United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 2004 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From _________ to___________
Commission file number 000-21642
ATA HOLDINGS CORP.
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(Exact name of registrant as specified in its charter)
Indiana 35-1617970
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 Washington Street
Indianapolis, Indiana 46231
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(Address of principal executive offices) (Zip Code)
(317) 247-4000
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(Registrant's telephone number, including area code)
Not applicable
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(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,823,864 shares outstanding as of April 30,
2004
PART I - Financial Information
Item I - Financial Statements
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
2004 2003
-------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 132,231 $ 160,644
Receivables, net of allowance for doubtful accounts
(2004 - $1,396; 2003 - $1,388) 124,359 118,745
Inventories, net 45,812 47,604
Prepaid expenses and other current assets 43,802 21,406
-------------- ------------
Total current assets 346,204 348,399
Property and equipment:
Flight equipment 326,803 324,697
Facilities and ground equipment 144,574 142,032
-------------- ------------
471,377 466,729
Accumulated depreciation (225,976) (213,247)
-------------- ------------
245,401 253,482
Restricted cash 31,529 48,301
Goodwill 14,887 14,887
Prepaid aircraft rent 158,013 144,088
Investment in BATA 14,352 14,672
Deposits and other assets 51,576 46,158
-------------- ------------
Total assets $ 861,962 $ 869,987
============== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 54,397 $ 51,645
Accounts payable 31,617 25,327
Air traffic liabilities 124,033 102,831
Accrued expenses 161,313 154,689
-------------- ------------
Total current liabilities 371,360 334,492
Long-term debt, less current maturities 445,346 443,051
Deferred gains from sale and leaseback of aircraft 54,432 55,392
Other deferred items 79,250 51,822
Redeemable preferred stock; authorized and issued 500 shares 50,000 56,330
-------------- ------------
Total liabilities 1,000,388 941,087
Commitments and contingencies
Convertible redeemable preferred stock; authorized and issued 300
shares 30,000 32,907
Shareholders' deficit:
Preferred stock; authorized 9,999,200 shares; none issued - -
Common stock, without par value; authorized 30,000,000 shares;
issued 13,535,304 - 2004; 13,502,593 - 2003 66,236 65,711
Treasury stock; 1,711,440 shares - 2004; 1,711,440 shares - 2003 (24,778) (24,778)
Additional paid-in capital 17,938 18,163
Retained deficit (227,822) (163,103)
-------------- ------------
Total shareholders' deficit (168,426) (104,007)
-------------- ------------
Total liabilities and shareholders' deficit $ 861,962 $ 869,987
============== ============
See accompanying notes.
2
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended March 31,
2004 2003
------------- -----------
(Unaudited) (Unaudited)
Operating revenues:
Scheduled service $ 277,167 $ 244,768
Charter 91,690 112,307
Ground package 4,895 5,211
Other 13,581 11,343
------------- -----------
Total operating revenues 387,333 373,629
------------- -----------
Operating expenses:
Salaries, wages and benefits 107,668 94,278
Fuel and oil 82,290 75,092
Aircraft rentals 59,545 55,269
Handling, landing and navigation fees 33,355 30,057
Aircraft maintenance, materials and rs 19,902 13,479
Crew and other employee travel 17,017 14,987
Depreciation and amortization 13,631 15,193
Other selling expenses 12,544 11,757
Passenger service 11,336 10,249
Advertising 9,827 10,275
Commissions 6,820 6,026
Facilities and other rentals 6,384 5,824
Insurance 5,498 7,335
Ground package cost 4,063 4,204
Other 19,804 18,084
------------- -----------
Total operating expenses 409,684 372,109
------------- -----------
Operating income (loss) (22,351) 1,520
Other income (expense):
Interest income 543 806
Interest expense (14,989) (12,682)
Loss on extinguishment of debt (27,314) -
Other (233) (636)
------------- -----------
Other expense (41,993) (12,512)
------------- -----------
Loss before income taxes (64,344) (10,992)
Income taxes - -
------------- -----------
Net loss (64,344) (10,992)
Preferred stock dividends (375) (375)
------------- -----------
Loss available to common shareholders $ (64,719) $ (11,367)
============ ===========
Basic earnings per common share:
Average shares outstanding 11,822,770 11,764,753
Net loss per share $ (5.47) $ (0.97)
============ ===========
Diluted earnings per common share:
Average shares outstanding 11,822,770 11,764,753
Net loss per share $ (5.47) $ (0.97)
============ ===========
See accompanying notes.
3
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND SHAREHOLDERS'
DEFICIT
(Dollars in thousands)
Redeemable Additional Total
Preferred Common Treasury Paid-in Retained Shareholders'
Stock Stock Stock Capital Deficit Deficit
-------- ------- --------- --------- --------- ------------
Balance as of December 31, 2003 $ 32,907 $65,711 $ (24,778) $ 18,163 $(163,103) $ (104,007)
Net loss (64,344) (64,344)
Stock options exercised 525 (225) 300
Preferred stock dividends (2,907) (375) (375)
-------- ------- --------- --------- --------- ------------
Balance as of March 31, 2004 $ 30,000 $66,236 $ (24,778) $ 17,938 $(227,822) $ (168,426)
======== ======= ========= ========= ========= ============
See accompanying notes.
4
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended March 31,
2004 2003
------------- -----------
(Unaudited) (Unaudited)
Operating activities:
Net loss $ (64,344) $ (10,992)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 13,631 15,193
Loss on extinguishment of debt 27,314 -
Other non-cash items (2,377) 759
Changes in operating assets and liabilities:
U.S. Government grant receivable - 6,158
Other receivables (5,614) (13,477)
Inventories 955 332
Prepaid expenses (17,304) (2,269)
Accounts payable 6,290 5,054
Air traffic liabilities 21,202 6,106
Accrued expenses 16,690 14,109
Other deferred items 20,000 -
------------- -----------
Net cash provided by operating activities 16,443 20,973
------------- -----------
Investing activities:
Capital expenditures (4,428) (10,147)
Noncurrent prepaid aircraft rent (13,925) (47,461)
(Additions) reductions to other assets (7,437) 4,998
Proceeds from sales of property and equipment - 68
------------- -----------
Net cash used in investing activities (25,790) (52,542)
------------- -----------
Financing activities:
Proceeds from long-term debt - 1,768
Payments of preferred dividends (9,612) -
Payments on long-term debt and exchange offers (21,434) (2,484)
Decrease (increase) in restricted cash 11,680 (7,294)
Proceeds from stock options exercises 300 -
------------- -----------
Net cash used in financing activities (19,066) (8,010)
------------- -----------
Decrease in cash and cash equivalents (28,413) (39,579)
Cash and cash equivalents, beginning of period 160,644 200,160
------------- -----------
Cash and cash equivalents, end of period $ 132,231 $ 160,581
============= ===========
Supplemental disclosures:
Cash payments (receipts) for:
Interest $ 15,401 $ 12,896
Income tax refunds (4,264) (16,745
Financing and investing activities not affecting cash:
Accrued capitalized interest 415 940
Additional new notes 12,991 -
Accrued preferred stock dividends - 375
See accompanying notes.
5
ATA HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Stock Based Compensation
The accompanying consolidated financial statements of ATA Holdings Corp.
and subsidiaries (the "Company") have been prepared in accordance with
instructions for reporting interim financial information on Form 10-Q and,
therefore, do not include all information and footnotes necessary for a
fair presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in the
United States ("GAAP"). For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
The consolidated financial statements for the quarters ended March 31, 2004
and 2003 reflect, in the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations and cash
flows for such periods. Results for the three months ended March 31, 2004
are not necessarily indicative of results to be expected for the full
fiscal year ending December 31, 2004.
During 1996, the Company adopted the disclosure provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123") with
respect to its stock options. As permitted by FAS 123, the Company has
elected to continue to account for employee stock options following the
intrinsic value method of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related
interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
The Company has not granted options since the year ended December 31, 2001.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period (1 to 3
years). The Company's pro forma information follows:
Three Months Ended March 31,
2004 2003
---------------- ---------------
(In thousands, except per share data)
Loss available to common shareholders, as
reported $ (64,719) $ (11,367)
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects (3) (10)
---------------- ---------------
Loss available to common shareholders, pro forma $ (64,722) $ (11,377)
================ ===============
Basic and diluted loss per share, as reported $ (5.47) $ (0.97)
================ ===============
Basic and diluted loss per share, pro forma $ (5.47) $ (0.97)
================ ===============
6
2. State of the Industry and the Company
The geopolitical impact of the conflict in the Middle East and generally
weak economic conditions of the past several years have adversely affected
the Company and the airline industry. The industry as a whole, and the
Company, have suffered significant financial losses since 2001. While the
Company realized net income for the year ended December 31, 2003, that net
income was favorably impacted by the Company's receipt in the second
quarter of 2003 of $37.2 million in U.S. Government funds in conjunction
with the Emergency Wartime Supplemental Appropriations Act ("Supplemental
Act"). The Supplemental Act reimbursed U.S. air carriers for expenses
incurred and revenue foregone related to federally mandated enhanced
aviation security subsequent to September 11, 2001. The continuing weak
revenue environment combined with increasing fuel prices resulted in a loss
for the Company in the first quarter of 2004.
In response to the financial losses since 2001, certain air carriers have
sought to reduce these losses, at least partially, by reducing their seat
capacity. As this has been accomplished by eliminating aircraft from
operating fleets, the fair value of aircraft, including aircraft owned by
the Company, has been adversely affected. The Company recorded substantial
charges to earnings resulting from fleet retirements and impairments over
the past three years. However, during this period the Company has
substantially replaced its fleet of aging aircraft with new fuel-efficient
Boeing aircraft.
