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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999.
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Commission File No.: 0-26914
AirTran Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 58-2189551
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9955 AirTran Boulevard, Orlando, Florida 32827
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(Address of principal executive offices) (Zip code)
(407) 251-5600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No[_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 10, 2000, the aggregate market value of voting stock held by non-
affiliates of the Registrant, based on the closing sales price of such stock in
the NASDAQ Stock Market on March 10, 2000, was approximately $244,367,000. As
of March 10, 2000, the Registrant had 65,724,148 shares of Common Stock
outstanding.
Documents Incorporated by Reference
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Portions of the Proxy Statement, to be used in connection with the solicitation
of proxies to be voted at the Registrant's annual meeting of Stockholders to be
held on May 18, 2000 and to be filed with the Commission, are incorporated by
reference into Part III of this Report on Form 10-K.
Exhibit Index is located on pages 36-38
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PART I
ITEM 1. BUSINESS
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General
The Company operates a low fare scheduled airline serving short-haul markets
primarily in the eastern United States. The Company is the second-largest
"affordable fare" airline in the United States behind Southwest Airlines (in
terms of originating travel). The Company's operations are focused on its hub in
Atlanta, Georgia, the nation's busiest airport and the fourth largest travel
market (in terms of passengers) in the United States. As of December 31, 1999,
the Company operated eight Boeing 717-200 (B717) aircraft, 35 McDonnell Douglas
DC-9 aircraft (DC-9) and four Boeing 737-200 (B737) aircraft and offered more
than 274 flights per day, including more than 130 daily departures from Atlanta
to 29 other cities. Additional contractual service is offered between
Gulfport/Biloxi and Dallas/Fort Worth, Houston (Hobby), Fort Lauderdale, Tampa
and Orlando.
The Company commenced operations in 1993 as ValuJet Airlines, Inc. ("ValuJet")
with two DC-9 aircraft serving three cities from Atlanta with eight flights per
day. In 1995, ValuJet became a wholly-owned subsidiary of ValuJet, Inc. The
Company's operations were interrupted by the suspension of the Company's service
on June 17, 1996, resuming on September 30, 1996 with limited operations.
ValuJet changed its name to "AirTran Airlines, Inc." ("Airlines"), and ValuJet,
Inc. changed its name to "AirTran Holdings, Inc." ("Holdings") in connection
with the Company's acquisition of Airways Corporation and its subsidiary,
AirTran Airways, Inc. ("Airways"), in November 1997. As part of that
transaction, Airways became a wholly-owned subsidiary of the Company. From
November 1997 until April 1998, the Company operated under the FAA operating
certificates of both Airlines and Airways. Since April 1998, all of the
Company's airline operations have been conducted under the Airways operating
certificate. The Airlines operating certificate was extinguished in August 1998.
In August 1999, Airlines merged with and into Airways.
The principal executive offices of the Company are located at 9955 AirTran
Boulevard, Orlando, Florida 32827, and its telephone number is (407) 251-5600.
The Company maintains an Internet site at http://www.airtran.com. The reference
to the Company's web address does not constitute incorporation by reference of
the information contained at the site.
Strategy
The Company's strategy is to offer among the lowest fares in its markets and
generate traffic by stimulating demand with price-sensitive travelers. The
Company controls 22 gates at Hartsfield Atlanta International Airport. Atlanta
provides a large local traffic base and the hub is well positioned for
connecting traffic throughout the Southeast. Atlanta's geographic position
enhances the Company's connecting opportunities. To maintain profitability, the
Company intends to maintain an affordable fare structure and offer safe and
reliable travel to both price-sensitive business and fare-conscious leisure
travelers. The Company intends to pursue a modest growth strategy while
maintaining its low cost structure. The Company also generates revenue by
carrying cargo, primarily U.S. Mail, A.S.A.P. express package service and air
freight. The
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Company's pricing structure is intended to stimulate new demand for air travel
by leisure customers and business travelers who would have otherwise not
traveled or who would have utilized ground transportation. The Company's fare
structure generally dictates pricing in most markets it serves, providing
travelers with substantial savings not generally available in the absence of
service by the Company. In addition to advance purchase fares, the Company
maintains reasonably priced "walk-up" fares that are generally well below
similar fares offered by its competitors in comparable markets, as well as
business class prices at substantial discounts to competitors' offerings. The
Company's fare structure is possible as a result of its comparatively low cost
structure.
The Company's comparatively low cost structure is made possible through low
ownership costs of its DC-9 aircraft, more fuel-efficient and less maintenance
burdened B717 aircraft, lower labor costs, lower distribution costs due to high
percentage of Internet bookings and the Company's decision not to offer many
amenities offered by many major airlines (such as hot meals and airport clubs).
As a result of the acquisition of B717 aircraft, the Company's ownership cost
will increase, but the Company believes that it will be able to maintain its
comparatively low cost structure as a result of expected savings in maintenance
and aircraft fuel efficiency.
The Company's service is intended to satisfy not only the basic air
transportation needs of its targeted customers, price-sensitive business
travelers and fare-conscious leisure travelers, but to provide customers with a
travel experience worth repeating.
In 1998, the Company sought to enhance its product offerings with the
introduction of business class, assigned seating, travel agency distribution and
an innovative frequent flyer program. In 1999, the Company focused on unit
revenue improvement, customer satisfaction and retention, increased penetration
of the corporate market, enhanced programs for leisure traffic, and continued
growth of alternative distribution channels, such as the Internet. For the
fourth quarter of 1999, Internet sales provided approximately 16.7% of total
passenger revenue.
Geographic Market
The Company's markets served from Atlanta are located predominantly in the
eastern United States. These markets are attractive to the Company due to the
concentration of major population centers within relatively short distances from
Atlanta, historically high air fares and the potential for attracting a
significant number of leisure and business customers.
In the Company's city selection process, the Company considers the market
demographics, the support offered by the airport communities to be served, the
ability to stimulate air travel and competitive factors.
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Fares, Route System and Scheduling
The Company serves 29 markets from Atlanta, generally under 1,000 miles. The
Company serves major metropolitan markets, including New York, Newark, Boston,
Philadelphia, Washington, Chicago, Miami, Houston and Dallas, and leisure
markets in Florida. The routes served to and from Atlanta range in frequency
from two to fifteen trips per day. The schedules are designed to provide a
consistent product for business-oriented travelers and to facilitate connections
for passengers traveling through Atlanta.
The Company offers a range of fares based on advance purchases of 14 days, 7
days, 3 days and "walk-up" fares. The Company manages the availability of seats,
at each fare level, by day of week and by flight to maximize revenue on peak-
travel days. Most of the Company's fares are nonrefundable, but can be changed
prior to departure with a $50 service charge. The Company's fares are always
offered on a one-way basis. The Company's fares do not require a round trip
purchase or a specific day of week (e.g., Saturday night) stay. The Company's
fare offerings are in direct contrast to prevalent pricing policies in the
industry where there are typically many different price offerings and
restrictions for seats on any one flight.
The Company's published Atlanta fares for coach non-stop service range from $39
to $99 for one-way travel on a 14-day advance purchase basis and $79 to $239 for
one-way travel on a "walk-up" basis. The Company offers fare sales from time to
time in order to generate additional traffic. The Company utilizes the Internet
and other distribution channels to stimulate incremental demand.
The Company provides one-stop service between many of its markets on a
connecting basis through Atlanta. The Company faces competition from numerous
airlines with varying degrees of flight frequency and marketing approaches. In
addition, the Company competes with numerous nonstop flights to many of its
cities from alternate airports in the same metropolitan areas as served by the
Company (such as Washington's Ronald Reagan National Airport, Chicago's O'Hare
Airport and New York's Kennedy Airport).
The airline industry is highly competitive. The Company competes primarily with
Delta in the markets served by the Company from Atlanta. In most all of these
markets, Delta offers more frequency than the Company.
The identity of competing airlines and the number of the flights they may fly
changes from month to month. Competing airlines and their flight schedules are
subject to frequent change. The Company's competition includes carriers with
substantially greater financial resources and name recognition.
The Company's aircraft scheduling strategy is directly related to the perceived
needs of its target market segments. The Company's target customers are price-
sensitive business travelers and fare-conscious leisure travelers.
The Company operates with a limited number of support aircraft in order to
provide operating spares and to rotate aircraft into routine scheduled
maintenance.
Maintenance and Repairs
Since all of the Company's DC-9 and B737 aircraft are more than 20 years old,
they will generally require higher maintenance expense than newer aircraft. The
Company believes that its aircraft are mechanically reliable and that in the
long-term the estimated cost of maintenance
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to fly such aircraft will be within industry norms for these aircraft types and
ages. Amendments to Federal Aviation Administration ("FAA") regulations are
under consideration, which would require certain heavy maintenance checks and
other maintenance requirements for aircraft operating beyond certain operational
limits. The Company would be required to comply with such proposals, if adopted,
and with any other aging aircraft issues, regulations or Airworthiness
Directives that may be promulgated in the future. There can be no assurance that
the Company's maintenance expenses (including costs to comply with aging
aircraft requirements) will fall within industry norms.
Aircraft maintenance and repair consists of routine daily or "turn-around"
maintenance and major overhaul. Routine daily maintenance is performed at
Atlanta by the Company's employees or contract employees and by contractors at
the other cities served by the Company. Heavy maintenance and other work which
require hangar facilities are currently performed at outside maintenance
contractors. Other routine daily maintenance contractors are provided by other
airlines, which operate DC-9 aircraft or other maintenance companies approved by
the FAA, both of which have employees qualified in DC-9 aircraft maintenance.
The Company expects that its maintenance expenses will be significantly reduced
with the addition of the B717 aircraft. However, the B717 aircraft will require
greater inventories of spare parts and associated costs.
Fuel
Jet fuel is a significant expenditure for the Company. The Company estimates
that a ten percent increase in the December 31, 1999 fuel cost would increase
fuel expenses by approximately $10.8 million in the year 2000, net of fuel hedge
instruments outstanding at December 31, 1999. Jet fuel costs are subject to wide
fluctuations as a result of sudden disruptions in supply. Due to the effect of
world and economic events on the price and availability of oil, the future
availability and cost of jet fuel cannot be predicted with any degree of
certainty. Increases in fuel prices or a shortage of supply could have a
material adverse effect on the Company's operations and operating results.
The majority of the Company's aircraft are relatively fuel inefficient compared
to newer aircraft and industry averages. The primary reason for this
inefficiency is engine technology. The B717 aircraft are expected to be more
fuel-efficient and should make the Company relatively less susceptible to
adverse effects attributable to fuel price changes.
A significant increase in the price of jet fuel would result in a
disproportionately higher increase in the Company's average total costs than its
competitors using more fuel efficient aircraft, whose fuel costs represent a
smaller portion of total costs, and who have greater purchasing leverage because
of size. Subject to market conditions, the Company might seek to pass such a
cost increase to its customers through a fare increase. There can be no
assurance that any such fare increase, or surcharge, would not reduce the
competitive advantage the Company seeks by offering affordable fares.
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Distribution and Marketing
The Company's marketing efforts are vital to its success as it seeks to position
its product to stimulate new customer demand. The Company focuses on two primary
market segments: the price conscious business travellers and leisure travellers.
These are the market segments in which the consumers seek value and in which the
Company believes it offers the greatest opportunity for stimulating new demand.
The primary objectives of the Company's marketing activities are to develop an
innovative brand identity and personality that is visibly unique and easily
contrasted with its competitors. The Company communicates directly with its
existing customer base and attempts to reach potential customers through
extensive use of advertising as well as active public relations efforts. The
Company communicates regularly and frequently with existing and potential
customers through the use of advertisements in newspapers, on radio, on
television, on billboards, through direct mail, in movie theatres and through a
website on the Internet. These communications feature the Company's
destinations, everyday affordable fares, ease of use (including its simplified
fare structure, ticketless alternative and easy-to-use web site) and calls to
action (through travel agents, toll-free numbers or the website).
The Company distributes its product through various channels: (1) direct to the
consumer via phone; (2) direct to the consumer via Internet; (3) through travel
agents and the global distribution systems ("GDS"); (4) through travel agents
direct - both via phone and via Internet. Of the distribution channels, during
1999, 47.3% of passenger revenue was booked direct from the consumer via phone,
11.0% was booked from the consumer and travel agents via the Internet and 41.7%
was booked through travel agents' GDS. The Company pays customary 5% sales
commissions to travel agents. Information on its customers' needs, travel
patterns and demographics is collected, organized and stored by the Company's
automated reservation system and may be used at a future time for direct
marketing efforts.
Travel agents play an integral role distributing the Company's product. In
1997, 8% of the Company's product was distributed through travel agents. During
1999, the percentage of distribution through travel agents was 41.7%. In 1999,
the Company was awarded "Best Domestic Airline of 1999" by the Southeast Chapter
of the American Society of Travel Agents.
The Company's Internet site is a leader in the field of airline electronic
commerce. In 1999, 11% of the Company's bookings came through this important
distribution channel. In May 1999, Travel Agent magazine ranked the Company's
web site an "A" for the user friendliness of its online booking engine. The
magazine further reported that the Company's web site booking engine is "simple"
and "elegant". In October 1999, the Company created additional functionality
with its website by allowing travel agents and corporate accounts the ability to
book travel online.
To attract more business fliers, the Company launched Business Class in late
1997. Business Class consists of a premium cabin with 2 by 2 oversized seats
with seven inches more legroom and additional seatroom than the coach seat.
Targeted to the price-sensitive business flier,
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Business Class is currently available for $25 over full coach fare to Atlanta.
In addition, a standby program for upgrades is available at the departure gates.
In addition, the Company began assigning seats in 1997. Full fare passengers,
the Company's most profitable business customers who tend to book at the last
minute, are allowed to reserve seats at the time of booking. All other
customers may reserve seats one hour prior to departure. In effect, the
Company's most profitable customers choose the best seats first, but all
passengers have assigned seats prior to boarding.
Furthermore, in March 1998, the Company launched a self-administered frequent
flier program known as "A-Plus Rewards" under which customers may earn either
free roundtrip travel or Business Class upgrades. A customer may earn a free
roundtrip by flying as few as six paid roundtrips. Full fare Business Class
customers earn double credits which make a free roundtrip even easier to obtain.
In addition, free travel on other airlines may be earned by doubling the
required number of roundtrips needed for free travel. Free trips on other
airlines may be used only to/from Atlanta, apply only to cities not served by
the Company and are subject to other terms and conditions. Furthermore, free
upgrades to Business Class may be earned in lieu of free tickets.
The Company performs marketing, promotional and media relations in house. An
outside firm assists the Company in handling advertising and public relations.
