Table of Contents
EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Overview
ExpressJet Holdings, Inc. (“Holdings”) has strategic investments in the air transportation industry. Our principal asset is all of the issued and
outstanding shares of stock of XJT Holdings, Inc., the sole stockholder of ExpressJet Airlines, Inc. (referred to in this report as “Airlines” and, together with Holdings, as “ExpressJet”, “we” or
“us”).
Our primary business is flying 244 aircraft under contractual arrangements for network carriers and entities desiring cost-effective and fully customizable
group travel. As of September 30, 2009, our fleet was assigned as follows:
•
|
214 aircraft for Continental Airlines, Inc. (“Continental”) as Continental Express pursuant to a capacity purchase agreement (the “Amended Continental CPA”); and
|
•
|
30 aircraft in our Corporate Aviation division, which is dedicated to long-term charter agreements and ad-hoc charter arrangements.
|
Liquidity.
In light of the ongoing challenges faced by the airline industry and the recession facing the global economy, we believe controlling costs and
preserving cash are crucial to sustaining our liquidity and meeting our financial obligations over the next year.
As of September 30, 2009, our cash balance (including restricted cash and short-term investments) was $105.4 million, net of fair-value discounts applied to our
short-term investments. We believe that our existing liquidity and projected 2009 cash flows will be sufficient to fund current operations and our financial obligations through the twelve months ending September 30, 2010. However, factors beyond our
control may have a material adverse impact on our ability to sustain operations over the long-term.
The interim financial information in the accompanying Condensed Consolidated Financial Statements and notes is unaudited, but reflects all adjustments necessary, in our
opinion, to provide a fair presentation of our financial results for the interim periods presented. These adjustments are of a normal, recurring nature. In addition, all intercompany transactions have been eliminated in consolidation. Certain
amounts reported in previous periods have been reclassified to conform to the current presentation. These interim Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and the notes thereto for the fiscal year
ended December 31, 2008 contained in our Current Report on Form 8-K dated October 16, 2009 (the “Revised 2008 10-K”) in addition to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “Original 2008
10-K”).
Note 1 – Summary of Significant Accounting Policies
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts
of Holdings and its subsidiaries. All material intercompany transactions have been eliminated in consolidation. The following are changes to the accounting policies and estimates described in our Revised 2008 10-K and Original 2008 10-K.
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Adopted Accounting Policies
Codification.
Effective July 1, 2009, the
Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) became the exclusive authoritative reference for nongovernmental generally accepted accounting principles (“GAAP”) in the United States. The ASC became the only level of authoritative GAAP and eliminated the previous
four-level hierarchy. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our Condensed Consolidated Financial Statements have been changed to refer to the
appropriate section of ASC.
Convertible Notes
.
On January 1, 2009, we adopted the Cash Conversion
Subsections of ASC Subtopic 470-20, “Debt with Conversion and Other Options – Cash Conversion” (“Debt with Conversion Options Subtopic”) which applies to all convertible debt instruments that have a “net settlement feature”,
meaning that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash or shares upon conversion. The Debt with Conversion Options Subtopic requires issuers to account separately for the liability and equity components
of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The Debt with Conversion Options Subtopic requires we split a component of the debt, the
classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our Condensed Consolidated Statements of Operations.
The Debt with Conversion Options Subtopic requires retrospective application to the terms of instruments as they existed for all periods presented.
The adoption of the Debt with Conversion Options Subtopic affects the accounting for our original 4.25% convertible notes due 2023 issued in 2003 (the “Original 4.25% Convertible Notes due 2023”), which on August 2, 2008, became our 11.25% Convertible
Secured Notes due 2023. The retrospective application of this pronouncement resulted in increased non-cash interest expense for 2003 through 2008. We adjusted the Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2008 to include non-cash interest expense (presented as Amortization of debt discount in our Condensed Consolidated Statements of Operations) of $2.5 million and $8.4 million, respectively, related to our Original 4.25% Convertible Notes due
2023
. During the first half of 2008, we recognized extinguishment gains of $2.1 million related to repurchases of our Original 4.25% Convertible Notes due 2023 prior to the tender offer we initiated in July 2008 in connection with such
notes. At the time of our tender offer, our Original 4.25% Convertible Notes due 2023 were trading at a discount as a result of the nature of the credit environment and our own liquidity position. As a result, the repurchase of debt under the tender offer
resulted in debt extinguishment gains. The 11.25% Convertible Secured Notes due 2023, of which $68.5 million remained outstanding after the tender offer in 2008, were also subject to the Debt with Conversion Options Subtopic, and we determined the fair value of
the liability component to be $40.7 million at that time. The remainder was allocated to equity and accounted for as a debt discount which will be amortized over the period until the next put date in August 2011. The fair value of the liability component
of the 11.25% Convertible Secured Notes due 2023 was based on current market data of our convertible notes, considering interest rates for stand alone debt given the disruption in the credit markets and our own credit rating.
Adjustments to
income taxes have been recorded on the foregoing adjustments to the extent tax benefits were available. As of September 30, 2009, $37.0 million, net of discount of $15.1 million, of our 11.25% Convertible Secured Notes due 2023 remain
outstanding.
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The following table sets forth the effect of the retrospective application of the Debt with Conversion Options Subtopic and the correction of an immaterial
tax matter on certain previously reported line items (in thousands, except per share data):
|
|
Three Months Ended September 30, 2008
|
|
|
|
Condensed Consolidated Statement of Operations
:
|
|
|
Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Amortization of debt discount
|
|
$
|
—
|
|
$
|
(2,516
|
)
|
Interest expense, net of capitalized interest
|
|
|
(3,600
|
)
|
|
(2,057
|
)
|
|
|
|
|
|
|
|
|
Income before Income Taxes
|
|
|
19,484
|
|
|
18,511
|
|
Income Tax Expense
|
|
|
(14,466
|
)
|
|
(14,096
|
)
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,018
|
|
$
|
4,415
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings per Common Share
|
|
$
|
0.32
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
Condensed Consolidated Statement of Operations
:
|
|
|
Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Extinguishment of debt
|
|
$
|
—
|
|
$
|
2,107
|
|
Amortization of debt discount
|
|
|
—
|
|
|
(8,431
|
)
|
Interest expense, net of capitalized interest
|
|
|
(7,808
|
)
|
|
(6,265
|
)
|
|
|
|
|
|
|
|
|
Loss before Income Taxes
|
|
|
(78,087
|
)
|
|
(82,868
|
)
|
Income Tax Benefit
|
|
|
20,068
|
|
|
22,764
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(58,019
|
)
|
$
|
(60,104
|
)
|
|
|
|
|
|
|
|
|
Basic and Diluted Loss per Common Share
|
|
$
|
(6.64
|
)
|
$
|
(6.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
Condensed Consolidated Balance Sheet:
|
|
|
|
Originally
Reported
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
$
|
42,807
|
|
$
|
47,598
|
|
Additional paid-in capital
|
|
|
$
|
238,065
|
|
$
|
263,859
|
|
Accumulated loss
|
|
|
$
|
(18,744
|
)
|
$
|
(49,329
|
)
|
Total Stockholders’ Equity
|
|
|
$
|
202,461
|
|
$
|
197,670
|
|
As we continued to evaluate the adoption of the Debt with Conversion Options Subtopic, the restated balance sheet noted above includes revisions from what was originally
presented for the periods ended March 31, 2009 and June 30, 2009. The Company finalized and filed a Form 8-K to reflect the adoption of the Debt with Conversion Options Subtopic for the 2008, 2007 and 2006 financial statements on October 16, 2009.
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Other-Than-Temporary Impairments.
In April 2009, the FASB issued new guidance
which modifies the requirements for
recognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our portfolio of auction rate securities (“ARS”),
was
adopted during the quarter ended June 30, 2009. Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”
Subsequent Events.
In May 2009, the FASB issued guidance which establishes general standards of accounting for, and disclosure
of, events that occur after the balance sheet date but before financial statements are issued. This guidance is contained in ASC Topic 855, “Subsequent Events” (“ASC Topic 855”). We adopted the provisions of ASC Topic 855 for the
quarter ended June 30, 2009. The adoption of these provisions did not have a material effect on our Condensed Consolidated Financial Statements. The Company has evaluated subsequent events for potential recognition and/or disclosure through November 13,
2009, the date the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued. For further discussion of our subsequent events, s
ee Note 11 – “Subsequent Events.”
Other Accounting Matter
In the process of adjusting our tax accrual for our 2008 actual tax return filed in the current quarter we identified an immaterial error related to our recording of
deferred tax assets and liabilities and related valuation allowance in 2008. The correction of the error resulted in a $4.8 million increase to “Deferred Income Taxes” and a $4.8 million increase to “Accumulated loss” in our Condensed
Consolidated Balance Sheet as of December 31, 2008. In addition, the correction of the error resulted in an increase to our income tax expense and an increase to our net loss for the three months ended December 31, 2008 of $4.8 million ($0.25 per common share)
and an increase to our income tax expense and an increase to our net loss for the year ended December 31, 2008 of $4.8 million ($0.43 per common share). We concluded that this item was not material to the 2008 financial statements and an amendment to the
Revised 2008 10-K is not required.
Note 2 – Contract Flying
Amended Continental CPA
. Prior to July 1, 2008, Airlines was entitled to receive payment for each block hour that Continental scheduled
it to fly pursuant to the terms of our original capacity purchase agreement with Continental (the “Original Continental CPA”). Payment was based on a formula designed to provide Airlines with a target operating margin of 10% before taking into
account variations in certain costs and expenses that were generally within our control. We had exposure for most labor costs and some maintenance and general administrative expenses if actual costs were higher than those budgeted in our block hour rates.
For the first six months of 2008, we recognized revenues using 2007 block hour rates, pursuant to a settlement agreement signed with Continental.
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In June 2008
, we reached an agreement with Continental to
amend the Original Continental CPA. The Amended Continental CPA, which became effective July 1, 2008, has a seven-year term and provides that we will fly a minimum of 205 aircraft for Continental
through June 30, 2009, and a minimum of 190
aircraft for the remainder of the term. Currently, we fly 214 aircraft for Continental. As of the date of this filing, we have not received notice from Continental of its intent to reduce the size of the fleet under the Amended Continental CPA.
Continental retains the right to reduce the number of aircraft to a minimum of 190 aircraft at any time during the remainder of the initial term ending on June 30, 2015. P
ursuant to the first amendment to the Amended Continental CPA, we recognized an
additional $4.8 million in contract revenues related to shortfalls in aircraft utilization for the six months ended June 30, 2009. Pursuant to the terms of the first and second amendments to the Amended Continental CPA, beginning in July 2009 and throughout the
remainder of term of the Amended CPA,
if Continental increases utilization of our aircraft above a pre-determined threshold, then Continental is entitled to receive a discount on the agreed, pre-determined block hour rates; provided that the
aggregate discount received by Continental shall not exceed $10 million. For the three months ended September 30, 2009, there was an increase in utilization of our aircraft above the pre-determined threshold for such period that resulted in Continental
receiving a discount in the amount of approximately $0.2 million.
Note 3– Restructuring and Related Special Charges
As of September 30, 2009, our remaining accruals for the special charges we incurred in 2008 and expect to pay in cash are as follows (in thousands):
|
|
|
Balance
December 31, 2008
|
|
|
|
Payments/
Adjustments
|
|
|
|
Balance
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages and fringe
|
|
$
|
297
|
|
|
$
|
(297
|
)
|
|
$
|
—
|
|
Contract termination costs
|
|
|
970
|
|
|
|
(970
|
)
|
|
|
—
|
|
Unused facility costs
|
|
|
3,952
|
|
|
|
(2,339
|
)
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,219
|
|
|
$
|
(3,606
|
)
|
|
$
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining special charge accrual of $1.6 million related to unused facility costs is included in “Accrued other liabilities” in our
Condensed Consolidated Balance Sheet as of September 30, 2009.
Final cash payments and adjustments related to the wages and fringe accrual and contract termination costs were made during the nine months ended September 30, 2009. Cash
payments remaining on our lease obligations for unused facilities will continue through 2010. For a detailed discussion of special charges incurred in 2008, refer to our Revised 2008 10-K and our Original 2008 10-K.
Table of Contents
Note 4
–
Segment Reporting
The following business discussion is based on two reportable segments, Contract Flying and Aviation Services, as they were structured during the three and nine months
ended September 30, 2009.
Contract Flying
.
This reportable segment includes components related to the
fleet operated by us under the Amended Continental CPA and long-term charter agreements and ad-hoc charter service arrangements within our Corporate Aviation division.
Aviation Services
.
This reportable segment includes components related to our ground-handling services;
our two wholly owned subsidiaries, ExpressJet Services, LLC and InTech Aerospace Services, LP and our majority owned subsidiary, Saltillo Jet Center, S. de R.L. C.V. These entities are collectively referred to herein as
“Services”.
Under Services’ brand, we paint aircraft and repair composite structures, aircraft interiors (including refurbishment of seats, galleys, lavatories and panels) and thrust reversers throughout our four
facilities in the United States and Mexico.
A significant portion of our operating expenses and infrastructure are integrated across segments (e.g., for maintenance, non-airport facility rentals, outside services,
general and administrative expenses) in order to support our entire fleet of aircraft and ExpressJet Services; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operations. The
presentation of our consolidated shared costs is consistent with the manner in which these expenses are reviewed and business decisions are made. Consequently, the tables below present (in thousands) our operating revenues, including inter-segment revenues, and
segment profit / (losses) generated per reportable segment for the three and nine months ended September 30, 2009 and 2008. We also included our reconciliation of the consolidated operating revenue to consolidated net loss before taxes and of our total assets
as of September 30, 2009 and 2008. The segmented information for prior periods will be restated to reflect all changes in reportable segments.
