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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998.
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No.: 0-26914
AirTran Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 58-2189551
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9955 AirTran Boulevard
Orlando, Florida 32827
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(Address of principal executive offices) (Zip Code)
407.251.5600
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 9, 1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant, based on the closing sales price of such stock
in the NASDAQ Stock Market on March 9, 1999, was approximately $197,688,270. As
of March 9, 1999, the Registrant had 64,926,864 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement, to be used in connection with the solicitation
of proxies to be voted at the Registrant's annual meeting of Stockholders to be
held on May 20, 1999 and to be filed with the Commission, are incorporated by
reference into Part III of this Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
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GENERAL
The Company, through its wholly-owned subsidiaries, AirTran Airlines, Inc. and
AirTran Airways, Inc., operates an affordable scheduled airline serving short
haul markets primarily in the eastern United States. The Company believes that
its low cost philosophy allows it to offer among the lowest fares in its markets
and generate its own traffic by stimulating incremental demand with fare-
conscious travelers.
The Company commenced flight operations in October 1993 with two McDonnell
Douglas DC9 ("DC9") aircraft serving three cities from Atlanta with eight
flights per day. Prior to June 17, 1996, the Company offered service to 30
cities from Atlanta, Washington, D.C. (Dulles Airport), Boston and Orlando and
operated up to 320 flights per peak day with its fleet of 51 aircraft. The
Company's operations were interrupted by the suspension of the Company's service
on June 17, 1996, pursuant to a consent order entered into with the Federal
Aviation Administration ("FAA") following the accident involving Flight 592 on
May 11, 1996 and the ensuing extensive adverse media and intense FAA scrutiny.
The Company resumed limited operations with service between Atlanta and four
other cities as of September 30, 1996. The Company has continued to work with
the FAA since that time to recertify aircraft and expand its flight operations.
As of March 15, 1999, the Company operates 40 DC9 aircraft and nine Boeing 737-
200 ("B737") aircraft. As of March 15, 1999, the Company operates a total of up
to 278 flights per day between Atlanta and 29 other cities. Additional service
is offered between Washington, D.C. (Dulles Airport) and Chicago and between
Gulfport/Biloxi, Mississippi and Dallas/Fort Worth, Houston, Fort Lauderdale,
Nashville and Tampa.
On November 17, 1997, Airways Corporation ("Airways") merged with and into the
Company. In anticipation of the Merger, the name of ValuJet Airlines was changed
to "AirTran Airlines" and upon completion of the Merger, the Company changed its
name to AirTran Holdings, Inc. Airways' operating subsidiary continues to
operate under the AirTran Airways name. In January 1998, the Company moved its
headquarters to Orlando, Florida. While the Company currently operates AirTran
Airlines and AirTran Airways under one operating certificate, it maintains two
operating specifications.
STRATEGY
In the Company's effort to return to profitability, the Company will continue to
offer an affordable fare structure and provide safe and reliable travel to both
price-sensitive business travelers and fare-conscious leisure travelers. The
Company intends to pursue a modest growth strategy while maintaining its
beneficial cost structure.
The Company's pricing structure is intended to stimulate new demand for air
travel by leisure customers and business travelers who would have otherwise not
traveled or who would have utilized ground transportation. The Company's fare
structure generally dictates pricing in most
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markets that it serves, providing travelers with substantial savings that would
generally, not be available in the absence of service by the Company. The
Company's fare structure is possible as a result of its low cost structure. In
addition to advance purchase fares, the Company maintains reasonably priced
"walk-up" fares that are generally well below similar fares offered by its
competitors in comparable markets.
The Company's service is intended to satisfy not only the basic air
transportation needs of the Company's targeted customers, price-sensitive
business travelers and short haul leisure travelers, but to provide a travel
experience worth repeating. The Company focuses on caring customer service and
has developed internal programs to build the positive attitudes of its
employees.
The Company has entered into a contract with Boeing to purchase 50 new Boeing
717-200 aircraft ("B717"), to be delivered from 1999 through 2002, with options
to purchase an additional 50 aircraft. The B717 will have a 117-seat
configuration, consisting of 12 business class seats and 105 coach seats. The
Company estimates that the B717 aircraft, which have a slightly larger seating
capacity, increased fuel efficiency and lower maintenance costs than the
Company's DC9-30 aircraft, will provide a cost per ASM lower than the Company's
DC9 fleet, even after taking into account the aircraft's higher ownership cost.
The Company is the "launch" customer of the B717 aircraft. As the launch
customer, the Company anticipates that this contract will provide material value
in terms of acquisition cost. The Company believes that the B717 aircraft offers
the optimum balance between operating cost and revenue opportunity in the
Company's markets.
GEOGRAPHIC MARKET
The Company's markets served from Atlanta are located predominantly in the
eastern United States. These markets are attractive to the Company due to the
concentration of major population centers within relatively short distances from
Atlanta, historically high air fares and the potential for attracting leisure
and business customers who would otherwise use ground transportation.
Additionally, the Company offers service to Florida markets as the Company
believes that more than 20 million people visit the Florida markets by
automobile every year from Atlanta and other points in the eastern United
States.
In the Company's city selection process, the Company considers the amount of
airport charges, incentives offered by communities to be served, the ability to
stimulate air travel and competitive factors.
FARES, ROUTE SYSTEM AND SCHEDULING
The Company serves short haul markets (generally under 1,000 miles) primarily
from Atlanta offering air transportation at affordable fares. The routes served
to and from Atlanta range in frequency from two to eight trips per day except
for Orlando, where more frequent service is provided, with some reductions in
service on the weekends. The schedules are designed to provide a consistent
product for business-oriented travelers and to facilitate connections for
passengers traveling through Atlanta.
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The Company offers a range of fares based on advance purchases of 14 days, 7
days, 3 days and "walk-up" fares. Within the advance purchase fare types, the
Company manages the availability of seats by day of week and by flight to
maximize revenue on peak-travel days. Most of the Company's fares are
nonrefundable, but can be changed prior to departure for a $45 fee. The
Company's fares are always offered on a one-way basis. The Company's fares do
not require any minimum, maximum or day of week (e.g., Saturday night) stay. The
Company's fare offerings are in direct contrast to prevalent pricing policies in
the industry where there are typically many different price offerings and
restrictions for seats on any one flight.
The Company's published Atlanta fares for coach non-stop service range from $49
to $109 for one-way travel on a 14-day advance purchase basis and $80 to $251
for one-way travel on a "walk-up" basis. The Company offers fare sales from time
to time in order to generate additional traffic.
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The following table sets forth certain information with respect to the Company's
route system based on the Company's schedule in effect as of March 15, 1999:
<TABLE>
<CAPTION>
Service Daily Round Trip
Commencement Flights Scheduled
Airport Served Date (a) (b)
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<S> <C> <C>
Atlanta-
Akron/Canton, OH March 1997 4
Bloomington/Normal, IL March 1998 3
Boston, MA February 1997 5
Buffalo, NY April 1998 3
Chicago, IL (Midway) October 1996 8
Dallas/Fort Worth, TX April 1997 5
Dayton, OH March 1998 3
Flint, MI May 1997 3
Fort Lauderdale, FL September 1996 7
Fort Myers, FL January 1997 3
Fort Walton Beach, FL October 1996 3
Greensboro, NC April 1998 3
Gulfport, MS March 1999 2
Hartford, CT May 1998 3
Houston, TX September 1997 5
Jacksonville, FL October 1996 4
Knoxville, TN March 1998 3
Memphis, TN October 1996 4
Miami, FL September 1998 5
Moline/Quad Cities, IL September 1998 2
New Orleans, LA October 1996 4
Newport News, VA October 1996 4
New York, NY (LaGuardia) December 1997 6
Orlando, FL September 1996 12
Philadelphia, PA October 1996 4
Raleigh/Durham, NC October 1996 4
Savannah, GA October 1996 3
Tampa, FL September 1996 7
Washington DC (Dulles) September 1996 8
Washington DC (Dulles)-
Atlanta, GA September 1996 8
Chicago, IL (Midway) July 1997 3
</TABLE>
(a) For markets served by the Company prior to the suspension of its
operations, the date indicated is the Company's recommenced service date.
(b) Reduced service may be provided on certain days (usually Saturday or
Sunday).
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In March 1999, the Company also commenced service with eight round-trip flights
daily during peak travel days between Gulfport/Biloxi, MS and Atlanta, GA,
Dallas/Fort Worth, TX, Fort Lauderdale, FL, Houston, TX, Nashville, TN, Orlando,
FL and Tampa, FL.
In the future, the Company may add additional service between cities already
served by the Company or may add service to new markets. The Company's selection
of markets depends on a number of factors existing at the time service to such
market is being considered. Consequently, there can be no assurance that the
Company will continue to provide service to all of the markets listed above or
that the Company will not provide service to any other particular market.
With respect to the Company's one-stop service provided between markets served
on a connecting basis through Atlanta, the Company faces competition from
numerous airlines with varying degrees of flight frequency and marketing
approaches. In addition, the Company competes with numerous nonstop flights to
many of its cities from other airports in the same metropolitan areas as served
by the Company (such as Washington's National Airport, Chicago's O'Hare Airport
and New York's Kennedy Airport).
The identity of competing airlines and the number and character of the flights
they may fly changes from month to month. Management believes published
schedules for the month of March 1999, upon which the foregoing information was
based, are representative of the competition the Company may face. Competing
airlines and their flight schedules are subject to frequent change. The
Company's competition includes carriers with substantially greater financial
resources.
The Company's aircraft scheduling strategy is directly related to the perceived
needs of its target market segments. The Company's target customers are price-
sensitive business travelers and fare-conscious leisure travelers.
The Company generally keeps a number of its aircraft out of scheduled service in
order to provide operating spares and to rotate aircraft into routine scheduled
maintenance.
DISTRIBUTION AND MARKETING
The Company's marketing efforts are vital to its success as it seeks to position
its product to stimulate new customer demand. The Company has targeted
price-sensitive business travelers and short haul travelers visiting friends and
relatives or vacationing. These are market segments, which the Company believes
offer the greatest opportunity for stimulating new demand.
The primary objectives of the Company's marketing activities are to develop a
brand identity or personality that is visibly unique and easily contrasted with
its competitors and to communicate its service directly to potential customers.
When initiating service to a new market, the Company typically makes extensive
use of advertising, as well as active public relations efforts, and focuses on
the affordable fares to be offered on an everyday basis.
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The Company communicates regularly and frequently with potential customers
through the use of advertisements in newspapers, on radio, on television and on
billboards and through toll-free telephone numbers and a web site on the
Internet. These communications feature the Company's destinations, everyday
affordable fares, ease of use (including its simplified fare structure,
ticketless alternative and easy to use Internet site) and the Company's
reservations phone number. The Company uses tag lines such as "AirTran - It's
something else" and "A more civilized way to fly" to reinforce its identity.
The Company distributes its product through various channels: (1) direct to the
consumer via phone; (2) direct to the consumer via Internet; (3) through travel
agents; and (4) through wholesalers such as AirTran Vacations. The Company pays
customary sales commissions to travel agents, but does so without volume
override payments. Information on its customers' needs, travel patterns and
identity is collected, organized and stored by the Company's automated
reservation system and can be used at a future time for direct marketing
efforts.
The Company is a participant in all five of the leading travel agency computer
reservation systems ("CRS") which include Amadeus, Galileo, SABRE, SystemOne,
and WorldSpan. These systems provide flight schedules, pricing information and
allow travel agents participating in all of these systems to electronically
process a flight reservation without contacting the Company's reservations
facility.
In March 1998, the Company instituted a frequent flyer program known as "A-Plus
Rewards" under which customers can earn free round trips on AirTran or on 14
other airlines. Free trips on AirTran can be earned twice as fast as with other
airlines. The purchase of business class seats provide customers with double
credit toward earning free trips. Free trips on other airlines may be used only
from Atlanta, Orlando or the Washington-Baltimore area, apply only to cities not
served by AirTran and are subject to other terms and conditions. The Company's
frequent flyer program provides for credit for flights taken by December 31,
1999 and the flight vouchers must be redeemed by December 31, 2000 for travel by
December 31, 2001.
The Company performs public relations and promotional activities in-house.
Advertising is handled by an outside advertising agency.
The Company and The Hertz Corporation operate a reservation call solicitation
agreement under which the Company's customers are able to reserve a Hertz rental
car at discounted rates when making a reservation for the Company's flights.
The Company has entered into an agreement with Renaissance Travel Solutions of
Hunt Valley, Maryland to operate a private label vacation product, AirTran
Vacations ("ATV"). ATV acts as the wholesaler and packages AirTran flights with
Hertz car rentals and accommodations in one of eleven cities. ATV are
distributed both through travel agents and direct to the consumer.
Air travel in the Company's markets tends to be seasonal, with the highest
levels occurring during the winter months to Florida and the summer months to
the midwest and northeastern United States. Advertising and promotional
expenses may be greater in lower traffic periods, as well as when entering a new
market, in an attempt to stimulate air travel.
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AUTOMATION
Automation is a key component of the Company's strategy. The Company's UNIX-
based computer reservations system, Open Skies, has been specifically designed
to implement the Company's simplified, ticketless service and is an important
component of the Company's attempt to maintain its low cost structure,
particularly as the Company grows.
A key component of the Company's low cost structure is the "ticketless"
alternative. At the time of a sale/reservation, the Company provides its
customers with a confirmation number, similar to the systems used by hotels and
car rental agencies. At the airport, this information is available for customer
check-in, which helps to alleviate long lines and achieve a quicker turnaround
of aircraft. After the flight has departed, the computer posts passenger
revenue from the passenger manifest information.
The Company has also expanded the distribution of its product through travel
agencies. Travel agents confirm reservations and issue tickets to customers,
which are then processed by the Company.
The Company uses the Open Skies reservation system to provide CRS booking
access, to improve unit revenue through enhanced data reporting and to
facilitate Internet reservations booking and processing.
EMPLOYEES
As of March 15, 1999, the Company employed approximately 3,500 employees.
Training, both initial and recurrent, is required for most employees. The
average training period for all new employees is approximately one to three
weeks, depending on classification. Both pilot training and mechanic training
are provided by in-house training instructors and at times, may be provided by
professional training organizations.
FAA regulations require pilots to be certificated as commercial pilots, with
specific ratings for aircraft to be flown, and to be medically certified as
physically fit. Pilot certificates and medical certifications are subject to
periodic continuation requirements including recurrent training and recent
flying experience. Mechanics, quality-control inspectors and flight dispatchers
must be certificated and qualified for specific aircraft. Flight attendants must
have initial and periodic competency fitness training and qualification.
Training programs are subject to approval and monitoring by the FAA. Management
personnel directly involved in the supervision of flight operations, training,
maintenance and aircraft inspection must meet experience standards prescribed by
FAA regulations. All of these employees are subject to pre-employment, random
and post-accident drug testing.
In May of 1998, the Company entered into a collective bargaining agreement with
its pilots represented by the National Pilots Association ("NPA"). The contract
includes competitive wages to those of similar airlines and expires in March
2001.
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In August of 1997, the Company entered into a collective bargaining agreement
with its mechanics represented by the International Brotherhood of Teamsters
("the Teamsters"). The contract includes simplified work rules and pay
increases. The contract expires in August 2003.
On September 8, 1998 the Company entered into a collective bargaining agreement
with its flight attendants represented by the Association of Flight Attendants
("AFA"). The contract includes a ten percent pay increase in year one and a
four percent increase each year thereafter expiring in August 2002.
The Company does not expect that the unionization of these employee groups will
have a material adverse effect on its operating costs or performance.
The Company is unable to predict whether any of its other employees will elect
to be represented by a labor union or other collective bargaining unit. The
election by the Company's employees for representation in such an organization
could result in employee compensation and working condition demands that may
affect operating performance or expenses.
AIRPORT OPERATIONS
Ground handling services typically can be placed in three categories - public
contact, under-wing and complete ground handling. Public contact services
involve meeting, greeting and serving the Company's customers at the check-in
counter, gate and baggage claim area. Under-wing ground handling services
include, but are not limited to, marshaling the aircraft into and out of the
gate, baggage and mail loading and unloading, as well as lavatory and water
servicing, deicing and certain services provided to the aircraft overnight.
Complete ground handling consists of public contact and under-wing services
combined.
The Company conducts its own ground handling services in 27 airports, including
Atlanta. At other airports, Company operations not conducted by the Company's
employees are contracted to other air carriers, ground handling companies or
fixed base operators. The Company has at least one employee at each of these
cities to oversee its operations.
SEASONALITY AND CYCLICALITY
The Company's operations are primarily dependent upon passenger travel demand
and, as such, may be subject to seasonal variations. Management believes that
the weakest travel periods will generally be during the months of January, May
and September. Leisure travel generally increases during the summer months and
at holiday periods.
The airline industry is highly volatile. General economic conditions directly
affect the level of passenger travel. Leisure travel is highly discretionary and
varies depending on economic conditions. While business travel is not as
discretionary, business travel generally diminishes during unfavorable economic
times, as businesses tend to tighten cost controls.
Effective September 7, 1998, the Company re-deployed its direct non-stop Orlando
service through Atlanta as a result of poor market performance. There are
multiple connecting services available through several competitive hubs,
including Atlanta.
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GOVERNMENT REGULATIONS
All interstate air carriers are subject to regulation by the Department of
Transportation ("DOT") and the FAA under the Federal Aviation Act of 1958, as
amended (the "Aviation Act"). The DOT's jurisdiction extends primarily to the
economic aspect of air transportation, while the FAA's regulatory authority
relates primarily to air saftey, including aircraft certification and
operations, crew licensing, training and maintenance standards.
In general, the amount of economic regulation over domestic carriers in terms of
market entry and exit, pricing and inter-carrier acquisitions and agreements has
been greatly reduced subsequent to enactment of the Airline Deregulation Act of
1978.
As a result of the Company's suspension of operations on June 17, 1996, AirTran
Airlines was required to apply for recertification by the DOT. The DOT issued a
"show cause" order on August 29, 1996, reflecting its preliminary determination
that the Company has satisfied the DOT requirements and issued its final order
on September 26, 1996, approving the Company's return to service.
The FAA regulates flying operations generally, including establishing personnel,
aircraft and security standards, and setting minimum standard for training and
maintenance. As part of that oversight, the FAA has implemented a number of
requirements that the Company is currently incorporating into its maintenance,
training and general aviation regulation programs. The Company expects to be in
compliance within the required time periods.
The Company's operating certificate was surrendered to the FAA in connection
with the consent order dated June 17, 1996 and returned to the Company on August
29, 1996, after the Company satisfied the requirements of the FAA in the consent
order. In the consent order, the FAA alleged that the Company violated various
federal regulations related to aircraft maintenance, maintenance manuals,
training, record keeping and reporting and the Company agreed to present a plan
to the FAA its qualifications to hold an air carrier operating certificate.
The Company currently operates under two separate operating specifications as
result of the two operating subsidiaries, AirTran Airlines and AirTran Airways.
The Company expects that by late March, 1999, that the Company will have
approval from the FAA to operate under one set of operating specifications,
which will finalize the merger between Airways and the Company.
The Company's labor relations are regulated under the Railway Labor Act, which
vests in the National Mediation Board certain regulatory functions with respect
to labor disputes between the Company and its labor unions related to collective
bargaining agreements. The U.S. Department of Justice has jurisdiction over
antitrust matters. The U.S. Postal Service has jurisdiction over certain
aspects of the transportation of mail.
Environmental Regulations
The Airport Noise and Capacity Act of 1990 ("ANCA") requires the phase-out by
December 31, 1999. Of Stage 2 aircraft operations, subject to certain
exceptions. Under final regulations issued by the FAA in 1991, air carriers are
required to reduce, by modification or retirement, the number of Stage 2
aircraft in their fleets 50 percent by December 31, 1996; 75 percent by December
31, 1998; and 100 percent by December 31, 1999. At December 31, 1998, AirTran
was in compliance with these regulations.
The ANCA generally recognizes the rights of airport operators with noise
problems to implement local noise abatement programs so long as they do not
interfere unreasonably with interstate or foreign commerce or the national air
transportation system. The ANCA generally requires FAA approval of local noise
restrictions on Stage 3 aircraft first effective after October 1990. While the
Company has had sufficient scheduling flexibility to accommodate local noise
restrictions imposed to date, AirTran's operations could be adversely affected
if locally-imposed regulations become more restrictive or widespread.
The Environmental Protection Agency ("EPA") regulates operations, including air
carrier operations, which affect the quality of air in the United States. The
Company has made all necessary modifications to its fleet to meet emission
standards issued by the EPA.
Miscellaneous
All international service is subject to the regulatory requirements of the
appropriate authorities of the other country involved. The Company does not
currently provide any international service. To the extent the Company seeks to
provide international air transportation in the future, it will be required to
obtain additional authority from the DOT and become subject to regulatory
requirements imposed by affected foreign jurisdictions.
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RISK FACTORS
Risk Resulting from the Accident of Flight 592
As a result of the accident of Flight 592 on May 11, 1996 ensuing adverse media
coverage, intensive FAA scrutiny and the resulting suspension of operations, the
Company now faces the following additional risk factors:
. The Company may not be able to regain and maintain its low cost structure or
to recover sufficient customer acceptance in order to regain and sustain
profitability.
. If the Company regains profitability, the Company may have increased costs or
reduced customer support which could decrease the Company's profitability
indefinitely.
. The occurrence of one or more subsequent incidents or accidents involving the
Company's aircraft would likely have a substantial adverse effect on the
Company's public perception and future operations.
Federal Regulation
The Company has the necessary authority to conduct flight operations, including
a Certificate of Public Convenience and Necessity from the DOT and an operating
certificate from the FAA; however, the continuation of such authority is subject
to continued compliance with applicable statutes, rules and regulations
pertaining to the airline industry, including any new rules and regulations that
may be adopted in the future. The FAA may enforce the safety laws and
regulations under the Federal Aviation Act of 1958, as amended, in a number of
ways, including the assessment of civil penalties, suspension or revocation of
the Company's authority to operate and the pursuit of criminal sanctions. The
DOT has similar authority with regard to enforcement of the economic laws and
regulations under the Aviation Act. The FAA has in the past imposed limitations
on the Company's ability to add new markets or additional aircraft and could do
so in the future. In such event, the Company's ability to expand could be
restricted or delayed. The Company cannot predict the cost of compliance with
all present and future rules and regulations and the effect of such compliance
on the business of the Company, particularly its expansion plans and aircraft
acquisition program.
AirTran's Recent Operating Losses
AirTran recorded net losses of $40.7 million in 1998, $96.7 million in 1997 and
$41.5 million in 1996. Continued losses by the Company in the future could
result in negative effects on the Company's financial condition and results of
operations. The Company's consolidated debt and recent history of losses may
adversely affect the Company's ability to obtain financing on terms satisfactory
to the Company in the future, if at all.
Risks Due to the Company's Significant Amount of Debt
The entire principal amount of the Company's 10.25% Senior Notes ($150.0
million) and 10.5% Senior Secured Notes ($80.0 million) become due on April 15,
2001. The Company does not expect to generate sufficient cash flow from
operations to repay all $230.0 million
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of such debt. Accordingly, the Company will likely need to refinance all or a
portion of the outstanding debt through additional equity or debt or a
combination thereof. However, the Company may not be able to obtain such
financing on acceptable terms. In such event, the Company could be forced to
default on its debt obligations and, ultimately, seek protection under Federal
bankruptcy laws.
The Company's ability to make scheduled payments of principal or interest and
the Company's ability to refinance its debt depend on its future performance and
financial results. Such results are subject to general economic, financial,
competitive, legislative, regulatory and other factors that are, to a certain
extent, beyond the Company's control.
The amount of the Company's debt could have important consequences to investors,
including the following: (1) a substantial portion of the Company's cash flow
from operations must be dedicated to debt service and will not be available for
operations; (2) the Company's ability to obtain additional financing for
aircraft purchases, capital expenditures, working capital or general corporate
purposes could be limited; and (3) the Company's vulnerability to adverse
economic and industry conditions is greater than its larger and more financially
secure competitors.
Fuel
The cost of jet fuel is an important expense for the Company. The Company
estimates that a one-cent increase in fuel cost would increase the Company's
fuel expenses by approximately $109,000 per month based on the Company's current
fuel consumption rate. Jet fuel costs are subject to wide fluctuations as a
result of sudden disruptions in supply, such as the effect of the invasion of
Kuwait by Iraq in August 1990. Due to the effect of world and economic events on
the price and availability of oil, the future availability and cost of jet fuel
cannot be predicted with any degree of certainty. Increases in fuel prices or a
shortage of supply could have a material adverse effect on the Company's
operations and operating results.
A significant increase in the price of jet fuel may result in a
disproportionately higher increase in the Company's average total costs than its
competitors using more fuel efficient aircraft and whose fuel costs represent a
smaller portion of total costs. The Company would possibly seek to pass such a
cost increase to the Company's customers through a fare increase. There can be
no assurance that any such fare increase would not reduce the competitive
advantage the Company seeks by offering affordable fares. In order to provide a
measure of control over price and supply, effective March 1999, the Company has
entered into a fuel-hedging program whereby the Company manages the price-risk
of fuel utilizing fuel swap contracts.
The Company's fleet of DC9-30 and B737-200 aircraft is relatively fuel
inefficient compared to newer aircraft and industry averages. The primary
reasons for this inefficiency are aircraft size and engine technology. The B717
aircraft to be acquired by the Company are expected to be more fuel-efficient.
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Market Dominance by Delta Air Lines, Inc.
The Atlanta market, which is the Company's principal hub, is currently dominated
by Delta Air Lines, which presently offers more than 600 flights per day from
Atlanta. During 1998, Delta enplaned approximately 78% of all passengers at
Atlanta's Hartsfield International Airport. The Company's Atlanta-based strategy
may not be successful in light of Delta's Atlanta market dominance.