The Company has partnered with The Hertz Corporation to operate a reservation
call and Internet booking solicitation agreement under which the Company's
customers are able to reserve a Hertz rental car at discounted rates when making
a reservation for the Company's flights. In addition, the Company partners with
American Express to send direct mail pieces to American Express Cardmembers who
regularly fly over the Company's route system. The American Express offer
allows customers (who charge their airfare on their American Express Card) to
earn a free ticket in A-Plus Rewards at an even faster pace.
Air travel in the Company's markets tends to be seasonal, with the highest
levels occurring during the winter months to Florida and the summer months to
the midwest and northeastern United States. Advertising and promotional
expenses may be greater in lower traffic periods, as well as when entering a new
market, in an attempt to stimulate air travel.
Computer Reservations
The Company is a participant in all of the leading travel agency GDSs, which
include Amadeus, Galileo, SABRE, SystemOne, and WorldSpan. These systems provide
flight schedules, pricing information and allow travel agents participating in
all of these systems to electronically process a flight reservation without
contacting the Company's reservations facility.
At the time of a sale/reservation, the Company provides its customers with a
confirmation number, similar to the systems used by hotels and car rental
agencies. At the airport, this information is available for customer check-in,
which helps to alleviate long lines and achieve a
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quicker turnaround of aircraft. After the flight has departed, the Company's
internal information system posts passenger revenue from the passenger manifest
information.
Employees
As of February 24, 2000, the Company employed approximately 4,000 employees and
3,200 full-time equivalents.
Training, both initial and recurrent, is required for most employees. The
average training period for all new employees is approximately one to three
weeks, depending on classification. Both pilot training and mechanic training
are provided by in-house training instructors and at times, may be provided by
professional training organizations.
FAA regulations require pilots to be certificated as commercial pilots, with
specific ratings for aircraft to be flown, and to be medically certified as
physically fit. Pilot certificates and medical certifications are subject to
periodic continuation requirements including recurrent training and recent
flying experience. Mechanics, quality-control inspectors and flight dispatchers
must be certificated and qualified for specific aircraft. Flight attendants must
have initial and periodic competency fitness training and qualification.
Training programs are subject to approval and monitoring by the FAA. Management
personnel directly involved in the supervision of flight operations, training,
maintenance and aircraft inspection must meet experience standards prescribed by
FAA regulations. All of these employees are subject to pre-employment, random
and post-accident drug testing.
The Company has entered into a collective bargaining agreement with its pilots
represented by the National Pilots Association ("NPA"). The contract includes
competitive wages to those of similar airlines and expires in March 2001.
The Company has entered into a collective bargaining agreement with its
mechanics represented by the International Brotherhood of Teamsters ("the
Teamsters"). The contract includes simplified work rules and pay increases.
The contract expires in August 2001.
The Company has entered into a collective bargaining agreement with its flight
attendants represented by the Association of Flight Attendants ("AFA"). The
contract includes a ten percent pay increase in year one and a four percent
increase each year thereafter expiring in October 2002.
The Company's dispatchers voted to be represented by the Transport Workers Union
("TWU") in April 1999. The TWU and the Company have yet to sign a contract, but
are in negotiations and expect to sign one in early 2000.
In February 2000, the Company's customer service, ramp and reservation agents
rejected the International Association of Machinists in a vote that received
less than 30% support. The
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Company is unable to predict whether any of its other employees will elect to be
represented by a labor union or other collective bargaining unit. The election
by the Company's employees for representation in such an organization could
result in employee compensation and working condition demands that may affect
operating performance or expenses.
The Company does not expect that the unionization of these employee groups will
have a material adverse effect on its operating costs or performance.
Airport Operations
Ground handling services typically can be placed in three categories - public
contact, under-wing and complete ground handling. Public contact services
involve meeting, greeting and serving the Company's customers at the check-in
counter, gate and baggage claim area. Under-wing ground handling services
include, but are not limited to, marshaling the aircraft into and out of the
gate, baggage and mail loading and unloading, as well as lavatory and water
servicing, deicing and certain services provided to the aircraft overnight.
Complete ground handling consists of public contact and under-wing services
combined.
The Company conducts its own ground handling services in 24 airports, including
Atlanta. At other airports, Company operations not conducted by the Company's
employees are contracted to other air carriers, ground handling companies or
fixed base operators. The Company has at least one employee at each of these
cities to oversee its operations.
Insurance
The Company carries customary levels of passenger liability insurance, aircraft
insurance for aircraft loss or damage and other business insurance. The Company
is exposed to potential catastrophic losses that may be incurred in the event of
an aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent loss
from service, but also significant potential claims of injured passengers and
others. The Company is required by the DOT to carry liability insurance on each
of its aircraft. The Company currently maintains liability insurance in the
amount of $850 million per occurrence. Although the Company currently believes
its insurance coverage is adequate, there can be no assurance that the amount of
such coverage will not be changed or that the Company will not be forced to bear
substantial losses from accidents. Substantial claims resulting from an
accident in excess of related insurance coverage or not covered by the Company's
insurance could have a material adverse effect on the Company. Moreover, any
aircraft accident, even if fully insured, could cause and has caused a public
perception that some of the Company's aircraft are less safe or reliable than
other aircraft, which could have and has had a material adverse effect on the
Company's business.
Seasonality and Cyclicality
The Company's operations are primarily dependent upon passenger travel demand
and, as such, may be subject to seasonal variations. Management believes that
the weakest travel periods will generally be during the months of January and
and September. Leisure travel generally increases during the summer months and
at holiday periods.
The airline industry is highly volatile. General economic conditions directly
affect the level of passenger travel. Leisure travel is highly discretionary and
varies depending on economic
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conditions. While business travel is not as discretionary, business travel
generally diminishes during unfavorable economic times, as businesses tend to
tighten cost controls.
Government Regulations
The airline industry is highly competitive, primarily due to the effects of the
Airline Deregulation Act of 1978, which has substantially eliminated government
authority to regulate domestic routes and fares. Deregulation has increased the
ability of airlines to compete with respect to destination, flight frequencies
and fares. Nevertheless, the airline industry remains highly regulated in other
aspects, as more fully described below.
DOT Oversight
Although regulation of domestic routes and fares was abolished by the Airline
Deregulation Act of 1978, the Department of Transportation ("DOT") retains the
authority to alter or amend any airline's certificate or to revoke such
certificate for intentional failure to comply with the terms and conditions of
the certificate. In addition, the DOT has jurisdiction over international
tariffs and pricing, international routes, computer reservation systems, and
economic and consumer protection matters such as advertising, denied boarding
compensation, smoking and codeshare arrangements and has the authority to impose
civil penalties for violation of the United States Transportation Code or DOT
regulations.
Aircraft Maintenance and Operations
The Company is subject to the jurisdiction of the FAA with respect to aircraft
maintenance and operations, including equipment, dispatch, communications,
training, flight personnel and other matters affecting air safety. The FAA has
the authority to issue new or additional regulations. To ensure compliance with
its regulations, the FAA conducts regular safety audits and requires all
airlines to obtain operating, airworthiness and other certificates, which are
subject to suspension or revocation for cause.
The FAA has issued several Airworthiness Directives ("ADs") mandating
modifications to the older aircraft maintenance programs. These ADs were issued
to ensure that the oldest portion of the nation's aircraft fleet remains
airworthy and require structural modifications to or inspections of those
aircraft. The Company believes that all of its aircraft are in compliance with
the aging aircraft mandates.
The Company cannot predict the cost of compliance with all present and future
rules and regulations and the effect of such compliance on the business of the
Company, particularly its expansion plans and aircraft acquisition program.
FAA Funding
In 1997, a law was enacted imposing new aviation ticket taxes as part of larger
tax legislation designed to balance the nation's budget, provide targeted tax
relief and fund air traffic control, other FAA programs and airport development.
As enacted, these new taxes will be imposed through September 30, 2007. Included
in the new law is a phase in of a modified federal air
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transportation excise tax structure with a system that includes: a domestic
excise tax starting at 9% which decreased to 7.5% in 1999; a domestic segment
tax starting at $1.00 and increasing to $3.00 by 2002; and an increase in taxes
imposed on international travel. Both the domestic segment tax and the
international tax are indexed for inflation. The legislation also includes a
7.5% excise tax on certain amounts paid to an air carrier for the right to
provide mileage and similar awards (e.g., purchase of frequent flyer miles by a
credit card company). As a result of competitive pressures, the Company and
other airlines have been limited in their ability to pass on the cost of these
taxes to passengers through fare increases.
Fuel Tax
In August 1993, the federal government increased taxes on fuel, including
aircraft fuel, by 4.3 cents per gallon. Total fuel taxes paid by the Company in
1999 were $9.4 million.
Passenger Facility Charges
During 1990, Congress enacted legislation to permit airport authorities, with
prior approval from the DOT, to impose passenger facility charges ("PFCs") as a
means of funding local airport projects. These charges, which are intended to be
collected by the airlines from their passengers, are limited to $3.00 per
enplanement and to no more than $12.00 per round trip. To date, the Company has
passed on the cost of the PFCs to its passengers.
Slot Restrictions
At New York City's John F. Kennedy Airport and LaGuardia Airport, Chicago's
O'Hare International Airport and Washington's Ronald Reagan National Airport,
which have been designated "High Density Airports" by the FAA, there are
restrictions on the number of aircraft that may land and take off during peak
hours. In the future, these take off and landing time slot restrictions and
other restrictions on the use of various airports and their facilities may
result in curtailment of services by, and increased operating costs for,
individual airlines, including the Company, particularly in light of the
increase in the number of airlines operating at such airports. In general, the
FAA rules relating to allocated slots at the High Density Airports contain
provisions requiring the relinquishment of slots for nonuse and permit carriers,
under certain circumstances, to sell, lease or trade their slots to other
carriers. The Company currently utilizes 12 slots at LaGuardia Airport.
Additional Security and Safety Measures
In 1996 and 1997 the President's Commission on Aviation Safety and Security
issued recommendations and the U.S. Congress and the FAA adopted increased
safety and security measures designed to increase airline passenger safety and
security and protect against terrorist acts. Such measures have resulted in
additional operating costs to the airline industry. Examples of increased safety
and security measures include the introduction of a domestic passenger manifest
requirement, increased passenger profiling, enhanced pre-board screening of
passengers and carry on baggage, positive bag match for profile selections,
continuous physical bag search at checkpoints, additional airport security
personnel, expanded criminal background checks for
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selected airport employees, significantly expanded use of bomb sniffing dogs,
certification of screening companies, aggressive testing of existing security
systems, expansion of aging aircraft inspections to include non structural
components, development of a new systems approach for air carriers and the FAA
to monitor and improve safety oversight and installation of new ground proximity
warning systems on all commercial aircraft. The Company cannot forecast what
additional security and safety requirements may be imposed in the future or the
costs or revenue impact that would be associated with complying with such
requirements.
Miscellaneous
All air carriers are subject to certain provisions of the Communications Act of
1934, as amended, because of their extensive use of radio and other
communication facilities, and are required to obtain an aeronautical radio
license from the Federal Communications Commission ("FCC"). To the extent the
Company is subject to FCC requirements, it has taken and will continue to take
all necessary steps to comply with those requirements.
The Company's operations may become subject to additional federal regulatory
requirements in the future under certain circumstances. The Company's labor
relations are covered under Title II of the Railway Labor Act of 1926, as
amended, and are subject to the jurisdiction of the National Mediation Board.
During a period of past fuel scarcity, air carrier access to jet fuel was
subject to allocation regulations promulgated by the Department of Energy. The
Company is also subject to state and local laws and regulations at locations
where it operates and the regulations of various local authorities that operate
the airports it serves.
All international service is subject to the regulatory requirements of the
appropriate authorities of the other country involved. The Company does not
currently provide any international service. To the extent the Company seeks to
provide international air transportation in the future, it will be required to
obtain additional authority from the DOT.
Environmental Regulations
The Airport Noise and Capacity Act of 1990 ("ANCA") generally recognizes the
rights of airport operators with noise problems to implement local noise
abatement programs so long as they do not interfere unreasonably with interstate
or foreign commerce or the national air transportation system. The ANCA
generally requires FAA approval of local noise restrictions on Stage 3 aircraft
first effective after October 1990. While the Company has had sufficient
scheduling flexibility to accommodate local noise restrictions imposed to date,
the Company's operations could be adversely affected if locally-imposed
regulations become more restrictive or widespread.
The Environmental Protection Agency ("EPA") regulates operations, including air
carrier operations, which affect the quality of air in the United States. The
Company believes it has made all necessary modifications to its fleet to meet
emission standards issued by the EPA.
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Risk Factors
We have a significant amount of debt which we may not be able to refinance or
repay.
We are highly leveraged and will continue to have significant debt
obligations. The entire $150 million of our 10.25% Senior Notes and $80 million
of our 10.5% Senior Secured Notes will become due on April 15, 2001. We do not
expect to generate sufficient cash flow from operations to repay all $230.0
million of this debt by its due date. Accordingly, we will likely need to
refinance all or a portion of the outstanding debt through additional equity or
debt or a combination of debt and equity. However, we may not be able to obtain
this financing on acceptable terms. In such event, we could be forced to default
on our debt obligations and, ultimately, seek protection under federal
bankruptcy laws.
In addition, in 1999, we issued $178.9 million of enhanced equipment trust
certificates and will incur substantial additional debt, some of which may be
under capital leases, to finance the acquisition of the B717 aircraft. See "Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Our ability to make scheduled payments of principal or interest and our
ability to refinance the Senior Notes and Senior Secured Notes depends on our
future performance and financial results. These results are subject to general
economic, financial, competitive, legislative, regulatory, and other factors
that are, to some extent, beyond our control.
The amount of our debt could have important consequences to investors,
including the following:
. a substantial portion of our cash flow from operations must be dedicated to
debt service and will not be available for operations;
. our ability to obtain additional financing for aircraft purchases, capital
expenditures, working capital, or general corporate purposes could be
limited;
. our vulnerability to adverse economic and industry conditions is greater than
our larger and more financially secure competitors;
. 24 of our DC-9 aircraft are pledged as collateral to secure our $80 million
of 10.5% Senior Secured Notes due 2001;
. eight B717 aircraft are pledged as collateral to secure other debt with a
principal balance of $137.2 million as of September 30, 2000; and
. future B717 aircraft to be acquired by us will be pledged as collateral to
secure debt we incur.
13
<PAGE>
Restricted covenants in our debt instruments could limit how we conduct our
business, and if we fail to comply with these restrictions, our debt obligations
could be accelerated.
Our debt instruments contain covenants that, among other things, restrict
our ability to:
. incur additional indebtedness;
. pay dividends and make other distributions;
. prepay subordinated indebtedness;
. make investments and other restricted payments;
. create liens;
. sell assets;
. enter into certain mergers; and
. engage in certain transactions with affiliates.