The Company's new Boeing aircraft are all leased and have higher
fixed-ownership costs than the older fleets that they replaced. The
original terms of many of these aircraft operating leases were determined
before September 11, 2001, and many were structured to require significant
cash payments in the first few years of each lease in order to reduce the
total rental cost over the entire lease terms. Consequently, the Company
made large cash lease payments on many of its aircraft, which resulted in a
substantial use of the Company's cash by December 31, 2003. Also
contributing to the Company's negative liquidity outlook were the scheduled
repayments of $175 million outstanding principal of its 10 1/2 % Senior
Notes ("2004 Notes") in August 2004 and the $125 million outstanding
principal of its 9 5/8% Senior Notes ("2005 Notes" and, together with the
2004 Notes, "Existing Notes") in December 2005.
To address these liquidity problems, on January 30, 2004, the Company
successfully completed exchange offers and issued Senior Notes due 2009
("2009 Notes") and cash consideration for certain of its 2004 Notes and
issued Senior Notes due 2010 ("2010 Notes" and, together with the 2009
Notes, "New Notes") and cash consideration for certain of its 2005 Notes.
In completing the exchange offers, the Company accepted $260.3 million of
Existing Notes tendered for exchange, issuing $163.1 million in aggregate
principal amount of 2009 Notes and delivering $7.8 million in cash in
exchange for $155.3 million in aggregate principal amount of 2004 Notes
tendered, and issuing $110.2 million in aggregate principal amount of 2010
Notes and delivering $5.2 million in cash in exchange for $105.0 million in
aggregate principal amount of 2005 Notes. In addition to the New Notes
issued, $19.7 million in aggregate principal amount of the 2004 Notes and
$20.0 million in aggregate principal amount of the 2005 Notes remain
outstanding after the completion of the exchange offers. In connection with
the exchange offers, the Company also obtained the consent of the holders
of the Existing Notes to amend or eliminate certain of the restrictive
operating covenants and certain default provisions of the indentures
governing the Existing Notes. In accordance with the Emerging Issues Task
Force of the FASB No. 96-19, Debtor's Accounting for Modification or
Exchange of Debt Terms ("EITF 96-19"), the Company recorded a non-operating
loss on extinguishment of debt of $27.3 million. The loss mainly relates to
the accounting for the $13 million cash consideration paid at closing of
the exchange offers and the $13 million of incremental notes issued during
the exchange offers. In accordance with EITF 96-19, the New Notes are
recorded in the Company's balance sheet at fair value at the date of the
exchange offers, which equates to their face value.
7
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, Boeing Capital
Services Corporation ("BCSC"), General Electric Capital Aviation Services
("GECAS") and International Lease Finance Corporation ("ILFC"). The effect
of the lease amendments was to delay the payment of portions of the amounts
due under those operating leases primarily between June 30, 2003 and March
31, 2005 and to extend the leases generally for two years. Most of the
payments delayed during this time period will be subsequently paid at
various times throughout the remaining life of the leases. The Company
received a refund of $29.8 million on January 30, 2004 related to payments
made in 2003 under the original terms of certain retroactively amended
leases. The amendments will also result in approximately $69.6 million in
lower cash payments during 2004 under these operating leases, as compared
to payments that would have been due under the original lease terms.
While the Company expects that adverse industry conditions are likely to
continue throughout 2004, the Company's management believes that, with the
completion of the exchange offers and operating lease amendments, the
Company has a viable plan to provide sufficient cash to fund operations for
the remainder of 2004. The Company's plan continues to require focused
marketing efforts on those businesses and markets where the Company
believes it can be a leading provider, the introduction of business class
service, and the implementation of additional cost-saving initiatives the
Company believes will maintain its low-cost advantage. Although the Company
believes the assumptions underlying its 2004 financial projections are
reasonable, there are significant risks that could cause the Company's 2004
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases
in fuel prices, competitive pricing and capacity increases, and the ongoing
geopolitical impacts of the conflicts in the Middle East.
3. Earnings per Share
The following tables set forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31 ,
2004 2003
---------------- -----------------
Numerator:
Net loss $ (64,344,000) $ (10,992,000)
Preferred stock dividends (375,000) (375,000)
Loss available to common ---------------- -----------------
shareholders - numerator for basic and
diluted earnings per share $ (64,719,000) $ (11,367,000)
================ =================
Denominator:
Denominator for basic and diluted earnings per share
- weighted average shares 11,822,770 11,764,753
================ =================
Basic and diluted loss per share $ (5.47) $ (0.97)
================ =================
In accordance with FASB Statement of Financial Accounting Standards No.
128, Earnings per Share ("FAS 128"), the impact of 1,914,486 shares of
convertible redeemable preferred stock in the three months ended March 31,
2004 and 2003 has been excluded from the computation of diluted earnings
per share because their effect would be antidilutive. Also, as of March 31,
2004 and 2003, the impact of 1,672,148 incremental shares from the assumed
exercise of warrants issued in conjunction with the secured term loan the
Company obtained in November 2002 were not included in the computation of
diluted earnings per share because their effect would be antidilutive. In
addition, the impact of 73,823 employee stock options for the period ended
March 31, 2004 was not included in the computation of diluted earnings per
share because their effect would also be antidilutive.
8
4. Commitments and Contingencies
The Company has a purchase agreement with the Boeing Company ("Boeing") to
purchase seven new Boeing 737-800s, which are currently scheduled for
delivery between July 2007 and December 2007. These aircraft are powered by
General Electric CFM56-7B27 engines. The manufacturer's list price is $52.4
million for each 737-800, subject to escalation. The Company's purchase
price for each aircraft is subject to various discounts. According to a
2004 amendment to the purchase agreement with Boeing, if the Company does
not have permanent financing for these aircraft suitable to the Company and
does not have suitable pre-delivery deposit financing, and if Boeing does
not elect to provide such financing acceptable to the Company, these
deliveries can be delayed for one year periods annually through December
31, 2010. Aircraft pre-delivery deposits are required for these aircraft,
and the Company has historically funded these deposits for past aircraft
deliveries using operating cash and pre-delivery deposit financing
facilities. The Company can provide no assurance that it will be able to
secure pre-delivery deposit financing facilities or permanent financing for
any future aircraft purchases. As of March 31, 2004, the Company had $4.6
million in long-term pre-delivery deposits outstanding for future aircraft
deliveries, which were funded with operating cash. Upon delivery and
financing of the aircraft, pre-delivery deposits funded with operating cash
are expected to be returned to the Company. As of March 31, 2004, the
Company also has purchase rights with Boeing for 40 Boeing 737-800
aircraft.
The Company has an agreement to lease one additional Boeing 737-800 under
an operating lease from ILFC, which is currently scheduled for delivery in
May 2004. The Company also has an agreement with GECAS to lease one
additional Boeing 737-800, which is currently scheduled for delivery in
November 2004.
The Company has an agreement with General Electric to purchase four
CFM56-7827 spare engines, which are currently scheduled for delivery
between 2005 and 2008.
The Company intends to finance all future aircraft and engine deliveries
under purchase agreements with leases accounted for as operating leases.
The Company has estimated the amount of payments for these expected future
lease obligations, using the terms of leases for comparable aircraft
currently in place. The estimated future payments for these nine future
aircraft deliveries and four spare engines, which do not include
obligations for leases currently in place, are shown in the following
table:
9
Expected
Future
Lease
Obligations
-------------
(in thousands)
2004 $ 3,101
2005 8,363
2006 9,770
2007 21,916
2008 45,184
Thereafter 553,890
-------------
$ 642,224
=============
In the Company's aircraft financing agreements, the Company typically
indemnifies the financing parties, trustees acting on their behalf and
other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the
aircraft and for tort liability, whether or not these liabilities arise out
of or relate to the negligence of these indemnified parties, except for
their gross negligence or willful misconduct. The Company expects that it
would be covered by insurance (subject to deductibles) for most tort
liabilities and related indemnities under these aircraft leases.
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints, which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority
of these suits are covered by insurance. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
5. Income Taxes
As of December 31, 2003, the Company had incurred a three-year cumulative
loss. Because of this cumulative loss and the presumption under GAAP that
net deferred tax assets should be fully reserved if it is more likely than
not that they will not be realized through carrybacks or other strategies,
the Company recorded a full valuation allowance against its net deferred
tax asset. In the first quarter of 2004 and 2003, the Company continued to
record a full valuation allowance against its net deferred tax asset under
the same presumption. This valuation allowance resulted in no tax benefit
being recognized in the Company's first quarter of 2004 and 2003.