Table of Contents
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Contract
Flying
|
|
|
Aviation
Services
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
$
|
171,062
|
|
$
|
10,034
|
|
$
|
(1,896
|
)
|
$
|
179,200
|
|
Direct segment expenses
|
|
126,958
|
|
|
5,688
|
|
|
(1,896
|
)
|
|
130,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
44,104
|
|
$
|
4,346
|
|
$
|
—
|
|
$
|
48,450
|
|
Other shared expenses
(1)
|
|
|
|
|
|
|
|
|
|
|
(56,589
|
)
|
Gain on sale of short-term investments, net
|
|
|
|
|
|
|
|
|
|
|
1,274
|
|
Impairment charge on investments
|
|
|
|
|
|
|
|
|
|
|
(108
|
)
|
Extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(966
|
)
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
(1,583
|
)
|
Interest expense, net of capitalized interest
|
|
|
|
|
|
|
|
|
|
|
(1,825
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(10,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
$
|
493,538
|
|
$
|
32,191
|
|
$
|
(6,232
|
)
|
$
|
519,497
|
|
Direct segment expenses
|
|
367,350
|
|
|
17,066
|
|
|
(6,232
|
)
|
|
378,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
126,188
|
|
$
|
15,125
|
|
$
|
—
|
|
$
|
141,313
|
|
Other shared expenses
(2)
|
|
|
|
|
|
|
|
|
|
|
(171,348
|
)
|
Gain on sale of short-term investments, net
|
|
|
|
|
|
|
|
|
|
|
1,755
|
|
Impairment charge on investments
|
|
|
|
|
|
|
|
|
|
|
(108
|
)
|
Extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(394
|
)
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
(3,912
|
)
|
Interest expense, net of capitalized interest
|
|
|
|
|
|
|
|
|
|
|
(5,835
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
837
|
|
Equity investments loss, net
|
|
|
|
|
|
|
|
|
|
|
(377
|
)
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(38,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
$
|
177,650
|
|
$
|
17,950
|
|
$
|
—
|
|
$
|
195,600
|
|
Other shared assets
(3)
|
|
|
|
|
|
|
|
|
|
|
149,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
|
|
|
|
$
|
345,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Some of the major components of other shared expenses for the three months ended September 30, 2009 are maintenance labor – $16.9 million; general and administrative labor and related expenses – $14.9 million; other general
and administrative expenses – $17.5 million; outside services – $5.6 million; non-airport rentals – $1.7 million.
|
(2)
|
Some of the major components of other shared expenses for the nine months ended September 30, 2009 are maintenance labor – $49.6 million; general and administrative labor and related expenses – $43.5 million; other general
and administrative expenses – $54.7 million; outside services – $17.3 million; non-airport rentals – $6.2 million.
|
(3)
|
Other shared assets include assets that are interchangeable between segments.
|
Table of Contents
|
|
Contract
Flying
|
|
|
Branded
Flying
|
|
|
|
Aviation
Services
|
|
|
Eliminations
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008:
(
as restated – Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
$
|
184,428
|
|
$
|
69,286
|
|
|
$
|
10,618
|
|
$
|
(2,006
|
)
|
|
$
|
262,326
|
|
Direct segment expenses
|
|
133,238
|
|
|
62,767
|
|
|
|
4,806
|
|
|
(2,006
|
)
|
|
|
198,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
$
|
51,190
|
|
$
|
6,519
|
|
|
$
|
5,812
|
|
$
|
—
|
|
|
$
|
63,521
|
|
Shared special charges
(1)
|
|
|
|
|
(21,187
|
)
|
|
|
|
|
|
|
|
|
|
(21,187
|
)
|
Other shared expenses
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,295
|
)
|
Gain from debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,785
|
|
Settlement of fuel contracts
|
|
|
|
|
23,149
|
|
|
|
|
|
|
|
|
|
|
23,149
|
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,516
|
)
|
Interest expense, net of capitalized interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,057
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,218
|
|
Equity investments income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008:
(as restated – Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
$
|
908,348
|
|
$
|
221,258
|
|
|
$
|
32,770
|
|
$
|
(4,706
|
)
|
|
$
|
1,157,670
|
|
Direct segment expenses
|
|
679,897
|
|
|
289,480
|
|
|
|
16,827
|
|
|
(4,706
|
)
|
|
|
981,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
$
|
228,451
|
|
$
|
(68,222
|
)
|
|
$
|
15,943
|
|
$
|
—
|
|
|
$
|
176,172
|
|
Shared special charges
(3)
|
|
(13,498
|
)
|
|
(29,809
|
)
|
|
|
|
|
|
|
|
|
|
(43,307
|
)
|
Other shared expenses
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240,607
|
)
|
Impairment charges on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,892
|
)
|
Extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,107
|
|
Gain from debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,785
|
|
Settlement of fuel contracts
|
|
|
|
|
23,149
|
|
|
|
|
|
|
|
|
|
|
23,149
|
|
Amortization of debt discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,431
|
)
|
Interest expense, net of capitalized interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,265
|
)
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,980
|
|
Equity investments loss, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(967
|
)
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(82,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
$
|
136,608
|
|
$
|
46,439
|
|
|
$
|
14,603
|
|
$
|
—
|
|
|
$
|
197,650
|
|
Other shared assets
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
449,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
(1)
|
Shared special charges for the three months ended September 30, 2008, include $21.2 million related to suspended flying under several lines of our at-risk operations.
|
(2)
|
Some of the major components of other shared expenses for the three months ended September 30, 2008 are maintenance labor – $20.0 million; general and administrative labor and related expenses – $17.3 million; other general
and administrative expenses – $20.0 million; outside services – $8.0 million; and non-airport rentals – $2.5 million. Transition costs incurred were approximately $3.5 million.
|
(3)
|
Shared special charges for the nine months ended September 30, 2008, include $21.2 million related to suspended flying under several lines of our at-risk operations in addition to a $12.8 million impairment of goodwill, an $8.6 million
impairment of fixed assets and $0.7 million charge related to base closure costs.
|
(4)
|
Some of the major components of other shared expenses for the nine months ended September 30, 2008 are maintenance labor – $60.3 million; general and administrative labor and related expenses – $62.4 million; other general
and administrative expenses – $72.6 million; outside services – $29.9 million; and non-airport rentals – $7.7 million. Transition costs incurred were approximately $7.7 million.
|
(5)
|
Other shared assets include assets that are used across segments.
|
We will continue to monitor various components of our business and, if necessary, isolate those components into new reportable segments or transfer those components
within our existing reporting structure.
Note 5 – Fair Value Measurements.
In February 2008, we invested approximately $65 million in ARS, which are classified as available-for-sale securities and reflected at fair value.
For a detailed discussion of our ARS, refer to our Revised 2008 10-K and our Original 2008 10-K.
In April 2009, the FASB issued new guidance
which modifies the requirements for recognizing other-than-temporarily-impaired debt securities and the
presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio,
was adopted during the quarter ended June 30, 2009. Other-than-temporary impairments are now reflected in our
Condensed Consolidated Statements of Operations as “Impairment charges on investments.”
Prior to the adoption of the new guidance on other-than-temporary-impairments, we recorded any changes in fair value of our ARS that we deemed to be temporary to
accumulated other comprehensive income. If we determined that any future decline in value was other than temporary, it was recognized as a charge to earnings as applicable.
Under
the new guidance on
other-than-temporary-impairments
if the fair value of our ARS falls below our adjusted cost basis and if it is our intent to sell the ARS, then an other-than-temporary impairment has occurred and a loss should be recorded in our Condensed
Consolidated Statements of Operations. As it is our intent to continue exploring opportunities to monetize the ARS, future declines in fair value below our adjusted cost basis will be deemed to be other-than-temporary and an adjustment will be recorded as
“Impairment charges on investments” in our Condensed Consolidated Statements of Operations
. T
he fair value of our $31.0 million ARS portfolio, as calculated
using a discounted cash flow valuation model as of
September 30, 2009
, was $24.1 million. As such
, we recognized an impairment charge on investments of $0.1 million for declines in fair value below the adjusted cost basis of our ARS holdings for the quarter ended September 30,
2009.
Table of Contents
In July 2009, we entered into a settlement agreement related to our ARS litigation against RBC Capital Markets Corporation et al. (collectively
“RBC”) with respect to certain ARS (CUSIPs 36156HAG3, 679110CM6, 709163EH8, and 78442GJC1) purchased from RBC. Among other terms, the settlement agreement provided for RBC to immediately repurchase ARS with an aggregate par value of $18,000,000 it
sold to ExpressJet for 87.5% of par value. Additionally, if within twelve months of the date of the execution of the settlement agreement, any of the ARS is redeemed or refinanced by its issuer and RBC is paid a sum representing greater than 87.5% of the par
value of that ARS, we shall be paid a sum representing the difference between (1) 87.5% of the par value of that ARS and (2) the sum actually received by RBC. As part of the settlement agreement, we dismissed our lawsuit against RBC and released
claims related to RBC’s sale of the ARS to us.
Pursuant to this settlement, we recorded an adjustment to other comprehensive income to reverse temporary impairments of $0.3 million recognized in previous periods.
As of September 30, 2009, we continue to earn interest at an average rate of 1.70% on our remaining ARS whose rates are reset every 7 or 28 days, depending on the terms
of the particular instrument.
We continue to closely monitor the ARS market and are aggressively pursuing the monetization of the assets at or near face
value through additional market transactions. In September 2009, we initiated litigation against Bank of America Corporation et al. (“BOA”) related to auction rate securities that BOA sold to ExpressJet in January 2008. As of September 30,
2009, the aggregate par value of our ARS holdings purchased from BOA was $21.0 million. Subsequent to September 30, 2009, we consummated three separate transactions pursuant to which we monetized $5.0 million of our ARS purchased from BOA for 90.5% of the face
value of the securities and $10.0 million of our ARS purchased from BOA for 90.0% of the face value of the securities.
Assets that we measure at fair value on a recurring basis are shown below (in thousands):
|
As of September 30, 2009
Fair Value Measurements Using
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
61,340
|
|
$
|
61,340
|
|
$
|
—
|
|
$
|
—
|
Short-term investments
|
|
24,118
|
|
|
—
|
|
|
—
|
|
|
24,118
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
85,458
|
|
$
|
61,340
|
|
$
|
—
|
|
$
|
24,118
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
The following table presents our ARS which were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in ASC Topic 820,
“Fair Value Measurements and Disclosures” (in thousands):
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
ARS Beginning Balance
|
|
$
|
41,369
|
|
$
|
—
|
|
Purchases
|
|
|
—
|
|
|
65,075
|
|
Sales / Redemptions
|
|
|
(3,631
|
)
|
|
—
|
|
Gross realized gains on sales
|
|
|
482
|
|
|
—
|
|
Other Than Temporary Impairments (included in
non-operating income)
|
|
|
—
|
|
|
(13,661
|
)
|
Temporary Changes in Market Value (included in
other comprehensive income)
|
|
|
(628
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
ARS Balance as of March 31
|
|
$
|
37,592
|
|
$
|
51,414
|
|
Sales / Redemptions
|
|
|
—
|
|
|
(650
|
)
|
Temporary Changes in Market Value (included in
other comprehensive income)
|
|
|
957
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
ARS Balance as of June 30
|
|
$
|
38,549
|
|
$
|
51,864
|
|
Sales / Redemptions / Settlements
|
|
|
(15,763
|
)
|
|
—
|
|
Gross realized gains on sales
|
|
|
1,274
|
|
|
—
|
|
Other Than Temporary Impairments (included in
non-operating income)
|
|
|
(108
|
)
|
|
—
|
|
Temporary Changes in Market Value (included in
other comprehensive income)
|
|
|
166
|
|
|
803
|
|
|
|
|
|
|
|
|
|
ARS Balance as of September 30
|
|
$
|
24,118
|
|
$
|
52,667
|
|
|
|
|
|
|
|
|
|
We determine the cost basis for our ARS sold using the specific identification method.
In March 2009, we entered into and drew down fully on a $5 million revolving line of credit (the “Citigroup Credit Facility”) with Citigroup Global Markets
Inc. (“Citigroup”) to increase our liquidity. The Citigroup Credit Facility, which has a five year term and is pre-payable at any time at our election, is secured by $10 million of our ARS holdings that were purchased from Citigroup. Since the
credit facility is secured by a portion of our ARS holdings, we classified the liability as current on our Condensed Consolidated Balance Sheet. We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARS
purchased from Citigroup.
Table of Contents
Note 6 – Debt
As of September 30, 2009 and December 31, 2008, respectively, our debt consisted of the following (in thousands):
|
|
|
September 30,
|
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Current Debt:
|
|
|
|
|
|
|
|
|
Current maturities of EDC Loans
|
|
$
|
3,459
|
|
|
$
|
3,459
|
|
Citigroup Credit Facility
|
|
|
5,000
|
|
|
|
—
|
|
Long-term Debt
|
|
|
|
|
|
|
|
|
EDC Loans
|
|
$
|
3,459
|
|
|
$
|
5,848
|
|
11.25% Convertible Secured Notes due 2023, net of discount
of $15,108 and $21,109, respectively
|
|
|
37,003
|
|
|
|
39,740
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,921
|
|
|
$
|
49,047
|
|
|
|
|
|
|
|
|
|
|
We estimated fair value of our 11.25% Convertible Secured Notes due 2023 based on an average of market trading activity for the convertible notes subsequent to the
tender offer that was completed in August 2008.
Pursuant to the terms of the amended indenture governing the 11.25% Convertible Secured Notes due 2023, we are required to deliver a certificate to the trustee from a
third-party appraiser dated no later than 15 business days after January 1 of each year certifying the value of the pledged collateral for the notes as of January 1 or such later date. We delivered a certificate from our independent appraiser in January 2009
indicating the previously appraised value of $180.4 million has not changed materially from the initial appraisal as of the amendment date. Based on the principal amount of notes remaining outstanding as of September 30, 2009, the pledged collateral required
under the 11.25% Convertible Secured Notes due 2023 is approximately $39.2 million of spare parts and $34.5 million of spare engines.
The 11.25% Convertible Secured Notes due 2023 are guaranteed by Airlines. Except as otherwise specified in the amended indenture governing the 11.25% Convertible
Secured Notes due 2023, there are no restrictions on Airlines’ ability to transfer funds to Holdings in the form of cash dividends, loans or advances. General provisions of applicable state law, however, may limit the ability of any subsidiary to pay
dividends or make distributions to its parent in certain circumstances.
Table of Contents
We have the right to redeem the notes for cash in whole at any time, or from time to time in part, for a price equal to 100% of the principal amount
plus accrued and unpaid interest, if any.
Additionally, pursuant to the terms of the 11.25% Convertible Secured Notes, due 2023, we can elect to use shares of common stock to repurchase any 11.25% Convertible Secured Notes due 2023,
the number of shares will be equal to the repurchase price divided by 97.5% of the average closing sales price of our common stock for the five consecutive trading days ending on the third business day prior to the applicable repurchase date (adjusted to take into
account the occurrence of certain events that would require adjustment of the conversion rate). In certain circumstances, the notes are convertible into our common stock, at a ratio of 54.9451 shares of common stock per $1,000 principal amount of notes, which
was equivalent to an initial conversion price of approximately $18.20 per common share. As a result of the reverse split of our common shares that occurred in October 2008, the ratio is now 5.49451 shares of common stock per $1,000 principal amount of notes,
which is equivalent to a price of approximately $182.00 per common share. The ratio is subject to adjustments if certain events take place, and holders may convert only if the closing sale price per common share exceeds 120% of the conversion price for at least
20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding calendar quarter.
In the first quarter of 2009, we repurchased $1.8 million par value (book value of $1.1 million) of our 11.25% Convertible Secured Notes due 2023 for $1.3 million,
resulting in a net realized loss of $0.2 million. In the second quarter of 2009, we repurchased $75,000 par value (book value of $51,101) of our 11.25% Convertible Secured Notes due 2023 for $54,000, resulting in an immaterial net realized loss. In the
third quarter of 2009, we repurchased $6.8 million par value (book value of $4.8 million) of our 11.25% Convertible Secured Notes due 2023 for approximately $5.8 million resulting in a net loss of $1.0 million. Subsequent to these repurchases, our interest
expense, calculated using the effective interest method, related to the debt discount will be $1.6 million for the remainder of 2009, $7.8 million in 2010 and $5.7 million for the seven months ending July 31, 2011.
As a result of the adoption of the Debt with Conversion Options Subtopic, we were required to separately account for the debt and equity components of our 11.25%
Convertible Secured Notes due 2023 in a manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest expense is recognized. The debt and equity components for 11.25% Convertible Secured Notes due 2023 were as follows (in
millions):
|
|
|
September 30, 2009
|
|
|
|
December 31, 2008
(as restated – Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Principal amount of convertible notes
|
|
$
|
52.1
|
|
|
$
|
60.8
|
|
Unamortized debt discount
|
|
|
15.1
|
|
|
|
21.1
|
|
Net carrying amount
|
|
$
|
37.0
|
|
|
$
|
39.7
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
$
|
27.8
|
|
|
$
|
27.8
|
|
At September 30, 2009, the unamortized discount had a remaining recognition period of approximately 22 months.
Table of Contents
As a result of adopting the Debt with Conversion Options Subtopic, the effective interest rates for the convertible notes for the three month periods ended September 30,
2009 and 2008 were approximately 33% and 25%, respectively.
We estimated the fair values of our $52.1 million and $60.8 million (carrying value)
11.25% Convertible Secured Notes due 2023 to be $45.2 million
and $38.9 million as of September 30, 2009 and December 31, 2008, respectively, based upon actual quoted market prices which are Level II fair value measurements under ASC Topic 820, “Fair Value Measurement and Disclosures.”
The following table presents the changes in our convertible notes (in millions):
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2008
(as restated – Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
Convertible notes beginning balance
|
|
|
$
|
39.7
|
|
|
$
|
127.6
|
|
Repurchases, net
|
|
|
|
(6.6
|
)
|
|
|
(6.3
|
)
|
Convertible notes converted to equity
|
|
|
|
—
|
|
|
|
(87.5
|
)
|
Amortization of debt discount
|
|
|
|
3.9
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes balance as of September 30
|
|
|
$
|
37.0
|
|
|
$
|
42.2
|
|
|
|
|
|
|
|
|
|
|
|
In 2003, we entered into a series of secured loan agreements (the “EDC Loans”)
with Export Development Canada.
