United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2002.
[ ] 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.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
- ---------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of shares of the registrant's Common Stock held by
non-affiliates of the registrant (based on closing price of shares of Common
Stock on the NASDAQ National Market on June 30, 2002) was approximately $23.4
million.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,764,753 shares outstanding as of February
28, 2003.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the ATA Holdings Corp. Proxy Statement to be filed within 120 days
after the close of the last fiscal year are incorporated by reference into Part
III.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 2002
ATA HOLDINGS CORP. AND SUBSIDIARIES
Page #
PART I
Item 1. Business........................................................3
Item 2. Properties......................................................9
Item 3. Legal Proceedings..............................................10
Item 4. Submission of Matters to a Vote of Security Holders............11
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters.................................................12
Item 6. Selected Consolidated Financial Data.. ......................13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.....45
Item 8. Financial Statements and Supplementary Data....................47
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................76
PART III
Item 10. Directors and Officers of the Registrant.......................77
Item 11. Executive Compensation.........................................77
Item 12. Security Ownership of Certain Beneficial Owners and Management.77
Item 13. Certain Relationships and Related Transactions.................77
Item 14. Controls and Procedures........................................77
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.78
Item 15d. Valuation and Qualifying Accounts..............................80
2
PART I
Item 1. Business
Company Overview
ATA Holdings Corp., formerly Amtran, Inc. (the "Company") owns ATA Airlines,
Inc., formerly American Trans Air, Inc. ("ATA"), the tenth largest passenger
airline in the United States, based upon 2002 capacity and traffic. The Company
is a leading provider of low-cost scheduled airline services, the largest
commercial charter airline in the United States based upon revenues for the
twelve months ended June 30, 2002, and is one of the largest providers of
passenger airline services to the U.S. military, based upon 2002 revenue. The
Company was incorporated in Indiana in 1984.
The following table summarizes the Company's revenue sources for the periods
indicated:
Year Ended December 31,
2002 2001 2000 1999 1998
----------------------------------------------------------------------
(Dollars in millions)
Scheduled Service $ 886.6 $ 820.7 $ 753.3 $ 624.6 $ 511.3
----------- ----------- ----------- ----------- ----------
Commercial Charter 131.3 192.2 246.7 263.8 222.6
Military Charter 177.9 167.5 188.6 126.2 121.9
----------- ----------- ----------- ----------- ----------
Total Charter Service 309.2 359.7 435.3 390.0 344.5
----------- ----------- ----------- ----------- ----------
Other 81.6 95.1 103.0 107.8 63.6
----------- ----------- ----------- ----------- ----------
Total $ 1,277.4 $ 1,275.5 $ 1,291.6 $ 1,122.4 $ 919.4
=========== =========== =========== =========== ==========
Percentage of Consolidated Revenues:
Scheduled Service 69.4% 64.3% 58.3% 55.7% 55.6%
Commercial Charter 10.3% 15.1% 19.1% 23.5% 24.2%
Military Charter 13.9% 13.1% 14.6% 11.2% 13.3%
Scheduled Service
The Company provides scheduled airline services on selected routes where it
believes that it can be a leading carrier in those markets, focusing primarily
on low-cost, nonstop or direct flights. The Company currently provides scheduled
service primarily from its gateway cities of Chicago-Midway and Indianapolis to
popular vacation and business destinations such as 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 and Charlotte. The Company also provides
transpacific service between the Western United States and Hawaii.
The Company owns all of the issued and outstanding stock of Chicago Express
Airlines, Inc. ("Chicago Express"), which currently operates a fleet of 17 SAAB
340B 34-seat propeller aircraft and provides commuter passenger scheduled
service between Chicago-Midway and the cities of Indianapolis, Cedar Rapids,
Dayton, Des Moines, Flint, Grand Rapids, Lexington, Madison, Milwaukee, Moline,
Toledo, South Bend, and Springfield.
Included in the Company's jet scheduled service are bulk-seat sales agreements
with tour operators. Under these arrangements, a tour operator purchases a large
portion of the seats on an aircraft and assumes responsibility for distribution
of those seats. The Company sells the remaining seats through its own scheduled
service distribution network. Under bulk-seat sales arrangements, the Company is
3
obligated to provide transportation to the tour operators' customers even in the
event of non-payment to the Company by tour operators. To reduce its credit
exposure under these arrangements, the Company requires a letter of credit or
prepayment of a portion of the contract price.
Commercial Charter Service
The Company provides commercial passenger charter airline services, primarily
through U.S. tour operators. The most significant portion of commercial charter
revenue is derived from contracts with tour operators for repetitive,
leisure-oriented round-trip patterns, operating over varying periods of time.
Under such contracts, the tour operator pays a fixed price for use of the
aircraft and assumes responsibility and risk for the actual sale of the
available aircraft seats. Under most of its contracts with tour operators, the
Company passes through increases in fuel costs from a contracted price. The
Company is required to absorb increases in fuel costs that occur within 14 days
of flight time.
In 2002, commercial charter revenue declined significantly, primarily due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that were
historically used in commercial charter flying. The Company's replacement fleets
of new Boeing 737-800 and 757-300 aircraft are economically disadvantaged when
used in the lower-utilization charter business, due to their higher fixed
ownership cost. Consequently, the Company expects future commercial charter
revenue to continue to represent a declining percentage of total revenue.
Military/Government Charter Service
The Company has provided passenger airline services to the U.S. military since
1983 and is currently one of the largest commercial airline providers of these
services. The Company believes that because these operations are generally less
seasonal than scheduled service, and because the military contract provides full
reimbursement for actual fuel expenses, they have a stabilizing impact on the
Company's operating margins. The U.S. Government awards one year contracts for
its military charter business and pre-negotiates contract prices for each type
of aircraft that a carrier makes available. Each contract year extends from
October 1 through September 30. The Company primarily uses its fleet of four
Lockheed L-1011-500 aircraft and certain Lockheed L-1011-50 and 100 aircraft to
support this military business, since these aircraft have a range and seating
configuration preferred by the military.
The Company is subject to biennial inspections by the U.S. Department of Defense
as a condition of retaining its eligibility to perform military charter flights.
The last such inspection was successfully completed in November 2001.
Industry Overview
The terrorist attacks of September 11, 2001 and generally weak economic
conditions have adversely affected the Company and the airline industry. The
industry as a whole, and the Company, suffered very significant financial losses
in 2001 and 2002. During 2002, two major air carriers, US Airways Group and UAL
Corporation, filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. Historically, air carriers involved in reorganizations have
substantially reduced their fares, which could reduce airline yields further
from current levels. Certain air carriers are seeking to recover, at least
partially, by reducing their seat capacity. As this is accomplished by
eliminating aircraft from operating fleets, the fair value of aircraft may be
adversely affected. The Company has recorded substantial charges to earnings
resulting from fleet retirements and impairments over the past two years.
However, during this period the Company has substantially replaced its fleet of
aging aircraft with new fuel-efficient Boeing aircraft. The industry and the
Company have also been adversely impacted by substantially higher insurance
costs, and higher passenger security costs.
4
The Company has benefited from some of the U.S. Government's initiatives for
assisting the airline industry. Most significant to the Company was the Air
Transportation Safety and System Stabilization Act ("Act") passed in 2001, which
provided for, among other things, up to $5.0 billion in compensation to U.S.
airlines and air cargo carriers for direct and incremental losses resulting from
the September 11, 2001 terrorist attacks and the availability of up to $10.0
billion in U.S. Government guarantees of certain loans made to air carriers,
which are administered by the newly-established Air Transportation Stabilization
Board ("ATSB"). The Company received $50.1 million is U.S. Government grant
compensation. The Company also obtained a $168.0 million secured term loan, of
which $148.5 million is guaranteed by the ATSB.
While it is expected that adverse industry conditions are likely to continue
throughout 2003, the Company's management believes it has a viable plan to
ensure sufficient cash to fund operations during the next 12 months. In addition
to the assistance the Company has already received in the form of U.S.
Government grant compensation and the secured term loan, the plan calls for
focusing marketing efforts on those routes where the Company believes it can be
a leading provider and implementing a number of cost-saving initiatives the
Company believes will enhance its low-cost advantage. Although the Company
believes the assumptions underlying its 2003 financial projections are
reasonable, there are significant risks which could cause the Company's 2003
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases in
fuel prices, the uncertain outcome of the two major airline bankruptcies filed
in 2002, the possibility of other airline bankruptcy filings, and the uncertain
outcome and geopolitical impact of the conflict in the Middle East.
Company Strategy
The Company intends to combat the adverse industry conditions by enhancing its
position as a leading provider of passenger airline services in selected markets
where it can capitalize on its competitive strengths. The key components of this
strategy are:
Participate in Markets Where It Can Be a Leader
The Company generally focuses on markets where it can be a leading provider of
airline services. In scheduled service, the Company concentrates on routes where
it can be the number one or number two carrier. The Company achieves this result
principally through nonstop schedules, value-oriented pricing, focused marketing
efforts and certain airport and aircraft advantages. The Company is a leading
provider of commercial and military charter services in large part because of
its variety of aircraft types, superior operational performance and its
worldwide service capability. The Company intends to expand its operations
selectively in areas where it believes it can achieve attractive financial
returns.
Maintain Low-Cost Position and Maximize Aircraft Utilization For 2002, 2001 and
2000, the Company's consolidated operating cost per available seat mile ("CASM")
of 8.17(cent), 8.45(cent) and 7.86(cent), respectively, was one of the lowest
among large U.S. passenger airlines. The Company believes that its lower costs
provide a significant competitive advantage. Supplementing the Company's cost
control initiatives is the enhancement of aircraft utilization, or the average
number of hours flown per aircraft per day. This strategy has become
increasingly important with the delivery of many new aircraft in the last
several years.
5
Competition
The Company's products and services encounter varying degrees of competition in
the markets it serves.
Competition for Scheduled Services
In scheduled service, the Company competes both against the large U.S. scheduled
service airlines and against smaller regional or start-up airlines. Competition
is generally on the basis of price, schedule and frequency, quality of service
and convenience.
The Company believes that it has significant competitive advantages in each of
its primary markets.
o Chicago-Midway, the Company's largest and fastest growing gateway,
represented approximately 71.2% of the Company's total scheduled service
capacity in 2002. The Company is the number one carrier in terms of market
share, based upon second quarter 2002 origin and destination revenue
passengers, on 19 of the 21 nonstop jet routes it serves from
Chicago-Midway. The Company believes its service at this gateway would be
difficult to replicate because of limited airport capacity. This
competitive position is enhanced by the customer convenience of
Chicago-Midway's proximity to downtown Chicago. The Company also enjoys a
strong competitive position relative to the entire Chicago metropolitan
area.
o Hawaii represented approximately 13.7% of the Company's total scheduled
service capacity in 2002. A majority of the Company's capacity in the
Hawaiian market is contracted to the nation's largest independent Hawaiian
tour operator, which assumes capacity, yield and most fuel-price risk. The
Company believes it is the lowest-cost provider of scheduled service
between the western United States and Hawaii, which is critical in this
price-sensitive, predominantly leisure market.
o Indianapolis represented approximately 10.5% of the Company's total
scheduled service capacity in 2002. The Company believes that it benefits
from being perceived as the hometown airline. The Company is the number one
provider in terms of market share, based upon second quarter 2002 origin
and destination revenue passengers, in seven of its nine jet routes from
Indianapolis. In Indianapolis, the Company operates Ambassadair Travel
Club, Inc. ("Ambassadair"), the nation's largest travel club, with
approximately 32,000 individual or family memberships, providing the
Company with another local marketing advantage.
Competition for Commercial Charter Services
In the commercial charter market, the Company competes both against the major
U.S. scheduled airlines and against small U.S. charter airlines. The scheduled
carriers compete with the Company's commercial charter operations by wholesaling
discounted seats on scheduled flights to tour operators, promoting packaged
tours to travel agents for sale to retail customers and selling discounted,
airfare-only products to the public.
Competition for Military/Government Charter Services
The Company competes for military and other government charters primarily with
smaller U.S. airlines. The allocation of U.S. military air transportation
contracts is based upon the number and type of aircraft a carrier makes
available for use to the military, among other factors.
6
Flight Operations and Aircraft Maintenance
Worldwide flight operations are planned and controlled by the Company's Flight
Operations group based in Indianapolis, Indiana, which is staffed on a 24-hour
basis, seven days a week. Logistical support necessary for extended operations
away from the Company's fixed bases is coordinated through its global
communications network. The Company has the ability to dispatch maintenance and
operational personnel and equipment as necessary to support temporary operations
around the world.
The Company's Maintenance and Engineering Center is located at Indianapolis
International Airport. This facility is an FAA-certificated repair station and
has the capability to perform routine and non-routine maintenance on the
Company's aircraft. The Company also has a maintenance facility at the
Chicago-Midway Airport, which is used to provide line maintenance for the Boeing
757-200, Boeing 757-300 and Boeing 737-800 fleets. The Company has approximately
1,150 employees supporting its aircraft maintenance operations, and currently
maintains 19 permanent maintenance facilities, including its Indianapolis and
Chicago facilities.
Fuel Price Risk Management
The Company has fuel reimbursement clauses and guarantees which applied to
approximately 29.4%, 32.0%, and 33.5% respectively, of consolidated revenues in
2002, 2001 and 2000. The Company occasionally enters into fuel-hedging contracts
to reduce volatility of fuel prices for a portion of its scheduled service fuel
needs. As of December 31, 2002, the Company had no outstanding fuel hedge
contracts.
Insurance
The Company carries types and amounts of insurance customary in the airline
industry, including coverage for public liability, passenger liability, property
damage, aircraft loss or damage, baggage and cargo liability and workers'
compensation. Under the Company's current insurance policies, it will not be
covered by such insurance were it to fly, without the consent of its insurance
provider, to certain high-risk countries. The Company will support certain U.S.
Government operations in areas where its insurance policy does not provide
coverage when the U.S. Government provides replacement insurance coverage.
Immediately following the September 11, 2001 terrorist attacks, the Company's
aviation insurers, and other air carriers' aviation insurers, reduced the
maximum amount of liability insurance coverage for losses related to persons
other than passengers and employees, resulting from acts of terrorism, war,
hijacking or other similar perils (war-risk coverage) and significantly
increased their premiums for this reduced coverage. Pursuant to the Air
Transportation Safety and System Stabilization Act ("Act") and other enabling
legislation, the U.S. Government has issued supplemental war-risk coverage to
U.S. air carriers, including the Company, which is expected to continue through
2003. It is anticipated that after this date, a commercial product for war-risk
coverage will become available, but the Company expects that it may incur
significant additional costs for this coverage.
Employees
As of December 31, 2002, the Company had approximately 7,200 full and part-time
employees, approximately 2,600 of whom were represented under collective
bargaining agreements. The Company's flight attendants are represented by the
Association of Flight Attendants ("AFA"). The current collective bargaining
agreement with the AFA will become subject to amendment, but will not expire, in
7
October 2004. The Company's cockpit crews are represented by the Air Line Pilots
Association ("ALPA"). The current collective bargaining agreement with ALPA will
become subject to amendment, but will not expire, in June 2006. The Company's
flight dispatchers are represented by the Transport Workers Union ("TWU"). The
current collective agreement with the TWU will become subject to amendment, but
will not expire, in August 2004. The Company's ramp service agents elected to be
represented by the International Association of Machinists ("IAM") in February
2001. The Company began negotiations with the IAM in May 2001, but no collective
bargaining agreement has been finalized. In February 2002, the Company's
aircraft mechanics elected to be represented by the Aircraft Mechanics Fraternal
Association ("AMFA"). The Company began negotiations with the AMFA in October
2002, but no collective bargaining agreement has been finalized.
While the Company believes that relations with its employees are good, any
prolonged dispute with employees, whether or not represented by a union, could
have an adverse impact on the Company's operations.
Regulation
The Company is subject to a wide range of governmental regulation, including
that of the Department of Transportation ("DOT") and the Federal Aviation
Administration ("FAA").
The DOT principally regulates economic matters affecting air service, including
air carrier certification and fitness; insurance; leasing arrangements;
allocation of route rights and authorization of proposed scheduled and charter
operations; allocation of landing slots and departing slots; consumer
protection; and competitive practices. The FAA primarily regulates flight
operations, especially matters affecting air safety, including airworthiness
requirements for each type of aircraft and crew certification. The FAA requires
each carrier to obtain an operating certificate and operations specifications
authorizing the carrier to fly to specific airports using specified equipment.
In 2001, the Aviation and Transportation Security Act ("Aviation Security Act")
was signed into law, creating the Transportation Security Administration ("TSA")
within the DOT and requiring substantially all aspects of civil aviation
passenger security and screening to be placed under federal control in 2002. The
cost of the provisions set forth in the Aviation Security Act are partially
funded by a security fee of $2.50 per passenger enplanement, limited to $5 per
one-way trip and $10 per round trip. Air carriers, including the Company, began
collecting the new fee on ticket sales beginning in February 2002. The Aviation
Security Act is also funded by a separate security infrastructure fee assessed
to each air carrier beginning in the second quarter of 2002. The amount of the
air carrier assessment is payable monthly and is equal to the amount each air
carrier spent on aviation security in 2000.
Several aspects of airline operations are subject to regulation or oversight by
federal agencies other than the DOT and FAA. The United States Postal Service
has jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company through ATA Cargo, Inc. ("ATA Cargo".) Labor
relations in the air transportation industry are generally regulated under the
Railway Labor Act, which vests in the National Mediation Board certain
regulatory powers with respect to disputes between airlines and labor unions
arising under collective bargaining agreements. The Company is subject to the
jurisdiction of the Federal Communications Commission regarding the utilization
of its radio facilities. In addition, the Immigration and Naturalization
Service, the U.S. Customs Service, and the Animal and Plant Health Inspection
Service of the Department of Agriculture have jurisdiction over inspection of
the Company's aircraft, passengers and cargo to ensure the Company's compliance
with U.S. immigration, customs and import laws. Also, while the Company's
8
aircraft are in foreign countries,they must comply with the requirements of
similar authorities in those countries. The Commerce Department also regulates
the export and re-export of the Company's U.S.-manufactured aircraft and
equipment.
In addition to various federal regulations, local governments and authorities in
certain markets have adopted regulations governing various aspects of aircraft
operations, including noise abatement, curfews and use of airport facilities.
Many U.S. airports have adopted a Passenger Facility Charge of up to $4.50
collected from each passenger departing from the airport and remitted by the
Company to the applicable airport authority.
Based upon bilateral aviation agreements between the U.S. and other nations,
and, in the absence of such agreements, comity and reciprocity principles, the
Company, as a charter carrier, is generally not restricted as to the frequency
of its flights to and from most foreign destinations. However, these agreements
generally restrict the Company to the carriage of passengers and cargo on
flights which either originate in the U.S. and terminate in a single foreign
nation, or which originate in a single foreign nation and terminate in the U.S.