6. Prepaid and Accrued Aircraft Rent
The Company's operating leases require periodic cash payments that vary in
amount and frequency. The Company accounts for aircraft rentals expense in
equal monthly amounts over the life of each operating lease because
straight-line expense recognition is most representative of the time
pattern from which benefit from use of the aircraft is derived. Forty-nine
of the Company's aircraft operating leases were structured to require
significant cash in the early years of the lease in order to obtain more
overall favorable lease rates. The amount of the cash payments in excess of
the aircraft rent expense in these early years has created a significant
prepaid aircraft rent amount on the Company's balance sheet. The portion of
the prepaid aircraft rent that will be utilized in the next twelve months
is recorded as short-term prepaid expense while the remainder is recorded
as long-term prepaid aircraft rent. Twenty-four of the Company's aircraft
operating leases require more significant cash payments later in the lease
term resulting in an accrued liability for aircraft rents on the Company's
balance sheet. The portion of the accrued liability that will be paid in
the next twelve months is recorded as short-term accrued expenses while the
remainder is recorded as long-term deferred items. Two of the Company's
aircraft operating leases were structured whereby monthly cash rents and
monthly book rents are equal. The table below summarizes the prepaid and
accrued aircraft rents as of March 31, 2004 and December 31, 2003 that
result from this straight-line expense recognition as reported under the
following captions on the Company's balance sheet:
10
March 31, December 31,
2004 2003
------------ --------------
(In thousands)
Assets:
Prepaid expenses and other current assets (short-term) $ 6,117 $ 3,879
Prepaid aircraft rent (long-term) 158,013 144,088
------------ --------------
Total prepaid aircraft rent $ 164,130 $ 147,967
============ ==============
Liabilities:
Accrued expenses (short-term) $ 1,462 $ 11,529
Other deferred items (long-term) 36,354 27,976
------------ --------------
Total accrued aircraft rent $ 37,816 $ 39,505
============ ==============
7. Dividends
In 2000, the Company issued and sold 300 shares of Series B convertible
redeemable preferred stock, without par value ("Series B Preferred"), at a
price of $100,000 per share. The purchaser of the Series B Preferred is
entitled to cumulative quarterly dividends at an annual rate of 5.0% on the
liquidation amount ($100,000 per share) of the Series B Preferred. The
annual rate is subject to an increase to 8.44% on the liquidation amount
($100,000 per share) if the Company fails to pay any quarterly dividend
within ten days of the due date. Once dividends in arrears have been paid
in full, the rate returns to the original annual rate of 5.0%. The Series B
Preferred is classified between liabilities and equity on the Company's
accompanying balance sheets. The dividends related to the Series B
Preferred are recorded below net income on the Company's statement of
operations.
Also, in 2000, the Company issued and sold 500 shares of Series A
redeemable preferred stock, without par value ("Series A Preferred"), at a
price of $100,000 per share. The purchaser of the Series A Preferred is
entitled to cumulative semiannual dividends at an annual rate of 8.44% on
the liquidation amount ($100,000 per share) of the Series A Preferred. As
of July 1, 2003, per the provisions of FASB Statement of Financial
Accounting Standards No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity ("FAS 150"), the Series
A Preferred is classified as a liability on the Company's accompanying
balance sheets, and the dividends related to the Series A Preferred are
classified as interest expense on the Company's statement of operations.
11
Prior to and as of December 31, 2003, the Company's unsecured senior notes
indentures contained certain restricted payment covenants, which limited
the Company's ability to pay preferred stock dividends. At the end of the
third quarter of 2002, that covenant no longer permitted payment of
preferred dividends. The Company accrued preferred dividends at the
appropriate rates plus interest for the payments due between December 15,
2002 and December 31, 2003. In January 2004, as a result of completion of
the exchange offers, the restricted payment covenants were removed. In
addition, the restricted payment covenants in the Senior Note indentures
for the 2009 Notes and 2010 Notes permits the Company to pay preferred
stock dividends. Concurrently with the completion of the exchange offers on
January 30, 2004, the Company paid all accrued preferred dividends in
arrears of $9.2 million.
12
PART I - Financial Information
Item II - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter Ended March 31, 2004, Versus Quarter Ended March 31, 2003
Overview
The Company is a leading provider of scheduled airline services to leisure and
other value-oriented travelers, and a leading provider of charter services to
the U.S. military. The Company, through its principal subsidiary, ATA Airlines,
Inc. ("ATA"), has been operating for 31 years and is the tenth largest U.S.
airline in terms of 2003 capacity and traffic. ATA provides jet scheduled
service through nonstop and connecting flights from the gateways of
Chicago-Midway and Indianapolis to popular vacation destinations such as Hawaii,
Phoenix, Las Vegas, Florida, California, Mexico and the Caribbean, as well as to
New York's LaGuardia Airport, Philadelphia, Denver, Dallas-Ft. Worth,
Washington, D.C., Boston, Seattle, Minneapolis-St. Paul, Newark, Charlotte, and
Pittsburgh. The Company's commuter subsidiary Chicago Express Airlines, Inc.
("Chicago Express") provides commuter scheduled service between Chicago-Midway
and the cities of Indianapolis, Cedar Rapids, Dayton, Des Moines, Flint, Grand
Rapids, Lexington, Madison, Milwaukee, Moline, South Bend, Springfield and
Toledo. Chicago Express has announced it will end service to Cedar Rapids and
Lexington effective May 31, 2004 and will begin offering daily service from
Chicago-Midway to Fort Wayne, Indiana on June 1, 2004. ATA also provides charter
service to independent tour operators, specialty charter customers and the U.S.
military.
In the three months ended March 31, 2004, the Company recorded an operating loss
of $22.4 million, as compared to operating income of $1.5 million in the same
period of 2003. The Company had a loss available to common shareholders of $64.7
million in the three months ended March 31, 2004, as compared to a loss
available to common shareholders of $11.4 million in the same period of 2003.
The first quarter 2004 loss available to common shareholders includes a
non-operating charge of $27.3 million related to a loss on extinguishment of
debt from the exchange offers completed on January 30, 2004. See "Notes to
Consolidated Financial Statements - Note 2 - State of the Industry and the
Company" for additional information on the exchange offers.
Consolidated revenue per available seat mile ("RASM") decreased 1.8% to 6.94
cents in the first quarter of 2004, as compared to 7.07 cents in the first
quarter of 2003. In the first quarter of 2004, the Company's scheduled service
revenues were adversely affected by the industry's added capacity, especially in
the Company's transcontinental and other east-west markets. In addition, the
Company was challenged by a competitive pricing environment, which included
extraordinary fare discounting by several airlines. As a result, the Company has
cancelled some of its east-west routes beginning in March and April 2004 while
continuing to review its other scheduled service markets. The Company intends to
enhance its position as a leading provider of passenger airline services in
those markets where it can capitalize on its competitive strengths. In April
2004 after implementing these changes, the Company estimates its unit revenue
will be up approximately 6.4% as compared to April 2003. Military/government
charter revenues decreased in the first quarter of 2004 as a result of the
deactivation of Civil Reserve Air Fleet ("CRAF") in the second quarter of 2003,
and due to the lowered availability of aircraft for use in the military
business.
The Company's unit costs remained among the lowest of major airlines in the
first quarter of 2004. Consolidated cost per available seat mile ("CASM")
increased 4.3% to 7.34 cents in the first quarter of 2004, as compared to 7.04
cents in the first quarter of 2003. This increase is partially due to a 4.6%
increase in the average cost per gallon of fuel in the first quarter of 2004 as
compared to the same period in 2003. In addition, the Company experienced
increases in maintenance costs resulting from a contractual rate increase on the
hourly engine maintenance agreement for the Company's fleet of Boeing 757-200
aircraft, and increased salary costs due to staffing needs arising from the
Company's increased capacity.
For the 2004 fiscal year, the Company currently expects that it may earn an
operating profit. However, significant uncertainties continue to exist with
respect to unit revenues and fuel prices, both of which may be adversely
affected by geopolitical and economic events, competitive price and capacity
actions, and the continuation of conflict in the Middle East, which are not
within the Company's direct control. Therefore, the Company can provide no
assurance that it will earn an operating profit in 2004.
13
Critical Accounting Policies
Please refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
Results of Operations
For the quarter ended March 31, 2004, the Company had an operating loss of $22.4
million, as compared to operating income of $1.5 million in the comparable
quarter of 2003. The Company had a net loss of $64.3 million in the three months
ended March 31, 2004, as compared to a net loss of $11.0 million in the same
period of 2003.
Operating revenues increased 3.7% to $387.3 million in the first quarter of
2004, as compared to $373.6 million in the same period of 2003. Consolidated
RASM decreased 1.8% to 6.94 cents in the first quarter of 2004, as compared to
7.07 cents in the first quarter of 2003. Scheduled service revenues increased
$32.4 million between periods, or 13.2%, while charter revenues decreased $20.6
million between periods, or 18.4%. Scheduled service unit revenues reflected
weakness in both load factors and yields in the first quarter of 2004.
Military/government charter operations decreased in the first quarter of 2004
primarily as a result of the deactivation of CRAF in the second quarter of 2003.
Operating expenses increased 10.1% to $409.7 million in the first quarter of
2004, as compared to $372.1 million in the comparable period of 2003.
Consolidated CASM increased 4.3% to 7.34 cents in the first quarter of 2004, as
compared to 7.04 cents in the first quarter of 2003.
14
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per available seat mile ("ASM").
Cents per ASM
Three Months Ended March 31,
2004 2003
--------- ---------
Consolidated operating revenues: 6.94 7.07
Consolidated operating expenses:
Salaries, wages and benefits 1.93 1.78
Fuel and oil 1.47 1.42
Aircraft rentals 1.07 1.05
Handling, landing and navigation fees 0.60 0.57
Aircraft maintenance, materials and repairs 0.36 0.26
Crew and other employee travel 0.30 0.28
Depreciation and amortization 0.24 0.29
Other selling expenses 0.22 0.22
Passenger service 0.20 0.19
Advertising 0.18 0.19
Commissions 0.12 0.11
Facilities and other rentals 0.11 0.11
Insurance 0.10 0.14
Ground package cost 0.07 0.08
Other 0.37 0.35
--------- ---------
Total consolidated operating expenses 7.34 7.04
--------- ---------
Consolidated operating income (loss) (0.40) 0.03
========= =========
ASMs (in thousands) 5,582,822 5,284,710
Consolidated Flight Operating and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "Jet" operations include the consolidated operations of Lockheed
L-1011, Boeing 737-800, Boeing 757-200, and Boeing 757-300 aircraft in all of
the Company's business units. Data shown for "SAAB" operations include the
operations of SAAB 340B propeller aircraft by Chicago Express as the ATA
Connection. Data for subservice operations, which is insignificant, is not
included.