Competitors in the Low-Fare Market
Delta Express, a division of Delta, began offering low cost/low fare service in
several of the Company's markets in 1996. As a result of the intense competitive
environment generated by Delta Express and by Southwest Airlines' entry into
certain markets, the Company withdrew service from certain markets. The Company
does not presently compete with Delta Express or Southwest Airlines on any
routes. Nevertheless, the Company may face greater competition from Delta
Express, Southwest Airlines or other low fare carriers in the future.
A Highly Competitive Industry
The airline industry is highly competitive, primarily due to the effects of the
Airline Deregulation Act of 1978, which has substantially eliminated government
authority to regulate domestic routes and fares. Deregulation has increased the
ability of airlines to compete with respect to destination, flight frequencies
and fares. The Company competes with airlines that serve the Company's current
and proposed routes and which are larger and have greater name recognition and
greater financial resources than the Company.
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The following table identifies airlines that provide non-stop service to and
from Atlanta in the city pair currently served by the Company and the
approximate number of daily round trip flights scheduled to be flown by those
other airlines as of March 1999.
<TABLE>
<CAPTION>
Daily Non-stop Round Trips
---------------------------------------
Atlanta to/from Delta and Affiliates Others(a)
- ----------------------- ---------------------- -----------
<S> <C> <C>
Akron/Canton, OH - -
Bloomington/Normal, IL - -
Boston, MA 15 -
Buffalo, NY 3 -
Chicago, IL (Midway)(b) 6 -
Dallas/Fort Worth, TX 15 14
Dayton, OH 6 -
Flint, MI - -
Fort Lauderdale, FL 11 -
Fort Myers, FL 8 -
Fort Walton Beach, FL - 9
Greensboro, NC 9 -
Gulfport, MS - 9
Hartford, CT 6 -
Houston, TX 12 9
Jacksonville, FL 9 -
Knoxville, TN 7 -
Memphis, TN 10 6
Miami, FL 11 6
Moline/Quad Cities, IL - -
New Orleans, LA 9 -
New York, NY (LaGuardia)(c) 20 -
Newport News, VA (d) 6 -
Orlando, FL 13 1
Philadelphia, PA 9 7
Raleigh/Durham, NC 10 4
Savannah, GA 8 -
Tampa, FL 11 -
Washington DC (Dulles)(e) 10 9
---------- ----------
224 74
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
(a) Includes Continental, Kiwi, Midway, ProAir and United. Also includes
commuter affilates of major airlines which generally provide service with
turboprop aircraft.
(b) Several major airlines operate daily flights to Chicago's O'Hare Airport
which are not reflected in the table above.
(c) Several major airlines operate daily flight to other airports in the New
York city area which are not reflected in the table.
(d) Service provided to Norfolk, VA by Delta.
(e) Delta also operates daily flights to Ronald Reagan Washington National
Airport which are not reflected in the table.
14
<PAGE>
The Company may also face competition from any of the following: (1) existing
airlines that may begin serving markets which the Company currently serves or
may serve in the future; (2) current competitors that may expand their existing
service; (3) new competitors that may form new airline companies and enter the
low fare market; and (4) companies that provide ground transportation.
Competitors with greater financial resources than the Company may price their
fares at or below the Company's fares or increase their service. Such
competition could prevent the Company from attaining a share of the passenger
traffic necessary to regain and sustain profitable operations. The Company's
ability to meet price competition depends on its ability to operate at costs
equal to or lower than its competitors or potential competitors.
Aging Aircraft; Maintenance and Reliability
The Company's fleet consists of DC9-30 aircraft manufactured between 1967 and
1976 and B737-200 aircraft manufactured between 1968 and 1985. Many aircraft
components must be replaced after specified numbers of flight hours or take-off
and landing cycles and new aviation technology may need to be retrofitted. As a
result, the cost in general to maintain aging aircraft will exceed the cost to
maintain newer aircraft. The Company believes that its cost to maintain its
aircraft in the long-term will be consistent with industry experience for the
aircraft type and age used by comparable airlines.
However, since the resumption of the Company's service in September 1996, the
Company has incurred higher than usual maintenance expenses as a result of
expenses related to reactivating its aircraft. Currently, the FAA is considering
amendments to FAA regulations, which would require certain heavy maintenance
checks and other additional maintenance requirements for aircraft operating
beyond certain operational limits.
It is likely that these maintenance requirements will apply to the aircraft
operated by the Company, although it is uncertain whether the proposed
amendments will require any changes to the heavy maintenance procedures already
used by the Company. In addition, the Company will be required to comply with
any other future regulations or Airworthiness Directives issued with respect to
aging aircraft. As a result, the Company's costs of maintenance (including costs
to comply with aging aircraft requirements) may increase in the future.
The Company believes that its aircraft are mechanically reliable based on the
percentage of scheduled flights completed. However, the Company cannot assure
investors that its aircraft will continue to be sufficiently reliable over
longer periods of time. Furthermore, given the age of the Company's fleet, any
public perception that the Company's aircraft are less than completely reliable
could have a negative effect on the Company's business.
15
<PAGE>
Aircraft Acquisitions
The Company has contracted with the Boeing Company ("Boeing") to purchase 50
B717 aircraft to be delivered from 1999 to 2002. The total cost of these
aircraft will exceed $1.0 billion. While the Company believes that financing
for these aircraft will be available, such additional financing may not remain
available when needed or may not be available on attractive terms.
For a summary of some of the Company's capital requirements under its aircraft
acquisition program, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and capital Resources" in Item 7
of this Form 10-K.
Stage 3 Compliance
To satisfy FAA rules regarding allowable noise levels, each airline must have
its fleet in compliance with Stage 3 noise level requirements by December 31,
1999. As of March 15, 1999, 36 of the Company's 49 aircraft comply with Stage 3
requirements.
The Company intends to comply with the Stage 3 noise requirement by installing
hush kits on or disposing of Stage 2 aircraft and acquiring or leasing Stage 3
aircraft. The Company does not believe there will be a problem installing the
hush kits on a timely basis; however, the failure to do so may negatively impact
the Company's business. For a discussion of the cost of Stage 3 hush kits, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in Item 7 of this Annual Report.
Risk of Loss
As evidenced by the accident involving Flight 592 on May 11, 1996, the Company
may incur catastrophic losses in the event of an aircraft accident. Any such
accident could involve not only repair or replacement of a damaged aircraft and
its consequent temporary or permanent loss from service, but also significant
potential claims of injured passengers and others. Moreover, any aircraft
accident, even if fully insured, could cause and has caused a public perception
that some of the Company's aircraft are less safe or reliable than other
aircraft, which could have and has had a negative effect on the Company's
business.
The Company is required by the DOT to carry liability insurance on each of its
aircraft. The Company currently maintains liability insurance in the amount of
$750 million per occurrence. The Company's cost of insurance substantially
increased after the accident. Although the Company currently believes its
insurance coverage is adequate, the amount of such coverage may be changed in
the future or the Company may be forced to bear substantial losses from
accidents. Substantial claims resulting from an accident in excess of related
insurance coverage could have a negative impact on the Company.
Risks Due to Litigation
For a discussion of certain risks presented by litigation affecting the Company,
see "Legal Proceedings" in Item 3 of this Annual Report.
16
<PAGE>
Year 2000 Compliance
For a discussion of certain risks presented by the ability of the Company and
others on whom the Company relies to successfully make their computer systems
Year 2000 compliant, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000" in Item 7 of this Annual
Report.
Dependence on Executive Officers
The Company is dependent on the services of Joseph B. Leonard (President,
Chairman of the Board and Chief Executive Officer) and its other executive
officers. The loss of services of these officers could materially and adversely
affect the business of the Company and its future prospects. The Company does
not, and does not presently intend to, maintain key man life insurance on any of
the Company's officers.
Reliance on Others
The Company has entered into agreements with contractors, including other
airlines, to provide certain facilities and services required for its
operations, including aircraft maintenance, ground facilities, baggage handling
and personnel training. The Company will likely need to enter into similar
agreements in any new markets that it decides to serve. All of these agreements
are subject to termination after notice. The Company's reliance upon others to
provide essential services on behalf of the Company may result in relative
inability to control the efficiency, timeliness and quality of contract
services. Management expects that the Company will be required to rely on such
contractors for some time in the future.
Airport Access
The Company's markets are located primarily in the eastern United States. Access
to certain "slot" controlled airports (such as Reagan Washington's National, New
York's Kennedy and LaGuardia and Chicago's O'Hare) is limited, and the Company
may not be able to obtain or maintain access to such airports at an acceptable
cost. Any condition, which would deny or limit the Company's access to the
airports it serves or seeks to serve, may have a negative impact on the
Company's business.
Taxation Affecting Air Fares
Recent legislation has imposed taxes on domestic airline transportation equal to
segment charge (currently $2.00 to be increased to $3.00 by 2003) plus 7.5% of
the ticket price. These taxes will likely have a greater effect on leisure
travelers. Since the Company relies to a large extent on leisure travelers, such
a tax increase may affect the Company to a greater extent than the Company's
competitors who rely more heavily on business travelers.
17
<PAGE>
Employee Relations
For a discussion of certain risks presented by the possible unionization of
employee groups not currently represented by unions, see "Business --Employees"
in Item 1 of this Annual Report.
Unauthorized Parts
The Company has heavy aircraft maintenance as well as engine and component
overhauls performed by FAA approved contract maintenance providers. Each of the
contractors as well as the Company, has procedures in place to ensure the use of
authorized materials during the performance of maintenance. Nevertheless, a risk
exists that through fraud or negligence unauthorized parts could be used on any
air carrier's aircraft including those of the Company.
18
<PAGE>
ITEM 2. PROPERTY
--------
OPERATING AIRCRAFT FLEETS
Owned and leased aircraft operated by the Company as of December 31, 1998
included:
<TABLE>
<CAPTION>
Average Average
No. of Operating Age
Aircraft Type Seats Owned Leased Total (Years)
- ------------- ------- ----- --------- ----- -------
<S> <C> <C> <C> <C> <C>
McDonnell Douglas DC9-30 106 40 - 40 29.1
Boeing 737-200 119 4 6 10 22.8
-- - -- -----
Total 44 6 50 27.84
-- - -- -----
</TABLE>
For information concerning the estimated useful lives, residual values, lease
terms, operating rent expense and firm orders on additional aircraft, see Notes
1, 3 and 5 to the consolidated financial statements.
As of December 31, 1998, 34 of the Company's owned aircraft were encumbered
under debt agreements.
The Company is expecting to take delivery of the B717 beginning in September,
1999. These aircraft will be used to replace the nine B737s currently in
operation. The Company returned one B737 back to the lessor in January 1999.
The lease expirations for Airtran's aforementioned leased aircraft as of
December 31, 1998 were as follows:
<TABLE>
Aircraft Type 1999 2000 2001 2002 2003 and
Thereafter
- ----------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Boeing 737-200 4 - - 1 1
</TABLE>
GROUND FACILITIES
The Company's principal executive offices are located two miles from the Orlando
International Airport in a leased facility consisting of approximately 34,000
square feet of office space. The facility houses the executive offices of the
Company as well as the Company's operations staff (including in-flight
operations and station operations), general administrative staff, computer
systems and personnel training facility. The lease agreement for this facility
expires in the year 2007 and may be extended an additional ten years through the
exercise of options in five-year increments.
19
<PAGE>
The Company owns an aircraft hangar of approximately 70,000 square feet at the
Orlando International Airport, subject to a ground lease with the Greater
Orlando Aviation Authority. The lease agreement for this facility expires in the
year 2011 and may be extended an additional ten years through the exercise of
options in five-year increments. The hangar houses a portion of the Company's
maintenance staff, maintenance records and parts inventory.
The Company leases 19,739 square feet of office space in Atlanta for use as a
reservations center under a lease that expires September 30, 1999. The Company
also leases approximately 15,000 square feet of space in Atlanta for use as a
training center under a lease that expires August 31, 1999. The Company
currently intends to renew both of these leases during 1999.
The Company has signatory status on a lease facility at Atlanta Hartsfield
International Airport, which expires in the year 2010. The Company also leases
a 13,028 square feet reservations center in Savannah, Georgia, which expires in
January 2000.
The check-in-counters, gates and airport office facilities at each of the
airports the Company serves are leased from the appropriate airport authority or
subleased from other airlines. Such arrangements may include baggage handling,
station operations, cleaning and other services.
If such facilities at any additional cities to be served by the Company are not
available to the Company at acceptable rates, or if such facilities become no
longer available to the Company at acceptable rates, then the Company may choose
not to service such markets.
ITEM 3. 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"). These suits have been consolidated into a single action (In re
-----
ValuJet, Inc.). The consolidated lawsuit is based on allegedly misleading
- -------------
public statements made by the Company or omission to disclose material facts in
violation of federal securities laws. Class certification has been granted for
all purchasers of stock in the Company during the period beginning in June 1995
and ending on June 18, 1996. The Company entered into a Memorandum of
Understanding to settle the consolidated lawsuit with attorneys representing the
certified class on December 31, 1998. Although the Company denies that it has
violated any of its obligations under the federal securities laws, it has agreed
to pay $2.5 million in cash and $2.5 million in common stock in the settlement,
which is subject to certain conditions. In the event the settlement is not
approved, discovery under the lawsuit would likely be revived. There can be no
assurance that the Company will not sustain material liability under such or
related lawsuits in the event the settlement is not approved.
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 are proceeding in
state courts in Florida, Georgia, Texas and Missouri. The Company's insurance
carrier has assumed
20
<PAGE>
defense of all of these suits under a reservation of rights against third
parties and the Company and has settled and paid approximately 93 claims as of
March 10,1999,and is pursuing settlements in the balance of the claims. As all
claims are handled independently by the Company's insurance carrier, the Company
cannot reasonably estimate the amount of liability that may 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. 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 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 that 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. The Court has ordered
this case to trial on April 5, 1999.
In May 1997, SabreTech filed a Complaint for declaratory judgment and other
relief against the Company in the United States District Court Southern District
of Florida, Miami Division. 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. On February
23, 1999, the court stayed this action pending the resolution of the Missouri
State Court action.
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. In March 1999, the court granted the Company's motion to dismiss
this lawsuit.
The Department of Transportation, the National Transportation Safety Board, the
U.S. Attorney's Office in Atlanta, Georgia and Miami, Florida and certain state
agencies in Florida have launched several governmental inquiries and
investigations in connection with the loss of Flight 592. 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, some of 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.
21
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
None.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
MARKET INFORMATION
The Company's Common Stock, $.001 par value, is traded on the NASDAQ Stock
Market under the symbol "AAIR". Prior to November 18, 1997, the Company's
Common Stock was traded under the symbol "VJET". As of March 9, 1999, there
were approximately 5,501 holders of record of the Company's Common Stock. The
following table sets forth the reported high and low sale prices for the Common
Stock for each fiscal quarter since January 1, 1997.
<TABLE>
<CAPTION>
Fiscal year ended December 31, 1997 High Low
- ----------------------------------- ---- ---
<S> <C> <C>
Quarter Ending March 31, 1997 $8.75 $6.13
Quarter Ending June 30, 1997 $8.00 $6.25
Quarter Ending September 30, 1997 $7.84 $4.75
Quarter Ending December 31, 1997 $6.25 $3.50
Fiscal year ended December 31, 1998 High Low
- ----------------------------------- ---- ---
<S> <C> <C>
Quarter Ending March 31, 1998 $8.06 $3.00
Quarter Ending June 30, 1998 $9.44 $6.75
Quarter Ending September 30, 1998 $8.12 $3.88
Quarter Ending December 31, 1998 $4.47 $2.13
</TABLE>
As of March 9, 1999, the closing price of the Common Stock was $3.28.
DIVIDENDS
No cash dividends have ever been declared by the Company on its Common Stock. In
addition, the Company's debt indentures restrict the Company's cash dividends.
The Company intends to retain earnings to finance the development and growth of
its business. Accordingly, the Company does not anticipate that any dividends
will be declared on its Common Stock for the foreseeable future. Future
payments of cash dividends, if any, will depend on the Company's financial
condition, results of operations, business conditions, capital requirements,
restrictions contained in agreements, future prospects and other factors deemed
relevant by the Company's Board of Directors.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this item is as follows:
<TABLE>
<CAPTION>
(in thousands except per share data)
1998(a)(b) 1997(c)(d) 1996(d) 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $439,307 $211,456 $219,636 $367,757 $133,901
Net income (loss) (40,738) (96,663) (41,469) 67,763 20,732
Basic (loss) earnings per share (0.63) (1.72) (0.76) 1.24 0.51
Diluted (loss) earnings per share (0.63) (1.72) (0.76) 1.13 0.46
Total assets 376,406 433,864 417,187 346,741 173,039
Long-term debt including
current maturities 245,994 250,712 244,706 109,038 46,965
</TABLE>
Notes:
a) Effective January 1,1998 the Company revised the salvage value and lives of
its DC9 fleet and related equipment. The effect of this change for the year
ended December 31, 1998 was to increase income by approximately $12
million.
b) Includes a $27.5 million impairment loss related to the acceleration of the
retirement of its four owned Boeing 737 ("B737") aircraft as a result of
the elimination of their original route system and continued operating
losses upon their redeployment to other routes.
c) Includes a $5.2 million charge to earnings for the renaming of the airline
in connection with the merger with Airways Corp. in November, 1997
d) Includes a $24.8 million and a $68 million charge to earnings in 1997 and
1996, respectively, related to the shutdown of the airline in 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
- --------------
As a result of the accident, the ensuing extraordinary review of the Company's
operations by the FAA, the suspension of operations in June 1996, and related
consequences, the Company's results for periods prior to May 11, 1996 are not
necessarily reflective of the results to be expected in future periods. The
Company's operations for 1996 and 1997 are also not reflective of results to be
expected in future periods. This comes as a result of the suspension of
operations for a significant portion of 1996, reduced service levels during the
fourth quarter of 1996 and during the year of 1997, incremental costs incurred
to reinitiate service to certain markets and to reactivate aircraft taken out of
service during the suspension of operations, and the merger of Airways
Corporation into the Company in November 1997. The Company's financial results
include the operations of Airways Corporation only from and after November 17,
1997, the date of the Merger.
1998 COMPARED TO 1997
SUMMARY
The Company recorded a net loss of $40.7 million and $96.7 million for the years
ended December 31, 1998 and 1997, respectively. Included in the 1998 net loss is
an impairment charge of $27.5 million related to the B737 fleet. Also, included
in the 1997 net loss is a one-time charge of $30.1 million related to rebranding
and shutdown costs. Excluding the charges, operating costs per available seat
miles ("ASM") decreased 16.0% from 9.4 cents to 7.9 cents primarily due to the
Company's continued increase in service levels. During 1998, both ASMs and
revenue
24
<PAGE>
passengers enplaned increased to 5.4 billion and 5.5 million, respectively, as
compared to 3.0 billion and 3.0 million for 1997, respectively.
OPERATING REVENUES
Total operating revenues in 1998 were $439.3 million as compared to $211.5
million for the year ending December 31, 1997. The 107.8% increase is primarily
due to the 81.7% increase in revenue passengers enplaned and a 3.1% increase in
yield (the average amount that a passenger pays to fly one mile) from 12.6 cents
to 13.0 cents. However, the Company is currently experiencing aggressive,
competitive pressures that could negatively impact future load factors and
yields which could ultimately negatively impact the Company's operating
revenues.
OPERATING EXPENSES
Flight operations include all expenses related directly to the operation of the
aircraft other than aircraft fuel, maintenance expenses and passenger services
expenses. Flight operations expenses were higher for the year ended December
31, 1998 than 1997 primarily due to the 80.3% increase in ASMs. The Company
also reached an agreement with the union representing its pilots, the National
Pilots Association, during 1998 that included a 10% pay increase effective May
1998.
Aircraft fuel expenses include both the direct costs of the fuel as well as the
cost of delivering fuel into the aircraft. Fuel expense increased 47.4%
primarily due to the increase in consumption offset by a 21.7% decrease in price
per gallon in 1998 from 69.0 cents per gallon to 54.0 cents per gallon.
Maintenance expenses include normal recurring maintenance performed during the
year as well as all administrative costs of the maintenance department.
Maintenance expenses in 1998 increased 25.1% due to a higher volume in required
heavy checks and engine overhauls resulting from an increase in the number of
operating aircraft from 44 at December 31, 1997 to 50 at December 31, 1998.
Station operations expenses include all expenses incurred at the airports, as
well as station operations administration and liability insurance. Station
operations expenses were higher due to the 80.3% increase in capacity.
Passenger services expenses include flight attendant wages, training, overnight
expenses and catering costs. Passenger service cost in 1998 increased 118.2%
again due to expanded capacity and costs incurred related to preparations for
threatened flight attendant labor actions. During 1998, the Company negotiated a
new contract with the union representing its flight attendants, the Association
of Flight Attendants, that included 10% pay increase effective October 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
increased due to the increase in commissionable sales and the increase in
passenger
25
<PAGE>
volume.
Effective January 1, 1998 the Company revised the salvage value and lives of its
DC9 fleet and related equipment. The revised salvage values of the Company's DC9
fleet ranges from approximately $434,000 to $2,614,000 per aircraft. The effect
of this change for the year ended December 31, 1998, was to increase income by
approximately $12 million or $0.19 per share on a diluted basis. These estimates
more accurately reflect management's expectations of estimated fair values at
the anticipated dates of disposal.
In the fourth quarter of 1998, the Company decided to accelerate the retirement
of its four owned Boeing 737 ("B737") aircraft as a result of the elimination of
their original route system and continued operating losses upon their
redeployment to other routes. The B737's will be replaced with B717 aircraft.
In connection with its decision to accelerate the retirement of these aircraft,
which were acquired in the Airways Merger, the Company performed an evaluation
to determine, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of these
aircraft would be less than the aggregate carrying amount of these aircraft and
related assets and an allocation of cost in excess of net assets acquired
resulting from the Airways Merger. SFAS No. 121 requires that when a group of
assets being tested for impairment was acquired as part of a business
combination that was accounted for using the purchase method of accounting, any
cost in excess of net assets acquired that arose as part of the transaction must
be included as part of the asset grouping. As a result of the evaluation,
management determined that the estimated future cash flows expected to be
generated by these aircraft would be less than their carrying amount and
allocated cost in excess of net assets acquired, and therefore these aircraft
are impaired as defined by SFAS No. 121. Consequently, the original cost basis
of these assets were reduced to reflect the fair market value at the date the
decision was made, resulting in a $27,492,000 impairment loss. The Company
considered recent transactions and market trends involving similar aircraft in
determining the fair market value. See Note 11 to the consolidated financial
statements.
NON-OPERATING EXPENSES
Interest expense, net, increased $4.5 million primarily due to the decrease in
interest income earned from excess cash (cash and cash equivalents decreased
from $86.0 million at December 31, 1997 to $10.9 million at December 31, 1998).
The Company has not recognized any benefit from the future use of operating loss
carryforwards because management's evaluation of all the available evidence in
assessing the realizability of the tax benefits of such loss carryforwards
indicates that the underlying assumptions of future profitable operations
contain risks that do not provide sufficient assurance to recognize such tax
benefits currently. The Company's income tax benefit was $0 and $22.8 million in
1998 and 1997 respectively. The benefit recorded in 1997 was the result of
operating loss carryback claims.
26
<PAGE>
1997 COMPARED TO 1996
SUMMARY
The Company recorded a net loss of $96.7 million and $41.5 million for the years
ended December 31, 1997 and 1996, respectively. Included in the 1997 and 1996
net losses are shutdown costs of $24.8 million and $68.0 million, respectively.
Also included in the 1997 loss is $5.2 million of rebranding expenses related to
the renaming of the airline. Operating expenses increased significantly due to
inefficiencies generated from restarting operations.
OPERATING REVENUES
Total operating revenues in 1997 were $211.5 million as compared to $219.6
million for the year ended December 31, 1996. The 3.7% decrease is primarily due
to a 7.4% decrease in load factor. The Company flew 3.0 billion ASMs in 1997 as
compared to 2.7 billion ASMs in 1996. The Company's load factors for 1997 and
1996 were 52.9% and 57.1%, respectively. The lower load factors in 1996 and 1997
were due in part to the 1996 accident and ensuing circumstances. Due to the
eight-month lapse of the 10% excise tax during 1996, the Company's average fare
in 1996 was $69.81 compared to $66.85 in 1997.
OPERATING EXPENSES
Flight operations expenses were higher for the year ended December 31, 1997,
than 1996, due to an 11% increase in ASMs, a substantial increase in the cost of
hull insurance effective October 1996, and the Company's change in compensation
structure in September 1996. The change in compensation structure reduced the
percentage of compensation represented by bonuses and shifted the cost to base
pay.
Fuel increased 4.5% due to a 6.6% increase in consumption offset by a 2.9%
decrease in price from 71.0 cents per gallon to 69.0 cents per gallon.
Maintenance expenses in 1997 were higher than 1996 primarily due to an increase
in the number of operating aircraft from 15 at December 31, 1996 to 44 at
December 31, 1997, which resulted in more check lines.
Station operations expenses were higher, on a per ASM basis, for the year ended
December 31, 1997, than in 1996, largely due to the suspension of operations and
inefficiencies generated from restarting operations in 1996. Many of the station
facilities were not fully utilized during the fourth quarter of 1996 and during
a portion of 1997 due to the limited operations. Of the 31 stations operated by
the Company prior to its suspension of operations, 15 were restarted during 1996
and eight during 1997. Certain facility rental expenses related to non-operating
stations as a result of the suspension of operations are included in shutdown
and other nonrecurring expenses. Other factors contributing to a higher 1997
station operations expense were an increase in insurance costs as of October 1,
1996 and an approximate 5% increase in labor rates. Certain station operations
administrative costs were also incurred during the suspension of operations in
1996 with no ASMs being generated over which to spread these costs.
