<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 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 July 7, 1999, there were 64,988,864 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 June 30,
1999 and 1998; Six months ended June 30, 1999 and 1998
Consolidated Balance Sheets June 30, 1999 and December 31, 1998
Consolidated Statements of Cash Flows - Six months ended June 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
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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 six months ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $135,947 $119,001 $250,960 $209,281
Cargo 819 764 1,966 1,562
Other 3,249 4,223 6,962 7,686
-------- -------- -------- --------
Total operating revenues 140,015 123,988 259,888 218,529
Operating expenses:
Salaries, wages and benefits 28,908 28,662 57,050 50,443
Aircraft fuel 17,588 19,139 31,349 35,791
Maintenance, materials and repairs 24,407 15,154 49,164 30,234
Commissions 10,604 10,386 19,404 18,063
Landing fees and other rents 6,824 6,656 13,011 13,035
Marketing and advertising 4,390 2,780 10,007 8,730
Aircraft rent 1,305 1,872 2,646 3,780
Depreciation 8,299 6,898 15,643 13,228
Other operating 16,235 17,954 31,158 33,633
Loss on disposal of equipment - 66 - 45
-------- -------- -------- --------
Total operating expenses 118,560 109,567 229,432 206,982
-------- -------- -------- --------
Operating income 21,455 14,421 30,456 11,547
Interest (income) expense:
Interest income (503) (906) (925) (1,904)
Interest expense 5,938 6,303 11,902 12,751
-------- -------- -------- --------
Interest (income) expense, net 5,435 5,397 10,977 10,847
-------- -------- -------- --------
Income before income taxes 16,020 9,024 19,479 700
Income tax expense 1,061 465 1,466 14
-------- -------- -------- --------
Net income $ 14,959 $ 8,559 $ 18,013 $ 686
======== ======== ======== ========
Basic earnings per share $ 0.23 $ 0.13 $ 0.28 $ 0.01
======== ======== ======== ========
Diluted earnings per share $ 0.22 $ 0.13 $ 0.26 $ 0.01
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AirTran Holdings, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
- ------ ----------- ------------
Current assets: (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 38,613 $ 10,882
Restricted cash 24,580 13,459
Accounts receivable, less allowance of $1,399 and $1,325 at
June 30, 1999 and December 31, 1998, respectively 20,748 12,084
Inventory, less allowance for obsolescence of $6,396 and $4,259
at June 30, 1999 and December 31, 1998, respectively 9,962 11,486
Prepaid expenses 4,793 5,046
-------- ---------
Total current assets 98,696 52,957
Property and equipment:
Flight equipment 323,666 306,026
Less: Accumulated depreciation (98,018) (87,084)
-------- ---------
225,648 218,942
Purchase deposits for flight equipment 32,291 36,518
Other property and equipment 23,641 23,491
Less: Accumulated depreciation (12,120) (10,542)
-------- --------
11,521 12,949
-------- --------
269,460 268,409
Other assets:
Intangibles resulting from business acquisition 40,928 42,727
Debt issuance costs 5,476 6,956
Other assets 4,878 5,357
-------- --------
Total assets $419,438 $376,406
======== ========
</TABLE>
See accompanying notes to consolidated financial statements. (Continued)
4
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AirTran Holdings, Inc.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Stockholders' Equity 1999 1998
- ------------------------------------ ---- ----
Current liabilities: (Unaudited) (Audited)
<S> <C> <C>
Accounts payable $ 13,676 $ 13,252
Accrued liabilities 57,482 44,508
Air traffic liability 32,763 17,022
Current portion of long-term debt 8,209 8,929
-------- --------
Total current liabilities 112,130 83,711
Long-term debt, less current portion 233,455 237,065
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 64,982,555 and 64,897,810 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 65 65
Additional paid-in capital 147,067 146,857
Accumulated deficit (73,279) (91,292)
-------- --------
Total stockholders' equity 73,853 55,630
-------- --------
Total liabilities and stockholders' equity $419,438 $376,406
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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AirTran Holdings, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 18,013 $ 686
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,452 13,954
Provisions for uncollectible accounts 2,882 2,584
Loss from disposal of assets - 45
Changes in current operating assets and liabilities:
Restricted cash (11,121) (703)
Accounts receivable (11,546) (3,767)
Other current assets (844) 789
Prepaid expenses and deposits 2,103 (1,766)
Accounts payable and accrued liabilities 14,128 (14,903)
Air traffic liability 15,737 10,162
-------- --------
Net cash flows provided by operating activities 46,804 7,081
Investing activities:
Purchases of property and equipment (19,858) (36,066)
Refund of aircraft purchase deposits 4,227 -