Our current and future financing arrangements contain and are expected to
continue to contain similar or more restrictive covenants. As a result of these
restrictions, we may be limited in how we conduct business, and we may be unable
to raise additional debt or equity financing to operate during general economic
or business downturns, to compete effectively, or to take advantage of new
business opportunities. This may affect our ability to generate revenues and
make profits. Without sufficient revenues and cash, we may not be able to pay
interest and principal on our indebtedness.
Our failure to comply with the covenants and restrictions contained in our
indentures and other financing agreements could lead to a default under the
terms of these agreements. If a default occurs, the other parties to these
agreements could declare all amounts borrowed and all amounts due under other
instruments that contain provisions for cross-acceleration or cross-default due
and payable. If that occurs, we may not be able to make payments on our debt,
meet our working capital and capital expenditure requirements, or be able to
find additional alternative financing. Even if we obtain additional alternative
financing, we cannot guarantee investors that this financing would be on
favorable or acceptable terms.
Further increases in fuel costs will negatively affect our financial results by
increasing our expenses.
The cost of jet fuel is a significant expenditure for us. During the third
quarter of 2000, the cost of jet fuel accounted for approximately 26% of our
operating expenses. Increases in fuel prices or a shortage of supply could have
a material adverse effect on our operations and operating results. The impact to
our operations is disproportionately higher on average than to our competitors,
primarily due to the fact that many of our competitors are currently using a
14
<PAGE>
larger percentage of more fuel-efficient aircraft, have favorable hedging
positions and, accordingly, have fuel costs that represent a smaller portion of
their total costs. Subject to market conditions, we may implement fare increases
to pass fuel cost increases to our customers. There can be no assurance that any
such fare increase would not reduce the competitive advantage we seek by
offering affordable fares.
Our fuel prices are currently at historically high levels, having increased
from $.4995 per gallon, net of hedges, in 1999 to $1.0340 per gallon, net of
hedges, for the third quarter of 2000. Despite this increase, we have been able
to achieve improvements in our operating margins. We expect our fleet to become
much more fuel-efficient as we add new B717 aircraft and we should become
relatively less susceptible to adverse effects attributable to fuel price
changes. We have experienced fuel savings of approximately 24% over our existing
DC-9s and B737s with the 13 B717s currently in operation.
Jet fuel costs are highly correlated to oil prices and thus fluctuate with
changes in supply and demand for oil. Due to the effect of world and economic
events on the price and availability of oil, the future availability and cost of
jet fuel cannot be predicted with any degree of certainty. We estimate that a
10% increase in the September 30, 2000 jet fuel price would increase our fuel
expenses by approximately $4.9 million, net of fuel hedge instruments currently
outstanding, over the 12 month period beginning on October 1, 2000. As of
September 30, 2000 we had hedged nearly 35% of our current fuel needs through
March 2001 and 15% of our current fuel needs through September 2004 at a price
no higher than $28.00 per barrel of crude oil.
Because of the loss of ValuJet Flight 592, the ensuing suspension of our
operations and subsequent events, our financial results prior to fiscal year
1999 may be of little comparative value.
As a result of the loss of ValuJet Flight 592 on May 11, 1996, the ensuing
extraordinary review of our operations by the FAA, the suspension of operations
from June 17, 1996 until September 29, 1996, and related consequences, our
results for the periods prior to May 11, 1996 are not necessarily reflective of
the results to be expected in future periods. Additionally, our operations for
the balance of 1996 and for 1997 are also not reflective of results to be
expected in future periods. This comes as a result of the suspension of
operations for a significant portion of 1996, reduced service levels during the
fourth quarter of 1996 and during the year of 1997, incremental costs incurred
to reinitiate service to certain markets and to reactivate aircraft taken out of
service during the suspension of operations, and the acquisition of Airways
Corporation in November 1997. Our operations for 1998 are also not reflective of
results to be expected in future periods as 1998 was a transition year with
respect to the our business strategy and focus, route system and management. Our
financial results include the operations of AirTran Airways, Inc. only from and
after November 17, 1997, the date of the acquisition. You should consider the
effects of these events in analyzing our financial results.
Our operating results may suffer because of competition in the markets we serve.
The airline industry is highly competitive and is served by numerous
companies. We may face greater competition in the future. Any increased
competition could have a negative impact on our business and operating results.
15
<PAGE>
Competitors with greater financial resources than ours may price their
fares at or below our fares or increase their service. This competition could
prevent us from attaining a share of the passenger traffic necessary to sustain
profitable operations. Our ability to meet price competition depends on our
ability to operate at costs equal to or lower than our competitors or potential
competitors.
The profitability of our operations is influenced by economic conditions as
demand for discretionary travel diminishes during economic downturns.
The profitability of our operations is influenced by the condition of the
U.S. economy, that may impact the demand for discretionary travel and our
competitive pricing position. A substantial portion of our business is
discretionary travel, which has historically declined during economic downturns.
We depend heavily on the Atlanta market to be successful.
Our business strategy has focused and is expected to continue to focus on
adding flights to and from our Atlanta base of operations. A significant
reduction in our share of the Atlanta market or reduced passenger traffic to or
from Atlanta could have a material adverse effect on our financial condition and
results of operations. In addition, our dependence on a primary hub and on a
route network operating largely on the East Coast makes us more susceptible to
adverse weather conditions and other traffic delays along the East Cost than
some of our competitors that may be better able to spread these traffic risks
over larger route systems.
Airline strategic combinations could have an impact on our operations in ways
yet to be determined.
The strategic environment in the airline industry changes from time to time
as carriers implement varying strategies in pursuit of profitability, including
consolidation to expand operations and increase market strength, and entering
into global alliance arrangements. The recent announcement of the proposed
merger of United Airlines and US Airways will effect the airline industry.
However, because the merger has not yet been completed, we are unable to predict
what affect, if any, this merger or other changes in the strategic landscape
might have on our business, financial condition and results of operations.
16
<PAGE>
Our older airplanes could increase our costs of maintenance and negatively
impact our business and financial results.
As of September 30, 2000, the average age of our operating aircraft fleet
was approximately 22 years. As a result, we have incurred increased overall
operating costs due to the higher maintenance and other operating costs
associated with older aircraft.
We are required to comply with all applicable regulations and airworthiness
directives issued by the FAA with respect to aging aircraft. As a result, our
costs of maintenance, including costs to comply with aging aircraft requirements
for our DC-9 and B737 aircraft, may increase in the future.
We believe that our aircraft are mechanically reliable based on the
percentage of scheduled flights completed. However, we cannot guarantee that our
aircraft will continue to be sufficiently reliable over longer periods of time.
Furthermore, given the age of our fleet, any public perception that our aircraft
are less than completely reliable could have a material adverse effect on our
business.
If we are not able to fulfill our purchase commitments for new aircraft, our
growth could be slowed.
We are required to purchase 50 B717 aircraft from Boeing. As of October 27,
2000, we had taken delivery of 14 of these aircraft. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." We presently have committed lease financing
facilities at favorable rates for the delivery of 16 additional B717 airplanes
scheduled for delivery through February 2002. We cannot guarantee that we will
be able to obtain satisfactory financing to allow us to fulfill our obligations
for any aircraft thereafter. Should we default on our obligations, Boeing would
have the right to terminate the purchase agreement, accelerate certain financing
agreements and to seek other remedies available to it. If we are unable to
purchase these aircraft, our ability to increase our number of flights could be
adversely impacted. On the other hand, if our growth slows or air travel in
general decreases, we may not be able to utilize all the aircraft we have
committed to purchase. If we cannot use such aircraft, we may be required to
sell or lease such aircraft on terms which will depend upon market conditions at
the time. We could suffer a financial loss from any such sales or leases.
Our reputation and financial results could be negatively affected in the event
of a major aircraft accident.
A major accident involving our aircraft could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent loss
from service, but also significant potential claims of injured passengers and
others. Moreover, any aircraft accident, even if fully insured, could cause a
public perception that some of our aircraft are less safe or reliable than other
aircraft, and that could have a negative effect on our business. The occurrence
of one or more incidents or accidents involving our aircraft could have a
material adverse effect on the public's perception of us and future operations.
We are required by the DOT to carry liability insurance on each of our
aircraft. We currently maintain liability insurance in amounts and of the type
consistent with industry
17
<PAGE>
practice. Although we currently believe our insurance coverage is adequate, the
amount of such coverage may be changed in the future or we may be forced to bear
substantial losses from accidents. Substantial claims resulting from an accident
in excess of related insurance coverage could have a material adverse impact on
our business and financial results.
We are subject to extensive regulation by the FAA and other governmental
agencies, compliance with which could cause us to incur increased costs and
negatively affect our business and financial results.
We are subject to a wide range of governmental regulation, including
regulation by the FAA. For example, in the last several years, the FAA has
issued a number of maintenance directives and other regulations relating to,
among other things, retirement of older aircraft, security measures, collision
avoidance systems, airborne windshear avoidance systems, noise abatement, and
increased inspections and maintenance procedures to be conducted on older
aircraft. A modification, suspension or revocation of any of our FAA
authorizations or certificates could adversely impact our business. We expect to
continue to incur expenses for the purpose of complying with the FAA's aging
aircraft regulations. In addition, several airports have recently sought to
increase substantially the rates charged to airlines, and the ability of
airlines to contest such increases has been restricted by federal legislation,
U.S. Department of Transportation regulations, and judicial decisions.
Additional laws and regulations have been proposed that could significantly
increase the cost of airline operations by imposing additional requirements or
restrictions on operations. Laws and regulations have also been considered that
would prohibit or restrict the ownership and/or transfer of airline routes or
takeoff and landing slots. Also, the availability of international routes to
United States carriers is regulated by treaties and related agreements between
the United States and foreign governments that are amendable. We cannot predict
what laws and regulations may be adopted or their impact and we cannot guarantee
that laws or regulations currently proposed or enacted in the future will not
adversely affect us.
18
<PAGE>
ITEM 2. PROPERTY
--------
Operating Aircraft Fleet
Owned and leased aircraft operated by the Company as of December 31, 1999
included:
Average Average
No. of Operating Age
Aircraft Type Seats Owned Leases Total (Years)
------------- ------- ----- --------- ----- --------
B717 117 8 0 8 0.21
DC-9 106 28 7 35 29.10
B737 119 3 1 4 22.80
----- --------- -----
Total 39 8 47 23.63
For information concerning the estimated useful lives, residual values, lease
terms, operating rent expense and firm orders on additional aircraft, see Note 1
to the consolidated financial statements.
As of December 31, 1999, 36 of the Company's owned aircraft were encumbered
under debt agreements.
The Company took delivery of the first of 50 B717's beginning in September,
1999. These aircraft will be used to replace the B737's and DC-9's currently in
operation. The Company returned five B737's to lessors during 1999. The
Company expects to take delivery of eight B717 aircraft in 2000.
The delivery schedule for the Company's 42 B717's under firm contract is as
follows:
Aircraft Type 2000 2001 2002 2003
------------- ---- ---- ---- ----
B717 8 16 18 -
The first of the eight B717 aircraft to be delivered in 2000 was delivered in
January 2000.
A preliminary retirement schedule of the Company's aircraft is as follows:
Aircraft Type 2000 2001 2002 2003
------------- ---- ---- ---- ----
DC-9 - 10 15 10
B737 - 3 - 1
19
<PAGE>
The delivery and retirement schedules represent Management's best estimates as
of March 15, 2000. Consequently, actual deliveries and/or retirements may vary
from the above tables. See "Item 7. Management's Discussion and Analysis --
Forward Looking Statements."
Ground Facilities
The Company's principal executive offices are located two miles from the Orlando
International Airport in a leased facility consisting of approximately 34,000
square feet of office space. The facility houses the executive offices of the
Company as well as the Company's operations staff (including in-flight
operations and station operations), general administrative staff, computer
systems and personnel training facility. The lease agreement for this facility
expires in 2007 and may be extended an additional ten years through the exercise
of options in five-year increments.
The Company owns an aircraft hangar of approximately 70,000 square feet at the
Orlando International Airport, subject to a ground lease with the Greater
Orlando Aviation Authority. The ground lease agreement for this facility expires
in 2011 and may be extended an additional ten years through the exercise of
options in five-year increments. The hangar houses a portion of the Company's
maintenance staff, maintenance records and parts inventory.
The Company leases 19,739 square feet of office space in Atlanta for use as a
reservations center under a lease that expires September 30, 2004. The Company
also leases approximately 15,000 square feet of space in Atlanta for use as a
training center under a lease that expires August 31, 2004. The Company also
leases a 13,028 square feet reservations center in Savannah, Georgia, which
expires in January 2003.
The Company has signatory status on the lease of facilities at Hartsfield
Atlanta International Airport, which expires in 2010. The check-in-counters,
gates and airport office facilities at each of the other airports the Company
serves are leased from the appropriate airport authority or subleased from other
airlines. Such arrangements may include baggage handling, station operations,
cleaning and other services.
If such facilities at any additional cities to be served by the Company are not
available to the Company at acceptable rates, or if such facilities become no
longer available to the Company at acceptable rates, then the Company may choose
not to service such markets.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Of the numerous lawsuits that were filed against the Company seeking damages
attributable to those on Flight 592, only one remaining case is being pursued in
a state court in Florida. This case involves a wrongful death action seeking
actual and punitive damages. The Company believes that the $750 million coverage
available with respect to these claims will be sufficient to cover all claims
arising from the accident. As all claims are handled independently by the
Company's insurance carrier, the Company cannot reasonably estimate the amount
of liability that may finally exist. As a result, no accruals for losses and the
related claim for recovery from the Company's insurance carrier have been
reflected in the Company's financial statements. There can be no assurance that
the total amount of judgments and
20
<PAGE>
settlements will not exceed the amount of insurance available therefor or that
all damages awarded will be covered by insurance.
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
None.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Market Information
The Company's Common Stock, $.001 par value, is traded on the American Stock
Exchange under the symbol "AAI". As of March 10, 2000, there were approximately
5,512 holders of record of the Company's Common Stock. The following table sets
forth the reported high and low sale prices for the Common Stock for each fiscal
quarter since January 1, 1998.
Fiscal year ended December 31, 1998 High Low
----------------------------------- ---- ---
Quarter Ending March 31, 1998 $8.06 $3.00
Quarter Ending June 30, 1998 $9.44 $6.76
Quarter Ending September 30, 1998 $8.12 $3.88
Quarter Ending December 31, 1998 $4.47 $2.13
Fiscal year ended December 31, 1999 High Low
----------------------------------- ---- ---
Quarter Ending March 31, 1999 $5.13 $2.75
Quarter Ending June 30, 1999 $6.00 $4.13
Quarter Ending September 30, 1999 $7.25 $4.94
Quarter Ending December 31, 1999 $6.06 $3.50
As of March 10, 2000, the closing price of the Common Stock was $3.94.