27
<PAGE>
Marketing and advertising expenses were higher in 1997 as a percentage of
revenue, compared to 1996. This was due to the aggressive marketing campaign in
the fourth quarter of 1997 to introduce the Company's new business class product
combined with a cost reduction effort in 1996 after the accident.
Sales and reservations expenses, as a percentage of revenue, increased in 1997
to 9.0% of revenues as compared to 8.4% for 1996, 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.
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, bad debts, accounting and other
miscellaneous expenses. General and administrative costs for 1997 decreased
10.5% from 1996 due to significantly reduced legal fees.
Depreciation expense includes depreciation on aircraft and ground equipment.
Start-up and route development costs are expensed as incurred. Depreciation
expense for the year ended December 31, 1997 was higher than 1996 due to the
return to operating status of aircraft which were previously idled or held for
disposition and due to additional capital spending primarily to purchase and
install hush kits to meet Stage 3 noise requirements. Depreciation on idled
aircraft, as a result of the suspension of operations and reduced operations,
was recorded in shutdown and other nonrecurring expenses. All of these aircraft
were reactivated during 1997. During 1996, the Company made the decision to
ground and dispose of certain idled aircraft. Subsequent to the decision to
sell or lease out such aircraft, no depreciation was recorded on those aircraft
held for sale. During 1997, as a result of the Merger, the Company's management
decided to return these aircraft to service. The aircraft were reclassified to
flight equipment and will continue to be depreciated over their remaining useful
lives.
Shutdown and other non-recurring expenses in 1997 and 1996 include costs
associated with the loss of Flight 592, excess operating costs related to the
reduced schedule from May 19, 1996 to June 17, 1996, the suspension of
operations from June 17, 1996 to September 29, 1996, and the reduced schedule
from September 30, 1996 to December 31, 1997. Such costs consisted of expenses
directly related to the accident and the ensuing extensive FAA review of the
Company's operations including legal fees, payments to the FAA, related
inspection costs and maintenance in excess of normal operating maintenance. In
addition, depreciation on grounded aircraft in 1996 and 1997, rental of
abandoned or idled facilities and costs of personnel idled as a result of the
reduced and suspended operations from May 1996 through December 1997 are
included in shutdown and other nonrecurring expenses. Personnel costs include
full wages, salaries and benefits that were provided to idled employees during
the reduction and suspension of operations. The 63.5% decrease in shutdown and
other nonrecurring expenses is primarily due to the resumption of operations in
September 1996 and the related increasing service levels.
28
<PAGE>
These costs consist of the following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
---- ----
<S> <C> <C>
Maintenance $15,380 $27,750
Legal and other 6,318 16,181
Depreciation 3,141 11,054
Facilities rental - 6,114
Wages, salaries and benefits,
excluding maintenance - 4,895
FAA remediation - 2,000
------- -------
$24,839 $67,994
------- -------
</TABLE>
No accrual was provided for costs to be incurred in future periods related to
aircraft depreciation, maintenance and rental costs associated with
temporarily idled facilities as such costs were recognized as they were
incurred.
During 1997, the Company recorded a $5.2 million charge related to the renaming
of the airline. The rebranding expenses emanated from the merger with Airways
Corporation, the parent company of AirTran Airways, Inc., which was announced in
July and consummated in November 1997 and the Company's decision to change the
name of its operating subsidiary to "AirTran Airlines" in September 1997. These
costs primarily include changing the signage, uniforms, information systems and
advertising.
NON-OPERATING EXPENSES
Net interest expense increased 21.6% in 1997 due to the issuance of $80.0
million, 10.5% Senior Secured Notes due 2001 to refinance previous outstanding
debt and due to reduced interest income as a result of reduced cash available
for investment. During 1996, interest expense exceeded interest income by
approximately $14.5 million due to increasing debt levels attributable to the
acquisition of aircraft and the completion of the issuance of $150.0 million of
10.25 % Senior Notes due 2001.
The Company's effective tax rate was 19% and 37% in 1997 and 1996 respectively.
The Company's 1997 income tax benefit of $22.8 million was the result of
operating loss carryback claims. At December 31, 1997, the Company did not
recognize any benefits from the future use of net operating loss carryforwards.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the
29
<PAGE>
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
The Company's internal computer software and computerized operating systems were
developed in conjunction with the commencement of the Company's business in 1993
and were designed to take into consideration the Year 2000 issue. Additionally,
the Company has implemented a Year 2000 compliance program to ensure that the
Company's computer systems and applications will perform properly beyond 1999.
In addition to the internal review, the Company has received assurance from its
significant computer system vendors that their applications are Year 2000
compliant.
The Company's business relies on government agencies and other third parties
(e.g., Department of Transportation, Federal Aviation Administration, airport
authorities and data suppliers). The ability of third parties upon which the
Company relies to adequately address their Year 2000 issues is outside the
Company's control. However, the Company has begun a program to assess the
Year 2000 readiness of these parties. Based upon the results of this assessment,
the Company will develop contingency plans as deemed necessary. The Company
cannot reasonably estimate the magnitude of the impact on the Company of the
Year 2000 problems that may be experienced by any of these parties. However, the
impact of any such problems could have a material adverse effect on the
Company's results of operations, financial condition and cash flow.
The Company currently has a team dedicated to identifying, evaluating and
resolving the Company's potential Year 2000 issues. The Company's Year 2000
program includes five phases: inventory, assessment, remediation, testing and
implementation. The inventory phase will allow the Company to evaluate current
equipment conditions and readiness for the Year 2000 transition. In the next
phase, assessment, the Company will determine based on the information gathered
during inventory, what, if any, upgrades/enhancements are necessary to meet the
compliance requirements. Remediation will provide a forum to develop solutions
to non-Year 2000-compatible equipment, systems, or software. The testing phase
will provide a "laboratory-type" environment for troubleshooting potential
problems and situations once the Year 2000 transition begins. The testing phase
will be the most critical in that all possible worst-case scenarios must be
addressed and procedures for handling these scenarios as they arise must be
developed and tested. Once inventory, assessment, remediation and testing phases
are complete, the Company will implement the Year 2000 program.
The Company has not yet completed all necessary phases of the Year 2000 program.
In the event that the Company does not complete any additional phases of the
Year 2000 program or outside vendors and third parties are not Year 2000
compliant by December 31, 1999, the most reasonable worst case scenario would be
a reduction or suspension of operations, which could have a material impact on
the Company's business or consolidated financial statements. In addition,
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect the Company. The Company could be subject to
litigation for computer systems failure, for example, equipment shutdown or
failure to properly date business
30
<PAGE>
records. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company expects to have substantially completed all phases of its Year 2000
program by June 30,1999, which will leave six months for additional internal
testing and troubleshooting prior to 2000. The Company is approximately 80%
complete with the assessment relating to Information Technology ("IT"). With
respect to IT systems that are known to have required remediation, approximately
20% of such systems have been remediated, tested and implemented and are
currently Year 2000 compliant. Based on the results of the Company's Year 2000
program, the Company will develop contingency plans as necessary.
Costs associated with the Year 2000 program (excluding costs relating to capital
improvements to IT systems that are not directly related to re-mediating Year
2000 problems in such systems) are being expensed as incurred. Funding for the
program is being provided through the Company's operating cash flows. To date
the Company has spent approximately $30,000 in connection with the Year 2000
program and expects to spend an additional $500,000 to complete the program. The
cost of the Company's Year 2000 project and the date on which the Company
believes it will be completed are based on management's best estimates and
include assumptions regarding third-party modification plans. However, due
primarily to the potential impact of third-party modification plans, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those anticipated.
PROPOSED LEGISLATION
Congress is currently reviewing three bills specifically related to air
transportation and passenger rights. Several recent events surrounding airline
passenger handling have prompted these proposals. In brief, the three proposals,
the Airline Passenger Fairness Act, the Airline Passenger Bill of Rights and
the Passenger Entitlement and Competition Enhancement Act, seek legislation to
protect the traveling public. The objectives of these acts are to: 1) provide
consumers with a basic expectation of fair treatment from airlines; 2) encourage
better service by airlines and make airlines more responsible for their
passengers; and 3) ensure protection for passengers from anti-competitive market
concentrations in the airline industry. To the extent legislation is enacted
that would hinder AirTran's flexibility with fares and customer service
operations, AirTran's financial results could be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on its operating cash flow to provide working
capital. The Company has no lines of credit or other facilities. As of
December 31, 1998, the Company had cash and cash equivalents of $10.9 million
compared to $86.0 million at December 31, 1997 and a working capital deficit of
$30.8 million compared to working capital of $25.9 million at December 31, 1997.
The Company generally must satisfy all of its working capital expenditure
requirements from cash provided by operating activities, from external capital
sources or from the sale of assets. Substantial portions of the Company's
assets have been pledged to secure various issues of outstanding indebtedness of
the Company. To the extent that the pledged assets are sold, the applicable
financing agreements generally require the sale proceeds to be applied
31
<PAGE>
to repay the corresponding indebtedness. To the extent that the Company's access
to capital is constrained, the Company may not be able to make certain capital
expenditures or to continue to implement certain other aspects of its strategic
plan, and the Company may therefore be unable to achieve the full benefits
expected therefrom. Based on the favorable economic conditions of the US airline
industry, the Company expects to be able to generate positive working capital
through its operations; however, since the airline industry is cyclical, we
cannot predict whether the current favorable trends and conditions will
continue.
For the year ended December 31, 1998, operating activities used $6.0 million in
cash flow. Investing activities used cash of $66.3 million primarily related to
the acquisition of hush kits and Boeing 717-200 advance purchase deposits.
Financing activities used cash of $2.8 million as a result of obtaining $6.1
million in financing for the purchase of spare engines and $1.9 million provided
by the exercise of stock options, offset by $10.8 million in scheduled long-term
debt payments.
As of December 31, 1998, the Company's operating fleet consisted of 40 McDonnell
Douglas DC9-30 aircraft and 10 Boeing 737-200 aircraft. The Company currently
leases one DC9-30 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. During the
third quarter of 1998, the Company reached an agreement with Boeing to defer the
remaining progress payments until the first delivery which is expected in
September 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 beginning
again after September 1999. If the Company exercises its option to acquire up to
an additional 50 Boeing 717-200 aircraft, additional payments could be required
beginning in 2002. The Company expects to finance at least 80% of the cost of
each of these aircraft. Although Boeing has agreed to provide support 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 support to be provided by Boeing, aircraft related debt financing
should be available when needed. However, there is no assurance that the Company
will be able to obtain sufficient financing on attractive terms. If it is unable
to secure acceptable financing, 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 additional
capital expenditures over the next year. As of December 31, 1998, 75% of the
Company's aircraft were Stage 3 compliant. 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, disposing of Stage 2
aircraft and by acquiring or leasing Stage 3 aircraft. The Company expects that
FAA certified hush kits will cost approximately $7.5 million in total for all
aircraft to be hushed in 1999. The Company may be able to finance a portion of
the cost of these hush kits and plans to make the balance of payments on these
hush kits out of its working capital. The Company
32
<PAGE>
expects to pay the debt service on such loans out of cash flow generated from
operations during the term of the financing.
As of December 31, 1998, the Company's debt related to asset financing totaled
$96.0 million, with respect to which the Company's aircraft and certain other
equipment are pledged as security. Included in such amount is $80.0 million of
the Company's 10.5% Senior Secured Notes due 2001 under which interest is
payable semi-annually. In addition, the Company has $150 million of 10.25%
Senior Unsecured Notes outstanding. The principal balance of the Senior Notes is
due in 2001 and interest is payable semi-annually. All of the Company's debt has
final maturities ranging from 1999 to 2002 with scheduled debt payments as
follows: 1999--$8.9 million, 2000--$ 5.6 million, 2001--$ 230.7 million, 2002--
$0.5 million and 2003--$0.2 million.
Certain debt bears interest at fixed rates ranging from 5.85% to 13.00% per
annum and is repayable in consecutive monthly or quarterly installments over a
four- to seven-year period. Certain other notes with an aggregate unpaid
principal balance of approximately $4.1 million as of December 31, 1998, have a
variable rate of interest based on the London Interbank Offered Rate (LIBOR)
plus 1.75% to 3.75%.
Numerous lawsuits have also been filed against the Company seeking damages
attributable to the deaths of those on Flight 592, and additional lawsuits are
expected. The Company's insurance carrier has assumed defense of these lawsuits
under a reservation of rights. As all claims are handled independently by the
Company's insurance carrier, the Company cannot reasonably estimate the amount
of liability that might exist. As a result, no accruals for losses or 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 provide facilities for all forms of aviation insurance for many
major airlines. The Company believes, based on the information currently
available to it, that such coverage is sufficient to cover claims associated
with this accident and that the insurers have sufficient financial strength to
pay claims. However, there can be no assurance that the total amount of
judgments and settlements will not exceed the amount of insurance available
thereof or that all damages awarded will be covered by insurance.
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for periods beginning after June 15, 1999. The Company is
currently evaluating SFAS No. 133 and has not yet determined its impact on the
consolidated financial statements. SFAS No. 133 would have had no impact on the
consolidated financial statements for the year ended December 31, 1998.
FORWARD-LOOKING STATEMENTS
The statements that are contained in this Report, that are not historical facts,
are "forward-looking statements" which can be identified by the use of forward-
looking terminology such as "expects", "intends", "believes" or the negative
thereof or other variations thereon or comparable
33
<PAGE>
terminology. Management wishes to caution the reader that the forward-looking
statements contained in this Report are only estimates or predictions and
regarding such matters are not historical facts. Such statements include, but
are not limited to: the Company's ability to regain profitability and to
generate working capital from operations; the impact of pending legislation; the
Company's ability to become Year 2000 compliant and the timing and cost thereof;
the Company's ability to finance the acquisition of aircraft and hush kits; the
adequacy of the Company's insurance coverage; and the results of pending
litigation or investigations. No assurance can be given that future results will
be achieved; actual events or results may differ materially as a result of risks
facing the Company or actual events differing from the assumptions underlying
such statements. Such risks and assumptions include, but are not limited to,
consumer demand and acceptance of services offered by the Company, the Company's
ability to achieve and maintain acceptable cost levels, fare levels and actions
by competitors, regulatory matters, general economic conditions, commodity
prices, changing business strategy and results of litigation. Additional
information concerning factors that could cause actual results to vary
materially from the future results indicated, expressed or implied in such
forward-looking statements is contained in the Company's Form 10-K for the year
ended December 31, 1998. All forward-looking statements made in connection with
this Report are expressly qualified in their entirety by these cautionary
statements. The Company disclaims any obligation to update or correct any of its
forward-looking statements.
BUSINESS STRATEGY
Eventhough the Company currently has no plans to do so, the Company may change
its business strategy in the future and may not pursue some of the goals and
initiatives stated herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The Company is subject to certain market risks including interest rates and
commodity prices (i.e., aircraft fuel). The adverse effects of changes in these
markets pose a potential loss as discussed below. The sensitivity analyses do
not consider the effects that such adverse changes may have an overall economic
activity nor do they consider additional actions management may take to mitigate
the Company's exposure to such changes. Actual results may differ. See the
notes to the consolidated financial statements for a description of the
Company's financial policies and additional information.
Interest Rates
As of December 31, 1998, the fair value of the Company's long-term debt was
estimated to be $175.3 million, based upon discounted future cash flows using
current incremental borrowing rates for similar types of instruments or market
prices. Market risk, estimated as the potential increase in fair value resulting
from a hypothetical one percent decrease in interest rates, was approximately
$4.2 million as of December 31, 1998.
34
<PAGE>
Aircraft Fuel.
The Company's results of operations are impacted by changes in the price of
aircraft fuel. Aircraft fuel accounted for 16.7% of the Company's operating
expenses (excluding impairment loss) in 1998. Based on the Company's 1999
projected fuel consumption, a one-cent change in the average price per gallon of
aircraft fuel would impact the Company's annual fuel expense by approximately
$1.3 million. On March 1, 1999, the Company entered into petroleum swap
contracts and jet fuel purchase commitments in order to manage the price risk
and utilization of fuel cost. This fuel hedging strategy could result in the
Company not fully benefiting from certain fuel price declines. As of March 1,
1999, the Company has hedged approximately 67% of its 1999 projected fuel
requirements. Prior to March 1, 1999, the Company had not entered into any
hedging contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The response to this Item is submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "ELECTION OF DIRECTORS" in the Proxy Statement to be used
in connection with the solicitation of proxies for the Company's annual meeting
of Stockholders to be held May 20, 1999, which Proxy Statement is to be filed
with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "EXECUTIVE COMPENSATION" in the Proxy Statement to be
used in connection with the solicitation of proxies for the Company's annual
meeting of Stockholders to be held May 20, 1999, which Proxy Statement is to be
filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "STOCK OWNERSHIP" in the Proxy Statement to be used in
connection with the solicitation of proxies for the Company's annual meeting of
Stockholders to be held May 20, 1999, which Proxy Statement is to be filed with
the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "CERTAIN TRANSACTIONS" in the Proxy Statement to be used
in connection with the solicitation of proxies for the Company's annual meeting
of Stockholders to be held May 20, 1999, which Proxy Statement is to be filed
with the Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) 1. The response to this portion of Item 14 is submitted as a separate
section of this report.
2. The response to this portion of Item 14 is submitted as a separate
section of this report.
3. Filing of Exhibits:
Exhibit 23 - Consent of Independent Auditors
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K: None
(c) The following exhibits are filed herewith or incorporated by reference
as indicated.
36
<PAGE>
Exhibit numbers refer to Item 601 of Regulation S-K.
Exhibit No. And Description
- ---------------------------
3.1 Articles of Incorporation (1)
3.2 Bylaws (As amended on November 17, 1997) (18)
4.1 See the Articles of Incorporation filed as Exhibit 3.1 and Bylaws filed
as Exhibit 3.2
4.2 Agreement and Plan of Merger among the Registrant, ValuJet Airlines, Inc.
and VJET Acquisition, Inc. (1)
4.3 Plan of Reorganization and Agreement of Merger dated July 10, 1997,
between ValuJet, Inc. and Airways Corporation (2)
4.4 Plan of Merger dated July 10, 1997, between ValuJet, Inc. and Airways
Corporation (2)
4.5 Amendment to Plan of Reorganization and Agreement of Merger between
ValuJet, Inc. and Airways Corporation (2)
4.6 Amendment to Plan of Merger between ValuJet, Inc. and Airways Corporation
(2)
4.7 Indenture dated as of April 17, 1996, among the Company, its subsidiaries
and Bank of Montreal Trust Company, as Trustee (3)
4.8 First Supplemental Indenture dated August 26, 1996, among the Company,
its subsidiaries, Bank of Montreal Trust Company and Fleet National Bank
4.9 Second Supplemental Indenture dated August 5, 1997, among the Company,
its subsidiaries and State Street Bank and Trust (18)
4.10 Third Supplemental Indenture dated November 17, 1997, among the Company,
its subsidiaries and State Street Bank and Trust
4.11 Indenture dated August 13, 1997, among the Company, ValuJet Airlines,
Inc., its subsidiaries and The Bank of New York, as Trustee (4)
4.12 First Supplemental Indenture dated November 17, 1997, among the Company,
its subsidiaries and The Bank of New York
4.13 Registration Rights Agreement dated August 13, 1997, among the Company,
ValuJet Airlines, Inc. and UBS Securities, LLC. (4)
10.1 Incentive Stock Option Agreement dated June 1, 1993, between ValuJet
Airlines, Inc. and Lewis H. Jordan (5)(6)
10.2 ValuJet Airlines, Inc. 1993 Incentive Stock Option Plan (5)(6)
10.3 ValuJet Airlines, Inc. 1994 Stock Option Plan (5)(6)
10.4 Director Non-Compete Agreement dated May 18, 1994, between ValuJet
Airlines, Inc. and Don L. Chapman (5)(6)
10.7 ValuJet Airlines, Inc. 401(k) Plan Adoption Agreement (8)
10.8 ValuJet Airlines, Inc. 1995 Employee Stock Purchase Plan (9)
10.9 Purchase Agreement between McDonnell Douglas Corporation and ValuJet
Airlines, Inc. dated December 6, 1995. The Commission has granted
confidential treatment with respect to certain portions of this Agreement
(10)
10.10 Agreement and Lease of Premises Central Passenger Terminal Complex
Hartsfield Atlanta International Airport (10)
10.11 Consent Order in the Matter of ValuJet Airlines, Inc. with United States
Department of Transportation, Federal Aviation Administration (11)
10.12 ValuJet, Inc. 1996 Stock Option Plan (12)
10.13 Employment letter dated October 28, 1996, between ValuJet Airlines, Inc.
and D. Joseph Corr (6) (12)
10.14 Code Share Agreement dated September 24, 1997, between AirTran Airways,
Inc. and
37
<PAGE>
ValuJet Airlines, Inc (2)
10.15 Consulting Agreement dated November 17, 1997, between the Company and
Robert L. Priddy (6) (18)
10.16 Consulting Agreement dated November 17, 1997, between the Company and
Lewis H. Jordan (6) (18)
10.17 Airways Corporation 1995 Stock Option Plan (13)
10.18 Airways Corporation 1995 Directors Stock Option Plan (13)
10.19 Lease of headquarters in Orlando, Florida, dated November 14, 1995 (14)
10.20 Orlando International Lease and Use Agreement (15)
10.21 Orlando Tradeport Maintenance Hangar Lease Agreement by and between
Greater Orlando Aviation Authority and Page AvJet Corporation dated
December 11, 1989 (16)
10.22 Amendment No. 1 to Orlando Tradeport Maintenance Hangar Lease Agreement
by and between Greater Orlando Aviation Authority and Page AvJet
Corporation dated June 22, 1990 (16)
10.23 Agreement and Second Amendment to Orlando Tradeport Maintenance Hangar
Lease Agreement by and between Greater Orlando Aviation Authority and
AirTran Airways, Inc. dated January 25, 1996 (16)
10.24 Employment Agreement dated January 1, 1998, between AirTran Holdings,
Inc. and D. Joseph Corr (17)
10.25 Supplemental Agreement dated as of November 17, 1998, between the Company
and D. Joseph Corr
10.26 Employment Agreement dated as of January 4, 1999, between the Company and
Joseph B. Leonard
10.27 Loan Agreement dated as of January 25, 1999, among the Company, Lewis H.
Jordan, Robert L. Priddy, Timothy P. Flynn and Maurice J. Gallagher, Jr.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 33-95232, filed with the Commission on August 1,
1995 and amendments thereto.
(2) Incorporated by reference to the Company's Registration Statement Form S-
4, registration number 333-33837, filed with the Commission on August 18,
1997 and amendments thereto.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, Commission File No. 0-26914, filed
with the Commission on May 3, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 333-37487, filed with the Commission on October
9, 1997 and amendments thereto.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-1, registration number 33-78856, filed with the Commission on May 12,
1994 and amendments thereto.
(6) Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) of
Form 10-K.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, Commission File No. 0-24164, filed
with the Commission on August 4, 1994.
38
<PAGE>
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, Commission File No. 0-24164, filed with
the Commission on March 31, 1995 and amendment thereto.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, Commission File No. 0-24164, filed
with the Commission on August 11, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, Commission File No. 0-26914, filed with
the Commission on March 29, 1996.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996, Commission File No. 0-26914, filed
with the Commission on August 14, 1996.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, Commission File No. 0-26914, filed with
the Commission on March 31, 1997.
(13) Incorporated by reference to Airways Corporation's Registration Statement
on Form S-4, registration number 33-93104, filed with the Commission.
(14) Incorporated by reference to Form 10-Q of Airways Corporation (Commission
File No. 0-26432) for the quarter ended December 31, 1995.
(15) Incorporated by reference to Form 10-Q of Airways Corporation (Commission
File No. 0-26432) for the quarter ended December 31, 1996.
(16) Incorporated by reference to Form 10-K of Airways Corporation (Commission
File No. 0-26432) for the year ended March 31, 1997.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, Commission File No. 0-26914, filed
with the Commission on August 14, 1998.
(18) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 21, 1997, Commission File No. 0-26194, filed with
the Commission on March 27, 1998
(d) Financial Statement Schedules - The response to this portion of Item 14
is submitted as a separate section of this Report.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Joseph B. Leonard
----------------------
Joseph B. Leonard
Chairman, President and Chief Executive Officer
Date: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
/s/ Joseph B. Leonard March 19, 1999
- ---------------------------
Joseph B. Leonard
Chairman, President and Chief Executive Officer
/s/ David W. Lancelot March 19, 1999
- ---------------------------
David W. Lancelot
Vice President and Controller (Principal Accounting Officer)
/s/ Don L. Chapman March 19, 1999
- ---------------------------
Don L. Chapman
Director
- ---------------------------
John K. Ellingboe
Director
/s/ Lewis H. Jordan March 19, 1999
- ---------------------------
Lewis H. Jordan
Director
/s/ Robert L. Priddy March 19, 1999
- ---------------------------
Robert L. Priddy
Director
/s/ Robert D. Swenson March 19, 1999
- ---------------------------
Robert D. Swenson
Director
40
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1998
AirTran Holdings, Inc.
Orlando, Florida
AirTran Holdings, Inc.
The following consolidated financial statements of AirTran Holdings, Inc. are
included in Item 8:
CONTENTS
<TABLE>
<S> <C>
Consolidated balance sheets - December 31, 1998 and 1997............ F-3
Consolidated statements of operations - Years ended
December 31, 1998, 1997, and 1996................................... F-5
Consolidated statements of stockholders' equity - Years ended
December 31, 1998, 1997, and 1996................................... F-6
Consolidated statements of cash flows - Years ended
December 31, 1998, 1997, and 1996................................... F-7
Notes to consolidated financial statements - December 31, 1998...... F-8
</TABLE>
The following consolidated financial statements schedule of AirTran Holdings,
Inc. is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
The Stockholders and Board of Directors
AirTran Holdings, Inc.