Proceeds from disposal of equipment 678 70
-------- --------
Net cash flows used for investing activities (14,953) (35,996)
Financing activities:
Issuance of long-term debt - 6,100
Payments of long-term debt (4,330) (4,938)
Proceeds from sale of common stock 210 923
-------- --------
Net cash flows provided by (used for) financing activities (4,120) 2,085
-------- --------
Net increase (decrease) in cash and cash equivalents 27,731 (26,830)
Cash and cash equivalents at beginning of period 10,882 86,025
-------- --------
Cash and cash equivalents at end of period $ 38,613 $ 59,195
======== ========
Supplemental disclosures of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 9,780 $ 11,092
======== ========
Income taxes refunded $ - $ 9,686
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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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 June
30, 1999 and December 31, 1998, the results of operations for the three and six
month periods ended June 30, 1999 and 1998, and cash flows for the six month
periods ended June 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
six month periods ended June 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 six months ended
June 30, June 30,
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $14,959 $ 8,559 $18,013 $ 686
======= ======= ======= =======
Denominator:
Basic earnings per share - weighted
average shares 64,957 64,540 64,936 64,479
Effect of dilutive stock options 3,608 3,930 3,211 3,601
------- ------- ------- -------
Diluted earnings per share - weighted
average shares and assumed conversions 68,565 68,470 68,147 68,080
======= ======= ======= =======
Basic earnings per share $ 0.23 $ 0.13 $ 0.28 $ 0.01
======= ======= ======= =======
Diluted earnings per share $ 0.22 $ 0.13 $ 0.26 $ 0.01
======= ======= ======= =======
</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 quarter and six months ended June 30, 1998, by approximately $3.0 million or
$0.04 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 June 30, 1999, the Company had a fuel
hedging agreement with a broker-dealer on approximately 54 million gallons of
fuel products, which represents approximately 80% of its expected fuel needs for
the remaining six 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 June 30, 1999,
representing the amount the Company would receive upon termination of the
agreements, totaled $7.7 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 6.6% and 5.2% for the second quarter of
1999 and 1998, respectively, and 7.5% and 2.0% for the six months ended June 30,
1999 and 1998, respectively. 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
For the three months and six months ended June 30, 1999 and 1998
The following is a table of selected operational statistics and financial data
for the three months and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue passengers 1,763,275 1,504,175 3,262,861 2,628,830
Revenue passenger miles (1) (000) 942,104 931,711 1,753,194 1,638,295
Available seat miles (2) (000) 1,400,350 1,471,604 2,736,261 2,697,552
Passenger load factor (3) 67.3% 63.3% 64.1% 60.7%
Break-even load factor (4) 59.4% 58.5% 59.1% 60.5%
Average yield per revenue passenger mile (5) 14.43c 12.77c 14.31c 12.77c
Passenger revenue per available seat mile (6) 9.71c 8.09c 9.17c 7.76c
Operating cost per available seat mile (7) 8.47c 7.45c 8.38c 7.67c
Average stage length (miles) 530 550 528 556
Average cost of aircraft fuel per gallon 49.69c 54.70c 45.97c 56.65c
Average daily utilization (hours) (8) 9:19 9:20 9:07 8:53
Number of aircraft in fleet at end of period 49 51 49 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.
9
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<TABLE>
<CAPTION>
Operating expenses per ASM:
For the three months For the six months
ended June 30, % ended June 30, %
-------------------- -------------------
1999 1998 Change 1999 1998 Change
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Salaries, wages and benefits 2.07c 1.95c 6.2% 2.08c 1.87c 11.2%
Aircraft fuel 1.26 1.30 -3.1% 1.14 1.33 -14.3%
Maintenance, materials
and repairs 1.74 1.03 68.9% 1.80 1.12 60.7%
Commissions 0.76 0.71 7.0% 0.71 0.67 6.0%
Landing fees and other rents 0.49 0.45 8.9% 0.47 0.48 -2.1%
Marketing and advertising 0.31 0.19 63.2% 0.37 0.32 15.6%
Aircraft rent 0.09 0.13 -30.8% 0.10 0.14 -28.6%
Depreciation 0.59 0.47 25.5% 0.57 0.49 16.3%
Other operating 1.16 1.22 -4.9% 1.14 1.25 -8.8%
---- ---- ---- ----
Total operating expenses 8.47c 7.45c 13.7% 8.38c 7.67c 9.3%
---- ---- ---- ----
</TABLE>
Quarter ended June 30, 1999 Compared to the Quarter ended June 30, 1998
Summary
AirTran recorded net income of $15.0 million for the three months ended June 30,
1999 compared to net income of $8.6 million for the three months ended June 30,
1998. AirTran's operating income increased $7.0 million, or 48.8%, for the
three months ended June 30, 1999, from $14.4 million in 1998.