Dividends
No cash dividends have ever been declared by the Company on its Common Stock. In
addition, the Company's debt indentures restrict the Company's ability to pay
cash dividends. The Company intends to retain earnings to finance the
development and growth of its business. Accordingly, the Company does not
anticipate that any dividends will be declared on its Common Stock for the
foreseeable future. Future payments of cash dividends, if any, will depend on
the Company's financial condition, results of operations, business conditions,
capital requirements, restrictions contained in agreements, future prospects and
other factors deemed relevant by the Company's Board of Directors.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this item is as follows:
<TABLE>
<CAPTION>
(in thousands except per share data)
1999 1998(b) 1997 1996 1995
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues $523,468 $439,307 $211,456 $219,636 $367,757
Net income (loss) (99,394) (a) (40,738) (c) (96,663) (d) (41,469) (e) 67,763
Basic earnings (loss)
per share (1.53) (0.63) (1.72) (0.76) 1.24
Diluted earnings (loss)
per share (1.53) (0.63) (1.72) (0.76) 1.13
Total assets 467,014 376,406 433,864 417,187 346,741
Long-term debt including
current maturities 415,688 245,994 250,712 244,706 109,038
</TABLE>
Notes: All special items listed below are pre-tax.
(a) Includes a $147.7 million impairment loss related to the accelerated
retirement of the DC-9 fleet as a result of the introduction of the B717
fleet and a gain of $19.6 million for a litigation settlement.
(b) See Note 1 to the consolidated financial statements.
(c) Includes a $27.5 million impairment loss related to the acceleration of the
retirement of four owned B737 aircraft as a result of the elimination of
their original route system and continued operating losses upon their
redeployment to other routes.
(d) Includes a $24.8 million charge related to the shutdown of the airline in
1996 and a $5.2 million charge for the renaming of the airline in connection
with the merger with Airways Corporation in November 1997.
(e) Includes a $68.0 million charge related to the shutdown of the airline in
1996, a $3.9 million gain on the sale of property, a $13.0 million
arrangement fee for aircraft transfer and a $2.8 million gain on insurance
recovery.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Results of Operations
For the twelve months ended December 31, 1999, 1998 and 1997
The following is a table of selected operational statistics and financial data
for the twelve months ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues passengers 6,460,533 5,462,827 3,005,731
Revenue passengers miles /(1)/ (000's) 3,473,490 3,244,539 1,597,585
Available seat miles /(2)/ (000's) 5,467,556 5,442,234 3,017,892
Passenger load factor /(3)/ 63.5% 59.6% 52.9%
Break-even load factor /(4)/ 59.4% 61.5% 76.3%
Average yield per revenue
passenger mile /(5)/ 14.01(cents) 12.97(cents) 12.58(cents)
Passenger revenue per available
seat mile /(6)/ 8.90(cents) 7.73(cents) 6.66(cents)
Operating cost per available seat mile /(7)/ 8.19(cents) 7.91(cents) 9.38(cents)
Average stage length (miles) 528 546 468
Average cost of aircraft fuel per gallon 49.95(cents) 54.87(cents) 69.00(cents)
Average daily utilization /(8)/ (hours) 9:54 9:42 8:25
Number of aircraft in fleet at end of period 47 50 53
</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) Excluding shutdown and other nonrecurring, rebranding and impairment
charges, 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, excluding shutdown and other nonrecurring, rebranding
and impairment charges, divided by available seat miles.
(8) The average number of hours per day that an aircraft flown in revenue
service is operated.
24
<PAGE>
Operating expenses per Available Seat Mile: (excluding shutdown and other
nonrecurring, rebranding and impairment charges)
<TABLE>
<CAPTION>
For the twelve months
ended December 31,
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Operating expenses
Salaries, wages and benefits 2.21(cents) 1.99(cents) 1.79(cents)
Aircraft fuel 1.25 1.32 1.62
Maintenance, materials and repairs 1.58 1.37 2.03
Commissions 0.68 0.64 0.33
Landing fees and other rents 0.49 0.43 0.60
Marketing and advertising 0.29 0.28 0.44
Aircraft rent 0.09 0.13 0.03
Depreciation 0.52 0.53 0.93
Other operating 1.08 1.22 1.61
---------- ---------- ----------
Total operating expenses 8.19(cents) 7.91(cents) 9.38(cents)
========== ========== ==========
</TABLE>
1999 Compared to 1998
Summary
We recorded a net loss of $99.4 million, or $1.53 per share, for the year
ended December 31, 1999, including the pre-tax impairment charge of $147.7
million and the litigation settlement gain of $19.6 million which together
reduced earnings per share by $1.98. For the year ended December 31, 1998, we
recorded a net loss of $40.7 million, or $.63 per share, including a pre-tax
impairment charge of $27.5 million or $.43 per share.
Our operating loss increased to $72.0 million in 1999 from $18.6 million in
1998. Our operating margins decreased to (13.8%) in 1999 from (4.2%) in 1998.
Included in these amounts were the impairment charges described above which
reduced operating income by $147.7 million in 1999 and $27.5 million in 1998.
These items and the 1999 settlement gain of $19.6 million included in other
revenues reduced the operating margin in 1999 by 25.4 percentage points and in
1998 by 6.3 percentage points.
Operating Revenues
Passenger revenues increased by 15.6% or $65.6 million in 1999 compared to 1998.
The growth in our 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. Yield (the average amount a passenger
pays to fly one mile) increased by 8.0%, year over year, from 13.0 cents to 14.0
cents.
25
<PAGE>
Unit revenue increased 15.1%, from 7.7 cents to 8.9 cents in 1998 and 1999,
respectively - better improvements than any major airline in the industry.
Our traffic, or revenue passenger miles (RPMs), increased 7.1% or 229.0 million
on a 0.5% increase in capacity, or available seat miles (ASMs). For the year
ended December 31, 1999, load factor increased 3.9 points to 63.5% versus 59.6%
for the year ended December 31, 1998. However, we continue to experience strong
competition that could negatively impact future loads and yields.
Other revenue increased 121.8%, or $18.2 million, this year compared to last
year due to the $19.6 million gain from a litigation settlement.
Operating Expenses
Excluding the impairment charges in 1999 and 1998, operating expenses increased
$17.4 million or 4.0% year over year. Our operating cost per ASM, excluding
impairment charges, increased 3.5% to 8.19 cents from 7.91 cents a year ago.
Salaries, wages and benefits increased 11.3%, or $12.3 million, due to a 6.1%
increase in overall headcount and contractual wage increases for our union-
represented labor groups. Aircraft fuel expense decreased year over year by
$3.6 million, or 5.0%, due to a 9.0% decrease in the average fuel cost per
gallon offset by a 4.4% increase in fuel consumption. Maintenance increased
15.8% or $11.8 million, due to a volume increase of five check lines as a result
of completing our structural life improvement program, and six additional engine
overhauls. The timing of maintenance to be performed is determined by the
number of hours an aircraft and engine are flown. Commissions paid to travel
agents increased $2.4 million or 6.9% due to an increase in commissionable
sales, offset by a rate reduction from 10% to 8% during the second quarter of
1998 and a further reduction to 5% during the fourth quarter of 1999. Landing
fees and other rents increased $3.6 million compared to the year ended 1998 due
to increased departures. We operated 5.1% more departures in 1999 than 1998, at
96,858 and 92,141, respectively. Aircraft rent decreased $2.4 million in 1999
from 1998 due to the return of five leased B737 aircraft throughout the year.
Other operating expenses decreased by $7.3 million, or 11.0%, primarily due to
the decline of credit card chargebacks and communications costs.
In the fourth quarter of 1999, we decided to accelerate the retirement of our
owned DC-9 fleet to accommodate the introduction of the B717 fleet. It was
originally our intent to use the B717s to increase overall capacity while
continuing to use the DC-9s into 2005. However, during 1999, the new management
team (including the CEO and President who joined us in 1999) reevaluated our
near and long-term fleet strategy and the components underlying such strategy.
By October 1999, we determined that it would be cost beneficial to retire the
DC-9s. As a result, we developed a fleet plan which provides for the retirement
of the DC-9s between December 31, 1999 and October 2003, generally coinciding
with the delivery of the B717s. Our board of directors approved the plan in
October 1999. In connection with our decision to accelerate the retirement of
these aircraft, we performed an evaluation to determine, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, whether future
cash flows (undiscounted and without interest charges) expected to result from
the use and eventual disposition of these aircraft would be less than the
aggregate carrying amount of these aircraft and related assets. As a result of
the evaluation, we determined that the estimated future cash flows expected to
be generated by these aircraft would be less than their carrying amount, and
therefore these aircraft are impaired as defined by SFAS No. 121. Consequently,
the original cost bases of these assets were reduced to reflect the fair market
value at the date the decision was made, resulting in a $147.7 million
impairment charge. We considered recent transactions and market trends involving
similar aircraft in determining the fair market value. See Note 10 to the
consolidated financial statements.
26
<PAGE>
Non-operating Expenses
Interest expense, net of interest income, increased 11.2% due to the November 3,
1999, issuance of $178.9 million of debt for financing ten B717 aircraft. See
Note 5 to the consolidated financial statements.
Income tax expense was $2.7 million and $0 in 1999 and 1998, respectively. The
1999 tax expense results from the utilization of a portion of our $141 million
of net operating loss ("NOL") carryforwards, existing at December 31, 1998,
offset in part by alternative minimum tax and the application to goodwill of the
tax benefit related to the realization of a portion of the Airways Corporation
NOL carryforwards. We have not recognized any benefit from the use beyond 1999
of NOL carryforwards because our 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. Although we produced operating profits in each quarter in 1999,
excluding the impairment charge, we do not believe this and other positive
evidence, including our projection of future profitable operations, offsets the
effect of our recent cumulative losses.
1998 Compared to 1997
Summary
Our results of operations for 1997 are not reflective of the results to be
expected in future periods. This comes as a result of reduced service levels
during the year of 1997, incremental costs incurred to reinitiate service to
certain markets and to reactivate aircraft taken out of service and the merger
of Airways Corporation into our Company in November 1997. Our financial results
include the operations of Airways Corporation only from and after November 17,
1997, the date of the Merger.
We recorded a net loss of $40.7 million, or $.63 per share, and $96.7 million,
or $1.72 per share, for the years ended December 31, 1998 and 1997,
respectively, The impairment charge of $27.5 million in 1998 increased the net
loss per share by $.43. The $30.1 million charge related to rebranding and
shutdown costs in 1997 increased the net loss per share by $.53
Our operating loss decreased to $18.6 million in 1998 from $101.8 million in
1997. Our operating margins decreased to (4.2%) in 1998 from (48.1%) in 1997.
Included in these amounts were the impairment and other charges described above
which reduced operating income by $27.5 million in 1998 and $30.1 million in
1997. These items reduced the operating margin in 1998 by 6.3 percentage points
and in 1997 by 14.2 percentage points.
Operating Revenues
Passenger revenues in 1998 were $420.9 million as compared to $200.9 million for
the year ending December 31, 1997. The 109.5% increase is principally due to an
81.8% increase in revenue passengers enplaned and a 103.1% increase in revenue
passenger miles. Our yield (the average amount that a passenger pays to fly one
mile) increased 3.2%, year over year, from 12.6 cents to 13.0 cents.
27
<PAGE>
Our RPMs increased 103.1%, or 1.6 billion, on an 80.3% increase in ASMs. For
the year ended December 31, 1998, load factor increased 6.7 points to 59.6%
versus 52.9% for the twelve months ended December 31, 1997.
Cargo revenue increased 55.0%, from $2.3 million in 1997 to $3.5 million in 1998
due to an 80.3% increase in capacity.
Other revenues increased 80.5%, or $6.7 million, in 1998 compared to 1997 due to
the 81.8% increase in revenue passengers enplaned.
Operating Expenses
Excluding the impairment charge in 1998 and rebranding and shutdown and other
nonrecurring charges in 1997, operating expenses increased $147.2 million or
52.0%. Our operating cost per ASM decreased 15.7% to 7.91 cents from 9.38 cents
in 1997. Labor costs increased from $54.1 million in 1997 to $108.5 million in
1998 primarily due to contractual wage increases for our union-represented labor
groups and the acquisition of Airways Corporation on November 17, 1997. Aircraft
fuel increased 47.4% primarily due to the increase in consumption related to
increased service levels, offset by a 21.7% decrease in price per gallon in 1998
from 69.0 cents per gallon 54.0 cents per gallon. Maintenance costs increased
21.7% due to additional check lines and engine overhauls principally resulting
from an increase in the number of operating aircraft from 44 at December 31,
1997 to 50 at December 31, 1998. Commissions expense increased 246.1% largely
due to the increase in passenger volume and the increase of travel agency
bookings through the Airline Reporting Corporation ("ARC"), which we joined in
September 1997. Landing fees and other rents increased 28.2%, from $18.2 million
in 1997 to $23.4 million in 1998, due to a 72% increase in number of departures.
Marketing and advertising increased 13.6% from $13.3 million in 1997 to $15.1
million in 1998. However, as a percentage of revenue, marketing and advertising
decreased 2.9 percentage points from 6.3% in 1997 to 3.4% in 1998, which is more
in line with industry standards. Aircraft rent increased from $0.9 million in
1997 to $7.2 million in 1998 due to a full year of B737 rent expense versus only
six weeks of aircraft rent expense recognized after the acquisition of Airways
Corporation in November 1997. Depreciation expense remained flat year over year.
Additional capital spending increased depreciation $12 million offset by a $12
million reduction due to revising the salvage values of our DC-9 equipment. See
Note 1 of the consolidated financial statements. Other operating expenses
increased 37.3%, or $18.0 million, in 1998 as compared to 1997, primarily as a
result of increases in passenger and aircraft servicing expenses.
In the fourth quarter of 1998, we decided to accelerate the retirement of four
owned Boeing B737 aircraft as a result of the elimination of their original
route system and continued operating losses upon their redeployment to other
routes. The B737s are intended to be replaced with B717 aircraft. In connection
with our decision to accelerate the retirement of these aircraft, which were
acquired in the acquisition of Airways Corporation, we performed an evaluation
to determine, in accordance with SFAS No. 121, whether future cash flows
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of these aircraft would be less than the aggregate carrying
amount of these aircraft and related assets and an allocation of cost in excess
of net assets acquired resulting from the acquisition of Airways
28
<PAGE>
Corporation. SFAS No. 121 requires that when a group of assets being tested for
impairment was acquired as part of a business combination that was accounted for
using the purchase method of accounting, any cost in excess of net assets
acquired that arose as part of the transaction must be included as part of the
asset grouping. As a result of the evaluation, we determined that the estimated
future cash flows expected to be generated by these aircraft would be less than
their carrying amount and allocated cost in excess of net assets acquired, and
therefore these aircraft are impaired as defined by SFAS No. 121. Consequently,
the original cost bases of these assets were reduced to reflect the fair market
value at the date the decision was made, resulting in a $27.5 million impairment
loss. We considered recent transactions and market trends involving similar
aircraft in determining the fair market value. See Note 10 to our consolidated
financial statements.
