, 2002 QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
         
Page
PART I —
   
FINANCIAL INFORMATION
     
Item 1.
   
Financial Statements
     
       
3
       
5
       
6
       
7
       
8
       
9
Item 2.
      
12
Item 3.
      
16
Item 4.
      
16
PART II —
   
OTHER INFORMATION
     
Item 5.
      
16
Item 6.
      
16

2

Table of Contents
 
ITEM 1.     FINANCIAL STATEMENTS
WORLD AIRWAYS, INC.
CONDENSED BALANCE SHEETS
ASSETS
(in thousands)
 
    
September 30,
2002
   
December 31,
2001
    
(unaudited)
     
CURRENT ASSETS
              
Cash and cash equivalents, including restricted cash of $784 at September 30, 2002 and $662 at December 31, 2001
   
$
28,762
   
$
19,540
Accounts receivable, less allowance for doubtful accounts of $1,066 at September 30, 2002 and $1,350 at December 31, 2001
   
 
28,518
   
 
25,219
Prepaid expenses and other current assets
   
 
6,278
   
 
5,641
    
  
Total current assets
   
 
63,558
   
 
50,400
    
  
EQUIPMENT AND PROPERTY
              
Flight and other equipment
   
 
75,236
   
 
74,292
Equipment under capital leases
   
 
9,463
   
 
9,463
    
  
    
 
84,699
   
 
83,755
Less: accumulated depreciation and amortization
   
 
44,535
   
 
41,223
    
  
Net equipment and property
   
 
40,164
   
 
42,532
    
  
LONG-TERM OPERATING DEPOSITS
   
 
18,861
   
 
18,777
OTHER ASSETS AND DEFERRED CHARGES, NET
   
 
729
   
 
520
    
  
TOTAL ASSETS
   
$
123,312
   
$
112,229
    
  
 
(Continued)
 

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Table of Contents
 
WORLD AIRWAYS, INC.
CONDENSED BALANCE SHEETS
(continued)
 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
(in thousands except share amounts)
 
 
    
September 30,
     
December 31,
  
    
2002
     
2001
  
    
(unaudited)
         
CURRENT LIABILITIES
                  
Notes payable
   
$
10,231
 
   
$
19,756
 
Current maturities of long-term obligations
   
 
749
 
   
 
1,787
 
Accounts payable
   
 
33,705
 
   
 
30,527
 
Accrued rent
   
 
22,307
 
   
 
11,362
 
Unearned revenue
   
 
1,202
 
   
 
3,400
 
Accrued maintenance
   
 
2,647
 
   
 
1,543
 
Accrued salaries and wages
   
 
9,153
 
   
 
7,850
 
Accrued taxes
   
 
3,234
 
   
 
3,158
 
Other accrued liabilities
   
 
314
 
   
 
1,090
 
    
  
Total current liabilities
   
 
83,542
 
   
 
80,473
 
    
  
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES
   
 
40,545
 
   
 
40,853
 
OTHER LIABILITIES
                  
Deferred gain from sale-leaseback transactions, net of accumulated amortization of $13,574 at September 30, 2002 and $11,966 at December 31, 2001
   
 
4,488
 
   
 
6,096
 
Accrued post-retirement benefits
   
 
2,929
 
   
 
2,861
 
Deferred rent
   
 
13,931
 
   
 
13,050
 
    
  
Total other liabilities
   
 
21,348
 
   
 
22,007
 
    
  
TOTAL LIABILITIES
   
 
145,435
 
   
 
143,333
 
    
  
STOCKHOLDERS’ DEFICIENCY
                  
Preferred stock, $.001 par value (5,000,000 shares authorized;
                  
no shares issued or outstanding)
   
 
—  
 
   
 
—  
 
Common stock, $.001 par value (100,000,000 shares authorized;
                  
12,158,341 shares issued; 11,077,098 shares outstanding at September 30,
                  
2002 and 11,065,898 shares outstanding at December 31, 2001)
   
 
12
 
   
 
12
 
Additional paid-in capital
   
 
24,314
 
   
 
24,165
 
Accumulated deficit
   
 
(33,592
)
   
 
(42,424
)
Treasury stock, at cost (1,081,243 shares at September 30, 2002 and
                  
December 31, 2001)
   
 
(12,857
)
   
 
(12,857
)
    
  
Total stockholders’ deficiency
   
 
(22,123
)
   
 
(31,104
)
    
  
COMMITMENTS AND CONTINGENCIES
                  
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
   
$
123,312
 
   
$
112,229
 
    
  
 
See accompanying Notes to Condensed Financial Statements.
 