The EDC Loans consist
of $10.7 million loaned to us in May 2003 and $6.6 million loaned to us in September 2003. During the nine months ended September 30, 2009, we made payments in the amount of $2.7 million on the EDC Loans, of which
$2.4 million related to principal. As of September 30, 2009, the outstanding principal balance of the EDC Loans was $6.9 million.
In March 2009, we entered into and drew down fully on the Citigroup Credit Facility in an effort to provide increased liquidity with respect to our ARS. The
Citigroup Credit Facility, which has a five year term and is pre-payable at any time at our election, is secured by $10 million of our ARS holdings that were purchased from Citigroup. Since the credit facility is secured by a portion of our ARS holdings, we
classified the liability as current on our Condensed Consolidated Balance Sheet. We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARS purchased from Citigroup.
Other than our 11.25% Convertible Secured Notes due 2023, the EDC Loans and the Citigroup Credit Facility, we do not have any other material borrowings or available
lines of credit.
Table of Contents
The following unaudited condensed consolidated balance sheets, results of operations and cash flows present separately the financial position of the parent issuer
(Holdings), the subsidiary guarantor (Airlines), and all other non-guarantor subsidiaries of Holdings on a combined basis.
|
|
|
Condensed Consolidated Balance Sheet
September 30, 2009
(In thousands)
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
—
|
|
|
$
|
138,669
|
|
|
$
|
5,774
|
|
|
$
|
—
|
|
|
$
|
144,443
|
|
Property and equipment, net
|
|
|
105
|
|
|
|
186,639
|
|
|
|
8,857
|
|
|
|
—
|
|
|
|
195,601
|
|
Investments in other entities
|
|
|
1,223
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,223
|
|
Other assets
|
|
|
1,222
|
|
|
|
4,410
|
|
|
|
2,033
|
|
|
|
(3,928
|
)
|
|
|
3,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,550
|
|
|
$
|
329,718
|
|
|
$
|
16,664
|
|
|
$
|
(3,928
|
)
|
|
$
|
345,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
994
|
|
|
|
89,384
|
|
|
|
1,137
|
|
|
|
—
|
|
|
|
91,515
|
|
Intercompany payables (receivables)
|
|
|
(336,696
|
)
|
|
|
332,749
|
|
|
|
3,947
|
|
|
|
—
|
|
|
|
—
|
|
Long-term debt
|
|
|
37,003
|
|
|
|
3,459
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,462
|
|
Other liabilities
|
|
|
3,840
|
|
|
|
48,657
|
|
|
|
—
|
|
|
|
(3,928
|
)
|
|
|
48,569
|
|
Stockholders’ equity
|
|
|
297,409
|
|
|
|
(144,531
|
)
|
|
|
11,580
|
|
|
|
—
|
|
|
|
164,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’
equity
|
|
$
|
2,550
|
|
|
$
|
329,718
|
|
|
$
|
16,664
|
|
|
$
|
(3,928
|
)
|
|
$
|
345,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet
December 31, 2008
(In thousands)
(as restated – Note 1)
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
—
|
|
|
$
|
153,182
|
|
|
$
|
8,549
|
|
|
$
|
—
|
|
|
$
|
161,731
|
|
Property and equipment, net
|
|
|
108
|
|
|
|
207,257
|
|
|
|
13,555
|
|
|
|
—
|
|
|
|
220,920
|
|
Investments in other entities
|
|
|
1,600
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,600
|
|
Other assets
|
|
|
1,722
|
|
|
|
4,666
|
|
|
|
2,206
|
|
|
|
(3,956
|
)
|
|
|
4,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,430
|
|
|
$
|
365,105
|
|
|
$
|
24,310
|
|
|
$
|
(3,956
|
)
|
|
$
|
388,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
2,662
|
|
|
|
91,562
|
|
|
|
2,048
|
|
|
|
—
|
|
|
|
96,272
|
|
Intercompany payables (receivables)
|
|
|
(338,432
|
)
|
|
|
332,187
|
|
|
|
6,245
|
|
|
|
—
|
|
|
|
—
|
|
Long-term debt
|
|
|
39,740
|
|
|
|
5,848
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,588
|
|
Other liabilities
|
|
|
3,840
|
|
|
|
49,463
|
|
|
|
12
|
|
|
|
(3,956
|
)
|
|
|
49,359
|
|
Stockholders’ equity
|
|
|
295,620
|
|
|
|
(113,955
|
)
|
|
|
16,005
|
|
|
|
—
|
|
|
|
197,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’
equity
|
|
$
|
3,430
|
|
|
$
|
365,105
|
|
|
$
|
24,310
|
|
|
$
|
(3,956)
|
|
|
$
|
388,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
|
|
|
Condensed Consolidated Results of Operations
Three Months Ended September 30, 2009
(In thousands)
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
177,877
|
|
|
$
|
3,219
|
|
|
$
|
(1,896
|
)
|
|
$
|
179,200
|
|
Operating expenses
|
|
|
1
|
|
|
|
186,307
|
|
|
|
2,927
|
|
|
|
(1,896
|
)
|
|
|
187,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1
|
)
|
|
|
(8,430
|
)
|
|
|
292
|
|
|
|
—
|
|
|
|
(8,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of short-term investments,
net
|
|
|
—
|
|
|
|
1,274
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,274
|
|
Impairment charge on investments
|
|
|
—
|
|
|
|
(108
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(108
|
)
|
Extinguishment of debt
|
|
|
(966
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(966
|
)
|
Amortization of debt discount
|
|
|
(1,583
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,583
|
)
|
Interest expense, net of capitalized
interest
|
|
|
(1,733
|
)
|
|
|
(4,544
|
)
|
|
|
—
|
|
|
|
4,452
|
|
|
|
(1,825
|
)
|
Interest income
|
|
|
4,452
|
|
|
|
200
|
|
|
|
—
|
|
|
|
(4,452
|
)
|
|
|
200
|
|
Other, net
|
|
|
—
|
|
|
|
(18
|
)
|
|
|
218
|
|
|
|
—
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
169
|
|
|
|
(11,626
|
)
|
|
|
510
|
|
|
|
—
|
|
|
|
(10,947
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
1,902
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
169
|
|
|
$
|
(9,724
|
)
|
|
$
|
510
|
|
|
$
|
—
|
|
|
$
|
(9,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Results of Operations
Nine Months Ended September 30, 2009
(In thousands)
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
514,729
|
|
|
$
|
11,001
|
|
|
$
|
(6,233
|
)
|
|
$
|
519,497
|
|
Operating expenses
|
|
|
15
|
|
|
|
545,025
|
|
|
|
10,725
|
|
|
|
(6,233
|
)
|
|
|
549,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(15
|
)
|
|
|
(30,296
|
)
|
|
|
276
|
|
|
|
—
|
|
|
|
(30,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of short-term investments,
net
|
|
|
—
|
|
|
|
1,755
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,755
|
|
Impairment charge on investments
|
|
|
—
|
|
|
|
(108
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(108
|
)
|
Extinguishment of debt
|
|
|
(394
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(394
|
)
|
Amortization of debt discount
|
|
|
(3,912
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,912
|
)
|
Interest expense, net of capitalized
interest
|
|
|
(5,602
|
)
|
|
|
(13,591
|
)
|
|
|
—
|
|
|
|
13,358
|
|
|
|
(5,835
|
)
|
Interest income
|
|
|
13,357
|
|
|
|
838
|
|
|
|
—
|
|
|
|
(13,358
|
)
|
|
|
837
|
|
Equity investments income, net
|
|
|
(377
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(377
|
)
|
Other, net
|
|
|
(6,519
|
)
|
|
|
(2,369
|
)
|
|
|
1,495
|
|
|
|
6,464
|
|
|
|
(929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,462
|
)
|
|
|
(43,771
|
)
|
|
|
1,771
|
|
|
|
6,464
|
|
|
|
(38,998
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
5,452
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,462
|
)
|
|
$
|
(38,319
|
)
|
|
$
|
1,771
|
|
|
$
|
6,464
|
|
|
$
|
(33,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
|
|
|
Condensed Consolidated Results of Operations
Three Months Ended September 30, 2008
(In thousands)
(as restated – Note 1)
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
259,257
|
|
|
$
|
5,075
|
|
|
$
|
(2,006
|
)
|
|
$
|
262,326
|
|
Operating expenses
|
|
|
599
|
|
|
|
288,244
|
|
|
|
4,450
|
|
|
|
(2,006
|
)
|
|
|
291,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(599
|
)
|
|
|
(28,987
|
)
|
|
|
625
|
|
|
|
—
|
|
|
|
(28,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from debt discount
|
|
|
27,785
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,785
|
|
Settlement of fuel contracts
|
|
|
—
|
|
|
|
23,149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,149
|
|
Amortization of debt discount
|
|
|
(2,516
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,516
|
)
|
Interest expense, net of capitalized
interest
|
|
|
(2,172
|
)
|
|
|
(4,339
|
)
|
|
|
(2
|
)
|
|
|
4,456
|
|
|
|
(2,057
|
)
|
Interest income
|
|
|
4,456
|
|
|
|
1,218
|
|
|
|
—
|
|
|
|
(4,456
|
)
|
|
|
1,218
|
|
Equity investments income, net
|
|
|
96
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
96
|
|
Other, net
|
|
|
—
|
|
|
|
(35
|
)
|
|
|
(168
|
)
|
|
|
—
|
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
27,050
|
|
|
|
(8,994
|
)
|
|
|
455
|
|
|
|
—
|
|
|
|
18,511
|
|
Income tax expense
|
|
|
(11,207
|
)
|
|
|
(2,606
|
)
|
|
|
(283
|
)
|
|
|
—
|
|
|
|
(14,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,843
|
|
|
$
|
(11,600
|
)
|
|
$
|
172
|
|
|
$
|
—
|
|
|
$
|
4,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Results of Operations
Nine Months Ended September 30, 2008
(In thousands)
(as restated – Note 1)
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
1,149,029
|
|
|
$
|
13,347
|
|
|
$
|
(4,706
|
)
|
|
$
|
1,157,670
|
|
Operating expenses
|
|
|
673
|
|
|
|
1,254,875
|
|
|
|
14,570
|
|
|
|
(4,706
|
)
|
|
|
1,265,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(673
|
)
|
|
|
(105,846
|
)
|
|
|
(1,223
|
)
|
|
|
—
|
|
|
|
(107,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charge on investments
|
|
|
—
|
|
|
|
(13,661
|
)
|
|
|
(5,231
|
)
|
|
|
—
|
|
|
|
(18,892
|
)
|
Extinguishment of debt
|
|
|
2,107
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,107
|
|
Gain from debt discount
|
|
|
27,785
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,785
|
|
Settlement of fuel contracts
|
|
|
—
|
|
|
|
23,149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
23,149
|
|
Amortization of debt discount
|
|
|
(8,431
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,431
|
)
|
Interest expense, net of capitalized
interest
|
|
|
(6,689
|
)
|
|
|
(12,936
|
)
|
|
|
(14
|
)
|
|
|
13,374
|
|
|
|
(6,265
|
)
|
Interest income
|
|
|
13,374
|
|
|
|
4,980
|
|
|
|
—
|
|
|
|
(13,374
|
)
|
|
|
4,980
|
|
Equity investments income, net
|
|
|
261
|
|
|
|
—
|
|
|
|
(1,228
|
)
|
|
|
—
|
|
|
|
(967
|
)
|
Other, net
|
|
|
525
|
|
|
|
1,172
|
|
|
|
(289
|
)
|
|
|
—
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
28,259
|
|
|
|
(103,142
|
)
|
|
|
(7,985
|
)
|
|
|
—
|
|
|
|
(82,868
|
)
|
Income tax benefit (expense)
|
|
|
(10,636
|
)
|
|
|
31,127
|
|
|
|
2,273
|
|
|
|
—
|
|
|
|
22,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
17,623
|
|
|
$
|
(72,015
|
)
|
|
$
|
(5,712
|
)
|
|
$
|
—
|
|
|
$
|
(60,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
|
|
|
Condensed Consolidated Cash Flows
Nine Months Ended September 30, 2009
(In thousands)
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
—
|
|
|
$
|
(6,157
|
)
|
|
$
|
(6,187
|
)
|
|
$
|
—
|
|
|
$
|
(12,344
|
)
|
Investing activities
|
|
|
—
|
|
|
|
17,873
|
|
|
|
5,442
|
|
|
|
176
|
|
|
|
23,491
|
|
Financing activities
|
|
|
—
|
|
|
|
(6,964
|
)
|
|
|
175
|
|
|
|
(176
|
)
|
|
|
(6,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
—
|
|
|
|
4,752
|
|
|
|
(570
|
)
|
|
|
—
|
|
|
|
4,182
|
|
Cash and cash equivalents at the
beginning of the period
|
|
|
—
|
|
|
|
56,672
|
|
|
|
856
|
|
|
|
—
|
|
|
|
57,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
end of the period
|
|
$
|
—
|
|
|
$
|
61,424
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
$
|
61,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Cash Flows
Nine Months Ended September 30, 2008
(In thousands)
(as restated – Note 1)
|
|
|
|
|
|
|
|
Holdings
|
|
|
|
Airlines
|
|
|
|
Other Non-
Guarantor
Subsidiaries
|
|
|
|
Eliminations
|
|
|
|
Consolidated
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
$
|
—
|
|
|
$
|
(44,617
|
)
|
|
$
|
(1,043
|
)
|
|
$
|
1,256
|
|
|
$
|
(44,404
|
)
|
Investing activities
|
|
—
|
|
|
|
(64,261
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(64,261
|
)
|
Financing activities
|
|
—
|
|
|
|
(12,670
|
)
|
|
|
1,254
|
|
|
|
(1,256
|
)
|
|
|
(12,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
—
|
|
|
|
(121,548
|
)
|
|
|
211
|
|
|
|
—
|
|
|
|
(121,337
|
)
|
Cash and cash equivalents at the
beginning of the period
|
|
—
|
|
|
|
188,834
|
|
|
|
425
|
|
|
|
—
|
|
|
|
189,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the
end of the period
|
$
|
—
|
|
|
$
|
67,286
|
|
|
$
|
636
|
|
|
$
|
—
|
|
|
$
|
67,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
Note 7 – Income Taxes
The tender offer and partial redemption in August 2008 of the Original 4.25% Convertible Notes due 2023 triggered a change in ownership limitation
under Section 382 of the Internal Revenue Code (“Section 382”) of Holdings. Prior to the finalization of our 2008 tax return, we estimated an after tax charge, primarily related to interest on the timing of certain tax obligations, in our statement
of operations for the year ended December 31, 2008. Upon completion of our 2008 tax return, we have reversed such estimate as part of our tax benefit of $5.4 million during the nine months ended September 30, 2009. The $5.4 million tax benefit also
included the recognition of additional state carry back claims and refunds filed or received year to date.
In the process of adjusting our tax accrual for our 2008 actual tax return filed in the current quarter we identified an immaterial
error related to our recording of deferred tax assets and liabilities and related valuation allowance in 2008. The correction of the error resulted in a $4.8 million increase to “Deferred Income Taxes” and a $4.8 million increase to
“Accumulated loss” in our Condensed Consolidated Balance Sheet as of December 31, 2008.
In conjunction with our initial public offering in April 2002, the tax basis of our tangible and intangible assets was adjusted to fair value. This adjustment to
tax basis should result in additional tax deductions being available to us through 2017. In accordance with our tax agreement with Continental, to the extent we generate taxable income sufficient to realize the additional tax deductions and tax attributes
allocated to us, we are required to pay Continental a percentage of the amount of tax savings actually realized, excluding the effect of any loss carryback. We are required to pay Continental 100% of the first third of the anticipated tax benefit, 90% of the
second third and 80% of the last third. However, if the tax benefits are not realized by the end of 2018, we will be obligated to pay Continental 100% of any benefit realized after that date. Since these payments are solely dependent on our ability to
generate sufficient taxable income to realize these deferred tax assets, they are recorded as an obligation to Continental within the deferred tax asset accounts, and the portion we may retain in the future is offset by a valuation allowance.