During 1997, we incurred $30.1 million of costs attributable to rebranding the
airline and shutdown and other nonrecurring costs attributable to the continued
effects of the reduced schedule after the 1996 suspension of operations. No
such costs were incurred during 1998.
Non-operating Expenses
Interest expense, net, increased $4.5 million primarily due to the decrease in
interest income earned from excess cash as a result of cash and cash equivalents
decreasing from $86.0 million at December 31, 1997 to $10.9 million at December
31, 1998.
We have not recognized any benefit from the future use of operating loss
carryforwards because our evaluation of all the available evidence in assessing
the realizability of the tax benefits of such loss carryforwards indicates that
the underlying assumptions of future profitable operations contain risks that do
not provide sufficient assurance to recognize such tax benefits currently. Our
income tax benefit was $0 and $22.8 million in 1998 and 1997, respectively. The
benefit recorded in 1997 was the result of operating loss carryback claims.
Outlook for 2000
During 1999, we celebrated many accomplishments on our return to profitability.
The accomplishments include, but are not limited to:
. Four quarters of profitability (exclusive of impairment loss in fourth quarter
and litigation settlement gain)
. Significant improvement in cash balance
. Introduction and delivery of eight B717 aircraft
. Awarded 75% of Department of Defense contract awards in which we bid -
estimated to be worth nearly $9.0 million per year
. Significant Revenue per ASM growth compared to the industry
29
<PAGE>
We expect 2000 to be another good year for our airline. We will benefit from
the travel agent commission reduction from 8% to 5%, reduced maintenance costs
per block hour and reduced depreciation expense as a result of the impairment
loss. We are exposed to high jet fuel prices without the benefit of a
significant hedge. Higher interest expense is also a risk we will face in 2000.
We are incurring higher interest expense due to aircraft financing. In
addition, there can be no assurance that attractive financing will be available
when we seek to refinance our $230.0 million of debt due in April 2001.
Year 2000
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and non-
information technology systems and believe those systems successfully responded
to the Year 2000 date change. We expensed approximately $800,000 during 1999 in
connection with remediating our systems. We are not aware of any material
problems resulting from Year 2000 issues, either with our internal systems, or
the products and services of third parties. We will continue to monitor our
mission critical computer applications and those of our suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
Liquidity and Capital Resources
We rely primarily on operating cash flows to provide working capital. We
presently have no lines of credit or other facilities. As of December 31, 1999,
we had cash and cash equivalents of $58.1 million compared to $10.9 million at
December 31, 1998 and working capital deficit of $7.3 million compared to a
working capital deficit of $30.8 million at December 31, 1999 and 1998,
respectively. We generally must satisfy all of our working capital expenditure
requirements from cash provided by operating activities, from external capital
sources or from the sale of assets. Substantial portions of our assets have been
pledged to secure various issues of our outstanding indebtedness. 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 our access to capital is constrained, we may
not be able to make certain capital expenditures or to continue to implement
certain other aspects of our strategic plan, and we may therefore be unable to
achieve the full benefits expected therefrom. Based on the favorable economic
conditions of the U.S. airline industry, we expect to be able to generate
positive working capital through our operations; however, we cannot predict
whether the current favorable economic trends and conditions will continue, or
the effects of competition or other factors, such as increased fuel prices, that
are beyond our control.
As of December 31, 1999, cash and cash equivalents increased from December 31,
1998 by $47.2 million. Operating activities generated $75.7 million in cash.
Investing activities used cash of $197.7 million primarily related to the
acquisition of eight B717 aircraft and several DC-9 hush kits. Financing
activities generated cash of $169.2 million in connection with issuance of debt
for the acquisition of ten B717 aircraft offset by long-term debt payments.
30
<PAGE>
As of December 31, 1999, our operating fleet consisted of 35 DC-9 aircraft, four
B737 aircraft and eight B717 aircraft. We returned five leased B737 aircraft and
grounded six Stage 2 DC-9 and B737 aircraft during 1999.
We have contracted with Boeing for the purchase of 50 B717 aircraft for delivery
from 1999 to 2002 - of which eight had been delivered as of December 31, 1999.
During the third quarter of 1998, we 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 we paid $6.6
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 B717s. If we exercise our option to acquire up to an
additional 50 B717 aircraft, additional payments could be required beginning in
2001. We expect to finance at least 85% of the cost of each of these aircraft.
We completed a private placement of $178.9 million, enhanced equipment trust
certificates (EETCs) on November 3, 1999. The proceeds will be used to purchase
the first ten B717 aircraft. The EETCs bear interest at 10.63% per annum and
are payable in semi-annual installments from April 17, 2000, through April 17,
2017. Although Boeing has agreed to provide financing support with respect to
the remaining aircraft to be acquired, we will be required to obtain the
financing from other sources. We believe that with the support to be provided
by Boeing, aircraft-related debt financing should be available when needed.
However, there is no assurance that we will be able to obtain sufficient
financing on attractive terms, if at all. If we are unable to secure acceptable
financing, we could be required to modify our aircraft acquisition plans or to
incur higher than anticipated financing costs, which could have a material
adverse effect on our results of operations and cash flows.
On November 5, 1999, we announced our decision to accelerate the retirement of
the DC-9 fleet to accommodate the introduction of the B717 fleet. The
accelerated retirement allows for a more moderate capacity growth and resulted
in a non-cash pretax fleet disposition charge of $147.7 million during the
fourth quarter of 1999.
As of December 31, 1999, our debt related to asset financing totaled $265.7
million, with respect to which aircraft and certain other equipment are pledged
as security. Included in such amount is $80.0 million of 10.50% Senior Secured
Notes due April 2001 under which interest is payable semi-annually and the
$178.9 million of 10.63% enhanced equipment trust certificates, of which a
portion of interest and principal is payable semi-annually. In addition, we
have $150.0 million of 10.25% Senior Notes outstanding. The principal balance
of the Senior Notes is due in April 2001 and interest is payable semi-annually.
The entire principal amount of the Senior Notes ($150.0 million) and Senior
Secured Notes ($80.0 million) will become due on April 15, 2001. We do not
expect to generate sufficient cash flow from operations to repay all $230.0
million of such debt by its due date. Accordingly, we will likely need to
refinance all or a portion of the outstanding debt through additional equity or
debt or a combination thereof. The ability to refinance our debt depends on our
future performance and financial results. Such results are subject to general
economic, financial, competitive, legislative, regulatory, and other factors
that are, to some extent, beyond our control. All of our debt has final
maturities ranging from 2000 to 2017 with scheduled debt payments as of December
31, 1999 as follows: 2000--$19.6 million, 2001--$232.2 million, 2002--$7.5
million, 2003--$4.6 million, 2004--$6.1 million and thereafter--$145.7 million.
31
<PAGE>
Certain debt bears interest at rates ranging from 5.85% to 11.67% per annum and
is repayable in consecutive monthly or quarterly installments over a four- to
seven-year period. One of these notes, with an aggregate unpaid principal
balance of approximately $1.2 million as of December 31, 1999, has a variable
rate of interest based on the London Interbank Offered Rate ("LIBOR") plus 1.50%
to 3.73%.
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 we would be
able to pass on increased fuel prices to our customers by increasing fares.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for periods beginning after June 15, 2000. We are
currently evaluating SFAS No. 133 and have not yet determined its impact on the
consolidated financial statements.
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.
We wish 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:
. our performance in future periods;
. our ability to maintain profitability and to generate working capital from
operations;
. our ability to take delivery of and to finance aircraft;
. the adequacy of our 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 our 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 our Company;
32
<PAGE>
. our ability to achieve and maintain acceptable cost levels;
. fare levels and actions by competitors;
. regulatory matters, general economic conditions; commodity prices; and
. 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 elsewhere in our Form 10-K for the year
ended December 31, 1999.
All forward-looking statements made in connection with this Report are expressly
qualified in their entirety by these cautionary statements. Our Company
disclaims any obligation to update or correct any of its forward-looking
statements.
Business Strategy
Even though we currently have no plans to do so, we may change our business
strategy in the future and may not pursue some of the goals and initiatives
stated herein.
33
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market Risk Sensitive Instruments and Positions
We are subject to certain market risks including interest rates and commodity
prices (i.e., aircraft fuel). The adverse effects of changes in these markets
pose a potential loss as discussed below. The sensitivity analyses do not
consider the effects that such adverse changes may have on overall economic
activity nor do they consider additional actions we may take to mitigate our
exposure to such changes. Actual results may differ. See the Notes to the
consolidated financial statements for a description of our Company's financial
policies and additional information.
Interest Rates
As of December 31, 1999 and 1998, the fair value of our long-term debt was
estimated to be $392.3 million and $175.3 million, respectively, based upon
discounted future cash flows using current incremental borrowing rates for
similar types of instruments or market prices. Market risk, estimated as the
potential increase in fair value resulting from a hypothetical one percent
decrease in interest rates, was approximately $8.0 million as of December 31,
1999, and approximately $4.2 million as of December 31, 1998.
Aircraft Fuel
Our results of operations are impacted by changes in the price of aircraft fuel.
Excluding the impairment charges, aircraft fuel accounted for 15.3% and 16.7% of
our operating expenses in 1999 and 1998, respectively. Based on our 2000
projected fuel consumption, a ten percent increase in the average price per
gallon of aircraft fuel at December 31, 1999 would increase fuel expense for the
next twelve months by approximately $10.8 million, net of hedging instruments
outstanding at December 31, 1999. Comparatively, based on 1999 fuel usage, a
10% increase in fuel prices would have resulted in an increase in fuel expense
of approximately $2.8 million, net of hedging instruments utilized during 1999.
The increase in market risk is primarily due to our fuel hedging contracts
covering significantly more fuel requirements in 1999 than in 2000. In 1999, we
entered into fixed rate swap contracts and jet fuel purchase commitments in
order to manage the price risk and utilization of fuel cost. At December 31,
1999, we had hedged approximately 11% of our projected fuel requirements for the
first six months of 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The response to this Item is submitted as a separate section of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "ELECTION OF DIRECTORS" in the Proxy Statement to be used
in connection with the solicitation of proxies for the Company's annual meeting
of stockholders to be held May 18, 2000, which Proxy Statement is to be filed
with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "EXECUTIVE COMPENSATION" in the Proxy Statement to be
used in connection with the solicitation of proxies for the Company's annual
meeting of stockholders to be held May 18, 2000, which Proxy Statement is to be
filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "STOCK OWNERSHIP" in the Proxy Statement to be used in
connection with the solicitation of proxies for the Company's annual meeting of
stockholders to be held May 18, 2000, which Proxy Statement is to be filed with
the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item is incorporated herein by reference to the
data under the heading "CERTAIN TRANSACTIONS" in the Proxy Statement to be used
in connection with the solicitation of proxies for the Company's annual meeting
of stockholders to be held May 18, 2000, which Proxy Statement is to be filed
with the Commission.
35
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) 1. The response to this portion of Item 14 is submitted as a separate
section of this report.
2. The response to this portion of Item 14 is submitted as a separate
section of this report.
3. Filing of Exhibits:
Exhibit 23 - Consent of Independent Auditors
(b) Reports on Form 8-K:
Form 8-K dated October 21, 1999 to report third quarter earnings.
(c) The following exhibits are filed herewith or incorporated by reference
as indicated. Exhibit numbers refer to Item 601 of Regulation S-K.
Exhibit No. And Description
---------------------------
3.1 Articles of Incorporation (1)
3.2 Bylaws (As amended on November 17, 1997) (10)
4.1 See the Articles of Incorporation filed as Exhibit 3.1 and Bylaws filed as
Exhibit 3.2
4.2 Agreement and Plan of Merger among the Company, ValuJet Airlines, Inc. and
VJET Acquisition, Inc. (1)
4.3 Plan of Reorganization and Agreement of Merger dated July 10, 1997,
between the Company and Airways Corporation (2)
4.4 Plan of Merger dated July 10, 1997, between the Company and Airways
Corporation (2)
4.5 Amendment to Plan of Reorganization and Agreement of Merger between the
Company and Airways Corporation (2)
36
<PAGE>
4.6 Amendment to Plan of Merger between the Company and Airways Corporation
(2)
4.7 Indenture dated as of April 17, 1996, among the Company, its subsidiaries
and Bank of Montreal Trust Company, as Trustee (3)
4.8 First Supplemental Indenture dated August 26, 1996, among the Company, its
subsidiaries, Bank of Montreal Trust Company and Fleet National Bank (11)
4.9 Second Supplemental Indenture dated August 5, 1997, among the Company, its
subsidiaries and State Street Bank and Trust (10)
4.10 Third Supplemental Indenture dated November 17, 1997, among the Company,
its subsidiaries and State Street Bank and Trust (11)
4.11 Indenture dated August 13, 1997, among the Company, its subsidiaries and
The Bank of New York, as Trustee (4)
4.12 First Supplemental Indenture dated November 17, 1997, among the Company,
its subsidiaries and The Bank of New York (11)
4.13 Second Supplemental Indenture dated April 23, 1999, among the Company, its
subsidiaries and The Bank of New York (16)
4.14 Third Supplemental Indenture dated December 30, 1999, among the Company,
its subsidiaries and The Bank of New York (16)
10.1 Incentive Stock Option Agreement dated June 1, 1993, between ValuJet
Airlines, Inc. and Lewis H. Jordan (5)(6)
10.2 1993 Incentive Stock Option Plan (5)(6)
10.3 1994 Stock Option Plan (5)(6)
10.5 1995 Employee Stock Purchase Plan (7)
10.6 Purchase Agreement between McDonnell Douglas Corporation and ValuJet
Airlines, Inc. dated December 6, 1995. The Commission has granted
confidential treatment with respect to certain portions of this Agreement
(8)
10.7 Agreement and Lease of Premises Central Passenger Terminal Complex
Hartsfield Atlanta International Airport (8)
10.8 1996 Stock Option Plan (6)(9)
10.9 Consulting Agreement dated November 17, 1997, between the Company and
Robert L. Priddy (6)(10)
10.10 Consulting Agreement dated November 17, 1997, between the Company and
Lewis H. Jordan (6)(10)
10.11 Airways Corporation 1995 Stock Option Plan (6)(12)
10.12 Airways Corporation 1995 Directors Stock Option Plan (6)(12)
10.13 Lease of headquarters in Orlando, Florida, dated November 14, 1995 (13)
10.14 Orlando International Lease and Use Agreement (14)
10.15 Orlando Tradeport Maintenance Hangar Lease Agreement by and between
Greater Orlando Aviation Authority and Page AvJet Corporation dated
December 11, 1989 (15)
10.16 Amendment No. 1 to Orlando Tradeport Maintenance Hangar Lease Agreement by
and between Greater Orlando Aviation Authority and Page AvJet Corporation
dated June 22, 1990 (15)
10.17 Agreement and Second Amendment to Orlando Tradeport Maintenance Hangar
Lease Agreement by and between Greater Orlando Aviation Authority and The
Company. dated January 25, 1996 (15)
10.18 Supplemental Agreement dated as of November 17, 1998, between the
Company and D. Joseph Corr (11)
10.19 Employment Agreement dated as of January 4, 1999, between the Company and
Joseph B. Leonard (11)
37
<PAGE>
10.20 Loan Agreement dated as of January 25, 1999, among the Company, Lewis H.
Jordan, Robert L Priddy, Timothy P. Flynn and Maurice J. Gallagher, Jr.