Operating Revenues
Passenger revenues increased by 14.2% or $16.9 million in the second quarter
compared to last year. 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 large gains in leisure traffic.
Yield (the average amount a passenger pays to fly one mile) increased by 13.0%,
over the second quarter 1998, from 12.8 cents to 14.4 cents. AirTran's traffic,
or revenue passenger miles (RPMs), increased 1.1% or 10.4 million on a 4.8%
decline in capacity, or available seat mile (ASM). Second quarter 1999 saw
strong demand, resulting in an increase in load factor to 67.3%. However, the
Company continues to experience aggressive competition that could negatively
impact future loads and yields.
10
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Operating Expenses
Operating expenses increased $8.9 million or 8.2% compared to the second quarter
of 1998. AirTran's operating cost per ASM increased 13.7% to 8.47 cents from
7.45 cents a year ago, primarily due to increased maintenance, materials and
repair costs and a 4.8% decline in capacity (ASM's) over which to spread costs.
Salaries, wages and benefits remained relatively flat from second quarter 1998
to second quarter 1999.
Aircraft fuel decreased year over year by $1.6 million or 8.1% primarily due to
a 9.2% decrease in the average fuel cost per gallon (including taxes and into-
plane fees) partially offset by a 1.2% increase in fuel consumption.
The 61.1% or $9.3 million increase in maintenance stems from two additional
check lines and increased costs related to engine overhauls. Also, second
quarter 1998 included a $3.0 million reversal of previous 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.
Commissions paid to travel agents increased $0.2 million or 2.1% due to the
increase in commissionable sales partially offset by a 20% rate reduction from
10% to 8%.
Landing fees and other rents remained relatively flat quarter over quarter.
Marketing and advertising expenses increased $1.6 million, or 57.9%, from second
quarter 1998 to second quarter 1999 as a result of increased advertising
expenses to promote the Company.
Aircraft rent decreased $.6 million from second quarter 1998 to second quarter
1999 due to the return of 2 leased B737 aircraft.
Depreciation expense increased 20.3% or $1.4 million primarily due to the
acquisition of Stage 3 hush kits and certain aircraft modifications during the
last half of 1998.
Other operating expenses decreased by $1.7 million primarily due to the decline
of credit card chargebacks.
Non-operating Expenses
Interest expense, net, remained relatively flat from second quarter 1998 to
second quarter 1999 as interest income declined approximately $.4 million as a
result of lower cash balances and interest expense declined approximately $.4
million due to a 1.8% lower amount of debt outstanding.
The Company's effective tax rate was 6.6% and 5.2% for the second quarter of
1999 and 1998, respectively. 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
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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.
Six Months ended June 30, 1999 Compared to the Six Months ended June 30, 1998
Summary
AirTran recorded net income of $18.0 million for the six months ended June 30,
1999 compared to net income of $0.7 million for the six months ended June 30,
1998. AirTran's operating income increased $18.9 million to $30.4 million for
the six months ended June 30, 1999, from $11.5 million in 1998.
Operating Revenues
Passenger revenues increased by 19.9% or $41.7 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 large gains in leisure traffic.
AirTran increased its yield (the average amount a passenger pays to fly one
mile) by 12.1% to 14.3 cents over the first six months of 1998. AirTran's
traffic, or revenue passenger miles (RPMs), increased 115.0 million or 7.0% on a
relatively small capacity increase, or available seat mile (ASM), of 1.4% or
38.7 million. Demand has outpaced capacity, which has resulted in fuller
airplanes. AirTran's load factor has increased 3.4 points, from 60.7% to 64.1%
for the six months ended June 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 $22.5 million or 10.8% compared to the six months
ended June 30, 1998. AirTran's operating cost per ASM increased 9.3% to 8.38
cents from 7.67 cents a year ago primarily due to increased maintenance,
materials and repair expense.
