<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ______________
Commission File No: 0-26914
AirTran Holdings, Inc.
(Exact name of registrant as specified in its charter)
Nevada 58-2189551
------ -----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9955 AirTran Boulevard, Orlando, Florida 32827
-----------------------------------------------
(Address of principal executive offices) (Zip code)
(407) 251-5600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 5, 1998, there were 64,657,007 shares of Common Stock of the
Registrant outstanding.
<PAGE>
AIRTRAN HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997
Consolidated Statements of Operations - Three months ended
June 30, 1998 and 1997; Six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows - Six months ended
June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- ---------------------
AIRTRAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1998 1997
- ------ --------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 59,195 $ 86,025
Restricted cash 6,668 5,965
Accounts receivable, less allowance of $341 and $1,354 at
June 30, 1998 and December 31, 1997, respectively 15,705 5,660
Income tax receivable - 8,862
Inventory, less allowance for obsolescence of $3,072 and
$1,325 at June 30, 1998 and December 31, 1997, respectively 11,088 11,650
Prepaid expenses 2,127 2,811
Other current assets 2,852 3,079
------- -------
Total current assets 97,635 124,052
Property and equipment:
Flight equipment 289,599 264,082
Other property and equipment 22,800 22,805
Less: Accumulated depreciation (85,717) (74,643)
------- -------
226,682 212,244
Purchase deposits for flight equipment 32,410 22,101
------- -------
259,092 234,345
Cost in excess of net assets acquired 56,455 57,776
Debt issuance costs 8,434 9,863
Other assets 10,278 7,828
-------- --------
Total assets $431,894 $433,864
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
3
<PAGE>
AIRTRAN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Stockholders' Equity 1998 1997
- ------------------------------------ --------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 16,349 $ 12,215
Accrued liabilities 42,537 61,574
Air traffic liability 25,078 14,916
Current portion of long-term debt 9,954 9,461
------- --------
Total current liabilities 93,918 98,166
Long-term debt, less current portion 241,920 241,251
------- -------
Total liabilities 335,838 339,417
Stockholders' equity:
Preferred stock, $.01 par value per share, 5,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, $.001 par value per share, 1,000,000,000 shares
authorized, and 64,565,498 and 64,312,207 shares issued and
outstanding at June 30, 1998 and December 31, 1997, respectively 65 64
Additional paid-in capital 145,859 144,937
Accumulated deficit (49,868) (50,554)
-------- --------
Total stockholders' equity 96,056 94,447
-------- --------
Total liabilities and stockholders' equity $431,894 $433,864
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AIRTRAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $ 119,001 $ 45,192 $ 209,281 $ 80,307
Cargo 764 678 1,562 1,127
Other 4,223 1,889 7,686 3,253
---------- ---------- ---------- ----------
Total operating revenues 123,988 47,759 218,529 84,687
Operating expenses and other, net
Flight operations 12,686 4,801 23,102 8,904
Aircraft fuel 19,139 10,716 35,791 19,852
Maintenance 19,669 10,534 38,536 24,640
Station operations 20,564 12,133 40,858 22,485
Passenger services 5,274 2,122 9,375 3,817
Marketing and advertising 3,470 2,875 9,904 5,227
Sales and reservations 16,634 3,723 27,454 6,801
General and administration 5,167 3,347 8,689 6,143
Depreciation 6,898 7,362 13,228 12,247
Loss (gain) on disposal of property 66 - 45 (49)
Shutdown and other non-recurring - - - 9,338
---------- ---------- ---------- ----------
Total operating expenses 109,567 57,613 206,982 119,405
---------- ---------- ---------- ----------
Operating income (loss) 14,421 (9,854) 11,547 (34,718)
Interest (income) expense:
Interest income (906) (1,702) (1,904) (3,268)
Interest expense 6,303 6,513 12,751 12,722
---------- ---------- ---------- ----------
Interest expense, net 5,397 4,811 10,847 9,454
---------- ---------- ---------- ----------
Income (loss) before income taxes 9,024 (14,665) 700 (44,172)
Income tax expense (benefit) 465 (5,439) 14 (16,439)
---------- ---------- ---------- ----------
Net income (loss) $ 8,559 $ (9,226) $ 686 $ (27,733)
========== ========== ========== ==========
Basic income (loss) per share $ 0.13 $ (0.17) $ 0.01 $ (0.51)
========== ========== ========== ==========
Diluted income (loss) per share $ 0.13 $ (0.17) $ 0.01 $ (0.51)
========== ========== ========== ==========
Basic weighted average number of shares outstanding 64,540,000 54,906,000 64,479,000 54,892,000
========== ========== ========== ==========
Diluted weighted average number of shares outstanding 68,470,000 54,906,000 68,080,000 54,892,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AIRTRAN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------
1998 1997
----------- ----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income (loss) $ 686 $(27,733)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 13,954 14,634
Provisions for uncollectible accounts 2,584 750
Loss (gain) from disposal of assets 45 (49)
Deferred income taxes - (11,307)
Changes in current operating assets and liabilities:
Restricted cash (703) -
Accounts receivable (3,767) (319)
Other current assets 789 169
Prepaid expenses and deposits (1,766) 5,585
Accounts payable and accrued liabilities (14,903) 3,467
Air traffic liability 10,162 6,825
Income tax payable - 21,431
-------- --------
Net cash flows provided by operating activities 7,081 13,453
Investing activities:
Purchases of property and equipment (36,066) (5,863)
Proceeds from disposal of equipment 70 950
-------- --------
Net cash flows used for investing activities (35,996) (4,913)
Financing activities:
Issuance of long-term debt 6,100 -
Payments of long-term debt (4,938) (9,045)
Proceeds from sale of common stock 923 217
-------- --------
Net cash flows provided by (used for) financing activities 2,085 (8,828)
-------- --------
Net decrease in cash and cash equivalents (26,830) (288)
Cash and cash equivalents at beginning of period 86,025 150,013
-------- --------
Cash and cash equivalents at end of period $ 59,195 $149,725
======== ========
Supplemental disclosures of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 11,092 $ 12,304
======== ========
Income taxes refunded $ 9,686 $ 25,387
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
AIRTRAN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
A. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, consolidated interim
financial statements contain all adjustments necessary to present fairly the
Company's financial position as of June 30, 1998 and December 31, 1997, the
results of operations for the three and six month periods ended June 30, 1998
and 1997, and cash flows for the six month periods ended June 30, 1998 and 1997.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission for Form 10-Q. It is suggested that
these unaudited interim financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Annual Report
on Form 10-K for the year ended December 31, 1997. The results of operations
for the three and six month periods ended June 30, 1998 are not necessarily
indicative of the results to be expected for the full fiscal year.
B. RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform to the current year presentation.
C. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 8,559 $(9,226) $ 686 $(27,733)
======== ======= ======= ========
Denominator for basic income
(loss) per share - weighted average
shares 64,540 54,906 64,479 54,892
Effect of dilutive stock options 3,930 - 3,601 -
-------- ------- ------- --------
Denominator for diluted income
(loss) per share - weighted-average
shares and assumed conversions 68,470 54,906 68,080 54,892
======= ======= ======= ========
Basic income (loss) per share $ 0.13 $ (0.17) $ 0.01 $ (0.51)
======= ======= ======= ========
Diluted income (loss) per share $ 0.13 $ (0.17) $ 0.01 $ (0.51)
------- ------- ------- --------
</TABLE>
7
<PAGE>
D. FREQUENT FLYER PROGRAM
The Company established its A-Plus Rewards frequent flyer program in the first
quarter of 1998. The Company accrues the estimated incremental cost of
providing free travel awards earned under its A-Plus Rewards frequent flyer
program when free travel awards are redeemed.
E. DEPRECIATION
Depreciation is calculated on a straight-line basis to estimated salvage values
over estimated depreciable lives. These estimates are periodically reviewed for
reasonableness and revised if necessary. Effective January 1, 1998, the Company
revised its estimated salvage values and useful lives on certain of its DC-9
aircraft related equipment as follows:
<TABLE>
<CAPTION>
Prior years' Current Prior years' Current
Salvage Value Salvage Value Useful Life Useful Life
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Airframes 10% 40% 10-12 years 10-12 years
Engines 10% 10% 3 years 10-12 years
Aircraft parts 5-50% 5% 3 years fleet life
</TABLE>
The revised salvage value of the Company's DC-9 fleet ranges from approximately
$434,000 to $2,614,000 per aircraft. The effect of this change for the quarter
and six months ended June 30, 1998 was to increase income by approximately $3
million or $0.04 per share on a diluted basis and $6 million or $0.09 per share
on a diluted basis, respectively. These estimates more accurately reflect
management's expectations of estimated fair values at the anticipated dates of
disposal.
F. MAINTENANCE ACCRUALS
At December 31, 1997, the Company had accrued the estimated costs to reactivate
certain aircraft. During the quarter ended June 30, 1998, the reactivation of
these aircraft were completed and the costs associated therewith were finalized.
The remaining maintenance accrual was therefore revised based on this additional
information and $3 million was reversed into income, increasing income for the
quarter and the six months ended June 30, 1998, by approximately $3 million or
$0.04 per share on a diluted basis.
G. COMMITMENTS AND CONTINGENCIES
As of June 30, 1998, the Company has a commitment to purchase 50 Boeing 717-200
aircraft. In addition, the Company intends to purchase hush kits for
installation on Stage 2 aircraft to meet Stage 3 noise requirements. Commitments
for these aircraft and hushkits will result in payments of approximately $37.8
million in 1998, $178.4 million in 1999, $233.9 million in 2000, $212.2 million
in 2001 and $302.7 million in 2002.
The Company has been in negotiations with the Association of Flight Attendants
(AFA) over a labor contract, but reached an impasse on August 6, 1998. The
Company and AFA were notified that the National Mediation Board was terminating
its services and that, beginning September 5, 1998, either party could resort to
self-help remedies, including a strike by the members of the AFA. The Company
has made contingency plans to mitigate the impact of potential disruptions.
However, a significant work stoppage by the AFA could have a material adverse
effect on the Company.