The civil aeronautics authorities in the relevant countries must generally
specifically approve proposals for any additional charter service. Approval of
such requests is typically based on considerations of comity and reciprocity and
cannot be guaranteed.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier-operating certificate issued by the FAA. A modification, suspension or
revocation of any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
Environmental Matters
Under the Airport Noise and Capacity Act of 1990 and related FAA regulations,
the Company's aircraft must comply with certain Stage 3 noise restrictions by
certain specified deadlines. In general, the Company is prohibited from
operating any Stage 2 aircraft after December 31, 1999. As of December 31, 2002,
the Company's entire fleet met Stage 3 requirements.
In addition to the aircraft noise regulations administered by the FAA, the
Environmental Protection Agency regulates operations, including air carrier
operations, which affect the quality of air in the United States. The Company
believes it has made all necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke-emissions standards.
At the Company's aircraft maintenance facilities, materials are used that are
regulated as hazardous under federal, state or local laws. The Company is
required to maintain programs to protect the safety of the employees who use
these materials and to manage and dispose of any waste generated by the use of
these materials in compliance with these laws. More generally, the Company is
also subject at these facilities to federal, state and local regulations
relating to protection of the environment and to discharge of material into the
environment. The Company does not expect that the costs associated with ongoing
compliance with any of these regulations will have a material impact on the
Company's capital expenditures, earnings or competitive position.
9
Item 2. Properties
Aircraft Fleet
At December 31, 2002, ATA and Chicago Express were certified to operate a fleet
of 83 aircraft. The following table summarizes the ownership characteristics of
each aircraft type as of the end of 2002.
Owned (Encumbered- Operating-Lease Operating-Lease
Pledged on Debt) (Fixed Buy-out) (No Buy-out) Total
Lockheed L-1011-50 and 100 5 - 1 6
Lockheed L-1011-500 4 - - 4
Boeing 737-800 - 18 12 30
Boeing 757-200 - 14 2 16
Boeing 757-300 - 10 - 10
SAAB 340B 2 15 - 17
--------------------------------------------------------------
TOTAL 11 57 15 83
==============================================================
Lockheed L-1011 Aircraft
The Company's Lockheed L-1011 aircraft are wide-body aircraft, and have a low
ownership cost relative to other wide-body aircraft types. Of the six Lockheed
L-1011-50 and 100 aircraft, three have a range of 2,971 nautical miles and three
have a range of 3,425 nautical miles. The four Lockheed L-1011-500 aircraft have
a range of 5,577 nautical miles. The combined fleet has an average age of
approximately 25 years.
Boeing 737-800 Aircraft
The Company's 30 Boeing 737-800 aircraft are narrow-body aircraft and have a
range of 2,500 nautical miles. These aircraft have higher ownership costs than
the Company's Lockheed L-1011 fleet, but lower operational costs resulting from
reduced fuel consumption, lower maintenance and cockpit crew costs, and improved
operating reliability. The fleet has an average age of approximately 1 year, and
the leases on these aircraft have initial terms that expire between June 2016
and December 2022.
Boeing 757-200 Aircraft
The Company's 16 Boeing 757-200 aircraft are narrow-body aircraft, all of which
have a range of 3,679 nautical miles. These aircraft also have higher ownership
costs than the Company's Lockheed L-1011 aircraft, but lower operational costs.
In addition, the Company's Boeing 757-200s have the capacity to operate on
extended flights over water. The fleet has an average age of approximately 5
years, and the leases on these aircraft have initial terms that expire between
January 2003 and May 2022.
10
Boeing 757-300 Aircraft
The Company's 10 Boeing 757-300 aircraft are narrow-body aircraft and have a
range of 2,700 nautical miles. These aircraft also have higher ownership costs
than the Company's Lockheed L-1011 aircraft, but lower operational costs. The
fleet has an average age of approximately 1 year, and the leases on these
aircraft have initial terms that expire on various dates between August 2021 and
September 2022.
SAAB 340B Aircraft
The Company's 17 SAAB 340B aircraft are commuter aircraft with twin turboprop
engines. These 34-seat aircraft have an average age of approximately 11.5 years
and the leases on 15 of these aircraft have initial lease terms that expire
between September 2009 and March 2012.
Ground Properties
The Company leases three adjacent office buildings in Indianapolis consisting of
approximately 136,000 square feet. These buildings are located approximately one
mile from the Indianapolis International Airport terminal and are used as
principal business offices and for the Indianapolis reservations center.
The Company's Maintenance and Operations Center is also located at Indianapolis
International Airport. This 150,000-square-foot facility was designed to meet
the base maintenance needs of the Company's operations, as well as to provide
support services for other maintenance locations. In addition, the Company
utilizes a 120,000 square-foot office building immediately adjacent to the
Company's Indianapolis Maintenance and Engineering Center which is occupied by
its Maintenance and Engineering office staff along with the Company's flight
operations center.
The Company leases Hangar No. 2 at Chicago's Midway Airport for an initial lease
term of ten years, subject to two five-year renewal options. This property is
used to perform line maintenance on the Company's narrow-body fleets. The
Company also leases an 18,700-square-foot reservation facility located near
Chicago's O'Hare Airport.
The Company routinely leases various properties at airports for use by passenger
service, flight operations and maintenance staffs.
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the Company arise
periodically involving complaints which are routine and incidental to the
Company's business. The majority of these lawsuits are covered by insurance. To
the knowledge of management, none of these claims involve damages in excess of
10 percent of the assets of the Company, nor are any a material proceeding under
federal or state environmental laws, nor are any an environmental proceeding
brought by a governmental authority involving potential monetary sanctions in
excess of $100,000.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the quarter ended
December 31, 2002.
11
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock is quoted on the Nasdaq National Market under the
symbol "ATAH." The Company had 280 and 262 registered shareholders,
respectively, at December 31, 2002 and 2001.
Market Prices of Common Stock
Year Ended December 31, 2002
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High 16.30 14.95 7.49 7.17
Low 11.75 6.01 2.72 3.15
Close 14.00 6.86 3.40 4.57
Market Prices of Common Stock
Year Ended December 31, 2001
(Amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
High 14.75 22.20 22.75 15.20
Low 9.44 9.00 7.60 5.50
Close 9.63 21.89 8.60 14.95
No dividends have been paid on the Company's common stock since becoming
publicly held.
In the last half of 2000, the Company issued and sold 300 shares of Series B
convertible redeemable preferred stock, without par value ("Series B
Preferred"), at a price and liquidation amount of $100,000 per share. The Series
B Preferred is convertible into shares of the Company's common stock at a
conversion rate of 6,381.62 shares of common stock per share of Series B
Preferred at a conversion price of $15.67 per share of common stock, subject to
antidilution adjustments. The Series B Preferred is optionally redeemable by the
Company under certain conditions, but the Company must redeem the Series B
Preferred no later than September 20, 2015. Optional redemption by the Company
may occur at 103.6% of the liquidation amount beginning September 20, 2003,
decreasing 0.3% of the liquidation amount per year to 100.0% of the liquidation
amount at the mandatory redemption date of September 20, 2015.
Also, in the last half of 2000, the Company issued and sold 500 shares of Series
A redeemable preferred stock, without par value ("Series A Preferred"), at a
price and liquidation amount of $100,000 per share. The Series A Preferred is
optionally redeemable by the Company under certain conditions, but the Company
must redeem the Series A Preferred in equal semiannual payments beginning
December 28, 2010, and ending December 28, 2015. Optional redemption by the
Company may occur at a redemption premium of 50.0% of the dividend rate
beginning December 28, 2003, decreasing 10.0% per year to 20.0% of the dividend
rate commencing December 28, 2006, and to 0.0% after the seventh year from
issuance. Prior to the third anniversary of issuance, the Company may redeem the
Series A Preferred with the net proceeds of a public offering of the Company's
common stock.
The issuance and sale of the Series A and Series B Preferred was exempt from
registration requirements under Section 4(2) of the Securities Act of 1933,
which applies to private offerings of securities. The proceeds of the issuances
of the Series A and Series B Preferred were used to finance aircraft
pre-delivery deposits on Boeing 757-300 and Boeing 737-800 aircraft ordered by
the Company and for other corporate purposes. See "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 10 -
Redeemable Preferred Stock."
12
Item 6. Selected Consolidated Financial Data - (Unaudited)
The unaudited selected consolidated financial data in this table have been
derived from the consolidated financial statements of the Company for the
respective periods presented. The data should be read in conjunction with the
consolidated financial statements and related notes appearing elsewhere herein.
ATA HOLDINGS CORP.
Five-Year Summary
Year Ended December 31,
(Dollars in thousands, except per share data and ratios) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $1,277,370 $1,275,484 $1,291,553 $1,122,366 $919,369
Operating expenses 1,437,407 1,367,354 1,288,983 1,032,339 843,996
Operating income (loss) (1) (160,037) (91,870) 2,570 90,027 75,373
Income (loss) before taxes (194,214) (116,067) (19,931) 77,797 67,210
Net income (loss) available to common shareholders (2) (174,984) (81,885) (15,699) 47,342 40,081
Net income (loss) per share - basic (14.94) (7.14) (1.31) 3.86 3.41
Net income (loss) per share - diluted (14.94) (7.14) (1.31) 3.51 3.07
Balance Sheet Data (at end of period):
Property and equipment, net $ 265,627 $ 314,943 $ 522,119 $ 511,832 $329,332
Total assets 848,136 1,002,962 1,032,430 815,281 594,549
Total debt 509,428 497,592 457,949 347,871 246,671
Redeemable preferred stock 82,485 80,000 80,000 - -
Shareholders' equity (deficit) (120,009) 44,132 124,654 151,376 102,751
Selected Consolidated Operating Statistics: (3)
Revenue passengers carried (thousands) 10,046.7 8,635.2 8,006.1 7,044.6 6,168.3
Revenue passenger miles (millions) 12,384.2 11,675.7 11,816.8 10,949.0 9,758.1
Available seat miles (millions) 17,600.0 16,187.7 16,390.1 15,082.6 13,851.7
Passenger load factor 70.4% 72.1% 72.1% 72.6% 70.5%
(1) Operating results for the years ended December 31, 2002 and 2001 include
several non-recurring or unusual charges. See "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - State
of the Industry and the Company," "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 15 - Fleet Impairment" and
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 16- Goodwill and Other Intangible Assets."
(2) Preferred stock dividends of $5.7 million, $5.6 million, and $0.4 million
were recorded in 2002, 2001 and 2000, respectively. No common stock dividends
were paid in any periods presented.
(3) Operating statistics pertain only to ATA and Chicago Express and do not
include information for other operating subsidiaries of the Company.
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading provider of low-cost scheduled airline services and
charter airline services to value-oriented travelers, and to the U.S. military.
The Company, through its principal subsidiary, ATA, has been operating for 30
years and is the tenth largest U.S. airline in terms of 2002 capacity and
traffic.
The Company recorded an operating loss of $160.0 million, and a loss available
to common shareholders of $175.0 million, for the year ended December 31, 2002.
Results of operations in 2002 were significantly impacted by non-cash aircraft
and goodwill impairment charges, and an adjustment to reduce a receivable for
U.S. Government grant compensation; such charges totaled $89.9 million.
Consolidated revenues were approximately unchanged in 2002 from 2001, although
consolidated available seat miles ("ASMs") increased 8.7% between years,
resulting in a decline in revenue per available seat mile ("RASM".) This
reflects a very weak pricing environment experienced by the Company and the
entire airline industry in 2002. Declining unit revenues are a result of excess
industry capacity in the scheduled service business, which began as a direct
result of the terrorist attacks of September 11, 2001, but has continued with
the weakened economy. The Company also believes that consumer confidence
continues to be affected by both the unsettled economic climate in the United
States, and by conflict in the Middle East and other geopolitical uncertainties.
The Company expects continued weakness in unit revenue throughout 2003.
The Company's unit costs remained among the lowest of the major airlines in
2002. The Company is continuing its efforts to further reduce operating costs,
and expects to continue to realize additional cost savings from the ongoing
deliveries of its new fleet of Boeing 737-800 and Boeing 757-300 aircraft. The
Company also expects, however, that fuel costs will remain very high as compared
to long-term average energy prices, and that these prices will adversely affect
the Company's results of operations in 2003. Due to the lack of available
credit, the Company does not have in place any fuel price hedge contracts for
expected 2003 consumption of jet fuel.
For the 2003 fiscal year, the Company currently expects that it may break even
or earn a small 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, including the uncertain
outcome of the two major airline bankruptcies filed in 2002 and the unknown
impact of the conflict in the Middle East, which are not within the Company's
direct control. Therefore, the Company can provide no assurance that it will
break even or return to profitability in 2003.
Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" discusses the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States ("GAAP"). The preparation of these financial statements
requires management to make judgments and estimates that affect the reported
amounts of assets, liabilities, revenues and expenses, and the disclosures of
contingent assets and liabilities. Certain significant accounting policies
applied in the preparation of the financial statements require management to
make difficult, subjective or complex judgments, and are considered critical
accounting policies by the Company. The Company has identified the following
areas as critical accounting policies.
14
Revenue Recognition. Passenger ticket sales are initially recorded as a
component of air traffic liability. Revenue derived from ticket sales is
recognized at the time service is provided. Tickets that are sold but not flown
on the scheduled travel date can be exchanged and reused for another flight, up
to a year from the date of sale, or can be refunded if the ticket is sold under
a refundable tariff. A small percentage of tickets (or partially-used tickets)
expire unused. The majority of the Company's tickets sold are nonrefundable in
cash, which is the primary source of forfeited tickets. The Company records
estimates of earned revenue in the period tickets are originally sold, for a
percentage of those sales which are expected to expire unused over the period of
ticket validity. These estimates are based upon historical experience over many
years, with particular emphasis given to expiration experience in more recent
years. The Company has consistently applied this accounting method to estimate
revenue from future unused and expired tickets.
Revenue accruals for expired and unused tickets are routinely compared to actual
expired and unused ticket experience to validate the accuracy of the Company's
estimates with respect to forfeited tickets, and accrual adjustments resulting
from these comparisons have not been material to the Company's results of
operations. If, however, customer behavior changes from historical patterns in
the manner in which tickets are purchased and used, it is possible that the
Company's revenue accruals for unused and expired tickets may require material
future adjustments in order to account for those changes in customer behavior.
Impairments of Long-Lived Assets. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 144 ("FAS 144") , Accounting for
the Impairment or Disposal of Long-Lived Assets, which superseded FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of. The Company continues to account for aircraft and related assets
that were impaired prior to January 1, 2002 and classified as held for sale
under the provisions of FAS 121, which is required by FAS 144. Both FAS 144 and
FAS 121 require that whenever events and circumstances indicate that the Company
may not be able to recover the net book value of its productive assets, that the
undiscounted estimated future cash flows must be compared to the net book value
of these productive assets to determine if impairment is indicated. FAS 144 and
FAS 121 require that assets deemed impaired be written down to their estimated
fair value through a charge to earnings. FAS 144 and FAS 121 state that fair
values may be estimated using discounted cash flow analysis or quoted market
prices, together with other available information.
The Company had been performing impairment reviews in accordance with FAS 121 on
the Lockheed L-1011-50 and 100 and the Boeing 727-200 fleets since the end of
2000, and both fleets initially became impaired under FAS 121 subsequent to the
terrorist attacks of September 11, 2001. The Company primarily used discounted
cash flow analysis to estimate the fair value of the Lockheed L-1011-50 and 100
fleet, and used quoted market prices to estimate the fair value of the Boeing
727-200 fleet.
In 2002, the Company decided to retire one of its five Lockheed L-1011-500
aircraft earlier than originally planned. This event caused the Company to
consider whether the remaining four aircraft and related assets in this fleet
were impaired. The Company performed an impairment analysis on the Lockheed
L-1011-500 fleet and related assets in accordance with FAS 144, and determined
that this fleet was not impaired. The Company primarily used discounted cash
flow analysis to estimate the fair value of the Lockheed L-1011-500 fleet.
The application of FAS 144 and FAS 121 required the exercise of significant
judgment and the preparation of numerous significant estimates. Although the
Company believes that its estimates, with regards to future cash flows, were
reasonable and based upon all available information, they required substantial
judgments and were based upon material assumptions about future events. Such
15
estimates were significant in determining the amount of the impairment charge to
be recorded, which could have been materially different under different sets of
assumptions and estimates.
Goodwill Accounting. In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001, under which goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized, but will be subject to annual
impairment reviews. A FAS 142 impairment review involves a two-step process.
Step one compares the fair value of a reporting unit (determined through market
quotes or the present value of estimated future cash flows) with its carrying
amount (assets less liabilities, including goodwill.) If the estimated fair
value exceeds the carrying amount, goodwill of the reporting unit is considered
not impaired, and step two of the impairment test is not necessary. If the
carrying amount of a reporting unit exceeds its estimated fair value, the second
step of the goodwill impairment test is then performed, which compares the
implied fair value of the reporting unit's goodwill (determined in accordance
with purchase accounting), with the carrying amount of the reporting unit's
goodwill. If the carrying amount of the reporting unit's goodwill exceeds the
implied fair value of the goodwill, an impairment loss is recognized in an
amount equal to that excess. If an impairment loss is recognized, the adjusted
carrying amount of the goodwill becomes the new accounting basis for future
impairment tests.
FAS 142 required companies to complete by June 30, 2002, a transitional goodwill
impairment review as of the date of adoption of the statement, which was January
1, 2002. The Company's recorded goodwill as of January 1, 2002 was related to
its ATA Leisure Corp., ("ATALC"), ATA Cargo and Chicago Express subsidiaries
acquired in 1999. During the transitional impairment review, the Company
identified ATALC, ATA Cargo and Chicago Express as the reporting units as
defined by FAS 142. The fair values of all of the Company's reporting units were
estimated using discounted future cash flows, since market quotes were not
readily available. In all transitional reviews, the estimated fair value was
higher than the carrying amount of each reporting unit, and thus no impairment
was indicated.
In addition to the transitional goodwill impairment review, FAS 142 required
companies to perform the first of their annual goodwill impairment reviews
during 2002. The Company performed its first annual impairment test in the
fourth quarter of 2002. By this time, the Company had outsourced the management
of two of its ATALC brands to the Mark Travel Corporation ("MTC"). The Company
continued in 2002 to manage the other ATALC brands, including the Key Tours
Canadian Rail programs, Key Tours Las Vegas ground operations, and the Kodiak
Call Center (collectively "KTI brands"). See further discussion in "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
Note 13 - Segment Disclosures." Based upon guidance provided in FAS 142, the
Company determined that the reporting unit previously identified as ATALC during
the transition test, was more appropriately defined as two reporting units,
after giving effect to the operational changes resulting from the outsourcing
agreement completed in the middle of 2002. In its first annual goodwill
impairment review, the Company determined that the goodwill related to Chicago
Express, ATA Cargo and the MTC brands was unimpaired. However, the estimated
fair value of the KTI brands was determined to be lower than the carrying
amount, and an impairment loss of $6.9 million was therefore recorded in the
fourth quarter of 2002.