15
Three Months Ended March 31,
2004 2003 Inc (Dec) % Inc (Dec)
Departures Jet 21,893 19,194 2,699 14.06
Departures SAAB 13,157 12,713 444 3.49
--------- --------- --------- ---------
Total Departures 35,050 31,907 3,143 9.85
--------- --------- --------- ---------
Block Hours Jet 68,009 60,816 7,193 11.83
Block Hours SAAB 12,958 12,423 535 4.31
--------- --------- --------- ---------
Total Block Hours 80,967 73,239 7,728 10.55
--------- --------- --------- ---------
RPMs Jet (000s) 3,524,437 3,324,647 199,790 6.01
RPMs SAAB (000s) 46,505 46,051 454 0.99
--------- --------- --------- ---------
Total RPMs (000s) (a) 3,570,942 3,370,698 200,244 5.94
--------- --------- --------- ---------
ASMs Jet (000s) 5,504,807 5,208,303 296,504 5.69
ASMs SAAB (000s) 78,015 76,407 1,608 2.10
--------- --------- --------- ---------
Total ASMs (000s) (b) 5,582,822 5,284,710 298,112 5.64
--------- --------- --------- ---------
Load Factor Jet (%) 64.02 63.83 0.19 0.30
Load Factor SAAB (%) 59.61 60.27 (0.66) (1.10)
--------- --------- --------- ---------
Total Load Factor (%) (c) 63.96 63.78 0.18 0.28
--------- --------- --------- ---------
Passengers Enplaned Jet 2,563,101 2,377,678 185,423 7.80
Passengers Enplaned SAAB 261,862 262,134 (272) (0.10)
--------- --------- --------- ---------
Total Passengers Enplaned (d) 2,824,963 2,639,812 185,151 7.01
--------- --------- --------- ---------
Revenue $ (000s) 387,333 373,629 13,704 3.67
RASM in cents (e) 6.94 7.07 (0.13) (1.84)
CASM in cents (f) 7.34 7.04 0.30 4.26
Yield in cents (g) 10.85 11.08 (0.23) (2.08)
Average Aircraft in Service
Lockheed L-1011 2.59 4.35 (1.76) (40.46)
Boeing 737-800 29.37 28.77 0.60 2.09
Boeing 757-200 14.17 14.73 (0.56) (3.80)
Boeing 757-300 10.44 9.67 0.77 7.96
SAAB 340B 16.00 16.00 - -
Average Block Hours Flown per day
Lockheed L-1011 10.64 8.82 1.82 20.63
Boeing 737-800 11.81 10.83 0.98 9.05
Boeing 757-200 13.20 12.44 0.76 6.11
Boeing 757-300 10.85 11.63 (0.78) (6.71)
SAAB 340B 8.90 8.63 0.27 3.13
See footnotes (a) through (g) on page 17.
16
(a) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(b) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(c) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of commercial charter and
military/government charter, load factor is less relevant because the right to
use an entire aircraft is sold by the Company instead of individual seats. Since
both costs and revenues are largely fixed for these types of charter flights,
changes in load factor have less impact on business unit profitability.
Consolidated load factors and scheduled service load factors for the Company are
shown in the appropriate tables for industry comparability, but load factors for
individual charter businesses are omitted from applicable tables.
(d) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(e) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's unit revenue using total available seat capacity. In the case of
scheduled service, RASM is a measure of the combined impact of load factor and
yield (see (g) below for the definition of yield).
(f) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM." CASM measures the
Company's unit cost using total available seat capacity.
(g) Revenue per RPM (expressed in cents) is total operating revenue divided by
total RPMs. This measure is also referred to as "yield." Yield is relevant to
the evaluation of scheduled service because yield is a measure of the average
price paid by customers purchasing individual seats. Yield is less relevant to
the commercial charter and military/government charter businesses because the
right to use an entire aircraft is sold at one time for one price. Consolidated
yields and scheduled service yields are shown in the appropriate tables for
industry comparability, but yields for individual charter businesses are omitted
from applicable tables.
17
Operating Revenues
Total operating revenues in the first quarter of 2004 increased 3.7% to $387.3
million, as compared to $373.6 million in the first quarter of 2003. This
increase was due to a $32.4 million increase in scheduled service revenue, and a
$2.2 million increase in other revenues, partially offset by a $5.5 million
decrease in military/government charter revenue, a $15.1 million decrease in
commercial charter revenue, and a $0.3 million decrease in ground revenue.
The following table sets forth, for the periods indicated, certain key operating
and financial data for the scheduled service, commercial charter and
military/government charter operations of the Company.
Three Months Ended March 31,
---------------------------------------------------------
2004 2003 Inc (Dec) % Inc (Dec)
---------------------------------------------------------
Scheduled Service
Departures 33,124 28,906 4,218 14.59
Block Hours 72,219 60,158 12,061 20.05
RPMs (000s) (a) 3,079,937 2,684,481 395,456 14.73
ASMs (000s) (b) 4,597,009 3,846,332 750,677 19.52
Load Factor (c) 67.00 69.79 (2.79) (4.00)
Passengers Enplaned (d) 2,704,249 2,384,463 319,786 13.41
Revenue $ (000s) 277,167 244,768 32,399 13.24
RASM in cents (e) 6.03 6.36 (0.33) (5.19)
Yield in cents (g) 9.00 9.12 (0.12) (1.32)
Revenue per segment $ (h) 102.49 102.65 (0.16) (0.16)
Military Charter
Departures 1,438 1,718 (280) (16.30)
Block Hours 7,084 8,416 (1,332) (15.83)
ASMs (000s) (b) 855,949 1,083,089 (227,140) (20.97)
Revenue $ (000s) 80,722 86,195 (5,473) (6.35)
RASM in cents (e) 9.43 7.96 1.47 18.47
RASM excluding fuel escalation (j) 9.14 7.75 1.39 17.94
Commercial Charter
Departures 440 1,283 (843) (65.71)
Block Hours 1,536 4,665 (3,129) (67.07)
ASMs (000s) (b) 120,738 355,289 (234,551) (66.02)
Revenue $ (000s) 10,968 26,112 (15,144) (58.00)
RASM in cents (e) 9.08 7.35 1.73 23.54
RASM excluding fuel escalation (i) 8.92 6.89 2.03 29.46
Percentage of Consolidated Revenues:
Scheduled Service 71.6% 65.5% 6.1% 9.31
Military Charter 20.8% 23.1% (2.3%) (9.96)
Commercial Charter 2.8% 7.0% (4.2%) (60.00)
See footnotes (a) through (j) on pages 17-19.
(h) Revenue per segment flown is determined by dividing total scheduled service
revenues by the number of passengers boarded. Revenue per segment is a broad
measure of the average price obtained for all flight segments flown by
passengers in the Company's scheduled service route network.
18
(i) Commercial charter contracts generally provide that the tour operator will
reimburse the Company for certain fuel cost increases, which, when earned, are
accounted for as additional revenue. A separate RASM calculation, excluding the
impact of fuel reimbursements, is provided as a separate measure of unit revenue
changes.
(j) Military/government reimbursements to the Company are calculated based upon
a "cost plus" formula, including an assumed average fuel price for each contract
year. If actual fuel prices differ from the contract rate, revenues are adjusted
up or down to neutralize the impact of the change on the Company. A separate
RASM calculation is provided, excluding the impact of the fuel price
adjustments.
Scheduled Service Revenues. Scheduled service revenues in the first quarter of
2004 increased 13.2% to $277.2 million from $244.8 million in the first quarter
of 2003 due to increased capacity. Although scheduled service capacity increased
between 2004 and 2003, unit revenues, load factor and yield declined. The lower
yields experienced in the first quarter of 2004 were primarily attributable to a
competitive pricing environment which included extraordinary fare discounting by
several airlines in many of the scheduled service markets the Company serves. In
addition, the Company's load factors were significantly impacted by the
industry's added capacity, especially in the Company's transcontinental and
other east-west markets. As a result, the Company has cancelled some of its
east-west routes beginning in March and April 2004 while continuing to review
its other scheduled service markets. The Company intends to combat the adverse
effects of the foregoing competitive factors by enhancing its position as a
leading provider of passenger airline services in selected markets where it can
capitalize on its competitive strengths. In April 2004 after implementing these
changes, the Company estimates its unit revenue will be up approximately 6.3% as
compared to April 2003. However, the Company expects that it will continue to be
challenged by competitive pricing actions throughout 2004.
Approximately 65.7% of the Company's scheduled service capacity was generated by
flights either originating or terminating at Chicago-Midway in the first quarter
of 2004, as compared to 71.3% in the first quarter of 2003. The Hawaiian market
generated approximately 13.0% of total scheduled service capacity in the first
quarter of 2004, as compared to 11.3% in the first quarter of 2003. Another
14.3% of total scheduled service capacity was generated in the Indianapolis
market in the first quarter of 2004, as compared to 12.6% in the first quarter
of 2003.