Salaries, wages and benefits increased $6.6 million or 13.1% 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 decreased year over year by $4.4 million or 12.4% primarily due to
an 18.9% decrease in the average fuel cost per gallon (including taxes and into-
plane fees) partially offset by a 7.9% increase in fuel consumption.
The 62.6% or $18.9 million increase in maintenance stems from 11 additional
check lines and increased costs related to engine overhauls. Also, the second
quarter 1998 included a $3.0 million
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reversal of maintenance accruals.
Commissions paid to travel agents remained relatively flat year over year. The
increase in commissionable sales was offset by a rate reduction from 10% to 8%
during the second quarter of 1998.
Landing fees and other rents remained flat over the first six months of 1999
compared to the first six months of 1998.
Marketing and advertising expenses increased 14.6%, or $1.3 million, from the
first six months of 1998 to the first six months of 1999 as a result of
increased advertising expenses in second quarter 1999. Passenger revenue,
however, has increased 19.9% from the first six months of 1998 to the first six
months of 1999.
Aircraft rent decreased $1.1 million from the first six months of 1998 to the
first six months of 1999 due to the return of 2 leased B737 aircraft.
Depreciation expense increased 18.3% or $2.4 million primarily due to the
acquisition of Stage 3 hush kits and certain aircraft modifications during the
last half of 1998.
Other operating expenses decreased by 7.4% primarily due to decreased credit
card chargebacks.
Non-operating Expenses
Interest expense, net, remained relatively flat from the first six months of
1998 to the first six months of 1999 as interest income declined approximately
$1.0 million as a result of lower cash balances and interest expense declined
approximately $.8 million due to lower amounts of debt outstanding.
The Company's effective tax rate was 7.5% and 2.0% for the six months ended June
30, 1999 and 1998, respectively. 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
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<PAGE>
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 assurances 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. 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 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 will be the most critical in that all possible worst-
case scenarios will be addressed and procedures for handling these scenarios as
they arise must be developed and tested. The Company expects to begin the
testing phase in late July and be complete by September 15, 1999. The Company
expects to implement the Year 2000 program by October 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 would 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
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<PAGE>
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
August 4, 1999, the Company has spent approximately $419,500 ($389,500 in 1999)
in connection with the Year 2000 program and expects to spend an additional
$183,000 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.
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 June
30, 1999, the Company had cash and cash equivalents of $38.6 million compared to
$10.9 million at December 31, 1998 and a working capital deficit of $13.4
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 June 30, 1999, cash and cash equivalents increased from December 31, 1998
by $27.7 million or 254.8%. Operating activities generated $46.8 million in
cash. Investing activities used cash of $15.0 million primarily related to the
acquisition of hush kits. Financing activities used cash of $4.1 million for
scheduled long-term debt payments.
As of June 30, 1999, the Company's operating fleet consisted of 40 McDonnell
Douglas DC9-30 aircraft and nine Boeing 737-200 aircraft. The Company currently
leases one DC9-30 aircraft to another carrier.
15
<PAGE>
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 is expected in September 1999.
Progress payments will resume in September 1999 and the Company expects to pay
$11.9 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
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 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 six months. As of June 30, 1999, 36 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 or disposing
of Stage 2 aircraft and acquiring or leasing Stage 3 aircraft. The Company
expects that FAA certified hush kits will cost approximately $7.5 million in
total for three aircraft to be hushed in 1999 and an additional $12.5 million if
the Company elects to bring five additional aircraft into compliance with the
Stage 3 noise requirements. The Company plans to make the payments on these
hush kits out of its working capital.
As of June 30, 1999, the Company's debt related to asset financing totaled
$91.7 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. All of the Company's debt has
final maturities ranging from 1999 to 2003 with scheduled debt payments as
follows: 1999--$4.6 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%.
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.
16
<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
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 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.
17
<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 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 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 that all damages awarded will be covered by insurance.
18
<PAGE>
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 damages that the
Company suffered as a result of the accident. This suit is scheduled for trial
September 7, 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.
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.
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.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
None.
20
<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: August 9, 1999 /s/ Joseph B. Leonard
------------------------------------
Joseph B. Leonard
Chairman and Chief Executive Officer
Date: August 9, 1999 /s/ David W. Lancelot
------------------------------------
David W. Lancelot
Vice President and Controller
(Chief Accounting Officer)
21
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