<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999.
[ ] Transition Report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
______________
Commission File No: 0-26914
AirTran Holdings, Inc.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 58-2189551
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9955 AirTran Boulevard, Orlando, Florida 32827
-------------------------------------------------------
(Address of principal executive offices) (Zip code)
(407) 251-5600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 18, 1999, there were 65,171,876 shares of Common Stock of the
Registrant outstanding.
<PAGE>
AIRTRAN HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - Three months ended September
30, 1999 and 1998; Nine months ended September 30, 1999 and 1998
Consolidated Balance Sheets - September 30, 1999 and December 31,
1998
Consolidated Statements of Cash Flows - Nine months ended September
30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- ------ --------------------
AirTran Holdings, Inc.
Consolidated Statements of Operations
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------------- ------------------------------
1999 1998 1999 1998
---------------- --------------- --------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $ 119,676 $ 110,575 $ 370,636 $ 319,856
Cargo 933 740 2,899 2,302
Other 22,874 3,745 29,836 11,431
--------- --------- --------- ---------
Total operating revenues 143,483 115,060 403,371 333,589
Operating expenses:
Salaries, wages and benefits 30,358 30,666 87,408 81,108
Aircraft fuel 18,888 19,321 50,237 55,112
Maintenance, materials and repairs 20,114 21,920 69,278 52,154
Commissions 9,191 8,221 28,595 26,284
Landing fees and other rents 6,531 7,521 19,542 20,556
Marketing and advertising 3,113 3,575 13,120 12,305
Aircraft rent 1,262 1,921 3,908 5,701
Depreciation 8,790 7,109 24,433 20,337
Other operating 15,666 19,809 46,824 53,443
Loss on disposal of equipment -- 316 -- 361
--------- --------- --------- ---------
Total operating expenses 113,913 120,379 343,345 327,361
--------- --------- --------- ---------
Operating income (loss) 29,570 (5,319) 60,026 6,228
Interest (income) expense:
Interest income (763) (779) (1,688) (2,683)
Interest expense 6,218 6,367 18,120 19,118
--------- --------- --------- ---------
Interest (income) expense, net 5,455 5,588 16,432 16,435
--------- --------- --------- ---------
Income (loss) before income taxes 24,115 (10,907) 43,594 (10,207)
Income tax expense (benefit) 948 (14) 2,414 --
--------- --------- --------- ---------
Net income (loss) $ 23,167 $ (10,893) $ 41,180 $ (10,207)
========= ========= ========= =========
Basic earnings (loss) per share $ 0.36 $ (0.17) $ 0.63 $ (0.16)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.34 $ (0.17) $ 0.60 $ (0.16)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AirTran Holdings, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
- ------ ------------- ------------
Current assets: (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 29,769 $ 10,882
Restricted cash 25,414 13,459
Accounts receivable, less allowance of $1,570 and $1,325 at
September 30, 1999 and December 31, 1998, respectively 45,664 12,084
Inventory, less allowance for obsolescence of $6,827 and $4,259
at September 30, 1999 and December 31, 1998, respectively 11,800 11,486
Prepaid expenses 4,974 5,046
--------- ---------
Total current assets 117,621 52,957
Property and equipment:
Flight equipment 368,445 306,026
Less: Accumulated depreciation (103,874) (87,084)
--------- ---------
264,571 218,942
Purchase deposits for flight equipment 28,201 36,518
Other property and equipment 24,185 23,491
Less: Accumulated depreciation (12,772) (10,542)
--------- ---------
11,413 12,949
--------- ---------
304,185 268,409
Other assets:
Intangibles resulting from business acquisition 40,084 42,727
Debt issuance costs 4,735 6,956
Other assets 4,899 5,357
--------- ---------
Total assets $ 471,524 $ 376,406
========= =========
See accompanying notes to consolidated financial statements. (Continued)
</TABLE>
4
<PAGE>
AirTran Holdings, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities and Stockholders' Equity 1999 1998
- ------------------------------------ --------------- ----------------
<S> <C> <C>
Current liabilities: (Unaudited) (Audited)
Accounts payable $ 10,759 $ 13,252
Accrued liabilities 55,114 44,508
Air traffic liability 34,425 17,022
Current portion of long-term debt 7,079 8,929
--------- ---------