The Company anticipates that its Chicago-Midway operation will continue to
represent a substantial proportion of its scheduled service business in the
future. The Company also anticipates further growth at Chicago-Midway, which
will be accomplished in conjunction with the completion of new terminal and gate
facilities at the Chicago-Midway Airport. Once all construction is complete in
mid-2004, the Company expects to occupy at least four additional jet gates at
the new airport concourses, as compared to its ten jet gates as of March 31,
2004. Also contributing to the growth at Chicago-Midway is Chicago Express,
which has been performing well as a commuter feeder of passengers to ATA's jet
system.
Military/Government Charter Revenues. Military/government charter revenue
decreased 6.4% to $80.7 million in the first quarter of 2004 from $86.2 million
in the first quarter of 2003.
The decrease in revenue for military/government charter revenues in the first
quarter of 2004 was mainly due to the deactivation of the CRAF program in the
second quarter of 2003. The CRAF program, which ran from February 18, 2003 to
June 18, 2003, required ATA to pledge up to 13 aircraft to military/government
charter use to support Operation Iraqi Freedom and allowed the Company to
increase its Lockheed L-1011 aircraft utilization (number of productive hours of
flying per day).
Although military/government charter revenues declined between periods,
military/government charter RASM increased 18.5% to 9.43 cents in the first
quarter of 2004 from 7.96 cents in the first quarter of 2003. The primary reason
for this increase was the Company utilizing less L-1011-50 and 100 aircraft in
the first quarter of 2004, as compared to the first quarter of 2003, which
generate a lower RASM compared to other types of aircraft.
19
Commercial Charter Revenues. Commercial charter revenues decreased 58.0% to
$11.0 million in the first quarter of 2004 from $26.1 million in the first
quarter of 2003.
The majority of the decline in commercial charter revenues was due to the
retirement of certain Lockheed L-1011 aircraft that the Company has
traditionally used in commercial charter flying. Since aircraft utilization is
typically much lower for commercial charter, as compared to scheduled service
flying, the Company's replacement fleets of new Boeing 737-800 and Boeing
757-300 aircraft are economically disadvantaged when used in the charter
business, because of their higher fixed-ownership cost. Consequently, the
Company expects its commercial charter revenues to continue to decline as the
fleet supporting this business continues to shrink as a result of aircraft
retirements.
Although commercial charter revenues declined between periods, commercial
charter RASM increased 23.5% to 9.08 cents in the first quarter of 2004 from
7.35 cents in the first quarter of 2003. The primary reason for the increase was
that the Company flew a higher percentage of specialty charter flights in the
first quarter of 2004, as compared to same period of 2003. The specialty charter
flights, which are designed to meet the customers' needs, historically yield
higher revenue per ASM than the track charter flights, which are repetitive
flights to vacation destinations marketed to tour operators.
Ground Package Revenues. The Company earns ground package revenues through the
sale of hotel, car rental and cruise accommodations in conjunction with the
Company's air transportation product. The Company markets these ground packages
through its Ambassadair subsidiary. Ambassadair Travel Club offers
tour-guide-accompanied vacation packages to its approximately 32,000 individual
and family members. In the first quarter of 2004, ground package revenues
decreased 5.8% to $4.9 million, as compared to $5.2 million in the same period
of 2003.
Other Revenues. Other revenues are comprised of the consolidated revenues of
certain affiliated companies, together with miscellaneous categories of revenue
associated with operations of the Company, such as cancellation and
administration service fees, Ambassadair Travel Club membership dues and cargo
revenue. Other revenues increased 20.4% to $13.6 million in the first quarter of
2004, as compared to $11.3 million in the same period of 2003 primarily due to
increases in cargo revenue and service fees.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits include the cost of
salaries and wages paid to the Company's employees, together with the Company's
cost of employee benefits and payroll-related local, state and federal taxes.
Salaries, wages and benefits expense in the first quarter of 2004 increased
14.2% to $107.7 million, as compared to $94.3 million in the same period of
2003.
The increase in salaries, wages and benefits is partially due to the Company
employing additional crewmembers and other operations employees to handle its
increased capacity in the first quarter of 2004, as compared to the first
quarter of 2003. The Company also incurred increasing costs in the first quarter
of 2004 for employee medical and workers' compensation benefits. In addition,
the Company's salary costs increased due to contractual rate increases effective
July 1, 2003 for the Company's cockpit crewmembers and the implementation of a
new defined-contribution plan for these crewmembers effective January 1, 2003.
The Company is experiencing an erosion of its competitive labor cost advantage
relative to other carriers as other carriers reduce their costs through
negotiated concessions. In response to this situation, the Company is currently
in discussions with its cockpit and cabin crews to postpone scheduled pay
increases due in 2004 and 2005.
Fuel and Oil. Fuel and oil expense increased 9.6% to $82.3 million in the first
quarter of 2004, as compared to $75.1 million in the same period of 2003.
Although jet block hours increased 11.8% in the first quarter of 2004, as
compared to the same period of 2003, the Company only consumed 6.0% more gallons
of fuel, due to the Company continuing to replace its aging, less-fuel efficient
Lockheed L-1011 aircraft with new Boeing 737-800 and Boeing 757-300 aircraft.
The increase in gallons consumed resulted in an increase in fuel and oil expense
of approximately $4.0 million.
20
During the first quarter of 2004, the average cost per gallon of jet fuel
consumed increased by 4.6% to $1.14, as compared to $1.09 in the first quarter
of 2003, resulting in an increase in fuel and oil expense of approximately $2.9
million.
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. The Company did not have any hedge
contracts in place in the first quarter of 2004. Although the Company did not
have any hedge contracts in place, the Company did benefit from fuel
reimbursement clauses and guarantees in its bulk scheduled service, commercial
charter and military/government contracts in the first quarter of 2004. The
benefit of these price guarantees was accounted for as revenue.
Aircraft Rentals. The Company's operating leases require periodic cash payments
that vary in amount and frequency. Many of the Company's aircraft operating
leases were originally structured to require very significant cash in the early
years of the lease in order to obtain more overall favorable lease rates. The
Company accounts for aircraft rentals expense in equal monthly amounts over the
life of each operating lease because straight-line expense recognition is most
representative of the time pattern from which benefit is derived from use of the
aircraft. Although the Company restructured many of its operating leases in
January 2004 resulting in significant cash deferrals, the amount of the cash
payments in excess of the aircraft rent expense in these early years has still
resulted in a significant prepaid aircraft rent amount on the Company's balance
sheet. This prepaid aircraft rent would have been substantially larger had the
leases not been restructured resulting in a $29.8 million refund received on
January 30, 2004 related to payments made in 2003 under the original terms of
certain retroactively amended leases. Aircraft rentals expense in the first
quarter of 2004 increased 7.6% to $59.5 million from $55.3 million in 2003. This
increase was mainly attributable to the delivery of two leased Boeing 737-800,
two leased Boeing 757-300 aircraft, and one leased 757-200 aircraft between
March 2003 and March 2004.
Handling, Landing and Navigation Fees. Handling and landing fees include the
costs incurred by the Company at airports to land and service its aircraft and
to handle passenger check-in, security, cargo and baggage where the Company
elects to use third-party contract services in lieu of its own employees. Where
the Company uses its own employees to perform ground handling functions, the
resulting cost appears within salaries, wages and benefits. Air navigation fees
are incurred when the Company's aircraft fly over certain foreign airspace.
Handling, landing and navigation fees increased by 11.0% to $33.4 million in the
first quarter of 2004, as compared to $30.1 million in the same period of 2003.
The increase in handling, landing and navigation fees between periods was
primarily due to a 14.1% increase in system-wide jet departures, which resulted
in an increase in handling, landing and navigation fees of $3.8 million. Also
contributing to this increase is an increase in the cost of landing fees per
departure resulting in $2.1 million more expense in the first quarter of 2004 as
compared to the same period of 2003. These increases were partially offset by a
decrease in the cost of handling per departure due to the negotiation of
favorable terms in new contracts, resulting in $3.4 million less expense in the
first quarter of 2004, as compared to the same period of 2003.
Aircraft Maintenance, Materials and Repairs. This expense includes the cost of
expendable aircraft spare parts, repairs to repairable and rotable aircraft
components, contract labor for maintenance activities, and other non-capitalized
direct costs related to fleet maintenance, including spare engine leases, parts
loan and exchange fees, and related shipping costs. It also includes the costs
incurred under hourly engine maintenance agreements the Company has entered into
on its Boeing 737-800, Boeing 757-200/300 and SAAB 340B power plants. These
agreements provide for the Company to pay monthly fees based on a specified rate
per engine flight hour, in exchange for major engine overhauls and maintenance.
Aircraft maintenance, materials and repairs expense increased 47.4% to $19.9
million in the first quarter of 2004, as compared to $13.5 million in the first
quarter of 2003. The increase in maintenance, materials and repairs was mainly
due to a contractual rate increase in the cost of the hourly engine maintenance
agreement for the Company's Boeing 757-200 fleet effective January 1, 2004,
which resulted in an increase in aircraft maintenance, materials and repairs
expense in the first quarter of 2004 of $5.5 million, as compared to the first
quarter of 2003.
21
Crew and Other Employee Travel. Crew and other employee travel is primarily the
cost of air transportation, hotels and per diem reimbursements to cockpit and
cabin crewmembers incurred to position crews away from their bases to operate
Company flights throughout the world. The cost of crew and other employee travel
increased 13.3% to $17.0 million in the first quarter of 2004, as compared to
$15.0 million in the first quarter of 2003. This increase in the first quarter
of 2004 is primarily due to the increase in system-wide jet departures of 14.1%
between periods.