All of the Company's fair value estimates involved highly subjective judgments
on the part of management, including the amounts of cash flows to be received,
their estimated duration, and perceived risk as reflected in selected discount
rates. In some cases, cash flows were estimated without the benefit of
historical data, although historical data was used where available. Although the
Company believes its estimates and judgments to be reasonable, different
assumptions and judgments might have resulted in additional impairment charges.
16
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
Year Ended December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
Consolidated operating revenues 7.26 7.88 7.88
Consolidated operating expenses:
Salaries, wages and benefits 2.02 2.01 1.81
Fuel and oil 1.17 1.55 1.68
Aircraft rentals 1.08 0.61 0.44
Handling, landing and navigation fees 0.63 0.55 0.59
Depreciation and amortization 0.44 0.75 0.76
Crew and other employee travel 0.31 0.37 0.40
Aircraft maintenance, materials and repairs 0.30 0.38 0.43
Other selling expenses 0.25 0.26 0.22
Advertising 0.23 0.16 0.13
Passenger service 0.22 0.27 0.28
Insurance 0.19 0.07 0.05
Ground package cost 0.16 0.26 0.31
Commissions 0.13 0.21 0.24
Facilities and other rentals 0.13 0.13 0.10
Special charges 0.00 0.14 0.00
Aircraft impairments and retirements 0.38 0.73 0.00
Goodwill impairment 0.04 0.00 0.00
U.S. Government grant 0.09 (0.41) 0.00
Other 0.40 0.41 0.42
---- ---- ----
Total consolidated operating expenses 8.17 8.45 7.86
---- ---- ----
Consolidated operating income (loss) (0.91) (0.57) 0.02
====== ====== ====
ASMs (in thousands) 17,599,968 16,187,687 16,390,101
17
Year Ended December 31, 2002, Versus Year Ended December 31, 2001
Consolidated Flight Operations and Flight 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 727-200, 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.
Twelve Months Ended December 31,
------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
------------------------------------------------------
Departures Jet 66,903 56,962 9,941 17.45
Departures SAAB 42,105 26,836 15,269 56.90
------------------------------------------------------
Total Departures 109,008 83,798 25,210 30.08
------------------------------------------------------
Block Hours Jet 199,290 172,207 27,083 15.73
Block Hours SAAB 40,008 24,836 15,172 61.09
------------------------------------------------------
Total Block Hours 239,298 197,043 42,255 21.44
------------------------------------------------------
RPMs Jet (000s) 12,231,661 11,581,733 649,928 5.61
RPMs SAAB (000s) 152,576 94,009 58,567 62.30
------------------------------------------------------
Total RPMs (000s) (a) 12,384,237 11,675,742 708,495 6.07
------------------------------------------------------
ASMs Jet (000s) 17,362,835 16,041,928 1,320,907 8.23
ASMs SAAB (000s) 237,133 145,759 91,374 62.69
------------------------------------------------------
Total ASMs (000s) (b) 17,599,968 16,187,687 1,412,281 8.72
------------------------------------------------------
Load Factor Jet 70.45 72.20 (1.75) (2.42)
Load Factor SAAB 64.34 64.50 (0.16) (0.25)
------------------------------------------------------
Total Load Factor (c) 70.37 72.13 (1.76) (2.44)
------------------------------------------------------
Passengers Enplaned Jet 9,139,770 8,058,886 1,080,884 13.41
Passengers Enplaned SAAB 906,909 576,339 330,570 57.36
------------------------------------------------------
Total Passengers Enplaned (d) 10,046,679 8,635,225 1,411,454 16.35
------------------------------------------------------
Revenue $ (000s) 1,277,370 1,275,484 1,886 0.15
RASM in cents (e) 7.26 7.88 (0.62) (7.87)
CASM in cents (f) 8.17 8.45 (0.28) (3.31)
Yield in cents (g) 10.31 10.92 (0.61) (5.59)
See footnotes (c) through (g) on page 19.
(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.
18
(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 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) 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
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.
Operating Revenues
Total operating revenues in 2002 increased 0.2% to $1.277 billion, as compared
to $1.275 billion in 2001. This increase was due to a $65.9 million increase in
scheduled service revenue, a $10.4 million increase in military/government
charter revenues and a $3.0 million increase in other revenues, partially offset
by a $60.9 million decrease in commercial charter revenues and a $16.5 million
decrease in ground package revenues.
19
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.
Twelve Months Ended December 31,
------------------------------------------------------------------------
2002 2001 Inc (Dec) % Inc (Dec)
------------------------------------------------------------------------
Scheduled Service
Departures 98,877 72,787 26,090 35.84
Block Hours 201,077 156,331 44,746 28.62
RPMs (000's) (a) 9,911,884 8,694,323 1,217,561 14.00
ASMs (000's) (b) 13,608,326 11,443,304 2,165,022 18.92
Load Factor (c) 72.84 75.98 (3.14) (4.13)
RASM in cents (e) 6.51 7.17 (0.66) (9.21)
Yield in cents (g) 8.94 9.44 (0.50) (5.30)
Revenue per segment $ (h) 100.08 112.74 (12.66) (11.23)
Commercial Charter
Departures 6,459 7,293 (834) (11.44)
Block Hours 22,159 24,495 (2,336) (9.54)
ASMs (000's) (b) 1,875,885 2,588,780 (712,895) (27.54)
RASM in cents (e) 7.00 7.43 (0.43) (5.79)
RASM excluding fuel escalation (i) 6.89 7.13 (0.24) (3.37)
Military Charter
Departures 3,650 3,702 (52) (1.40)
Block Hours 15,975 16,159 (184) (1.14)
ASMs (000's) (b) 2,103,874 2,147,248 (43,374) (2.02)
RASM in cents (e) 8.46 7.80 0.66 8.46
RASM excluding fuel escalation (j) 8.48 7.58 0.90 11.87
See footnotes (a) through (g) on pages 18 and 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.
(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 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 to the Company. A separate
RASM calculation is provided, excluding the impact of the fuel price
adjustments.
20
Scheduled Service Revenues. Scheduled service revenues increased 8.0% in 2002 to
$886.6 million from $820.7 million in 2001. Scheduled service revenues comprised
69.4% of consolidated revenues in 2002, as compared to 64.3% in 2001. While
total scheduled service revenues and ASMs increased, scheduled service RASM
declined 9.2% from 7.17 cents in 2001 to 6.51 cents in 2002. The declining unit
revenues experienced by the Company were a result of continuing overcapacity in
the airline industry. Customer demand declined abruptly immediately after the
terrorist attacks of September 11, 2001, and demand has also been lowered by the
slowing pace of economic activity in the United States. The Company does not
expect any significant recovery in demand for its services until after the
uncertainty of the conflict in the Middle East has been resolved, and economic
growth returns.
Scheduled service departures grew 35.8% in 2002, compared to the ASM growth of
18.9%. This reflects the growth of the Chicago Express SAAB 340B fleet from 11
aircraft as of December 31, 2001 to 17 aircraft as of December 31, 2002. The
additional SAAB aircraft generated significantly more departures, but because
the aircraft seats only 34 passengers and operates on short stage length
flights, the increase in ASMs was not as great as departures.
Approximately 71.2% of the Company's scheduled service capacity was generated by
the Chicago-Midway market in 2002, as compared to 66.8% in 2001. The Hawaiian
market generated approximately 13.7% of total scheduled service capacity in
2002, as compared to 18.6% in 2001. Another 10.5% of total scheduled service
capacity was generated in the Indianapolis market in 2002, as compared to 9.2%
in 2001.
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
2004, the Company expects to occupy at least 14 jet gates and one commuter
aircraft gate at the new airport concourses. A Federal Inspection Service
("FIS") facility was completed at Chicago-Midway in the first quarter of 2002,
which allowed the Company to begin nonstop international services from
Chicago-Midway. Also contributing to the growth at Chicago-Midway is Chicago
Express, which has been performing well as a feeder of passengers to ATA's jet
system. The Company operated 152 peak daily jet and commuter departures from
Chicago-Midway and served 41 destinations on a nonstop basis in 2002, as
compared to 109 peak daily jet and commuter departures and 28 nonstop
destinations in 2001.
The Company's declining capacity in the Hawaiian market was primarily
attributable to the transition to the smaller 247-seat Boeing 757-300 aircraft
from the wide-body Lockheed L-1011 aircraft for certain West Coast-Hawaii routes
beginning in mid-2002. The Company provided nonstop services in both years from
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui. From June to September 2002, the
Company operated seasonal service to Lihue from Los Angeles and San Francisco.
The Company's growth in the Indianapolis market is primarily attributable to the
addition of limited jet service between Indianapolis and Chicago-Midway in the
second quarter of 2002, and the addition of nonstop service to New York
LaGuardia and Phoenix beginning in the third quarter of 2002.
Commercial Charter Revenues. Commercial charter revenues decreased 31.7% to
$131.3 million in 2002 from $192.2 million in 2001. Commercial charter revenues
accounted for 10.3% of consolidated revenues in 2002, as compared to 15.1% in
2001.
21
The majority of the decline in commercial charter revenues was due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the
Company has traditionally used in commercial charter flying. Since aircraft
utilization (number of productive hours of flying per aircraft each month) 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 through aircraft retirements.
The decrease in commercial charter RASM in 2002, as compared to 2001, was due to
the same economic and geopolitical factors which have reduced scheduled service
unit revenues between years. The Company currently expects that commercial
charter will represent a less significant source of future revenues, especially
after the end of 2003 when a contract with a major customer expires.
Military/Government Charter Revenues. Military/government charter revenue
increased 6.2% to $177.9 million in 2002 from $167.5 million in 2001.
Military/government charter revenue accounted for 13.9% of consolidated revenues
in 2002, as compared to 13.1% in 2001.
The increase in revenue and RASM for military/government charter revenues in
2002 was due primarily to rate increases awarded for the contract year ended
September 30, 2002, based upon cost data submitted to the U.S. military by the
Company and other air carriers providing these services. The Company earned
$175.6 million in the contract year ended September 30, 2002, a 10.2% increase
as compared to $159.3 million earned in the preceding contract year ended
September 30, 2001. The Company renewed its U.S. military contract for the
fiscal year beginning October 1, 2002, although the reimbursement rate was
nearly unchanged as compared to the prior contract year.
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 and ATALC subsidiaries. Ambassadair Travel Club offers
tour-guide-accompanied vacation packages to its approximately 32,000 individual
and family members. ATALC offers numerous ground accommodations to the general
public, which are marketed through travel agents, as well as directly by the
Company.
In 2002, ground package revenues decreased 31.6% to $35.7 million, as compared
to $52.2 million in 2001. This decline in ground package sales (and related
ground package costs) is primarily due to the Company's July 1, 2002 outsourcing
of the management and marketing of its ATA Vacations and Travel Charter
International brands to MTC. Under that outsourcing agreement, MTC directly
sells ground arrangements to customers who also purchase charter or scheduled
service air transportation from the Company. Therefore, ground package sales
(and related ground package costs) are no longer recorded by the Company for ATA
Vacations and Travel Charter International.
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
miscellaneous service fees, Ambassadair Travel Club membership dues and cargo
revenue. Other revenues increased 7.0% to $45.9 million in 2002, as compared to
$42.9 million in 2001, primarily due to an increase in cancellation and
administrative fee revenues.
22
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 2002 increased 9.2% to $355.2 million,
as compared to $325.2 million in 2001.
The increase in salaries, wages and benefits primarily reflects the impact of
the Company's amended collective bargaining agreement with the Company's cockpit
crewmembers, who are represented by ALPA. The Company recorded $9.9 million in
2002 for a signing bonus as provided by the amended contract. Cockpit crewmember
contract rate increases became effective July 1, 2002. The Company also incurred
increasing costs in 2002 for employee medical and workers' compensation
benefits. The Company expects future salaries, wages and benefits costs to be
significantly increased by the amended cockpit crewmember contract. The amended
contract is expected to increase cockpit crewmembers' average salaries by
approximately 80% over the four-year contract period. Additionally, the amended
contract provides for expanded retirement benefits for cockpit crewmembers.
Fuel and Oil. Fuel and oil expense decreased 17.8% to $206.6 million in 2002, as
compared to $251.3 million in 2001. Although total jet block hours increased
15.7% in 2002, as compared to 2001, the Company consumed 8.9% fewer gallons of
jet fuel for flying operations. This decrease was primarily due to the addition
of Boeing 737-800 and Boeing 757-300 aircraft to the Company's fleet beginning
in May 2001. These aircraft replaced certain less-fuel-efficient Boeing 727-200
and Lockheed L-1011 aircraft, which were retired from revenue service. The
decrease in fuel burn, due to the new aircraft, resulted in a decrease in fuel
and oil expense of approximately $25.0 million. Also contributing to the decline
in fuel expense was the decrease in the Company's average cost per gallon of jet
fuel consumed of 7.9%, resulting in an additional savings in fuel and oil
expense of approximately $18.1 million.
Periodically, the Company has entered into fuel price hedge contracts to reduce
the risk of fuel price fluctuations. During 2002, the Company recorded gains of
$0.5 million on these hedge contacts, as compared to losses of $2.6 million in
2001. As of December 31, 2002, the Company had no outstanding fuel hedge
agreements.
Since December 31, 2002, the cost per gallon of jet fuel has increased
approximately 21% based on March 20, 2003 market prices. Continued increases in
the cost of fuel will adversely affect the Company in 2003.
Aircraft Rentals. 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. As of
December 31, 2002 and December 31, 2001, the Company had recorded $68.8 million
and $49.2 million, respectively, of prepaid aircraft rent under its operating
leases. Aircraft rentals expense in 2002 increased 92.0% to $190.1 million from
$99.0 million in 2001. The increase was mainly attributable to the delivery of
30 leased Boeing 737-800 and 10 leased Boeing 757-300 aircraft between May 2001
and December 2002.
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.
23
Handling, landing and navigation fees increased by 24.6% to $110.5 million in
2002, as compared to $88.7 million in 2001. The increase in handling, landing
and navigation fees between years was primarily due to a 17.5% increase in
system-wide jet departures. The Company also incurred approximately $5.7 million
in additional airport security costs associated with increased security
requirements implemented after the terrorist attacks on September 11, 2001.
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 36.8% to
$76.7 million in 2002, as compared to $121.3 million in the 2001.
In 2001 and 2002, the Company retired eight Lockheed L-1011-50 aircraft from
revenue service. During the fourth quarter of 2001, the Company also determined
that the remaining fleet of Lockheed L-1011-50 and 100 aircraft, rotable parts
and inventory was impaired. These assets were classified as held for use in
accordance with FAS 121, requiring them to be recorded on the balance sheet at
their estimated fair value at the time of impairment, which is the new asset
basis to be depreciated over their estimated remaining useful lives. The Company
recorded a further reduction in the carrying value of these assets in 2002. Due
to the reduced cost basis of these assets, the Company recorded $17.6 million
less depreciation and amortization expense for this fleet in 2002, as compared
to 2001.
In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned, and these aircraft were determined to be impaired under FAS
121. Boeing 727-200 aircraft not already transferred to BATA Leasing LLC
("BATA"), a 50/50 joint venture with Boeing Capital Corporation ("BCC"), have
been classified in the accompanying balance sheets as assets held for sale. In
accordance with FAS 121, depreciation expense was not recorded after the fleet
was deemed impaired and held for sale. As a result, depreciation expense on the
Boeing 727-200 fleet decreased by $28.9 million in 2002, as compared to 2001.
Partially offsetting these decreases were increased amortization of capitalized
engine and airframe overhauls on the Lockheed L-1011-500 fleet and increases in
depreciation and amortization expense associated with other fleet rotable parts,
owned engines and the provision for inventory obsolescence, along with
fluctuations in expenses related to furniture and fixtures, computer hardware
and software, and debt issue costs between periods, none of which was
individually significant.
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
decreased 7.6% to $54.8 million in 2002, as compared to $59.3 million in 2001.
This decrease was mainly due to the decrease in military and charter flights
between years, which often operate to and from points remote from the Company's
crew bases including international destinations, thus requiring significant
positioning expenditures for crewmembers on other airlines and higher hotel
costs. The decrease also reflects a decline in non-crew employee travel in 2002,
as compared to 2001, due to the Company's cost-cutting initiatives.
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
24
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 decreased 14.8% to $52.3
million in 2002, as compared to $61.4 million in 2001.
The decline in maintenance, materials and repairs expense in 2002, as compared
to 2001, was primarily attributable to a decrease in materials consumed and
components repaired related to maintenance on the Company's aging fleets of
Lockheed L-1011-50 and 100 and Boeing 727-200 aircraft. During 2001 and 2002,
the Company placed 23 Boeing 727-200 aircraft into BATA, and retired eight
Lockheed L-1011-50 aircraft prior to the due dates of heavy maintenance visits.
Maintenance, materials and repairs expense associated with these two fleets
decreased $20.1 million in 2002, as compared to 2001.
This decline in maintenance, materials and repairs was partially offset by an
increase in the cost of the hourly engine maintenance agreement for the
Company's growing fleet of Saab 340B propeller aircraft operated by Chicago
Express. In addition, the Company entered into an hourly engine maintenance
agreement for the Boeing 757-200 fleet in 2002, which resulted in an increase in
maintenance, materials and repair expense between years.
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 single-seat and vacation package
customers who contact the Company directly to book reservations. Other selling
expenses increased 5.5% to $43.9 million in 2002, as compared to $41.6 million
in 2001. This increase is primarily the result of a greater portion of the
Company's sales being made on credit cards, and higher CRS fees.
Advertising. Advertising expense increased 51.5% to $40.0 million in 2002, as
compared to $26.4 million in 2001. The Company incurs advertising costs
primarily to support single-seat scheduled service sales. The increase in
advertising was primarily attributable to the promotion of the new scheduled
service destinations added in 2002 and the promotion of low fares in a market
that had less demand for air service. The Company also increased advertising in
an effort to increase consumer preference for the Company's enhanced product,
especially in its important Chicago-Midway hub, which included a new advertising
campaign identifying the Company as "An Honestly Different Airline."
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 2002 and 2001, catering represented 82.1% and 74.4%,
respectively, of total passenger service expense.
The total cost of passenger service decreased 12.8% to $38.3 million in 2002, as
compared to $43.9 million in 2001. Approximately $7.4 million of the decrease is
attributable to catering expense, primarily because in 2002 the Company boarded
a higher ratio of scheduled service passengers to charter passengers than in
2001. Scheduled service passengers are provided a significantly less expensive
catering service than is provided to commercial charter and military passengers.