At the time of the initial public offering, the valuation allowance and the obligation to Continental offset the step-up in basis of assets in our long-term deferred tax
asset account. There were no payments made to Continental under the tax agreement during the nine months ended September 30, 2009. The Section 382 ownership change that occurred in August 2008, and any further Section 382 ownership changes, limit our
ability to realize our gross deferred tax assets. Federal and many state net operating loss carryovers are subject to substantial annual limitations over their remaining life, while our regular federal tax deductions for our tax amortizable intangible assets
are limited for the five year period after this ownership change. Due to these limitations we have not recorded deferred tax assets related to our net losses before income taxes for the quarter ended September 30, 2009 and we have fully reserved for our
remaining deferred tax assets.
We account for income taxes in accordance with the subsections of ASC Topic 740, “Income Taxes.” This guidance clarifies the accounting for uncertainty
in income taxes recognized in financial statements if a position is more likely than not of being sustained by a taxing authority. As of September 30, 2009 there were no material unrecognized tax benefits or associated accrued interest and penalties.
Table of Contents
Note 8 – Earnings / (Loss) Per Share
We account for earnings per share in accordance with the subsections in ASC Topic 260 “Earnings Per Share.” Basic earnings per common share (“Basic
EPS”) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the periods presented. Diluted EPS reflects the potential dilution that could occur if
securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. As discussed below under “Reverse Stock Split,” our
stock began trading on a split-adjusted basis when the market opened on October 2, 2008. As required per SEC Staff Accounting Bulletin Topic 4C, “Changes in Capital Structure”, the computation of basic and diluted loss per share has been
retroactively adjusted to reflect the reverse stock split for all periods presented in our Condensed Consolidated Statements of Operations.
The following table sets forth the reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and nine
months ended September 30, 2009 and the three and nine months ended September 30, 2008 (in thousands, except per share amounts).
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
(as restated
– Note 1)
|
|
|
2009
|
|
|
2008
(as restated
– Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
$
|
(9,045
|
)
|
$
|
4,415
|
|
$
|
(33,546
|
)
|
$
|
(60,104
|
)
|
Income impact of assumed conversion of
convertible debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,045
|
)
|
$
|
4,415
|
|
$
|
(33,546
|
)
|
$
|
(60,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
14,851
|
|
|
15,872
|
|
|
15,581
|
|
|
8,737
|
|
Effect of stock options and restricted
stock outstanding
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
Assumed conversion of convertible debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,851
|
|
|
15,880
|
|
|
15,581
|
|
|
8,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
(0.61
|
)
|
$
|
0.28
|
|
$
|
(2.15
|
)
|
$
|
(6.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
$
|
(0.61
|
)
|
$
|
0.28
|
|
$
|
(2.15
|
)
|
$
|
(6.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We excluded 795,592 shares of restricted stock from the weighted average shares used in computing Basic EPS and Diluted EPS for the three and nine months ended September
30, 2009 and 236,881 shares of restricted stock from the weighted average shares used in computing Basic EPS and Diluted EPS for the three and nine months ended September 30, 2008, as these shares were not vested as of these dates.
Table of Contents
Weighted average common shares outstanding for the Diluted EPS calculation also include the incremental effect of shares issuable upon the exercise of stock options and
restricted stock not yet vested. We excluded the following common stock equivalents from our Diluted EPS calculations, because their inclusion would have been anti-dilutive:
•
|
Options to purchase 0.3 million and 0.4 million shares of our common stock for the three and nine months ended September 30, 2009 and 0.4 million and 0.5 million shares of our common stock for the three and nine months ended September
30, 2008, as these options exercise prices were greater than the average market price of the common shares for the respective periods;
|
•
|
0.1 million shares of restricted stock for the three months ended September 30, 2008; and
|
•
|
0.3 million shares of common stock equivalents for the assumed conversion of convertible debt for the three and nine months ended September 30, 2009 in addition to 0.4 million shares of common stock equivalents for the assumed
conversion of convertible debt for the three and nine months ended September 30, 2008.
|
Note 9 – Investments in Other Entities
In January 2006, we purchased a 44% interest in Flight Services and Systems, Inc. (“FSS”) for $3 million. At the
same time, we loaned FSS $1 million which was originally classified in Other Assets, net, on our Condensed Consolidated Balance Sheets. The note was due and payable in full on September 30, 2007, and provided that interest was due and payable quarterly on the
15th day following the close of each calendar quarter. The note provided that if International Total Services, Inc. (“ITS”) (also owned by the non-ExpressJet owners of FSS) emerged from bankruptcy and FSS could utilize its federal income tax
attributes through a transaction or series of transactions, then any unpaid balance of the note would be deemed paid in full as a contribution by us to the capital of FSS. The loan interest rate was equal to the lesser of 7% per annum or the three-month LIBOR
plus 150 basis points. In 2008, we reached a tentative agreement with FSS with respect to its obligations under the note; and accordingly, we reclassified the note from “Other Assets, net” to “Investments in Other Entities” on our
Condensed Consolidated Balance Sheets pending finalization of the agreement. As of December 31, 2008, we evaluated and determined that the carrying value of our investment in FSS was other-than-temporarily impaired due to the uncertainty surrounding the
realizability of FSS’s tax attributes and FSS’s 2008 financial performance. As such, we recorded an impairment charge of $2.6 million in 2008. This impairment charge was recognized as a decrease to our investment balance and corresponding
equity loss presented in the line “Impairment charges on investments” in our Condensed Consolidated Statements of Operations. As of September 30, 2009 our investment in FSS totaled $1.2 million. On October 27, 2009, we finalized an agreement
with FSS pursuant to which, among other things, FSS repurchased our interest and each party granted the other a mutual release of all present and future claims against the other. The purchase price received from FSS consisted of $1.0 million and a promissory
note in the amount of $600,000, which note is payable in sixty (60) equal monthly installments of principal plus interest, with the first payment to be made on December 1, 2009.
Table of Contents
Note 10 – Commitments and Contingencies
Capacity Purchase Agreement.
See Note 2 – “Contract Flying” for further information regarding our original and amended capacity
purchase agreements with Continental.
Purchase Commitments.
As of September 30, 2009, we held options for 25 ERJ-145XR aircraft that may be exercised for other types of aircraft within
the ERJ-145 family. These options will expire on December 1, 2009 if we do not exercise such options on or before such date. We retain the right to exercise the unexpired options and fly these aircraft for other airlines or under our own code, subject to
certain restrictions; however, we will have to finance our acquisition of these aircraft independently. Currently, we do not have any firm commitments for aircraft purchases.
General Guarantees and Indemnifications.
Pursuant to the Amended Continental CPA, we indemnify Continental for certain of our actions and it
indemnifies us for some of its actions.
Additionally, we are party to many contracts under which it is common for us to agree to indemnify third parties for tort liabilities that arise out of or relate to the
subject matter of the contract. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but typically excludes liabilities caused by gross negligence or willful misconduct. We cannot estimate
the potential amount of future payments under these indemnities until events arise that would trigger a liability under the indemnities. However, we expect to be covered by insurance for a material portion of these liabilities, subject to deductibles, policy
terms and condition.
Legal Proceedings.
We are a defendant in various lawsuits and proceedings arising in the ordinary course of our business. While the outcome of
these lawsuits and proceedings cannot be predicted with certainty and could have a material adverse effect on our financial position, results of operations or cash flows, we do not believe that the ultimate disposition of these proceedings will have a material
adverse effect on our financial position, results of operations or cash flows.
Note 11 – Subsequent Events
United.
United Air Lines, Inc. ("United") announced today that we were awarded a multiyear arrangement to fly 22
ERJ-145 aircraft as United Express beginning May 1, 2010. The arrangement will have an initial term of three years for 11 aircraft and two years for the remaining 11 aircraft, and will have a renewal option, at United’s election, for additional periods up
to a total term of five years. From May 2010 through October 2010, we will fly an additional 10 aircraft for United in the current ExpressJet livery. These aircraft will be sourced from our corporate aviation division and as necessary, leased from
alternate sources.
Prior to May 1, 2010, we will operate up to 22 aircraft under a short-term arrangement for United to assist with the transition of flying from their previous
partner. The aircraft, crew maintenance and insurance (ACMI) arrangement will begin with three aircraft on December 1, 2009 and increase to 22 aircraft by March 2010. These aircraft will also be sourced from our corporate aviation division.
We anticipate that the definitive agreement with respect to the multiyear arrangement will include a grant to United of 2.7 million common stock warrants with an
exercise price of $0.01 per share of common stock and that all related documents will be executed in the near future. Once executed, we will file a Current Report on Form 8-K with respect to the definitive agreement.
Table of Contents
ARS.
Subsequent to September 30, 2009, we consummated three separate transactions pursuant to which we monetized $5.0 million
of our ARS purchased from BOA for 90.5% of the face value of the securities and $10.0 million of our ARS purchased from BOA for 90.0% of the face value of the securities.
Investments in Other Entities.
On October 27, 2009, we finalized an agreement with FSS pursuant to which,
among other things, FSS repurchased our interest and each party granted the other a mutual release of all present and future claims against the other. The purchase price received from FSS consisted of $1.0 million and a promissory note in the amount of
$600,000, which note is payable in sixty (60) equal monthly installments of principal plus interest, with the first payment to be made on December 1, 2009.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains a number of forward-looking statements that are based on our current expectations and involve a number of risks and uncertainties, many
of which are outside our control. Specifically statements regarding our future results of operations, operating costs, business prospects, growth and capital expenditures, including plans with respect to our fleet, are forward-looking statements.
Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks. Some of the known risks that could significantly impact our revenues, operating
results, and capacity include, but are not limited to: our dependence on Continental Airlines, Inc. (“Continental”) and our operations under the capacity purchase agreement (the “Amended Continental CPA”); our charter operations; our
small shareholder base; our current debt obligations; government regulations; dependence upon technology infrastructure; and any adverse effects from an aviation accident involving one of our aircraft.
For further discussion of these risks, please see our Current Report on Form 8-K dated October 16, 2009 (the “Revised 2008 10-K”) in addition to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 (the “Original 2008 10-K”). The statements in this report are made as of November 13, 2009 and the events described in forward-looking statements might not occur or might occur to a
materially different extent than described in this report. We undertake no duty to update or revise any of our forward-looking statements, whether as a result of new information, future events or otherwise.
Our website address is www.expressjet.com. All of our SEC filings, together with exhibits, are available free of charge through our website as soon as reasonably
practicable after we file them with, or furnish them to, the SEC.
Third Quarter Financial Highlights
•
|
Generated $4.5 million in positive cash flow during the quarter;
|
•
|
Reported a 35.7% reduction in expenses year-over-year due to the Amended Continental CPA and suspension of non-profitable flying operations;
|
•
|
Added approximately $16 million to our cash and cash equivalents balance by
entering into a settlement agreement related to our auction rate securities
(“ARS”)
litigation
against RBC Capital Markets Corporation et al. (collectively “RBC”);
|
•
|
Allocated an additional $10 million to our securities repurchase program – purchasing debt at discounted prices to market value at the time of purchase;
|
•
|
Experienced increased wage pressure due to our experienced workforce and a significant decrease in employee attrition; and
|
•
|
Achieved significant
revenue growth in corporate aviation due to a short-term flying arrangement during the quarter with United Air Lines (“United”).
|
Table of Contents
Third Quarter Operational Highlights
•
|
Established a new all-time record for on-time performance with the Department of Transportation – turning in an 87.3% on-time performance during the month of September;
|
•
|
Completed 99.9% of our 97,967 scheduled flights during the quarter for items we could control (maintenance, crews and scheduling), and operated 99.2% of all scheduled flights considering all types of cancellations (weather and air
traffic control);
|
•
|
Implemented new guidelines to take a proactive approach with Continental to reduce extended tarmac delays;
|
•
|
Added one station to our aviation services division totaling 30 stations ground-handled by us for Continental as well as other operators; and
|
•
|
Continued to fly at low utilization levels due to decreased demand. Utilization began declining in the third quarter of 2008 due to record-breaking fuel prices and has continued to remain depressed due to the global economic
recession.
|
Outlook
ExpressJet continues to focus on three core areas: contract flying for mainline partners; long-term charter agreements and ad-hoc charter arrangements for
customers seeking customizable travel solutions (corporate aviation) and aviation services. As we now generate revenue for hours flown versus scheduled, our reported results will closely follow the general trends of the aviation industry. For example, we
believe our results for the fourth quarter 2009 and first quarter 2010 will reflect the decline in travel demand, typically seen across the industry during the slower travel season resulting in continued lower utilization across our system.
The industry continues to experience a significant decrease in demand due to the global economic recession. The Air Transport Association recently
reported
system-wide passenger unit revenue fell by 16.1% to 10.08 cents in September 2009 from 12.00 cents in September 2008 and a decline of 5.6% from the 10.68 cents reported for August 2009.
A sequential monthly decline in September 2009 versus August 2009 indicates weakness continues as we head into the typically slower travel period during the fourth and first quarters. As a result, the capacity we fly for mainline partners, as
measured in block hours, will likely remain at historically low levels through this period. However, those reductions could be somewhat offset by our partners capability to utilize our smaller aircraft to economically serve markets that may not otherwise be
viable in this reduced demand environment. We will continue to focus on providing the most economically efficient and reliable service possible to best position ourselves for opportunities within the airline industry. We believe this strategy will assist
us in bidding regional contracts; or capitalizing on short-term contract opportunities to increase the overall block hours of our fleet.
In addition given the increased regulatory and media scrutiny on regional airline carriers in the aftermath of the Colgan Q400 accident in Buffalo, New
York, we believe ExpressJet is well positioned to respond to any additional regulatory requirements. During the quarter ended September 30, 2009, we began implementation of our Advanced Qualification Program. This program complements our current Flight
Operations Quality Assurance (FOQA) Program, Aviation Safety Action Program (ASAP) and Threat and Error Management training and helps us in our adoption of an overall Safety Management System
.
We currently
incorporate the costs associated with these programs into our financial results and do not expect large additional expenditures as we move to an overall Safety Management
System. Our workforce is also very senior and while it causes additional pressures on our expenses, we believe a senior workforce, in addition to managing all training for our flight crews in-house, provides us a distinct advantage for responding to any
additional regulatory requirements in a cost-effective and efficient manner.
Table of Contents
We will also continue to market our unscheduled services to customers needing customizable travel solutions. Currently our corporate aviation section is growing
mainly because our aircraft size fills a niche (41 and 50-seats) in the charter sector and because we are able to utilize the aircraft in unique ways. One example during the third quarter is transporting college football fans to away games through our
partnership with Premiere Sports. Because of our success in this relationship, we are currently adding trips for additional sporting events planned in early 2010. Other advantages in our charter segment include providing one of the most reliable services
in the industry marked by our 99.96% maintenance completion factor. We expect our revenues to continue growing in this division as we enter into additional contracts, generate additional brand awareness and the global economy recovers.
We also continue to leverage our aviation services segment. This segment includes providing customer and ramp ground-handling services, interior and seat
refurbishments and aircraft painting. The ground handling operations allow us to generate additional income and provide a seamless product to our partners’ customers while the services functions decrease our overall costs helping ensure we remain
competitive in the current environment. During the quarter, we were successful in a bid to begin providing aircraft cleaning services to Continental at its Houston hub in Terminal B for a one-year period beginning in early December. We are in the process of
reviewing specific terms of the agreement with Continental and anticipate entering into a definitive agreement in the near future. This service should provide an incremental revenue stream within the aviation services segment.