Total current liabilities 107,377 83,711
Long-term debt, less current portion 266,162 237,065
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 65,165,567 and 64,897,810 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 65 65
Additional paid-in capital 148,032 146,857
Accumulated deficit (50,112) (91,292)
--------- ---------
Total stockholders' equity 97,985 55,630
--------- ---------
Total liabilities and stockholders' equity $ 471,524 $ 376,406
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AirTran Holdings, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-----------------------------
1999 1998
------------- --------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income (loss) $ 41,180 $ (10,207)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 26,979 21,174
Provisions for uncollectible accounts 3,501 4,906
Loss from disposal of assets -- 361
Changes in current operating assets and liabilities:
Restricted cash (11,955) (2,232)
Accounts receivable (37,081) (8,220)
Other current assets (3,225) 258
Prepaid expenses and deposits 2,232 (1,535)
Accounts payable and accrued liabilities 9,318 (8,867)
Air traffic liability 17,399 8,761
-------- ---------
Net cash flows provided by operating activities 48,348 4,399
Investing activities:
Purchases of property and equipment (62,788) (56,328)
Refund of aircraft purchase deposits 4,227 --
Proceeds from disposal of equipment 678 155
-------- ---------
Net cash flows used for investing activities (57,883) (56,173)
Financing activities:
Issuance of long-term debt 33,729 6,100
Payments of long-term debt (6,482) (7,713)
Proceeds from sale of common stock 1,175 1,878
-------- ---------
Net cash flows provided by financing activities 28,422 265
-------- ---------
Net increase (decrease) in cash and cash equivalents 18,887 (51,509)
Cash and cash equivalents at beginning of period 10,882 86,025
-------- ---------
Cash and cash equivalents at end of period $ 29,769 $ 34,516
======== =========
Supplemental disclosures of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 8,783 $ 10,360
======== =========
Income taxes refunded $ -- $ 9,686
======== =========
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
A. Basis of Presentation
In the opinion of management, the accompanying unaudited, consolidated interim
financial statements contain all adjustments, which are of a normal recurring
nature, necessary to present fairly the Company's financial position as of
September 30, 1999 and December 31, 1998, the results of operations for the
three and nine month periods ended September 30, 1999 and 1998, and cash flows
for the nine month periods ended September 30, 1999 and 1998. Certain
information and footnote disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission for Form 10-Q. It is suggested that these
unaudited interim financial statements are read in conjunction with the audited
financial statements and the notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 1998. The results of operations for the
three and nine month periods ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full fiscal year.
B. Reclassifications
Operating expense amounts in the 1998 financial statements have been
reclassified to conform to the current presentation. This presentation complies
with current industry standards.
C. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 23,167 $ (10,893) $ 41,180 $(10,207)
======== ========= ======== ========
Denominator:
Basic earnings per share - weighted
average shares 65,123 64,688 64,998 64,550
Effect of dilutive stock options 4,016 -- 3,479 --
-------- --------- -------- --------
Diluted earnings per share - weighted
average shares and assumed conversions 69,139 64,688 68,477 64,550
======== ========= ======== ========
Basic earnings (loss) per share $ 0.36 $ (0.17) $ 0.63 $ (0.16)
======== ========= ======== ========
Diluted earnings (loss) per share $ 0.34 $ (0.17) $ 0.60 $ (0.16)
======== ========= ======== ========
</TABLE>
7
<PAGE>
D. Maintenance Accruals
At December 31, 1997, the Company had accrued the estimated costs to reactivate
certain aircraft. During the quarter ended June 30, 1998, the reactivation of
these aircraft was completed and the costs associated therewith were finalized.
The remaining maintenance accrual was therefore revised based on this additional
information, and $3.0 million was reversed into income, increasing income for
the nine months ended September 30, 1998, by approximately $3.0 million or $0.05
per share on a diluted basis.