In addition, in 2002 the
Company introduced round-trip catering for flights originating in Chicago-Midway
to reduce catering service charges. In 2002, as compared to 2001, the Company
also incurred approximately $4.8 million less expense for mishandled baggage and
passenger inconvenience, due to significantly fewer flight delays and
cancellations in 2002.
25
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. The total cost of insurance
increased 217.8% to $34.0 million in 2002, as compared to $10.7 million in 2001.
Liability insurance increased $14.8 million in 2002, as compared to 2001.
Immediately following the September 11, 2001 terrorist attacks, the Company's
insurer reduced the maximum amount of insurance coverage they would underwrite
for liability to persons other than employees or passengers resulting from acts
of terrorism, war, hijacking, or other similar perils (war-risk coverage) and
significantly increased their premiums for this reduced coverage. Pursuant to
the Air Transportation Safety and System Stabilization Act and other enabling
legislation, the U.S. Government has issued supplemental war-risk coverage to
U.S. air carriers, including the Company, which is expected to continue through
2003. It is anticipated that after this date a commercial product for war-risk
coverage will become available, but the Company may continue to incur
significant additional costs for this coverage.
Hull insurance increased $5.1 million in 2002, as compared to 2001. The increase
is mainly attributable to the increase in the Company's hull value between
periods due to the addition of the new Boeing 737-800 and Boeing 757-300
aircraft. The increase is also attributable to an increase in premium rates
following the September 11, 2001 terrorist attacks. Expenses related to the
Company's general insurance policies increased $3.4 million in 2002, as compared
to 2001, due primarily to an increase in workers' compensation premiums and
claims handling fees between periods, and general increases in other
miscellaneous policies between years.
Ground Package Cost. Ground package cost is incurred by the Company with hotels,
car rental companies, cruise lines and similar vendors who provide ground and
cruise accommodations to Ambassadair and ATALC customers. Ground package cost
decreased 33.9% to $27.9 million in 2002, as compared to $42.2 million in 2001,
approximately proportional to the decrease in ground package revenues. See the
"Ground Package Revenues" section above for an explanation of the decline in
both ground package sales and related costs.
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 decreased 33.0% to $23.3 million in 2002, as
compared to $34.8 million in 2001.
The Company experienced a decrease in commissions of $3.8 million in 2002, as
compared to 2001, attributable to commissions paid to travel agents by ATALC,
which is consistent with the decrease in related revenue. In addition, scheduled
service commissions decreased $9.0 million in 2002 due to the elimination of
standard travel agency commissions for sales made after March 21, 2002. The
Company continues to pay special travel agency commissions targeted to specific
markets and periods of the year.
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 11.9% to $22.6 million in 2002, as compared to $20.2 million
in 2001. Growth in facilities costs between periods was primarily attributable
to facilities at airport locations required to support new scheduled service
destinations added in late 2001 and 2002, and expanded services at existing
destinations.
26
Special Charges. Special charges represent direct expenses which, due to the
events of September 11, 2001, were considered unusual in nature under the
provisions of APB Opinion 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and the Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). Special
charges in 2001 were $21.5 million, while no expenses were classified as special
charges in 2002. The 2001 special charges were comprised primarily of costs
associated with the early removal from service of the Company's Boeing 727-200
fleet, some of which were leased, a decision made immediately after September
11, 2001; costs associated with the Company's proposed transaction in which ATA
Holdings Corp. would have been taken private, which was substantially complete
by September 11, 2001, when the Company lost financing as a result of the
September 11, 2001 attacks; and expenses directly associated with the FAA's
temporarily-mandated suspension of commercial flights on September 11, 2001 and
for several days thereafter. Also classified as special charges were increased
hull and liability insurance costs; additional advertising expense incurred as a
direct result of September 11, 2001; interest expense related to debt incurred
under the Company's credit facility to provide operating cash after September
11, 2001; and other expenses not individually significant.
Aircraft Impairments and Retirements. Aircraft impairment and retirement costs
decreased 43.8% to $66.8 million in 2002, as compared to $118.9 million in 2001.
In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned, determined the aircraft and related rotable parts and
inventory were impaired under FAS 121 and recorded an impairment charge. In
accordance with FAS 121, the Company continues to re-evaluate current fair
values of previously impaired assets, making further adjustments as deemed
appropriate. In 2002, the Company recorded asset impairment charges of $35.9
million, as compared to $44.5 million in 2001, related to its remaining net book
value of Boeing 727-200 aircraft, including those recorded as an investment in
BATA.
In 2001, the Company also determined that the Lockheed L-1011-50 and 100 fleet
and related rotable parts and inventory were impaired under FAS 121 and recorded
an impairment charge. In accordance with FAS 144, the Company continues to
re-evaluate the current fair values of these impaired assets, making further
adjustments as deemed appropriate. In 2002, the Company recorded asset
impairment charges of $7.6 million, as compared to $67.8 million in 2001,
related to its remaining net book value of Lockheed L-1011-50 and 100 aircraft
and related parts.
In 2002, the Company retired three Lockheed L-1011-50 aircraft, resulting in a
charge of $9.0 million, and retired one Lockheed L-1011-500 aircraft, resulting
in a charge of $14.2 million. In 2001, the Company retired three Lockheed
L-1011-50 aircraft resulting in a charge of $6.6 million. These charges were
included as part of aircraft impairments and retirements.
Goodwill Impairment. The Company began annual goodwill impairment reviews under
FAS 142 in 2002. In accordance with FAS 142, the Company determined that the
fair value of the KTI brands was lower than the carrying amount and a goodwill
impairment loss of $6.9 million was recorded in the fourth quarter of 2002.
U.S Government Grant. After the terrorist attacks of September 11, 2001, the Air
Transportation Safety and System Stabilization Act ("Act") was passed, which
provided for, among other things, up to $5.0 billion in compensation to U.S. air
carriers for direct and incremental losses resulting from the September 11, 2001
terrorist attacks, and the availability of up to $10.0 billion in U.S.
Government guarantees of certain loans made to air carriers, which are
administered by the newly established Air Transportation Stabilization Board
("ATSB").
27
The Company had recorded $66.3 million in U. S. Government grant compensation as
of December 31, 2001. This estimate was based on guidance available from the DOT
at the time for identifying those expenses it deemed reimbursable. Throughout
2002, the Company discussed the calculation with the DOT, and as of December 31,
2002 had reversed approximately $16.2 million of the accrued government
reimbursement and revised its estimate of total U.S. Government grant
compensation to $50.1 million. In early 2003, the Company received the last cash
installment of grant reimbursement from the U.S. Government, consistent with
that estimate.
Other Operating Expenses. Other operating expenses decreased 5.6% to $71.2
million in 2002, as compared to $67.4 million in 2001. No expenses comprising
this line item changed significantly between these periods.
Interest Income and Expense. Interest expense in 2002 increased to $35.7
million, as compared to $30.1 million in 2001. The Company incurred $1.7 million
in 2002 in interest expense relating to the $168.0 million guaranteed loan
funded in November 2002. No such financing was in place in 2001. The Company
also capitalized $3.4 million less interest in 2002, as compared to 2001,
associated with new aircraft pre-delivery deposit requirements.
The Company invested excess cash balances in short-term government securities
and commercial paper and thereby earned $2.8 million in 2002, as compared to
$5.3 million in 2001. The decrease in interest income between years is primarily
due to a decline in the average interest rate earned.
Income Tax Expense. In 2002, the Company recorded an income tax credit of $25.0
million applicable to $194.2 million in pre-tax loss, while in 2001 the Company
recorded an income tax credit of $39.8 million applicable to $116.1 million in
pre-tax loss. The effective tax rate applicable to 2002 was 12.8%, as compared
to 34.2% in 2001.
As of December 31, 2002, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under accounting principles
generally accepted in the United States 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 tax strategies, the Company has recorded a full
valuation allowance against its net deferred asset of $43.3 million. This
allowance adjustment, included in income tax expense, resulted in an effective
tax rate of 12.8% for a tax credit applicable to the loss incurred in 2002. As
of December 31, 2002, the Company had recorded an income tax refund receivable
of $15.8 million using a five-year carryback of alternative minimum tax
operating losses from 1997 to 2001. Payment for this refund was received in
March 2003.
28
Year Ended December 31, 2001, Versus Year Ended December 31, 2000
Consolidated Flight Operations 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 727-200, Boeing 737-800, Boeing 757-200 and Boeing 757-300
aircraft in all of the Company's business units. Data shown for "J31/SAAB"
operations include the operations of Jetstream 31 and SAAB 340B propeller
aircraft by Chicago Express as the ATA Connection.
Twelve Months Ended December 31,
-------------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
-------------------------------------------------------------
Departures Jet 56,962 55,714 1,248 2.24
Departures J31/SAAB (k) 26,836 18,985 7,851 41.35
-------------------------------------------------------------
Total Departures 83,798 74,699 9,099 12.18
-------------------------------------------------------------
Block Hours Jet 172,207 172,824 (617) (0.36)
Block Hours J31/SAAB 24,836 18,708 6,128 32.76
-------------------------------------------------------------
Total Block Hours 197,043 191,532 5,511 2.88
--------------------------------------------------------------
RPMs Jet (000s) 11,581,733 11,760,135 (178,402) (1.52)
RPMs J31/SAAB (000s) 94,009 56,669 37,340 65.89
-------------------------------------------------------------
Total RPMs (000s) (a) 11,675,742 11,816,804 (141,062) (1.19)
--------------------------------------------------------------
ASMs Jet (000s) 16,041,928 16,295,730 (253,802) (1.56)
ASMs J31/SAAB (000s) 145,759 94,371 51,388 54.45
-------------------------------------------------------------
Total ASMs (000s) (b) 16,187,687 16,390,101 (202,414) (1.23)
--------------------------------------------------------------
Load Factor Jet 72.20 72.17 0.03 0.04
Load Factor J31/SAAB 64.50 60.05 4.45 7.41
-------------------------------------------------------------
Total Load Factor (c) 72.13 72.10 0.03 0.04
--------------------------------------------------------------
Passengers Enplaned Jet 8,058,886 7,686,077 372,809 4.85
Passengers Enplaned J31/SAAB 576,339 320,062 256,277 80.07
-------------------------------------------------------------
Total Passengers Enplaned (d) 8,635,225 8,006,139 629,086 7.86
--------------------------------------------------------------
Revenue $ (000s) 1,275,484 1,291,553 (16,069) ( 1.24)
RASM in cents (e) 7.88 7.88 - -
CASM in cents (f) 8.45 7.86 0.59 7.51
Yield in cents (g) 10.92 10.93 (0.01) (0.09)
See footnotes (a) through (g) on pages 18 and 19.
(k) During the first three quarters of 2000, Chicago Express operated certain
19-seat Jetstream ("J31") aircraft as it phased in the SAAB fleet.
29
Operating Revenues
Total operating revenues in 2001 decreased 1.3% to $1.275 billion, as compared
to $1.292 billion in 2000. This decrease was due to a $54.5 million decrease in
commercial charter revenues, a $21.1 million decrease in military/government
charter revenues, a $7.6 million decrease in ground package revenues, and a $0.3
million decrease in other revenues, partially offset by a $67.4 million increase
in scheduled service revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "Jet" operations include the combined
operations of Lockheed L-1011, Boeing 727-200, Boeing 757-200, Boeing 757-300
and Boeing 737-800 aircraft in scheduled service. Data shown for "J31/SAAB"
operations include the operations of Jetstream 31 and SAAB 340B propeller
aircraft by Chicago Express as the ATA Connection.
Twelve Months Ended December 31,
-------------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
-------------------------------------------------------------
Departures Jet 45,951 40,892 5,059 12.37
Departures J31/SAAB (k) 26,836 18,985 7,851 41.35
-------------------------------------------------------------
Total Departures 72,787 59,877 12,910 21.56
-------------------------------------------------------------
Block Hours Jet 131,495 118,473 13,022 10.99
Block Hours J31/SAAB 24,836 18,708 6,128 32.76
-------------------------------------------------------------
Total Block Hours 156,331 137,181 19,150 13.96
-------------------------------------------------------------
RPMs Jet (000s) 8,600,314 7,700,639 899,675 11.68
RPMs J31/SAAB (000s) 94,009 56,669 37,340 65.89
-------------------------------------------------------------
Total RPMs (000s) (a) 8,694,323 7,757,308 937,015 12.08
-------------------------------------------------------------
ASMs Jet (000s) 11,297,545 10,025,603 1,271,942 12.69
ASMs J31/SAAB (000s) 145,759 94,371 51,388 54.45
-------------------------------------------------------------
Total ASMs (000s) (b) 11,443,304 10,119,974 1,323,330 13.08
-------------------------------------------------------------
Load Factor Jet 76.13 76.81 (0.68) (0.89)
Load Factor J31/SAAB 64.50 60.05 4.45 7.41
-------------------------------------------------------------
Total Load Factor (c) 75.98 76.65 (0.67) (0.87)
-------------------------------------------------------------
Passengers Enplaned Jet 6,703,150 5,873,598 829,552 14.12
Passengers Enplaned J31/SAAB 576,339 320,062 256,277 80.07
-------------------------------------------------------------
Total Passengers Enplaned (d) 7,279,489 6,193,660 1,085,829 17.53
-------------------------------------------------------------
Revenue $ (000s) 820,666 753,301 67,365 8.94
RASM in cents (e) 7.17 7.44 (0.27) (3.63)
Yield in cents (g) 9.44 9.71 (0.27) (2.78)
Revenue per segment $ (h) 112.74 121.62 (8.88) (7.30)
See footnotes (a) through (k) on pages 18 - 20 and 29.
30
Scheduled service revenues in 2001 increased 8.9% to $820.7 million from $753.3
million in 2000. Scheduled service revenues were 64.3% of consolidated revenues
in 2001, as compared to 58.3% of consolidated revenues in 2000.
The Company's scheduled service operations in 2001 were adversely affected by
the terrorist attacks of September 11. The Company estimates that it lost
approximately $80.0 million in scheduled service revenues between September 11
and December 31, 2001, as a result of flights which were canceled, and as a
result of flights operated with lower load factors and yields. In the eight
months ended August 31, 2001, the Company's scheduled service RASM was virtually
unchanged at 7.72 cents, as compared to 7.71 cents in the comparable period of
2000. However, due to the decrease in scheduled service demand after the
terrorist attacks, resulting in lower load factors and yields, the Company's
scheduled service RASM in the last four months of 2001 was 5.92 cents, a
decrease of 14.3%, as compared to 6.91 cents in the last four months of 2000.
The Company's scheduled service at Chicago-Midway accounted for approximately
66.8% of scheduled service ASMs and 86.6% of scheduled service departures in
2001, as compared to 63.5% and 83.5%, respectively, during 2000. During the
third and fourth quarters of 2001, the Company began operating nonstop flights
to Newark and Miami. During the second and third quarters of 2000, the Company
beganoperating nonstop flights to Ronald Reagan Washington National Airport,
Boston, Seattle and Minneapolis-St. Paul. In addition to this new service, the
Company served the following existing jet markets in both years: Dallas-Ft.
Worth, Denver, Ft. Lauderdale, Ft. Myers, Las Vegas, Los Angeles, New York's
LaGuardia Airport, Orlando, Philadelphia, Phoenix, St. Petersburg, San
Francisco, San Juan and Sarasota. The Company operated 109 peak daily jet and
commuter departures from Chicago-Midway in 2001, as compared to 94 in 2000, and
served 28 destinations on a nonstop basis in 2001, as compared to 25 nonstop
destinations served in 2000.
The Company's Hawaii service accounted for 18.6% of scheduled service ASMs and
3.9% of scheduled service departures in 2001, as compared to 17.0% and 4.3%,
respectively, in 2000. The Company provided nonstop service in both years from
Los Angeles, Phoenix and San Francisco to both Honolulu and Maui, with
connecting service between Honolulu and Maui.
The Company's Indianapolis service accounted for 9.2% of scheduled service ASMs
and 6.5% of scheduled service departures in 2001, as compared to 12.2% and 8.8%,
respectively, in 2000. In both years, the Company operated nonstop to Cancun,
Ft. Lauderdale, Ft. Myers, Las Vegas, Orlando, St. Petersburg and Sarasota. The
Company has served Indianapolis for 29 years through the Ambassadair Travel Club
and through scheduled service since 1986.
Commercial Charter Revenues. Commercial charter revenues accounted for 15.1% of
consolidated revenues in 2001 as compared to 19.1% in 2000.
The impact of the September 11, 2001 terrorist attacks was less significant on
the commercial charter business than on scheduled service. The Company estimates
that it lost approximately $1.4 million in commercial charter revenues as a
result of flight cancellations during the FAA-mandated air system shutdown from
September 11 until September 13, and decreased demand for commercial charter
flights following September 11. The majority of the decline in commercial
charter revenues in 2001, as compared to 2000, was principally due to the
retirement of certain Lockheed L-1011 and Boeing 727-200 aircraft that the
Company has traditionally used in commercial charter flying.
31
The following table sets forth, for the periods indicated, certain key operating
and financial data for the commercial charter operations of the Company.
Twelve Months Ended December 31,
---------------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------
Departures 7,293 9,722 (2,429) (24.98)
Block Hours 24,495 34,356 (9,861) (28.70)
RPMs (000s) (a) 2,010,477 2,687,051 (676,574) (25.18)
ASMs (000s) (b) 2,588,780 3,610,413 (1,021,633) (28.30)
Passengers Enplaned (d) 1,128,660 1,472,340 (343,680) (23.34)
Revenue $ (000s) 192,246 246,705 (54,459) (22.07)
RASM in cents (e) 7.43 6.83 0.60 8.78
RASM excluding fuel escalation (i) 7.13 6.47 0.66 10.20
See footnotes (a) through (i) on pages 18-20.
Military/Government Charter Revenues. The following table sets forth, for the
periods indicated, certain key operating and financial data for the
military/government charter operations of the Company.
Twelve Months Ended December 31,
---------------------------------------------------------------
2001 2000 Inc (Dec) % Inc (Dec)
---------------------------------------------------------------
Departures 3,702 4,961 (1,259) (25.38)
Block Hours 16,159 19,443 (3,284) (16.89)
RPMs (000s) (a) 965,740 1,339,545 (373,805) (27.91)
ASMs (000s) (b) 2,147,248 2,605,791 (458,543) (17.60)
Passengers Enplaned (d) 225,641 329,200 (103,559) (31.46)
Revenue $ (000s) 167,524 188,557 (21,033) (11.15)
RASM in cents (e) 7.80 7.24 0.56 7.73
RASM excluding fuel escalation (j) 7.58 6.88 0.70 10.17
See footnotes (a) through (j) on pages 18-20.