The following highlights key statistics within our three core areas during third quarter 2009:
•
|
214 EMB-145 aircraft operated for Continental;
|
•
|
30 EMB-145 aircraft operated within our corporate aviation division;
|
•
|
30 stations under management for 40 ground-handling contracts;
|
•
|
7 hours 55 minute system-wide average daily aircraft utilization;
|
•
|
99.2% system-wide completion factor; and
|
•
|
177,649 system-wide block hours flown.
|
We will continue to focus on keeping our variable costs below the revenue-generating capability of our aircraft to be competitive as we begin concentrating on adding
additional flying for other mainline partners as contracts go out for renewal in 2009 and 2010. We believe we are well positioned for these contracts due to the cost restructuring we underwent in 2008 creating alignment with the financial performance of our
partner. We believe we are also one of the best operators in the regional industry and can provide excellent results in extraordinarily complex operating environments.
As we are able to diversify our revenue streams, add block hours or increase our profitability within the corporate aviation segment, we expect that we will begin to
generate positive cash flows followed by positive income streams.
Due to seasonal weakness coupled with the global economic recession, we expect losses for the remainder of 2009, despite positive cash flows during the second and third
quarters.
United announced today that we were awarded a multiyear arrangement to fly 22 ERJ-145 aircraft as United Express beginning May 1, 2010. The arrangement will have
an initial term of three years for 11 aircraft and two years for the remaining 11 aircraft, and will have a renewal option, at United’s election, for additional periods up to a total term of five years. From May 2010 through October 2010, we will fly an
additional 10 aircraft for United in the current ExpressJet livery. These aircraft will be sourced from our corporate aviation division and as necessary, leased from alternate sources.
Table of Contents
Prior to May 1, 2010, we will operate up to 22 aircraft under a short-term arrangement for United to assist with the transition of flying from their previous
partner. The aircraft, crew maintenance and insurance (ACMI) arrangement will begin with three aircraft on December 1, 2009 and increase to 22 aircraft by March 2010. These aircraft will also be sourced from our corporate aviation division.
We anticipate that the definitive agreement with respect to the multiyear arrangement will include a grant to United of 2.7 million common stock warrants with an
exercise price of $0.01 per share of common stock and that all related documents will be executed in the near future. Once executed, we will file a Current Report on Form 8-K with respect to the definitive agreement.
In both cases, we expect these operations to service United’s existing hubs. We expect that block hours within our contract flying segment should increase
between 10% and 15% as a result of this flying for United. As the capacity flown for United will be based on a longer term arrangement, future reporting for United will be categorized in the contract segment. For the quarter ending September 30, 2009, we
included the operational results for United in our corporate aviation (charter) segment.
As we progress into 2010, our objective will be to control expenses to ensure we are well positioned for strategic opportunities and continued low utilization. If
utilization of our aircraft does not improve, we will be required to review our fleet allocation and consider further cost savings measures.
As of September 30, 2009, our available liquidity (including restricted and unrestricted cash and our ARSholdings) was $105.4 million. We will continue to focus on
improving our balance sheet through generating cash flow from operations, selling non-core assets, making repurchases under our approved security repurchase program and attempting to secure financing, if necessary. We also intend to continue evaluating the
market for our ARS holdings to
attempt to monetize the assets at or near face value and initiated litigation in September 2009 against Bank of America Corporation et al. related to such investments brokered by the firm.
We believe that our existing liquidity and projected 2009 cash flows will be sufficient to fund current operations and our financial obligations
through the twelve months ending September 30, 2010. However, as noted above, factors outside our control may dictate that we alter our current plans and expectations.
Critical Accounting Policies and Estimates
The following are changes to our accounting policies and estimates described in our Revised 2008 10-K and Original 2008 10-K.
Adopted Accounting Policies
Convertible Notes
.
On January 1, 2009, we adopted the Cash Conversion Subsections of ASC Subtopic 470-20, “Debt with
Conversion and Other Options – Cash Conversion” (“Debt with Conversion Options Subtopic”) which applies to all convertible debt instruments that have a “net settlement feature”, meaning that such convertible debt instruments, by
their terms, may be settled either wholly or partially in cash upon conversion. The Debt with Conversion Options Subtopic requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that
reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. The Debt with Conversion Options Subtopic requires we split a component of the debt, the classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of interest expense in our Condensed Consolidated Statements of Operations.
Table of Contents
The Debt with Conversion Options Subtopic requires retrospective application to the terms of instruments as they existed for all periods presented.
The adoption of the Debt with Conversion Options Subtopic affects the accounting for our original 4.25% convertible notes due 2023 issued in 2003 (the “Original 4.25% Convertible Notes due 2023”) which on August 2, 2008, became our 11.25% Convertible
Secured Notes due 2023. The retrospective application of this pronouncement resulted in increased non-cash interest expense for 2003 through 2008. We adjusted the Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2008 to include non-cash interest expense (presented as Amortization of debt discount in our Condensed Consolidated Statements of Operations) of $2.5 million and $8.4 million related to our Original 4.25% Convertible Notes due 2023
. During the first half of 2008, we recognized extinguishment gains of $2.1 million related to repurchases of our Original 4.25% Convertible Notes due 2023 prior to the tender offer we initiated in July 2008 in connection with such notes. At the
time of our tender offer, our Original 4.25% Convertible Notes due 2023 were trading at a discount as a result of the nature of the credit environment and our own liquidity position. As a result, the repurchase of debt under the tender offer resulted in debt
extinguishment gains. The 11.25% Convertible Secured Notes due 2023, of which $68.5 million remained outstanding after the tender offer in 2008, were also subject to the Debt with Conversion Options Subtopic, and we determined the fair value of the liability
component to be $40.7, million at that time. The remainder was allocated to equity and accounted for as a debt discount which will be amortized over the period until the next put date in August 2011. The fair value of the liability component of the 11.25%
Convertible Secured Notes due 2023 was based on current market data of our convertible notes, considering interest rates for stand alone debt given the disruption in the credit markets and our own credit rating.
Adjustments to income taxes
have been recorded on the foregoing adjustments to the extent tax benefits were available. As of September 30, 2009, $37.0 million, net of discount of $15.1 million, of our 11.25% Convertible Secured Notes due 2023 remain outstanding.
Other-Than-Temporary Impairments.
In April 2009, the FASB issued new guidance
which modifies the
requirements for recognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio,
was adopted during the quarter
ended June 30, 2009. Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”
Subsequent Events.
In May 2009, the FASB issued guidance which establishes general standards of
accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued. This guidance is contained in ASC Topic 855, “Subsequent Events” (“ASC Topic 855”). We adopted the
provisions of ASC Topic 855 for the quarter ended June 30, 2009. The adoption of these provisions did not have a material effect on our Condensed Consolidated Financial Statements. The Company has evaluated subsequent events for potential recognition
and/or disclosure through November 13, 2009, the date the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.
Results of Operations
The following discussion provides an analysis of our results of operations and reasons for material changes in those results for the three and nine months ended
September 30, 2009, compared to the three and nine months ended September 30, 2008.
Table of Contents
Comparison of Three Months Ended September 30, 2009 to Three Months Ended September 30, 2008
Operating Revenue and Segment Profit (Loss)
The table below (in thousands, except percentage data) sets forth the changes in revenue, direct segment costs and segment profit (loss) from the three months ended
September 30, 2009 compared to the same period in 2008.
A significant portion of our operating expenses and infrastructure is integrated across segments (e.g., for maintenance, non-airport facility rentals, outside services, general and
administrative expenses) in order to support our entire fleet of aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operation. The presentation of our consolidated shared costs
is consistent with the manner in which these expenses are reviewed by our chief operating decision makers. These costs are included as a part of the analysis of our operating expenses below.
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
|
2008
(as restated
– Note 1)
|
|
Total
Revenue %
|
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Flying
|
|
$
|
171,062
|
|
|
95.5
|
%
|
|
$
|
184,428
|
|
70.3
|
%
|
|
$
|
(13,366
|
)
|
|
(7.2
|
%)
|
Branded Flying
|
|
|
—
|
|
|
n/a
|
(1)
|
|
|
69,286
|
|
26.4
|
|
|
|
(69,286
|
)
|
|
n/a
|
(1)
|
Aviation Services
|
|
|
10,034
|
|
|
5.6
|
|
|
|
10,618
|
|
4.0
|
|
|
|
(584
|
)
|
|
(5.5
|
)
|
Eliminations
|
|
|
(1,896
|
)
|
|
(1.1
|
)
|
|
|
(2,006
|
)
|
(0.8
|
)
|
|
|
110
|
|
|
(5.5
|
)
|
Total Revenue from customers
|
|
|
179,200
|
|
|
100.0
|
|
|
|
262,326
|
|
100.0
|
|
|
|
(83,126
|
)
|
|
(31.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Flying
|
|
|
126,958
|
|
|
70.8
|
|
|
|
133,238
|
|
50.8
|
|
|
|
(6,280
|
)
|
|
(4.7
|
)
|
Branded Flying
|
|
|
—
|
|
|
n/a
|
(1)
|
|
|
62,767
|
|
23.9
|
|
|
|
(62,767
|
)
|
|
n/a
|
(1)
|
Aviation Services
|
|
|
5,688
|
|
|
3.2
|
|
|
|
4,806
|
|
1.8
|
|
|
|
882
|
|
|
18.4
|
|
Eliminations
|
|
|
(1,896
|
)
|
|
(1.1
|
)
|
|
|
(2,006
|
)
|
(0.8
|
)
|
|
|
110
|
|
|
(5.5
|
)
|
Total Direct segment costs
|
|
|
130,750
|
|
|
72.9
|
|
|
|
198,805
|
|
75.8
|
|
|
|
(68,055
|
)
|
|
(34.2
|
)
|
Segment profit
|
|
|
48,450
|
|
|
27.1
|
|
|
|
63,521
|
|
24.2
|
|
|
|
(15,071
|
)
|
|
(23.7
|
)
|
Special charges
|
|
|
—
|
|
|
|
|
|
|
(21,187
|
)
|
|
|
|
|
|
|
|
|
|
Other shared expenses, including
transition costs
|
|
|
(56,589
|
)
|
|
|
|
|
|
(71,295
|
)
|
|
|
|
|
|
|
|
|
|
Gain on sale of short-term investments, net
|
|
|
1,274
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Impairment charges on investments
|
|
|
(108
|
)
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of debt
|
|
|
(966
|
)
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Gain from debt discount
|
|
|
—
|
|
|
|
|
|
|
27,785
|
|
|
|
|
|
|
|
|
|
|
Settlement of fuel contracts
|
|
|
—
|
|
|
|
|
|
|
23,149
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
(1,583
|
)
|
|
|
|
|
|
(2,516
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense, net of capitalized
interest
|
|
|
(1,825
|
)
|
|
|
|
|
|
(2,057
|
)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
200
|
|
|
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
Equity investments income, net
|
|
|
—
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
200
|
|
|
|
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before
income taxes
|
|
$
|
(10,947
|
)
|
|
|
|
|
$
|
18,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Branded flying operations were suspended on September 2, 2008.
|
Table of Contents
The table below (in thousands, except percentage data) sets forth the segment profit for the three months ended September 30, 2009 and the three months ended September
30, 2008 for each segment.
|
|
|
Contract
Flying
|
|
|
Aviation
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
|
$
|
171,062
|
|
|
100.0
|
%
|
$
|
10,034
|
|
$
|
100.0
|
%
|
Direct segment costs
|
|
|
126,958
|
|
|
74.2
|
|
|
5,688
|
|
|
56.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$
|
44,104
|
|
|
25.8
|
%
|
$
|
4,346
|
|
|
43.3
|
%
|
|
|
Contract
Flying
|
|
|
Branded
Flying
|
|
|
Aviation
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Total
Revenue %
|
|
|
|
2008
|
|
|
Total
Revenue %
|
|
|
|
2008
|
|
|
Total
Revenue %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
|
$
|
184,428
|
|
|
100.0
|
%
|
|
$
|
69,286
|
|
|
100.0
|
%
|
|
$
|
10,618
|
|
|
100.0
|
%
|
Direct segment costs
|
|
|
133,238
|
|
|
72.2
|
|
|
|
62,767
|
|
|
90.6
|
|
|
|
4,806
|
|
|
45.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$
|
51,190
|
|
|
27.8
|
%
|
|
$
|
6,519
|
|
|
9.4
|
%
|
|
$
|
5,812
|
|
|
54.7
|
%
|
Contract Flying
.
Block hours for contract flying with Continental
were down by 1.5% for the three months ended September 30, 2009 as compared to the same period ended September 30, 2008. Since we operated under the Amended Continental CPA for both periods under comparison, the decrease in operating revenue and expenses within
our Contract Flying segment for the three months ended September 30, 2009 is primarily due to a decrease in pass through expenses such as station expenditures at Continental managed stations.
Prior to July 1, 2008, Airlines was entitled to receive payment for each block hour that Continental scheduled it to fly. The payments were based on a formula
designed to provide Airlines with a target operating margin of 10%. Under the Amended Continental CPA, which became effective July 1, 2008, revenues are calculated at pre-determined rates based on block hours. These rates are considerably lower rates than
under the Original Continental CPA. Likewise, under the Amended Continental CPA, Continental provides fuel for all flights and subleases the aircraft to us, both at no cost; therefore, these items are not included in our Condensed Consolidated Statements of
Operations beginning with July 1, 2008.
Additionally, we agreed with Delta Airlines (“Delta”) to terminate our capacity purchase agreement (the “Delta CPA”) effective September 2, 2008,
and accordingly, there was no activity in operations under the Delta CPA for the three month period ended September 30, 2009. Airlines earned approximately $15.9 million in revenue under the Delta CPA for the three months ended September 30, 2008.
Table of Contents
Branded Flying
.
Airlines suspended flying under our ExpressJet brand and our pro-rate flying arrangement with Delta (the
“Delta Prorate”) effective September 2, 2008, and accordingly, there was no activity in operations under the ExpressJet brand or the Delta Prorate for the three month period ended September 30, 2009
.
Aviation
Services.
For the three months ended September 30, 2009, Aviation Services had a
segment profit margin of 43.3%, down from 54.7% for the three months ended September 30, 2008. During the first quarter of 2009, we sold substantially all of the assets of a wholly-owned subsidiary, American Composites, LLC (“American
Composites”). Revenues and expenses for this profitable component are no longer reflected in our Condensed Consolidated Statements of Operations.
Operating Expenses
The
table below (in thousands, except percentage data) sets forth
the changes in operating expenses from the three months
ended September 30, 2009 compared to the three months ended September 30, 2008.
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Total
Revenue %
|
|
|
2008
|
|
Total
Revenue %
|
|
|
Change
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
$
|
81,435
|
|
45.4
|
%
|
$
|
98,252
|
|
37.5
|
%
|
$
|
(16,817
|
)
|
(17.1
|
%)
|
Maintenance, materials and repairs
|
|
44,251
|
|
24.7
|
|
|
48,296
|
|
18.4
|
|
|
(4,045
|
)
|
(8.4
|
)
|
Other rentals and landing fees
|
|
16,367
|
|
9.1
|
|
|
22,646
|
|
8.6
|
|
|
(6,279
|
)
|
(27.7
|
)
|
Depreciation and amortization
|
|
6,921
|
|
3.9
|
|
|
6,718
|
|
2.6
|
|
|
203
|
|
3.0
|
|
Outside services
|
|
6,344
|
|
3.5
|
|
|
8,509
|
|
3.2
|
|
|
(2,165
|
)
|
(25.4
|
)
|
Aircraft rentals
|
|
5,472
|
|
3.1
|
|
|
18,917
|
|
7.2
|
|
|
(13,445
|
)
|
(71.1
|
)
|
Aircraft fuel and related taxes
|
|
4,555
|
|
2.5
|
|
|
32,235
|
|
12.3
|
|
|
(27,680
|
)
|
(85.9
|
)
|
Ground handling
|
|
1,896
|
|
1.1
|
|
|
5,862
|
|
2.2
|
|
|
(3,966
|
)
|
(67.7
|
)
|
Marketing and distribution
|
|
428
|
|
0.2
|
|
|
1,767
|
|
0.7
|
|
|
(1,339
|
)
|
(75.8
|
)
|
Special charges
|
|
—
|
|
—
|
|
|
21,187
|
|
8.1
|
|
|
(21,187
|
)
|
(100.0
|
)
|
Other operating expenses
|
|
19,670
|
|
11.0
|
|
|
26,898
|
|
10.3
|
|
|
(7,228
|
)
|
(26.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
$
|
187,339
|
|
104.5
|
%
|
$
|
291,287
|
|
111.1
|
%
|
$
|
(103,948
|
)
|
(35.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following explanations are related to changes between the three months ended September 30, 2009 compared to the same period in
2008.