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Table of Contents
 
WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2002 and 2001
(in thousands except per share data)
(unaudited)
 
OPERATING REVENUES
   
2002
     
2001
  
Flight operations
   
$
107,273
 
   
$
84,898
 
Other
   
 
650
 
   
 
289
 
    
  
Total operating revenues
   
 
107,923
 
   
 
85,187
 
OPERATING EXPENSES
                  
Flight
   
 
34,483
 
   
 
29,247
 
Maintenance
   
 
17,086
 
   
 
12,483
 
Aircraft costs
   
 
22,598
 
   
 
19,932
 
Fuel
   
 
17,738
 
   
 
11,829
 
Flight operations subcontracted to other carriers
   
 
188
 
   
 
—  
 
Commissions
   
 
4,085
 
   
 
3,348
 
Depreciation and amortization
   
 
1,132
 
   
 
1,196
 
Sales, general and administrative
   
 
7,840
 
   
 
8,842
 
    
  
Total operating expenses
   
 
105,150
 
   
 
86,877
 
OPERATING INCOME (LOSS)
   
 
2,773
 
   
 
(1,690
)
OTHER INCOME (EXPENSE)
                  
Interest expense
   
 
(1,097
)
   
 
(1,206
)
Interest income
   
 
159
 
   
 
94
 
Other, net
   
 
49
 
   
 
487
 
    
  
Total other expense
   
 
(889
)
   
 
(625
)
NET EARNINGS (LOSS)
   
$
1,884
 
   
$
(2,315
)
    
  
BASIC EARNINGS (LOSS) PER SHARE
                  
Net earnings (loss)
   
$
0.17
 
   
$
(0.21
)
    
  
Weighted average shares outstanding
   
 
11,077
 
   
 
10,920
 
DILUTED EARNINGS (LOSS) PER SHARE
                  
Net earnings (loss)
   
$
0.17
 
   
$
(0.21
)
    
  
Weighted average shares outstanding
   
 
15,767
 
   
 
10,920
 
 
 
See accompanying Notes to Condensed Financial Statements
 

5

Table of Contents
WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2002 and 2001
(in thousands except per share data)
(unaudited)
 
    
2002
     
2001
  
OPERATING REVENUES
                  
Flight operations
   
$
282,817
 
   
$
234,824
 
Other
   
 
1,544
 
   
 
711
 
    
  
Total operating revenues
   
 
284,361
 
   
 
235,535
 
OPERATING EXPENSES
                  
Flight
   
 
86,257
 
   
 
78,788
 
Maintenance
   
 
38,855
 
   
 
45,212
 
Aircraft costs
   
 
64,649
 
   
 
56,694
 
Fuel
   
 
43,103
 
   
 
29,568
 
Flight operations subcontracted to other carriers
   
 
924
 
   
 
924
 
Commissions
   
 
12,343
 
   
 
10,955
 
Depreciation and amortization
   
 
3,506
 
   
 
4,730
 
Sales, general and administrative
   
 
22,619
 
   
 
26,133
 
    
  
Total operating expenses
   
 
272,256
 
   
 
253,004
 
OPERATING INCOME (LOSS)
   
 
12,105
 
   
 
(17,469
)
OTHER INCOME (EXPENSE)
                  
Interest expense
   
 
(3,439
)
   
 
(4,748
)
Interest income
   
 
435
 
   
 
380
 
Other, net
   
 
(269
)
   
 
185
 
    
  
Total other expense
   
 
(3,273
)
   
 
(4,183
)
NET EARNINGS (LOSS)
   
$
8,832
 
   
$
(21,652
)
    
  
BASIC EARNINGS (LOSS) PER SHARE
                  
Net earnings (loss)
   
$
0.80
 
   
$
(2.02
)
    
  
Weighted average shares outstanding
   
 
11,070
 
   
 
10,726
 
DILUTED EARNINGS (LOSS) PER SHARE
                  
Net earnings (loss)
   
$
0.71
 
   
$
(2.02
)
    
  
Weighted average shares outstanding
   
 
15,762
 
   
 
10,726
 
 
See accompanying Notes to Condensed Financial Statements
 

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Table of Contents
 
CONDENSED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ DEFICIENCY
Nine Months Ended September 30, 2002
(in thousands except share amounts)
(unaudited)
 
    
Common Stock
   
Additional Paid-in Capital
   
Accumulated
Deficit
     
Treasury Stock, at Cost
     
Total Stockholders’ Deficiency
  
Balance at December 31, 2001
   
$
12
   
$
24,165
   
$
(42,424
)
   
$
(12,857
)
   
$
(31,104
)
Amortization of warrants
   
 
—  
   
 
138
   
 
—  
 
   
 
—  
 
   
 
138
 
Exercise of Stock Options
          
 
11
                     
 
11
 
Net earnings
   
 
—  
   
 
—  
   
 
8,832
 
   
 
—  
 
   
 
8,832
 
    
  
  
  
  
Balance at September 30, 2002
   
$
12
   
$
24,314
   
$
(33,592
)
   
$
(12,857
)
   
$
(22,123
)
    
  
  
  
  
 
See accompanying Notes to Condensed Financial Statements.
 