8
<PAGE>
A total of approximately 100 claims have been filed against the Company seeking
damages attributable to the deaths of those on Flight 592. The Company's
insurance carrier has assumed defense of these suits under a reservation of
rights against third parties and the Company. The insurance carrier has settled
and paid approximately 70 claims and is pursuing settlements in the balance of
the claims. In the remaining lawsuits, a third party maintenance contractor has
been named as a co-defendant as a result of the role that it played in the
accident. As all claims are handled independently by the Company's insurance
carrier, the Company cannot reasonably estimate the amount of liability which
might finally exist. As a result, no accruals for losses and the related claim
for recovery from the Company's insurance carrier have been reflected in the
Company's financial statements. The Company maintains $750 million of liability
insurance, per occurrence, with a major group of independent insurers that
provides facilities for all forms of aviation insurance for many major airlines.
Although the Company believes, based on the information currently available to
it, that such coverage is sufficient to cover claims arising out of the loss of
Flight 592 and that the insurers have sufficient financial strength to pay
claims, there can be no assurance that the total amount of judgments and
settlements will not exceed the amount of insurance available therefore or that
all damages awarded will be covered by insurance.
In November 1997, the Company filed a suit in the Circuit Court of St. Louis
County, Missouri against a third party maintenance contractor, seeking to hold
it responsible for the accident involving Flight 592. The complaint seeks
indemnification against losses attributable to the lawsuits referred to above
and other damages that the Company suffered as a result of the accident.
In May 1997, the third party maintenance contractor filed a Complaint for
declaratory judgment and other relief against the Company. The action seeks a
determination that the third party maintenance contractor is not liable to the
Company for the accident involving Flight 592 as a result of language contained
in certain of the contracts between the parties and that the Company is liable
to the third party maintenance contractor for damages that it has suffered. The
Company intends to vigorously defend this lawsuit and to assert all claims it
has against the third party maintenance contractor.
Also in May 1997, the State of Florida filed suit against the Company and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. The Company does not believe that it is obligated for such amounts
and has filed a motion to dismiss this lawsuit.
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT, the
National Transportation Safety Board, the U.S. Attorney's office in Atlanta,
Georgia and Miami, Florida and certain state agencies in Florida. Although the
Company does not believe, based on information currently available to it, that
such investigations and inquiries will result in any finding of criminal
wrongdoing on its part, the investigations have not yet been concluded and the
possibility of such a finding cannot be ruled out. The Company may also be
assessed civil penalties in connection with the accident and/or the results of
ensuing investigations. Any such findings or penalties could be material.
Several stockholder class action suits have been filed against the Company and
certain of its present and former executive officers and Directors
("Defendants"). The consolidated lawsuits seek class certification
9
<PAGE>
for all purchasers of stock in the Company during periods beginning on or after
June 1995 and ending on or before June 18, 1996, and are based on allegedly
misleading public statements made by the Company or failure to disclose material
facts in violation of federal securities laws. The Company denies that it has
violated any of its obligations under the federal securities laws and believes
that meritorious defenses exist in the lawsuits.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit against
the Company in State Court in Tennessee for breach of contract and a declaratory
judgment for an anticipatory breach. The Nashville Airport Authority seeks
damages of approximately $2.6 million. The dispute involves whether the
Company was entitled to exercise a termination right contained in its lease
agreement. Management believes the ultimate resolution will not have a
materially adverse effect on the Company's financial position or results of
operations.
From time to time, the Company is engaged in other litigation arising in the
ordinary course of business. The Company does not believe that any such pending
litigation will have a material adverse effect on its results of operations or
financial condition.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
RESULTS OF OPERATIONS
The following chart indicates the service offered by the Company as of various
dates between January 1, 1997 and June 30, 1998:
<TABLE>
<CAPTION>
Total Number of Number of Number of
Aircraft in Service Flights Per Day Cities Served
As of (1) (1) (1)
- ----------------- ------------------- --------------- -------------
<S> <C> <C> <C>
January 1, 1997 15 124 18
March 31, 1997 24 148 21
June 30, 1997 30 184 24
September 30, 1997 31 200 22
December 31, 1997 44 237 43
March 31, 1998 46 249 38
June 30, 1998 51 281 37
</TABLE>
(1) Includes aircraft operated by and service offered by AirTran Airlines and
AirTran Airways after November 17, 1997.