(11)
10.21 Note Purchase Agreement dated as of November 3, 1999, among the Company,
AirTran Airways, Inc., State Street Bank and Trust Company of
Connecticut National Association and First Security Bank, National
Association. (16)
21 Subsidiaries of the Registrant (16)
23 Consent of Independent Auditors
27 Financial Data Schedule (16)
---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 33-95232, filed with the Commission on August 1,
1995 and amendments thereto.
(2) Incorporated by reference to the Company's Registration Statement Form
S-4, registration number 333-33837, filed with the Commission on August
18, 1997 and amendments thereto.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, Commission File No. 0-26914, filed
with the Commission on May 3, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4, registration number 333-37487, filed with the Commission on October
9, 1997 and amendments thereto.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-1, registration number 33-78856, filed with the Commission on May 12,
1994 and amendments thereto.
(6) Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to Item 14(c) of
Form 10-K.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, Commission File No. 0-24164, filed
with the Commission on August 11, 1995.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, Commission File No. 0-24164, filed with
the Commission on March 29, 1996 and amendment thereto.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, Commission File No. 0-24164, filed with
the Commission on March 31, 1997.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, Commission File No. 0-26914, filed with
the Commission on March 27, 1998.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, Commission File No. 0-26914, filed with
the Commission on
38
<PAGE>
March 31, 1999.
(12) Incorporated by reference to Airways Corporation's Registration Statement
on Form S-4, registration number 33-93104, filed with the Commission.
(13) Incorporated by reference to the Quarterly Report on Form 10-Q of Airways
Corporation (Commission File No. 0-26432) for the quarter ended December
31, 1995.
(14) Incorporated by reference to the Quarterly Report on Form 10-Q of Airways
Corporation (Commission File No. 0-26432) for the quarter ended December
31, 1996.
(15) Incorporated by reference to the Annual Report on Form 10-K of Airways
Corporation (Commission File No. 0-26432) for the year ended March 31,
1997.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, Commission File No. 0-26914, filed with
the Commission on March 30, 2000.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AIRTRAN HOLDINGS, INC.
By:
/s/ Joseph B. Leonard
---------------------
Joseph B. Leonard
Chairman, President and Chief Executive Officer
Date: October 20, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C>
/s/ Joseph B. Leonard October 20, 2000
---------------------
Joseph B. Leonard
Chairman, President and Chief Executive Officer
/s/ Stanley J. Gadek October 20, 2000
---------------------
Stanley J. Gadek
Senior Vice President of Finance and Chief Financial
Officer (Principal Accounting and Financial Officer)
/s/ Don L. Chapman October 20, 2000
------------------
Don L. Chapman
Director
/s/ John K. Ellingboe October 20, 2000
---------------------
John K. Ellingboe
Director
/s/ Lewis H. Jordan October 20, 2000
-------------------
Lewis H. Jordan
Director
/s/ Robert L. Priddy October 20, 2000
--------------------
Robert L. Priddy
Director
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
/s/ Robert D. Swenson October 20, 2000
---------------------
Robert D. Swenson
Director
/s/ William J. Usery October 20, 2000
--------------------
S. William J. Usery
Director
</TABLE>
41
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1999
AirTran Holdings, Inc.
Orlando, Florida
42
<PAGE>
The following consolidated financial statements of AirTran Holdings, Inc. are
included in Item 8:
CONTENTS
Consolidated statements of operations - Years ended
December 31, 1999, 1998, and 1997........................................ 47
Consolidated balance sheets - December 31, 1999 and 1998................. 48
Consolidated statements of stockholders' equity (deficit) - Years ended
December 31, 1999, 1998, and 1997........................................ 50
Consolidated statements of cash flows - Years ended
December 31, 1999, 1998, and 1997........................................ 51
Notes to consolidated financial statements - December 31, 1999........... 52
The following consolidated financial statements schedule of AirTran Holdings,
Inc. is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
43
<PAGE>
Report of Independent Auditors
The Stockholders and Board of Directors
AirTran Holdings, Inc.
We have audited the accompanying consolidated balance sheets of AirTran
Holdings, Inc. as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the index at item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AirTran
Holdings, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
January 25, 2000
44
<PAGE>
AirTran Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating revenues:
Passenger $486,487 $420,901 $200,939
Cargo 3,888 3,488 2,250
Other 33,093 14,918 8,267
-------- -------- --------
Total operating revenues 523,468 439,307 211,456
Operating expenses:
Salaries, wages and benefits 120,737 108,461 54,133
Aircraft fuel 68,331 71,922 48,797
Maintenance, materials and repairs 86,374 74,577 61,270
Commissions 37,278 34,886 10,079
Landing fees and other rents 27,004 23,366 18,227
Marketing and advertising 15,643 15,112 13,299
Aircraft rent 4,869 7,241 946
Depreciation 28,533 28,591 28,148
Other operating 58,952 66,216 48,241
Impairment loss 147,735 27,492 -
Shutdown and other nonrecurring - - 24,839
Rebranding - - 5,243
-------- -------- --------
Total operating expenses 595,456 457,864 313,222
-------- -------- --------
Operating loss (71,988) (18,557) (101,766)
Interest (income) expense:
Interest income (3,183) (3,181) (6,659)
Interest expense 27,850 25,362 24,331
-------- -------- --------
Interest expense, net 24,667 22,181 17,672
-------- -------- --------
Loss before income taxes (96,655) (40,738) (119,438)
Income tax expense (benefit) 2,739 - (22,775)
-------- -------- ---------
Net loss $(99,394) $(40,738) $ (96,663)
======== ======== =========
Basic and diluted loss per share $ (1.53) $ (0.63) $ (1.72)
======== ======== =========
Weighted average shares outstanding
(basic and diluted) 65,097 64,641 56,068
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE>
AirTran Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
Assets 1999 1998
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 58,102 $ 10,882
Restricted cash 18,069 13,459
Accounts receivable, less allowance of $927 and
$1,325 at December 31, 1999 and 1998, respectively 7,599 7,784
Spare parts, materials and supplies, less allowance
for obsolescence of $2,260 and $4,259 at
December 31, 1999 and 1998, respectively 5,816 11,486
Prepaid expenses 14,058 9,346
-------- --------
Total current assets 103,644 52,957
Property and equipment:
Flight equipment 244,662 306,026
Less: Accumulated depreciation (4,973) (87,084)
-------- --------
239,689 218,942
Purchase deposits for flight equipment 22,562 36,518
Other property and equipment 24,914 23,491
Less: Accumulated depreciation (13,436) (10,542)
-------- --------
11,478 12,949
-------- --------
273,729 268,409
Other assets:
Intangibles resulting from business acquisition 38,862 42,727
Unexpended debt proceeds-restricted 39,232 -
Debt issuance costs 5,733 6,956
Other assets 5,814 5,357
-------- --------
Total assets $467,014 $376,406
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
AirTran Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
Liabilities and Stockholders' Equity (Deficit) 1999 1998
---------------------------------------------- -------- --------
<S> <C> <C>
Current liabilities:
Accounts payable $ 10,410 $ 13,252
Accrued liabilities 57,456 44,508
Air traffic liability 23,491 17,022
Current portion of long-term debt 19,569 8,929
-------- --------
Total current liabilities 110,926 83,711
Long-term debt, less current portion 396,119 237,065
Stockholders' equity (deficit):
Preferred stock, $.01 par value per share, 5,000 shares
authorized, no shares issued or outstanding - -
Common stock, $.001 par value per share, 1,000,000
shares authorized, and 65,698 and 64,898 shares
issued and outstanding at December 31, 1999 and
1998, respectively 66 65
Additional paid-in capital 150,589 146,857
Accumulated deficit (190,686) (91,292)
--------- --------
Total stockholders' equity (deficit) (40,031) 55,630
--------- --------
Total liabilities and stockholders' equity (deficit) $ 467,014 $376,406
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE>
AirTran Holdings, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Common Stock
--------------
Retained Total
Additional Earnings Stockholders'
Paid-in (Accumulated Equity
Shares Amount Capital Deficit) (Deficit)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 54,876 $ 55 $ 77,235 $ 46,109 $123,399
Issuance of common stock for exercise of options 317 - 904 - 904
Issuance of common stock under stock purchase plan 24 - 143 - 143
Issuance of common stock and stock options to acquire business 9,095 9 66,655 - 66,664
Net loss - - - (96,663) (96,663)
----------------------------------------------------------------
Balance at December 31, 1997 64,312 64 144,937 (50,554) 94,447
Issuance of common stock for exercise of options 563 1 1,790 - 1,791
Issuance of common stock under stock purchase plan 23 - 130 - 130
Net loss - - - (40,738) (40,738)
----------------------------------------------------------------
Balance at December 31, 1998 64,898 65 146,857 (91,292) 55,630
Issuance of common stock for exercise of option 226 - 1,031 - 1,031
Issuance of common stock under stock purchase plan 51 - 202 - 202
Issuance of common stock in litigation settlement 523 1 2,499 - 2,500
Net loss - - - (99,394) (99,394)
----------------------------------------------------------------
Balance at December 31, 1999 65,698 $ 66 $150,589 $(190,686) $(40,031)
================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
48
<PAGE>
AirTran Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss $ (99,394) $(40,738) $ (96,663)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 30,432 31,525 32,376
Impairment loss 147,735 27,492 -
Provisions for uncollectible accounts 4,022 8,003 2,895
Deferred income taxes 2,387 - (13,221)
Changes in current operating assets and liabilities:
Restricted cash (4,610) (7,494) 4,480
Accounts receivable (3,837) (11,425) (1,420)
Spare parts, materials and supplies (1,657) (1,878) (94)
Prepaid expenses and deposits (5,169) 5,911 5,556
Accounts payable and accrued liabilities (636) (19,476) 28,879
Air traffic liability 6,469 2,106 153
Income tax payable - - 21,472
--------- -------- ---------
Net cash flows provided by (used for) operating activities 75,742 (5,974) (15,587)
Investing activities:
Purchases of property and equipment (187,667) (66,716) (30,349)
Refund of aircraft purchase deposits 4,374 - -
Cash paid for acquisition, net of cash acquired - - (364)
Preacquisition advance to Airways Corporation - - (11,681)
Restricted funds for aircraft purchases (39,232) - -
Proceeds from disposal of equipment 24,815 370 3,595
--------- -------- ---------
Net cash flows used for investing activities (197,710) (66,346) (38,799)
Financing activities;
Issuance of long-term debt 244,756 6,100 72,493
Payments of long-term debt (76,801) (10,844) (83,142)
Proceeds from sale of common stock 1,233 1,921 1,047
--------- --------- ---------
Net cash flows provided (used for) financing activities 169,188 (2,823) (9,602)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 47,220 (75,143) (63,988)
Cash and cash equivalents at beginning of period 10,882 86,025 150,013
--------- --------- ---------
Cash and cash equivalents at end of period $ 58,102 $ 10,882 $ 86,025
========= ========= =========
Supplemental disclosures of cash flow activities:
Cash paid for interest, net of amounts capitalized $ 23,911 $ 21,557 $ 22,776
========= ========= =========
Income taxes (refunded) paid $ 420 $ (9,686) $ (31,124)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization and Principles of Consolidation
Pursuant to a Plan of Reorganization and Agreement of Merger, the Company
acquired Airways Corporation ("Airways") on November 17, 1997, through a merger
of Airways with and into the Company ("the Airways Merger"). In connection with
the Airways Merger, each outstanding share of Common Stock, $.01 par value per
share, of Airways was converted into and became the right to receive one share
of Common Stock, $.001 par value per share, of ValuJet, Inc. Therefore, the then
current shareholders of Airways became stockholders of AirTran Holdings, Inc.
(formerly ValuJet, Inc.) and AirTran Airways, Inc. ("AirTran Airways"), Airways'
wholly-owned subsidiary, became a wholly-owned subsidiary of AirTran Holdings,
Inc. On August 6, 1999, AirTran Airlines, Inc., a wholly-owned subsidiary of
the Company, was merged with and into AirTran Airways. See Note 2.
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant inter-company
accounts and transactions have been eliminated in consolidation.
Description of Business
The Company offers affordable scheduled air transportation and mail service,
serving short-haul markets primarily in the eastern United States.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results inevitably will differ from
those estimates, and such differences may be material to the consolidated
financial statements.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Restricted cash primarily
represents amounts escrowed relating to air traffic liability.
Accounts Receivable
Accounts receivable are due primarily from major credit card processors and
travel agents. These receivables are unsecured. The Company provides an
allowance for doubtful accounts equal to the estimated losses expected to be
incurred in the collection of accounts receivable.
50
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Spare Parts, Materials and Supplies
Spare parts, materials and supplies are stated at cost using the first-in,
first-out method (FIFO). These items are charged to expense when used.
Allowances for obsolescence are provided over the estimated useful life of the
related aircraft and engines for spare parts expected to be on hand at the date
aircraft are retired from service.
Property and Equipment
Property and equipment is stated on the basis of cost. Flight equipment is
depreciated to its salvage values using the straight-line method.
The B717 fleet has a salvage value of 10% and useful life of 25 years. In
conjunction with the 1999 impairment charge, the DC-9 fleet was written down to
its fair market value. Accordingly, the salvage values were revised to 38% -
52%, and the useful lives were revised to 1 - 3 years. In conjunction with the
1998 impairment charge, the B737 fleet was written down to its fair market
value, and the Company believes that the fair market value is indicative of its
salvage value. The useful lives of the B737 aircraft were revised to two years.
Aircraft parts are depreciated over the respective fleet life to a salvage value
of 5%.
Other property and equipment is depreciated over three to ten years.