E. Fuel Price Risk Management
The Company has entered into two fuel swap contracts to protect against
increases in jet fuel prices. Under the fuel swap agreements, AirTran receives
or makes payments based on the difference between a fixed price and a variable
price for certain fuel commodities. The change in market value of such
agreements has a high correlation to the price changes of the fuel being hedged.
Gains or losses on the fuel hedging agreements are recognized as a component of
fuel expense when the underlying fuel being hedged is used. Gains and losses on
the fuel hedging agreements would be recognized immediately should the changes
in the market value of the agreements cease to have a high correlation to the
price changes of the fuel being hedged. At September 30, 1999, the Company had
a fuel hedging agreement with a broker-dealer on approximately 34.2 million
gallons of fuel products, which represents approximately 80% of its expected
fuel needs for the remaining three months of 1999. The Company also had a fuel
hedging agreement with a broker-dealer on approximately 7.2 million gallons of
fuel products, which represents 11% of its expected fuel needs for the first six
months of 2000. The fair value of the Company's fuel hedging agreements at
September 30, 1999, representing the amount the Company would receive upon
termination of the agreements, totaled $7.8 million. A default by the broker-
dealer to the swap agreements would expose the Company to potential fuel price
risk on the remaining fuel purchases in that the Company would be required to
purchase fuel at the current fuel price rather than at the swap agreement
exchange rate.
F. Income Taxes
The Company's effective tax rate was 3.9% for the third quarter of 1999 and 5.5%
for the nine months ended September 30, 1999. The 1999 rates result from the
expected utilization of a portion of the Company's $141 million net operating
loss ("NOL") carryforwards offset in part by the application of the tax benefit
related to the realization of a portion of the Airways NOL carryforwards to
goodwill. The Company has not recognized any benefit from the use beyond 1999
of NOL carryforwards because management's evaluation of all the available
evidence in assessing the realizability of 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.
G. Sabretech - Other Matters
On September 23, 1999, the Company settled its lawsuit against a third party
maintenance provider and its parent. The net proceeds from the settlement are
included in other revenue in the three
8
<PAGE>
months ended September 30, 1999 consolidated statement of operations.
H. Subsequent Events
During the third quarter of 1999, the Company incurred $33.7 million of short-
term debt in connection with the purchase of new aircraft. Such debt was due on
December 23, 1999. With the issuance of $178.8 million of 10.63% enhanced
equipment trust certificates (EETC's) on November 3, 1999, due in installments
from 2000 to 2017, the short-term debt was paid off. Because the Company has
refinanced the short-term debt on a long-term basis, such debt is classified as
a long-term liability in the September 30, 1999 balance sheet
On November 5, 1999, the Company announced its decision to accelerate the
retirement of its DC9-30 fleet to accommodate the introduction of its Boeing 717
fleet. The accelerated retirement allows for a more moderate capacity growth
and will result in a non-cash pretax fleet disposition charge between $140.0 and
$150.0 million during the fourth quarter of 1999.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
Results of Operations
For the three months and nine months ended September 30, 1999 and 1998
The following is a table of selected operational statistics and financial data
for the three months and nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenue passengers 1,598,238 1,416,865 4,861,099 4,045,695
Revenue passenger miles (1) (000) 864,947 842,698 2,618,141 2,480,993
Available seat miles (2) (000) 1,350,183 1,407,496 4,086,444 4,105,048
Passenger load factor (3) 64.1 % 59.9 % 64.1 % 60.4 %
Break-even load factor (4) 61.7 % 65.8 % 59.9 % 62.4 %
Average yield per revenue passenger mile (5) 13.84(cent) 13.12(cent) 14.16(cent) 12.89(cent)
Passenger revenue per available seat mile (6) 8.86(cent) 7.86(cent) 9.07(cent) 7.79(cent)
Operating cost per available seat mile (7) 8.44(cent) 8.55(cent) 8.40(cent) 7.97(cent)
Average stage length (miles) 529 534 529 540
Average cost of aircraft fuel per gallon 54.92(cent) 55.46(cent) 48.97(cent) 56.23(cent)
Average daily utilization (hours) (8) 9:18 8:42 9:06 8:48
Number of aircraft in fleet at end of period 48 51 48 51
</TABLE>
(1) The number of scheduled revenue miles flown by passengers.