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Table of Contents
WORLD AIRWAYS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(in thousands)
(unaudited)
 
 
    
2002
     
2001
  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
$
19,540
 
   
$
14,386
 
CASH FLOWS FROM OPERATING ACTIVITIES
                  
Net earnings (loss)
   
 
8,832
 
   
 
(21,652
)
Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities:
                  
Depreciation and amortization
   
 
3,506
 
   
 
4,730
 
Deferred gain recognition
   
 
(1,608
)
   
 
(1,130
)
Loss on sale of property and equipment
   
 
331
 
   
 
—  
 
Other
   
 
15
 
   
 
2,114
 
Provision for doubtful accounts receivable
   
 
(284
)
   
 
—  
 
Increase (decrease) in cash resulting from changes in operating assets and liabilities:
                  
Accounts receivable
   
 
(3,015
)
   
 
(8,419
)
Deposits, prepaid expenses and other assets
   
 
(721
)
   
 
40
 
Accounts payable, accrued expenses and other liabilities
   
 
7,077
 
   
 
10,258
 
Unearned revenue
   
 
(2,198
)
   
 
(5,128
)
    
  
Net cash provided (used) by operating activities
   
 
11,935
 
   
 
(19,187
)
    
  
CASH FLOWS FROM INVESTING ACTIVITIES
                  
Purchases of equipment and property
   
 
(1,703
)
   
 
(3,253
)
Proceeds from disposal of equipment and property
   
 
148
 
   
 
477
 
Sales and maturities of marketable investments
   
 
—  
 
   
 
1,685
 
    
  
Net cash used in investing activities
   
 
(1,555
)
   
 
(1,091
)
    
  
CASH FLOWS FROM FINANCING ACTIVITIES
                  
Increase (decrease) in line of credit borrowing arrangement, net
   
 
(9,525
)
   
 
3,058
 
Repayment of debt
   
 
(1,346
)
   
 
(9,356
)
Proceeds of sale/leaseback transactions
   
 
—  
 
   
 
15,505
 
Proceeds from exercise of options
   
 
11
 
   
 
—  
 
Deferral of aircraft rent obligations
   
 
9,702
 
   
 
—  
 
    
  
Net cash provided (used) by financing activities
   
 
(1,158
)
   
 
9,207
 
    
  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
 
9,222
 
   
 
(11,071
)
    
  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
   
$
28,762
 
   
$
3,315
 
    
  
 
See accompanying Notes to Condensed Financial Statements.
 

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Table of Contents
 
WORLD AIRWAYS, INC.
 
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
 
1.
 
Management believes that all adjustments necessary for a fair statement of results have been included in the Condensed Financial Statements for the interim periods presented, which are unaudited. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002.
 
These interim period Condensed Financial Statements and accompanying footnotes should be read in conjunction with the Financial Statements contained in World Airways’ Annual Report on Form 10-K for the year ended December 31, 2001.
 
2.
 
Earnings (Loss) per Share
The following table sets forth the computations of basic and diluted earnings (loss) per share (in thousands except per share data):
 
 
    
Three Months Ended September 30, 2002
  
    
Earnings
       
Shares
   
Per Share
  
    
(Numerator)
       
(Denominator)
   
Amount
  
Basic EPS
                         
Earnings available to common stockholders
   
$
1,884
 
     
11,077
   
$
0.17
 
    
    
  
Effect of Dilutive Securities
                         
Options
   
 
—  
 
     
134
         
8% convertible debentures
   
 
818
 
     
4,556
         
    
    
        
Diluted EPS
                         
Earnings available to common stockholders plus assumed conversions
   
$
2,702
 
     
15,767
   
$
0.17
 
    
    
  
    
Three Months Ended September 30, 2001
  
    
Earnings
       
Shares
   
Per Share
  
    
(Numerator)
       
(Denominator)
   
Amount
  
Basic EPS
                         
Net loss
   
$
(2,315
)
     
10,920
   
$
(0.21
)
    
    
  
Effect of Dilutive Securities
                         
Options
   
 
—  
 
     
—  
         
8% convertible debentures
   
 
—  
 
     
—  
         
    
    
        
Diluted EPS
                         
Net loss
   
$
(2,315
)
     
10,920
   
$
(0.21
)
    
    
  