Depreciation and Amortization. Depreciation reflects the periodic expensing of
the recorded cost of owned airframes and engines, leasehold improvements and
rotable parts for all fleet types, together with other property and equipment
owned by the Company. Depreciation and amortization expense decreased 10.5% to
$13.6 million in the first quarter of 2004, as compared to $15.2 million in the
first quarter of 2003.
The decrease in depreciation and amortization expense is mainly attributable to
the L-1011-50 and 100 fleet. The Company retired four L-1011-50 and 100 aircraft
from revenue service since the first quarter of 2003. Due to these retirements,
the Company recorded $2.2 million less in depreciation in the first quarter of
2004, as compared to the same period of 2003.
Other Selling Expenses. Other selling expenses are comprised primarily of
booking fees paid to computer reservation systems ("CRS"), credit card discount
expenses incurred when selling to customers using credit cards for payment, and
toll-free telephone services provided to customers who contact the Company
directly to book reservations. Other selling expenses increased 5.9% to $12.5
million in the first quarter of 2004, as compared to $11.8 million in the same
period of 2003. The Company experienced increases in credit card and CRS fees
due to the increase in scheduled service passengers enplaned between periods.
These increases were partially offset by a decrease in toll-free service costs
between periods due to contractual rate decreases offered by the Company's new
provider.
Passenger Service. Passenger service expense includes the onboard costs of meal
and non-alcoholic beverage catering, the cost of alcoholic beverages and the
cost of onboard entertainment programs, together with certain costs incurred for
mishandled baggage and passengers inconvenienced due to flight delays or
cancellations. For the first quarters of 2004 and 2003, catering represented
80.3% and 81.1%, respectively, of total passenger service expense.
The total cost of passenger service increased 10.8% to $11.3 million in the
first quarter of 2004, as compared to $10.2 million in the first quarter of
2003. This increase is mainly attributable to the increase in scheduled service
passengers enplaned between periods.
Advertising. Advertising expense decreased 4.9% to $9.8 million in the first
quarter of 2004, as compared to $10.3 million in the same period of 2003. The
Company incurs advertising costs primarily to support single-seat scheduled
service sales. In the first quarter of 2003, the Company increased advertising
in an effort to increase customer preference for the Company's enhanced product
with an advertising campaign identifying the Company as "An Honestly Different
Airline." The brand awareness campaign has enabled the Company to achieve
efficiencies in the use of advertising resources causing the expense to decrease
in the first quarter of 2004, as compared to the same period of 2003.
Commissions. The Company incurs commissions expense in association with the sale
by travel agents of single seats on scheduled service. In addition, the Company
incurs commissions to secure some commercial and military/government charter
business. Commissions expense increased 13.3% to $6.8 million in the first
quarter of 2004, as compared to $6.0 million in the first quarter of 2003. The
Company experienced an increase in military/government charter commissions of
$1.6 million because certain CRAF flights in the first quarter of 2003 were
exempt from commissions. CRAF ended in June 2003, so the military flights flown
in the first quarter of 2004 were commissionable. This increase was partially
offset by a decrease in scheduled service commissions of $0.8 million in the
first quarter of 2004, as compared to the first quarter of 2003, due to the
increasing share of non-commissionable ticket purchases made on the Company's
own website.
22
Facilities and Other Rentals. Facilities and other rentals include the cost of
all ground facilities that are leased by the Company such as airport space,
regional sales offices and general offices. The cost of facilities and other
rentals increased 10.3% to $6.4 million in the first quarter of 2004, as
compared to $5.8 million in the first quarter of 2003. Growth in facilities
costs between periods was primarily attributable to facilities at airport
locations required to support new scheduled service destinations added between
periods, and rate increases at some existing locations.
Insurance. Insurance expense represents the Company's cost of hull and liability
insurance and the costs of general insurance policies held by the Company,
including workers' compensation insurance premiums and claims handling fees. The
total cost of insurance decreased 24.7% to $5.5 million in the first quarter of
2004, as compared to $7.3 million in the first quarter of 2003. The decrease is
mainly attributable to decreased contract rates for the Company's hull and
liability insurance for the policy year beginning in September 2003.
Ground Package Cost. Ground package cost is incurred by the Company through
hotels, car rental companies, cruise lines and similar vendors who provide
ground and cruise accommodations to Ambassadair customers. Ground package cost
decreased 2.4% to $4.1 million in the first quarter of 2004, as compared to $4.2
million in the first quarter of 2003. See the "Ground Package Revenues" section
above for an explanation of the ground package sales and related costs.
Other Operating Expenses. Other operating expenses increased 9.4% to $19.8
million in the first quarter of 2004, as compared to $18.1 million in the first
quarter of 2003. This increase was attributable to various changes in other
expenses comprising this line item, none of which was individually significant.
Interest Expense. Interest expense in the quarter ended March 31, 2004 increased
to $15.0 million, as compared to $12.7 million in the same periods of 2003. The
Company recorded $1.4 million in interest expense in the first quarter of 2004
related to unsecured senior notes restructured in January 2004. The company also
recorded interest expense of $1.2 million related to dividends on the Series A
redeemable preferred stock, without par value ("Series A Preferred"). As of July
1, 2003, per the provisions of FAS 150, the dividends related to the Series A
Preferred are classified as interest expense on the Company's statement of
operations and the Series A Preferred is recorded as a liability in the
accompanying balance sheet.
Loss on Extinguishment of Debt. On January 30, 2004, the Company successfully
completed exchange offers and issued 2009 Notes and cash consideration for
certain of its 2004 Notes and issued 2010 Notes and cash consideration for
certain of its 2005 Notes. The Company accepted $260.3 million of Existing Notes
tendered for exchange, issuing $163.1 million in aggregate principal amount of
2009 Notes and delivering $7.8 million in cash in exchange for $155.3 million in
aggregate principal amount of 2004 Notes tendered, and issuing $110.2 million in
aggregate principal amount of 2010 Notes and delivering $5.2 million in cash in
exchange for $105.0 million in aggregate principal amount of 2005 Notes. As a
result of this transaction, the Company recorded a non-operating loss on
extinguishment of debt of $27.3 million in accordance with EITF 96-19. The loss
mainly relates to the accounting for the $13 million cash consideration paid at
closing of the exchange offers and the $13 million of incremental notes issued
during the exchange offers. In accordance with EITF 96-19, the New Notes are
recorded in the Company's balance sheet at fair value at the date of the
exchange offers, which equates to their face value.
23
Income Taxes. The Company did not record any income tax expense or benefit in
the first quarter of 2004 applicable to its $64.3 million in pre-tax loss for
that period, nor did it record any income tax expense or benefit in the first
quarter of 2003 applicable to its $11.0 million in pre-tax loss for that period.
As of December 31, 2003, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under GAAP that net deferred
tax assets should be fully reserved if it is more likely than not that they will
not be realized through carrybacks or other strategies, the Company had recorded
a full valuation allowance against its net deferred tax asset. In the first
quarter of 2004, the Company continued to record a full valuation allowance
against its net deferred tax asset under the same presumption.
Liquidity and Capital Resources
Cash Flows. In the three months ended March 31, 2004, net cash provided by
operating activities was $16.4 million, as compared to $21.0 million for the
same period of 2003. The decrease in cash provided by operating activities
between periods primarily resulted from the more significant net loss in the
first quarter of 2004, as compared to the first quarter of 2003, partially
offset by the receipt of a prepayment for future revenue in March of 2004
related to the Company entering into a credit card agreement. See the "ATA
Credit Card" section below for more information about the agreement.
Net cash used in investing activities was $25.8 million in the first quarter of
2004, as compared to $52.5 million in the same period of 2003. Such amounts
included capital expenditures totaling $4.4 million in the first quarter of
2004, as compared to $10.1 million in the first quarter of 2003. Cash used for
non-current prepaid aircraft rent payments of $13.9 million, net of the $29.8
million refund received on January 30, 2004 related to payments made in 2003
under the original terms of certain retroactively amended leases, in the first
quarter of 2004 was less significant as compared to $47.5 million in the same
period of 2003, mainly due to the completion of the lease amendments on January
30, 2004. See "Bond Exchange and Lease Amendments" section below.
Net cash used in financing activities was $19.1 million in the first quarter of
2004, as compared to $8.0 million in the same period of 2003. Upon completion of
the exchange offers on January 30, 2004, the Company paid all accrued preferred
dividends in arrears totaling $9.2 million. In addition, in the first quarter of
2004, the Company also paid $13.0 million as cash consideration for the
completion of the exchange offers and made other scheduled debt payments of $8.4
million. In the first quarter of 2003, the Company made scheduled debt payments
of $2.5 million. Also in the first quarter of 2004, the Company reduced
restricted cash $11.7 million primarily due to the cancellation of a surety bond
relating to the Department of Transportation ("DOT") charter obligations. In
contrast, in the first quarter of 2003, the Company's restricted cash increased
by $7.3 million to collateralize additional letters of credit.
The Company presently expects that the $132.2 million cash on hand at March 31,
2004, together with cash generated by future operations, will be sufficient to
fund the Company's obligations throughout 2004. Although the Company believes
the assumptions underlying its 2004 financial projections are reasonable, there
are significant risks that could cause the Company's 2004 financial performance
to be different than projected. These risks relate primarily to further declines
in demand for air travel, further increases in fuel prices, competitive pricing
and capacity actions, and the ongoing geopolitical impacts of the conflicts in
the Middle East.