Results of operations for the three and six months ended June 30, 1998 as
compared to June 30, 1997:
<TABLE>
<CAPTION>
Three months ended June 30, 1998 Three months ended June 30, 1997
-------------------------------- --------------------------------
% of % of
Amount Revenues Per ASM Amount Revenues Per ASM
------ -------- ------- ------ -------- -------
(000) (000)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES $123,988 100.0% $0.084 $ 47,759 100.0% $ 0.068
EXPENSES
Flight Operations $ 12,686 10.2% $0.009 $ 4,801 10.1% $ 0.007
Aircraft Fuel 19,139 15.4% 0.013 10,716 22.4% 0.015
Maintenance 19,669 15.9% 0.013 10,534 22.1% 0.015
Station Operations 20,564 16.6% 0.014 12,133 25.4% 0.017
Passenger Services 5,274 4.3% 0.004 2,122 4.4% 0.003
Marketing and Advertising 3,470 2.8% 0.002 2,875 6.0% 0.004
Sales and Reservations 16,634 13.4% 0.011 3,723 7.8% 0.005
General and Administrative 5,167 4.2% 0.004 3,347 7.0% 0.005
Depreciation 6,898 5.6% 0.005 7,362 15.4% 0.011
Loss on disposal of property 66 - - - - -
--------- ------ -------- -------
Total operating
expenses and other, net 109,567 88.4% 0.074 57,613 120.6% 0.082
Interest expense, net 5,397 4.4% 0.004 4,811 10.1% 0.007
-------- ------ -------- -------
Income (loss) before income taxes $ 9,024 7.3% $0.006 $(14,665) (30.7%) $(0.021)
-------- ------ -------- -------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30, 1998 Six months ended June 30, 1997
------------------------------ ------------------------------
% of % of
Amount Revenues Per ASM Amount Revenues Per ASM
------ -------- ------- ------ -------- -------
(000) (000)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES $218,529 100.0% $0.081 $ 84,687 100.0% $ 0.070
EXPENSES
Flight Operations $ 23,102 10.6% $0.009 $ 8,904 10.5% $ 0.007
Aircraft Fuel 35,791 16.4% 0.013 19,852 23.4% 0.016
Maintenance 38,536 17.6% 0.014 24,640 29.1% 0.020
Station Operations 40,858 18.7% 0.015 22,485 26.6% 0.019
Passenger Services 9,375 4.3% 0.003 3,817 4.5% 0.003
Marketing and Advertising 9,904 4.5% 0.004 5,227 6.2% 0.004
Sales and Reservations 27,454 12.6% 0.010 6,801 8.0% 0.006
General and Administrative 8,689 4.0% 0.003 6,143 7.3% 0.005
Depreciation 13,228 6.1% 0.005 12,247 14.5% 0.010
Loss (gain) on disposal of property 45 - - (49) (0.1%) -
Shutdown and other
nonrecurring expenses - - - 9,338 11.0% 0.008
--------- ------ -------- -------
Total operating
expenses and other, net 206,982 94.7% 0.077 119,405 141.0% 0.098
Interest expense, net 10,847 5.0% 0.004 9,454 11.2% 0.008
-------- ------ -------- -------
Income (loss) before income taxes $ 700 0.3% $ - $(44,172) (52.2%) $(0.036)
-------- ------ -------- -------
</TABLE>
Quarter over quarter comparison
- -------------------------------
Total operating revenues for the quarter ended June 30, 1998 increased 159.6% to
$123,988,000 as compared to $47,759,000 for the quarter ended June 30, 1997. The
Company's ASMs, load factors and average fares for the second quarter 1998 were
1.5 billion, 63.3% and $79.12, respectively, as compared to 701 million, 54.9%
and $58.92, respectively, for the same period of 1997. Capacity increased due to
the increased number of flights per day, the number of cities served, along with
an increase of 21 operating aircraft in the second quarter of 1998, partially as
a result of the Company's acquisition of Airways Corporation in November 1997,
as compared to the same period of 1997. A healthy economy helped contribute to
increased demand and yield in the second quarter of 1998, as compared to the
same period of 1997. In addition, the Company has focused its efforts on
attracting more business travelers and has also implemented several initiatives
to enhance revenue, including a frequent flyer program, business class seating
and an automated revenue management system. However, the Company is currently
experiencing aggressive, competitive pricing strategies that could negatively
impact future loads and yields.
12
<PAGE>
Flight operations expenses include direct aircraft operating costs, hull
insurance and pilot compensation, but exclude aircraft fuel, maintenance and
passenger services expenses. Flight operations expenses increased in the second
quarter of 1998 primarily due to a 110.0% increase in ASMs. Flight operations
expenses increased on a per ASM basis for the quarter ended June 30, 1998
primarily due to a 10% wage increase during April of 1998 and premium
compensation paid as a result of pilot shortages.
Fuel expense, on a per ASM basis, declined primarily due to a drop in the
Company's average fuel cost per gallon to $0.55 for the second quarter of 1998
from $0.67 for the same period of 1997.
Maintenance expenses include all administrative costs of the maintenance
department as well as normal recurring maintenance. Expenses for engine overhaul
and certain scheduled heavy maintenance procedures are expensed as incurred and
are included in this cost. Overall, maintenance expenses for the quarter ended
June 30, 1998 increased due to significant expansion of service from the same
period of last year. On a per ASM basis, however, maintenance costs decreased
slightly due to the significant increase in ASMs for the quarter ended June 30,
1998 as compared to the same period of 1997.
Station operations expense includes all expenses incurred at the airports, as
well as station operations administration and liability insurance. Station
operations expenses were lower, on a per ASM basis, for the second quarter of
1998 than the second quarter of 1997 due to inefficiencies incurred during 1997
generated from restarting operations on a limited basis.
Passenger services expenses include flight attendant wages and benefits and
catering expenses. Also included are the costs for flight attendant training
and flight attendant overnight expenses. Passenger services expenses remained
relatively constant as a percentage of revenue and on a per ASM basis from the
second quarter of 1998 as compared to the second quarter of 1997.
Marketing and advertising expenses include all advertising expenses and wages
and benefits for the marketing department. Marketing and advertising expenses
decreased as a percentage of revenue and on a per ASM basis from the second
quarter of 1998 as compared to the second quarter of 1997 due primarily to the
Company's decision to limit advertising to its major markets during the quarter
ended June 30, 1998.
Sales and reservations expenses include all of the costs related to recording a
sale or reservation. These expenses include wages and benefits for
reservationists, rent, telecommunication charges, credit card fees, ARC
processing fees and travel agency commissions. Sales and reservations expenses,
as a percentage of revenue, increased in the second quarter of 1998 as compared
to the second quarter of 1997 due primarily to the fact that the Company joined
the Airline Reporting Corporation (ARC) in September 1997 to process all of its
ARC member travel agency bookings.