Wages, salaries and related costs
decreased 17.1% primarily due to staff and line employee reductions, net of severance, associated with the
suspension of flying under our ExpressJet brand and the Delta Prorate effective as of September 2, 2008.
Other rentals and landing fees
decreased 27.7% in total, primarily driven by fewer airport locations flown to and
transitioning some locations to Continental. Together these events drove a reduction in airport facilities rents of $5.3 million or 90.5% from the same period in 2008.
Outside services
decreased 25.4% due primarily to legal and consulting fees paid in 2008 related to the tender offer made in connection with our
Original 4.25% Convertible Notes due 2023. No such fees were incurred during the quarter ended September 30, 2009.
Table of Contents
Aircraft rentals
expense decreased 71.1%. With the Amended Continental CPA, we returned 39 aircraft to
Continental and reallocated 18 aircraft to our Corporate Aviation division. For the aircraft flying in our Corporate Aviation division, we pay Continental reduced rental rates.
Aircraft fuel and related taxes
decreased 85.9%
primarily due to
the suspension of
flying under our ExpressJet brand, the Delta Prorate, and the Delta CPA
effective September 2, 2008.
Ground Handling
expense decreased 67.7%
primarily due to
the suspension
of
flying under our ExpressJet brand, the Delta Prorate, and the Delta CPA
effective September 2, 2008.
Marketing and Distribution
expense
decreased 75.8% primarily due
to the suspension of flying under our ExpressJet brand and the Delta Prorate that became effective September 2, 2008 leaving only expenses associated with our Corporate Aviation division and ExpressJet Services. All marketing and distribution costs for aircraft
operated by us under the Amended Continental CPA are incurred directly by Continental and are not included in our Condensed Consolidated Statements of Operations.
Special charges
decreased $21.2 million primarily due to the suspension of flying under our branded
commercial passenger flight operations and our capacity purchase and pro-rate agreements with Delta Airlines in September 2008. In connection with these capacity reductions and the transition of up to 39 aircraft back to Continental, we incurred special charges
related to aircraft, employee reductions and certain other charges. Similar impairment charges did not occur during the three months ended September 30, 2009.
Non-Operating Expenses
The table below (in thousands, except percentage data) sets forth the changes in non-operating expenses from the three months ended September 30, 2009 compared to the
three months ended September 30, 2008.
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
|
2008
(as restated
– Note 1)
|
|
Total
Revenue %
|
|
|
|
Change
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of short-term
investments, net
|
$
|
1,274
|
|
|
0.7
|
%
|
|
$
|
—
|
|
—
|
%
|
|
$
|
1,274
|
|
100.0
|
%
|
Impairment charge on
investments
|
|
(108
|
)
|
|
(0.1
|
)
|
|
|
—
|
|
—
|
|
|
|
(108
|
)
|
100.0
|
|
Extinguishment of debt
|
|
(966
|
)
|
|
(0.5
|
)
|
|
|
—
|
|
—
|
|
|
|
(966
|
)
|
100.0
|
|
Gain from debt discount
|
|
—
|
|
|
—
|
|
|
|
27,785
|
|
10.6
|
|
|
|
(27,785
|
)
|
(100.0
|
)
|
Settlement of fuel contracts
|
|
—
|
|
|
—
|
|
|
|
23,149
|
|
8.8
|
|
|
|
(23,149
|
)
|
(100.0
|
)
|
Amortization of debt discount
|
|
(1,583
|
)
|
|
(0.9
|
)
|
|
|
(2,516
|
)
|
(1.0
|
)
|
|
|
933
|
|
(37.1
|
)
|
Interest expense, net of
capitalized interest
|
|
(1,825
|
)
|
|
(1.0
|
)
|
|
|
(2,057
|
)
|
(0.8
|
)
|
|
|
232
|
|
(11.3
|
)
|
Interest income
|
|
200
|
|
|
0.1
|
|
|
|
1,218
|
|
0.5
|
|
|
|
(1,018
|
)
|
(83.6
|
)
|
Equity investments income, net
|
|
—
|
|
|
—
|
|
|
|
96
|
|
0.0
|
|
|
|
(96
|
)
|
(100.0
|
)
|
Other, net
|
|
200
|
|
|
0.1
|
|
|
|
(203
|
)
|
(0.1
|
)
|
|
|
403
|
|
(198.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income
(expenses)
|
$
|
(2,808
|
)
|
|
(1.6
|
%)
|
|
$
|
47,472
|
|
18.0
|
%
|
|
$
|
(50,280
|
)
|
(105.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
The following explanations are related to changes in non-operating expenses between the three months ended September 30, 2009 compared to the same period in
2008.
Gain on sale of short-term investments, net
was a $1.3 million gain related to
the settlement agreement that provided for RBC to
immediately repurchase ARS with an aggregate par value of $18,000,000 it sold to ExpressJet for 87.5% of par value.
No sales of ARS occurred in the quarter ended September 30, 2008.
Extinguishment of debt
was a $1.0 million loss related to
repurchases of $6.8 million par value of our 11.25
% Convertible Secured Notes due 2023 made during the third quarter of 2009. The extinguishment of debt consists of derecognition losses
as accounted for
under the Debt with Conversion Options Subtopic. No repurchases were made during the quarter ended September 30, 2008.
Gain from debt discount
was
$27.8 million in 2008 as we determined,
i
n accordance with the Debt with Conversion Options Subtopic, that the fair value of the liability component of our $68.5 million 11.25% Convertible Secured Notes due 2023 outstanding at September 30, 2008, to be $40.7
million. The difference was allocated to equity and is accounted for as a debt discount which will be amortized over the period until the next put date in August 2011. The fair value adjustment was recorded as a non-recurring gain under non-operating
income in the third quarter of 2008. No such gain was recorded during the quarter ended September 30, 2009.
Settlement of Fuel Contracts
was $23.1 million in 2008 as we recorded the sale of our
fixed forward
purchase contracts for periods subsequent to September 2, 2008.
Impairment charges on investments
was $0.1 million as we adopted
FASB’s new guidance on the
requirements for recognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio,
was adopted
during the quarter ended June 30, 2009. Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”
Interest income
decreased primarily due to decreases in the volume of cash invested, the rate of interest earned and spending
related to capital projects.
Table of Contents
Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended September 30, 2008
Operating Revenue and Segment Profit (Loss)
The table below (in thousands, except percentage data) sets forth the changes in revenue, direct segment costs and segment profit (loss) from the nine months ended
September 30, 2009 compared to the same period in 2008.
A significant portion of our operating expenses and infrastructure is integrated across segments (e.g., for maintenance, non-airport facility rentals, outside services, general and
administrative expenses) in order to support our entire fleet of aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operation. The presentation of our consolidated shared costs
is consistent with the manner in which these expenses are reviewed by our chief operating decision makers. These costs are included as a part of the analysis of our operating expenses below.
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
|
2008
(as restated
– Note 1)
|
|
Total
Revenue %
|
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Flying
|
|
$
|
493,538
|
|
|
95.0
|
%
|
|
$
|
908,348
|
|
78.5
|
%
|
|
$
|
(414,810
|
)
|
|
(45.7
|
%)
|
Branded Flying
|
|
|
—
|
|
|
n/a
|
(1)
|
|
|
221,258
|
|
19.1
|
|
|
|
(221,258
|
)
|
|
n/a
|
(1)
|
Aviation Services
|
|
|
32,191
|
|
|
6.2
|
|
|
|
32,770
|
|
2.8
|
|
|
|
(579
|
)
|
|
(1.8
|
)
|
Eliminations
|
|
|
(6,232
|
)
|
|
(1.2
|
)
|
|
|
(4,706
|
)
|
(0.4
|
)
|
|
|
(1,526
|
)
|
|
32.4
|
|
Total Revenue from customers
|
|
|
519,497
|
|
|
100.0
|
|
|
|
1,157,670
|
|
100.0
|
|
|
|
(638,173
|
)
|
|
(55.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Flying
|
|
|
367,350
|
|
|
70.7
|
|
|
|
679,897
|
|
58.7
|
|
|
|
(312,547
|
)
|
|
(46.0
|
)
|
Branded Flying
|
|
|
—
|
|
|
n/a
|
(1)
|
|
|
289,480
|
|
25.0
|
|
|
|
(289,480
|
)
|
|
n/a
|
(1)
|
Aviation Services
|
|
|
17,066
|
|
|
3.3
|
|
|
|
16,827
|
|
1.5
|
|
|
|
239
|
|
|
1.4
|
|
Eliminations
|
|
|
(6,232
|
)
|
|
(1.2
|
)
|
|
|
(4,706
|
)
|
(0.4
|
)
|
|
|
(1,526
|
)
|
|
32.4
|
|
Total Direct segment costs
|
|
|
378,184
|
|
|
72.8
|
|
|
|
981,498
|
|
84.8
|
|
|
|
(603,314
|
)
|
|
(61.5
|
)
|
Segment profit
|
|
|
141,313
|
|
|
27.2
|
|
|
|
176,172
|
|
15.2
|
|
|
|
(34,859
|
)
|
|
(19.8
|
)
|
Special charges
|
|
|
—
|
|
|
|
|
|
|
(43,307
|
)
|
|
|
|
|
|
|
|
|
|
Other shared expenses, including
transition costs
|
|
|
(171,348
|
)
|
|
|
|
|
|
(240,607
|
)
|
|
|
|
|
|
|
|
|
|
Gain on sale of short-term investments, net
|
|
|
1,755
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Impairment charges on investments
|
|
|
(108
|
)
|
|
|
|
|
|
(18,892
|
)
|
|
|
|
|
|
|
|
|
|
Extinguishment of debt
|
|
|
(394
|
)
|
|
|
|
|
|
2,107
|
|
|
|
|
|
|
|
|
|
|
Gain from debt discount
|
|
|
—
|
|
|
|
|
|
|
27,785
|
|
|
|
|
|
|
|
|
|
|
Settlement of fuel contracts
|
|
|
—
|
|
|
|
|
|
|
23,149
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
(3,912
|
)
|
|
|
|
|
|
(8,431
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense, net of capitalized
interest
|
|
|
(5,835
|
)
|
|
|
|
|
|
(6,265
|
)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
837
|
|
|
|
|
|
|
4,980
|
|
|
|
|
|
|
|
|
|
|
Equity investments loss, net
|
|
|
(377
|
)
|
|
|
|
|
|
(967
|
)
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(929
|
)
|
|
|
|
|
|
1,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss before income taxes
|
|
$
|
(38,998
|
)
|
|
|
|
|
$
|
(82,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Branded flying operations were suspended on September 2, 2008.
|
Table of Contents
The table below (in thousands, except percentage data) sets forth the segment profit (loss) for the nine months ended September 30, 2009 and the nine months ended
September 30, 2008 for each segment.
|
|
|
Contract
Flying
|
|
|
Aviation
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
|
$
|
493,538
|
|
|
100.0
|
%
|
$
|
32,191
|
|
|
100.0
|
%
|
Direct segment costs
|
|
|
367,350
|
|
|
74.4
|
|
|
17,066
|
|
|
53.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$
|
126,188
|
|
|
25.6
|
%
|
$
|
15,125
|
|
|
47.0
|
%
|
|
|
Contract
Flying
|
|
|
Branded
Flying
|
|
|
Aviation
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Total
Revenue %
|
|
|
|
2008
|
|
|
Total
Revenue %
|
|
|
|
2008
|
|
|
Total
Revenue %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
|
$
|
908,348
|
|
|
100.0
|
%
|
|
$
|
221,258
|
|
|
100.0
|
%
|
|
$
|
32,770
|
|
|
100.0
|
%
|
Direct segment costs
|
|
|
679,897
|
|
|
74.8
|
|
|
|
289,480
|
|
|
130.8
|
|
|
|
16,827
|
|
|
51.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
228,451
|
|
|
25.2
|
%
|
|
$
|
(68,222
|
)
|
|
(30.8
|
%)
|
|
$
|
15,943
|
|
|
48.7
|
%
|
Contract Flying
.
Block hours for contract flying with
Continental were down 7.3% for the nine months ended September 30, 2009 as compared to the same period ended September 30, 2008. The decrease in operating revenue and expenses within our Contract Flying segment is primarily due to operating under the Original
Continental CPA for the first half of 2008 versus under the Amended Continental CPA for all of 2009 highlighting different revenue and expense structures contained in each agreement.
Prior to July 1, 2008, Airlines was entitled to receive payment for each block hour that Continental scheduled it to fly, which arrangement was based on a formula
designed to provide Airlines with a target operating margin of 10%. Under the Amended Continental CPA, which became effective July 1, 2008, revenues are calculated at a pre-determined rate based on block hours flown at considerably lower rates than under the
Original Continental CPA. Likewise, under the Amended Continental CPA, Continental is responsible for the cost of providing fuel for all flights and for paying aircraft rent for all aircraft covered by the Amended Continental CPA and, therefore, these items are
not included in our Condensed Consolidated Statements of Operations beginning July 1, 2008.
Additionally, we agreed with Delta to terminate the Delta CPA effective September 2, 2008, and accordingly, there was no activity in operations for the Delta CPA for the
nine month period ended September 30, 2009. Airlines earned approximately $43.7 million in revenue under the Delta CPA for the nine months ended September 30, 2008.
Branded Flying
.
Airlines suspended flying under our ExpressJet brand and the Delta Prorate effective September 2, 2008, and
accordingly, there was no activity in operations under the ExpressJet brand or the Delta Prorate for the nine month period ended September 30, 2009
.
Table of Contents
Aviation
Services
.
For the
nine months ended September 30, 2009, Aviation Services had a segment profit margin of 47.0%, down from 48.7% for the nine months ended September 30, 2008. The decrease in profit margin for Ground Handling during the nine months ended September 30, 2009 is
offset by increased allowance for doubtful accounts for
ExpressJet Services, LLC. In addition,
we sold substantially all of the assets of a wholly-owned subsidiary, American Composites. Revenues and expenses for this profitable
component are no longer reflected in our Condensed Consolidated Statements of Operations.
Operating Expenses
The
table below (in thousands, except percentage data) sets forth
the changes in operating expenses from the nine months
ended September 30, 2009 compared to the nine months ended September 30, 2008.
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Total
Revenue %
|
|
|
2008
|
|
Total
Revenue %
|
|
|
Change
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wages, salaries and related costs
|
$
|
240,729
|
|
46.3
|
%
|
$
|
321,686
|
|
27.8
|
%
|
$
|
(80,957
|
)
|
(25.2
|
%)
|
Maintenance, materials and repairs
|
|
123,922
|
|
23.9
|
|
|
160,349
|
|
13.9
|
|
|
(36,427
|
)
|
(22.7
|
)
|
Other rentals and landing fees
|
|
45,491
|
|
8.8
|
|
|
81,398
|
|
7.0
|
|
|
(35,907
|
)
|
(44.1
|
)
|
Depreciation and amortization
|
|
22,180
|
|
4.3
|
|
|
24,145
|
|
2.1
|
|
|
(1,965
|
)
|
(8.1
|
)
|
Outside services
|
|
20,071
|
|
3.9
|
|
|
41,819
|
|
3.6
|
|
|
(21,748
|
)
|
(52.0
|
)
|
Aircraft rentals
|
|
16,416
|
|
3.2
|
|
|
192,432
|
|
16.6
|
|
|
(176,016
|
)
|
(91.5
|
)
|
Aircraft fuel and related taxes
|
|
10,175
|
|
2.0
|
|
|
226,184
|
|
19.5
|
|
|
(216,009
|
)
|
(95.5
|
)
|
Ground handling
|
|
7,497
|
|
1.4
|
|
|
57,813
|
|
5.0
|
|
|
(50,316
|
)
|
(87.0
|
)
|
Marketing and distribution
|
|
2,093
|
|
0.4
|
|
|
25,173
|
|
2.2
|
|
|
(23,080
|
)
|
(91.7
|
)
|
Impairment of fixed assets and goodwill
|
|
—
|
|
—
|
|
|
21,410
|
|
1.8
|
|
|
(21,410
|
)
|
(100.0
|
)
|
Special charges
|
|
—
|
|
—
|
|
|
21,896
|
|
1.9
|
|
|
(21,896
|
)
|
(100.0
|
)
|
Other operating expenses
|
|
60,958
|
|
11.7
|
|
|
91,107
|
|
7.9
|
|
|
(30,149
|
)
|
(33.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
$
|
549,532
|
|
105.9
|
%
|
$
|
1,265,412
|
|
109.3
|
%
|
$
|
(715,880
|
)
|
(56.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following explanations are related to changes between the nine months ended September 30, 2009 compared to the same period in
2008.