(2) The number of seats available for passengers multiplied by the number of
scheduled miles each seat is flown.
(3) The percentage of aircraft seating capacity that is utilized is calculated
by dividing revenue passenger miles by available seat miles.
(4) The percentage of seats that must be occupied by revenue passengers in
order for the Company to break even on a pre-tax income basis.
(5) The average amount one passenger pays to fly one mile.
(6) Passenger revenue divided by available seat miles.
(7) Operating expenses divided by available seat miles.
(8) The average number of hours per day that an aircraft flown in revenue
service is operated.
10
<PAGE>
Operating expenses per ASM:
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, % ended September 30, %
------------------------- -------------------------
1999 1998 Change 1999 1998 Change
------------ ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Salaries, wages and benefits 2.25(cent) 2.18(cent) 3.2% 2.14(cent) 1.98(cent) 8.1%
Aircraft fuel 1.40 1.37 2.2% 1.23 1.34 -8.2%
Maintenance, materials
and repairs 1.49 1.56 -4.5% 1.70 1.27 33.9%
Commissions 0.68 0.58 17.2% 0.70 0.64 9.4%
Landing fees and other rents 0.48 0.53 -9.4% 0.48 0.50 -4.0%
Marketing and advertising 0.23 0.25 -8.0% 0.32 0.29 10.3%
Aircraft rent 0.10 0.14 -28.6% 0.09 0.14 -35.7%
Depreciation 0.65 0.51 27.5% 0.60 0.50 20.0%
Other operating 1.16 1.41 -17.7% 1.14 1.30 -12.3%
Loss on disposal of equipment -- 0.02 -- -- 0.01 --
---- ---- ---- ----
Total operating expenses 8.44(cent) 8.55(cent) -1.4% 8.40(cent) 7.97(cent) 5.4%
---- ---- ---- ----
</TABLE>
Quarter ended September 30, 1999 compared to the quarter ended September 30,
1998
Summary
AirTran recorded net income of $23.2 million for the three months ended
September 30, 1999 compared to a net loss of $10.9 million for the three months
ended September 30, 1998. AirTran's operating income increased $34.9 million
for the three months ended September 30, 1999, from operating loss of $5.3
million in 1998 to operating income of $29.6 for the three months ended
September 30, 1999. Exclusive of the effect of the settlement of the SabreTech
suit, AirTran recorded net income of $ 3.9 million or 6 cents per diluted share
during the third quarter of 1999.
Operating Revenues
Passenger revenues increased by 8.2% or $9.1 million in the third quarter
compared to third quarter 1998. The growth in AirTran's passenger revenue stems
from increasing traffic demand in both the business and leisure market segments.
Business class loads were up significantly versus last year. Adjustments in
pricing and inventory strategies also led to gains in leisure traffic.
Other revenue increased 510.8%, or $19.1 million, in the third quarter compared
to last year due to the net proceeds from the settlement of the suit filed by
AirTran against SabreTech and its parent
11
<PAGE>
corporation, Sabreliner Corporation.
Yield (the average amount a passenger pays to fly one mile) increased by 5.5%,
over the third quarter 1998, from 13.1 cents to 13.8 cents. AirTran's traffic,
or revenue passenger miles (RPMs), increased 2.6% or 22.2 million despite a 4.1%
decline in capacity, or available seat mile (ASM). Third quarter 1999 demand
increased, resulting in an increase in load factor to 64.1%. However, the
Company continues to experience aggressive competition that could negatively
impact future loads and yields.