General and administrative expenses include the wages and benefits for the
Company's executive officers and various other administrative personnel. Also
included are costs for legal expenses, accounting and other miscellaneous
expenses. General and administrative costs for the second quarter of 1998 were
lower, on a per ASM basis, as compared to the second quarter of 1997 due to the
increased service levels during the second quarter of 1998 over which to spread
these costs.
Depreciation expense includes depreciation on aircraft and ground equipment.
Depreciation expense for the quarter ended June 30, 1998 was lower than the
quarter ended June 30, 1997 due to the change in estimated salvage values and
estimated useful lives as discussed in Note E in the notes to the consolidated
financial statements above.
13
<PAGE>
Interest expense, net for the quarter ended June 30, 1998 increased over the
quarter ended June 30, 1997 due to an increase in the average debt balance
outstanding, offset by an increase in capitalized interest on advance purchase
deposits for the new Boeing 717-200 fleet.
Year to date over year to date comparison
- -----------------------------------------
Total operating revenues for the six months ended June 30, 1998 increased 158.0%
to $218,529,000 as compared to $84,687,000 for the six months ended June 30,
1997. The Company's ASMs, load factors and average fares for the first six
months of 1998 were 2.7 billion, 60.7% and $79.60, respectively, as compared to
1.2 billion, 54.5% and $59.62, respectively, for the same period of 1997.
Capacity increased due to the increased number of flights per day, increased
number of cities served, and an increase of 21 operating aircraft during the six
months ended June 30, 1998, partially as a result of the Company's acquisition
of Airways Corporation in November 1997, as compared to the same period of 1997.
A healthy economy helped contribute to increased demand and yield in the first
six months of 1998 as compared to the same period of 1997. In addition, the
Company has implemented several initiatives to enhance revenue, including a
frequent flyer program, business class seating and an automated revenue
management system. However, the Company is currently experiencing aggressive,
competitive pricing strategies that could negatively impact future loads and
yields.
Flight operations expenses increased slightly on a per ASM basis for the six
months ended June 30, 1998 primarily due to a 10% wage increase during April of
1998 and premium compensation paid as a result of pilot shortages. Overall,
flight operations expenses increased for the first six months of 1998 reflecting
the 122.4% increase in ASMs.
Fuel expense, on a per ASM basis, declined primarily due to a drop in the
Company's average fuel cost per gallon to $0.57 for the six months ended June
30, 1998 from $0.71 for the same period of 1997.
Maintenance expense for the six months ended June 30, 1998 increased primarily
due to the introduction of 21 additional aircraft since June 30, 1997. On a per
ASM basis, however, maintenance costs decreased primarily due to the
reactivation of 9 fewer aircraft during the six months ended June 30, 1998 as
compared to the same period of 1997.
Station operations expenses were lower, on a per ASM basis, for the six months
ended June 30, 1998 than the six months ended June 30, 1997 due to
inefficiencies incurred during 1997 relating to restarting operations on a
limited basis.
Passenger services expenses remained constant as a percentage of revenue and on
a per ASM basis for the six months ended June 30, 1998 as compared to the same
period of last year.
Marketing and advertising expenses remained constant on a per ASM basis for the
six months ended June 30, 1998 as compared to the same period of last year.
Sales and reservations expenses, as a percentage of revenue and on a per ASM
basis, increased for the six months ended June 30, 1998 as compared to the same
period of last year primarily due to the fact that the Company joined the
Airline Reporting Corporation (ARC) in September 1997 to process all of its ARC
member travel agency bookings.
14
<PAGE>
General and administrative costs for the six months ended June 30, 1998 were
lower, on a per ASM basis, as compared to the six months ended June 30, 1997 due
to the increased efficiency relating to economies of scale achieved with
expanded operations in 1998.
Depreciation expense for the six months ended June 30, 1998 was higher than the
six months ended June 30, 1997 due to the return of aircraft to operating
specifications (previously classified as assets held for sale) and to
depreciation expense on non-performing assets which was included in shutdown and
other non-recurring expenses in the first six months of 1997. The increase was
partially offset by the change in estimated salvage values and estimated lives
as discussed in Note E in the notes to the consolidated financial statements
above.
Interest expense, net for the six months ended June 30, 1998 increased over the
six months ended June 30, 1997 due to an increase in the average debt balance
outstanding, offset by an increase in capitalized interest on advance purchase
deposits for the new Boeing 717-200 fleet.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
AirTran relies primarily on its operating cash flow to provide working capital.
There are no lines of credit or other facilities. As of June 30, 1998, the
Company had cash and cash equivalents of $59.2 million compared to $86.0 million
at December 31, 1997 and working capital of $3.7 million compared to $25.9
million at December 31, 1997.
For the six months ended June 30, 1998, operating activities provided $7.1
million in cash flow. Investing activities used $36.0 million as a result of the
acquisition of spare engines and Boeing 717-200 advance purchase deposits.
Financing activities provided $2.1 million as a result of obtaining $6.1 million
in financing for the purchase of spare engines and $0.9 million provided by the
exercise of stock options. These proceeds were offset by $4.9 million in debt
payments.