The Company estimates that it lost approximately $1.0 million in military
revenues, net of cancellation fees, due to the FAA-mandated shut down of the air
traffic system from September 11 until September 13. After having resumed flight
operations late in the day on September 13, 2001, the Company's military flight
schedule quickly returned to normal. Although current military flight operations
of the Company have not been significantly affected by the terrorist attacks of
September 11, future operations may be significantly affected by changes in the
transportation needs of the U.S. military, possibly in association with military
operations in the United States and abroad.
The decline in military revenues in 2001, as compared to 2000, was primarily due
to changes in teaming arrangements used both by the Company and some of the
Company's competitors in the military/government charter business. Such changes
reduced the fixed-award flying allocated to the Company for the contract year
ending September 30, 2001. The Company earned $159.3 million in
military/government charter revenues in the contract year ended September 30,
2001, a 6.0% reduction as compared to $169.5 million earned in the preceding
contract year ended September 30, 2000.
32
The increase in RASM for military/charter revenues in 2001, as compared to 2000,
was due to rate increases awarded for the current contract year, based upon cost
data submitted to the U.S. military by the Company and other air carriers
providing these services.
Operating Expenses
Salaries, Wages and Benefits. Salaries, wages and benefits expense in 2001
increased 9.5% to $325.2 million from $297.0 million in 2000.
The Company increased its average equivalent employees by approximately 4.7%
between 2001 and 2000. This annual growth rate combines employment growth in
conjunction with a growing flight schedule prior to the terrorist attacks on
September 11, offset by the employee furloughs under the Company's cost-cutting
initiatives implemented shortly after the attacks. By the middle of October
2001, the Company had furloughed approximately 1,100 employees as a result of a
20% flight capacity reduction implemented after the September 11 attacks. As of
December 31, 2001, the Company had recalled approximately half of those
employees furloughed during the fourth quarter of 2001.
Additionally, in May 2000, the Company replaced its contracted ground handler at
its busiest airport, Chicago-Midway, with its own ramp employees. Although this
contributed to a year-over-year increase in salaries, wages and benefits, the
Company experienced a corresponding reduction in handling, landing and
navigation fees, where third-party handling expenses are classified.
Also contributing to the increase in salaries, wages and benefits, is an
increase of approximately $7.8 million in benefits expenses to $34.3 million in
2001 as compared to $26.5 million in 2000. This increase is primarily due to
increases in medical insurance claims and workers' compensation costs between
years.
Fuel and Oil. Fuel and oil expense decreased 8.6% to $251.3 million in 2001, as
compared to $274.8 million in 2000. The Company consumed 5.8% fewer gallons of
jet fuel for flying operations in 2001, as compared to 2000, which resulted in a
decrease in fuel expense of approximately $13.7 million between periods. Fuel
consumption varies with changes in jet block hours flown, and with changes in
the composition of the aircraft fleet. The Company flew 172,207 jet block hours
in 2001, as compared to 172,824 jet block hours in 2000, a decrease of 0.4%
between years. Fuel consumption in 2001 was more significantly affected by the
delivery of 14 Boeing 737-800 aircraft and five Boeing 757-300 aircraft,
replacing certain less fuel-efficient Boeing 727-200 and Lockheed L-1011
aircraft subsequently retired from service. The Company estimates that
approximately $9.4 million of the variance attributable to lower fuel
consumption resulted from flying approximately 18,000 of these block hours using
the 19 new aircraft, as compared to flying those block hours with the
less-fuel-efficient fleets. During 2001, the Company's average cost per gallon
of jet fuel consumed decreased by 6.0% as compared to 2000, resulting in a
decrease in fuel and oil expense of approximately $12.6 million between periods.
During 2001 and 2000, the Company entered into several fuel price hedge
contracts under which the Company sought to reduce the risk of fuel price
fluctuations. The Company recorded losses of $2.6 million on these hedge
contracts in 2001 as compared to gains of $0.1 million in 2000. As of December
31, 2001, the Company had entered into swap agreements for approximately 6.3
million gallons of heating oil for future delivery between January 2002 and June
2002, which represented approximately 2.6% of total expected fuel consumption in
2002.
33
Aircraft Rentals. Aircraft rentals expense for 2001 increased 37.3% to $99.0
million, as compared to $72.1 million in 2000. The Company took delivery of two
Boeing 757-200 aircraft in June 2000 and two Boeing 757-200 aircraft in November
2000, all of which were financed under operating leases. These four aircraft
added $10.3 million to aircraft rentals expense in 2001, as compared to 2000.
Aircraft rent also increased $17.6 million for 2001, as compared to 2000, as a
result of the delivery of 14 leased Boeing 737-800 and five leased Boeing
757-300 aircraft between May and December of 2001.
Also during 2001, the Company terminated leases on five Boeing 727-200s which
were transferred to BATA. The Company also transferred seven owned Boeing
727-200 aircraft to BATA. Subsequently, the Company leased certain of those
aircraft from BATA under short-term operating leases. These transactions
resulted in a net decrease in aircraft rent of approximately $2.9 million in
2001. Additional Chicago Express aircraft and spare engine leases generated an
increase in aircraft rent expense of approximately $1.9 million in 2001, as
compared to 2000.
Handling, Landing and Navigation Fees. Handling, landing and navigation fees
decreased by 8.9% to $88.7 million in 2001 as compared to $97.4 million in 2000,
although the total number of system-wide jet departures between 2001 and 2000
increased by 2.2% to 56,962 from 55,714. The decrease in handling, landing and
navigation fees is primarily due to the reduction in commercial and
military/government charter flying between years (much of which is operated to
and from international airports), since international handling and landing fees
are generally more expensive than at domestic U.S. airports, and air navigation
fees apply only to international flying. In 2001, international departures were
6,469, a reduction of 16.7% as compared to international departures of 7,763 in
2000.
The Company also recorded $2.9 million less in de-icing expense in 2001 due to
relatively milder weather as compared to 2000.
Depreciation and Amortization. Depreciation and amortization expense decreased
3.0% to $121.3 million in 2001, as compared to $125.0 million in 2000.
During the first nine months of 2001, the Company was depreciating the L-1011-50
and 100 fleet assuming a common retirement date of 2004. However, during 2001,
the Company decided to retire several of these aircraft as of their next
scheduled heavy maintenance check. During the first nine months of 2001, the
Company retired three L-1011-50 aircraft from revenue service in this manner,
recording a loss on disposal of $6.6 million for these aircraft in aircraft
impairments and retirements. During the fourth quarter of 2001, the Company
determined that the remaining 10 L-1011-50 and 100 aircraft, together with
related rotable parts and inventory, were impaired in accordance with FAS 121.
Because the Company continues to utilize these assets, they are classified as
held for use under FAS 121, and are recorded on the balance sheet at their
estimated fair value at the time of impairment, which is the new asset basis to
be depreciated over the assets' estimated remaining useful lives. Due primarily
to the reduced cost basis of the remaining 10 aircraft, and the retirement of
three aircraft, the Company recorded $5.0 million less engine and airframe
overhaul amortization expense for the L-1011-50 and 100 fleet in 2001 than in
2000.
In March 2001, the Company entered into an agreement to transfer its entire
fleet of 24 Boeing 727-200 aircraft to BATA by May 2002. As a result, in the
first quarter of 2001, the Company implemented a change in accounting estimate
to adjust the estimated useful lives and salvage value of these aircraft to the
terms of the BATA agreement. This change in accounting estimate resulted in an
increase of depreciation expense of $2.5 million in 2001, as compared to 2000.
34
Immediately following the terrorist attacks of September 11, 2001, the Company
decided to retire its Boeing 727-200 fleet from revenue service, although some
aircraft were used for charter service through the first half of 2002. These
aircraft were determined to be impaired under FAS 121. Boeing 727-200 aircraft
not already transferred to BATA have been classified in the accompanying balance
sheets as assets held for sale. In accordance with FAS 121, depreciation expense
was not recorded after the fleet was deemed impaired and will not be recorded in
future accounting periods. As a result, the Company did not record any
depreciation expense on the Boeing 727-200 fleet in the last four months of
2001, which resulted in a $13.3 million decrease in depreciation expense in
2001, as compared to 2000.
Amortization of capitalized engine and airframe overhauls on the Boeing 757-200
and Lockheed L-1011-500 fleets increased $9.0 million in 2001, as compared to
2000, after including amortization of related manufacturers' credits. This
increase is primarily due to amortization of engine overhauls on the Lockheed
L-1011-500 and Boeing 757-200 aircraft. Both fleets are relatively new to the
Company and neither required overhauls until late 2000.
Crew and Other Employee Travel. The cost of crew and other employee travel
decreased 9.9% to $59.3 million in 2001 as compared to $65.8 million in 2000.
The decrease in crew and employee travel in 2001, as compared in 2000, was
mainly due to a significant decrease in crew positioning expense. The average
cost of crew positioning per full-time-equivalent crew member deceased 20.9% in
2001, as compared to 2000. The decrease was primarily due to the decrease in
military and charter flights. For those positioning events which did occur, the
Company was also able to obtain lower prices from other air carriers through
specifically negotiated agreements, as well as benefiting from lower airfares
which became generally available in the second half of 2001. Crew and other
employee travel also declined due to a decrease in hotel expenses, also
resulting primarily from the decline in international flying.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and
repairs expense decreased 12.8% to $61.4 million in 2001, as compared to $70.4
million in 2000.
The 2001 decline in maintenance, materials and repairs expense was primarily
attributable to a decrease in materials consumed and components repaired related
to maintenance on the Company's aging fleets of Lockheed L-1011 and Boeing
727-200 aircraft. During 2001, the Company placed 12 Boeing 727-200 aircraft
into BATA and retired three Lockheed L-1011 aircraft from service before related
heavy airframe maintenance checks were due to be performed.
The Company also recorded a decrease of $3.0 million in maintenance, materials
and repairs in 2001, as compared to 2000, due to a negotiated elimination of
return condition requirements on one leased Lockheed L-1011 aircraft and the
recognition of a return condition receivable on one leased Boeing 757-200
aircraft. The Company accrues estimated costs and credits associated with
maintenance return conditions for aircraft on leases as a component of
maintenance, materials and repairs expense.
The Company recognized an increase in aircraft maintenance, materials and
repairs of $3.0 million in 2001, as compared to 2000, relating to the 11 SAAB
340B aircraft operated by Chicago Express.
Other Selling Expenses. Other selling expenses increased 13.4% to $41.6 million
in 2001, as compared to $36.7 million in 2000.
Approximately $3.7 million of this increase in 2001 resulted from an increase in
CRS fees. This increase resulted partially from the growth in single-seat sales
volumes between periods and partially because of increases in rates charged by
CRS systems for improved booking functionality. Credit card discount expense
increased $1.5 million as compared to 2000, primarily due to higher volumes of
scheduled service tickets sold using credit cards as form of payment.
35
Advertising. Advertising expense increased 20.0% to $26.4 million in 2001, as
compared to $22.0 million in 2000. In 2001, the Company increased its
advertising (introducing a new marketing campaign) primarily in Chicago in
connection with the arrival of the new Boeing 737-800 and 757-300 aircraft, the
opening of new ticketing and baggage claim facilities at Chicago-Midway Airport,
the announcement of new scheduled service destinations, and the promotion of low
fares as compared to the competition.
The Company also incurred $6.3 million of incremental advertising costs in 2001
associated with rebuilding customer demand after the September 11 terrorist
attacks, but due to their unusual nature, these expenses were included as
special charges on the income statement.
Passenger Service. For 2001 and 2000, catering represented 74.4% and 78.8%,
respectively, of total passenger service expense.
The total cost of passenger service decreased 3.7% to $43.9 million in 2001, as
compared to $45.6 million in 2000. The Company experienced a decrease of
approximately 14.2% in the average unit cost of catering each passenger between
2001 and 2000, primarily because in 2001 there were fewer military and
commercial charter passengers in the Company's business mix, which are provided
a more expensive catering product due to the longer stage length of these
flights. This resulted in a price-and-business-mix decrease of $5.4 million in
catering expense in 2001, as compared to 2000. Total jet passengers boarded
increased 4.9% between years, resulting in approximately $2.1 million in higher
volume-related catering expenses between the same sets of comparative periods.
In 2001, as compared to 2000, the Company incurred approximately $1.8 million in
higher expenses for mishandled baggage and passenger inconvenience due to flight
delays and cancellations.
Insurance Expense. The total cost of insurance increased 39.0% to $10.7 million
in 2001, as compared to $7.7 million in 2000. The Company experienced increases
in liability insurance and hull insurance between years, mainly due to the
increase in scheduled service traffic and the addition of the new Boeing 737-800
and Boeing 757-300 fleets beginning in May 2001. The Company also experienced
increases in miscellanous general insurance policies between years.
Ground Package Cost. Ground package cost decreased 17.1% to $42.2 million in
2001, as compared to $50.9 million in 2000. Ground package costs vary based on
the mix of vacation destinations served, the quality and types of ground
accommodations offered, and general competitive conditions in the Company's
markets, all of which factors can change from period to period. This decline was
more significant than the decline in ground package revenue in 2001 as compared
to 2000, because the Company received discounted hotel pricing in the last half
of the year due to the weakening economy and the reduction in travel demand
after the September 11 attacks.
Commissions. Commissions expense decreased 11.0% to $34.8 million in 2001, as
compared to $39.1 million in 2000.
Approximately $3.8 million of the decrease in commissions in 2001, as compared
to 2000, was attributable to lower military commissions, which is consistent
36
with the decrease in military revenue between the same time periods. The Company
also experienced a decrease of $2.5 million between 2001 and 2000 in commissions
paid to travel agents by ATALC, which is consistent with the decrease in related
revenues for that affiliate. These decreases were partially offset by increases
in scheduled service commissions of $2.2 million between 2001 and 2000 due to an
increase in scheduled service sales made by travel agents.
Facilities and Other Rentals. The cost of facilities and other rentals increased
27.8% to $20.2 million in 2001, as compared to $15.8 million in 2000. Growth in
facilities costs between periods was primarily attributable to the need to
provide maintenance, flight crew and passenger service facilities at airport
locations to support new scheduled service destinations and higher frequencies
to existing destinations. The Company also began occupancy of significantly
expanded and improved passenger check-in and baggage claim facilities at
Chicago-Midway Airport beginning in March 2001.
Aircraft Impairments and Retirements. Following the events of September 11,
2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned. Most of the aircraft were retired from revenue service in
the fourth quarter of 2001, although some continued to be used for charter
service through the first half of 2002. In accordance with FAS 121, the Company
determined that the estimated future undiscounted cash flows expected to be
generated by the Boeing 727-200s was less than the net book value of these
aircraft and the related rotable parts and inventory. Therefore, these assets
were impaired under FAS 121. In 2001, the Company recorded an asset impairment
charge on these assets of $44.5 million.
Also, in the fourth quarter of 2001, the Company determined that, in accordance
with FAS 121, the estimated future undiscounted cash flows expected to be
generated by the Lockheed L-1011-50 and 100 fleet was less than the current net
book value of these aircraft and the related rotable parts and inventory.
Therefore, the assets were impaired under FAS 121. The Company recorded an asset
impairment charge on these assets of $67.8 million in 2001.
U.S. Government Grant. As a result of the approval of its initial applications
by the DOT, the Company received cash payments of $32.6 million in the third
quarter of 2001, and $11.9 million in the fourth quarter of 2001. The Company
recorded total U.S. Government grant revenues of $66.3 million in the second
half of 2001 relating to its estimates of direct and incremental losses it
incurred during that time period, recording a current receivable of $21.8
million for the balance of cash expected to be paid in 2002.
Other Operating Expenses. Other operating expenses increased 10.9% to $84.6
million in 2001, as compared to $76.3 million in 2000. The purchase by ATALC of
charter air services from airlines other than the Company was $4.0 million
higher in 2001 than in 2000. Flight simulator rentals increased $3.3 million
between years due to the crew training required to introduce the new aircraft.
These increases were partially offset by net decreases in other expenses
included in this category, none of which was individually significant.
Interest Income and Expense. Interest expense in 2001 decreased 4.4% to $30.1
million, as compared to $31.5 million in 2000. The Company capitalized
additional interest totaling $10.8 million in 2001, as compared to 2000, on
aircraft pre-delivery deposits. Additional interest expense of $7.4 million, all
of which was capitalized, was incurred in 2001, as compared to 2000, for
incremental borrowings made to fund a portion of aircraft pre-delivery deposits.
The Company also incurred approximately $2.0 million in interest expense in
2001, relating to three Boeing 757-300 aircraft which were temporarily financed
with bridge debt immediately after the September 11, 2001 terrorist attacks.
These aircraft were refinanced with operating leases at the end of 2001.
37
The Company invested excess cash balances primarily in commercial paper and
money market funds and thereby earned $5.3 million in interest income in 2001,
as compared to $8.4 million in 2000. The decrease in interest income between
periods is mainly due to a decline in the average interest rate earned between
periods on these investments.
Income Tax Expense. In 2001, the Company recorded $39.8 million in income tax
credits applicable to $116.1 million of pre-tax loss for that period, while in
2000 the Company recorded $4.6 million in income tax credits applicable to $19.9
million of pre-tax loss. The effective tax rate applicable to credits in 2001
was 34.2%, as compared to an effective tax rate of 23.1% in 2000.
Income tax credits in both periods were affected by the permanent
non-deductibility for federal income tax purposes of 40% of certain amounts paid
for crew per diem. The value of these permanent differences was not
significantly different in 2001 as compared to 2000, so they impacted 2000
taxable loss more significantly.
Liquidity and Capital Resources
Cash Flows. In 2002, net cash used in operating activities was $59.0 million, as
compared to net cash provided by operating activities in 2001 and 2000 of $144.4
million and $111.7 million, respectively. The change in cash provided by or used
in operating activities between 2002 and 2001 primarily resulted from a decrease
in earnings, a decrease in the non-cash impact of impairment losses recognized
on the Boeing 727-200 and Lockheed L-1011-50 and 100 fleets, and lower
depreciation and amortization expense due to those retirements and impairments.
The change was also impacted by changes in operating assets and liabilities,
most significantly an increase in a credit card holdback receivable implemented
in late 2001, and a decrease in accrued expenses resulting primarily from the
decrease in the deferred payment of certain federal and state taxes authorized
in the wake of the 2001 terrorist attacks, and the reduction of deferred
interest payable on pre-delivery deposits in conjunction with the significant
number of aircraft deliveries in 2002. These changes were partially offset by a
decrease in the U.S. Government grant receivable.