We have audited the accompanying consolidated balance sheets of AirTran
Holdings, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AirTran Holdings,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
January 29, 1999
F-2
<PAGE>
Airtran Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
Assets 1998 1997
- ------- --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,882 $ 86,025
Restricted cash 13,459 5,965
Accounts receivable, less allowance of $1,325 and $1,354 at
December 31, 1998 and 1997, respectively 12,084 5,660
Income tax receivable - 8,862
Inventory, less allowance for obsolescence of $4,259 and $1,325
at December 31, 1998 and 1997, respectively 11,486 11,650
Prepaid expenses 3,457 2,811
Other current assets 1,589 3,079
--------- ---------
Total current assets 52,957 124,052
Property and equipment:
Flight equipment 306,026 264,082
Other property and equipment 23,491 22,805
Less: Accumulated depreciation (97,626) (74,643)
--------- ---------
231,891 212,244
Purchase deposits for flight equipment 36,518 22,101
--------- ---------
268,409 234,345
Intangibles resulting from business acquisition 42,727 57,776
Debt issuance costs 6,956 9,863
Other assets 5,357 7,828
--------- ---------
Total assets $376,406 $433,864
========= =========
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
F-3
<PAGE>
Airtran Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
Liabilities and Stockholders' Equity 1998 1997
- ------------------------------------ -------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable $ 13,252 $ 12,215
Accrued liabilities 44,508 61,574
Air traffic liability 17,022 14,916
Current portion of long-term debt 8,929 9,461
-------- ---------
Total current liabilities 83,711 98,166
Long-term debt, less current portion 237,065 241,251
-------- ---------
Total liabilities 320,776 339,417
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 64,897,810 and 64,312,207 shares
issued and outstanding at December 31, 1998 and
1997, respectively 65 64
Additional paid-in capital 146,857 144,937
Accumulated deficit (91,292) (50,554)
-------- --------
Total stockholders' equity 55,630 94,447
-------- --------
Total liabilities and stockholders' equity $376,406 $433,864
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AirTran Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------ ------------ ---------------
<S> <C> <C> <C>
Operating revenues:
Passenger $ 420,901 $ 200,939 $ 209,707
Cargo 3,488 2,250 2,969
Other 14,918 8,267 6,960
------------- ------------ ----------------
Total operating revenues 439,307 211,456 219,636
Operating expenses and other, net:
Flight operations 46,853 22,260 16,479
Aircraft fuel 71,922 48,796 46,691
Maintenance 95,683 76,502 49,500
Station operations 77,777 49,625 42,018
Passenger services 20,858 9,558 8,879
Marketing and advertising 17,199 16,998 8,426
Sales and reservations 58,178 19,025 18,378
General and administration 13,311 12,228 14,904
Depreciation and amortization 28,230 28,024 17,551
Impairment loss 27,492 - -
Loss (gain) on sale of property 361 124 (3,935)
Shutdown and other non-recurring - 24,839 67,994
Rebranding - 5,243 -
Arrangement fee for aircraft transfers - - (13,036)
Gain on insurance recovery - - (2,815)
------------ ------------ ------------
Total operating expenses 457,864 313,222 271,034
------------ ------------ ------------
Operating loss (18,557) (101,766) (51,398)
Interest (income) expense :
Interest income (3,181) (6,659) (7,652)
Interest expense 25,362 24,331 22,186
------------ ------------ ------------
Interest expense, net 22,181 17,672 14,534
------------ ------------ ------------
Loss before income taxes (40,738) (119,438) (65,932)
Income tax benefit - (22,775) (24,463)
----------- ------------ -----------
Net loss $ (40,738) $ (96,663) $ (41,469)
============ ============ ============
Loss per share (basic and diluted) $ (0.63) $ (1.72) $(0.76)
============ ============ ============
Weighted average number of shares
outstanding (basic and diluted) 64,641,000 56,068,000 54,702,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AirTran Holdings, Inc.
Consolidated Statements of Stockholders' Eqiuty
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------
RETAINED
ADDITIONAL EARNINGS TOTAL
PAID IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 54,556 $55 $ 74,432 $ 87,578 $162,065
Issuance of common stock for exercise of options 311 - 836 - 836
Issuance of common stock under stock purchase plan 9 - 113 - 113
Accrued compensation related to stock options - - 1,854 - 1,854
Net loss - - - (41,469) (41,469)
---------------------------------------------------------------------
Balance at December 31, 1996 54,876 55 77,235 46,109 123,399
Issuance of common stock for exercise of options 317 - 904 - 904
Issuance of common stock under stock purchase plan 24 - 143 - 143
Issuance of common stock and stock options to
acquire business 9,095 9 66,655 - 66,664
Net loss - - - (96,663) (96,663)
---------------------------------------------------------------------
Balance at December 31, 1997 64,312 64 144,937 (50,554) 94,447
Issuance of common stock for exercise of options 563 1 1,790 - 1,791
Issuance of common stock under stock purchase plan 23 - 130 - 130
Net loss - - - (40,738) (40,738)
---------------------------------------------------------------------
Balance at December 31, 1998 64,898 $65 $146,857 $(91,292) $ 55,630
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AirTran Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(40,738) $(96,663) $ (41,469)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 31,164 32,500 29,165
Impairment loss and (gain) on disposal of property 27,853 (124) (6,749)
Provisions for uncollectible accounts 8,003 2,895 3,638
Deferred income taxes - (13,221) 8,925
Changes in current operating assets and liabilities:
Restricted cash (7,494) 4,480 -
Accounts receivable (14,427) 1,120 1,422
Other current assets 8,474 (2,334) (2,839)
Prepaid expenses and deposits (1,439) 5,256 (3,310)
Accounts payable and accrued liabilities (19,476) 28,879 (14,355)
Air traffic liability 2,106 153 (18,408)
Income tax payable - 21,472 (36,466)
-------------- -------------- ---------------
Net cash used for operating activities (5,974) (15,587) (80,446)
INVESTING ACTIVITIES:
Purchases of property and equipment (66,716) (30,349) (127,570)
Proceeds from disposal of equipment 370 3,595 97,598
Cash paid for acquisition, net of cash acquired - (364) -
Preacquisition advance to Airways Corporation - (11,681) -
-------------- -------------- ---------------
Net cash flows for investing activities (66,346) (38,799) (29,972)
FINANCING ACTIVITIES:
Issuance of long-term debt 6,100 72,493 224,497
Payments of long-term debt (10,844) (83,142) (92,963)
Proceeds from sale of common stock 1,921 1,047 950
-------------- -------------- ---------------
Net cash provided by (used for) financing activities (2,823) (9,602) 132,484
-------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents (75,143) (63,988) 22,066
Cash and cash equivalents at beginning of period 86,025 150,013 127,947
-------------- -------------- ---------------
Cash and cash equivalents at end of period $ 10,882 $ 86,025 $ 150,013
============== ============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
CASH PAID DURING THE YEAR FOR
Income taxes (refunded) paid $ (9,686) $(31,124) $ 4,041
============== ============== ===============
Interest, net of amounts capitalized $ 21,557 $ 22,776 $ 19,412
============== ============== ===============
NONCASH INVESTING ACTIVITY:
Fair value of assets acquired $ - $ 45,709 $ -
Intangibles resulting from business acquisition - 58,029 -
Liabilities assumed - (36,710) -
Fair value of common stock and options issued - (66,664) -
-------------- -------------- ---------------
Net cash paid for acquisition $ - $ 364 $ -
============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION AND PRINCIPLES OF CONSOLIDATION
ValuJet Airlines, Inc. was originally incorporated on July 10, 1992 under the
name of Charter Way, Inc. In May 1993, the Company changed its name to ValuJet
Airlines, Inc. As a result of a merger between ValuJet Airlines, Inc. and VJET
Acquisition, Inc. on October 19, 1995, ValuJet Airlines, Inc. became a wholly-
owned subsidiary of ValuJet, Inc. ValuJet, Inc. was incorporated on July 17,
1995 by ValuJet Airlines, Inc. as its wholly-owned subsidiary.
Pursuant to a Plan of Reorganization and Agreement of Merger, the Company
acquired Airways Corporation ("Airways") on November 17, 1997, through a merger
of Airways with and into the Company ("the Airways Merger"). In connection with
the Airways Merger, each outstanding share of Common Stock, $.01 par value per
share, of Airways, was converted into and became the right to receive one share
of Common Stock, $.001 par value per share, of ValuJet, Inc. Therefore, the then
current shareholders of Airways became stockholders of ValuJet, Inc., and
AirTran Airways, Inc. ("AirTran Airways"), Airways' wholly-owned subsidiary,
became a wholly-owned subsidiary of ValuJet, Inc. In connection with the Airways
Merger, the Company changed its name to AirTran Holdings, Inc. and changed the
name of ValuJet Airlines, Inc. to AirTran Airlines, Inc. ("AirTran Airlines").
See Note 2.
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant inter-company
accounts and transactions have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company offers affordable scheduled air transportation and mail service,
serving short-haul markets primarily in the eastern United States.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results inevitably will differ from
those estimates, and such differences may be material to the consolidated
financial statements.
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Restricted cash primarily
represents amounts escrowed relating to air traffic liability.
F-8
<PAGE>
ACCOUNTS RECEIVABLE
Accounts receivable are due primarily from major credit card processors and
travel agents. These receivables are unsecured. The Company provides an
allowance for doubtful accounts equal to the estimated losses expected to be
incurred in the collection of accounts receivable.
INVENTORIES OF PARTS AND SUPPLIES
Spare parts, materials and supplies are stated at cost using the first-in,
first-out method (FIFO). These items are charged to expense when used.
Allowances for obsolescence are provided over the estimated useful life of the
related aircraft and engines for spare parts expected to be on hand at the date
aircraft are retired from service.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Flight equipment is
depreciated to its salvage values, estimated at 5-40%, using the straight-line
method over seven to ten years. Other property and equipment is depreciated over
three to ten years.
The estimated salvage values and depreciable lives are periodically reviewed for
reasonableness and revised if necessary. Effective January 1, 1998, the Company
revised its salvage values and useful lives on its DC9 fleet and related
equipment as outlined below:
<TABLE>
<CAPTION>
Prior Years' Current Prior Years' Current
Salvage Value Salvage Value Useful Life Useful Life
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Airframes 10% 40% 10-20 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 DC9 fleet ranges from approximately
$434,000 to $2,614,000 per aircraft. The effect of this change for the year
ended December 31, 1998 was to increase income by approximately $12 million or
$0.19 per share. These estimates more accurately reflect management's
expectations of estimated fair values at the anticipated dates of disposal.
Due to restrictions imposed by the Federal Aviation Administration ("FAA") in
1996, the Company's management decided to sell or lease certain aircraft in its
fleet and therefore, classified these aircraft in the balance sheet as assets
held for disposition and recorded these assets at the lower of carrying amount
or fair value less cost to sell. The fair value, as estimated by the current
market value of these aircraft, less costs to sell, exceeded the carrying amount
of such aircraft. During 1997, as a result of the pending merger with Airways
and the resulting opportunities for the Company to expand its services, these
aircraft were reinstated into service. Therefore, they were reclassified in the
balance sheet from assets held for disposition to flight equipment and are
continuing to be depreciated over their useful lives.
F-9
<PAGE>
MEASUREMENT OF IMPAIRMENT
In accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS No. 121"), the Company records impairment losses on long-
lived assets used in operations when events or circumstances indicate that the
assets may be impaired and the undiscounted cash flows estimated to be generated
by those assets are less than the net book value of those assets.
INTANGIBLES RESULTING FROM BUSINESS ACQUISITION
Intangibles resulting from business acquisition consist of cost in excess of net
assets acquired and the trade name and are being amortized on the straight-line
method over 30 years. Accumulated amortization at December 31, 1998 and 1997 was
approximately $2,227,000 and $253,000, respectively.
The carrying value of cost in excess of net assets acquired is reviewed for
impairment whenever events or changes in circumstances indicate that it may not
be recoverable. If such an event occurred, the Company would prepare projections
of future results of operations for the remaining amortization period. If such
projections indicated that the expected future net cash flows (undiscounted and
without interest) would become less than the carrying amount of cost in excess
of net assets acquired, the Company would record an impairment loss in the
period such determination is made based on the fair value of the related
business.
CAPITALIZED INTEREST
Interest attributable to funds used to finance the acquisition of new aircraft
is capitalized as an additional cost of the related asset. Interest is
capitalized at the Company's weighted average interest rate on long-term debt
or, where applicable, the interest rate related to specific borrowings.
Capitalization of interest ceases when the asset is placed in service. In 1998,
1997 and 1996, approximately $3,339,000, $1,555,000 and $1,212,000 of interest
cost was capitalized, respectively.
AIRCRAFT AND ENGINE MAINTENANCE
The Company accounts for airframe and engine overhaul costs using the direct-
expensing method. Overhauls are performed on a continuous basis and the cost of
overhauls and routine maintenance costs for airframe and engine maintenance are
charged to maintenance expense as incurred.
ADVERTISING COSTS
Advertising costs are charged to expense in the period the costs are incurred.
Advertising expense was approximately $14,835,000, $13,087,000 and $6,261,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
F-10
<PAGE>
REVENUE RECOGNITION
Passenger and cargo revenue is recognized when transportation is provided.
Transportation purchased but not yet used is included in air traffic liability.
ARRANGEMENT FEE FOR AIRCRAFT TRANSFERS
During 1996, the Company sold its contractual purchase commitments with respect
to certain aircraft to other entities for approximately $17,000,000 which, net
of related deposits, resulted in income of approximately $13,000,000. This
amount is reflected as Arrangement Fee for Aircraft Transfers in the
accompanying statement of operations. The Company has no further obligations
with respect to these purchase commitments.
REBRANDING EXPENSES
Rebranding expenses represent costs incurred in connection with the Company's
name change such as costs for advertising, new signs, uniforms and conforming
information systems.
INCOME TAXES
The Company accounts for income taxes using the liability method in accordance
with SFAS No. 109, Accounting for Income Taxes.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to officers,
directors, key employees and consultants of the Company with an exercise price
equal to or below the fair value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and accordingly, recognizes
compensation expense only if the market price of the underlying stock exceeds
the exercise price of the stock option on the date of grant.
SFAS No. 123, Accounting for Stock-Based Compensation, provides an alternative
to APB Opinion No. 25 in accounting for stock-based compensation issued to
employees. However, the Company will continue to account for stock-based
compensation in accordance with APB Opinion No. 25.
NET LOSS PER SHARE
Net loss per share (basic and diluted) was computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Common stock
equivalents were anti-dilutive and therefore excluded from the computation of
weighted average shares used in computing diluted loss per share.
F-11
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. SFAS
No. 131 changes the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in interim financial reports. SFAS No. 131 is effective for
periods beginning after December 15, 1997. The Company adopted SFAS No. 131 in
the first quarter of 1998 and there was no impact on the consolidated financial
statements as the Company operates in a single segment.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for periods beginning after June 15, 1999. The Company is
currently evaluating SFAS No. 133 and has not yet determined its impact on the
consolidated financial statements. SFAS No. 133 would have had no impact on the
consolidated financial statements for the year ended December 31, 1998.
RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the current year presentation.
2. ACQUISITIONS
On November 17, 1997, the Company acquired all of the outstanding shares of
common stock of Airways, which through its wholly-owned subsidiary, AirTran
Airways, Inc., operates a domestic commercial airline providing point-to-point
scheduled air transportation. The acquisition was recorded under the purchase
method of accounting, and accordingly, Airways' results of operations are
included in the accompanying consolidated financial statements from the date of
acquisition. The aggregate purchase price was approximately $68,374,000
compromised of the following; 9,094,937 shares of the Company's common stock
valued at approximately $63,664,000; 732,700 options to purchase the Company's
common stock valued at approximately $3,000,000; 50,000 warrants to purchase the
Company's common stock valued at $210,000; and cash of approximately $1,500,000
for the expenses of the Airways Merger and other costs. The purchase price has
been allocated to the tangible and intangible assets purchased and the
liabilities assumed based on the estimated fair market values at the date of
acquisition. The allocation of the purchase price was finalized in 1998
resulting in an $8,154,000 increase in goodwill. The excess of cost over the
fair value of the net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 30 years.
F-12
<PAGE>
The following data represents the combined unaudited operating results of the
Company on a pro forma basis as if the acquisition of Airways had occurred at
the beginning of the periods presented. The pro forma information does not
necessarily reflect the results of operations as they would have been had the
acquisition actually taken place at the time, nor are they indicative of the
results of future combined operations. Adjustments include amounts of
depreciation to reflect the fair market value and economic lives of property and
equipment and amortization of intangible assets. In addition, adjustments were
made to reflect the additional shares issued.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Years Ended December 31,
1997 1996
-------- --------
(In thousands, except per share data)
<S> <C> <C>
Total operating revenues $ 303,669 $ 319,483
Net Loss (107,017) (49,743)
Net loss per share:
basis and diluted (1.67) (0.78)
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
On May 11, 1996 the Company lost Flight 592 in an accident that resulted in a
review by the FAA of the Company's operations. As a result, the Company
significantly reduced its schedule between May 19, 1996 and June 17, 1996 and
agreed to suspend operations. After three months of suspended operations, the
Company resumed operations on September 30, 1996. See Note 11 regarding charges
associated with the suspension of operations.
As a result of the above mentioned events, 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 are proceeding in state courts in Florida,
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 90 claims and is pursuing
settlements in the balance of the claims. In the remaining lawsuits, a third
party maintenance provider 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 that may 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 provide 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 will be sufficient to cover all
claims arising from 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 Company's insurance
limit or that
F-13
<PAGE>
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 provider and its corporation,
seeking to hold them responsible for the accident involving Flight 592. The
third party maintenance provider 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 that 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. The Court has ordered this case to trial on April 5,
1999.
In May 1997, the third party maintenance provider filed a Complaint for
declaratory judgment and other relief against the Company in the United States
District Court Southern District of Florida, Miami Division. The action seeks a
determination that they are 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 them for damages that it has
suffered. On February 23, 1999, the court stayed this action pending the
resolution of the Missouri State Court action. The Company intends to vigorously
defend this lawsuit and to assert all claims it has against the third party
maintenance contractor.
In May 1997, the State of Florida filed suit against the Company and its
insurers in the United States District Court Southern District of Florida
seeking recovery of costs incurred relating to the accident involving Flight
592. In March 1999, the court granted the Company's motion to dismiss this
lawsuit.
The Department of Transportation, the National Transportation Safety Board, the
U.S. Attorney's Office in Atlanta, Georgia and Miami, Florida and certain state
agencies in Florida have launched several governmental inquiries and
investigations in connection with the loss of Flight 592. 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, some of 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.
Several stockholder class action suits have been filed against the Company and
certain of its present and former executive officers and Directors
("Defendants"). These suits have been consolidated into a single action (In re
-----
ValuJet, Inc.). The consolidated lawsuit is based on allegedly misleading public
- -------------
statements made by the Company or omission to disclose material facts in
violation of federal securities laws. Class certification has been granted for
all purchasers of stock in the Company during the period beginning in June 1995
and ending on June 18, 1996. On December 31, 1998, the Company entered into a
Memorandum of Understanding to settle the consolidated lawsuit with attorneys
representing the certified class. Although the Company denies that it has
violated any of its obligations under the federal securities laws, it has agreed
to pay $2.5 million in cash and $2.5 million in common stock in the settlement,
which is subject to certain conditions. In the event the settlement is not
approved,
F-14
<PAGE>
discovery under the lawsuit would likely be revived. The settlement amount is
included in accrued liabilities as of December 31, 1998. There can be no
assurance that the Company will not sustain material liability under such or
related lawsuits in the event the settlement is not approved.
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 materially adverse effect on its results of
operations or financial condition.
At December 31, 1998, the Company's contractual commitments consisted primarily
of scheduled aircraft acquisitions. The Company has entered into a contract with
Boeing to purchase 50 new jet aircraft, to be delivered from 1999 to 2002, with
options to purchase another 50 jet aircraft. Aggregate funding needed for these
and all other aircraft commitments was approximately $963 million at December
31, 1998.
Approximately $86 million of this amount is required to be paid in progress
payments due from 1999 to 2001. After progress payments, the balance of the
total purchase price must be paid or financed upon delivery of each aircraft.
While the major aircraft manufacturer is required to provide credit support for
a limited portion of third party financing, the Company will be required to
obtain financing from other sources relating to these deliveries. If the Company
exercises its option to acquire up to an additional 50 aircraft, additional
payments could be required beginning in 2002. In conjunction with these
contractual commitments, the Company has made non-refundable deposits of
approximately $36,518,000 at December 31, 1998.
The following chart outlines the future required deposits for aircraft progress
payments as of December 31, 1998 (in thousands):
1999 $ 11,884
2000 44,874
2001 29,565
--------------
$ 86,323
--------------
By December 31, 1999, all of the Company's aircraft must be brought into
compliance with the FAA's Stage 3 noise requirements. The Company intends to
meet its Stage 3 noise requirement obligations by installing hush kits on Stage
2 aircraft, disposing of Stage 2 aircraft and by acquiring or leasing Stage 3
aircraft. The Company expects that FAA certified hush kits will cost
approximately $7.5 million for those aircraft to be hushed in 1999.
F-15
<PAGE>
4. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Accrued maintenance $ 15,541 $ 35,644
Accrued interest 5,508 5,405
Accrued salaries, wages and benefits 4,931 3,042
Accrued federal excise taxes 3,042 1,843
Other 15,486 15,640
-------- --------
$ 44,508 $ 61,574
-------- --------
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Senior notes $150,000 $150,000
Senior secured notes 80,000 80,000
Promissory notes for aircraft and
other equipment 15,994 20,712
-------- --------
245,994 250,712
Less current maturities (8,929) (9,461)
-------- --------
$237,065 $241,251
-------- --------
</TABLE>
During April 1996, the Company closed a private offering of $150,000,000
principal amount of 10.25% Senior Notes due 2001. In November 1996, the Company
exchanged substantially all of the unregistered Notes for Registered 10.25%
Senior Notes due 2001. Interest on the Senior Notes is payable semi-annually on
April 15 and October 15.
During August 1997, the Company closed a private offering of $80,000,000
principal amount of 10.5% Senior Secured Notes due 2001. In January 1998, the
Company exchanged the unregistered Notes for Registered 10.5% Senior Secured
Notes due 2001. Interest on the Senior Secured Notes is payable semi-annually on
April 15 and October 15. Certain aircraft, together with the installed engines
related thereto, three spare engines and four hush kits serve as collateral for
the Senior Secured Notes.
The promissory notes relate primarily to aircraft financing and bear interest at
rates ranging from 5.85% to 13.00% per annum, and principal and interest
payments are due in monthly or quarterly installments over four to seven year
terms on a mortgage-style amortization based on the delivery date of the
aircraft. Certain of these notes, with an aggregate unpaid principal balance of
F-16
<PAGE>
approximately $4,100,000 at December 31, 1998, have a variable rate of interest
based on the London Interbank Offered Rate ("LIBOR") (5.08% at December 31,
1998) plus a range of 1.75% to 3.75%.
Certain aircraft, engines, computer and telephone equipment totaling
approximately $149,361,000 serve as collateral on the Senior Secured Notes and
promissory notes.
Future statutory long-term debt principal payments at December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
1999 $ 8,929
2000 5,565
2001 230,744
2002 516
2003 240
----------
$ 245,994
----------
</TABLE>
6. LEASES
The Company leases six Boeing 737-200s under operating leases with terms of four
months to seven years. The Company also leases facilities from local airport
authorities or other carriers, as well as office space. These leases are
operating leases and have terms from one month to thirteen years.
Total rental expense charged to operations for aircraft, facilities and office
space for the years ended December 31, 1998, 1997 and 1996 was approximately
$23,851,000, $13,655,000 and $15,824,000, respectively.
The following schedule outlines the future minimum lease payments at December
31,1998, under non-cancelable operating leases with initial terms in excess of
one year (in thousands):
<TABLE>
<S> <C>
1999 $ 8,420
2000 5,909
2001 5,592
2002 4,856
2003 4,533
Thereafter 21,417
----------
$ 50,727
----------
</TABLE>
7. STOCKHOLDERS' EQUITY
On June 28, 1994 ("the IPO date"), the Company issued 39,680 shares of common
stock to a trust for the benefit of its employees at the IPO date. These shares
were valued at the IPO price of $3.12 per share and compensation expense related
to these shares was recognized over the vesting period of three years from the
issuance date. At the end of the vesting term in 1997, the
F-17
<PAGE>
shares were divided among the employees employed at the IPO date remaining with
the Company at the end of the three-year vesting period. All of these shares
were issued during 1997.
At December 31, 1998 and 1997 the Company had warrants outstanding for the
purchase of common stock. The warrants entitled the holder to purchase 50,000
shares of common stock for $3.82 per share and expired unexercised on January 8,
1999.
8. STOCK OPTIONS PLANS
In 1993, the Company established its 1993 Incentive Stock Option Plan (the "1993
Plan") whereby up to 4,800,000 options may be granted to officers, directors and
key employees to purchase shares of common stock at prices not less than the
fair value of the shares on the dates of grant. With respect to individuals
owning more than 10% of the voting power of all classes of the Company's stock,
the exercise price per share shall not be less than 110% of the fair value of
the shares on the date of grant.
On March 31, 1994, the Company established its 1994 Stock Option Plan (the "1994
Plan") whereby up to 4,000,000 incentive stock options or non-qualified options
may be granted to officers, directors, key employees and consultants of the
Company.
On January 30, 1996, the Company established its 1996 Stock Option Plan (the
"1996 Plan") whereby up to 5,000,000 incentive stock options or non-qualified
options may be granted to officers, directors, key employees and consultants of
the Company.