As of June 30, 1998, the Company's operating fleet consisted of 40 McDonnell
Douglas DC-9-30 aircraft and 11 Boeing 737-200 aircraft. The Company currently
leases one DC-9-30 aircraft to another carrier.
The Company has contracted with Boeing (successor to McDonnell Douglas) for the
purchase of 50 Boeing 717-200 aircraft, at a cost of approximately $1.0 billion
(subject to adjustments for inflation), for delivery in 1999 to 2002.
Approximately $45.8 million of this amount will be paid in progress payments
during the remainder of 1998 and 1999. There can be no assurance that cash
provided by operations will be sufficient to meet the progress payments for the
Boeing 717-200's. If the Company exercises its option to acquire up to an
additional 50 Boeing 717-200 aircraft, additional payments could be required
beginning in June 1999. The Company expects to finance at least 80% of the cost
of each of these aircraft. Although Boeing has agreed to provide assistance with
respect to the financing of aircraft to be acquired, the Company will be
required to obtain the financing from other sources. The Company believes that
with the assistance to be provided by Boeing, aircraft related debt financing
should be available when needed. There is no assurance that the Company will be
able to obtain sufficient financing on attractive terms. If it is unable to do
so, the Company could be required to modify its aircraft acquisition plans or to
incur higher than anticipated financing costs, which could have a material
adverse effect on the Company's results of operations and cash flows.
The Company's compliance with Stage 3 noise requirements will require
substantial additional capital expenditures over the next two years. By December
31, 1998, 75% of the Company's aircraft must be
15
<PAGE>
brought into compliance with Stage 3 requirements and by December 31, 1999, full
compliance is required. The Company intends to meet its Stage 3 noise
requirement obligations by installing hush kits on Stage 2 aircraft or disposing
of Stage 2 aircraft and by acquiring or leasing Stage 3 aircraft. The Company
expects that FAA certified hush kits will cost approximately $45.3 million for
its remaining non-hushed DC-9-30 and 737-200 aircraft. Any disposition of Stage
2 aircraft would reduce this obligation. There can be no assurance that cash
provided by operations will be sufficient to meet the capital requirements to
finance the remaining hushkits required for Stage 3 compliance.
The Company has been in negotiations with the Association of Flight Attendants
(AFA) over a labor contract, but reached an impasse on August 6, 1998. The
Company and the AFA were notified that the National Mediation Board was
terminating its services and that beginning September 5, 1998, either party
could resort to self-help remedies, including a strike by the members of the
AFA. The Company has made contingency plans to mitigate the impact of potential
disruptions. However, a significant work stoppage by the AFA could have a
material adverse effect on the Company. In the event that there is a significant
work stoppage, there can be no assurance that the Company will be able to
sustain sufficient cash flows from operations to meet its Boeing 717-200
progress payments and Stage 3 requirements.
New price competitions, the Company's preparation for possible labor actions and
any such labor actions could likely impair the Company's third quarter
profitability.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- --------------------------
Several stockholder class action suits have been filed against the Company and
certain of its present and former executive officers and Directors
("Defendants"). The consolidated lawsuits discussed below seek class
certification for all purchasers of stock in the Company during periods
beginning on or after June 1995 and ending on or before June 18, 1996, and are
based on allegedly misleading public statements made by the Company or omission
to disclose material facts in violation of federal securities laws. These suits
have been consolidated into a single action (In re ValuJet, Inc.). A
------------------
Consolidated Amended Complaint was filed on October 18, 1996. All of the
Defendants filed a joint Motion to Dismiss which was denied in part and granted
in part (dismissing the negligent misrepresentations claims). The Defendants
have filed an answer to the Consolidated Amended Complaint. On November 25,
1996, Plaintiffs filed their Motion for Class Certification. Defendants filed
their response memorandum of law on July 7, 1998. The discovery period will end
on February 28, 1999. Two suits (Cohen et al. v. ValuJet, Inc., et al. and
-------------------------------------
Hepler et al. v. ValuJet, Inc. et al.) have been filed in the State Court of
- -------------------------------------
Fulton County, Georgia. On December 23, 1997, a Consent Order of Dismissal in
favor of all Defendants without prejudice was entered. Although the Company
denies that it has violated any of its obligations under the federal securities
laws, there can be no assurance that the Company will not sustain material
liability under such or related lawsuits.
Numerous lawsuits have been filed against the Company seeking damages
attributable to the deaths of those on Flight 592. Approximately 100 such
lawsuits have been filed against the Company. Most of the cases were initially
removed to the federal court. That court, however, remanded the majority of the
actions to the state courts from which they originated and retained jurisdiction
over only seven cases. As a consequence, most of the cases will proceed in state
courts in Florida and Georgia, Texas and Missouri. The Company's insurance
carrier has assumed defense of all of these suits under a reservation of rights
against third parties and the Company and has settled and paid approximately 70
claims as of August 3, 1998, and is pursuing settlements in the balance of the
claims. In the remaining lawsuits, SabreTech has been named as a co-defendant as
a result of the role that it played in the accident. The Company maintains a
$750 million
16
<PAGE>
policy of liability insurance per occurrence. The Company believes that the
coverage will be sufficient to cover all claims arising from the accident.