Net cash provided by investing activities was $88.9 million in 2002, while net
cash used in investing activities was $129.8 million and $290.8 million,
respectively, in the years ended December 31, 2001 and 2000. In 2002, $149.5
million in aircraft pre-delivery deposits were returned to the Company, net of
additional deposits made, in conjunction with aircraft deliveries, while in 2001
and 2000, $30.8 million and $117.0 million, respectively of expenditures were
made for pre-delivery deposits on future deliveries of new aircraft, net of
returned deposits on delivered aircraft. Changes in cash provided by or used in
investing activities were also impacted by capital expenditures. Capital
expenditures totaling $59.3 million, $119.8 million and $146.5 million,
respectively, were made in 2002, 2001 and 2000 primarily for aircraft purchases,
engine and airframe overhauls, airframe improvements, and the purchase of
rotable parts. The declining trend in capital expenditures is due primarily to
the replacement of older aircraft with newer fleets, in which all the aircraft
are being leased under operating leases. The Company's maintenance cost per hour
agreements, whereby payments are charged to maintenance expense as flight hours
are incurred, have and are expected to continue to reduce capital spending on
related engine overhauls.
38
Net cash used in financing activities was $14.2 million in 2002, while net cash
provided by financing activities was $40.7 million and $188.1 million for the
years ended December 31, 2001 and 2000, respectively. In all years, cash used in
or provided by financing activities relates primarily to proceeds from and
repayments of short-term and long-term debt. In 2002, the Company repaid $109.9
million in pre-delivery deposit financings upon delivery of aircraft, net of new
borrowings used to fund new deposits. Also in 2002, the Company borrowed and
repaid $192.5 million in temporary financing related to the purchase of certain
Boeing 737-800 and Boeing 757-300 aircraft, which were subsequently financed
through operating leases. In addition, in 2002, the Company obtained a federally
guaranteed loan for $168.0 million, of which $10.0 million in proceeds were used
to fully repay remaining borrowings under its revolving credit facility. In
2001, the Company obtained $28.4 million in proceeds related to the financing of
pre-delivery deposits on aircraft, borrowed $35.0 million under the its bank
credit facility, and repaid $17.0 million in special facility revenue bonds.
Also in 2001, the Company borrowed and repaid $153.4 million in temporary debt
related to the purchase of certain Boeing 757-300 aircraft, which were
subsequently financed with operating leases in late 2001. In 2000, net proceeds
from short-term and long-term debt primarily consisted of $89.9 million from the
financing of pre-delivery deposits on aircraft and proceeds of $23.0 million in
notes collateralized by two L-1011-500 aircraft.
The Company presently expects that cash on hand at December 31, 2002, together
with cash generated by future operations and the return of pre-delivery cash
deposits held by the manufacturers on future aircraft and engine deliveries,
will be sufficient to fund the Company's obligations during 2003.
The adverse impact of current airline industry conditions on the Company, and
the ongoing sufficiency of its financial resources to absorb that impact, will
depend upon a number of factors, including but not limited to: (1) the Company's
ability to continue to reduce its operating costs and conserve its financial
resources; (2) the pace and extent of seat capacity reductions in the industry,
if any, as these may affect competitive pricing for the Company's services; (3)
the resolution of the current war in the Middle East; (4) changes in, if any,
the Company's current credit card holdback levels; (5) the number of crew
members who may be called for duty in the United States armed forces, and the
resulting impact on the Company's ability to operate as planned; (6) any further
declines in the values of the aircraft in the Company's fleet, and any aircraft
or other asset impairment charges; (7) the increasing price of jet fuel consumed
by the Company; and (8) the Company's ability to retain its management and other
employees in light of current industry conditions.
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, with the exception of insignificant amounts not
requiring disclosure under GAAP, does not guarantee the debt of any other party.
The following table summarizes the Company's contractual debt and operating
lease obligations at December 31, 2002, and the effect such obligations are
expected to have on its liquidity and cash flows in future periods.
39
Total 2004 2006 After
As of 12/31/02 2003 -2005 -2007 2007
-------------- ---- ----- ----- ----
(in thousands)
Current and long-term debt (1) $ 516,828 $ 22,575 $ 371,219 $ 60,477 $ 62,557
Lease obligations (2) 3,634,623 293,119 548,597 517,890 2,275,017
Expected future lease obligations (3) 816,810 5,155 90,156 116,719 604,780
---------- -------- ---------- -------- ----------
Total contractual cash obligations $4,968,261 $320,849 $1,009,972 $695,086 $2,942,354
========== ======== ========== ======== ==========
(1) See discussion of debt obligations in "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 5 -
Debt."
(2) See discussion of operating leases in "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 6 - Lease
Commitments."
(3) Represents estimated payments on 11 new Boeing 757-300 and Boeing 737-800
aircraft the Company is committed to taking delivery of in 2003 and 2004, as
well as four spare engines the Company is committed to taking delivery of in
2003 through 2006. The Company intends to finance these aircraft and engines
with operating leases. However, no such leases are in place as the Company has
not received the aircraft. Payments for expected future lease obligations were
derived using leases for comparable aircraft currently in place. For further
discussion, see "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 12 - Commitments and Contingencies."
Aircraft and Fleet Transactions. In 2000, the Company entered into a purchase
agreement with the Boeing Company to purchase directly from Boeing 10 new Boeing
757-300s and 20 new Boeing 737-800s. The Boeing 737-800 aircraft are powered by
General Electric CFM56-7B27 engines, and the Boeing 757-300 aircraft are powered
by Rolls-Royce RB211-535 E4C engines. The Company also received purchase rights
for an additional 50 aircraft. The manufacturer's list price is $73.6 million
for each 757-300 and $52.4 million for each 737-800, subject to escalation. The
Company's purchase price for each aircraft is subject to various discounts. To
fulfill its purchase obligations, the Company has arranged for each of these
aircraft, including the engines, to be purchased by third parties that will, in
turn, enter into long-term operating leases with the Company. As of December 31,
2002, the Company had taken delivery of 13 Boeing 737-800s and 10 Boeing
757-300s obtained directly from Boeing. All remaining aircraft to be purchased
directly from Boeing are scheduled for delivery between July 2004 and December
2004. Aircraft pre-delivery deposits are required for these purchases, and the
Company has funded these deposits using operating cash and primarily short-term
deposit finance facilities. As of December 31, 2002, the Company had $21.2
million in pre-delivery deposits outstanding for these aircraft, of which $8.4
million was provided by a deposit finance facility with Rolls-Royce. Upon
delivery of the aircraft, pre-delivery deposits funded with operating cash will
be returned to the Company, and those funded with a deposit facility will be
used to repay that facility.
In December 2001, the Company entered into an agreement to exercise purchase
rights on two Boeing 757-300 aircraft to be delivered in May and June 2003. The
Company currently has purchase rights remaining for eight Boeing 757-300
aircraft and 40 Boeing 737-800 aircraft.
The Company had operating lease agreements in place to lease 14 new Boeing
40
737-800s from ILFC. As of December 31, 2002, the Company had taken delivery of
12 Boeing 737-800s that are being leased from ILFC. The remaining aircraft under
these operating lease agreements are currently scheduled for delivery in June
2003 and November 2003.
The Company had an agreement to acquire five additional new Boeing 737-800s to
be financed by operating leases with GE Capital Aviation Services ("GECAS"). The
Company took delivery of the fifth Boeing 737-800 aircraft being leased from
GECAS in the third quarter of 2002.
Although the Company typically finances aircraft with long-term operating
leases, it has a bridge financing facility which provides for maximum borrowings
of $200.0 million to finance new Boeing 737-800 aircraft and new Boeing 757-300
aircraft. Borrowings under the facility bear interest, at the option of ATA, at
LIBOR plus a margin, which depends on the percentage of the purchase price
borrowed and whether the borrowing matures 18 or 24 months after the aircraft
delivery date. During the first four months of 2002, the Company borrowed $192.5
million, under this bridge facility, for the purchase of certain Boeing 737-800
and Boeing 757-300 aircraft. As of June 30, 2002, these borrowings were repaid
in full, while the related aircraft were financed under long-term operating
leases.
The Company has an agreement with General Electric to purchase four spare
engines, which are scheduled for delivery between 2003 and 2006. The Company has
acquired two spare Rolls Royce engines, one of which was delivered in 2001, and
the other in June 2002.
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. As of September 30, 2002, the Company had taken delivery of all six
SAAB 340B aircraft under this agreement.
In March 2001, the Company entered into a limited liability company agreement
with BCC to form BATA, a 50/50 joint venture. Because the Company does not
control BATA, the Company's investment is being accounted for under the equity
method of accounting. BATA is expected to remarket the Company's fleet of Boeing
727-200 aircraft in either passenger or cargo configurations. In exchange for
supplying the aircraft and certain operating services to BATA, the Company has
and will continue to receive both cash and equity in the income or loss of BATA.
As of December 31, 2002, the Company has transferred 23 of its original fleet of
24 Boeing 727-200 aircraft to BATA.
Significant Financings. On November 20, 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 will be 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 rotables. The receivables had a carrying amount of approximately
$44.2 million as of December 31, 2002. The aircraft, spare engines and parts
consist of three Lockheed L-1011-500 aircraft, nine 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, which held a combined
carrying amount of approximately $95.6 million as of December 31, 2002.
41
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 purchase up to 0.2 million shares of
its common stock to other loan participants, in each case at an exercise price
of $3.53 per share for a term of ten years. The Company has recorded $7.4
million as the total fair value of warrants issued, which is also recorded as
unamortized discount on the secured term loan as of December 31, 2002.
Prior to obtaining the secured term loan, the Company had a secured revolving
bank credit facility which provided for maximum borrowings of $60.0 million,
including up to $50.0 million for stand-by letters of credit. Borrowings under
the facility were subject to an interest rate, at the option of the Company, at
either LIBOR plus a margin or the agent bank's prime rate. The facility was
subject to certain restrictive covenants and was collateralized by certain
aircraft, receivables, and engines. Upon repayment of the borrowings and letters
of credit, the revolving bank credit facility was terminated, and all assets
previously pledged as collateral were released.
Card Agreement. The Company accepts charges to most major credit and debit cards
("cards") as payment from its customers. Approximately 90% of scheduled service
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 2002, the Company processed approximately $633.0
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. As of December 31, 2002, the bank had withheld $30.0
million in cash. As of December 31, 2001, the bank had withheld $23.1 million,
$20.0 million of which was funded by a letter of credit. The deposits as of
December 31, 2002 and December 31, 2001 constituted approximately 60% of the
Company's total future obligations to provide services purchased by charges to
card accounts as of those dates. The bank has subsequently agreed to require an
ongoing 60% deposit, with that percentage being subject to increase up to either
75% or 100%, in the event that certain restrictive covenants are not met. A
deposit of 100% of this obligation would have resulted in the additional
retention of $20.0 million by the bank at December 31, 2002, and $15.4 million
at December 31, 2001. The bank's right to maintain a 60% deposit does not
terminate unless, in its reasonable judgment and at its sole discretion, it
determines that a deposit is no longer required.
The Company has the right to terminate its agreement with the bank upon
providing appropriate 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.
42
Although the Company continues to process significant dollar amounts of ticket
sales using credit cards other than Mastercard and Visa, as of December 31, 2002
no cash deposit requirements had been implemented by the issuers or processors
of those cards.
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 also requires the Company to provide a surety bond or to
escrow customer deposits to secure potential refund claims of charter customers
who have made prepayments to the Company for future transportation. One issuer
currently provides all surety bonds issued on behalf of the Company.
Prior to the terrorist attacks of September 11, 2001 the Company had provided a
letter of credit of $1.5 million as security to the issuer for its total
estimated surety bond obligations, which were $20.9 million at August 31, 2001.
Effective October 5, 2001, the issuer required the Company to increase its
letter of credit to 50% of its estimated surety bond liability. 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. The Company's letter of credit was adjusted accordingly, and the
Company is subject to future adjustments of its letter of credit based upon
further revisions to the estimated liability for total surety bonds outstanding.
As of December 31, 2002, the letter of credit requirement had decreased to $15.2
million, reflecting an actual decline in outstanding charter deposit obligations
of the Company. The Company has the right to replace the issuer with one or more
alternative issuers of surety bonds, although the Company can provide no
assurance that it will be able to secure more favorable terms from other
issuers.
Future Accounting Changes
In April of 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("FAS 145"). FAS 145 rescinds both
FASB Statements of Financial Accounting Standards No. 4, Reporting Gains and
Losses from Extinguishment of Debt, ("FAS 4"), and an amendment to FAS 4, FASB
Statements of Financial Accounting Standards No. 64, Extinguishments of Debt
Made to Satisfy Sinking Fund Requirements ("FAS 64"). FAS 4 required that all
gains and losses from the extinguishment of debt be aggregated and, if material,
be classified as an extraordinary item, net of the related income tax effect.
Upon the adoption of FAS 145, all gains and losses on the extinguishment of debt
for periods presented in the financial statements will be classified as
extraordinary items only if they meet the criteria of APB Opinion 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("APB 30"). The provisions of FAS 145 related to the rescission of
FAS 4 and FAS 64 shall be applied for fiscal years beginning after May 15, 2002.
In June of 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("FAS
146"). FAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring). FAS
146 generally requires companies to recognize costs associated with exit
activities when they are incurred, rather than at the date of a commitment to an
exit or disposal plan, and is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
43
Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also expands the disclosure required
to be made by a guarantor about its obligations under certain guarantees that it
has issued. Initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified. The
disclosure requirements are effective immediately.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest in after that date. The related disclosure
requirements are effective immediately.
See "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 18 - Recently Issued Accounting Pronouncements."
Forward-Looking Information and Risk Factors
Information contained within "Business" and "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 may 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 from
those expected. Such factors include, but are not limited to, the following:
o economic conditions;
o labor costs;
o aviation fuel costs;
o competitive pressures on pricing;
o weather conditions;
o governmental legislation and regulation;
o consumer perceptions of the Company's products;
o demand for air transportation overall, considering the impact of
September 11, 2001, 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 does not undertake to update its forward-looking statements to
reflect future events or circumstances.
44
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to certain market risks, including commodity price risk
resulting from aircraft fuel price fluctuations and interest rate risk. The
adverse effects of potential changes in these market risks are discussed below.
The sensitivity analyses presented do not consider the effects that such adverse
changes may have on overall economic activity, nor do they consider additional
actions management might take to mitigate the adverse impact of such changes on
the Company. See the notes to consolidated financial statements for a
description of the Company's accounting policies and other information related
to these financial instruments.
Aircraft Fuel Prices. The Company's results of operations are significantly
impacted by changes in the price of aircraft fuel. During 2002, aircraft fuel
accounted for approximately 14.4% of the Company's operating expenses, compared
to 18.4% in 2001. In addition to purchasing fuel-hedging contracts, the Company
obtains fuel price fluctuation protection from escalation clauses in certain
commercial charter, military charter, bulk scheduled service and mail contracts.
During 2002 and 2001, the Company entered into fuel hedge contracts to reduce
the volatility of fuel prices, using heating oil swaps. As of December 31, 2002,
the Company had no outstanding fuel hedge agreements.
Market risk is estimated as a hypothetical 10% increase in the December 31, 2002
cost per gallon of fuel. Based on projected 2003 fuel usage, excluding
anticipated protection from escalation clauses, such a change would result in an
increase in aircraft fuel expense of approximately $19.4 million. As of December
31, 2001, that risk was $16.5 million.
Interest Rates. The Company's results of operations are affected by fluctuations
in market interest rates. As of December 31, 2002, the majority of the Company's
variable-rate debt was comprised of approximately $168.0 million and $8.4
million, respectively, of variable-rate debt through the secured term loan, and
debt funding aircraft pre-delivery deposits. As of December 31, 2001, the
majority of the Company's variable-rate debt was comprised of approximately
$35.0 million and $118.2 million, respectively, of variable-rate debt through a
revolving credit facility, and debt funding aircraft pre-delivery deposits. If
interest rates average 100 basis points more on variable-rate debt in 2003, as
compared to 2002 average rates, the Company's interest expense would increase by
approximately $1.8 million. In comparison, if interest rates averaged 100 basis
points more on variable-rate debt in 2002, as compared to 2001 average rates,
the Company's interest expense would have increased by approximately $1.5
million.
As of December 31, 2002 and 2001, the majority of the Company's fixed-rate debt
was comprised of unsecured debt with a carrying value of $300.0 million. Based
upon a calculation of discounted future cash flows using current incremental
borrowing rates as of the end of the year for similar types of instruments, the
fair value as of December 31, 2002 of this fixed-rate debt is estimated to be
approximately $262.2 million. Market risk, estimated as the potential increase
in fair value resulting from a hypothetical 100 basis point decrease in market
interest rates, was approximately $32.5 million as of December 31, 2002. As of
December 31, 2001, that risk was approximately $17.2 million.
45
If 2003 average short-term interest rates decreased by 100 basis points as
compared to 2002 average rates, the Company's projected interest income from
short-term investments would decrease by approximately $2.0 million. In
comparison, the Company estimated that if 2002 average short-term interest rates
decreased by 100 basis points as compared to 2001 average rates, the Company's
interest income from short-term investments would have decreased by
approximately $1.8 million as of December 31, 2001.
All estimated changes in interest income and expense are determined by
considering the impact of hypothetical changes in interest rates on the
Company's debt and cash balances at December 31, 2002 and 2001.
46
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
ATA Holdings Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of ATA Holdings
Corp. and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in redeemable preferred stock,
common stock and other shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2002. Our audits also included
the financial statement schedule listed in the index at Item 15(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ATA Holdings Corp.
and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth herein.
As discussed in Note 16 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets".
ERNST & YOUNG LLP
Indianapolis, Indiana
January 24, 2003
47
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, December 31,
2002 2001
------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 200,160 $ 184,439
Aircraft pre-delivery deposits 16,768 166,574
Receivables, net of allowance for doubtful accounts
(2002 - $2,375; 2001 - $1,526) 86,377 75,046
Inventories, net 51,233 47,648
Assets held for sale - 18,600
Prepaid expenses and other current assets 39,214 19,471
------------------- ----------------------
Total current assets 393,752 511,778
Property and equipment:
Flight equipment 312,652 327,541
Facilities and ground equipment 134,355 119,975
------------------- ----------------------
447,007 447,516
Accumulated depreciation (181,380) (132,573)
------------------- ----------------------
265,627 314,943
Restricted cash 30,360 -
Goodwill 14,887 21,780
Assets held for sale 5,090 33,159
Prepaid aircraft rent 68,828 49,159
Investment in BATA, LLC 22,968 30,284
Deposits and other assets 46,624 41,859
------------------- ----------------------
Total assets $ 848,136 $ 1,002,962
=================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt $ 14,191 $ 5,820
Short-term debt 8,384 118,239
Accounts payable 23,688 26,948
Air traffic liabilities 94,693 100,958
Accrued expenses 160,924 177,102
------------------- ----------------------
Total current liabilities 301,880 429,067
Long-term debt, less current maturities 486,853 373,533
Deferred income taxes - 13,655
Deferred gains from sale and leaseback of aircraft 54,889 45,815
Other deferred items 42,038 16,760
------------------- ----------------------
Total liabilities 885,660 878,830
Commitments and contingencies
Redeemable preferred stock; authorized and issued 800 shares 82,485 80,000
Shareholders' equity (deficit):
Preferred stock; authorized 9,999,200 shares; none issued - -
Common stock, without par value; authorized 30,000,000 shares;
issued 13,476,193 - 2002; 13,266,642 - 2001 65,290 61,964
Treasury stock; 1,711,440 shares - 2002; 1,710,658 shares - 2001 (24,778) (24,768)
Additional paid-in capital 18,374 11,534
Other comprehensive loss - (687)
Retained deficit (178,895) (3,911)
------------------- ----------------------
Total shareholders' equity (deficit) (120,009) 44,132
------------------- ----------------------
Total liabilities and shareholders' equity (deficit) $ 848,136 $ 1,002,962
=================== ======================
See accompanying notes.