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Table of Contents
 
    
Nine Months Ended September 30, 2002
  
    
Earnings
       
Shares
   
Per Share
  
    
(Numerator)
       
(Denominator)
   
Amount
  
Basic EPS
                         
Earnings available to common stockholders
   
$
8,832
 
     
11,070
   
$
0.80
 
    
    
  
Effect of Dilutive Securities
                         
Options
   
 
—  
 
     
136
         
8% convertible debentures
   
 
2,426
 
     
4,556
         
    
    
        
Diluted EPS
                         
Earnings available to common stockholders plus assumed conversions
   
$
11,258
 
     
15,762
   
$
0.71
 
    
    
  
    
Nine Months Ended September 30, 2001
  
    
Earnings
       
Shares
   
Per Share
  
    
(Numerator)
       
(Denominator)
   
Amount
  
Basic EPS
                         
Net loss
   
$
(21,652
)
     
10,726
   
$
(2.02
)
    
    
  
Effect of Dilutive Securities
                         
Options
   
 
—  
 
     
—  
         
8% convertible debentures
   
 
—  
 
     
—  
         
    
    
        
Diluted EPS
                         
Net loss
   
$
(21,652
)
     
10,726
   
$
(2.02
)
    
    
  
 
3.
 
Capital Stock
 
In April 2002, the Company was notified by NASDAQ that it was reviewing the Company’s eligibility for continued listing since it was not in compliance with Marketplace Rule 4310(c) (2) (B), which requires the Company to meet a minimum net tangible assets, stockholders’ equity, market capitalization or net income from continuing operations requirement for continued listing. The Company responded to NASDAQ regarding its specific plan to achieve and sustain compliance with the NASDAQ listing requirements. The NASDAQ Staff was not satisfied that the Company provided a definitive plan evidencing its ability to achieve near-term compliance within a time frame that the Staff was able to approve. The Company appealed the Staff’s determination to the NASDAQ Listing Qualifications Panel (“Panel”) pursuant to procedures set forth in the NASDAQ Marketplace Rule 4800 Series. The hearing occurred on July 18, 2002. In the presentation to the Panel, the Company articulated the steps that have been taken to achieve fiscal 2002 net earnings that would exceed the minimum listing requirement.
 
On August 15, 2002, World Airways was notified by NASDAQ that the Company’s common stock had not maintained a closing bid price of at least $1.00 for the previous thirty consecutive trading days as required by the NASDAQ SmallCap Market rule. NASDAQ invited the Company to make a written submission addressing the closing bid price deficiency by August 22, 2002 and would consider the bid price deficiency when making its decision regarding the net tangible assets, stockholders’ equity, market capitalization or net income from continuing operations requirement.
 
On August 23, 2002, World Airways was notified by NASDAQ that it was granted a temporary exception from the NASDAQ standards contingent upon certain conditions. In order to meet the requirements of the exception, the Company must provide information to NASDAQ on its financial results for the nine months ended September 30, 2002 by November 15, 2002. NASDAQ required that the Company show evidence of continued profitability on a net income basis for the quarter ending September 30, 2002, as well as net income from continuing operations of at least $500,000 for the nine month period ending September 30, 2002. The Company has now met these requirements as of September 30, 2002. By February 17, 2003, the Company must submit to NASDAQ draft financial statements for the fiscal year ending December 31, 2002 evidencing net income from continuing operations of at least $500,000. The Company must also provide NASDAQ with its Form 10-K for the fiscal year ending December 31,

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2002 by March 31, 2003. In addition, the Company has been given until February 17, 2003 to comply with the minimum bid price requirements. Beginning August 27, 2002, the Company’s stock began trading under the symbol WLDAC. In the event that the Company is deemed to have met the terms of the exceptions, it shall continue to be listed on The NASDAQ SmallCap Market. At that time, the stock will return to its original symbol, WLDA.
 
4.
 
Air Transportation Safety and System Stabilization Act
 
The Air Transportation Safety and System Stabilization Act (Stabilization Act) was enacted on September 22, 2001 in direct response to the September 11, 2001 terrorist attacks on the United States. The Act provides for:
 
 
a.
 
Compensation to air carriers for direct and incremental losses incurred resulting from the September 11 events;
 
b.
 
Loan guarantees to air carriers by the U.S. Government;
 
c.
 
Reimbursement for increases in certain insurance premiums incurred by air carriers; and
 
d.
 
Limitations on liabilities incurred or to be incurred by air carriers as a result of the September 11 events.
 