In November 1997, the Company filed a suit in the Circuit Court of St. Louis
County, Missouri against SabreTech and its parent corporation (Sabreliner
Corporation), seeking to hold SabreTech responsible for the accident involving
Flight 592. SabreTech is the maintenance contractor who delivered oxygen
generators without safety caps and in a mislabeled box for shipment aboard
Flight 592. The oxygen generators are believed to have caused or contributed to
the fire which resulted in the accident. The complaint seeks indemnification
against losses attributable to the lawsuits referred to above and other damages
that the Company suffered as a result of the accident.
In May 1997, SabreTech filed a Complaint for declaratory judgment and other
relief against the Company. The action seeks a determination that SabreTech is
not liable to the Company for the accident involving Flight 592 as a result of
language contained in certain of the contracts between the parties and that the
Company is liable to SabreTech for damages that it has suffered. The Company
intends to vigorously defend this lawsuit and to assert all claims it has
against SabreTech.
On August 30, 1996, Metropolitan Nashville Airport Authority filed suit against
the Company in State Court in Tennessee for breach of contract and a declaratory
judgment for an anticipatory breach. The Nashville Airport Authority seeks
damages of approximately $2.6 million. The dispute involves whether the
Company was entitled to exercise a termination right contained in its lease
agreement.
In May 1997, the State of Florida filed suit against the Company and its
insurers in the United States District Court for the Southern District of
Florida seeking recovery of costs incurred relating to the accident involving
Flight 592. The Company does not believe that it is obligated for such amounts
and has filed a motion to dismiss this lawsuit.
In November 1997, the AFA and a former flight attendant filed suit in federal
court in the Eastern District of Virginia alleging that the Company had violated
the Railway Labor Act. The Company does not believe that it has violated such
act. This case has been removed to the United States District Court in the
Northern District of Georgia.
From time to time, the Company is engaged in other litigation arising in the
ordinary course of its business. The Company does not believe that any such
pending litigation will have a material adverse effect on its results of
operations or financial condition.
Several governmental inquiries and investigations have been launched in
connection with the loss of Flight 592, including investigations by the DOT, the
NTSB, the U.S. Attorney's Office in Atlanta, Georgia and Miami, Florida and
certain state agencies in Florida. Although the Company does not believe, based
on information currently available to it, that such investigations and inquiries
will result in any finding of criminal wrongdoing on its part, the
investigations have not yet been concluded and the possibility of such a finding
cannot be ruled out. The Company may also be assessed civil penalties in
connection with the accident and/or the results of ensuing investigations. Any
such findings or penalties could be material. In addition, it is possible that
the Company could be indirectly affected by negative publicity related to
charges of wrongdoing, if any, against others acting on behalf of the Company at
the time of the accident.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Exhibits:
10 Employment Agreement dated January 1, 1998, between AirTran Holdings,
Inc. and D. Joseph Corr.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
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.
AIRTRAN HOLDINGS, INC.
Date: August 10, 1998 /s/ D. Joseph Corr
---------------------------------------
D. Joseph Corr
President and Chief Executive Officer
Date: August 10, 1998 /s/ David W. Lancelot
---------------------------------------
David W. Lancelot
Vice President and Controller
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 65,863
<SECURITIES> 0
<RECEIVABLES> 16,046
<ALLOWANCES> 341
<INVENTORY> 11,088
<CURRENT-ASSETS> 97,635
<PP&E> 344,809
<DEPRECIATION> 85,717
<TOTAL-ASSETS> 431,894
<CURRENT-LIABILITIES> 93,918
<BONDS> 230,000
0
0
<COMMON> 65
<OTHER-SE> 95,991
<TOTAL-LIABILITY-AND-EQUITY> 431,894
<SALES> 209,281
<TOTAL-REVENUES> 218,529
<CGS> 0
<TOTAL-COSTS> 206,982
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,751
<INCOME-PRETAX> 700
<INCOME-TAX> 14
<INCOME-CONTINUING> 686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 686
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
<PAGE>
EXHIBIT 99.1(a)
EMPLOYMENT AGREEMENT - CORR
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this 1st
day of January, 1998,
BY AND BETWEEN AIRTRAN HOLDINGS, INC.
a Nevada corporation hereinafter referred to
as the "Company"
AND D. JOSEPH CORR, an
individual, hereinafter referred to as
"Corr"
WITNESSETH:
1. EMPLOYMENT. Company hereby retains and employs Corr to serve in the
----------
capacity of President and Chief Executive Officer of the Company and its
subsidiaries. Corr accepts such employment upon the terms and conditions
herein set forth.
2. TERM. The term of this Agreement shall commence on January 1, 1998 and
----
shall continue until November 1, 1999, unless terminated earlier in
accordance herewith.
3. DUTIES. During the term of this Agreement, and subject to the direction
------
and control of Company's Board of Directors, Corr shall perform such duties
and functions as are incident and necessary to the management of the
Company and such other duties and functions consistent with the office held
by Corr or otherwise assigned to him during the term of this Agreement
consistent with his position. Corr agrees to devote his full time,
attention and best efforts to the performance of his duties for the
Company.
4. COMPENSATION AND BONUS.
----------------------
(a) Salary. As compensation for his services hereunder, and subject to
------
review by the Company's Board of Directors annually, Corr shall
receive an annual base salary of $300,000 per annum, payable in such
manner as is consistent with the Company's then current payroll
practices. Such annual base salary shall be prorated for any partial
period of employment. The Company shall deduct from each salary
payment any and all sums required to be deducted by the Company for
Social Security, federal and state withholding taxes, and any other
federal or local tax or charge, whether now in effect or hereafter
enacted or required, on such compensation.