Wages, salaries and related costs
decreased 25.2% primarily due to staff and line employee reductions, net of severance, associated with the
suspension of flying under our ExpressJet brand and our pro-rate flying arrangement with Delta that went into effect September 2, 2008.
Maintenance, materials and repairs
decreased 22.7% in line with the system-wide decrease in block hours of 24.3% over the same period year
over year.
Other rentals and landing fees
decreased 44.1%. As a result of our suspended operations, expenses associated with landing
fees decreased approximately 17.8%. In addition, lower expenses resulted from transitioning station management of a majority of the stations under the Amended Continental CPA from ExpressJet to Continental. As a result, the associated facility rentals are
now incurred directly by Continental and the related expense is no longer included in our Condensed Consolidated Statements of Operations.
Table of Contents
Outside services
decreased 52.0% primarily due to the suspension of flying under our ExpressJet brand and the Delta Prorate as of September 2, 2008
and in part to Continental administrative fees earned in 2008 but not in 2009. This administrative fee was eliminated in the Amended Continental CPA effective July 1, 2008. In addition, we incurred legal and consulting fees in 2008 from our independent
financial advisors related to the tender offer made in connection with our Original 4.25% Convertible Notes due 2023 and the unsolicited takeover offer from SkyWest, Inc.
Aircraft rentals
expense decreased 91.5% primarily due to new terms under the Amended Continental CPA which became effective
July 1, 2008. Under the Amended Continental CPA, Continental is responsible for paying aircraft rent for all aircraft operated for Continental thereunder and, therefore, the related expense is no longer included in our Condensed Consolidated Statements of
Operations. In addition, lease payments for the 30 aircraft operating outside of the Amended Continental CPA are at significantly lower rates than the lease obligations under the Original Continental CPA.
Aircraft fuel and related taxes
decreased 95.5%
primarily due to new
terms under the Amended Continental CPA which became effective July 1, 2008. Prior to July 1, 2008, o
ur fuel price, including related fuel taxes, was capped at 71.20 cents per gallon under the Original Continental CPA.
U
nder the Amended Continental CPA, Continental is responsible for the cost of providing fuel for all aircraft operated by us under the Amended Continental CPA and, therefore, the related expense is no longer included in our Condensed
Consolidated Statements of Operations.
Ground
Handling
expense decreased 87.0% primarily due to new
terms under the Amended Continental CPA which
became effective July 1, 2008. Under the Amended Continental CPA, Continental is responsible for the station expenditures at Continental-managed stations directly.
In addition, u
nder the Amended Continental CPA,
Continental is responsible for the cost of providing fueling services for all aircraft operated by us under the Amended Continental CPA and, therefore, the related ground handling and aircraft servicing expense related to operations in respect of the Amended
Continental CPA is no longer included in our Condensed Consolidated Statements of Operations.
Marketing and Distribution
expense
decreased 91.7% primarily due
to the suspension of flying under our ExpressJet brand and the Delta Prorate as of September 2, 2008 leaving only expenses associated with our Corporate Aviation division and ExpressJet Services. All marketing and distribution costs for aircraft operated by
us under the Amended Continental CPA are incurred directly by Continental and are not included in our Condensed Consolidated Statements of Operations.
Impairment charges on fixed assets and goodwill
decreased $21.4
million primarily due to a $12.8 million non-cash impairment of goodwill related to the original Continental CPA and an $8.6 million non-cash impairment to write-off certain capital assets, primarily non-moveable equipment, building and aircraft improvements
(associated with our Branded Flying Segment) in 2008. Similar impairment charges did not occur during the nine months ended September 30, 2009.
Special charges
decreased $21.9 million primarily due to the suspension of flying under our branded commercial
passenger flight operations and our capacity purchase and pro-rate agreements with Delta Airlines in September 2008. In connection with these capacity reductions and the transition of up to 39 aircraft back to Continental, we incurred special charges of $21.2
million related to aircraft, employee reductions and certain other charges in addition to a $0.7 million non-cash charge related to previously disputed base closure costs associated with the original Continental CPA during 2008. Similar impairment charges did
not occur during the nine months ended September 30, 2009.
Table of Contents
Non-Operating Expenses
The table below (in thousands, except percentage data) sets forth the changes in non-operating expenses from the nine months ended September 30, 2009 compared to the
nine months ended September 30, 2008.
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Total
Revenue %
|
|
|
|
2008
(as restated
– Note 1)
|
|
Total
Revenue %
|
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of short-term
investments, net
|
$
|
1,755
|
|
|
0.3
|
%
|
|
$
|
—
|
|
—
|
%
|
|
$
|
1,755
|
|
|
100.0
|
%
|
Impairment charge on investments
|
|
(108
|
)
|
|
0.0
|
|
|
|
(18,892
|
)
|
(1.6
|
)
|
|
|
18,784
|
|
|
(99.4
|
)
|
Extinguishment of debt
|
|
(394
|
)
|
|
(0.1
|
)
|
|
|
2,107
|
|
0.2
|
|
|
|
(2,501
|
)
|
|
(118.7
|
)
|
Gain from debt discount
|
|
—
|
|
|
—
|
|
|
|
27,785
|
|
2.4
|
|
|
|
(27,785
|
)
|
|
(100.0
|
)
|
Settlement of fuel contracts
|
|
—
|
|
|
—
|
|
|
|
23,149
|
|
2.0
|
|
|
|
(23,149
|
)
|
|
(100.0
|
)
|
Amortization of debt discount
|
|
(3,912
|
)
|
|
(0.8
|
)
|
|
|
(8,431
|
)
|
(0.7
|
)
|
|
|
4,519
|
|
|
(53.6
|
)
|
Interest expense, net of capitalized
interest
|
|
(5,835
|
)
|
|
(1.1
|
)
|
|
|
(6,265
|
)
|
(0.5
|
)
|
|
|
430
|
|
|
(6.9
|
)
|
Interest income
|
|
837
|
|
|
0.2
|
|
|
|
4,980
|
|
0.4
|
|
|
|
(4,143
|
)
|
|
(83.2
|
)
|
Equity investments loss, net
|
|
(377
|
)
|
|
(0.1
|
)
|
|
|
(967
|
)
|
(0.1
|
)
|
|
|
590
|
|
|
(61.0
|
)
|
Other, net
|
|
(929
|
)
|
|
(0.3
|
)
|
|
|
1,408
|
|
0.1
|
|
|
|
(2,337
|
)
|
|
(166.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income
(expenses)
|
$
|
(8,963
|
)
|
|
(1.9
|
%)
|
|
$
|
24,874
|
|
2.2
|
%
|
|
$
|
(33,837
|
)
|
|
(136.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following explanations are related to changes in non-operating expenses between the nine months ended September 30, 2009 compared to the same period in
2008.
Gain on sale of short-term investments, net
included a $0.5 million gain recognized for a sale of ARS in January 2009 as well as gains of
$1.3 million related to
the settlement agreement that provided for RBC to immediately repurchase ARS with an aggregate par value of $18,000,000 it sold to ExpressJet for 87.5% of par value during the third quarter of 2009. No such gains
were recognized during the nine months ended September 30, 2008.
Extinguishment of debt
decreased 118.7% in 2009 and is
related to repurchases of our 11.25
% Convertible Secured Notes due 2023 made in 2009 when compared to repurchases of our
Original 4.25% Convertible Notes due 2023
in 2008. E
xtinguishment of debt consists of derecognition gains or losses
as accounted for under the Debt with Conversion Options Subtopic using the fair value of bond trading activity at the time of
repurchase.
Gain from debt discount
was
$27.8 million in 2008 as we determined, i
n accordance with the Debt with Conversion Options Subtopic, that the fair value of the liability component of our $68.5 million 11.25% Convertible Secured Notes due 2023 outstanding
at September 30, 2008, to be $40.7, million. The difference was allocated to equity and is accounted for as a debt discount which will be amortized over the period until the next put date in August 2011. The fair value adjustment was recorded as a
non-recurring gain under non-operating income in the third quarter of 2008.
Table of Contents
Settlement of Fuel Contracts
was $23.1 million in 2008 as we recorded the sale of our fixed forward purchase contracts for periods subsequent
to September 2, 2008.
Impairment charge on investments
decreased $18.9 million primarily due to a $13.7 million impairment that we recorded on our
ARS investment during the nine months ended September 30, 2008. The need to record an other-than-temporary decline in valuation was caused by the uncertainty in the ARS market and the fact we determined we would consider liquidating these investments at a
discount if necessary.
In addition,
we impaired our remaining investment in Wing Holdings, LLC during the nine months ended September 30, 2008 for $5.2 million. We review our investments in unconsolidated affiliates for
impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. In 2009, impairment charge on investments was $0.1 million as we adopted FASB’s new guidance on the
requirements for recognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio,
was adopted
during the quarter ended June 30, 2009. Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”
Amortization of debt discount
decreased $4.5 million due to our adoption of the Debt with Conversion Options Subtopic and its
retroactive application to all periods presented. As a result, the financial statements for the nine months ended September 30, 2008 were adjusted to reflect an additional $6.9 million in amortization of debt discount related to our Original 4.25% Convertible
Notes due 2023 and our 11.25% Convertible Secured Notes due 2023 to the $1.5 million in amortization of debt discount originally reported for the period. The $3.9 million in amortization of debt discount for the nine months ended September 30, 2009, is related
to debt discount on our 11.25% Convertible Secured Notes due 2023.
Interest income
decreased primarily due to decreases in the volume of cash invested, the rate of interest earned and spending
related to capital projects.
Certain Operational Information
The following statistical information for the periods indicated is helpful in understanding our financial results:
|
|
For the Three Months Ended September 30,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passenger miles (millions)
(1)
|
|
2,212
|
|
|
2,439
|
|
|
(227
|
)
|
|
(9.3
|
%)
|
|
Available seat miles (millions)
(2)
|
|
2,779
|
|
|
3,164
|
|
|
(385
|
)
|
|
(12.2
|
%)
|
|
Passenger load factor
(3)
|
|
79.6
|
%
|
|
77.1
|
%
|
|
2.5
|
pts
|
|
3.2
|
%
|
|
Operating cost per available seat mile (cents)
(4)
|
|
6.74
|
|
|
9.21
|
|
|
(2.47
|
)
|
|
(26.8
|
%)
|
|
Block hours
(5)
|
|
177,649
|
|
|
204,810
|
|
|
(27,161
|
)
|
|
(13.3
|
%)
|
|
Operating cost per block hour (dollars)
(6)
|
|
1,055
|
|
|
1,422
|
|
|
(367
|
)
|
|
(25.8
|
%)
|
|
Departures
|
|
97,920
|
|
|
108,520
|
|
|
(10,600
|
)
|
|
(9.8
|
%)
|
|
Average length of aircraft flight (miles)
|
|
569
|
|
|
597
|
|
|
(28
|
)
|
|
(4.7
|
%)
|
|
Average daily utilization of each aircraft (hours)
(7)
|
|
7.91
|
|
|
8.12
|
|
|
(0.21
|
)
|
|
(2.6
|
%)
|
|
Completion factor
|
|
99.2
|
%
|
|
96.9
|
%
|
|
2.3
|
pts
|
|
2.4
|
%
|
|
Revenue passengers (thousands)
|
|
3,744
|
|
|
3,939
|
|
|
(195
|
)
|
|
(4.9
|
%)
|
|
Actual aircraft in fleet at end of period
|
|
244
|
|
|
274
|
|
|
(30
|
)
|
|
(10.9
|
%)
|
|
Table of Contents
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue passenger miles (millions)
(1)
|
|
6,005
|
|
|
7,742
|
|
|
(1,737
|
)
|
|
(22.4
|
%)
|
|
Available seat miles (millions)
(2)
|
|
7,836
|
|
|
10,195
|
|
|
(2,359
|
)
|
|
(23.1
|
%)
|
|
Passenger load factor
(3)
|
|
76.6
|
%
|
|
75.9
|
%
|
|
0.7
|
pts
|
|
0.9
|
%
|
|
Operating cost per available seat mile (cents)
(4)
|
|
7.01
|
|
|
12.41
|
|
|
(5.40
|
)
|
|
(43.5
|
%)
|
|
Block hours
(5)
|
|
507,317
|
|
|
669,943
|
|
|
(162,626
|
)
|
|
(24.3
|
%)
|
|
Operating cost per block hour (dollars)
(6)
|
|
1,083
|
|
|
1,889
|
|
|
(806
|
)
|
|
(42.7
|
%)
|
|
Departures
|
|
272,275
|
|
|
350,685
|
|
|
(78,410
|
)
|
|
(22.4
|
%)
|
|
Average length of aircraft flight (miles)
|
|
577
|
|
|
596
|
|
|
(19
|
)
|
|
(3.1
|
%)
|
|
Average daily utilization of each aircraft (hours)
(7)
|
|
7.62
|
|
|
8.92
|
|
|
(1.30
|
)
|
|
(14.5
|
%)
|
|
Completion factor
|
|
98.3
|
%
|
|
97.3
|
%
|
|
1.0
|
pts
|
|
1.0
|
%
|
|
Revenue passengers (thousands)
|
|
10,047
|
|
|
12,612
|
|
|
(2,565
|
)
|
|
(20.3
|
%)
|
|
Actual aircraft in fleet at end of period
|
|
244
|
|
|
274
|
|
|
(30
|
)
|
|
(10.9
|
%)
|
|
(1)
|
Revenue passenger miles are the number of scheduled miles flown by revenue passengers.
|
(2)
|
Available seat miles are the number of passenger seats available multiplied by the number of scheduled miles those seats are flown.
|
(3)
|
Passenger load factor equals revenue passenger miles divided by available seat miles.
|
(4)
|
Operating cost per available seat mile is operating costs divided by available seat miles. The reimbursable expenses are different under the terms of the Amended Continental CPA versus the Original Continental CPA, and therefore
costs are inconsistent with prior periods, beginning July 2008.
|
(5)
|
Block hours are the hours from gate departure to gate arrival.
|
(6)
|
Operating cost per block hour is operating costs divided by block hours.
|
(7)
|
Average daily utilization of each aircraft is the average number of block hours per day that an aircraft in revenue service is operated.
|
Future Costs
Even after successful implementation of our cost saving initiatives, including headcount reductions, wage concessions and third-party vendor concessions, we need to
remain committed to providing competitively priced services by controlling our costs. We believe that our costs may still increase in the future due to:
•
|
changes in wages, salaries and related fringe benefit costs, including utilization of our self-insured medical and workers compensation plans;
|
•
|
changes in wages related to average seniority increases as a result of low employee attrition;
|
•
|
the aging of our fleet, resulting in higher aircraft maintenance costs;
|
•
|
changes in the costs of materials and outside services, including our information technology costs;
|
•
|
changes in governmental regulations, insurance and taxes affecting air transportation and the costs charged for airport access, including new security requirements; and
|
•
|
financing costs incurred to satisfy any operating and/or financial obligations.
|
In the long term, failure to control our costs would prevent us from remaining competitive and reduce our ability to limit losses including the opportunities to attract
additional corporate customers or to survive economic downturns.