In connection with the acquisition of Airways on November 17, 1997, the Company
assumed the Airways Corporation 1995 Stock Option Plan ("Airways Plan") and the
Airways Corporation 1995 Director Stock Option Plan ("Airways DSOP"). Under the
Airways Plan up to 1,150,000 incentive stock options or non-qualified options
may be granted to officers, directors, key employees or consultants of the
Company. Under the Airways DSOP, up to 150,000 non-qualified options may be
granted to Directors.
Vesting and term of all options is determined by the Board of Directors and may
vary by optionee; however, the term may be no longer than ten years from the
date of grant.
At December 31, 1996, the vesting of 1,504,000 stock options with a weighted
average exercise price of $0.85 granted to two executive officers was
accelerated such that they became fully vested on that date. Such stock options
represented all of the non-vested stock options held by the two executive
officers.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of
5.4%, 5.7% and 7.3%; no dividend yields; volatility factors of the expected
market price of the Company's common stock of 0.710, 0.570 and 0.625; and a
weighted-average expected life of the options of 5 years.
F-18
<PAGE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. A summary of stock
option activity under the aforementioned plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price Range Price
--------- ------------------ --------
<S> <C> <C> <C>
Balance at January 1, 1996 5,619,400 $0.17 - 23.19 $ 2.20
Granted 1,406,000 3.75 - 23.19 15.99
Exercised (310,010) 0.17 - 3.13 2.68
Canceled (91,860) 0.17 - 12.19 5.91
---------
Balance at December 31, 1996 6,623,530 0.17 - 23.19 5.06
Granted 1,304,000 5.31 - 6.88 5.52
Assumed in Airways Merger 732,700 2.70 - 10.75 4.60
Exercised (317,480) 0.17 - 5.13 2.85
Canceled (226,320) 1.00 - 21.38 12.20
---------
Balance at December 31, 1997 8,116,430 0.17 - 23.19 4.84
Granted 235,000 5.50 - 8.13 7.67
Exercised (562,580) 0.17 - 5.69 2.81
Canceled (997,870) 0.17 - 21.38 7.16
---------
Balance at December 31, 1998 6,790,980 0.17 - 23.19 4.71
=========
Exercisable at December 31, 1998 4,891,128 0.17 - 23.19 3.20
=========
</TABLE>
F-19
<PAGE>
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.17 2,412,000 4.5 $ 0.17 2,412,000 $ 0.17
$ 1.00-$6.88 2,958,380 6.5 4.27 1,843,688 3.87
$ 7.03-$13.25 730,000 8.1 7.87 355,600 7.75
$18.38-$23.19 690,600 7.1 19.12 279,840 19.16
----------- -----------
$ 0.17-$23.19 6,790,980 6.0 4.71 4,891,128 3.20
=========== ===========
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss $ (42,279) $ (97,876) $ (44,880)
Basic and diluted pro forma
net loss per share (0.65) (1.75) (0.82)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
The weighted average fair value of options granted during 1998, 1997 and 1996
with option prices equal to the market price on the date of grant was $7.98,
$2.66 and $7.82, respectively. The weighted average fair value of options
granted during 1996 with option prices less than the market price of the stock
on the date of grant was $10.13. There were no options granted during 1998 and
1997 with option prices less than the market price of the stock on the date of
grant.
At December 31, 1998, the Company had reserved a total of 10,984,720 shares of
common stock for future issuance, upon exercise of stock options.
F-20
<PAGE>
9. INCOME TAXES
The income tax provision (benefit) is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ - $ (9,554) $(31,311)
State - - (2,077)
----------- ----------- -----------
Total current - (9,554) (33,388)
Deferred:
Federal - (13,221) 10,614
State - - (1,689)
----------- ----------- -----------
Total deferred - (13,221) 8,925
----------- ----------- -----------
$ - $(22,775) $(24,463)
----------- ----------- -----------
</TABLE>
A reconciliation of the provision for income taxes (benefit) to the federal
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Tax at statutory rate $(14,258) $(41,803) $(23,076)
State taxes, net of federal benefit (606) (4,761) (2,448)
Goodwill 7,705 89 -
Other (110) (570) 1,061
Valuation reserve 7,269 24,270 -
------------- ------------- ------------
$ - $(22,775) $(24,463)
------------- ------------- ------------
</TABLE>
F-21
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 28,370 $ 26,894
Gain on involuntary conversion - 1,484
Other 342 2,761
-------- --------
Total deferred tax liabilities 28,712 31,139
Deferred tax assets:
Accrued liabilities 2,362 3,347
Nonqualified stock options 930 930
Federal operating loss carryforwards 49,820 42,463
State operating loss carryforwards 8,188 7,364
AMT credit carryforwards 2,617 2,617
Other 4,807 3,418
-------- --------
Total deferred tax assets 68,724 60,139
Valuation allowance for deferred tax assets (40,012) (29,000)
-------- --------
Net deferred tax assets 28,712 31,139
-------- --------
Net deferred tax liabilities $ - $ -
-------- --------
</TABLE>
For financial reporting purposes, a valuation allowance has been recognized at
December 31, 1998 and 1997, to reduce the net deferred income tax assets to
zero. The Company has not recognized any benefit from the future use of
operating loss carryforwards because management's evaluation of all the
available evidence in assessing the realizability of the tax benefits of such
loss carryforwards indicates that the underlying assumptions of future
profitable operations contain risks that do not provide sufficient assurance to
recognize such tax benefits currently.
At December 31, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $141,343,000 that begin to expire in 2012.
In addition, the Company has Alternative Minimum Tax credit carryforwards for
income tax purposes of $2,617,000. Various subsidiaries of the Company have
additional state operating loss carryforwards of approximately $3,100,000 with
expiration dates through the year 2011.
The amount of net operating loss carryforwards generated by Airways prior to the
Airways Merger is $23,098,000. The use of pre-acquisition operating loss
carryforwards is subject to limitations imposed by the Internal Revenue Code.
The Company does not anticipate that these limitations will affect utilization
of the carryforwards prior to expiration. For financial reporting
F-22
<PAGE>
purposes, a valuation allowance of $4,730,000 was recognized at the date of the
acquisition to offset the deferred tax assets related to those carryforwards.
This valuation allowance was increased to $8,093,000 during 1998 in connection
with a reallocation of the purchase price. When realized, the tax benefit for
those items will be applied to reduce goodwill related to the acquisition of
Airways.
10. IMPAIRMENT LOSS
In the fourth quarter of 1998, the Company decided to accelerate the retirement
of its four owned Boeing 737 ("B737") aircraft as a result of the elimination of
their original route system and continued operating losses upon their
redeployment to other routes. The B737s will be replaced with B717 aircraft.
In connection with its decision to accelerate the retirement of these aircraft,
which were acquired in the Airways Merger, the Company performed an evaluation
to determine, in accordance with SFAS No. 121, whether future cash flows
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of these aircraft would be less than the aggregate carrying
amount of these aircraft and related assets and an allocation of cost in excess
of net assets acquired resulting from the Airways Merger. SFAS No. 121 requires
that when a group of assets being tested for impairment was acquired as part of
a business combination that was accounted for using the purchase method of
accounting, any cost in excess of net assets acquired that arose as part of the
transaction must be included as part of the asset grouping. As a result of the
evaluation, management determined that the estimated future cash flows expected
to be generated by these aircraft would be less than the carrying amount and
allocated cost in excess of net assets acquired, and therefore these aircraft
are impaired as defined by SFAS No. 121. Consequently, the original cost basis
of these assets were reduced to reflect the fair market value at the date the
decision was made, resulting in a $27,492,000 impairment loss. The Company
considered recent transactions and market trends involving similar aircraft in
determining the fair market value.
11. SHUTDOWN AND OTHER NONRECURRING EXPENSES
Shutdown and other nonrecurring expenses include costs associated with the loss
of Flight 592 and excess operating costs related to the reduced schedule between
May 19, 1996 to June 17, 1996; the suspension of operations from June 17, 1996
to September 29, 1996; and costs associated with the reduced schedule from
September 30, 1996 to December 31, 1997. Such costs consist of expenses directly
related to the accident and the ensuing extensive FAA review of the Company's
operations including legal fees, payments to the FAA, inspection related costs
and unusual maintenance in excess of normal recurring maintenance. In addition,
depreciation on grounded aircraft, rental of abandoned or idled facilities and
costs of personnel idled as a result of the reduced and suspended operations
from May 1996 through December 1997 are included in shutdown and other
nonrecurring expenses. Personnel costs include full wages, salaries and benefits
that were provided to idled employees during the reduction and suspension of
operations.
F-23
<PAGE>
Below is a detail of such costs (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
-------- --------
<S> <C> <C>
Maintenance $ 15,380 $ 27,750
Legal and other 6,318 16,181
Depreciation 3,141 11,054
Facilities rental - 6,114
Wages, salaries and benefits,
excluding maintenance - 4,895
FAA remediation - 2,000
--------- ---------
$ 24,839 $ 67,994
========= =========
</TABLE>
No accrual was provided for cost to be incurred in future periods related to
aircraft depreciation and maintenance and rental costs associated with
temporarily idled facilities as such costs were recognized as incurred. There
were no such costs incurred during 1998.
12. RELATED PARTY TRANSACTIONS
The Company has utilized temporary employees provided by a temporary agency that
is partially owned by the daughter of one of the Company's directors. This
arrangement was terminated during 1996. Amounts recorded as expense related to
this agency were approximately $4,223,000 for the year ended December 31, 1996.
13. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains cash and cash equivalents with
various high credit-quality financial institutions or in short-duration high
quality debt securities. The Company periodically evaluates the relative credit
standing of those financial institutions that are considered in the Company's
investment strategy. Concentration of credit risk with respect to accounts
receivable is limited due to the large number of customers comprising the
Company's customer base.
The Company used the following methods and assumptions in estimating its fair
value disclosures for financial instruments:
Cash, cash equivalents and restricted cash: The carrying amounts reported in
the balance sheet for cash and cash equivalents and restricted cash
approximate their fair value.
Long-term debt: The fair values of the Company's long-term debt are based on
quoted market prices, if available, or are estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
F-24
<PAGE>
The carrying amounts and estimated fair values of the Company's financial
instruments are detailed below (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Cash, cash equivalents and
restricted cash $ 24,341 $ 24,341 $ 91,990 $ 91,990
Long-term debt 245,994 175,294 250,712 235,093
</TABLE>
14. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Company consolidated its 401(k) Plans (the
"Plan"). All employees of AirTran Holdings, Inc., AirTran Airlines and AirTran
Airways are eligible to participate in the consolidated Plan, a defined
contribution benefit plan which qualifies under Section 401(k) of the Internal
Revenue Code. Participants may contribute up to 15% of their base salary to the
Plan. Contributions to the Plan by the Company are discretionary and amounted to
approximately $288,000 in 1998. There were no contributions made during 1997 or
1996.
Effective May 16, 1995, the Company formed the 1995 Employee Stock Purchase Plan
(the "Stock Plan") whereby employees who complete twelve months of service are
eligible to make quarterly purchases of the Company's common stock at up to a
15% discount from the market value on the offering date. The Board of Directors
determines the discount rate before each offering date. The Company is
authorized to issue up to 4,000,000 shares of common stock under this plan.
During 1998, 1997 and 1996 the employees purchased a total of 23,023, 24,190 and
8,770 shares, respectively, at an average price of $5.65, $5.90 and $12.94 per
share, respectively, which represented a 5% discount from the market price on
the offering dates.
F-25
<PAGE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Quarter
-----------------------------------------------------------
First Second Third Fourth
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal 1998
Operating revenues $ 94,541 $123,988 $115,060 $105,718
Operating income (loss) (2,874) 14,421 (5,319) (24,785)
Net income (loss) (7,873) 8,559 (10,893) (30,531)
Basic and diluted
income (loss) per share (0.12) 0.13 (0.17) (0.47)
Quarter
-----------------------------------------------------------
First Second Third Fourth
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal 1997
Operating revenues $ 36,928 $ 47,759 $ 56,413 $ 70,356
Operating loss (24,864) (9,854) (12,800) (54,248)
Net loss (18,507) (9,226) (14,612) (54,318)
Basic and diluted
loss per share (0.34) (0.17) (0.27) (0.91)
</TABLE>
The results of the fourth quarter of 1998 include an impairment charge of
$27,492,000 related to the B737 fleet.
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 was completed and the associated costs 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 ended June 30, 1998, by approximately $0.05 per share on a diluted
basis.
The results of operations for the fourth quarter of 1997 include shutdown and
other non-recurring expenses of approximately $15,501,000 that primarily relate
to unusual maintenance costs incurred in returning eight aircraft to service and
to legal costs. The results of the fourth quarter of 1997 also include
rebranding expenses of approximately $5,240,000.
During the year the Company provides for income taxes using anticipated
effective annual tax rates. The rates are based on expected operating results
and permanent differences between book and tax income. Adjustments are made in
each quarter for changes in the anticipated rates used in previous quarters. If
the actual annual effective tax rate had been used in each of the quarters of
1998, net loss for the year would be unchanged. However, net loss for the first
through fourth quarters of 1997 would have been $(23,880,000), $(11,869,000),
$(14,800,000), and $(46,114,000), respectively.
F-26
<PAGE>
16. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's $150,000,000 of 10.25% Senior Notes issued during 1996 are fully
and unconditionally guaranteed on a joint and several basis by AirTran Airlines
and AirTran Airways, wholly-owned subsidiaries of the Company, and by all of
AirTran Airlines' subsidiaries ("Guarantors"). AirTran Airways has no
subsidiaries. The $80,000,000 of 10.50% Senior Secured Notes issued by AirTran
Airlines during 1997 are fully and unconditionally guaranteed on a joint and
several basis by AirTran Holdings, Inc., AirTran Airways, and all of AirTran
Airlines' subsidiaries. AirTran Airlines and its subsidiaries conduct and all of
the operations of the Company. The operations conducted by AirTran Airways were
transferred to AirTran Airlines in 1998. All of the subsidiary Guarantors are
wholly owned or indirect subsidiaries of the Company, and there are no direct or
indirect subsidiaries of the Company that are not Guarantors. Separate financial
statements of the subsidiary Guarantors are not presented because AirTran
Holdings, Inc. and all of its subsidiaries guarantee the Senior Notes and the
Senior Secured Notes on a full, unconditional, and joint and several basis.
Summarized consolidated financial information as of and for the year ended
December 31,1998 is as follows (in thousands):
<TABLE>
<CAPTION>
AIR TRAN AIR TRAN
AIRLINES AIR TRAN HOLDINGS, INC.
AND AIR TRAN HOLDINGS, AND
SUBSIDIARIES AIRWAYS INC. ELIMINATIONS SUBSIDIARIES
------------ -------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Current assets $ 52,957 $ - $ - $ - $ 52,957
Non-current assets 321,646 3,290 208,835 (210,322) 323,449
Current liabilities 83,798 - 3,203 (3,290) 83,711
Non-current liabilities 240,268 - 150,000 (153,203) 237,065
Operating revenues 439,307 - - - 439,307
Operating loss (18,557) - - - (18,557)
Loss before income
taxes (benefit) (39,922) (816) - - (40,738)
Net loss (39,922) (816) - - (40,738)
</TABLE>
F-27
<PAGE>
Summarized consolidated financial information as of and for the year ended
December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
AIRTRAN AIRTRAN
AIRLINES AIRTRAN HOLDINGS, INC.
AND AIRTRAN HOLDINGS, AND
SUBSIDIARIES AIRWAYS INC. ELIMINATIONS SUBSIDIARIES
-------------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Current assets $ 118,485 $ 15,601 $ 35,931 $ (45,965) $ 124,052
Non-current assets 206,510 100,480 238,651 (235,829) 309,812
Current liabilities 71,162 42,834 30,135 (45,965) 98,166
Non-current liabilities 230,967 6,150 150,000 (145,866) 241,251
Operating revenues 198,084 13,246 126 - 211,456
Operating (loss) income (101,894) 490 (362) - (101,766)
(Loss) income before income
taxes (benefit) (119,509) 433 (362) - (119,438)
Net (loss) income (96,839) 433 (257) - (96,663)
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 2 CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for Doubtful Accounts 1,353,568 8,328,392 8,356,960 1,325,000
Provision for Obsolescence 2,217,057 2,041,885 4,258,996
--------------------------------------------------------------------
Total 3,570,625 10,370,277 - 8,356,960 5,583,996
====================================================================
Year ended December 31, 1997
Allowance for Doubtful Accounts 837,707 2,894,727 2,378,866 1,353,568
Provision for Obsolescence 500,000 1,717,057 - 2,217,057
--------------------------------------------------------------------
Total 1,337,707 4,611,784 - 2,378,866 3,570,625
====================================================================
Year ended December 31, 1996
Allowance for Doubtful Accounts 404,870 3,637,589 3,204,752 837,707
Provision for Obsolescence 500,000 - - 500,000
--------------------------------------------------------------------
Total 904,870 3,637,589 - 3,204,752 1,337,707
====================================================================
</TABLE>
S-1
<PAGE>
EXHIBIT 4.10
================================================================================
AIRTRAN HOLDINGS, INC.,
as Issuer,
THE SUBSIDIARY GUARANTORS SIGNATORIES HERETO,
as Guarantors,
AIRTRAN AIRWAYS, INC.,
as Guarantor
and
STATE STREET BANK AND TRUST COMPANY,
as Trustee
_______________
THIRD SUPPLEMENTAL INDENTURE
Dated as of November 17, 1997
to
INDENTURE
Dated as of April 17, 1996
_______________
10 1/4% Senior Notes due 2001
================================================================================
<PAGE>
THIRD SUPPLEMENTAL INDENTURE
THIRD SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
----------------------
November 17, 1997, by and among AirTran Holdings, Inc., a Nevada corporation
(the "Company"), the Subsidiary Guarantors parties hereto (the "Guarantors"),
------- ----------
AirTran Airways, Inc., a Delaware corporation ("Airways") and State Street Bank
-------
and Trust Company, as trustee (the "Trustee").
-------
RECITALS
WHEREAS, the Company has heretofore executed and delivered to the Trustee
an Indenture, dated as of April 17, 1996, as supplemented by the First
Supplemental Indenture thereto dated as of August 26, 1996, and as further
supplemented by the Second Supplemental Indenture thereto dated as of August 5,
1997 (the "Indenture"), providing for the issuance of an aggregate principal
---------
amount of $150,000,000 of 10 1/4% Senior Notes due 2001 (the "Notes");
-----
WHEREAS, pursuant to the merger of Airways Corporation with and into the
Company as of November 17, 1997 (the "Merger"), Airways, which had theretofore
------
been a wholly-owned subsidiary of Airways Corporation, became a wholly-owned
subsidiary of the Company;
WHEREAS, pursuant to the Merger, Airways became a Restricted Subsidiary of
the Company;
WHEREAS, pursuant to Section 1305 of the Indenture, the Company will cause
each Restricted Subsidiary to become a Subsidiary Guarantor of the Notes;
WHEREAS, pursuant to Section 901(6) of the Indenture, the Company, the
Guarantors and the Trustee may enter into one or more supplemental indentures
without the consent of any Holders to add new Subsidiary Guarantors pursuant to
Section 1305; and
WHEREAS, in connection with the Merger, the Company changed its name from
"ValuJet, Inc." to "AirTran Holdings, Inc."
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Company, the Guarantors, Airways and the Trustee mutually covenant and agree for
the equal and ratable benefit of the Holders of the Notes as follows:
1. Definitions. Capitalized terms used herein without definition shall
-----------
have the meanings assigned to them in the Indenture. For all purposes of this
Supplemental Indenture, except as otherwise herein expressly provided or unless
the context otherwise requires, the words "herein", "hereof" and "hereby" and
other words of similar import used in this Supplemental Indenture refer to this
Supplemental Indenture as a whole and not to any particular section hereof.
2. Guarantee. Airways hereby (i) becomes, and subject to the provisions
---------
of the Indenture, after the date hereof shall be, a Subsidiary Guarantor, and
(ii) subjects itself to the provisions (including the representations and
warranties) of the Indenture as a Subsidiary Guarantor, and agrees to be bound
thereby. In furtherance of the foregoing, and not in limitation thereof,
pursuant to Section 1301 of the Indenture, Airways hereby jointly and severally
with all other Guarantors unconditionally guarantees to each Holder of a
Security authenticated and
<PAGE>
delivered by the Trustee, and to the Trustee on behalf of such Holder, the due
and punctual payment of the principal of (and premium, if any) and interest on
such Security when and as the same shall become due and payable, whether at the
Stated Maturity or by acceleration, call for redemption, purchase or otherwise,
in accordance with the terms of such Security and of the Indenture. In case of
the failure of the Company punctually to make any such payment, Airways hereby
jointly and severally agrees with all other Guarantors to cause such payment to
be made punctually when and as the same shall become due and payable, whether at
the Stated Maturity or by acceleration, call for redemption, purchase or
otherwise, and as if such payment were made by the Company.
3. Change of Corporate Name. Pursuant to Section 901(5) of the Indenture,
------------------------
any and all references in the Indenture to VALUJET, INC., shall be changed to
AIRTRAN HOLDINGS, INC.
4. Ratification of Indenture; Supplemental Indentures Part of Indenture.
--------------------------------------------------------------------
Except as expressly amended hereby, the Indenture is in all respects ratified
and confirmed and all the terms, conditions and provisions thereof shall remain
in full force and effect. This Supplemental Indenture shall form a part of the
Indenture for all purposes, and every Holder of Notes heretofore or hereafter
authenticated and delivered shall be bound hereby.
5. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
6. Trustee Makes No Representation. The Trustee makes no representation
-------------------------------
as to the validity or sufficiency of this Supplemental Indenture.
7. Counterparts. The parties may sign any number of copies of this
------------
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
8. Effect of Headings. The Section headings herein are for convenience
------------------
only and shall not effect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
AIRTRAN AIRWAYS, INC., as Guarantor
By: /s/ D. Joseph Corr
---------------------------
Name: D. Joseph Corr
Title: President (CEO)
2
<PAGE>
AIRTRAN HOLDINGS, INC.
By: /s/ D. Joseph Corr
------------------------
Name: D. Joseph Corr
Title: President (CEO)
STATE STREET BANK AND TRUST
COMPANY, as Trustee
By: ________________________
Name:
Title:
AIRTRAN AIRLINES, INC., as Guarantor
By: /s/ D. Joseph Corr
------------------------
Name: D. Joseph Corr
Title: President (CEO)
VALUJET MANAGEMENT CORP., as
Guarantor
By: /s/ D. Joseph Corr
------------------------
Name: D. Joseph Corr
Title: President
VALUJET INVESTMENT CORP., as
Guarantor
By: /s/ D. Joseph Corr
------------------------
Name: D. Joseph Corr
Title: President
3
<PAGE>
VALUJET CAPITAL CORP., as
Guarantor
By: /s/ D. Joseph Corr.
----------------------
Name: D. Joseph Corr
Title: President
VALUJET MANAGEMENT CORP., as
general partner of VALUJET
CORPORATE PARTNERS, L.P. as
Guarantor
By: /s/ D. Joseph Corr
-----------------------
Name: D. Joseph Corr
Title: President
VALUJET MANAGEMENT CORP., as
general partner of VALUJET
RESERVATION PARTNERS, L.P., as
Guarantor
By: /s/ D. Joseph Corr
-------------------------
Name: D. Joseph Corr
Title: President
VALUEJET I, LTD., as Guarantor
By: /s/ Robert L. Priddy
---------------------------
Name: Robert L. Priddy
Title: President
VALUJET II, LTD., as Guarantor
By: /s/ Robert L. Priddy
---------------------------
Name: Robert L. Priddy
Title: President
4
<PAGE>
EXHIBIT 4.12
================================================================================
AIRTRAN AIRLINES, INC.,
as Issuer,
AIRTRAN HOLDINGS, INC. AND
THE SUBSIDIARY GUARANTORS SIGNATORIES HERETO,
as Guarantors,
AIRTRAN AIRWAYS, INC.,
as Guarantor
and
THE BANK OF NEW YORK,
as Trustee and Collateral Trustee
________________________
FIRST SUPPLEMENTAL INDENTURE
Dated as of November 17, 1997
to
INDENTURE
Dated as of August 13, 1997
-----------------------
10 1/2% Senior Secured Notes due 2001
================================================================================
<PAGE>
FIRST SUPPLEMENTAL INDENTURE
FIRST SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
----------------------
November 17, 1997, by and among AirTran Airlines, Inc., a Nevada corporation
(the "Company"), AirTran Holdings, Inc., a Nevada corporation (the "Parent
------- ------
Company"), the Subsidiary Guarantors parties hereto (the "Guarantors"), AirTran
- ------- ----------
Airways, Inc., a Delaware corporation ("Airways") and The Bank of New York, as
-------
trustee and collateral trustee (the "Trustee").