<PAGE>
(b) Bonus. Corr shall be eligible to participate in any management
-----
incentive bonus program as the Board of Directors of the Company may
determine from time to time and upon such terms and conditions as the
Board of Directors of the Company may determine.
5. REIMBURSEMENT OF EXPENSES. The Company shall reimburse Corr for his
-------------------------
reasonable and necessary out-of-pocket expenses incurred in connection with
the business of the Company and consistent with Company policies.
6. BENEFITS. Corr shall receive all employment benefits, including, without
--------
limitation, health insurance, vacation and sick leave, offered or generally
inuring to the benefit of other officers or employees of the Company from
time to time, to the extent Corr is eligible therefor. In the event the
Company wishes to obtain key man life insurance on Corr's life, Corr agrees
to cooperate with the Company in completing any applications necessary to
obtain such insurance and promptly submit to such physical examinations and
furnish such information as any proposed insurance carrier may reasonably
request.
7. TERMINATION. The Company may terminate Corr's employment hereunder at any
-----------
time with or without cause and Corr may resign his employment with Company
at any time.
(a) Upon termination of Corr's employment by the Company for cause or by
Corr's resignation, Corr shall be entitled to no further compensation or
benefits under this Agreement. For purposes of this Agreement, "Cause" to
terminate Corr's employment shall mean (i) that Corr has been convicted of
a felony, as evidenced by binding and final judgment, order or decree of a
court of competent jurisdiction in effect after exhaustion or lapse of all
right of appeal; or (ii) that Corr shall have breached a material term of
this Agreement.
(b) Upon termination of Corr's employment by the Company without cause, the
Company shall pay to Corr a single lump sum severance pay amount equal to
one year's base salary. In such event, the vesting of Corr's stock options
shall be accelerated to the extent such stock options would have become
vested during the twelve (12) months following the date of Corr's
termination of employment by the Company without cause.
8. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the
----------
benefit of the successors and assigns of the Company. The services to be
rendered by Corr to the Company are individual and personal and performance
of such services may not be rendered to the Company on behalf of Corr by
any other person.
9. FURTHER ASSURANCES. Each party agrees that from time to time it will, on
------------------
its own initiative taken in good faith and at the reasonable request of the
other party, execute and deliver or cause to be executed and delivered such
documents and papers and take all such
2
<PAGE>
further action, in addition to those required under the express terms of
this Agreement, as may be reasonably required in order to consummate more
effectively the purposes of this Agreement.
10. INDEMNIFICATION. The Company shall provide Corr indemnification throughout
---------------
the term of his employment for his acts as an officer and director of the
Company to such extent as exists on the date hereof, provided however, that
if such indemnification is diminished or is required to be diminished under
any applicable law, statute or other governmental regulation, such
diminution shall not constitute a violation of this provision. The terms
of this Item 10 shall survive the termination of this Agreement for any
reason whatsoever.
11. MISCELLANEOUS.
-------------
(a) Entire Agreement. This Agreement rescinds and supersedes any other
----------------
agreement and this Agreement contains the entire understanding between
the parties relative to the employment of Corr, there being no terms,
conditions, warranties, or representations other than those contained
herein, and no amendment hereto shall be valid unless made in writing
and signed by both of the parties hereto.
(b) Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the State of Nevada.
(c) Severability. In the event that any provision herein shall be legally
------------
unenforceable, the remaining provisions nevertheless shall be carried
into effect.
(d) Notices. All notices required or permitted to be given hereunder
-------
shall be deemed given if in writing and delivered personally or sent
by telex, telegram, telecopy, or forwarded by prepaid registered or
certified mail (return receipt requested) to the party or parties at
the following addresses (or at such other addresses as shall be
specified by like notices), and any notice however given, shall be
effective when received:
To Corr: D. Joseph Corr
AirTran Holdings, Inc.
9955 AirTran Boulevard
Orlando, Florida 32827
Fax: (407) 251-5567
To the Company: AirTran Holdings, Inc.
9955 AirTran Boulevard
Orlando, Florida 32827
Attn: Chief Financial Officer
Fax: (407) 251-5567
3
<PAGE>
(e) Waiver. The waiver by any party of a breach of any provision of this
------
Agreement by the other shall not operate or be construed as a waiver
of any subsequent breach of the same provision or any other provision
of this Agreement.
(f) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(g) Headings. The subject headings to the sections in this Agreement are
--------
included for purposes of convenience only and shall not affect the
construction or interpretation of any of its provisions.
(h) Construction. Each party has had the opportunity to set forth in this
------------
Agreement all matters related to the subject hereof. Corr and the
Company acknowledge the binding legal effect of this Agreement, that
this Agreement has been negotiated by the parties hereto and that each
party has, to the extent desired, sought legal counsel related to the
terms, conditions and effect of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first hereinabove written.
/s/ D. Joseph Corr
----------------------------------------
D. JOSEPH CORR
AIRTRAN HOLDINGS, INC.
By: /s/ Richard Schroeter
-------------------------------------
Title: Senior Vice President - Finance
---------------------------------
4