48
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
2002 2001 2000
--------------------------------------------------
Operating revenues:
Scheduled service $ 886,579 $ 820,666 $ 753,301
Charter 309,242 359,770 435,262
Ground package 35,687 52,182 59,848
Other 45,862 42,866 43,142
----------- ------------- -----------
Total operating revenues 1,277,370 1,275,484 1,291,553
----------- ------------- -----------
Operating expenses:
Salaries, wages and benefits 355,201 325,153 297,012
Fuel and oil 206,574 251,333 274,820
Aircraft rentals 190,148 98,988 72,145
Handling, landing and navigation fees 110,528 88,653 97,414
Depreciation and amortization 76,727 121,327 125,041
Crew and other employee travel 54,774 59,278 65,758
Aircraft maintenance, materials and repairs 52,254 61,394 70,432
Other selling expenses 43,934 41,601 36,650
Advertising 40,028 26,421 22,016
Passenger service 38,345 43,856 45,571
Insurance 33,981 10,675 7,733
Ground package cost 27,882 42,160 50,903
Commissions 23,326 34,789 39,065
Facilities and other rentals 22,624 20,241 15,817
Special charges - 21,525 -
Aircraft impairments and retirements 66,787 118,868 -
Goodwill impairment 6,893 - -
U.S. Government grant 16,221 (66,318) -
Other 71,180 67,410 68,606
----------- ------------- -----------
Total operating expenses 1,437,407 1,367,354 1,288,983
----------- ------------- -----------
Operating income (loss) (160,037) (91,870) 2,570
Other income (expense):
Interest income 2,829 5,331 8,389
Interest expense (35,746) (30,082) (31,452)
Other (1,260) 554 562
----------- ------------- -----------
Other expenses (34,177) (24,197) (22,501)
----------- ------------- -----------
Loss before income taxes (194,214) (116,067) (19,931)
Income tax credit (24,950) (39,750) (4,607)
----------- ------------- -----------
Net loss (169,264) (76,317) (15,324)
Preferred stock dividends (5,720) (5,568) (375)
----------- ------------- -----------
Loss available to common shareholders $ (174,984) $ (81,885) $ (15,699)
=========== ============= ===========
Basic earnings per common share:
Average shares outstanding 11,711,906 11,464,125 11,956,532
Net loss per common share $ (14.94) $ (7.14) $ (1.31)
=========== ============= ===========
Diluted earnings per common share:
Average shares outstanding 11,711,906 11,464,125 11,956,532
Net loss per common share $ (14.94) $ (7.14) $ (1.31)
=========== ============= ===========
See accompanying notes.
49
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK, COMMON STOCK AND OTHER SHAREHOLDERS'
EQUITY (DEFICIT)
(Dollars in thousands)
Redeemable Additional Deferred Other Retained Total
Preferred Common Treasury Paid-in Comprehensive Comprehensive Earnings Shareholders'
Stock Stock Stock Capital ESOP Income (Deficit) Equity(Deficit)
------ ------- -------- ------- ----- ----- ---------- --------------
Balance, December 31, 1999 $ - $55,826 $(10,500) $12,910 $(533) $ - $ 93,673 $ 151,376
------ ------- -------- ------- ----- ------ ---------- ---------
Net loss - - - - - - (15,324) (15,324)
Issuance of redeemable
preferred stock 80,000 - - - - - - -
Issuance of common stock for
ESOP - - - 276 533 - - 809
Preferred dividends - - - - - - (375) (375)
Restricted stock grants - 67 (14) 17 - - - 70
Stock options exercised - 2,937 - (1,356) - - - 1,581
Purchase of treasury stock - - (14,050) - - - - (14,050)
Disqualifying disposition of
stock - - - 411 - - - 411
Acquistions of businesses - 182 - (26) - - - 156
------ ------- -------- ------- ----- ----- ---------- ---------
Balance as of December 31, 2000 80,000 59,012 (24,564) 12,232 - - 77,974 124,654
======= ======= ======== ========= ===== ===== ========= =========
Net loss - - - - - - (76,317) (76,317)
Net loss on derivative
instruments, net of tax - - - - - (687) - (687)
---- ------- ------
Total comprehensive loss - - - - - (687) (76,317) (77,004)
---- ------- ------
Preferred dividends - - - - - - (5,568) (5,568)
Restricted stock grants - 40 (8) 10 - - - 42
Stock options exercised - 2,912 - (1,242) - - - 1,670
Purchase of treasury stock - - (196) - - - - (196)
Disqualifying disposition of
stock - - - 534 - - - 534
------ ------- -------- ------- ----- ----- ---------- ---------
Balance as of December 31, 2001 80,000 61,964 (24,768) 11,534 - (687) (3,911) 44,132
======= ======= ======== ========= ====== ===== ========= =========
Net loss - - - - - - (169,264) (169,264)
Net gain on derivative
instruments, net of tax - - - - - 687 - 687
---- ------- ------
Total comprehensive loss - - - - - 687 (169,264) (168,577)
---- ------- ------
Preferred dividends - - - - - - (5,720) (5,720)
Restricted stock grants - 13 (10) 4 - - - 7
Payment of liability with stock - 2,445 - (295) - - - 2,150
Stock options exercised - 868 - (419) - - - 449
Warrants issued with ATSB loan - - - 7,424 - - - 7,424
Disqualifying disposition of
stock - - - 126 - - - 126
Accrued preferred stock
dividends 2,485 - - - - - - -
------ ------- -------- ------- ----- ------ ---------- ---------
Balance as of December 31, 2002 $82,485 $65,290 $(24,778) $ 18,374 $ - $ - $(178,895) $(120,009)
======= ======= ======== ========= ====== ======= ========= =========
See accompanying notes.
50
ATA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
2002 2001 2000
-------------------------------------------------
Operating activities:
Net loss $(169,264) $ (76,317) $ (15,324)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 76,727 121,327 125,041
Aircraft impairments and retirements 66,787 118,868 -
Goodwill impairments 6,893
Deferred income tax credit (8,697) (40,848) (3,990)
Other non-cash items 39,817 1,843 4,324
Changes in operating assets and liabilities:
U.S. Government grant receivable 16,221 (21,861) -
Other receivables (27,552) 3,420 (4,506)
Inventories (7,411) (11,586) (15,191)
Prepaid expenses and other current assets (24,701) 5,940 (2,466)
Accounts payable (3,260) 16,882 (10,168)
Air traffic liabilities (6,265) (6,092) 13,543
Accrued expenses (18,309) 32,848 20,429
--------- --------- ---------
Net cash provided by (used in) operating activities (59,014) 144,424 111,692
--------- --------- ---------
Investing activities:
Aircraft pre-delivery deposits 149,510 (30,781) (116,978)
Capital expenditures (59,346) (119,798) (146,523)
Noncurrent prepaid aircraft rent (12,304) (17,180) (16,811)
Investment in BATA 18,632 27,343 -
(Additions) reductions to other assets (7,985) 10,474 (10,593)
Proceeds from sales of property and equipment 424 151 68
--------- --------- ---------
Net cash provided by (used in) investing activities 88,931 (129,791) (290,837)
--------- --------- ---------
Financing activities:
Preferred stock dividends (3,235) (5,568) (375)
Proceeds from sale/leaseback transactions 2,253 5,229 10,791
Proceeds from short-term debt 56,858 71,537 90,825
Payments on short-term debt (167,839) (44,123) -
Proceeds from long-term debt 363,040 219,422 33,117
Payments on long-term debt (235,352) (207,294) (13,998)
Increase in restricted cash (30,360) - -
Proceeds from stock option exercises 449 1,670 1,822
Proceeds from redeemable preferred stock - - 80,000
Purchase of treasury stock (10) (204) (14,064)
--------- --------- ---------
Net cash provided by (used in) financing activities (14,196) 40,669 188,118
--------- --------- ---------
Increase in cash and cash equivalents 15,721 55,302 8,973
Cash and cash equivalents, beginning of period 184,439 129,137 120,164
--------- --------- ---------
Cash and cash equivalents, end of period $ 200,160 $ 184,439 $ 129,137
========= ========= =========
Supplemental disclosures:
Cash payments for:
Interest $ 42,102 $ 44,839 $ 31,628
Income taxes (refunds) $ 1,572 $ (9,721) $ 579
Financing and investing activities not affecting cash:
Capital lease $ - $ - $ 117
Accrued capital interest $ (10,487) $ 7,465 $ 7,890
Notes payable $ 2,427 $ - $ -
Issuance of warrants $ 7,424 $ - $ -
See accompanying notes.
51
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation and Business Description
The consolidated financial statements include the accounts of ATA Holdings
Corp., formerly Amtran Inc. (the "Company") and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
The Company operates principally in one business segment through ATA Airlines,
Inc. , formerly American Trans Air, Inc. ("ATA"), its principal subsidiary,
which accounts for approximately 90% of the Company's operating revenues. ATA is
a U.S.-certificated air carrier providing domestic and international charter and
scheduled passenger air services.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are carried at cost, which approximates market, and are
primarily comprised of money market funds and investments in U.S. Treasury
repurchase agreements. (See "Note 3 - Cash and Cash Equivalents.")
Inventories
Inventories consist primarily of expendable aircraft spare parts, fuel and other
supplies. Aircraft parts inventories are stated at cost and are reduced by an
allowance for obsolescence. The obsolescence allowance is provided by amortizing
the cost of the aircraft parts inventory, net of an estimated residual value,
over the related fleet's estimated useful service life. The obsolescence
allowance at December 31, 2002 and 2001 was $14.7 million and $10.9 million,
respectively. Inventories are charged to expense when consumed.
Investment in BATA, LLC
The Company has a limited liability company agreement with Boeing Capital
Corporation ("BCC") forming BATA Leasing LLC ("BATA"), a 50/50 joint venture.
Because the Company does not control BATA, the Company's investment is accounted
for under the equity method of accounting. BATA is expected to remarket the
Company's fleet of Boeing 727-200 aircraft in either passenger or cargo
configurations. In exchange for supplying the aircraft and certain operating
services to BATA, the Company has and will continue to receive both cash and its
share of the income or loss of BATA. As of December 31, 2002, the Company has
transferred 23 of its original fleet of 24 Boeing 727-200 aircraft to BATA.
52
Revenue Recognition
Revenues are recognized when air transportation or other services are provided.
Customer flight deposits and unused passenger tickets sold are included in air
traffic liability. As is customary within the industry, the Company performs
periodic evaluations of this estimated liability, and any resulting adjustments,
which can be significant, are included in the results of operations for the
periods in which the evaluations are completed.
Passenger Traffic Commissions
Passenger traffic commissions are recognized as expense when the transportation
is provided and the related revenue is recognized. The amount of passenger
traffic commissions paid in advance and not yet recognized as expense are
included in prepaid expenses and other current assets in the accompanying
consolidated balance sheets.
Reclassifications
Certain 2001 balance sheet amounts have been reclassified to conform to the 2002
presentation.
Property and Equipment
Property and equipment are recorded at cost and are depreciated to residual
values over their estimated useful service lives using the straight-line method.
The estimated useful service lives for the principal depreciable asset
classifications are as follows:
53
Asset Estimated Useful Service Life
- ----- -----------------------------
Aircraft and related equipment
Lockheed L-1011 (Series 50 and 100) Depreciating to individual aircraft
retirement date (2003-2004)
(See "Note 15 - Fleet Impairment.")
Lockheed L-1011 (Series 500) Depreciating to common retirement
date of December 2010
Boeing 737-800 All aircraft are subject to
operating leases
Boeing 757-200 All aircraft are subject to
operating leases
Boeing 757-300 All aircraft are subject to
operating leases
SAAB 340B 15 years
Major rotable parts, avionics and Life of equipment to which
assemblies applicable(generally ranging
from 5-18 years)
Improvements to leased flight equipment Period of benefit or term of lease
Other property and equipment 3-7 years
Aircraft Lease Return Conditions
The Company finances a significant number of aircraft through operating leases.
Many of these leases require that the airframes and engines be in a specified
maintenance condition upon their return to the lessor at the end of the lease.
If these return conditions are not met by the Company, the leases generally
require financial compensation to the lessor. When an operating lease is within
five years of its initial termination date, the Company accrues ratably over
that five years, if estimable, the total estimated return condition obligation
or the total estimated costs that will be incurred by the Company to render the
aircraft in a suitable return condition per the contract.
Airframe and Engine Overhauls
The Company has entered into engine manufacturers' maintenance agreements for
engines which power the Boeing 737-800, Boeing 757-200, Boeing 757-300 and SAAB
340B fleets, which provide for the Company to pay a monthly fee per engine
flight hour in exchange for major overhaul and maintenance of those engines. The
Company expenses the cost per flight hour under these agreements as incurred.
The cost of engine overhauls for remaining fleet types, and the cost of airframe
overhauls for all fleet types other than the SAAB 340B, are capitalized when
performed and amortized over estimated useful lives based upon usage, or to
earlier fleet or aircraft retirement dates, for both owned and leased aircraft.
This accounting treatment was also applied to Boeing 757-200 engine overhauls
completed prior to October 2001, the effective date of the engine manufacturers'
maintenance agreement for this fleet. Airframe overhauls for SAAB 340B aircraft
are expensed as incurred.
54
Aircraft Pre-delivery Deposits
Advance payments for future aircraft deliveries scheduled within the next 12
months are classified as current aircraft pre-delivery deposits in the
accompanying consolidated balance sheets, as the aircraft will be acquired and
paid for by third parties who will lease them to the Company. Advance payments
for future aircraft deliveries not scheduled within the next 12 months are
classified as deposits and other assets. As of December 31, 2002 and 2001,
deposits and other assets included advanced payments for future aircraft and
engine deliveries totaling $4.4 million and $4.1 million, respectively.
Restricted Cash
Restricted cash consists of deposits held to secure outstanding stand-by letters
of credit currently provided by the Company. While the existing letters of
credit mature within the next 12 months, management believes it is likely that
the letters of credit will be renewed and has classified the restricted cash as
a long-term asset on the balance sheet as of December 31, 2002.
Intangible Assets
Goodwill, which represents the excess of cost over fair value of net assets
acquired, was amortized on a straight-line basis over 20 years, until January 1,
2002, when the Company adopted FASB Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). The Company now
annually tests goodwill and other intangible assets deemed to have indefinite
lives for impairment. The Company's policy is to record an impairment charge
when it is determined that an asset's carrying value may not be recoverable.
Financial Instruments
The carrying amounts of cash equivalents, receivables and variable-rate debt
approximate fair value. (See "Note 5 - Debt.") The fair value of fixed-rate
debt, including current maturities, is estimated using discounted cash flow
analysis based on the Company's current incremental rates for similar types of
borrowing arrangements. The carrying value of the Company's unsecured senior
notes of $300 million had an aggregate estimated fair value of $124.5 million
and $226.4 million based upon dealer-quoted prices at December 31, 2002, and
December 31, 2001, respectively.
Advertising
The Company expenses advertising costs in the period incurred.
Stock Based Compensation
During 1996, the Company adopted the disclosure provisions of 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
55
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
There were no options granted by the Company in 2002. The weighted-average fair
value of options granted during 2001 and 2000 is estimated at $5.44 and $6.02
per share, respectively, on the grant date. These estimates were made using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 2001 and 2000: risk-free interest rate of 3.59% and 5.06%;
expected market price volatility of 0.62 and 0.51; weighted-average expected
option life of 1.04 years and 0.94 years; estimated forfeitures of 10.8% and
6.0%; and no dividends.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models use highly subjective
assumptions, including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employees' stock options.
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:
2002 2001 2000
-------------------------------------------------
(In thousands, except per share data)
Net loss available to common shareholders as
reported $ (174,984) $ (81,885) $ (15,699)
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects (140) (1,188) (3,182)
-------- ------- -------
Net loss available to common shareholders pro forma (175,124) (83,073) (18,881)
======== ======= =======
Basic and Diluted loss per share as reported (14.94) (7.14) (1.31)
======== ======= =======
Basic and Diluted loss per share pro forma (14.95) (7.25) (1.58)
======== ======= =======
2. State of the Industry and the Company
On September 11, 2001, four commercial aircraft operated by two other U.S.
airlines were hijacked and destroyed in terrorist attacks on the United States.
These attacks resulted in significant loss of life and property damage in New
York City, Washington, D.C. and western Pennsylvania. In response to these
attacks, on September 11, 2001 the FAA temporarily suspended all commercial
flights to, from and within the United States until September 13, 2001. The
Company resumed limited flight operations on September 13, 2001, with the
exception of flights to and from Chicago-Midway Airport, which commenced partial
operations on September 14, 2001. From September 11, 2001 to September 14, 2001,
the Company canceled over 800 scheduled flights.
56
The terrorist attacks of September 11, 2001 and generally weak economic
conditions have adversely affected the Company and the airline industry. The
industry as a whole, and the Company, suffered very significant financial losses
in 2001 and 2002. During 2002, two major air carriers, US Airways Group and UAL
Corporation, filed for reorganization under Chapter 11 of the United States
Bankruptcy Code. Historically, air carriers involved in reorganizations have
substantially reduced their fares, which could reduce airline yields further
from current levels. Certain air carriers are seeking to recover, at least
partially, by reducing their seat capacity. As this is accomplished by
eliminating aircraft from operating fleets, the fair value of aircraft may be
adversely affected. The Company has recorded substantial charges to earnings
resulting from fleet retirements and impairments over the past two years.