-------
RECITALS
WHEREAS, the Company, the Parent Company and the Guarantors have heretofore
executed and delivered to the Trustee an Indenture, dated as of August 13, 1997
(the "Indenture"), providing for the issuance of an aggregate principal amount
---------
of $80,000,000 of 10 1/2% Senior Secured Notes due 2001 (the "Notes"); and
-----
WHEREAS, pursuant to the merger of Airways Corporation with and into the
Parent Company as of November 17, 1997 (the "Merger"), Airways, which had
------
theretofore been a wholly-owned subsidiary of Airways Corporation, became a
wholly-owned subsidiary of the Parent Company; and
WHEREAS, pursuant to the Merger, Airways became a Restricted Subsidiary of
the Parent Company; and
WHEREAS, pursuant to the terms of the Indenture, the Parent Company will
cause each Restricted Subsidiary to become a Subsidiary Guarantor of the Notes;
and
WHEREAS, pursuant to Section 901 of the Indenture, the Company and the
Trustee may enter into one or more supplemental indentures without the consent
of any Holders to add new Subsidiary Guarantors and to make certain other
changes to the Indenture; and
WHEREAS, in anticipation of the Merger, the Company changed its name from
"ValuJet Airlines, Inc." to AirTran Airlines, Inc."; and
WHEREAS, in connection with the Merger, the Parent Company changed its name
from "ValuJet, Inc." to "AirTran Holdings, Inc."; and
WHEREAS, the Indenture provides for the execution and delivery of a
supplement to the Indenture which shall particularly describe the Engines being
specifically mortgaged to the Trustee for the benefit and security of the
Holders pursuant to the Indenture; and
WHEREAS, the Indenture relates to certain Airframes and Engines more
particularly described therein, which Indenture was recorded with the FAA on
November 4, 1997 and given Conveyance No. GG011890; and
WHEREAS, it is the desire of the Trustee and the Company to add Collateral
under the Indenture one (1) McDonnell Douglas DC-9-32 aircraft, registration
number N913VV and serial number 47318 (the "Replacement Aircraft") along with
--------------------
its two (2) related Pratt & Whitney JT8D-9 aircraft
1
<PAGE>
engines bearing serial numbers 665721 and 666135, and one (1) additional Pratt &
Whitney JT8D-9 aircraft engine bearing serial number 666060 (which three
aircraft engines are referred to herein collectively as the "Replacement
-----------
Engines"), in replacement of and substitution for one (1) McDonnell Douglas
- -------
DC-9-32 aircraft, registration number N960VV and serial number 47067 (the
"Released Aircraft") and three (3) Pratt & Whitney JT8D-9 Engines bearing
-----------------
serial numbers 665820, 665470 and 666974 (the "Released Engines");
-----------------
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Company, the Parent Company, the Guarantors, Airways and the Trustee mutually
covenant and agree for the equal and ratable benefit of the Holders of the Notes
as follows:
1. Definitions. Capitalized terms used herein without definition shall
-----------
have the meanings assigned to them in the Indenture. For all purposes of this
Supplemental Indenture, except as otherwise herein expressly provided or unless
the context otherwise requires, the words "herein," hereof," and "hereby" and
other words of similar import used in this Supplemental Indenture refer to this
Supplemental Indenture as a whole and not to any particular section hereof.
2. Guarantee. Airways hereby (i) becomes, and subject to the provisions
---------
of the Indenture, after the date hereof shall be, a Subsidiary Guarantor, and
(ii) subjects itself to the provisions (including the representations and
warranties) of the Indenture as a Subsidiary Guarantor, and agrees to be bound
thereby. In furtherance of the foregoing, and not in limitation thereof,
pursuant to Section 1401 of the Indenture, Airways hereby jointly and severally
with the Parent Company and all other Guarantors unconditionally guarantees to
each Holder of a Security authenticated and delivered by the Trustee, and to the
Trustee on behalf of such Holder, the due and punctual payment of the principal
of (and premium, if any) and interest on such Security when and as the same
shall become due and payable, whether at the Stated Maturity or by acceleration,
call for redemption, purchase or otherwise, in accordance with the terms of such
Security and of the Indenture. In case of the failure of the Company punctually
to make any such payment, Airways hereby jointly and severally agrees with the
Parent Company and all other Guarantors to cause such payment to be made
punctually when and as the same shall become due and payable, whether at the
Stated Maturity or by acceleration, call for redemption, purchase or otherwise,
and as if such payment were made by the Company.
3. Change of Corporate Names. Any and all references in the Indenture to
-------------------------
VALUJET, INC. shall be changed to AIRTRAN HOLDINGS, INC. and any and all
references to VALUJET AIRLINES, INC. shall be changed to AIRTRAN AIRLINES, INC.
4. Substitute Security.
-------------------
(a) To secure the prompt payment of the principal amount of and
interest on, and all other amounts due with respect to, all Securities from time
to time outstanding under the Indenture and the performance and observance by
the Company of all the agreements, covenants and provisions contained in the
Indenture for the benefit and security of the Holders under the Indenture and
the prompt payment of any and all amounts from time to time owing under the
Indenture by the Company to the Trustee, the Company does hereby effective as of
July 23, 1998, grant, sell, assign, transfer, convey, pledge and confirm unto
the Trustee, its successors and assigns, for the benefit and security of the
Holders and the Trustee, a first priority security interest in all estate,
right, title and interest of the
2
<PAGE>
Company in and to the Replacement Aircraft and Replacement Engines (each such
engine having 750 or more rated takeoff horsepower or the equivalent thereof)
together with all equipment and accessories, parts and appurtenances pertaining
or attached to the Replacement Aircraft and Replacement Engines whether now
owned or hereafter acquired and all substitutions, modifications, improvements,
accessions and accumulations to the New Engine and all warranties of any
manufacturer with respect thereto.
(b) As evidence of the releasing of all right, title and interest of
the Trustee in, to and under the Released Aircraft and Released Engines, the
Trustee shall execute effective as of July 23, 1998, a separate Partial Release
and any other document reasonably requested by the Company to evidence such
release.
(c) The Company hereby acknowledges that the Replacement Aircraft and
Replacement Engines referred to in this Supplemental Indenture are owned by and
have been delivered to the Company and are included in the property of the
Company subject to the pledge and mortgage thereof under the Indenture.
5. Ratification of Indenture: Supplemental Indentures Part of Indenture.
--------------------------------------------------------------------
Except as expressly amended hereby, the Indenture is in all respects ratified
and confirmed and all the terms, conditions and provisions thereof shall remain
in full force and effect. This Supplemental Indenture shall form a part of the
Indenture for all purposes, and every Holder of Notes heretofore or hereafter
authenticated and delivered shall be bound hereby.
6. Governing Law. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND
-------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
7. Trustee Makes No Representation. The Trustee makes no representation
-------------------------------
as to the validity or sufficiency of this Supplemental Indenture.
8. Counterparts. The parties may sign any number of copies of this
------------
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
9. Effect of Headings. The Section headings herein are for convenience
------------------
only and shall not affect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
AIRTRAN AIRWAYS, INC., as Guarantor
By: /s/ D. Joseph Corr
-----------------------
Name: D. Joseph Corr
Title: President
3
<PAGE>
AIRTRAN AIRLINES, INC., the Company
By: /s/ D. Joseph Corr
-------------------------------
Name: D. Joseph Corr
Title: President
AIRTRAN HOLDINGS, INC., the Parent
Company
By: /s/ D. Joseph Corr
-------------------------------
Name: D. Joseph Corr
Title: President
THE BANK OF NEW YORK, as Trustee
and Collateral Trustee
By: /s/ Marie E. Trimboli
-------------------------------
Name: MARIE E. TRIMBOLI
Title: Assistant Treasurer
VALUJET MANAGEMENT CORP., as
Guarantor
By: /s/ D. Joseph Corr
-------------------------------
Name: D. Joseph Corr
Title: President
VALUJET INVESTMENT CORP., as
Guarantor
By: /s/ D. Joseph Corr
-------------------------------
Name: D. Joseph Corr
Title: President
VALUJET CAPITAL CORP., as Guarantor
By: /s/ D. Joseph Corr
-------------------------------
Name: D. Joseph Corr
Title: President
4
<PAGE>
EXHIBIT 10.25
SUPPLEMENTAL AGREEMENT
----------------------
THIS SUPPLEMENTAL AGREEMENT (the "Agreement") is made and entered into as
of the 17th day of November, 1998, by and between D. JOSEPH CORR ("Corr") and
AIRTRAN HOLDINGS, INC., a Nevada corporation (the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the parties hereto desire to state herein the continuing rights,
duties and obligations between themselves following the termination of Corr's
employment as President and Chief Executive Officer of the Company;
NOW, THEREFORE, in consideration of the mutual promises of the parties
hereto and of the mutual benefits to be gained by the performance thereof, and
for other good and valuable consideration, the receipt, adequacy and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound hereby, do hereby agree as follows:
1. Effective Date. This Agreement shall not become effective until the
--------------
Effective Date set forth in Item 3A below and shall have no force and effect
until such time.
2. Termination of Prior Agreements.
-------------------------------
A. Except as provided in Paragraph B below, this Agreement shall as
of the Effective Date contain all of the covenants and agreements between the
parties hereto with respect to the subject matter hereof. This Agreement shall
as of the Effective Date supersede any and all other agreements, either oral or
in writing between the parties hereto with respect to the subject matter hereof,
including but not limited to that certain Employment Agreement dated as of
January 1, 1998, by and between Corr and the Company (the "Employment
Agreement").
B. Notwithstanding the foregoing, that certain Stock Option
Agreement dated January 6, 1997 between Corr and the Company and that certain
Stock Option Agreement dated November 25, 1997 between Corr and the Company, as
such agreements are being amended simultaneously herewith, shall remain in full
force and effect to govern the terms of Corr's stock options in the Company.
3. President/CEO Status.
--------------------
A. Corr shall continue to serve as President and Chief Executive
Officer of the Company until such date (the "Effective Date") as shall be
identified by the Board of Directors of the Company by written notice to Corr.
The Effective Date shall not be earlier than November 18, 1998.
B. As of the Effective Date, Corr hereby resigns as President and
Chief Executive Officer and as a Director of the Company. As of the Effective
Date, Corr does also hereby resign as a director and officer of each subsidiary
of the Company, including, but not limited to, AirTran Airways, Inc., AirTran
Airlines, Inc. and ValuJet Investment Corp.
<PAGE>
C. After the Effective Date, Corr agrees to use good faith efforts
to cooperate with the successor chief executive officer in order to provide for
a smooth transition for the Company.
4. Compensatory Payments from the Company.
--------------------------------------
A. Corr shall be entitled to receive his usual base salary from the
Company (at the rate of $25,000 per month) for services rendered by Corr up to
and until the Effective Date.
B. Upon the Effective Date, the Company shall pay to Corr a lump sum
severance payment of $300,000.
C. Corr hereby acknowledges that except as expressly set out in this
Agreement, Corr has heretofore received all compensation to which he was
entitled from the Company or any subsidiary of the Company pursuant to the
Employment Agreement or otherwise for all periods through and including the
Effective Date.
D. Corr shall be responsible for all social security, federal and
state withholding taxes and any other such taxes required by governmental
authority with respect to the payments from the Company to Corr under this Item
4.
5. Stock Options.
-------------
A. The parties acknowledge that Corr has the following options to
purchase stock in the Company: options to purchase 450,000 shares at $7.125 per
share under a Stock Option Agreement dated January 6, 1997 (the "1996 Options")
and options to purchase 150,000 shares at $5.50 per share under a Stock Option
Agreement dated November 25, 1997 (the "1997 Options").
B. The parties acknowledge that: (i) as of the Effective Date, Corr
will have the vested right to exercise all of the 1996 Options and 100,000 of
the 1997 Options; (ii) Corr shall have the right to exercise his vested options
at any time prior to the date that is five (5) years after the Effective Date;
and (iii) in the event of Corr's death prior to the exercise of such stock
options, Corr's personal representative shall have the right to exercise Corr's
vested stock options at any time prior to the earlier of the date that is one
(1) year after Corr's death or the date that is five (5) years after the
Effective Date.
C. The parties agree to execute amendments to Corr's Stock Option
Agreements in the form attached hereto as Exhibits "A" and "B" in order to
effectuate the provisions of this Item 5.
6. Continuing Health Insurance/Flight Passes.
-----------------------------------------
A. Corr and his wife shall have the right during their lifetimes to
continuing coverage in the Company's (or its successor's) health insurance plan
in effect from time to time. Such participation shall be at Corr's cost, not to
exceed the COBRA (or equivalent) premium that would be chargeable with respect
to such coverage.
-2-
<PAGE>
B. Corr and his wife shall have lifetime pass privileges on Company
flights, consistent with the most favorable pass privileges available to any
Company executives as in effect from time to time.
7. Indemnification of Corr. Except as provided below, the Company shall
-----------------------
indemnify Corr in the event he is made a party to a proceeding because he is or
was a director or officer of the Company against liability incurred by him in
the proceeding if he acted in good faith and in a manner he believed to be in or
not opposed to the best interests of the Company and, in the case of any
criminal proceeding, he had no reasonable cause to believe his conduct was
unlawful. The Company shall not indemnify Corr under this paragraph in
connection with a proceeding by or in the right of the Company in which Corr is
adjudged liable to the Company, unless and only to the extent the court in which
the proceeding is brought or other court of competent jurisdiction determines
upon application that in view of all circumstances of the case, Corr is fairly
and reasonably entitled to indemnity for such expenses as the court deems
proper. Indemnification permitted under this paragraph in connection with a
proceeding is limited to liability and expenses actually and reasonably incurred
in connection with the proceeding.
8. Mutual Releases.
---------------
A. The Company, on behalf of itself, its agents, successors and
assigns (collectively referred to in this Paragraph as the "Releasors"), do
hereby release, remise and forever discharge Corr and his agents, personal
representatives, heirs, legal representatives, successors and assigns
(collectively referred to in this Paragraph as the "Releasees" but expressly
excluding the Releasors) of and from any and all actions, suits, debts, dues,
accounts, bonds, covenants, contracts, agreements, judgments, liens, claims,
demands and liabilities of whatsoever type or description and no matter how
arising, in law or in equity, known or unknown, which the Releasors ever had,
now have or may hereafter have against the Releasees for or by reason of any
cause, matter or thing whatsoever from the beginning of the world to the
Effective Date; provided, however, that the provisions of this Paragraph shall
not extend to (i) the obligations of the Releasees under and pursuant to this
Agreement, or (ii) any costs, expenses or liabilities incurred by Releasors
which arise out of or relate to any acts or omissions by Corr which are illegal
or unethical, including but not limited to fraud or sexual harassment, or (iii)
any acts or omissions after the Effective Date hereof.
B. Corr, on behalf of himself, his agents, personal representatives,
heirs, legal representatives, successors and assigns (collectively referred to
in this Paragraph as the "Releasors") does hereby release, remise and forever
discharge the Company and its agents, officers, directors, shareholders,
employees, personal representatives, heirs, legal representatives, successors,
subsidiaries and assigns (collectively referred to in this Paragraph as the
"Releasees" but expressly excluding the Releasors) of and from any and all
actions, suits, debts, dues, accounts, bonds, covenants, contracts, agreements,
judgments, liens, claims, demands and liabilities of whatsoever type or
description and no matter how arising, in law or in equity, known or unknown,
which the Releasors ever had, now have or may hereafter have against the
Releasees for or by reason of any cause, matter or thing whatsoever from the
beginning of the world to the Effective Date; provided, however, that the
provisions of this Paragraph shall not extend to (i) the obligations of the
Releasees under and pursuant to this Agreement, or (ii) any acts or omissions
after the Effective Date hereof.
-3-
<PAGE>
9. Further Assurances. At any time and from time to time after the date
------------------
of this Agreement, upon request of any party hereto and without the payment of
any further consideration, another party hereto shall duly execute, acknowledge
and deliver all such further assignments, conveyances and other instruments of
transfer and other documents, and will take such other action, consistent with
the terms of this Agreement, as reasonably may be requested for the purposes of
consummating the transactions contemplated hereby.
10. Waiver. Failure to insist upon strict compliance with any of the
------
terms, covenants or conditions hereof shall not be deemed a waiver of such
terms, covenants or conditions, nor shall any waiver or relinquishment of any
right or power hereunder, at any one time or more times, be deemed a waiver or
relinquishment of such right or power at any other time or times.
11. Specific Performance - Breach. All parties acknowledge that a breach
-----------------------------
of this Agreement will result in irreparable and continuing damage for which
there may be no adequate remedy at law. Therefore, in addition to any other
remedy afforded by law, any breach or threatened breach of this Agreement shall
be subject to specific performance by injunction or any other equitable remedies
of any court of competent jurisdiction.
12. Transaction Expenses. All fees and expenses incurred by the parties
--------------------
in connection with the negotiation of this Agreement and the consummation of the
transactions contemplated herein shall be paid and borne by the respective party
incurring such cost.
13. Miscellaneous. This Agreement shall be governed by the laws of the
-------------
State of Nevada. No amendment or modification of this Agreement shall be valid
or binding upon any party unless made in writing and duly signed by all parties.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed to be an original, but all of which together shall constitute one and
the same instrument. The rights and obligations of a party under this Agreement
shall not be subject to assignment or alienation without the prior written
consent of the other party. The losing party in any action brought to enforce
the terms of this Agreement shall pay the attorney's fees and all other costs
incurred by the prevailing party in any such action. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, legal representatives, and permitted successors and assigns.
All representations, warranties, covenants and agreements made by a party to
this Agreement or pursuant hereto shall survive the closing of the transactions
contemplated hereby and shall be actionable at any time after said closing.
14. Notices. Any notice required or permitted to be given pursuant to
-------
this Agreement shall be sufficiently given when personally delivered (with
written acknowledgment of receipt of such personal delivery) or mailed by
certified or registered mail, return receipt requested, postage prepaid:
To the Company: 9955 AirTran Boulevard
Orlando, Florida 32827
(407) 251-5944
Attn: President
-4-
<PAGE>
To Corr: _________________________
_________________________
_________________________
or at such other address as any of such parties to be given notice shall
designate by written notice to the other parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
___________________________(SEAL)
D. JOSEPH CORR
AIRTRAN HOLDINGS, INC.
By: /s/ Robert D. Swenson
------------------------------
Robert D. Swenson
Title: Chairman of the Board
(CORPORATE SEAL)
-5-
<PAGE>
EXHIBIT "A"
AMENDMENT TO
STOCK OPTION AGREEMENT
THIS IS AN AMENDMENT (the "Amendment") to that certain Stock Option
Agreement dated January 6, 1997 (the "Agreement") between AIRTRAN HOLDINGS,
INC., a Nevada corporation formerly known as ValuJet, Inc.(the "Company")
and D. JOSEPH CORR (the"Optionee"). Under the Agreement, Optionee was granted
options to purchase 450,000 shares at $7.125 per share.
In consideration of Optionee's past and future employment with the
Company and its subsidiaries and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
acknowledge and agree as follows:
1. Item 2C of the Agreement is herby amended to read as follows:
"C. Options granted under this Agreement shall constitute
nonqualified stock options."
2. The vesting schedule contained in Item 5A of the Agreement is hereby
amended to read as follows:
"Vesting Schedule
-----------------
As of Number of Option Shares Exercisable
----- -----------------------------------
The date hereof 300,000
The "Effective Date" 450,000
For all purposes of this Agreement, the "Effective Date" shall be the
date as of which Optionee no longer serves as President and Chief Executive
Officer under the terms of that certain Supplemental Agreement dated
November 17, 1998 between Optionee and the Company."
3. Item 5E of the Agreement is hereby amended to read as follows:
"E. Exercise of Options by Optionee. The Option shall be
-------------------------------
exercisable only to the extent exercisable as set forth in Paragraph A
above and must be exercised on or before the date that is five (5) years
following the Effective Date. To the extent any portion of the Option is
not exercised within the time period provided, such portion of the Option
shall terminate as of the date of expiration of such time period. Nothing
in the Plan shall be construed as imposing any obligation on the Company to
continue the employment of Optionee or shall interfere or restrict in any
way the rights of the Company to discharge Optionee at any time for any
reason whatsoever, with or without cause."
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4. Item 5F of the Agreement is hereby amended to read as follows:
"F. Exercise of Options After Death of Optionee. In the event of
-------------------------------------------
the death of the Optionee, the personal representative of the Optionee may,
subject to the provisions hereof and before the earlier of the Option's
expiration date as set forth in Paragraph E above or the expiration of one
(1) year after the date of such death, exercise the Option granted to the
Optionee to the same extent the Optionee might have exercised such Option
on the date of his death, but not further or otherwise. To the extent any
portion of the Option is not exercised within the time period provided,
such portion of the Option shall terminate as of the date of expiration of
such time period."
IN WITNESS WHEREOF, this Agreement has been duly executed as of the 17th
day of November, 1998.
OPTIONEE: AIRTRAN HOLDINGS, INC.
(SEAL) By: /s/ Robert D. Swenson
_________________________ -------------------------
D. JOSEPH CORR Robert D. Swenson
Title: Chairman of the Board
7
<PAGE>
EXHIBIT "B"
AMENDMENT TO
STOCK OPTION AGREEMENT
THIS IS AN AMENDMENT (the "Amendment") to that certain Stock Option
Agreement dated November 25, 1997 (the "Agreement") between AIRTRAN HOLDINGS,
INC., a Nevada corporation (the"Company") and D. JOSEPH CORR (the" Optionee").
Under the Agreement, Optionee was granted options to purchase 150,000 shares at
$5.50 per share.
In consideration of Optionee's past and future employment with the Company
and its subsidiaries and other good and valuable consideration, the receipt and
sufficency of which are hereby acknowledged, the parties acknowledge and agree
as follows:
1. Item 2B of the Agreement is hereby amended to read as follows:
"B. Options granted under this Agreement shall constitute
nonqualified stock options."
2. The vesting schedule contained in Item 5A of the Agreement is hereby
amended to read as follows:
"Vesting Schedule
----------------
As of Number of Option Shares Exercisable
----- -----------------------------------
November 17, 1998 50,000
The "Effective Date" 100,000
Optionee will have the vested right to exercise the remaining 50,000
options only if the Effective Date occurs on or after November 17, 1999
(which is not anticipated). If the Effective Date occurs prior to November 17,
1999, then the option to purchase the remaining 50,000 shares shall lapse as
of the Effective Date.
For all purposes of this Agreement, the "Effective Date" shall be the date
as of which Optionee no longer serves as President and Chief Executive Officer
under the terms of that certain Supplemental Agreement dated November 17, 1998
between Optionee and the Company".
3. Item 5E of the Agreement is hereby amended to read as follows:
"E. Exercise of Options by Optionee. The Option shall be
-------------------------------
exercisable only to the extent exercisable as set forth in Paragraph A above
and must be exercised on or before the date that is five (5) years following
the Effective Date. To the extent any portion of the Option is not exercised
within the time period provided, such portion of the Option shall terminate as
of the date of expiration of such time period. Nothing in the Plan shall be
8
<PAGE>
construed as imposing any obligation on the Company to continue the
employment of Optionee or shall interfere or restrict in any way the rights
of the Company to discharge Optionee at any time for any reason whatsoever,
with or without cause."
4. Item 5F of the Agreement is hereby amended to read as follows:
"F. Exercise of Options After Death of Optionee. In the event
--------------------------------------------
of the death of the Optionee, the personal representative of the Optionee
may, subject to the provisions hereof and before the earlier of the
Option's expiration date as set forth in Paragraph E above or the
expiration of one (1) year after the date of such death, exercise the
Option granted to the Optionee to the same extent the Optionee might have
exercised such Option on the date of his death, but not further or
otherwise. To the extent any portion of the Option is not exercised within
the time period provided, such portion of the Option shall terminate as of
the date of expiration of such time period."
IN WITNESS WHEREOF, this Agreement has been duly executed as of the 17th
day of November, 1998.
OPTIONEE: AIRTRAN HOLDINGS, INC.
/s/ D. Joseph Corr(SEAL) By: /s/ Robert D. Swenson
- ------------------ -------------------------
D. JOSEPH CORR Robert D. Swenson
Title: Chairman of the Board
9
<PAGE>
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
DATED AS OF JANUARY 4, 1999
BETWEEN
AIR TRAN HOLDINGS, INC.
AND
JOSEPH B. LEONARD
This Employment Agreement (henceforth the "Agreement") is made and entered into
as of this Fourth day of January 1999 (the "Effective Date") by and between
JOSEPH B. LEONARD (henceforth the "Executive") and AIR TRAN HOLDINGS, INC., a
Nevada corporation (henceforth the "Company").
RECITALS
A. The non-management members of the Company's Board of Directors (henceforth
the "Board") believe the Executive to be the best qualified individual to
protect and enhance the best interests of the Company and its stockholders
and that entering into this Agreement to ensure the Executive's long-term
employment with the Company is in the best interests of the Company and its
stockholders.
B. The Company recognizes that, as in the case of many publicly-held
corporations, the possibility of a change of control may exist and that the
uncertainty and questions which such possibility may raise among management
may result in the departure or distraction of management personnel to the
detriment of the Company and its stockholders.
C. The non-management members of the Board have determined that in the event
of that contingency, it is imperative to be able to rely on management's
continuance and in particular, the leadership of the Executive and that
appropriate steps should be taken to secure that essential service.
D. The Executive and the Company now desire to enter into this Agreement.
CONTRACT TERMS
1. DEFINITIONS
1.1 "Affiliate" means any Person directly or indirectly controlling or
controlled by or under the direct or indirect common control with such
Person. For purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.
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1.2 "Affiliated Company" means
1.2.1 A member of a controlled group of corporations of which the
Company is a member or;
1.2.2 An unincorporated trade or business which is under common
control with the Company as determined in accordance with
Section 414(c) of the Internal Revenue Code of 1986, as amended
(henceforth the "Code") and regulations issued thereunder.
1.2.3 For purposes hereof, a "controlled group of corporations" shall
mean a controlled group of corporations as defined in Section
1563(a) of the Code determined without regard to Section
1563(a)(4) and (e)(3)(C) of the Code.
1.3 A "Change of Control" will be deemed to have occurred in the event
that, after the date of this Agreement:
1.3.1 Any Person, or Persons acting together that would constitute a
"group" (a "Group"), for purposes of Section 13(d) of the
Securities Exchange Act of 1934 as from time to time amended,
together with any Affiliates or Related Persons thereof (other
than any employee stock ownership plan), beneficially owns 50%
or more of the total voting power of all classes of Voting
Stock of the Company;
1.3.2 Any Person or Group, together with any Affiliates or Related
Persons thereof, succeeds in having a sufficient number of its
nominees elected to the Board of Directors of the Company such
that such nominees, when added to any existing director
remaining on the Board of Directors of the Company after such
election who is an Affiliate or Related Person of such Person
or Group, will constitute a majority of the Board of the
Company;
1.3.3 There occurs any transaction, or series of related
transactions, and the beneficial owners of the Voting Stock of
the Company immediately prior to such transaction (or series)
do not, immediately after such transaction (or series),
beneficially own Voting Stock representing more than 50% of the
voting power of all classes of Voting Stock of the Company (or
in the case of a transaction (or series) in which another
entity becomes a successor to the Company, of the successor
entity); or,
1.3.4 The Company shall cease to own a majority of the capital stock
of its operating subsidiaries, provided that the foregoing
shall not apply with respect to any such Person or Group
referred to in
2
<PAGE>
Clauses 1.3.1 or 1.3.2 above, which consists exclusively, or to
any transaction (or series) referred to in Clause 1.3.3 above
if at least 50% of such voting power is beneficially owned
immediately thereafter by any Person or Group, which consists
exclusively, of any one or more Permitted Holders and their
Affiliates (while they are such).