Operating Expenses
Operating expenses decreased $6.5 million or 5.4% compared to the third quarter
of 1998. AirTran's operating cost per ASM decreased 1.3% to 8.44 cents from 8.55
cents a year ago. Salaries, wages and benefits remained relatively flat from
third quarter 1998 to third quarter 1999. Aircraft fuel expense decreased year
over year by $0.4 million or 2.2% due to a 1.0% decrease in the average fuel
cost per gallon (including taxes and into-plane fees) mixed with a 1.3% decrease
in fuel consumption. The 8.24% or $1.8 million decrease in maintenance expense
stems from five less check lines offset by three additional engine overhauls.
Commissions paid to travel agents increased $1.0 million or 11.8% due to a 15%
increase in commissionable sales. Landing fees and other rents decreased $1.0
million compared to the third quarter 1998 due to decreased capacity. Marketing
and advertising expenses decreased slightly from third quarter 1998 to third
quarter 1999. Aircraft rent decreased $.7 million from third quarter 1998 to
third quarter 1999 due to the return of 3 leased B737 aircraft. Depreciation
expense increased 23.7% or $1.7 million primarily due to the acquisition of
Stage 3 hush kits and certain aircraft modifications during the last three
months of 1998 and first nine months of 1999. Other operating expenses
decreased by $4.1 million primarily due to the decline of credit card
chargebacks and communications costs.
Non-operating Expenses
Interest expense, net, remained relatively flat from third quarter 1998 to third
quarter 1999.
The Company's effective tax rate was 3.9% for the third quarter of 1999. The
1999 rate results from the expected utilization of a portion of the Company's
$141 million net operating loss ("NOL") carryforwards offset in part by the
application to goodwill of the tax benefit related to the realization of a
portion of the Airways Corporation NOL carryforwards. The Company has not
recognized any benefit from the use beyond 1999 of NOL carryforwards because
management's evaluation of all the available evidence in assessing the
realizability of 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.
12
<PAGE>
Nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998
Summary
AirTran recorded net income of $41.2 million for the nine months ended September
30, 1999 compared to a net loss of $10.2 million for the nine months ended
September 30, 1998. AirTran's operating income increased $53.8 million to $60.0
million for the nine months ended September 30, 1999, from $6.2 million in 1998.
Exclusive of the effect of the settlement of the SabreTech suit, AirTran
recorded net income of $21.9 million or 32 cents per diluted share during the
nine months ended September 30, 1999.
Operating Revenues
Passenger revenues increased by 15.9% or $50.8 million primarily due to
increasing traffic demand in both the business and leisure market segments.
Business class loads were up significantly versus last year. Adjustments in
pricing and inventory strategies also led to gains in leisure traffic.
Other revenue increased 161.0%, or $18.4 million over the first nine months of
1998. Included in other revenue are the proceeds from settlement of the suit
filed by AirTran against SabreTech and its parent corporation, Sabreliner
Corporation.
AirTran increased its yield (the average amount a passenger pays to fly one
mile) by 9.8%, to 14.2 cents, during the first nine months of 1999, compared to
the first nine months of 1998. AirTran's traffic, or revenue passenger miles
(RPMs), increased 137 million or 5.5% despite a small capacity decrease of 0.5%.
Demand has outpaced capacity, which has resulted in fuller airplanes. AirTran's
load factor has increased 3.7 points, from 60.4% to 64.1% for the nine months
ended September 30, 1998 and 1999, respectively. However, the Company is
currently experiencing aggressive competition that could negatively impact
future loads and yields.