Bond Exchange and Lease Amendments
The geopolitical impact of the conflict in the Middle East and generally weak
economic conditions of the past several years has adversely affected the Company
and the airline industry. The Company's new Boeing aircraft are all leased and
have higher fixed ownership costs than the older fleets that they replaced. The
terms of many of these aircraft operating leases were initially determined
before September 11, 2001, and were originally structured to require significant
cash payments in the first few years of each lease in order to reduce the total
rental cost over the related lease terms. Consequently, the Company made large
cash lease payments on many of its aircraft in the year ended December 31, 2003,
which resulted in a substantial use of the Company's cash. As of December 31,
2003, the Company was also scheduled to repay its 2004 Notes in August 2004 and
its 2005 Notes in December 2005. The Company did not anticipate that its cash on
hand together with cash generated by future operating activities would be
sufficient to meet its scheduled aircraft operating lease obligations beginning
in 2004 and to repay its debt when it matured.
24
To address these liquidity problems, on January 30, 2004, the Company
successfully completed exchange offers and issued 2009 Notes and cash
consideration for certain of its 2004 Notes and issued 2010 Notes and cash
consideration for certain of its 2005 Notes. In completing the exchange offers,
the Company accepted $260.3 million of Existing Notes tendered for exchange,
issuing $163.1 million in aggregate principal amount of 2009 Notes and
delivering $7.8 million in cash in exchange for $155.3 million in aggregate
principal amount of 2004 Notes tendered, and issuing $110.2 million in aggregate
principal amount of 2010 Notes and delivering $5.2 million in cash in exchange
for $105.0 million in aggregate principal amount of 2005 Notes. In addition to
the New Notes issued, $19.7 million in aggregate principal amount of the 2004
Notes and $20.0 million in aggregate principal amount of the 2005 Notes remain
outstanding after the completion of the exchange offers. In connection with the
exchange offers, the Company also obtained the consent of the holders of the
Existing Notes to amend or eliminate certain of the restrictive operating
covenants and certain default provisions of the indentures governing the
Existing Notes. In accordance with EITF 96-19 the Company recorded a
non-operating loss on extinguishment of debt of $27.3 million. The loss mainly
relates to the accounting for the $13 million cash consideration paid at closing
of the exchange offers and the $13 million of incremental notes issued during
the exchange offers. In accordance with EITF 96-19, the New Notes are recorded
in the Company's balance sheet at fair value at the date of the exchange offers,
which equates to their face value.
On January 30, 2004, the Company also completed the amendments of certain
aircraft operating leases with its three major lessors, BCSC, GECAS and ILFC.
The effect of the lease amendments was to delay the payment of portions of the
amounts due under those operating leases primarily between June 30, 2003 and
March 31, 2005 and to extend the leases generally for two years. Most of the
payments delayed during this time period will be subsequently paid at various
times throughout the remaining life of the leases. The Company received a refund
of $29.8 million on January 30, 2004 related to payments made in 2003 under the
original terms of certain retroactively amended leases. The amendments will also
result in approximately $69.6 million in lower cash payments during 2004 under
these operating leases, as compared to payments, which would have been due under
the original lease terms.
The table below summarizes the significant items that will affect liquidity in
the year ending December 31, 2004, as a result of the exchange offers and
operating lease amendments in addition to deferring $155.3 million dollars of
the senior indebtedness previously due in August 2004:
Cash savings (outflows)
(in thousands)
----------
Refund of certain 2003 aircraft operating lease payments $ 29,806
Reduction in aircraft operating lease payments in 2004 69,546
Payment of cash consideration for 2004 Notes (7,765)
Payment of cash consideration for 2005 Notes (5,250)
Payment of preferred dividends accrued at December 31, 2003 (9,237)
Payment of fees related to exchange offers and lease amendments in 2004 (7,777)
Additional interest costs related to Exchange Offers (12,910)
----------
Total Net Cash Savings $ 56,413
==========
Debt and Operating Lease Cash Payment Obligations. The Company is required to
make cash payments in the future on debt obligations and operating leases.
Although the Company is obligated on a number of long-term operating leases,
which are not recorded on the balance sheet under GAAP, the Company has no
off-balance sheet debt and does not guarantee the debt of any other party. The
following table summarizes the Company's contractual debt and operating lease
obligations as of March 31, 2004, and the effect such obligations are expected
to have on its liquidity and cash flows in future periods.
25
Cash Payments Currently Scheduled
---------------------------------
Total 2 Qtr- 4 Qtr 2005 2007 After
2004 -2006 -2008 2008
----------- --------- ---------- ---------- -----------
(in thousands)
Current and long-term debt $ 504,642 $ 44,951 $ 101,148 $ 81,170 $ 277,373
Lease obligations 3,797,593 125,276 582,341 627,993 2,461,983
Expected future lease obligations (1) 642,224 3,101 18,133 67,100 553,890
Redeemable Preferred Stock (2) 50,000 - - - 50,000
----------- --------- ---------- ---------- -----------
Total contractual cash obligations $ 4,994,459 $ 173,328 $ 701,622 $ 776,263 $ 3,343,246
=========== ========= ========== ========== ===========
(1) Represents estimated payments on nine new Boeing 737-800 aircraft the
Company is committed to taking delivery of in 2004 through 2007, as well as four
spare engines the Company is committed to taking delivery of in 2005 through
2008. The Company intends to finance these aircraft and engines with operating
leases. However, no such leases are in place as of March 31, 2004, as the
Company has not received the aircraft. Payments for expected future lease
obligations were derived using terms of leases for comparable aircraft currently
in place.
(2) Represents the mandatory redemption of the 500 shares of Series A Preferred
in equal semiannual installments between 2010 and 2015. Amount excludes the
mandatory redemption of the 300 shares of Series B convertible preferred stock
in 2015, as these shares can be converted into common stock at any time up to
the mandatory redemption date.
Aircraft and Fleet Transactions. The Company has a purchase agreement with
Boeing to purchase directly from Boeing seven new Boeing 737-800s, which are
currently scheduled for delivery between July 2007 and December 2007. These
aircraft are powered by General Electric CFM56-7B27 engines. The manufacturer's
list price is $52.4 million for each 737-800, subject to escalation. The
Company's purchase price for each aircraft is subject to various discounts.
According to a 2004 amendment to the purchase agreement with Boeing, if the
Company does not have permanent financing for these aircraft suitable to the
Company, and does not have suitable pre-delivery deposit financing, and if
Boeing does not elect to provide such financing suitable to the Company, these
deliveries can be delayed for one year periods annually through December 31,
2010. Aircraft pre-delivery deposits are required for these aircraft, and the
Company has historically funded these deposits for past aircraft deliveries
using operating cash and pre-delivery deposit finance facilities. The Company
can provide no assurance that it will be able to secure pre-delivery deposit
finance facilities or permanent financing for any future aircraft purchases. As
of March 31, 2004, the Company had $4.6 million in long-term pre-delivery
deposits outstanding for future aircraft deliveries, which were funded with
operating cash. Upon delivery and financing of the aircraft, pre-delivery
deposits funded with operating cash are expected to be returned to the Company.
As of March 31, 2004, the Company also has purchase rights with Boeing for 40
Boeing 737-800 aircraft.
The Company has an agreement to lease one additional Boeing 737-800 under an
operating lease from ILFC, which is currently scheduled for delivery in May
2004. The Company also has an agreement with GECAS to lease one additional
Boeing 737-800, which is currently scheduled for delivery in November 2004.
The Company has an agreement with General Electric to purchase four spare
engines CFM56-7B27 engines, which are currently scheduled for delivery between
2005 and 2008.
26
In May 2002, the Company entered into an agreement with AMR Leasing Corporation
to lease six SAAB 340B aircraft, with options to lease up to 10 additional
aircraft. The Company took delivery of all six SAAB 340B aircraft under this
agreement in 2002.
In March 2001, the Company entered a limited liability agreement with Boeing
Capital Corporation - Equipment Leasing Corporation ("BCC-ELC") forming BATA, a
50/50 joint venture. BATA is remarketing the Company's fleet of Boeing 727-200
aircraft in cargo configurations. In exchange for supplying the aircraft and
certain operating services to BATA, the Company has and expects to continue to
receive both cash and equity in the income or loss of BATA. As of March 31,
2004, the Company had transferred 23 of its fleet of Boeing 727-200 aircraft to
BATA.
Significant Financings. In November 2002, the Company obtained a $168.0 million
secured term loan, of which $148.5 million was guaranteed by the Air
Transportation Stabilization Board. The net proceeds of the secured term loan
were approximately $164.8 million, after deducting issuance costs. The Company
used a portion of the net proceeds to repay borrowings on its existing bank
credit facility and to collateralize new letters of credit, previously secured
under the bank facility. The remaining funds were used for general corporate
purposes. Interest is payable monthly at LIBOR plus a margin. Guarantee fees of
5.5% of the outstanding guaranteed principal balance in 2003, with escalation to
9.5% on the outstanding guaranteed principal balance in 2004 through 2008, are
payable quarterly.
The secured term loan is subject to certain restrictive covenants and is
collateralized primarily by certain receivables, certain aircraft, spare
engines, and rotable parts. The aircraft, spare engines and parts consist of two
Lockheed L-1011-500 aircraft, one Lockheed L-1011-50 and 100 aircraft, two SAAB
340B aircraft, 24 Rolls Royce RB211 spare engines and Boeing 757-200, Boeing
757-300 and Boeing 737-800 rotables.