1.4 "Disability" shall mean the permanent and total inability by reason of
mental or physical infirmity or both, of the Executive to perform the
work customarily assigned to him. Additionally, a medical doctor,
selected or approved by the Board must advise the Board that it is
either not possible to determine when such Disability will terminate
or that it appears probable that such Disability will be permanent
during the remainder of the Participant's lifetime. If the Company
secures an "own occupation" disability policy to cover its liability
pursuant to this Agreement, such definition in the policy shall be
deemed to control.
1.5 "Person" means any individual, corporation, partnership, trust, joint
venture or other legal entity holding, or acquiring Voting Stock of
the Company.
1.6 "Permitted Holder" means Robert L. Priddy, Maurice J. Gallagher, Jr,
Lewis H. Jordan, Stephen C. Nevin, Thomas Kalil, Don. L. Chapman and
Timothy P. Flynn.
1.7 "Related Person" means any Person owning:
1.7.3 5% or more of the outstanding Common Stock of such Person; or,
1.7.4 5% or more of the Voting Stock of such Person.
1.8 "Termination for Cause" means the termination as a result of a
conviction for a willful violation of any law, rule or regulation
(other than traffic violations or similar offenses), that results in a
material loss to the Company or one of its Affiliates, or a material
breach of this Agreement on the part of the Executive that is not
cured within ten (10) business days of notification by the Company.
1.9 "Voting Stock" means any equity security or series of equity
securities, issued by the Company which are entitled to vote for
Directors of the Company.
2. TERM
2.1 Initial Term - The term of this Agreement shall commence on the date
first noted above, and shall terminate on December 31, 2001 unless
extended, pursuant to Section 2.2.
3
<PAGE>
2.2 Extension - This Agreement shall be automatically extended by one year
each January 1, unless the Company or Executive provides 90 days
notice before such anniversary date of the intention to terminate the
Agreement.
3. POSITION AND DUTIES
3.1 Executive shall be employed by the Company no later than January 11,
1999 as its President, Chief Executive Officer and Chairman of the
Board. Executive shall report directly and solely to the Company's
Board. Executive agrees to serve as Chairman of the Board. The duties
and responsibilities of the Chairman of the Board, President and Chief
Executive Officer shall be as defined in the by-laws of the Company in
effect as of the date hereof, and shall be without consideration of
other positions the Executive may hold with the Company. Executive's
services are mutually agreed to be unique.
3.2 During Executive's period of service hereunder, Executive agrees to
perform such services not inconsistent with his position as shall from
time to time be assigned to him by the Company's Board. During the
Term (both the Initial Term and as extended), except for disability,
illness and vacation periods, Executive shall devote his full
productive time, attention and energies to the position of Chairman of
the Board, President and Chief Executive Officer.
3.3 Executive's expenditure of reasonable amounts of time in connection
with outside activities, not competitive with the business of the
Company, such as outside directorships or charitable or professional
activities shall not be considered in contravention of this Agreement
so long as such activities do not materially interfere with his
performance of this Agreement . Further, it is understood and agreed
by the parties hereto that Executive is entitled to engage in passive
and personal investment activities not materially interfering with his
performance of this Agreement.
3.4 Service as an executive of an Affiliated Company, whether separately
compensated or not, shall not be considered in contravention of this
Agreement.
4. SALARY
4.1 Throughout the Initial Term of this Agreement, the Executive shall
receive an annual base salary of at least $350,000.
4.2 The Board (or such committee designated by the Board) shall review the
Executive's salary at least annually, at or before the first regularly
4
<PAGE>
scheduled Board meeting following the annual stockholders' meeting of
each fiscal year. The Board (or the relevant committee) may increase
the base salary based upon relevant considerations, including, but not
limited to the performance of the Executive and the Company, changes
in the cost of living and competitive compensation data.
5. INCENTIVE COMPENSATION
5.1 In addition to the salary stated in Section 4, the Executive shall be
eligible for an annual cash incentive award based on his performance
and the performance of the Company. Unless otherwise amended by the
Company with the agreement of the Executive, the annual cash incentive
award shall be calculated in the following manner:
5.1.1 The Board shall note the Applicable T-Bill Rate at the
commencement of the year, such rate equal to the current
twelve-(12) month Treasury Bill rate as of January 1.
5.1.2 A Multiplier shall be established equal to one hundred percent
(100%) divided by the difference between twenty percent (20%)
and the Applicable T-Bill Rate.
5.1.3 At the close of the fiscal year, the Company shall compute its
Return On Equity, as follows:
5.1.3.1 Income shall be determined as pre-tax, pre-bonus
income, less estimated taxes, determined by Generally
Accepted Accounting Principles;
5.1.3.2 Equity shall be determined as Stockholder's Equity as
of the close of the immediately preceding Fiscal Year,
as determined by Generally Accepted Accounting
Principles.
5.1.3.3 Return on Equity shall be determined by dividing
Income (as determined in Section 5.1.3.1) by Equity
(as determined in 5.1.3.2)
5.1.4 The difference between the Return on Equity and the Applicable
T-Bill Rate shall be multiplied by the Multiplier to determine
the Executive's Incentive Percentage.
5.1.5 The Incentive Percentage shall be multiplied by the Executive's
current base salary of record to determine his incentive
payment for the year.
5
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5.1.6 If the payment pursuant to Section 5.1.5 would exceed one-
hundred and fifty percent (150%) of the Executive's base
salary, such payment shall be capped at 150% of base salary.
6. STOCK OPTIONS
6.1 Executive shall be eligible to participate in any Stock Option plans
maintained by the Company and any additional or successor plans
created from time to time.
6.2 As of the Effective Date, or the date on which the selection of the
Executive as President, Chief Executive Officer and Chairman is
reported in the national news media, whichever occurs first, the
Executive shall be granted a Stock Option for the purchase of
1,500,000 shares of the Company's Common Stock. The option shall:
6.2.1 Have an exercise price equal to 100% (one hundred percent) of
the fair market value of the Company's Common Stock as of the
closing price of the date of grant as traded on the NASDAQ
National Market.
6.2.2 Vest in three installments at the rate of 40% on the first
anniversary of the grant, 30% on the second anniversary of the
grant and 30% on the third anniversary of the grant.
6.2.3 Vest 100% if the Executive is terminated without Cause
(including termination due to death or Disability), after July
11, 2000. If the Executive is terminated without Cause
(including termination due to death or Disability) prior to
July 11, 2000, 1,000,000 Options shall be vested.
6.2.4 Accelerate and become fully vested in the event of a Change of
Control.
6.2.5 Be exercisable for a period of 10 years following the grant,
subject to earlier termination only if the Executive is
terminated for Cause pursuant to Section 13.2 or terminates his
employment other than pursuant to Section 14. If the Executive
terminates employment due to death or Disability, the
provisions of the Company's stock option plan shall control, as
to time allowable to exercise vested stock options.
6.2.6 Provide that if antidilution protection is provided to any
member of a group including Messrs. Lewis Jordan, Robert Priddy
or Rob Swenson, identical protection shall be extended to the
Options granted to the Executive pursuant to this Agreement.
6
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6.3 In addition to the Stock Option grant pursuant to Section 6.2 the
Executive shall be eligible for additional grants on an annual basis,
consistent with other executives of the Company and competitive
practices.
7. SIGNING BONUS
The Company acknowledges that the Executive has forfeited significant
valuable rights regarding stock options, restricted stock, deferred
compensation and retirement benefits, both qualified and non-qualified from
his former employer in accepting the position with the Company. In
recognition of this, as well as the risk assumed by the Executive in this
position, the Company shall provide to the Executive a lump sum cash
payment of $100,000 payable on the Effective Date.
8. REIMBURSEMENT OF EXPENSES
The Executive shall be authorized to incur and shall be reimbursed by the
Company for all reasonable expenses for the advancement of the Company's
business pursuant to standing Company policy at least monthly.
9. MOVING EXPENSES
9.1. Recognizing that it is in the interests of the Company that the
Executive commence work at Company headquarters as quickly and
efficiently as possible, the Company will reimburse the Executive for
actual expenses connected with selling his primary residence in
California, acquiring a new residence and relocating. Such
reimbursement shall include, but not be limited to:
9.1.1 Commissions on the sale of the Executive's current primary
residence;
9.1.2 All transfer fees and taxes connected with the Executive's
current residence which are typically paid by the seller,
exclusive of any capital gains associated with the sale of the
residence;
9.1.3 Reasonable house-hunting expenses for the Executive and the
Executive's spouse;
9.1.4 Closing costs on the purchase of a new residence, including all
fees and taxes which are typically paid by the buyer, including
any mortgage points;
9.1.5 All costs connected with the transportation of the Executive,
his family and household goods from California to his new
residence.
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9.1.6 The provision of an apartment in the Orlando area for two
months.
9.2 The Executive will exercise reasonable judgment with regard to
incurring moving expenses to control such costs through the use of
multiple estimates and bids. In no event shall the Company be
obligated to pay moving expenses in excess of One Hundred Fifty
Thousand Dollars ($150,000).
10. OTHER BENEFITS
10.1 The Executive shall be eligible to participate in any and all other
benefit programs which are, and which may be in the future, generally
available to members of the Company's management, including, but not
limited to group health, disability, and life insurance benefits,
participation in any pension, retirement and/or profit-sharing plans,
financial planning, or other perquisites.
10.2 The Company shall provide free air transportation on any route
maintained by the Company for the Executive and his spouse for the
lifetimes of both the Executive and his spouse during employment and
for life on the completion of two years service.
11. DISABILITY
If the Executive's services hereunder are terminated due to Disability as
defined in the Agreement, the Executive shall receive:
11.1 His full salary for the remainder of the Initial Term, offset by any
amounts payable from a disability policy maintained by the Company.
11.2 Any stock options or stock appreciation rights granted to the
Executive shall be immediately vested; and,
11.3 The Executive and his spouse shall retain the travel benefits noted in
Section 10.2.
12. DEATH BENEFITS
12.1 In addition to participation in any life insurance plans maintained by
the Company, to the extent that the Company's group term life
insurance provides a death benefit of less than $1,000,000, the
Company shall pay the premium on a universal life insurance policy to
be owned by the Executive equal to the difference between the coverage
provided by the Company and $1,000,000. Company's premiums need only
be sufficient to maintain the face death benefit of the policy.
8
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12.2 This insurance policy shall be in lieu of any continuation of salary
or incentives pursuant to Sections 4 or 5 of this Agreement, other
than accrued but unpaid salary or incentive compensation.
13. TERMINATION BY THE COMPANY
Company shall have the right to terminate the Executive's service hereunder
under the following circumstances:
13.1 Upon ten (10) business days' written notice from the Company to the
Executive in the event of Disability which has incapacitated the
Executive from performing his duties for a period of at least six (6)
consecutive months, subject to the provisions of Section 11.
13.2 For Cause, as defined in this Agreement, upon immediate written
notice;
13.3 Upon immediate written notice to the Executive where the Board, by a
majority vote, elects to terminate the Executive for any reason, other
than the reasons noted in Sections 13.1 and 13.2 above.
13.4 Upon the death of the Executive, subject to the provisions of Section
12.
14. TERMINATION BY THE EXECUTIVE
Executive shall have the right to terminate his service under this
Agreement upon 90 days written notice following the date on which the
Executive becomes aware of any of the following without the consent of the
Executive:
14.1 The Executive is not elected or retained as Chairman, President and
Chief Executive Officer and a director of the Company during the term
of this Agreement, including any extensions;
14.2 Any assignment of the Executive of any duties other than those
reasonably contemplated by, or any limitation of the powers or
prerogatives of Executive in any respect not reasonably contemplated
by Section 3 of this Agreement, including, but not limited to the
creation by the Board of a multi-person Office of the Chairman;
14.3 Any removal of the Executive from responsibilities substantially
similar to those described or contemplated in Section 3 hereof;
14.4 Any reduction in, or limitation upon the compensation, reimbursable
expenses or other benefits provided in this Agreement, other than as
may be required by valid public law or regulation;
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<PAGE>
14.5 Any assignment to the Executive of duties which would require him to
relocate or transfer his principal place of residence or the transfer
of the headquarters of the Company to any location without the
expressed written agreement of the Executive.
15. BENEFITS FOLLOWING TERMINATION
15.1 If the Executive's employment with the Company is terminated pursuant
to Section 13.1, the Executive shall receive the benefits noted in
Section 11 of this Agreement.
15.2 If the Executive's employment with the Company is terminated pursuant
to Section 13.2, this Agreement shall terminate immediately. Any
unvested stock options or other benefits shall be immediately
forfeited upon the effective date of termination, as shall any accrued
but unpaid amounts with regard to salary, bonuses or other benefits.
15.3 If the Executive's employment with the Company is terminated pursuant
to Section 13.3, the Executive shall be entitled to:
15.3.1 A lump sum payment of $500,000;
15.3.2 Immediate vesting of any stock options, to the extent provided
in Section 6.2.3 of this Agreement;
15.3.3 Immediate vesting of any other benefits provided by the
Company consistent with operation of law.
15.3.4 Continued participation in any health or insurance plans
maintained by the Company for a period of 36 months. If, by
operation of law, the Executive is prohibited from
participation in a plan, the Company shall pay to the
Executive funds sufficient to maintain equivalent coverage on
an individual, such coverage to terminate when the Executive
is provided with substantially similar coverage by a
subsequent employer; and,
15.3.5 The Executive and his spouse shall retain the travel benefits
noted in Section 10.2.
15.4 If the Executive's employment with the Company is terminated pursuant
to Section 13.4, the Executive or his beneficiary or estate shall
receive the benefits noted in Section 12 of this Agreement.
15.5 If the Executive terminates this Agreement pursuant to Section 14, he
shall be entitled to the same benefits as if the Company had
terminated him without cause pursuant to Section 13.3.
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15.6 If the Executive is terminated by the Company other than for Cause or
if the Executive terminates employment for death, disability or
pursuant to Section 14, he will receive a pro-rated bonus for the year
of termination based upon the number of days worked in the year of
termination.
15.7 If the Executive terminates this Agreement other than pursuant to
Section 14, he shall be entitled to:
15.7.1 Accrued but unpaid amounts with regard to salary and benefits;
15.7.2 Any previously vested Stock Options;
15.7.3 Such other benefits and amounts as the Company shall determine
appropriate.
15.7.4 No bonus shall be payable pursuant to Section 5 if the
Executive terminates employment prior to the end of a year
other than pursuant to Section 14.
16. CHANGE OF CONTROL
In the event of a Change of Control as defined in this Agreement, the
termination benefits payable pursuant to this Section shall supersede any
other termination benefits and shall be in lieu of and not in addition to
the termination benefits set forth elsewhere in this Agreement.
16.1 Any outstanding stock options shall vest 100% at the time of the
Change of Control.
16.2 The Executive shall have twenty-four (24) months following the Change
of Control to elect to terminate this Agreement.
16.3 If the Company elects to terminate this Agreement within six months
before or twenty four months following a Change of Control for any
reason other than death, Disability or Cause, the Executive shall
receive termination benefits pursuant to this Section 16.
16.4 If the Agreement is terminated pursuant to this Section 16, Executive
shall be entitled to:
16.4.1 Immediate vesting of any stock options not previously vested;
16.4.2 Continued participation in any health or insurance plans
maintained by the Company for a period of 36 months. If, by
operation of law, the Executive is prohibited from
participation in a plan, the
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Company shall pay to the Executive funds sufficient to
maintain equivalent coverage on an individual basis;
16.4.3 The Executive and his spouse shall retain the travel benefits
noted in Section 10.2; and,
16.4.4 A lump sum payment of one million dollars ($1,000,000) in lieu
of any other termination benefits under this Agreement other
than those specified in this Section 16.
17. INDEMNIFICATION
In the event Executive is made, or threatened to be made a party to any
legal action or proceeding, whether civil or criminal or administrative, by
reason of the fact that Executive is, or was, a director or officer of the
Company or serves or served any other Affiliate in any capacity at the
request of the Company, Executive shall be indemnified by the Company, and
the Company shall pay Executive's related expenses when and as incurred, to
the full extent permitted by law, if he acted in good faith and in a manner
he believed to be in or not opposed to the best interests of the Company
and, in the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful.
18. REMEDIES
Company recognizes that because of Executive's special talents and
opportunities, in the event of termination by the Company, other than for
Cause, Company acknowledges and agrees that the provisions of this
Agreement, regarding further payment of base salary, incentives, and
vesting and exercisability of options and other benefits constitute fair
and reasonable provisions for the consequences of such termination, do not
constitute a penalty, and such payments and benefits shall not be limited
or reduced by amounts the Executive might earn or be able to earn from any
other employment or ventures during the remaining period of the Agreement.
Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise.
19. BINDING AGREEMENT
This Agreement shall be binding upon and inure to the benefit of the
Executive, his heirs, distributees and assigns, and the Company, its
successors and assigns. Executive may not, without the expressed written
consent of the Company, assign or pledge any rights or obligations
hereunder to any person, firm or corporation. If the Executive should die
while any amounts would still be payable to the Executive had he continued
to live, all such amounts, unless otherwise provided herein, shall be paid
in accordance with this Agreement to the Executive's estate, or to his
Beneficiaries, if such beneficiary designation is so provided.
12
<PAGE>
20. NO ATTACHMENT
Except as required by law or with the consent of the Company or by laws of
descent and distribution or permitted designation, no right to receive
payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge or
hypothecation or to execution, attachment, levy or similar process or
assignment by operation of law, and any attempt, voluntary or involuntary,
to effect any such action shall be null, void and of no effect.
21. ASSIGNMENT
Company shall require any successor (whether direct or indirect, by
operation of law, by purchase, merger, consolidation, or otherwise to all
or substantially all of the business and/or assets of the Company) to
expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it if no
such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall, at Executive's election, be deemed a material breach of this
Agreement. In such event, the Executive shall be entitled to a compensation
equal to the greater of the benefit payable pursuant to Section 15.5 or
Section 16.4. As used in this Agreement, "Company" shall mean the Company
as defined above and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law or otherwise.
22. WAIVER
No term or condition of this Agreement shall be deemed to have been waived,
nor shall there be any estoppel against the enforcement of any provision of
this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing
waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any
act other than that specifically waived.
23. NOTICE
For purposes of this Agreement, notices and all other communications
provided for in this Agreement shall be in writing and shall be deemed to
have been duly given when personally delivered and acknowledged or
delivered by United States registered mail, return receipt requested,
addressed, in the case of the Executive to the Executive at: Joseph B.
Leonard at his then current primary residence, as the Company may, from
time to time be notified, with a copy to Michael Gutt, Gutt Financial
Management, 3414 Peachtree Rd., N.E., 103 Monarch Plaza, Atlanta,
13
<PAGE>
GA 30326, and in the case of the Company, to the attention to the Corporate
Secretary of the Company at the principal executive offices of the Company,
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of a change of address
shall be effective only upon receipt.
24. GOVERNING LAW
This Agreement shall be governed and construed in accordance with the laws
of the State of Nevada.
25. COSTS
The Company shall pay up to $7,000 of the expenses of the Executive,
including attorneys' and consultant fees for negotiation and preparation of
the Agreement, in addition to the Company's own expenses in connection
there with.
26. SEVERABILITY
If, for any reason, any provision of this Agreement is held invalid, such
invalidity shall not affect any other provision of this Agreement not held
so invalid, and each such other provision shall to the full extent
consistent with the law continue in full force and effect. If any provision
of this Agreement shall be held invalid in part, such invalidity shall in
no way affect the rest of such provision not held so invalid, and the rest
of such provision, together with all other provisions of this Agreement
shall to the full extent consistent with the law continue in full force and
effect.
27. ARBITRATION
27.1 Any disagreement, dispute, controversy or claim arising out of or in
any way related to this Agreement or the subject matter hereof or the
interpretation hereof or any arrangements relating hereto or
contemplated herein or the breach, termination or invalidity hereof or
the provision or failure to provide for any other benefits on a Change
of Control pursuant to any other bonus or compensation plans, stock
option plan, stock ownership plan, stock purchase plan, life insurance
plan or similar plan or agreement with the Company and or an Affiliate
as "change of control" may be defined in such other agreements or
plans, which benefits constitute "Parachute Payments" shall be settled
exclusively and finally by arbitration. If this Section 27 conflicts
with any provision in any such plan or agreement, this provision
requiring arbitration shall control.
27.2 Arbitration shall be conducted in accordance with the Commercial
Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association. The arbitration tribunal shall consist of
three arbitrators, one
14
<PAGE>
chosen by the Company, one chosen by the Executive and one chosen by
the preceding two persons.
27.3 The parties shall equally divide all costs of arbitration but the
parties shall bear their own expenses for attorney's fees and witness
costs, unless such fees and costs are assessed by the Arbitrator as
part of his or her final judgment.
27.4 The arbitration shall be conducted in Orlando, FL or in any other city
in the United States of America as the parties to the dispute may
designate by mutual written consent.
27.5 Any decision or award of the arbitration tribunal shall be final and
binding upon the parties to the arbitration proceeding. The parties
hereto hereby waive, to the extent permitted by law, any rights to
appeal or review such award by any court or tribunal. The parties
hereto agree that the arbitration award may be enforced against the
parties to the arbitration proceeding or their assets wherever the
award may be entered in any court having jurisdiction thereof.
27.6 The parties stipulate that discovery may be held in any such
arbitration proceeding as provided in the Florida Code of Civil
Procedure, as may be amended from time to time.
28. ENTIRE AGREEMENT
As of the Effective Date this Agreement contains the full understanding of
the parties hereto. This Agreement may not be changed orally, but only by
an agreement, in writing, signed by the party against whom enforcement of
any waiver, change, modification, extension or discharge is sought.
EXECUTIVE COMPANY
AIR TRAN HOLDINGS, INC.
/s/ Joseph B. Leonard By: /s/ [SIGNATURE ILLEGIBLE]^^
------------------------- ---------------------------
Joseph B. Leonard Title DIRECTOR
15
<PAGE>
EXHIBIT 10.27
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT ("Agreement") dated as of the 25th day of January, 1999
is made and entered into on the terms and conditions hereinafter set forth, by
and among AIRTRAN HOLDINGS, INC., a Nevada corporation ("Debtor" or the
"Company"), and TIMOTHY P. FLYNN, MAURICE J. GALLAGHER, JR., LEWIS H. JORDAN and
ROBERT L. PRIDDY (referred to herein individually as a "Lender" or collectively
as the "Lenders").
RECITALS
--------
WHEREAS, Debtor is the defendant in a pending class action lawsuit in the
United States District Court for the Northern District of Georgia, Atlanta
Division entitled In re: ValuJet, Inc. Securities Litigation (the "Action") in
------------------------------------------
which each Lender has been individually named as a defendant; and
WHEREAS, Debtor and the Lenders are desirous of settling the Action on the
basis of a payment of $2.5 million in cash and $2.5 million in stock of Debtor;
and
WHEREAS, Debtor has heretofore agreed to indemnify the Lenders and hold
them harmless from any cost or expense attributable to the Action; and
WHEREAS, the Lenders, and each of them, have at all times denied, and
continue to deny, that they have committed any wrongful act or violation of law
or duty of any nature; and
WHEREAS, the Debtor is seeking, and the Lenders have agreed to provide, a
loan commitment to Debtor to encourage Debtor to consummate the proposed
settlement of the Action; and
WHEREAS, upon request of Debtor as set forth herein, the Lenders shall make
available to Debtor a term loan in a principal amount of up to One Million and
no/100ths Dollars ($1,000,000.00) (the "Loan") on the terms and conditions
hereinafter set forth, and for the purpose hereinafter set forth; and
WHEREAS, in order to induce the Lenders to make the Loan to Debtor, Debtor
has made certain representations to Lenders; and
WHEREAS, the Lenders, in reliance upon the representations and inducements
of Debtor, have agreed to make the Loan upon the terms and conditions
hereinafter set forth.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the agreement of Lenders to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Debtor and Lenders hereby agree as follows:
<PAGE>
SECTION 1
THE LOAN
1.1 Funding of Loan. At any time prior to April 15, 1999, Debtor may
---------------
request Lenders to advance to Debtor the principal amount of the Loan by written
notice to Lenders accompanied by (i) evidence reasonably satisfactory to the
Lenders that the Action has been settled and that all Lenders have been released
from liability in connection therewith, and (ii) an executed promissory note as
set forth in Section 1.2 hereof. Within ten (10) days after receipt of such
request accompanied by such evidence and promissory note, the Lenders shall
advance the amount requested by Debtor, up to but not in excess of the Loan
amount. The Loan shall be funded in the following proportions: Flynn - 25%,
Gallagher - 25%, Jordan - 25% and Priddy - 25%. No Lender shall be liable for
the default by any other Lender in funding his respective portion of the Loan.
1.2 Evidence of Loan Indebtedness and Repayment. Subject to the terms and
-------------------------------------------
conditions hereof, the Lenders shall make the Loan to Debtor as herein provided.
The Loan from each Lender shall be evidenced by a Promissory Note in the
original principal amount of the amount of the Loan funded by such Lender which
promissory note shall be substantially in the form of Exhibit A attached hereto
and incorporated herein by this reference (the "Note" or the "Promissory Note").