Operating Expenses
Operating expenses increased $16.0 million or 4.9% compared to the nine months
ended September 30, 1998. During the period, AirTran's operating cost per ASM
increased 5.4% to 8.40 cents from 7.97 cents a year ago. Salaries, wages and
benefits increased $6.3 million or 7.8% due primarily to contractual labor rate
and seniority increases negotiated in 1998 between the Company and its three
major union represented labor groups. Aircraft fuel expense decreased year over
year by $4.9 million or 8.9% primarily due to a 13.0% decrease in the average
fuel cost per gallon (including taxes and into-plane fees), offset by a 4.7%
increase in fuel consumption. The 32.8% or $17.1 million increase in
maintenance stems from 6 additional check lines and increased costs and volume
related to engine overhauls. Also, the nine months ended September 30, 1998
included a $3.0 million reversal of maintenance accruals. Commissions paid to
travel agents increased $2.3 million, or 8.8%, year over year primarily due to a
year over year increase in commissionable sales. The increase in commissionable
sales was offset by a rate reduction from 10% to 8% during the second quarter of
13
<PAGE>
1998. Landing fees and other rents decreased by $1.0 million, or 4.9%, during
the first nine months of 1999 compared to the first nine months of 1998 due to
decreased capacity. Marketing and advertising expenses increased 6.6%, or $0.8
million, from the first nine months of 1998 to the first nine months of 1999 as
a result of increased advertising expenses in second quarter 1999. Aircraft
rent decreased $1.8 million from the first nine months of 1998 to the first nine
months of 1999 due to the return of 3 leased B737 aircraft. Depreciation
expense increased 20.1% or $4.1 million primarily due to the acquisition of
Stage 3 hush kits and certain aircraft modifications during the last three
months of 1998 and first nine months of 1999. Other operating expenses
decreased by 12.4% primarily due to decreased credit card chargebacks and
communication charges.
Non-operating Expenses
Interest expense, net, remained relatively flat from the first nine months of
1998 to the first nine months of 1999.
The Company's effective tax rate was 5.5% for the nine months ended September
30, 1999. The 1999 rate results from the expected utilization of a portion of
the Company's $141 million net operating loss ("NOL") carryforwards offset in
part by the application of the tax benefit related to the realization of a
portion of the Airways Corporation NOL carryforwards to goodwill. The Company
has not recognized any benefit from the use beyond 1999 of NOL carryforwards
because management's evaluation of all the available evidence in assessing the
realizability of 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.
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 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. 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 assurances
from its significant technology vendors and key business partners that their
systems and 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. 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.
14
<PAGE>
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 testing all of the Company's
potential Year 2000 issues. The testing phase provides a "laboratory-type"
environment for troubleshooting potential problems and situations once the Year
2000 transition begins. While the Company has received assurances from its
significant vendors for their systems, there is no assurance, that collectively,
the systems will operate simultaneously importing and exporting data to each
other. The testing phase has been the most critical in that all possible worst-
case scenarios will be addressed and procedures for handling these scenarios as
they arise have been developed. The Company completed both of these phases as of
November 15, 1999.
In the event that the Company does not complete any testing 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 and 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 records. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
The Company is currently developing and documenting its contingency plans within
all major departments based on a worst case scenario in order to further
mitigate the Year 2000 risk. Specific examples include:
. Agreements are being negotiated with major software vendors for the
availability of on-site technical support for the reservation system and the
operational systems.
. Procedures to perform database backups, hard copy printouts and data
retention recovery are being established for critical business data.
. Seeking Y2K compliant alternative vendors and suppliers for aircraft parts
and other major safety related services.
Costs associated with the Year 2000 program (excluding costs relating to capital
improvements to IT systems that are not directly related to remediating 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. As of
October 31, 1999, the Company has spent approximately $737,100 ($707,000 in
1999) in connection with the Year 2000 program and expects to spend an
additional $72,000 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.
15
<PAGE>
Liquidity and Capital Resources
The Company relies primarily on its operating cash flows to provide working
capital. The Company has no lines of credit or other facilities. As of
September 30, 1999, the Company had cash and cash equivalents of $29.8 million
compared to $10.9 million at December 31, 1998 and working capital of $10.2
million compared to a working capital deficit of $30.8 million at December 31,
1998. 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 sales proceeds to be applied 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, management cannot predict whether the current
favorable economic trends and conditions will continue, or the effects of
competition or other factors beyond the Company's control.