Table of Contents
Liquidity, Capital Resources and Financial Position
Sources and Uses of Cash
As of September 30, 2009, our cash balance (including restricted cash and short-term investments) was $105.40 million, net of fair-value discounts
applied to our short-term investments. Our primary source of liquidity is cash flow provided from our operations. For the nine months
ended September 30, 2009 and 2008, our operations used $12.3 million and $44.4 million,
respectively. As of September 30, 2009 and December 31, 2008, we had $19.5 million and $20.5 million of restricted cash, respectively, which is comprised of collateral for our workers’ compensation coverage, customer deposits for future charter flights
and letters of credit.
For the nine months ended September 30, 2009 and 2008, we spent $3.9 million and $9.1 million, respectively, on capital expenditures. We anticipate capital
expenditures for the remainder of 2009 to be approximately $1.8 million primarily related to technology for our charter operation and flight equipment.
In light of the ongoing challenges faced by the airline industry and the global economic recession, we believe controlling costs and preserving cash are crucial to
sustain our liquidity and meet our financial obligations over the next year.
Our 2009 cash flows have included $10.2 million of proceeds from the sale of certain assets and a $5.0 million revolving line of credit (the “Citigroup Credit
Facility”) with Citigroup Global Markets Inc. (“Citigroup”) outside of normal operating revenues. We believe that our existing liquidity and projected 2009 cash flows, including the incremental sources of liquidity noted above, and the
implementation of cost saving initiatives, if needed, will be sufficient to fund current operations and our financial obligations through the twelve months ending September 30, 2010. However, as noted above, factors beyond our control may dictate that we alter
our current plans and expectations and could have a material adverse impact on our ability to sustain operations over the long term.
Debt
As of September 30, 2009, total debt, including current maturities, totaled $48.9 million net of a discount of $15.1 million. Our debt consisted of the 11.25%
Convertible Secured Notes due 2023, the Citigroup Credit Facility and the secured debt owed under the EDC Loans.
Our August
2008 tender offer resulted in a gain on extinguishment of our Original 4.25% Convertible Notes due 2023, based on the
accounting guidance in the Debt with Conversion Options Subtopic. In accordance with the accounting literature, the gain on extinguishment was calculated based on an allocation of the fair value of the consideration issued between the liability and equity
components as compared to book value. The total fair value of the consideration issued in the tender offer was $100.4 million based on $59.7 million in shares and the estimated fair value of the 11.25% Convertible Secured Notes due 2023 of $40.7 million.
Based on the estimated fair value of the liability component of the Original 4.25% Convertible Notes due 2023 immediately prior the tender offer in 2008, this consideration was accounted for as an extinguishment of a $128.2 million liability for $100.4 million,
resulting in the gain of $27.8 million. Because the issuance of our 11.25% Convertible Secured Notes due 2023 occurred at or around the tender offer, the equity component was deemed to have no value, therefore the proceeds of $100.4 million were assigned to the
liability component. In addition, we recognized extinguishment gains of $2.1 million in 2008 related to repurchases of our Original 4.25% Convertible Notes due 2023 prior to the tender offer. Given the credit environment at the time of this transaction,
including our own liquidity, our debt was trading at a significant discount, resulting in these gains. The fair value of the liability component of the 11.25% Convertible Secured Notes due 2023 was based on current market data of our convertible notes,
considering interest rates for stand alone debt given the disruption in the credit markets and our own
Table of Contents
credit rating. The net carrying value of the 11.25% Convertible Secured Notes due 2023 outstanding as of September 30, 2009 was $37.0 million.
We estimated fair value of the 11.25% Convertible Secured Notes due 2023 based on an average of market trading activity for the convertible notes subsequent to the
exchange in August 2008.
Pursuant to the terms of the amended indenture governing the 11.25% Convertible Secured Notes due 2023, we are required to deliver a certificate to the trustee from a
third-party appraiser dated no later than 15 business days after January 1 of each year certifying the value of the pledged collateral for the notes as of January 1 or such later date. We delivered a certificate from our independent appraiser in January 2009
indicating the previously appraised value of $180.4 million has not changed materially from the initial appraisal as of the amendment date. Based on the principal amount of notes remaining outstanding as of September 30, 2009, the pledged collateral requirement
under the 11.25% Convertible Secured Notes due 2023 is approximately $39.2 million in spare parts and $34.5 million in spare engines.
The 11.25% Convertible Secured Notes due 2023 are guaranteed by Airlines. Except as otherwise specified in the amended indenture governing the 11.25% Convertible
Secured Notes due 2023 were issued, there are no restrictions on Airlines’ ability to transfer funds to Holdings in the form of cash dividends, loans or advances. General provisions of applicable state law, however, may limit the ability of any subsidiary
to pay dividends or make distributions to its parent in certain circumstances.
We have the right to redeem the notes for cash in whole at any time, or from time to time in part, for a price equal to 100% of the principal
amount plus accrued and unpaid interest, if any.
Additionally, pursuant to the terms of the 11.25% Convertible Secured Notes, due 2023, we can elect to use shares of common stock to repurchase any 11.25% Convertible Secured Notes due
2023, the number of shares will be equal to the repurchase price divided by 97.5% of the average closing sales price of our common stock for the five consecutive trading days ending on the third business day prior to the applicable repurchase date (adjusted to take
into account the occurrence of certain events that would require adjustment of the conversion rate). In certain circumstances, the notes are convertible into our common stock, at a ratio of 54.9451 shares of common stock per $1,000 principal amount of notes,
which was equivalent to an initial conversion price of approximately $18.20 per common share. As a result of the reverse split of our common shares that occurred in October 2008, the ratio is now 5.49451 shares of common stock per $1,000 principal amount of
notes, which is equivalent to a price of approximately $182.00 per common share. The ratio is subject to adjustments if certain events take place, and holders may convert only if the closing sale price per common share exceeds 120% of the conversion price for
at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding calendar quarter.
In 2003, we entered into a series of secured loan agreements (the “EDC Loans”)
with Export Development Canada
(“EDC”).
The EDC Loans consist
of $10.7 million loaned to us in May 2003 and $6.6 million loaned to us in September 2003. During the nine months ended September 30, 2009, we made payments in the
amount of $2.7 million on the EDC Loans, of which $2.4 million related to principal. As of September 30, 2009, the outstanding principal balance of the EDC Loans was $6.9 million.
In March 2009, we entered into and drew down fully on the Citigroup Credit Facility with Citigroup to increase our liquidity. The Citigroup Credit Facility, which
has a five year term and is pre-payable at any time at our election, is secured by $10 million of our ARS holdings that were purchased from Citigroup. Since the credit facility is secured by a portion of our ARS holdings, we classified the liability as current
on our Condensed Consolidated Balance Sheet. We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARS purchased from Citigroup.
Other than our 11.25% Convertible Secured Notes due 2023, the EDC Loans and the Citigroup Credit Facility, we do not have any other material long-term borrowings or
available lines of credit.
Table of Contents
Securities Repurchase Program
In July 2005, our Board of Directors authorized the expenditure of up to $30 million to repurchase shares of our common stock. In February 2006, the Board
authorized the inclusion of our Original 4.25% Convertible Notes due 2023 (now our 11.25% Convertible Secured Notes due 2023), within the previously announced program. Since inception, the Board has authorized an additional $25 million for this program.
Purchases have been made from time to time in the open market and in privately negotiated transactions; the timing of any repurchases under the program depends on a variety of factors, including market conditions, and may be suspended or discontinued at any
time. As of September 30, 2009, we had a balance of $9.7 million remaining within the program for additional purchases. See Part II, Item 2 of this report for more information about our repurchases.
Purchase Commitments and Contingencies
As September 30, 2009, we held options for 25 ERJ-145XR aircraft that may be exercised for other types of aircraft within the ERJ-145 family. Options on 25
aircraft expired unexercised on April 1, 2009 and the remaining 25 options will expire on December 1, 2009 if we do not exercise such options on or before such date. We retain the right to exercise the unexpired options and fly these aircraft for other airlines
or under our own code, subject to certain restrictions; however, we will have to finance our acquisition of these aircraft independently. Currently, we do not have any firm commitments for aircraft purchases.
Aircraft, Simulator and Spare Engine Leases
.
As of September
30, 2009, we had significant lease and sublease obligations for aircraft, a flight training device and spare engines that are classified as operating leases, which are not reflected as assets or liabilities on our balance sheet. These leases expire between 2015
and 2022. As of September 30, 2009, our expected total minimum rental expense for the full year 2009 under current and future firm order aircraft, simulator operating leases and spare engine operating leases is $25.2
million. Under the Amended
Continental CPA that went into effect July 1, 2008, Continental will bear all the rent expense for aircraft operating for Continental under that arrangement. For the 30 aircraft retained outside of the Amended Continental CPA, we incur rent expense at reduced
rental rates. As of September 30, 2009, our expected total 2009 minimum rental expense for the 30 aircraft retained outside of the Amended Continental CPA is approximately $21.9
million. A substantial portion of our aircraft are leased directly by
Continental from third parties and subleased to us by Continental. If Continental were to default under these leases, our ability to retain access to the aircraft could be adversely affected. Pursuant to the terms of the amended indenture governing our
11.25% Convertible Secured Notes due 2023, we granted a security interest on certain of our property, including spare parts and spare aircraft engines. We agreed that if certain collateral ratios are greater than the applicable maximum, we will pledge
additional spare parts, spare aircraft engines and / or cash and cash equivalents.
Table of Contents
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We have been and are subject to market risks, including commodity price risk, such as aircraft fuel prices and interest rate risk. See the Notes to Condensed
Consolidated Financial Statements included in our Revised 2008 10-K as well as our Original 2008 10‑K for a description of our accounting policies and other information related to these financial instruments.
Aircraft Fuel
Prior to July 1, 2008, Continental provided all fuel for aircraft covered by the Original Continental CPA, and we incurred fuel expense and fuel tax equal to the lower
of the actual cost of the fuel and the related taxes or agreed-upon caps of 66.0 cents and 5.2 cents per gallon, respectively. Under the Amended Continental CPA, Continental is responsible for the cost of providing fuel for all flights and, therefore, effective
July 1, 2008, fuel expense is no longer included in our Condensed Consolidated Statements of Operations for aircraft flying within this arrangement.
Interest Rates
We estimated the fair values of our $52.1 million and $60.8 million (carrying value) 11.25% Convertible Secured Notes due
2023 to be $45.2 million and $38.9 million as of September 30, 2009 and December 31, 2008, respectively, based upon quoted market prices. Changes in the fair market value of our fixed-rate debt could be affected by a variety of factors including general
investor behavior, industry specific risks and interest rate risks. Holders of this debt had the right to require that we repurchase their notes on August 1, 2008. On that date we satisfied $59.7 million in aggregate principal of outstanding notes that
had been validly tendered. Following the completion of the tender offer, $68.5 million aggregate principal of our Original 4.25% Convertible Notes due 2023 remained outstanding. In accordance with the Debt with Conversion Options Subtopic, we calculated the
fair value of the liability component of our 11.25% Convertible Secured Notes due 2023 to be $40.7 million and the equity component and related debt discount to be $27.8. The $27.8 million discount is being accreted to “Amortization of debt
discount” in our Condensed Consolidated Statements of Operations and will continue until August 1, 2011. Subsequent to repurchases made through September 30, 2009, our interest expense, calculated using the effective interest method, related to the debt
discount will be $1.6 for the remainder of 2009, $7.8 million in 2010 and $5.7 million for the seven months ending July 31, 2011. In conjunction with the amortization of debt discount, we are currently amortizing $2.0 million of capitalized fees associated with the
convertible debt refinancing to interest expense until August 1, 2011.
We have potential interest rate exposure with respect to our loan agreements with EDC and Citigroup. The interest rates applicable to the variable rate notes may
rise, increasing our interest expense. The impact of market risk is estimated using a hypothetical increase in interest rates by 100 basis points for our variable rate long-term debt. Based on this hypothetical assumption, any additional amounts incurred
in interest expense for 2009 would not be material.
Table of Contents
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
. Based on their evaluation of our disclosure controls and procedures
as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.
(b) Changes in internal control over financial reporting.
We have not identified any material weakness in
our internal control over financial reporting as of September 30, 2009.
No other changes in our internal control over financial reporting during our most recent fiscal quarter have materially affected or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
Important factors that could cause actual results to differ materially from estimates or projections contained in forward-looking statements are described in our
Original 2008 10-K under Part I, Item 1A, Risk Factors and subsequent quarterly and current reports filed with the SEC. There have been no material changes in these risk factors since that report, except as discussed in “Outlook” and
“Liquidity, Capital Resources and Financial Position” in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
Since 2005, our board of directors has authorized the expenditure of up to $55 million to repurchase shares of our common stock and our
Original 4.25% Convertible Notes due 2023 (now our 11.25% Convertible Secured Notes due 2023).
As of December 31, 2008, we had $10.1 million remaining within the program for purchases. In the first quarter of 2009, we purchased 2.6 million shares of our
common stock and $1.8 million par value ($1.1 million book value) of our 11.25% Convertible Secured Notes due 2023 for approximately $4.0 million. In the second quarter of 2009, we purchased 0.4 million shares of our common stock and $75,000 par value of our
11.25% Convertible Secured Notes due 2023 for approximately $0.6 million. In August 2009, we announced that our board of directors had authorized an additional $10 million for the previously announced securities repurchase program. In the third quarter of
2009, we purchased $6.8 million par value of our 11.25% Convertible Secured Notes due 2023 for approximately $5.8 million, leaving a current balance of $9.7 million within the program for additional purchases.
Table of Contents
Period
|
|
(a) Total
number of
shares
purchased
(1)
|
|
|
(b) Average
price paid
per share
(1)
|
|
|
(c) Total
number
of shares
purchased as
part of publicly
announced
program
(2)
|
|
|
(d) Maximum
value of
shares / notes
that may yet
be purchased
under
the program
(in millions)
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1 to July 31, 2009
|
|
(3
|
)
|
$
|
1.59
|
|
|
—
|
|
$
|
5.5
|
August 1 to August 31, 2009
|
|
20
|
|
$
|
1.56
|
|
|
—
|
|
$
|
10.0
|
September 1 to September 30, 2009
|
|
75
|
|
$
|
2.78
|
|
|
—
|
|
$
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
92
|
|
$
|
2.55
|
|
|
—
|
|
$
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts reflect total shares purchased which include those repurchased within our securities repurchase program as well as those withheld to satisfy individual employee tax obligations arising upon the vesting of restricted stock
awards. Shares withheld to satisfy individual employee tax obligations do not count against our securities repurchase program.
|
(2)
|
Amounts shown relate to shares of our common stock repurchased within our securities repurchase program.
|
(3)
|
Amounts shown reflect the remaining balance available for repurchases within our securities repurchase program.
|
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Table of Contents
Item 6.
Exhibits.
3.1
|
|
Restated Certificate of Incorporation, as amended by the Certificate of Amendment dated July 1, 2008 and Certificate of Amendment dated October 1, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008 filed on November 12, 2008, File No. 1-31300).
|
3.2
|
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 24, 2007, File No. 1-31300).
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.
(1)
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.
(1)
|
32.1
|
|
Section 1350 Certification
by Chief Executive Officer.
(2)
|
32.2
|
|
Section 1350 Certification
by Chief Financial Officer.
(2)
|
|
|
|
|
|
(1)
Filed herewith.
|
|
|
(2)
Furnished herewith.
|
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, ExpressJet Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
|
|
EXPRESSJET HOLDINGS, INC.
(Registrant)
|
Date: November 13, 2009
|
|
/s/ Phung
Ngo-Burns
|
|
|
Phung Ngo-Burns
Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
Date: November 13, 2009
|
|
/s/ Robert
Bickmore
|
|
|
Robert Bickmore
Senior Director and Controller
(Principal Accounting Officer)
|