Under the Stabilization Act, each air carrier is entitled to receive the lesser of its actual direct and incremental losses for the period September 11, 2001 to December 31, 2001 or its maximum allocation of grant funds as determined by the Department of Transportation (“DOT”). In the fourth quarter of 2001, the Company received a $5.1 million grant from the federal government. The Company may receive a maximum of $1.9 million of additional grant funds in 2002, based on the excess of actual direct and incremental losses over the $5.1 million. However, no additional grants may be received or the Company may have to return some of the grant funds already received based on the DOT’s final determination of the above-described amounts. Due to the uncertainty of the maximum allocation amount determined by the DOT and the fact that the DOT has not completed its final review of the Company’s calculation of actual direct and incremental losses, the Company determined it would not be appropriate to accrue the benefit of any additional grant funds or provide for the returning of any grant funds until final resolution.
 
The Stabilization Act included an Air Carrier Loan Guarantee program. This program is designed to assist viable airlines that suffered financially as a result of the September 11th events who do not otherwise have access to reasonable credit. The loan guarantee is subject to certain conditions and fees, including the potential requirement that the U.S. Government be issued warrants or other equity instruments in connection with such loan guarantees. The Company filed an application on June 28, 2002 for $27 million in federal loan guarantees. If the loan guarantee request is approved, the Company plans to raise a total of $30 million. The Company’s loan application included a detailed seven-year business plan, which showed increased utilization of existing aircraft, expanded sales efforts, continued support of the U.S. Air Force Air Mobility Command program, lowered costs through process improvements, and continued customer service initiatives. The loan, if any, would be repaid from 2004 to 2009. However, there can be no assurance that the application will be approved and that this source of financing will be available to the Company.
 
5.
 
Sub-lease
 
The Company is obligated through April 2006 under a lease agreement for office space for its former headquarters located in Herndon, Virginia. The Company sub-leases this office space to a tenant that has recently had difficulties in making timely rental payments to the Company. The Company has received rental payments and reduced rental expense through March 31, 2002 by using proceeds from a letter of credit provided by the tenant. Effective April 2002, the Company ceased recording reductions in rental expense. The sub-lessee is currently working on obtaining additional financing, which it will use to satisfy its past, current and future lease payments. If the sub-lessee is not able to obtain additional financing and meet its obligations under the sub-lease agreement, the Company may seek other tenants. In this case, depending on the ability of the Company to secure additional tenants at rates approximating the Company’s lease costs, a loss may be incurred. As of September 30, 2002, the Company believes it is probable that the sub-lessee will perform under the terms of the lease agreement, and accordingly, no accrual has been recorded. However, the Company will monitor this situation in forthcoming quarters. While the Company cannot reasonably estimate what such a loss, if any, would be, the Company’s total obligation at September 30, 2002 under the lease is $5.5 million through 2006.
 
6.
 
Aircraft Lease
 
The Company is obligated to return a DC-10-30 convertible freighter aircraft to its lessor by the lease termination date of January 15, 2003. The Company has reached a tentative agreement with the parties to the lease to purchase the aircraft. The lease on this aircraft contains contractual provisions related to the condition of the aircraft upon

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return to the lessor. The Company’s tentative purchase agreement for the aircraft will eliminate the requirements of the Company to comply with the return conditions of the lease. The Company is responsible for all lease payments through the end of the lease term. If the purchase of the aircraft is consummated on or before January 15, 2003, any remaining lease payments will be due at that time.
 
7.
 
GMAC
 
For the quarters ending June 30 and September 30, 2002, the Company failed the tangible net worth covenant in its GMAC loan facility. GMAC agreed not to, and forbear to, take any action with respect to such default until December 15, 2002, provided that the Company’s financial condition does not deteriorate as determined by GMAC at their sole discretion. The Company has a signed letter of intent with another financial institution to replace GMAC. This institution’s formal credit committee has approved a loan facility with World Airways and expects a closing by mid-December. Borrowings and letters of credit under the GMAC facility were $10.2 million and $2.0 million, respectively, at September 30, 2002. The $10.2 million in borrowings is included in the current liabilities section of the Balance Sheet.
 
8.
 
Other
 
In August 2001, the Financial Accounting Standards Board issued Financial Accounting Standard No. 144 - “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”). SFAS 144 supercedes SFAS 121 and the portion of the Accounting Principle Board Opinion No. 30 that deals with disposal of a business segment. Effective January 1, 2002, the Company adopted SFAS 144, which did not have an effect on our results of operations.
 
ITEM
 
2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS
 
Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of World Airways, Inc. (“World Airways” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2001. The information contained herein is not a comprehensive management overview and analysis of the financial condition and results of operations of the Company, but rather updates disclosures made in the aforementioned filing.
 
The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the reliance on key strategic alliances, fluctuations in operating results and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These risks could cause the Company’s actual results for 2002 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company.
 