As of September 30, 1999, cash and cash equivalents increased from December 31,
1998 by $18.9 million or 173.6%. Operating activities generated $48.3 million
in cash. Investing activities used cash of $57.9 million primarily related to
the acquisition of two Boeing 717-200 aircraft and several McDonnell Douglas
DC9-30 hush kits. Financing activities generated cash of $28.4 million in
connection with issuance of debt for the acquisition of two B717-200 aircraft
offset by long term debt payments.
As of September 30, 1999, the Company's operating fleet consisted of 40
McDonnell Douglas DC9-30 aircraft and eight Boeing 737-200 aircraft. The Company
took delivery of two Boeing 717-200 aircraft in September. The Company expects
to return four leased B737 aircraft and ground six of its Stage 2 DC9-30 and
B737 aircraft by December 31, 1999. In addition the Company expects to take
delivery of six B717s by December 31, 1999.
The Company has contracted with Boeing for the purchase of 50 Boeing 717-200
aircraft for delivery from 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 occurred in September 1999. Progress
payments resumed in September 1999 and the Company expects to pay $10.5 million
in progress payments through December 1999. There can be no assurance that cash
provided by operations will be sufficient to meet the progress payments for the
Boeing 717-200s. If the Company exercises its option to acquire up to an
additional 50 Boeing 717-200 aircraft, additional payments could be required
beginning in 2001. The Company expects to finance at least 85% of the cost of
each of these aircraft. The Company completed a private placement of $178.8
million, enhanced equipment trust certificates (EETC's) on November 3, 1999.
The proceeds will be used to purchase the first ten B717 aircraft. The EETC's
bear interest at 10.63% and are payable in semiannual installments from March 1,
2000 through September 1, 2017. Although Boeing has agreed to provide support
with respect to the remaining financing of aircraft to be acquired, the
16
<PAGE>
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
at all. 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 remaining three months of 1999. As of September
30, 1999, 37 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 and
disposing of Stage 2 aircraft and acquiring or leasing Stage 3 aircraft. The
Company expects that FAA certified hush kits will cost approximately $5.0
million in total for two aircraft to be hushed in 1999. The Company plans to
make the payments on these hush kits out of its working capital.
On November 5, 1999, the Company announced its decision to accelerate the
retirement of its DC9-30 fleet to accommodate the introduction of its Boeing 717
fleet. The accelerated retirement allows for a more moderate capacity growth
and will result in a non-cash pretax fleet disposition charge between $140.0 and
$150.0 million during the fourth quarter of 1999.
As of September 30, 1999, the Company's debt related to asset financing totaled
$123.2 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 1/2% Senior Secured Notes due 2001 under which interest is
payable semi-annually. In addition, the Company has $150.0 million of 10 1/4%
Senior Notes outstanding. The principal balance of the Senior Notes is due in
April 2001 and interest is payable semi-annually. In September 1999, the
Company incurred $33.7 million of short-term debt in connection with the
purchase of new aircraft. Such debt was due on December 23, 1999. With the
issuance of $178.8 million of 10.63% enhanced equipment trust certificates
(EETC's) on November 3, 1999, due in 2017, the short-term debt was paid off.
Because the Company has refinanced the short-term debt on a long-term basis,
such debt is classified as a long-term liability in the September 30, 1999
balance sheet. The proceeds from the privately placed EETC's were used to
purchase the first ten B717 aircraft. All of the Company's debt has final
maturities ranging from 1999 to 2017 with scheduled debt payments of the
September 30, 1999 as follows: 1999--$2.1 million, 2000--$8.2 million, 2001--
$231.3 million, 2002--$1.8 million, 2003--$1.3 million and thereafter --$28.5
million.
Certain debt bears interest at fixed rates ranging from 5.85% to 13.0% 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 4.0%.
Due to the competitive nature of the airline industry, in the event of any
increase in the price of jet fuel, there can be no assurance that AirTran would
be able to pass on increased fuel prices to its customers by increasing fares.
17
<PAGE>
New Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards
("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, 2000. The Company is currently evaluating SFAS No.
133; however, based on the current market conditions, SFAS No. 133 is not
expected to have a material impact on the Company's financial condition.