In conjunction with obtaining the secured term loan, the Company issued a
warrant to the Federal Government to purchase up to 1.5 million shares of its
common stock, and additional warrants to other loan participants to purchase up
to 0.2 million shares of its common stock, in each case at an exercise price of
$3.53 per share for a term of ten years. The Company recorded $7.4 million as
the total fair value of warrants issued, which was recorded as unamortized
discount on the secured loan at the date of the loan.
On March 30, 2004, the Company signed a letter agreement with Boeing and ILFC
(together "Issuer") that provides a financing commitment from the Issuer to ATA
for up to $30 million to be used under certain specific conditions. As
consideration for the financing commitment, ATA must pay the Issuer $1.2 million
upon execution of a definitive documentation of the financing agreement. The
commitment expires on January 3, 2005. If the Company uses financing under the
financing commitment, that financing availability will be reduced by $10 million
per year on the anniversary of the funding, for up to three years.
Card Agreement. The Company accepts charges to most major credit and debit cards
("cards") as payment from its customers. Approximately 90% of scheduled service
and vacation package sales are purchased using these cards. More than half of
these card sales are made using MasterCard or Visa cards. The Company maintains
an agreement with a bank for the processing and collection of charges to these
cards. Under this agreement, a sale is normally charged to the purchaser's card
account and is paid to the Company in cash within a few days of the date of
purchase, although the Company may provide the purchased services days, weeks or
months later. In 2003, the Company processed approximately $753.8 million in
MasterCard and Visa charges under its merchant processing agreement.
On September 21, 2001, the bank notified the Company that it had determined that
the terrorist attacks of September 11, 2001, the ensuing grounding of commercial
flights by the FAA, and the significant uncertainty about the level of future
air travel entitled the bank to retain cash collected by it on processed card
charges as a deposit, up to 100% of the full dollar amount of purchased services
to be provided at a future date. If the Company fails to perform pre-paid
services which are purchased by a charge to a card, the purchaser may be
entitled to obtain a refund which, if not paid by the Company, is the obligation
of the bank. The deposit secures this potential obligation of the bank to make
such refunds. The bank exercised its right to withhold distributions beginning
shortly after its notice to the Company. The retention percentage employed by
the bank ranged from 60% to 100% through March 1, 2004 and was at 100% on March
1, 2004.
27
On March 1, 2004, the Company amended its agreement with its credit card
processing bank to reflect an extension for the processing of sales charges on
MasterCard and Visa cards until March 31, 2005. The credit card processing bank
agreed to reduce the holdback percentage for sales for future travel to 75%
effective with the execution of the amendment. The effect of decreasing the
holdback percentage from 100% to 75% increased the Company's cash balance by
approximately $21 million based on the holdback balance at March 1, 2004, which
is reflected on the March 31, 2004 balance sheet. The amended agreement provides
quarterly financial covenants under which the Company may maintain a holdback at
75% or 50% of sales for future travel, but at no time during the life of the
amendment will the holdback be lower than 50% of sales for future travel.
However, the Company can provide no assurances that it will be able to maintain
the percentage of holdback below 100% in future periods under this amendment. As
of March 31, 2004 and March 31, 2003 the bank had withheld $61.2 million and
$37.4 million, respectively.
The Company has the right to terminate its agreement with the bank upon
providing 90 days notice, as does the bank. In the event of such termination,
the bank may retain a deposit equal to the amount of purchased services not yet
performed, for up to 24 months from the date of termination.
Although the Company continues to process significant dollar amounts of ticket
sales using credit cards other than MasterCard and Visa, as of March 31, 2004,
no cash deposit requirements had been implemented by the issuers or processors
of those cards.
ATA Credit Card. On March 31, 2004, the Company entered into agreements with a
credit card issuer and Visa to introduce a consumer credit card ("the Card")
bearing redemption benefits on ATA Airlines, Inc. Holders of the Card will
accumulate points through purchases on the Card, which will allow them to earn
free travel on the airline once certain point thresholds are attained. The
Company will earn revenue from the credit card issuer as consideration for
issuing the Card with the Company's logo, and certain cooperative advertising
activities. Upon signing the agreement, the Company received a prepayment for
future revenue to be earned from the issuer, all of which was accounted for as a
deferred item as of March 31, 2004. The Company expects to launch the Card in
the third quarter of 2004.
Surety Bonds. The Company has historically provided surety bonds to airport
authorities and selected other parties, to secure the Company's obligation to
these parties. The DOT requires the Company to provide a surety bond or an
escrow to secure potential refund claims of charter customers who have made
prepayments to the Company for future transportation.
The Company has also historically provided both escrow arrangements and a surety
bond to the DOT to meet DOT charter obligations. Prior to the terrorist attacks
of September 11, 2001, the Company had provided a letter of credit of $1.5
million as security to its surety bond issuer for its total estimated surety
bond obligations, including the DOT charter obligations. Effective January 16,
2002, the issuer implemented a requirement for the Company's letter of credit to
secure 100% of estimated surety bond obligations, which totaled $19.8 million at
that date. The Company's letter of credit was adjusted accordingly, and the
Company has been subject to further adjustments of its letter of credit, based
upon further revisions to the estimated liability for total surety bonds
outstanding. The cash pledged to secure the Company's letter of credit was
included in non-current restricted cash.
On December 15, 2003, upon cancellation of the DOT charter obligation surety
bond by the issuer, the Company entered into an escrow arrangement which
requires the Company to place advance receipts for certain charter flights into
escrow until the flight operates. Once the flight occurs the Company is paid
from the escrow account those advance deposits specific to that completed
flight. As of March 31, 2004, the Company has $5.1 million in advance charter
receipts deposited in escrow, which was included in prepaid expenses and other
current assets on the Company's balance sheet as of that date. The surety bond
of $12.9 million relating to the DOT charter obligations was released in the
first quarter of 2004, and the restricted cash securing the letter of credit was
returned to the Company.
28
As of March 31, 2004, the Company's restricted cash pledged to secure its
letters of credit for all surety bonds, totaled $31.5 million and is shown as
non-current restricted cash on the Company's balance sheet.
Forward-Looking Information
Information contained within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" includes forward-looking information which
can be identified by forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "anticipates," or the negative thereof, or other
variations in comparable terminology. Such forward-looking information is based
upon management's current knowledge of factors affecting the Company's business.
The differences between expected outcomes and actual results can be material,
depending upon the circumstances. Where the Company expresses an expectation or
belief as to future results in any forward-looking information, such expectation
or belief is expressed in good faith and is believed to have a reasonable basis.
The Company can provide no assurance that the statement of expectation or belief
will result or will be achieved or accomplished.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause actual results to be materially different. Such
factors include, but are not limited to, the following:
o economic conditions;
o threat of future terrorist attacks;
o labor costs;
o aviation fuel costs;
o competitive pressures on schedules and pricing;
o weather conditions;
o governmental legislation and regulation;
o consumer perceptions of the Company's products;
o demand for air transportation overall and specifically in markets in
which the Company operates;
o higher costs associated with new security directives;
o higher costs for insurance and the continued availability of such
insurance;
o the Company's ability to raise additional financing and to refinance
existing borrowings upon maturity;
o declines in the value of the Company's aircraft, as these may result in
lower collateral value and additional impairment charges; and
o other risks and uncertainties listed from time to time in reports the
Company periodically files with the Securities and Exchange Commission.
The Company is under no obligation to update, and will not undertake to update,
its forward-looking statements to reflect future events or changes in
circumstances.
29
PART I - Financial Information
Item III - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided
in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of ATA
Holdings Corp.'s Annual Report on Form 10-K for the year 2003.
30
PART I - Financial Information
Item IV - Controls and Procedures
The Company conducted an evaluation (under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer), pursuant to Rule 13a-15 promulgated under the
Securities Exchange Act of 1934 ("Exchange Act"), as amended, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of March 31, 2004. Based on this evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of March
31, 2004, the controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by the Company in reports it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls, subsequent to the
date of the evaluation.
31
PART II - Other Information
Item I - Legal Proceedings
None
Item II - Changes in Securities
None
Item III - Defaults Upon Senior Securities
None
Item IV - Submission of Matters to a Vote of Security Holders
None
Item V - Other information
None
Item VI - Exhibits and Reports on Form 8-K
(a) Exhibits are filed as a separate section of this report as set forth in
the Index to Exhibits attached to this report.
(b) Report filed on January 5, 2004, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on January 12, 2004, furnishing items under Item 5. Other
Events, Item 7. Financial Statements and Exhibits, and Item 9. Regulation
FD Disclosure.
Report filed on January 22, 2004, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on January 23, 2004, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on January 27, 2004, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on January 30, 2004, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on January 30, 2004, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on January 30, 2004, furnishing items under Item 9. Regulation
FD Disclosure.
Report filed on February 2, 2004, furnishing items under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
Report filed on February 24, 2004, furnishing items under Item 9.
Regulation FD Disclosure.
32
Report filed on April 12, 2004, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on April 30, 2004, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on May 6, 2004, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on May 6, 2004, furnishing items under Item 9. Regulation FD
Disclosure.
Report filed on May 7, 2004, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
Report filed on May 13, 2004, furnishing items under Item 5. Other Events
and Item 7. Financial Statements and Exhibits.
33
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATA Holdings Corp.
(Registrant)
Date May 14, 2004 by /s/ David M. Wing
--------------------
David M. Wing
Executive Vice President and Chief Financial Officer
On behalf of the Registrant
Index to Exhibits
Exhibit No.
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002