OVERVIEW
 
General
 
For the third quarter of 2002, the Company’s net earnings were $1.9 million compared to a net loss of $2.3 million for the same period in 2001.
 
The following table provides statistical data, used by management in evaluating the operating performance of the Company, for the quarters ended September 30, 2002 and 2001.
 
   
Quarter Ended September 30,
  
   
2002
     
2001
  
Revenue block hours:
                       
Full service passenger
  
6,281
   
61
%
   
5,181
   
56
%
Full service cargo
  
1,572
   
15
%
   
35
   
—  
 
ACMI passenger
  
773
   
7
%
   
1,797
   
20
%
ACMI cargo
  
1,594
   
15
%
   
2,044
   
22
%
Miscellaneous
  
178
   
2
%
   
164
   
2
%
   
  
  
  
Total
  
10,398
   
100
%
   
9,221
   
100
%
   
  
  
  
Aircraft at quarter-end
  
16
   
14
Average available aircraft per day
  
16.0
   
13.7
Average daily utilization
  
7.1
   
7.3
(block hours flown per day per aircraft)
                       

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For the first nine months of 2002, the Company’s net earnings were $8.8 million compared to a net loss of $21.7 million for the same period in 2001. The following table provides statistical data, used by management in evaluating the operating performance of the Company, for the nine months ended September 30, 2002 and 2001.
 
   
Nine Months Ended September 30,
  
   
2002
     
2001
  
Revenue block hours:
                       
Full service passenger
  
16,732
   
61
%
   
13,676
   
54
%
Full service cargo
  
2,144
   
8
%
   
35
   
—  
 
ACMI passenger
  
2,235
   
8
%
   
6,644
   
26
%
ACMI cargo
  
5,783
   
21
%
   
4,400
   
18
%
Miscellaneous
  
551
   
2
%
   
399
   
2
%
   
  
  
  
Total
  
27,445
   
100
%
   
25,154
   
100
%
   
  
  
  
Aircraft at quarter-end
  
16
   
14
Average available aircraft per day
  
15.5
   
12.3
Average daily utilization
  
6.5
   
7.5
(block hours flown per day per aircraft)
                       
 
Significant Customer Relationships
 
The Company is highly dependent on revenues from the U.S. Air Force (“USAF”). The loss of the USAF as a customer would have a material adverse effect on the Company. The Company’s principal customers, and the percent of revenues from those customers, for the quarter and nine months ended September 30, 2002 and 2001 are as follows:
 
    
Quarter Ended September 30,
     
Nine Months Ended September 30,
  
    
2002
     
2001
     
2002
     
2001
  
USAF
   
69.9
%
   
58.8
%
   
75.2
%
   
60.8
%
Emery Air Freight Corporation (“Emery”)
   
7.0
%
   
9.4
%
   
7.5
%
   
7.9
%
Sonair Serviceo Aereo (“Sonair”)
   
5.3
%
   
8.4
%
   
5.8
%
   
8.4
%
 
RESULTS OF OPERATIONS
 
Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001
 
Operating Revenues.    Revenues from operations increased $22.7 million, or 26.7%, to $107.9 million in 2002 from $85.2 million in 2001. The revenue increase in the third quarter of 2002 was due principally to increased flying under the contract with the USAF, as well as an increase in commercial cargo flying. The increase in the military and commercial cargo revenue was offset by lower non-military commercial passenger revenue.
 
Operating Expenses.    Total operating expenses increased $18.3 million, or 21.0% in 2002 to $105.2 million from $86.9 million in 2001.
 
Flight operations expenses include all expenses related directly to the operation of the aircraft other than aircraft costs, fuel and maintenance. Also included are expenses related to flight dispatch and flight operations administration. Flight operations expenses increased $5.2 million, or 17.9%, in 2002. This resulted primarily from an increase of $2.3 million in landing/security/handling fees, $0.7 million in flight communication costs, $0.6 million in catering costs and $0.6 million of passenger expenses. These higher costs are directly attributable to increased flying for the USAF as well as more full-service flights in the third quarter of 2002 compared to the same period in 2001. In addition, the third quarter of 2002 was higher due to an accrual for a crew bonus as stipulated in the union contracts.
 
Maintenance expenses increased $4.6 million, or 36.9%, in 2002. In the third quarter of 2002, the Company expensed an additional $2.4 million for engine overhauls compared to the 2001 third quarter. Thrust reverser and landing gear overhaul expense were each higher by $0.3 million for the third quarter of 2002. Component repairs and maintenance reserves were up by $0.7 and $0.4 million, respectively, due to a 12.8% increase in block hours flown as well as supporting two additional aircraft which were added to the fleet.