The estimated salvage values and depreciable lives are periodically reviewed for
reasonableness and revised if necessary. At January 1, 1998, the Company
revised its salvage values and useful lives on its DC-9 fleet and related
equipment as outlined below:
1997 1998 1997 1998
Salvage Value Salvage Value Useful Life Useful Life
------------- ------------- ----------- -----------
Airframes 10% 40% 10-20 years 10-12 years
Engines 10% 10% 3 years 10-12 years
Aircraft parts 5-50% 5% 3 years fleet life
The revised salvage value of the Company's DC-9 fleet ranged from approximately
$434,000 to $2,614,000 per aircraft. The effect of this change for the year
ended December 31, 1998, was to increase income by approximately $12 million or
$0.19 per share. At the time, these estimates more accurately reflected
management's expectations of estimated fair values at the anticipated dates of
disposal.
51
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Measurement of Impairment
In accordance with Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS No. 121"), the Company records impairment losses on long-
lived assets used in operations when events or circumstances indicate that the
assets may be impaired and the undiscounted cash flows estimated to be generated
by those assets are less than the net book value of those assets.
Intangibles Resulting from Business Acquisition
Intangibles resulting from business acquisition consist of cost in excess of net
assets acquired and the trade name and are being amortized using the straight-
line method over 30 years. Accumulated amortization at December 31, 1999 and
1998 was approximately $3,704,000 and $2,227,000, respectively.
The carrying value of cost in excess of net assets acquired is reviewed for
impairment whenever events or changes in circumstances indicate that it may not
be recoverable. If such an event occurred, the Company would prepare projections
of future results of operations for the remaining amortization period. If such
projections indicated that the expected future net cash flows (undiscounted and
without interest) are less than the carrying amount of cost in excess of net
assets acquired, the Company would record an impairment loss in the period such
determination is made based on the fair value of the related business.
Capitalized Interest
Interest attributable to funds used to finance the acquisition of new aircraft
is capitalized as an additional cost of the related asset. Interest is
capitalized at the Company's weighted average interest rate on long-term debt
or, where applicable, the interest rate related to specific borrowings.
Capitalization of interest ceases when the asset is placed in service. In 1999,
1998 and 1997, approximately $6,736,000, $3,339,000 and $1,555,000 of interest
cost was capitalized, respectively.
Aircraft and Engine Maintenance
The Company accounts for airframe and engine overhaul costs using the direct-
expensing method. Overhauls are performed on a continuous basis and the cost of
overhauls and routine maintenance costs for airframe and engine maintenance are
charged to maintenance expense as incurred.
Advertising Costs
Advertising costs are charged to expense in the period the costs are incurred.
Advertising expense was approximately $14,799,000, $14,835,000 and $13,087,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
Revenue Recognition
Passenger and cargo revenue is recognized when transportation is provided.
Transportation purchased but not yet used is included in air traffic liability.
52
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Rebranding Expenses
Rebranding expenses represent costs incurred in 1997 in connection with the
Company's name change such as costs for advertising, new signs, uniforms and
conforming information systems.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to officers,
directors, key employees and consultants of the Company with an exercise price
equal to or below the fair value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and accordingly, recognizes
compensation expense only if the market price of the underlying stock exceeds
the exercise price of the stock option on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," provides an alternative
to APB Opinion No. 25 in accounting for stock-based compensation issued to
employees. However, the Company will continue to account for stock-based
compensation in accordance with APB Opinion No. 25.
Net Loss Per Share
Net loss per share (basic and diluted) was computed by dividing net loss by the
weighted average number of shares of common stock outstanding. Common stock
equivalents were anti-dilutive and therefore excluded from the computation of
weighted average shares used in computing diluted loss per share.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 is effective for periods beginning after June 15, 2000. The Company is
currently evaluating SFAS No. 133 and has not yet determined its impact on the
consolidated financial statements.
Reclassification
Operating expenses in the 1998 and 1997 financial statements have been
reclassified to the current presentation. This presentation complies with
current industry standards. Certain other prior year amounts have been
reclassified to conform with the current year financial statement presentation.
2. Acquisitions
On November 17, 1997, the Company acquired all of the outstanding shares of
common stock of Airways, which through its wholly-owned subsidiary, AirTran
Airways, Inc., operates a domestic commercial airline providing point-to-point
scheduled air transportation. The acquisition was recorded under the purchase
method of accounting, and accordingly, Airways' results of operations are
included in the accompanying consolidated financial statements from the date of
acquisition. The aggregate purchase
53
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
price was approximately $68,374,000 compromised of the following; 9,094,937
shares of the Company's common stock valued at approximately $63,664,000;
732,700 options to purchase the Company's common stock valued at approximately
$3,000,000; 50,000 warrants to purchase the Company's common stock valued at
$210,000; and cash of approximately $1,500,000 for the expenses of the Airways
Merger and other costs. The purchase price has been allocated to the tangible
and intangible assets purchased and the liabilities assumed based on the
estimated fair market values at the date of acquisition. The allocation of the
purchase price was finalized in 1998 resulting in an $8,154,000 increase in
goodwill. The excess of cost over the fair value of the net assets acquired has
been recorded as goodwill and is being amortized on a straight-line basis over
30 years.
The non-cash investing activity for the acquisition is as follows:
Fair value of assets acquired $ 45,709
Intangibles resulting from business acquisition 58,029
Liabilities assumed (36,710)
Fair value of common stock and options issued (66,664)
--------
Net cash paid for acquisition $ 364
========
The following data represents the combined unaudited operating results of the
Company on a pro forma basis as if the acquisition of Airways had occurred at
the beginning of the period presented. The pro forma information does not
necessarily reflect the results of operations as they would have been had the
acquisition actually taken place at that time, nor are they indicative of the
results of future combined operations. Adjustments include amounts of
depreciation to reflect the fair market value and economic lives of property and
equipment and amortization of intangible assets. In addition, adjustments were
made to reflect the additional shares issued.
Unaudited Pro Forma
Year Ended December 31, 1997
(In thousands, except per share data)
Total operating revenues $ 303,669
Net loss (107,017)
Net loss per share:
basic and diluted (1.67)
3. Commitments and Contingencies
Of the numerous lawsuits that were filed against the Company seeking damages
attributable to those on Flight 592, there are two remaining cases proceeding in
state courts in Florida and Texas. 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
54
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
statements. The Company believes that the $750 million coverage available with
respect to these claims 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 against SabreTech and its parent
corporation seeking to hold them responsible for the accident involving Flight
592. On September 23, 1999, the Company settled its lawsuit against SabreTech
and its parent. The net proceeds of $19,640,000 from the settlement are
included in other revenue in the 1999 statement of operations.
Several stockholder class action suits were filed against the Company and
certain of its current and former executive officers and Directors. The suits
were subsequently consolidated into a single action. On December 31, 1998, the
Company entered into a Memorandum of Understanding to settle the consolidated
lawsuit. Although the Company denied that it violated any of its obligations
under the federal securities laws, it paid $2.5 million in cash and $2.5 million
in common stock in the settlement which was approved on October 28, 1999.
From time to time, the Company is engaged in other litigation arising in the
ordinary course of business. The Company does not believe that any such pending
litigation will have a materially adverse effect on its results of operations or
financial condition.
At December 31, 1999, the Company's contractual commitments consisted primarily
of scheduled aircraft acquisitions. The Company has entered into a contract with
The Boeing Company to purchase 50 new B717 aircraft, to be delivered from 1999
to 2002, with options to purchase another 50 B717 aircraft. Aggregate funding
needed for these and all other aircraft commitments was approximately $780
million at December 31, 1999.
Approximately $86 million of this amount is required to be paid in progress
payments due from 2000 to 2001. After progress payments, the balance of the
total purchase price must be paid or financed upon delivery of each aircraft.
While the major aircraft manufacturer is required to provide credit support for
a limited portion of third party financing, the Company will be required to
obtain financing from other sources relating to these deliveries. If the Company
exercises its option to acquire up to an additional 50 aircraft, additional
payments could be required beginning in 2001. In conjunction with these
contractual commitments, the Company has made non-refundable deposits of
approximately $22,562,000 at December 31, 1999.
55
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
The following chart outlines the approximate future required deposits for
aircraft progress payments as of December 31, 1999 (in thousands):
2000 $56,211
2001 29,565
2002 -
-------
$85,776
=======
4. Fuel Price Risk Management
The Company entered into two fixed rate fuel swap contracts to protect against
increases in jet fuel prices. Under the swap agreements, the Company 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 December 31, 1999, the Company 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 agreement at
December 31, 1999, representing the amount the Company would receive upon
termination of the agreement, totaled $1.1 million. If in the future, a fuel
swap agreement were terminated, any resulting gain or loss would be deferred and
amortized to fuel expense over the remaining life of the agreement. A default
by the broker-dealer to the swap agreement 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. The Company does not enter into fuel swap contracts
for trading purposes.
56
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
5. Accrued Liabilities
December 31,
1999 1998
-------- --------
(In Thousands)
Accrued maintenance $24,278 $15,541
Accrued interest 9,447 5,508
Accrued salaries, wages and benefits 8,961 4,931
Deferred gain 6,300 -
Accrued federal excise taxes 2,176 3,042
Other 6,294 15,486
------- -------
$57,456 $44,508
======= =======
6. Long-Term Debt
December 31,
1999 1998
-------- --------
(In Thousands)
Aircraft notes payable through 2017, 10.63% weighted
average interest rate $178,850 $ -
Senior notes due April 2001, 10.25% interest rate 150,000 150,000
Senior secured notes due April 2001, 10.50% interest rate 80,000 80,000
Promissory notes for aircraft and other equipment payable
through 2002, 5.85% to 11.7% interest rates 6,838 15,994
-------- --------
415,688 245,994
Less current maturities (19,569) (8,929)
-------- --------
$396,119 $237,065
======== ========
The Company completed a private placement of $178,850,000 enhanced equipment
trust certificates (EETCs) on November 3, 1999. The proceeds have been and will
be used to purchase the first ten B717 aircraft, which will serve as collateral
for the EETCs. Unexpended proceeds from the EETCs issue, $39,232,000 at
December 31, 1999, are presented as a non-current asset in the balance sheet.
The promissory notes relate primarily to aircraft financing and bear interest at
rates ranging from 5.85% to 11.67% per annum, and principal and interest
payments are due in monthly or quarterly installments over four to seven year
terms on a mortgage-style amortization based on the delivery date of the
aircraft. One of these notes, with an aggregate unpaid principal balance of
approximately $1,200,000 at December 31, 1999, has a variable rate of interest
based on the London Interbank Offered Rate ("LIBOR") (5.82% at December 31,
1999) plus a range of 1.50% to 3.73%.
57
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Certain aircraft, engines, computer and telephone equipment with a book value
totaling approximately $218,028,000 serve as collateral on the Senior Secured
Notes, EETC's and promissory notes.
Future long-term debt principal payments at December 31, 1999 are as follows (in
thousands):
2000 $ 19,569
2001 232,158
2002 7,523
2003 4,643
2004 6,142
Thereafter 145,653
--------
$415,688
========
7. Leases
The Company leases seven DC-9's and one B737 under operating leases with terms
that expire in 2003. The Company has the option to renew the DC-9 lease for one
or more periods of not less than six months, with the renewal term to commence
upon the expiration of the original term. The Company also leases facilities
from local airport authorities or other carriers, as well as office space. These
leases are operating leases and have terms from one month to thirteen years.
Total rental expense charged to operations for aircraft, facilities and office
space for the years ended December 31, 1999, 1998 and 1997 was approximately
$21,705,000, $23,851,000 and $13,655,000, respectively.
The following schedule outlines the future minimum lease payments at December
31, 1999, under non-cancelable operating leases with initial terms in excess of
one year (in thousands):
2000 $ 18,059
2001 17,208
2002 15,609
2003 15,233
2004 8,700
Thereafter 45,623
--------
$120,432
========
8. Stock Option Plans
The 1993 Incentive Stock Option Plan (the "1993 Plan") provides up to 4,800,000
options to be granted to officers, directors and key employees to purchase
shares of
58
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
common stock at prices not less than the fair value of the shares on the dates
of grant. With respect to individuals owning more than 10% of the voting power
of all classes of the Company's stock, the exercise price per share shall not be
less than 110% of the fair value of the shares on the date of grant.
The 1994 Stock Option Plan (the "1994 Plan") provides up to 4,000,000 incentive
stock options or non-qualified options to be granted to officers, directors, key
employees and consultants of the Company.
The 1996 Stock Option Plan (the "1996 Plan") provides up to 5,000,000 incentive
stock options or non-qualified options to be granted to officers, directors, key
employees and consultants of the Company.
In connection with the acquisition of Airways on November 17, 1997, the Company
assumed the Airways Corporation 1995 Stock Option Plan ("Airways Plan") and the
Airways Corporation 1995 Director Stock Option Plan ("Airways DSOP"). Under the
Airways Plan up to 1,150,000 incentive stock options or non-qualified options
may be granted to officers, directors, key employees or consultants of the
Company. Under the Airways DSOP, up to 150,000 non-qualified options may be
granted to Directors.
Vesting and term of all options is determined by the Board of Directors and may
vary by optionee; however, the term may be no longer than ten years from the
date of grant.
Pro forma information regarding net loss and loss per share is required by SFAS
No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rates of 5.0%, 5.4% and 5.7%; no
dividend yields; volatility factors of the expected market price of the
Company's common stock of 0.648, 0.710 and 0.570; and a weighted average
expected life of the options of 6 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
59
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
The Company's pro forma information is as follows (in thousands, except per
share data):
1999 1998 1997
--------- -------- --------
Pro forma net loss $(102,173) $(42,279) $(97,876)
Basic and diluted pro forma
net loss per share (1.57) (0.65) (1.75)
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not fully reflected until 1999.
A summary of stock option activity under the aforementioned plans is as follows:
Weighted
Average
Shares Price Range Price
--------- ------------- --------
Balance at January 1, 1997 6,623,530 $0.17 - 23.19 $ 5.06
Granted 1,304,000 5.31 - 6.88 5.52
Assumed in Airways Merger 732,700 2.70 - 10.75 4.60
Exercised (317,480) 0.17 - 5.13 2.85
Canceled (226,320) 1.00 - 21.38 12.20
---------
Balance at December 31, 1997 8,116,430 0.17 - 23.19 4.84
Granted 235,000 5.50 - 8.13 7.67
Exercised (562,580) 0.17 - 5.69 2.81
Canceled (997,870) 0.17 - 21.38 7.16
---------
Balance at December 31, 1998 6,790,980 0.17 - 23.19 4.71
Granted 2,571,000 3.03 - 6.41 3.52
Exercised (226,420) 0.17 - 5.50 4.56
Canceled (495,040) 3.13 - 21.50 7.04
---------
Balance at December 31, 1999 8,640,520 $0.17 - 23.19 $4.16
=========
Exercisable at December 31, 1999 5,382,149 $0.17 - 23.19 $3.61
=========
60
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.17 2,407,000 3.5 $ 0.17 2,407,000 $ 0.17
1.00-4.00 3,549,300 7.1 3.18 1,339,300 3.13
4.50-6.88 1,909,580 7.4 5.36 1,152,835 5.41
7.03-13.25 108,400 6.7 10.45 77,734 10.75
18.38-23.19 666,240 6.1 19.04 405,280 19.03
---------- ---------
$0.17-23.19 8,640,520 6.0 $ 4.14 5,382,149 $ 3.60
========== =========
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and 1997,
with option prices equal to the market price on the date of grant, was $2.07,
$7.98 and $2.66, respectively. There were no options granted during 1999, 1998
and 1997 with option prices less than the market price of the stock on the date
of grant.