The Loan shall be payable in accordance with the terms of the Note. Unless a
Note has previously been paid in full, such Note shall be convertible, at the
option of each Lender, into shares of the common stock, $.001 par value per
share (the "Common Stock") of Debtor as provided in the Note. The Note, this
Agreement and any other instruments and documents executed by Debtor now or
hereafter evidencing or in any way related to the indebtedness evidenced by the
Note are herein individually referred to as a "Loan Document" and collectively
referred to as the "Loan Documents."
1.3 Termination of Loan Commitment. To the extent the Debtor has not
------------------------------
requested Lenders to advance the full amount of the Loan by April 15, 1999, the
commitment by the Lenders to fund the balance of the Loan shall expire as of
April 15, 1999.
1.4 Partial Prepayment. Debtor may prepay the indebtedness evidenced by
------------------
the Note in whole or in part at any time and from time to time without premium
or penalty.
1.5 Purpose of Loan and Use of Proceeds. The purpose of the Loan shall be
-----------------------------------
to provide working capital to Debtor.
1.6 Further Documents. Debtor agrees, on request of Lenders, at any time
-----------------
and from time to time to execute or join with Lenders in the execution and
filing of additional documents in the form and content reasonably required by
Lenders to effectuate the terms of this Agreement.
-2-
<PAGE>
SECTION 2
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Agreement, the Debtor represents
and warrants to the Lenders, as of the date hereof, as follows:
2.1 Organization and Standing; Certificate and By-Laws. The Company is a
--------------------------------------------------
corporation duly organized and existing under, and by virtue of, the laws of the
State of Nevada and is in good standing under such laws. The Company has the
requisite corporate power and authority to own and operate its properties and
assets, and to carry on its business as presently conducted.
2.2 Corporate Power. The Company has all requisite legal and corporate
---------------
power and authority to execute and deliver the Loan Documents and to carry out
and perform its obligations under the terms of this Agreement.
2.3 Authorization and Enforceability. All corporate action on the part of
--------------------------------
the Company, its directors and shareholders necessary for the authorization,
execution, delivery and performance of the Loan Documents by the Company, and
the performance of all of the Company's obligations hereunder have been taken.
This Agreement, as well as each of the other Loan Documents, when executed and
delivered by the Company, shall constitute a valid and binding obligation of the
Company, enforceable in accordance with its terms.
2.4 Consents and Approvals. As of the date hereof, the Company has
----------------------
obtained, in form and substance acceptable to Lenders, the waiver, consent and
approval (i) of all persons or entities whose waiver, consent or approval is
required and material for the Company to consummate its obligations with respect
to the transactions contemplated by this Agreement; (ii) of any person or entity
which is required by any material agreement, lease, instrument, arrangement,
judgment, decree, order or license to which the Company is a party or subject as
of the date hereof, and which would prohibit such transactions, or require the
waiver, consent or approval of any person to such transactions; or (iii) under
any material agreement, lease, instrument, arrangement, judgment, decree, order
or license under which, without such waiver, consent or approval, such
transactions would constitute an occurrence of a breach or a default, result in
the acceleration of any material obligation thereunder, or give rise to a right
of any party thereto to terminate its obligations thereunder.
2.5 Bankruptcy. Neither the Company nor any entities affiliated, related
----------
or controlled by the Company, has filed a petition or request for reorganization
or protection or relief under the bankruptcy laws of the United States or any
state or territory thereof; made any general assignment for the benefit of
creditors; or consented to the appointment of a receiver or trustee, including a
custodian under the United States bankruptcy laws, whether such receiver or
trustee is appointed in a voluntary or involuntary proceeding which has not been
discharged prior to the date hereof.
2.6 Stock. Unless a Note is earlier paid in full, the shares of Common
-----
Stock that may be issued upon conversion of such Note have been duly and validly
reserved and, when issued in
-3-
<PAGE>
compliance with the provisions of such Note, will be validly issued, fully paid
and nonassessable, and will be free of any liens, claims, charges, encumbrances,
voting proxies or voting agreements, other than those agreed to by the Lender
holding such Note and those imposed by federal and applicable state securities
laws.
SECTION 3
REGISTRATION OF COMMON STOCK
3.1 Registration of Shares. In the event any Common Stock is issued to
----------------------
any Lender upon conversion of a Note, the Company will promptly:
(a) prepare and within 45 days after the date of such issuance file
with the Securities and Exchange Commission a registration statement with
respect to such Common Stock and thereafter use its best efforts to cause such
registration statement to become effective (provided that before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish to Lenders copies of all such documents proposed to be
filed):
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective for a period of either (i) not less than four (4) months, or
(ii) such shorter period as will terminate when all of the Common Stock covered
by such registration statement has been disposed of in accordance with the
intended methods of disposition by the seller thereof set forth in such
registration statement (but in any event not before the expiration of any longer
period required under the Securities Act), and the Company will comply with the
provisions of the Securities Act of 1933, as amended (the "Securities Act") with
respect to the disposition of all Common Stock covered by such registration
statement so long as such registration statement remains in effect or until such
earlier time as all of such Common Stock has been disposed of in accordance with
the intended methods of disposition by the seller thereof set forth in such
registration statement;
(c) furnish to Lenders such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as the Lenders may reasonably request in order to facilitate the
disposition of the Common Stock;
(d) notify the Lenders at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of any
event (a "Changing Event") as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading in light of the
circumstances under which they were made, and, at the request of any Lender, the
Company will as soon as possible prepare and furnish to such seller (a
"Correction Event") a reasonable number of copies of a supplement or amendment
to such prospectus so that, as thereafter delivered to the
-4-
<PAGE>
purchasers of such Common Stock, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading in light of the circumstances under which they
were made;
(e) otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission; and
(f) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any securities included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order.
As a condition to the Company's obligations under this Item, each Lender
receiving Common Stock upon conversion of a Note shall furnish the Company with
such information regarding such seller and the distribution of the Common Stock
as the Company may from time to time reasonably request in writing. Each Lender
agrees that, upon receipt of any notice from the Company of the happening of any
Changing Event as described above, such Lender will forthwith discontinue the
disposition of the Common Stock pursuant to the registration statement until
such Lender's receipt of the copies of a supplemented or amended prospectus as
contemplated by paragraph (d) above.
After the registration statement covering the Common Stock has been
declared effective by the Securities and Exchange Commission and so long as said
registration statement remains effective, the Company shall cause its transfer
agent to effect the transfer of the Lender's Common Stock to purchasers thereof
in the public market in accordance with the request of such Lender or its agent
provided that such Lender provides to the Company or its counsel evidence that
such Common Stock has been sold and that the prospectus constituting a part of
such registration statement shall have been delivered to such purchasers.
3.2 Registration Expenses. All actual expenses incident to the Company's
---------------------
performance of or compliance with Section 3.1 of this Agreement, including,
without limitation, all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws, printing expenses, messenger and
delivery expenses, and fees and disbursements of counsel for the Company and all
independent certified public accountants and other persons retained by the
Company in connection therewith (all such expenses being herein called
"Registration Expenses") will be borne by the Company. The Company will also
pay its internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit or quarterly review and the expense of any
liability insurance.
-5-
<PAGE>
3.3 Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless, to the extent
permitted by law, the Lenders against any losses, claims, damages, liabilities,
joint or several, to which the Lenders may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon (i) any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto, or (ii) any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the Company will
reimburse the Lenders for any legal or any other expenses incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement, or omission or alleged
omission, made in such registration statement, any such prospectus or
preliminary prospectus or any amendment or supplement thereto, or in any
application, in reliance upon, and in conformity with, written information
prepared and furnished to the Company by a Lender expressly for use therein or
by a Lender's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished the Lenders with sufficient number of copies of the same.
(b) The Lenders will furnish to the Company in writing such
information and affidavits as the Company reasonably requests for use in
connection with any such registration statement or prospectus and, to the extent
permitted by law, the Lenders will indemnify and hold harmless the Company, its
directors and officers and each other person who controls the Company (within
the meaning of the Securities Act) against any losses, claims, damages,
liabilities, joint or several, to which the Company or any such director or
officer or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) or expenses
arise out of or are based upon (i) the purchase or sale of Common Stock during
any period beginning upon a Changing Event (as defined in Section 3.2) and
ending on a Correction Event (as defined in Section 3.2), provided the Lenders
received proper written notice of such Changing Event pursuant to such
paragraph, (ii) any untrue or alleged untrue statement of material fact
contained in the registration statement, prospectus or preliminary prospectus or
any amendment thereof or supplement thereto or in any application, or (iii) any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, but, with respect to
clauses (ii) and (iii) above, only to the extent that such untrue statement or
omission is made in such registration statement, any such prospectus or
preliminary prospectus or any amendment or supplement thereto, or in any
application, in reliance upon and in conformity with written information
prepared and furnished to the Company by the Lenders expressly for use therein,
and the Lenders will reimburse the Company and each such director, officer and
controlling person for any legal or any other expenses incurred by them in
connection with investigating or defending any such loss, claim, liability,
action or proceeding.
-6-
<PAGE>
(c) Any person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any person's right to indemnification hereunder to the extent
such failure has not materially prejudiced the indemnifying party) and (ii)
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. Such indemnifying party shall
not, however, enter into any settlement with a party without obtaining an
unconditional release of each indemnified party by such party with respect to
any and all claims against each indemnified party. If such defense is assumed,
the indemnifying party will not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim.
SECTION 4
DEFAULT
The occurrence of one or more of the following events shall, at the option
of Lenders, constitute an "Event of Default" hereunder:
(a) if Debtor defaults in the payment of the Note or any installment
thereof or interest thereon or any other payment due Lenders within five (5)
days after its due date;
(b) if any warranty or representation of Company contained herein shall be
materially false or misleading when made;
(c) if Company shall (i) cease to do business as a going concern, (ii)
generally fail to meet its obligations as they mature, (iii) file a petition or
request for reorganization or protection or relief under the bankruptcy laws of
the United States or any state or territory thereof, (iv) make any general
assignment for the benefit of creditors, (v) consent to the appointment of a
receiver or trustee, including a custodian under the United States bankruptcy
laws, whether such receiver or trustee is appointed in a voluntary or
involuntary proceeding, or (vi) permit a request or petition for liquidation,
reorganization or other relief under the bankruptcy laws of the United States,
or any state thereof, or any other type of insolvency proceedings, to not be
vacated or dismissed within sixty (60) days of such event under the bankruptcy
laws of the United States or any state or territory thereof, whether such filing
or petition is voluntary or involuntary; or
(d) a default occurs herein or in the Note, any other Loan Document or any
agreement executed pursuant thereto or in connection therewith, or if Company
fails to perform or keep any of the other covenants, agreements or warranties
contained herein or therein and fails to cure same within ten (10) business days
of notice from Lenders to cure, unless a shorter or longer time period is
expressly specified for any particular covenant.
-7-
<PAGE>
Upon the occurrence of any Event of Default as defined above, at Lenders'
option, the entire unpaid principal balance of the Note, together with all
accrued and unpaid interest thereon and all other indebtedness secured hereby
shall immediately become due and payable, without notice or demand, and Lenders
shall have all of the rights and remedies stated in this Agreement or other
documents which now or hereafter evidences the Loan evidenced by the Note. Such
rights and remedies shall be cumulative, and the exercise of any right or remedy
shall not preclude the exercise of any other right or remedy.
SECTION 5
DELIVERIES AT CLOSING
The following deliveries shall be made, for or on behalf of the Company,
contemporaneously with the execution of this Agreement:
(a) all other documents required to be executed and delivered in
connection herewith;
(b) any consents or approvals required pursuant to this Agreement; and
(c) such other documents as the Lenders may reasonably request, in form
and substance reasonably satisfactory to the Lenders' counsel.
SECTION 6
WAIVER OF BREACH
No delay or failure on the part of Lenders to exercise any right or remedy
accruing to Lenders hereunder or under the Note upon any default or breach by
Company of any covenant, condition or provision hereof shall be held to be an
abandonment thereof, and no delay on the part of Lenders in exercising any of
its rights or remedies shall preclude Lenders from the exercise thereof at any
time during the continuance of any default or breach, nor shall any waiver of a
single default or breach be deemed a waiver of any subsequent default or breach.
All waivers under this Agreement must be in writing. Lenders may enforce any
one or more remedies hereunder successively or concurrently, at their option.
-8-
<PAGE>
SECTION 7
APPLICABLE LAW
All acts, agreements, certificates, assignments, transfers and transactions
hereunder, and all rights of the parties hereto, shall be governed as to
validity, enforcement, interpretation, construction, effect and in all other
respects by the laws and decisions of the State of Nevada.
SECTION 8
NOTICES
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given: (i) upon delivery if
delivered by hand or by telecopy (receipt confirmed), or (ii) if mailed, by
United States certified or registered mail, prepaid, and three business days
shall have elapsed after the same shall have been mailed to the parties, or
(iii) on the date following the day sent by a reputable express air courier
service guaranteeing next day delivery, when addressed as follows:
As to Lenders:
-------------
Timothy P. Flynn
Maurice J. Gallagher, Jr.
3291 N. Buffalo Drive
Suite 8
Las Vegas, Nevada 89129
Fax: (702) 256-7209
Lewis H. Jordan
610 Wingspread
Peachtree City, Georgia 30269
Fax: (770) 486-1617
Robert L. Priddy
4938 St. Charles Avenue
New Orleans, Louisiana 70115
Fax: (504) 895-1284
-9-
<PAGE>
As to Debtor:
------------
AirTran Holdings, Inc.
9955 AirTran Boulevard
Orlando, Florida 32827
Attn: Leslie C. Head, Esq.
Fax: (407) 251-5567
With a copy to:
--------------
Robert B. Goldberg, Esq.
Ellis, Funk, Goldberg, Labovitz & Dokson, P.C.
One Securities Centre
Suite 400
3490 Piedmont Road
Atlanta, Georgia 30305
Fax: (404) 233-2188
Any party may change its address for notices by giving the other a notice
of address change no later than ten (10) days in advance of the effective date
of the change of address.
SECTION 9
GENERAL
9.1 This Agreement together with the Note supersedes all prior agreements
and negotiations between Lenders and Company relating hereto.
9.2 No amendment hereto shall be valid unless in a writing duly executed
by Lenders and Debtor.
9.3 This Agreement shall benefit and bind the successors and assigns of
the parties, but Debtor may not assign this Agreement. Lenders may freely
assign their interest in the Note, in whole or in part, at any time. The
section titles herein are for convenience only and do not define, limit or
construe the contents of such sections.
9.4 Simultaneously herewith, the Company will pay all reasonable
documented costs and expenses actually incurred by the Lenders in connection
with the preparation and execution of the Loan Documents. In addition, the
Company will pay all taxes and recording expenses, including all intangible and
stamp taxes, if any, all fees and commissions due to brokers in connection with
this
-10-
<PAGE>
transaction at closing, and all reasonable legal fees of outside counsel for
Lenders. All amounts hereunder shall be due upon demand, and shall be an Event
of Default if not paid within thirty (30) days following the date on which
notice is deemed given by Lenders.
9.5 In the event that Lenders employ legal counsel after default with
respect to any action or proceeding relating to the maintenance, enforcement or
defense of this Agreement, or in the relationship created hereby or any and all
rights of Lenders hereunder, all reasonable, documented attorneys' fees actually
incurred by Lenders arising from such services and any reasonable expenses,
costs and charges relating thereto shall constitute additional obligations of
Company secured hereby, payable on demand.
9.6 If Company fails to perform any obligation under this Agreement,
Lenders may, at their option, perform such obligation or cause it to be
performed by others, and any reasonable cost or expense incurred or funds
advanced by Lenders for such purposes shall be immediately paid by Company to
Lenders on demand. Any such sum shall, at Lenders' option, bear simple interest
after demand at the rate set forth in the Note, or such lesser rate as Lenders
shall designate. All amounts hereunder shall be due upon demand, and shall be
an Event of Default if not paid within thirty (30) days following the date on
which notice is deemed given by Lenders.
[SIGNATURES ON FOLLOWING PAGE]
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
AIRTRAN HOLDINGS,INC.,
Debtor
By:________________________________
Title:_____________________________
(CORPORATE SEAL)
_____________________________(SEAL)
TIMOTHY P. FLYNN, Lender
_____________________________(SEAL)
MAURICE J. GALLAGHER, JR., Lender
_____________________________(SEAL)
LEWIS H. JORDAN, Lender
_____________________________(SEAL)
ROBERT L. PRIDDY, Lender
-12-
<PAGE>
EXHIBIT "A"
PROMISSORY NOTE
$250,000.00 _____________, 1999
FOR VALUE RECEIVED, AirTran Holdings, Inc., a Nevada corporation (the
"Maker") hereby promises to pay to __________________________________ (the
"Payee") having an address at _________________________________________ (or at
such other location as the Payee may from time to time designate by notice in
writing to the Maker), the principal amount of Two Hundred Fifty Thousand
Dollars ($250,000.00) or so much thereof shall have been advanced by Payee to
Maker, together with interest thereon from the date hereof at the rate of ten
percent (10%) per annum until paid as follows:
The outstanding principal and all unpaid accrued interest shall be due and
payable on August 15, 1999.
Payment hereunder shall be in such coin or currency of the United States of
America as at the time shall be legal tender for the payment of public and
private debts.
This Note may be declared immediately due and payable by the Payee in the
event of (i) the failure to pay when due any payment required under this Note,
or (ii) an occurrence of an event of default under the Loan Agreement between
Maker, Payee and certain other persons of even date herewith. All rights or
remedies of the Payee provided herein and in the Loan Agreement shall be
cumulative, and the exercise of any right or remedy shall not preclude the
exercise of any other right or remedy. From and after maturity of any
installment due hereunder, whether by acceleration or otherwise, the amount not
paid when due hereunder shall, at Maker's option, bear interest at the rate of
ten percent (10%) per annum.
All payments required or permitted to be made under this Note or the Loan
Agreement shall be made to the address specified in the first paragraph of this
Note (or such other address as the Payee may from time to time designate by
notice in writing to the Maker). Maker shall have fully satisfied its
obligation with respect to any such payment by making payment in such manner.
Maker shall not be responsible or incur any liability (including, without
limitation, by way of any indemnification set forth in the Loan Documents) for
any allocation or misallocation of such payment, or any portion thereof, as
between any holders of this Note.
This Note may be prepaid in whole or in part at any time without penalty or
premium. All payments hereunder received shall be applied first to interest to
the extent then accrued and then to principal.
Maker agrees to pay the holder hereof an amount equal to actual attorneys'
fees for the services of counsel employed to collect this Note, whether or not
suit be brought, and whether incurred in connection with collection, trial,
appeal or otherwise, and to indemnify and hold the holder harmless against
liability for the payment of state intangible, documentary and recording taxes
and other taxes (including interest and penalties, if any) which may be
determined to be payable with respect to this transaction.
13
<PAGE>
In no event shall the amount of interest due or payable hereunder exceed
the maximum rate of interest allowed by applicable law, and in the event any
such payment is inadvertently paid by the Maker or inadvertently received by the
holder, then such excess sum shall be credited as a payment of principal, unless
the Maker shall notify the holder, in writing, that the Maker elects to have
such excess sum returned to it forthwith. It is the express intent hereof that
the Maker not pay and the holder not receive, directly or indirectly, in any
manner whatsoever, interest in excess of that which may be lawfully paid by the
Maker under applicable law.
The remedies of the holder as provided herein and in any other documents
governing or securing repayment hereof shall be cumulative and concurrent and
may be pursued singly, successively or together at the sole discretion of the
holder, and may be exercised as often as occasion therefor shall arise.
No act of omission or commission of the holder, including specifically any
failure to exercise any right, remedy or recourse, shall be effective unless set
forth in a written document executed by the holder, and then only to the extent
specifically recited therein. A waiver or release with reference to one event
shall not be construed as continuing, as a bar to, or as a waiver or release of
any subsequent right, remedy or recourse as to any subsequent event.
The Maker hereby waives demand, presentment of payment, notice of
nonpayment, protest, notice of protest and all other notice, filing of suit and
diligence in collecting this Note, or in enforcing any of its rights under any
guaranties securing the repayment hereof.
Time is of the essence of this Note.
This Note shall bind the Maker and its successors and assigns, and the
benefits hereof shall inure to the Payee and its successors and assigns, and any
holder hereof.
This Note shall be construed and enforced in accordance with, and governed
by, the laws of the State of Nevada, without regard to its conflict of laws
principles. No delay on the part of the holder hereof in enforcing any rights
with respect hereto shall operate as a waiver of such rights.
This Note is issued subject to the following additional terms and
conditions:
1. Optional Conversion.
-------------------
(a) If the Maker fails to pay the full amount of principal and accrued
interest under this Note by the due date thereof, then until such time as this
Note has been paid in full, Payee shall have the right at his option to convert,
subject to the terms and provisions hereof, all or a portion of the outstanding
principal and accrued interest payable under this Note into shares of Maker's
Common Stock at the conversion price hereinafter provided.
(b) To convert the balance of this Note, in whole or in part as
provided herein at Payee's election, Payee shall surrender this Note to Maker
prior to such time as this Note has been paid in full, accompanied by written
notice (the "Conversion Notice") to Maker in form reasonably satisfactory to
Maker. The Conversion Notice shall indicate the Payee's intention to convert,
stating
14
<PAGE>
the portion of the Note that is to be converted and the name and address of each
person in whose name the shares of stock issuable upon such conversion are to be
registered. In such event, this Note and the Conversion Notice shall be
delivered to Maker during usual business hours at the Maker's principal
executive office. Upon receipt of the shares of Common Stock to be issued upon
such conversion, the Payee shall return this Note marked "canceled" to Maker.
(c) As promptly as practical after the surrender and giving of notice
to convert as herein provided, Maker shall deliver or cause to be delivered at
its office or agency maintained for that purpose to or upon written order of
Payee certificates representing the number of fully paid and nonassessable
shares of Common Stock of Maker into which said Note is converted (which shares
shall be free and clear of all liens) and, in the event of partial conversion, a
new Note in an aggregate principal amount equal to the unconverted principal
portion of said Note, dated as of the date of the Note and in all other respects
identical to the Note converted.
(d) The conversion price for each share of Common Stock issuable
pursuant to the conversion of the Note shall be the closing price for Maker's
Common Stock as quoted in the Wall Street Journal at the close of business on
the day the Conversion Notice has been delivered to Maker (hereinafter called
the "Conversion Price").
2. Reserved Shares.
---------------
(a) Maker covenants and agrees that it shall reserve and shall at all
times hereafter reserve and keep available out of its authorized but unissued
Common Stock, solely for the purpose of issuing such shares upon the conversion
of this Note, the full number of shares of Common Stock deliverable upon the
conversion hereof. Maker covenants and agrees that the shares of its Common
Stock delivered upon conversion of this Note shall, at the time of delivery of
the certificates for such shares of Common Stock, be validly issued and fully
paid and nonassessable shares of Common Stock. Maker further covenants and
agrees that it will pay when due and payable any and all Federal and state
original issue taxes which may be payable in respect of the issuance of this
Note or any shares of Common Stock upon the conversion of this Note.
(b) Each person in whose name any certificate for shares of Common
Stock is issuable upon the conversion of this Note shall for all purposes be
deemed to have become the holder of record of the Common Stock represented
thereby on, and such certificate shall be dated, the date upon which the Note
was duly surrendered and notice of conversion was given in accordance with the
provisions of this Note; provided, however, that if the date of such surrender
and notice is a date upon which the stock transfer books of Maker are closed,
such person shall be deemed to have become the record holder of such shares on,
and such certificate shall be dated, the next business day on which the stock
transfer books of the Maker are open.
3. Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issuable upon conversion of this Note, but a payment in cash will be made in
respect of any fraction of a share which would otherwise be issuable upon the
surrender of this Note, or portion hereof, for conversion. Such payment shall
be based on the closing price per share of the Common Stock at the time of
conversion of this Note.
15
<PAGE>
IN WITNESS WHEREOF, this Note has been duly executed and delivered by the
undersigned.
AIRTRAN HOLDINGS, INC.
By:_____________________________________
Title:____________________________________
(CORPORATE SEAL)
16
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
AirTran Airlines, Inc.
AirTran Airways, Inc.
ValuJet Investment Corp.
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the; (i) Registration Statement
(Form S-8 No. 33-87658) pertaining to the ValuJet Airlines, Inc. 1993 Incentive
Stock Option Plan and the ValuJet Airlines, Inc. 1994 Stock Option Plan, (ii)
Registration Statement (Form S-8 No. 33-91624) pertaining to the ValuJet
Airlines, Inc. 1995 Employee Stock Purchase Plan, (iii) Registration Statement
(Form S-8 No. 33-98566) pertaining to the Airways Corporation 1995 Stock Option
Plan and 1995 Director Stock Option Plan, (iv) Registration Statement (Form S-3
No. 33-62863) of AirTran Holdings, Inc. and, (v) Registration Statement (Form
S-3 No. 33-83048) of ValuJet Airlines, Inc., of our report dated January 29,
1999, with respect to the consolidated financial statements and schedule of
AirTran Holdings, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1998.
ERNST & YOUNG LLP
Atlanta, Georgia
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,341
<SECURITIES> 0
<RECEIVABLES> 13,409
<ALLOWANCES> 1,325
<INVENTORY> 11,486
<CURRENT-ASSETS> 52,957
<PP&E> 366,035
<DEPRECIATION> 97,626
<TOTAL-ASSETS> 376,406
<CURRENT-LIABILITIES> 83,711
<BONDS> 230,000
0
0
<COMMON> 65
<OTHER-SE> 55,565
<TOTAL-LIABILITY-AND-EQUITY> 376,406
<SALES> 420,901
<TOTAL-REVENUES> 439,307
<CGS> 0
<TOTAL-COSTS> 457,864
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,362
<INCOME-PRETAX> (40,738)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,738)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,738)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