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Aircraft costs, which include aircraft rent and insurance, increased $2.7 million, or 13.4%, in 2002. This resulted primarily from an increase in the number of average aircraft to 16.0 in the third quarter of 2002 compared to 13.7 in the same quarter of 2001, as well as higher hull and war risk insurance costs in 2002.
 
Fuel expenses increased $5.9 million, or 50.0%, in 2002 due to higher per-gallon costs as well as more consumption associated with the increase in full service flying. The Company is generally able to pass fuel cost increases through to its customers.
 
Sales, general and administrative expenses decreased $1.0 million, or 11.3%, in 2002. The decrease in 2002 was primarily due to the recording of $0.6 million bad debt expense in the third quarter of 2001. The remainder of the decrease was spread over a number of different account categories.
 
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001
 
Operating Revenues.    Revenues from operations increased $48.9 million, or 20.7%, to $284.4 million in 2002 from $235.5 million in 2001. The increase was due to more block hours flown as well as a higher average yield, or revenue per block hour, as a result of more full service USAF hours as a percent of total hours in 2002 compared to 2001.
 
Operating Expenses.    Total operating expenses increased $19.3 million, or 7.6% in 2002 to $272.3 million from $253.0 million in 2001.
 
Flight operations expenses include all expenses related directly to the operation of the aircraft other than aircraft costs, fuel and maintenance. Also included are expenses related to flight dispatch and flight operations administration. Flight operations expenses increased $7.5 million, or 9.5%, in 2002. This resulted primarily from an increase of $2.8 million in landing/security/handling fees, $2.1 million in flight communication costs, $1.1 million in catering costs and $1.1 million of passenger expenses and an accrual for a crew bonus as stipulated in the union contracts.
 
Maintenance expenses decreased by $6.4 million, or 14.1% in 2002. In the first nine months of 2001, the Company expensed an additional $1.8 million for engine and thrust reverser overhauls. In addition, the Company benefited from a decrease of $4.2 million in routine maintenance checks, landing gear repairs and component repairs during the first nine months of 2002 compared to 2001.
 
Aircraft costs, which include aircraft rent and insurance, increased $8.0 million, or 14.0%, in 2002. This resulted primarily from an increase in the number of average aircraft to 15.5 in the first nine months of 2002 compared to 12.3 in the same period of 2001, as well as higher hull and war risk insurance costs in 2002.
 
Fuel expenses increased $13.5 million, or 45.8%, in 2002 due to higher per-gallon costs as well as more consumption associated with the increase in full service flying. The Company is generally able to pass fuel cost increases through to its customers.
 
Sales, general and administrative expenses decreased $3.5 million, or 13.4%, in 2002. The decrease in 2002 was primarily due to $2.2 million in severance, travel and moving costs associated with the relocation of the Company’s headquarters from Virginia to Georgia in 2001. Outside service costs for the first nine months of 2001 were $1.1 million higher due to positions being filled by temporary personnel as well as payments to consultants and other vendors in connection with the move to Georgia. In addition, $0.6 million of bad debt expense was recorded in the third quarter of 2001.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The Company is highly leveraged. At September 30, 2002, the Company’s current assets were $63.6 million and current liabilities were $83.5 million. The ratio of the Company’s current assets to its current liabilities (“current ratio”) was 0.8:1. Also, as of September 30, 2002, the Company had outstanding long-term debt and capital leases of $40.5 million and notes payable and current maturities of long-term debt of $11.0 million. In addition, the Company has significant long-term obligations relating to operating leases for aircraft and spare engines. At September 30, 2002, the Company had submitted all of its available eligible receivables under its Accounts Receivable Management and Security Agreement (“the Agreement”) with GMAC Commercial Credit, LLC (“GMAC”).
 
For the quarters ending June 30 and September 30, 2002, the Company failed the tangible net worth covenant in its GMAC loan

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facility. GMAC agreed not to, and forbear to, take any action with respect to such default until December 15, 2002, provided that the Company’s financial condition does not deteriorate as determined by GMAC at their sole discretion. The Company has a signed letter of intent with another financial institution to replace GMAC. This institution’s formal credit committee approved a loan facility with World Airways and expects a closing by mid-December. Borrowings and letters of credit under the GMAC facility were $10.2 million and $2.0 million, respectively, at September 30, 2002. The $10.2 million in borrowings is included in the current liabilities section of the Balance Sheet.
 
In the third quarter of 2002, the Company continued to pay amounts less than its original contractual aircraft rent obligations under agreements with its lessors that amended the terms of the original aircraft lease agreements to provide for the repayment of the unpaid contractual rent obligations. The Company continued to recognize expense for the full amount of its contractual rent payments due. The accrual for unpaid contractual rent obligations is $19.5 million and is included as accrued rent in the current liabilities section of the Balance Sheet at September 30, 2002. During the fourth quarter of 2002, the Company will repay approximately $2.9 million of this contractual rent obligation.
 