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", "will" or the
negative thereof or other variations thereon or comparable terminology.
Management wishes to caution the reader that the forward-looking statements
contained in this Report are only estimates or predictions and are not
historical facts. Such statements include, but are not limited to: the
Company's ability to maintain profitability and to generate working capital from
operations; the impact of proposed legislation, the Company's ability to become
Year 2000 compliant and the timing and cost thereof; the Company's ability to
take delivery of and to finance 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
and 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, ability of other parties on which the Company relies to become
Year 2000 compliant, 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 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.
18
<PAGE>
Item 3. Quantitative and Qualitative Market Risk
- ------ ----------------------------------------
For discussion of certain market risks related to the Company, See Part I Item,
7A "Quantitative and Qualitative Disclosures about Market Risks", in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998. There have been no significant developments with respect to derivatives or
exposure to market risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- ------ -----------------
Several stockholder class action suits were filed against the Company and
certain of its present and former executive officers and Directors
("Defendants"). These suits were consolidated into a single action (In re
-----
ValuJet, Inc.). The consolidated lawsuit was based on allegedly misleading
- ------------
public statements made by the Company or omission to disclose material facts in
violation of federal securities laws. Class certification was 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 denied that it violated any of
its obligations under the federal securities laws, it agreed to pay $2.5 million
in cash and $2.5 million in common stock in the settlement. The settlement
stated above was approved by the federal district court on October 28, 1999.
Numerous lawsuits were filed against the Company seeking damages attributable to
the deaths of those on Flight 592. Approximately 100 such lawsuits were 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 and Texas. 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. 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.
However, there can be no assurance that the total amount of judgments and
settlements will not exceed the amount of insurance available therefor or that
all damages awarded will be covered by insurance.
In November 1997, the Company filed a suit in the Circuit Court of St. Louis
County, Missouri against SabreTech and its parent corporation (Sabreliner
Corporation), seeking to hold SabreTech responsible for the accident involving
Flight 592. SabreTech is the maintenance contractor who
19
<PAGE>
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. This suit was settled on
September 23, 1999, and the results of the settlement are reflected in the
Company's operating results for the quarter and nine months ended September 30,
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 sought 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. This action was settled in conjunction with the settlement
in the Missouri action on September 23, 1999.
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.
On October 1, 1999, the Company filed suit in the Superior Court of Gwinnett
County, Georgia, against United States Aviation Underwriters, Inc. and United
States Aviation Insurance Group for declaratory relief and damages based on
claims of breach of contract and tortious breach of covenant of good faith and
fair dealing for matters involving litigation related to Flight 592.
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.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits:
(27) Financial Data Schedule.
(b) The following Current Reports on Form 8-K have been filed by the Company:
Form 8-K dated September 22, 1999 to report a cautionary statement relating
to the Company's third quarter profit outlook.
Form 8-K dated October 21, 1999 to report third quarter earnings.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AIRTRAN HOLDINGS, INC.
Date: November 13, 1999 /s/ Robert L. Fornaro
----------------------------------
Robert L. Fornaro
President, Chief Financial Officer
Date: November 13, 1999 /s/ David W. Lancelot
----------------------------------
David W. Lancelot
Chief Accounting Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 55,183
<SECURITIES> 0
<RECEIVABLES> 44,094
<ALLOWANCES> 1,570
<INVENTORY> 11,800
<CURRENT-ASSETS> 117,621
<PP&E> 420,831
<DEPRECIATION> 116,646
<TOTAL-ASSETS> 471,524
<CURRENT-LIABILITIES> 107,377
<BONDS> 230,000
0
0
<COMMON> 65
<OTHER-SE> 97,985
<TOTAL-LIABILITY-AND-EQUITY> 471,524
<SALES> 119,676
<TOTAL-REVENUES> 143,483
<CGS> 0
<TOTAL-COSTS> 113,913
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,218
<INCOME-PRETAX> 24,115
<INCOME-TAX> 948
<INCOME-CONTINUING> 23,167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,167
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.34
</TABLE>