At December 31, 1999, the Company had reserved a total of 12,519,330 shares of
common stock for future issuance, upon exercise of stock options.
9. Income Taxes
The income tax provision (benefit) is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 352 $ - $ (9,554)
State - - -
------ ------ --------
Total current 352 - (9,554)
Deferred:
Federal 2,010 - (13,321)
State 377 - -
------ ------ --------
Total deferred 2,387 - (13,321)
------ ------ --------
$2,739 $ - $(22,875)
====== ====== ========
</TABLE>
61
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
A reconciliation of the provision for income taxes (benefit) to the federal
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ----------
<S> <C> <C> <C>
Tax at statutory rate $(33,829) $(14,258) $(41,803)
State taxes, net of federal
benefit (3,089) (606) (4,761)
Goodwill 517 7,705 89
Alternative minimum tax 909 - -
Benefit of preacquisition net
operating loss carryforwards 2,387 - -
Other (434) (110) (570)
Valuation reserve 36,278 7,269 24,270
-------- --------- --------
$ 2,739 $ - $(22,775)
======== ========= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ - $ 28,370
Other - 342
--------- ----------
Total deferred tax liabilities - 28,712
Deferred tax assets:
Depreciation 21,740 -
Accrued liabilities 1,011 2,362
Nonqualified stock options 930 930
Federal operating loss carryforwards 37,938 49,470
State operating loss carryforwards 6,741 8,158
AMT credit carryforwards 3,526 2,617
Other 4,024 4,807
--------- ----------
Total deferred tax assets 75,910 68,344
Valuation allowance for deferred
tax assets (75,910) (39,632)
--------- ----------
Net deferred tax assets - 28,712
--------- ----------
Net deferred tax liabilities $ - $ -
========= ==========
</TABLE>
For financial reporting purposes, a valuation allowance has been recognized at
December 31, 1999 and 1998, to reduce the net deferred income tax assets to
zero. The Company has not recognized any benefit from the future use of
operating loss carryforwards because management's evaluation of all the
available evidence in assessing the realizability of the tax benefits of such
loss carryforwards indicates that the underlying
62
<PAGE>
AirTran Holdings, Inc
Notes to Consolidated Financial Statements
December 31, 1999
assumptions of future profitable operations contain risks that do not provide
sufficient assurance to recognize such tax benefits currently. Although the
Company produced operating profits in each quarter in 1999, excluding the
impairment charge, management does not believe this and other positive evidence,
including projections of future profitable operations, offsets the effect of
the Company's recent cumulative losses;
At December 31, 1999, the Company had net operating loss carryforwards for
income tax purposes of approximately $108,394,000 that begin to expire in 2012.
In addition, the Company has Alternative Minimum Tax credit carryforwards for
income tax purposes of $3,526,000.
The amount of net operating loss carryforwards generated by Airways prior to the
Airways Merger is $23,098,000. The use of pre-acquisition operating loss
carryforwards is subject to limitations imposed by the Internal Revenue Code.
The Company does not anticipate that these limitations will affect utilization
of the carryforwards prior to expiration. For financial reporting purposes, a
valuation allowance of $4,730,000 was recognized at the date of the acquisition
to offset the deferred tax assets related to those carryforwards. This valuation
allowance was increased to $8,093,000 during 1998 in connection with a
reallocation of the purchase price. When realized, the tax benefit for those
items will be applied to reduce goodwill related to the acquisition of Airways.
During 1999, the Company utilized $6,282,000 of Airways' net operating loss
carryforwards and reduced goodwill by the $2,387,000 tax benefit of such
utilization.
10. Impairment Loss
In the fourth quarter of 1998, the Company decided to accelerate the retirement
of its four owned B737 aircraft as a result of the elimination of their original
route system and continued operating losses upon their redeployment to other
routes. The B737s, which were acquired in the Airways merger, will be replaced
with B717 aircraft. In the fourth quarter of 1999, the Company decided to
accelerate the retirement of its 42 DC-9 aircraft to accommodate the
introduction of its B717 fleet. It was the Company's original intent to use the
B717s to increase overall capacity while continuing to use the DC-9s into 2005.
However, during 1999, the new management team (including the CEO and President
who joined the Company in 1999) reevaluated the Company's near and long-term
fleet strategy and the components underlying such strategy. By October 1999, the
Company determined that it would be cost beneficial to begin to retire the DC-
9s. As a result, the Company developed a fleet plan which provides for the
retirement of the DC-9s between December 31, 1999 and October 2003, generally
coinciding with the delivery of the B717s. The Company's board of directors
approved the plan in October 1999.
In connection with each of the decisions to accelerate the retirement of these
aircraft, the Company performed evaluations to determine, in accordance with
SFAS No. 121, whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of these
aircraft would be less than the aggregate carrying amount of these aircraft and
related assets and, for the B737's, an allocation of cost in excess of net
assets acquired resulting from the Airways merger. SFAS No. 121 requires that
when a group of assets being tested for impairment was acquired as part of a
business combination that was accounted for using the purchase method of
accounting, any cost in excess of net assets acquired that arose as part of the
transaction must be included as part of the asset grouping. As a result of the
evaluations, management determined that the estimated future cash flows expected
to be generated by these aircraft would be less than their carrying amounts and,
for the B737's, allocated cost in excess of net assets acquired, and therefore
these aircraft are impaired as defined by SFAS No. 121. Consequently, the
original cost bases of these assets were reduced to reflect the fair market
value at the date the decisions were made, resulting in a $27,492,000 impairment
loss on the B737's in 1998 and a $147,735,000 impairment loss on the DC-9's in
1999. The Company considered recent transactions and market trends involving
similar aircraft in determining the fair market value.
63
<PAGE>
AirTran Holdings, Inc
Notes to Consolidated Financial Statements
December 31, 1999
11. Shutdown And Other Nonrecurring Expenses
Shutdown and other nonrecurring expenses include costs associated with the loss
of Flight 592 and the resulting excess costs related to the reduced schedule in
1997. Such costs consist of expenses directly related to the accident and the
ensuing extensive FAA review of the Company's operations including legal fees,
payments to the FAA, inspection related costs and unusual maintenance in excess
of normal recurring maintenance. In addition, depreciation on grounded aircraft
is included in shutdown and other nonrecurring expenses.
Below is a detail of such costs for the year ended December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Maintenance $15,380
Legal and other 6,318
Depreciation 3,141
-------
$24,839
=======
</TABLE>
12. Financial Instruments
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains cash and cash equivalents with
various high credit-quality financial institutions or in short-duration high
quality debt securities. The Company periodically evaluates the relative credit
standing of those financial institutions that are considered in the Company's
investment strategy. Concentration of credit risk with respect to accounts
receivable is limited due to the large number of customers comprising the
Company's customer base.
The fair values of the Company's long-term debt are based on quoted market
prices, if available, or are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amounts and estimated fair values of the
Company's long-term debt were $415,688,000 and $392,288,000, respectively, at
December 31, 1999 and $245,994,000 and $175,294,000, respectively, at December
31, 1998.
13. Employee Benefit Plans
Effective January 1, 1998, the Company consolidated its 401(k) Plans (the
"Plan"). All employees of AirTran Holdings, Inc., and AirTran Airways are
eligible to participate in the consolidated Plan, a defined contribution benefit
plan which qualifies under Section 401(k) of the Internal Revenue Code.
Participants may contribute up to 15% of their base salary to the Plan.
Contributions to the Plan by the Company are discretionary and amounted to
approximately $347,000 in 1999 and $288,000 in 1998. There were no
contributions made during 1997.
Under the 1995 Employee Stock Purchase Plan (the "Stock Plan"), employees who
complete twelve months of service are eligible to make quarterly purchases of
the
64
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Company's common stock at up to a 15% discount from the market value on the
offering date. The Board of Directors determines the discount rate before each
offering date. The Company is authorized to issue up to 4,000,000 shares of
common stock under this plan. During 1999, 1998 and 1997 the employees purchased
a total of 51,318, 23,023 and 24,190 shares, respectively, at an average price
of $3.94, $5.65 and $5.90 per share, respectively, which represented a 5%
discount from the market price on the offering dates.
14. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1999 and 1998 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Quarter
---------------------------------------------------------
First Second Third Fourth
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Fiscal 1999
Operating revenues $119,873 $140,015 $143,483 $ 120,097
Operating income (loss) 9,001 21,455 29,570 (132,014)
Net income (loss) 3,054 14,959 23,167 (140,574)
Basic earnings (loss) per share 5 (cents) 23 (cents) 36 (cents) (2.15)
Diluted earnings (loss) per share 5 (cents) 22 (cents) 34 (cents) (2.15)
Quarter
---------------------------------------------------------
First Second Third Fourth
-------- -------- --------- ----------
Fiscal 1998
Operating revenues $ 94,541 $123,988 $115,060 $ 105,718
Operating income (loss) (2,874) 14,421 (5,319) (24,785)
Net income (loss) (7,873) 8,559 (10,893) (30,531)
Basic and diluted income
(loss) per share (12)(cents) 13 (cents) (17)(cents) (47)(cents)
</TABLE>
The results of the fourth quarters of 1999 and 1998 include impairment charges
of $147,735,000 and $27,492,000, respectively, related to the DC-9 fleet and the
B737 fleet.
The results of the third quarter of 1999 include net proceeds of $19,640,000
from the settlement of a lawsuit against a third party maintenance provider.
Year-end adjustments resulted in increasing the loss before income taxes during
the fourth quarter of 1999 by approximately $5,250,000. Of this amount,
approximately $3,160,000 relates to the correction of revenue recorded in
earlier quarters during 1999 and approximately $2,090,000 relates to changes in
management's estimates and assumptions primarily related to accruals for
vacation and group health insurance.
At December 31, 1997, the Company had accrued the estimated costs to reactivate
certain aircraft. During the quarter ended June 30, 1998, the reactivation of
these aircraft was completed and the associated costs were finalized. The
remaining maintenance accrual
65
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
was therefore revised based on this additional information and $3 million was
reversed into income, increasing income for the quarter ended June 30, 1998, by
approximately $0.05 per share on a diluted basis.
15. Supplemental Guarantor Financial Information
The Company's $150,000,000 of 10.25% Senior Notes issued during 1996 are fully
and unconditionally guaranteed on a joint and several basis by AirTran Airways,
a wholly-owned subsidiary of the Company, and by AirTran Airways' subsidiary
("Guarantors"). The $80,000,000 of 10.50% Senior Secured Notes issued by
AirTran Airlines, now AirTran Airways, during 1997 are fully and unconditionally
guaranteed on a joint and several basis by AirTran Holdings, Inc., and AirTran
Airways' subsidiary. AirTran Airways and its subsidiary conduct all of the
operations of the Company. All of the subsidiary Guarantors are wholly-owned or
indirect subsidiaries of the Company, and there are no direct or indirect
subsidiaries of the Company that are not Guarantors. Separate financial
statements of the subsidiary Guarantors are not presented because AirTran
Holdings, Inc. and all of its subsidiaries guarantee the Senior Notes and the
Senior Secured Notes on a full, unconditional, and joint and several basis.
Summarized consolidated financial information as of and for the year ended
December 31, 1999 is as follows (in thousands):
AirTran AirTran
Airways AirTran Holdings, Inc.
and Holdings, and
Subsidiary Inc. Eliminations Subsidiaries
---------- --------- ------------ --------------
Current assets $103,644 $ - $ - $103,644
Non-current assets 362,355 113,172 (112,157) 363,370
Current liabilities 107,723 3,203 - 110,926
Non-current liabilities 399,322 150,000 (153,203) 396,119
Operating revenues 523,468 - - 523,468
Operating loss (71,988) - - (71,988)
Loss before income taxes (96,655) - - (96,655)
Net loss (99,394) - - (99,394)
66
<PAGE>
AirTran Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
Summarized consolidated financial information as of and for the year ended
December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
AirTran AirTran
Airways AirTran Holdings, Inc.
and AirTran Holdings, and
Subsidiaries Airways Inc. Eliminations Subsidiaries
------------ --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Current assets $ 52,957 $ - $ - $ - $ 52,957
Non-current assets 321,646 3,290 208,835 (210,322) 323,449
Current liabilities 83,798 - 3,203 (3,290) 83,711
Non-current liabilities 240,268 - 150,000 (153,203) 237,065
Operating revenues 439,307 - - - 439,307
Operating loss (18,557) - - - (18,557)
Loss before income
taxes (benefit) (39,922) (816) - - (40,738)
Net loss (39,922) (816) - - (40,738)
</TABLE>
67
<PAGE>
AirTran Holdings, Inc.
Schedule II - Valuation and Qualifying Accounts
(In Thousands)
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS- BALANCE AT
PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
------------ ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for Doubtful Accounts $ 1,325 $ 4,022 - $4,420 $ 927
Provision for Obsolescence 4,259 1,406 - 3,405 2,260
Valuation allowance for deferred taxes 39,632 36,278 - - 75,910
------- ------- ------ ------ -------
Total $45,216 $41,706 - $7,825 $79,097
======= ======= ====== ====== =======
Year ended December 31, 1998
Allowance for Doubtful Accounts $ 1,354 $ 8,003 - $8,032 $ 1,325
Provision for Obsolescence 2,217 2,042 - - 4,259
Valuation allowance for deferred taxes 29,000 7,269 $3,363(1) - 39,632
------- ------- ------ ------ -------
Total $32,571 $17,314 $3,363 $8,032 $45,216
======= ======= ====== ====== =======
Year ended December 31, 1997
Allowance for Doubtful Accounts $ 838 $ 2,895 - $2,379 $ 1,354
Provision for Obsolescence 500 1,717 - - 2,217
Valuation allowance for deferred taxes - 24,270 $4,730(1) - 29,000
------- ------- ------ ------ -------
Total $ 1,338 $28,882 $4,730 $2,379 $32,571
======= ======= ====== ====== =======
</TABLE>
(1) Amounts represent valuation allowance resulting from the acquisition of
Airways Corporation.
68