The Stabilization Act included an Air Carrier Loan Guarantee program. This program is designed to assist viable airlines that suffered financially as a result of the September 11th events who do not otherwise have access to reasonable credit. The loan guarantee is subject to certain conditions and fees, including the potential requirement that the U.S. Government be issued warrants or other equity instruments in connection with such loan guarantees. The Company filed an application on June 28, 2002 for $27 million in federal loan guarantees. If the loan guarantee request is approved, the Company plans to raise a total of $30 million. The Company’s loan application included a detailed seven-year business plan, which showed increased utilization of existing aircraft, expanded sales efforts, continued support of the U.S. Air Force Air Mobility Command program, lowered costs through process improvements, and continued customer service initiatives. The loan, if any, would be repaid from 2004 to 2009. However, there can be no assurance that the application will be approved and that this source of financing will be available to the Company.
 
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 2002.
 
Cash Flows from Operating Activities
 
Operating activities provided $11.9 million in cash during the nine months ended September 30, 2002 compared to using $19.2 million in the comparable 2001 period. The cash provided in 2002 principally reflects the $8.8 million net earnings, a $7.1 million increase in accounts payable and accrued expenses, and net non-cash income statement charges of $2.2 million, offset by a $3.3 million increase in accounts receivable and a net increase of $2.9 million in other operating assets and liabilities. The decrease of $19.2 million in 2001 is mainly due to the $21.7 million loss for the first nine months, net non-cash income statement charges of $5.7 million, an $8.4 million increase in accounts receivable, and a net decrease of $5.2 million in operating assets and liabilities.
 
Cash Flows from Investing Activities
 
Investing activities used $1.6 million in the first nine months of 2002 compared to using $1.1 million in the comparable period of 2001. In both 2002 and 2001, cash was used for the purchase of rotable parts. In 2001, this outflow was partially offset by sale and maturity of marketable investments.
 
Cash Flows from Financing Activities
 
Financing activities used $1.2 million in cash for the nine months ended September 30, 2002, which was primarily due to a reduction in the amount owed under the Agreement with GMAC of $9.5 million and debt repayments of $1.3 million offset by deferred aircraft rent obligations of $9.7 million. For the nine months ended September 30, 2001, financing activities provided $9.2 million of cash. This was primarily due to $15.5 million of proceeds from sale leaseback transactions, offset by the repayment of debt on engines subject to the sale leaseback transactions, along with scheduled debt payments, of $9.4 million and an increase of $3.1 million in the amount owed under the Agreement with GMAC.

15

Table of Contents
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Part I, Item 3 of this report should be read in conjunction with Part II, Item 7a of World Airways, Inc. Annual Report on Form 10-K for the year ended December 31, 2001. The information contained herein is not a quantitative and qualitative discussion about market risk the Company faces, but rather updates disclosures made in the aforementioned filing.
 
World Airways continues to not have any material exposure to market risks.
 
ITEM 4.    CONTROLS AND PROCEDURES
 
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.
 
PART II
 
ITEM 5.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
ITEM 6.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a)  Exhibits
 
No.
 
Description
 
99.1
 
Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
99.2
 
Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(b)
 
Reports on Form 8-K
 
None
 
*    *    *    *    *    *    *    *    *    *     *    *    *    *    *

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Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
WORLD AIRWAYS, INC.
By:
  
/s/ Gilberto M. Duarte, Jr.
   
Principal Accounting and Financial Officer
 
 
Date: November 13, 2002

Table of Contents
 
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
 
I, Gilberto M. Duarte, Jr., Chief Financial Officer of World Airways, Inc (the “Company”), certify pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:
 
 
1)
 
I have reviewed this quarterly report on Form 10-Q of World Airways, Inc.
 
 
2)
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3)
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4)
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5)
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6)
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
        Date:    11/13/2002
  
/s/    Gilberto M. Duarte, Jr.
   
Gilberto M. Duarte, Jr.
Chief Financial Officer of World Airways, Inc.

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CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
 
I, Hollis L, Harris, Chairman and Chief Executive Officer of World Airways, Inc (the “Company”), certify pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:
 
 
1)
 
I have reviewed this quarterly report on Form 10-Q of World Airways, Inc.
 
 
2)
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3)
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4)
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5)
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6)
 
The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
        Date:    11/13/2002
  
/s/    Hollis L. Harris
   
Hollis L. Harris
Chairman and Chief Executive Officer of World Airways, Inc.

19