However, during the period the Company has substantially replaced its fleet of
aging aircraft with new fuel-efficient Boeing aircraft. These new Boeing
aircraft are all leased and have higher fixed ownership costs than the older
fleets. The Company made large operating lease payments on these aircraft in
early 2003, which caused a substantial decrease in the Company's cash balance
since December 31, 2002. In addition, since all of these aircraft are leased,
the Company has pledged receivables and other assets to secure debt, leaving the
Company with few unencumbered assets. The industry and the Company have also
been adversely impacted by substantially higher insurance costs, and higher
passenger security costs.
The Company has benefited from some of the U.S. Government's initiatives for
assisting the airline industry. Most significant to the Company was the Air
Transportation Safety and System Stabilization Act ("Act") passed in 2001, which
provided for, among other things, up to $5.0 billion in compensation to U.S.
airlines and air cargo carriers for direct and incremental losses resulting from
the September 11, 2001 terrorist attacks and the availability of up to $10.0
billion in U.S. Government guarantees of certain loans made to air carriers,
which are administered by the newly-established Air Transportation Stabilization
Board ("ATSB").
The Company had recorded $66.3 million in U.S. Government grant compensation as
of December 31, 2001. This estimate was based on guidance available from the DOT
at the time for identifying those expenses it deemed reimbursable. Throughout
2002, the Company discussed the calculation with the DOT, and as of December 31,
2002 had reversed approximately $16.2 million ($15.2 million in the second
quarter and $1.0 million in the fourth quarter) of that revenue and revised its
estimate of total U.S. Government grant compensation to $50.1 million. In early
2003, the Company received the last cash installment of grant reimbursement from
the U.S. Government, consistent with that estimate.
In November 2002, the Company also obtained a $168.0 million secured term loan,
of which $148.5 million was guaranteed by the ATSB. The net proceeds of the 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
revolving bank credit facility and to collateralize new letters of credit,
previously secured by the bank facility. The remainder of the proceeds of
approximately $104.7 million will be used for general corporate purposes. 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 over a term of ten years. (See "Note 5 - Debt" and "Note 9 -
Shareholders' Equity (Deficit)" for additional information about the loan.)
While the Company believes that adverse industry conditions are likely to
continue throughout 2003, the Company's management believes it has a viable plan
to ensure sufficient cash to fund operations during the next 12 months. In
addition to the assistance the Company has already received in the form of U.S.
Government grant compensation and the secured term loan, the plan calls for
focusing marketing efforts on those routes where the Company believes it can be
a leading provider and implementing a number of cost-saving initiatives the
57
Company believes will enhance its low-cost advantage. Although the Company
believes the assumptions underlying its 2003 financial projections are
reasonable, there are significant risks which could cause the Company's 2003
financial performance to be different than projected. These risks relate
primarily to further declines in demand for air travel, further increases in
fuel prices, the uncertain outcome of the two major airline bankruptcies filed
in 2002, the possibility of other airline bankruptcy filings, and the uncertain
outcome and geopolitical impact of the conflict in the Middle East.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
December 31,
2002 2001
----------------------------------
(in thousands)
Cash and money market funds $ 176,404 $ 180,388
U.S. Treasury repurchase agreements 23,756 4,051
----------------------------------
$ 200,160 $ 184,439
==================================
4. Property and Equipment
The Company's property and equipment consist of the following:
December 31,
2002 2001
-----------------------------
(in thousands)
Flight equipment, including airframes, engines and other $ 312,652 $ 327,541
Less accumulated depreciation 94,173 58,396
------------- -------------
218,479 269,145
------------- -------------
Facilities and ground equipment 134,355 119,975
Less accumulated depreciation 87,207 74,177
------------- -------------
47,148 45,798
------------- -------------
$ 265,627 $ 314,943
============= =============
Depreciation and amortization expense related to property and equipment was
$68.9 million, $113.3 million and $118.5 million for 2002, 2001 and 2000,
respectively.
58
5. Debt
Debt consists of the following:
December 31,
2002 2001
-------- --------
(in thousands)
Partially guaranteed term loan, variable rate of LIBOR plus a margin, $168,000 $ -
averaging 2.8% in 2002, payable in varying installments from November
2003 through November 2008
Unamortized discount on partially guaranteed term loan (7,400) -
Unsecured Senior Notes, fixed rate of 10.5%, payable in August 2004 175,000 175,000
Unsecured Senior Notes, fixed rate of 9.625%, payable in December 2005 125,000 125,000
Aircraft pre-delivery deposit finance facilities, variable rates of LIBOR plus
3.0% to 3.25%, averaging 4.1% in 2002 and 6.2% in 2001,
payable upon delivery of aircraft 8,384 118,239
Secured note payable to institutional lender, variable rate of LIBOR
plus 2.0%, averaging 5.0% in 2002 and 6.7% in 2001, payable in varying
installments through October 2005 7,675 9,375
Secured note payable to institutional lender, variable rate of LIBOR
plus 2.0%, averaging 5.0% in 2002 and 6.7% in 2001, payable in varying
installments through March 2005 6,683 8,383
Mortgage note payable to institutional lender, fixed rate of 8.75%,
payable in varying installments through June 2014 9,080 9,538
Mortgage note payable to institutional lender, fixed rate of 8.30%,
payable in varying installments through June 2014 6,915 7,280
City of Chicago variable rate (averaging 1.5% in 2002 and 2.7% in 2001)
special facility revenue bonds, payable in December 2020 6,000 6,000
Borrowings against secured revolving bank credit facility - 35,000
Other 4,091 3,777
-------- --------
509,428 497,592
Less current maturities and short-term debt 22,575 124,059
-------- --------
$486,853 $373,533
======== ========
59
On November 20, 2002, the Company obtained a $168.0 million secured term loan,
of which $148.5 million is guaranteed by the Air Transportation Stabilization
Board. 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 net proceeds of the 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 revolving bank credit facility and
to collateralize new letters of credit, previously secured by the bank facility.
Upon repayment of the borrowings and letters of credit, the revolving bank
credit facility terminated, and any assets previously held as collateral were
released. The additional secured term loan proceeds of approximately $104.7
million will be used for general corporate purposes. 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
receivables had a carrying amount of approximately $44.2 million as of December
31, 2002. The aircraft, spare engines and parts consist of three Lockheed
L-1011-500 aircraft, nine 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 rotable parts, which have a combined carrying amount of
approximately $95.6 million as of December 31, 2002. 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
over a term of ten years. The Company has allocated $7.4 million as the total
value of warrants issued. (See "Note 9 - Shareholders' Equity (Deficit).") The
effective rate on the secured term loan, due to the issuance of the warrants,
was 3.2% as of December 31, 2002.
In July 1997, the Company sold $100.0 million principal amount of 10.5%
unsecured senior notes. The Company sold an additional $75.0 million principal
amount of these notes in December 1999. Interest on these notes is payable on
February 1 and August 1 of each year. Effective August 1, 2002, the Company may
redeem the notes, in whole or in part, initially at 105.25% of their principal
amount plus accrued interest, declining ratably to 100.0% of their principal
amount plus accrued interest at maturity.
In December 1998, the Company sold $125.0 million principal amount of 9.625%
unsecured senior notes. Interest on these notes is payable on June 15 and
December 15 of each year. The Company may redeem the notes, in whole or in part,
at any time on or after June 15, 2003, initially at 104.81% of their principal
amount plus accrued interest, declining to 102.41% of their principal amount
plus accrued interest on June 15, 2004, then to 100.0% of their principal amount
plus accrued interest at maturity.
In June 1999, the Company obtained an $8.0 million loan at 8.30% secured by a
15-year mortgage on the new Maintenance and Operations Center. This building has
a carrying amount of $7.8 million as of December 31, 2002.
In March and October 2000, the Company issued two $11.5 million variable rate
five-year notes, each collateralized by one Lockheed L-1011-500 aircraft. The
related aircraft have a combined carrying amount of $22.6 million as of December
31, 2002.
In September 2000, the Company obtained a $10.0 million, 14-year loan at 8.75%,
secured by a mortgage on its maintenance facility at the Indianapolis
International Airport. The building has a carrying amount of $8.2 million as of
December 31, 2002.
In December 2000, the Company entered into three finance facilities to fund
pre-delivery deposits on the new Boeing 757-300 and Boeing 737-800 aircraft. The
60
Company obtained the first facility from Banca Commerciale Italiana which
provided up to $75.0 million in pre-delivery deposit funding that matured on
December 31, 2002. The Company obtained a second facility from GE Capital
Aviation Services, Inc. which provided for up to approximately $58.2 million in
pre-delivery deposit funding that matured on December 31, 2002. The third
facility, obtained from Rolls-Royce Plc., provides up to $40.0 million in
pre-delivery deposits and matures on August 31, 2003. As of December 31, 2002
and 2001, the Company had borrowed $8.4 and $118.2 million on these facilities.
This debt has been classified as current in the accompanying balance sheets,
because it will be repaid through the return of related pre-delivery deposits on
aircraft scheduled for delivery within 12 months of each balance sheet date, as
the aircraft will be acquired and paid for by third parties who will lease them
to the Company. Interest on these facilities is payable monthly.
Although the Company typically finances aircraft with long-term operating
leases, it has a bridge financing facility which provides for maximum borrowings
of $200.0 million to finance new Boeing 737-800 aircraft and new Boeing 757-300
aircraft. Borrowings under the facility bear interest, at the option of ATA, at
LIBOR plus a margin, which depends on the percentage of the purchase price
borrowed and whether the borrowing matures 18 or 24 months after the aircraft
delivery date. During 2001, the Company borrowed against this facility to
temporarily finance three 757-300 aircraft. These aircraft were permanently
financed with long-term operating leases in the fourth quarter of 2001. During
2002, the Company borrowed against this facility to temporarily finance one
737-800 aircraft and three 757-300 aircraft. These aircraft were permanently
financed with long-term operating leases in the first and second quarters of
2002. The company had no borrowings against this bridge financing facility as of
December 31, 2002 and 2001.
The unsecured senior notes, guaranteed term loan, and other loans secured by
certain collateral are subject to restrictive covenants, including, among other
things, limitations on the incurrence of additional indebtedness; the payment of
dividends; certain transactions with shareholders and affiliates; and the
creation of liens on or other transactions involving certain assets. In
addition, certain covenants require specified financial ratios to be maintained.
The guaranteed term loan and certain other loans contain cross-default
provisions.
Future maturities of long-term debt are as follows:
December 31, 2002
-----------------
(in thousands)
2003 $ 22,575
2004 208,545
2005 162,674
2006 30,451
2007 30,026
Thereafter 62,557
--------
Total cash payments 516,828
Less amount representing discount 7,400
--------
Total balance outstanding
at December 31, 2002 $509,428
========
61
Interest capitalized in connection with long-term asset purchase agreements and
construction projects was $7.8 million, $29.0 million and $15.3 million in 2002,
2001, and 2000, respectively. The capitalized interest includes $1.4 million,
$14.7 million and $7.9 million in 2002, 2001 and 2000, respectively, of interest
to be paid to Boeing upon delivery of certain Boeing 737-800 and Boeing 757-300
aircraft in lieu of the Company making additional pre-delivery deposits, as
allowed by the purchase agreement.
6. Lease Commitments
At December 31, 2002, the Company had the following operating aircraft leases:
Total Leased Initial Lease Expirations Initial Lease Terms
------------ ------------------------- -------------------
Lockheed L-1011-100 1 2003 60 months
Boeing 727-200 (1) 1 2003 72 months
Boeing 757-200 16 Between 2003 and 2022 1 to 22 years
Boeing 757-300 10 2021 and 2022 20 years
Boeing 737-800 30 Between 2016 and 2022 15 to 20 years
SAAB 340B 15 2009 and 2012 9.5 years
Engines - Lockheed L-1011-500 6 2006 and 2007 7 years
Engines - Boeing 757-200 5 Between 2008 and 2011 9 to 15 years
Engines - Boeing 757-300 2 2024 22.5 years
Engines - Boeing 737-800 2 2021 20 years
(1) As of December 31, 2002, this aircraft has been retired from revenue
service, but the Company remains obligated on the lease.
The Company is responsible for all maintenance costs on these aircraft and
engines, and it must meet specified airframe and engine return conditions upon
lease expiration.
As of December 31, 2002, the Company had other long-term leases related to
certain ground facilities, including terminal space and maintenance facilities
and certain ground equipment, with lease terms that vary from 2 to 45 years and
expire at various dates through 2040. The lease agreements relating to the
ground facilities, which are primarily owned by governmental units or
authorities, generally do not provide for transfer of ownership, nor do they
contain options to purchase.
The Company leases its headquarters facility from the Indianapolis Airport
Authority under an operating lease agreement, which expired in December 2002.
The Company exercised an option to extend the lease another five years. The
Company is responsible for maintenance, taxes, insurance and other expenses
incidental to the operation of the facilities.
62
Future minimum lease payments at December 31, 2002, for noncancelable operating
leases with initial terms of more than one year are as follows:
Facilities
Flight and Ground
Equipment Equipment Total
----------------------------------------------
(in thousands)
2003 $ 279,554 $ 13,565 $ 293,119
2004 266,809 12,987 279,796
2005 258,172 10,629 268,801
2006 247,723 9,589 257,312
2007 251,292 9,286 260,578
Thereafter 2,245,812 29,205 2,275,017
----------- --------- ------------
$ 3,549,362 $ 85,261 $ 3,634,623
=========== ========= ============
Rental expense for all operating leases in 2002, 2001 and 2000 was $212.8
million, $119.2 million and $88.0 million, respectively.
7. Income Taxes
The provision for income tax credit consisted of the following:
December 31,
2002 2001 2000
-------------------------------------------
(In thousands)
Federal:
Current $ (15,743) $ 4,070 $ -
Deferred (6,888) (40,546) (4,278)
---------- ---------- ---------
(22,631) (36,476) (4,278)
State:
Current 306 510 328
Deferred (2,625) (3,784) (657)
---------- ---------- ---------
(2,319) (3,274) (329)
---------- ---------- ---------
Income tax credit $ (24,950) $ (39,750) $ (4,607)
========== ========== =========
63
The income tax credit differed from the amount obtained by applying the
statutory federal income tax rate to loss before income taxes as follows:
December 31,
2002 2001 2000
----------------------------------------------------
(In thousands)
Federal income tax credit at statutory rate $ (67,975) $ (40,626) $ (6,841)
State income tax credit net of federal benefit (4,108) (2,328) (143)
Non-deductible expenses 2,393 2,041 1,872
Valuation allowance 43,324 - -
Other, net 1,416 1,163 505
---------- ---------- ----------
Income tax credit $ (24,950) $ (39,750) $ (4,607)
========== ========== ==========
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax liability and asset components are as follows:
December 31,
2002 2001
(In thousands)
Deferred tax liabilities:
Property and equipment $ 15,353 $ 35,031
Other taxable temporary differences - 342
--------- --------
Deferred tax liabilities 15,353 35,373
--------- --------
Deferred tax assets:
Tax benefit of net operating loss carryforwards 40,766 383
Alternative minimum tax and other tax credit carryforwards 1,261 19,528
Vacation pay accrual 6,526 4,723
Deferred rent expense 3,985 -
Other deductible temporary differences 6,139 2,042
--------- --------
Deferred tax assets 58,677 26,676
--------- --------
Valuation allowance (43,324) -
--------- --------
Net deferred tax liability $ - $ 8,697
========= ========
Deferred taxes classified as:
Current asset $ - $ 4,958
Non-current liability $ - $ 13,655
64
As of December 31, 2002, the Company had incurred a three-year cumulative loss.
Because of this cumulative loss and the presumption under accounting principles
generally accepted in the United States 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 tax strategies, the Company has recorded a full
valuation allowance against its net deferred asset of $43.3 million. Also as of
December 31, 2002, the Company has a income tax refund receivable of $15.8
million. Payment for this refund was received in March 2003.
Approximately $108.6 million of net operating loss carryover remains as of
December 31, 2002. Its use is limited to future taxable income of the Company.
The carryover will expire starting in 2020.
8. Retirement Plan
The Company has a defined contribution 401(k) savings plan which provides for
participation by substantially all the Company's employees immediately upon
hire. The Company has elected to contribute an amount equal to 60.0% in 2002,
55.0% in 2001 and 50.0% in 2000, of the amount contributed by each participant
up to the first six percent of eligible compensation. Company matching
contributions expensed in 2002, 2001 and 2000 were $5.2 million, $4.7 million
and $3.9 million, respectively.
Effective January 1, 2003, the Company will have a defined contribution pension
plan for cockpit crewmember employees that will be fully funded by the Company.
In the 2003 plan year, the Company will contribute between 4.0% and 6.5% of a
cockpit crewmember's eligible earnings, depending on years of service with the
Company. The contribution percentages increase in future plan years. New cockpit
crewmembers will be eligible for the plan immediately upon hire, but
contributions vest after five years of service. The Company estimates that
contribution expense for this plan in 2003 will be approximately $5.2 million.
9. Shareholders' Equity (Deficit)
Since 1994, the Company's Board of Directors has approved the repurchase of up
to 1,900,000 shares of the Company's common stock. As of December 31, 2002, the
Company had repurchased 1,711,440 common shares at a cost of $24.8 million.
The Company's 1993 Incentive Stock Plan for Key Employees (1993 Plan) authorizes
the grant of options for up to 900,000 shares of the Company's common stock. The
Company's 1996 Incentive Stock Plan for Key Employees (1996 Plan) authorizes the
grant of options for up to 3,000,000 shares of the Company's common stock. The
Company's 2000 Incentive Stock Plan for Key Employees (2000 Plan) authorizes the
grant of options for up to 3,000,000 shares of the Company's common stock.
Options granted have five to 10-year terms and generally vest and become fully
exercisable over specified periods of up to three years of continued employment.
65
A summary of common stock option changes follows:
Number Weighted-Average
of Shares Exercise Price
--------- -----------------
Outstanding at December 31, 1999 2,493,160 $ 13.41
--------- -----------------
Granted 638,550 15.69
Exercised (183,906) 8.61
Canceled (37,331) 17.88
--------- -----------------
Outstanding at December 31, 2000 2,910,473 14.19
--------- -----------------
Granted 106,600 12.21
Exercised (181,949) 9.18
Canceled (121,075) 21.60
--------- -----------------
Outstanding at December 31, 2001 2,714,049 14.14
--------- -----------------
Granted - -
Exercised (54,261) 8.27
Canceled (272,013) 19.13
Outstanding at December 31, 2002 2,387,775 $ 13.71
========= ================
Options exercisable at December 31, 2000 1,741,092 $ 11.51
========= ================
Options exercisable at December 31, 2001 2,528,633 $ 13.80
========= ================
Options exercisable at December 31, 2002 2,329,076 $ 13.69
========= ================
Options outstanding at December 31, 2002 expire from January 2003 to November
2011. A total of 3,112,671 shares are reserved for future grants as of December
31, 2002, under the 1993, 1996 and 2000 Plans. The following table summarizes
information concerning outstanding and exercisable options at December 31, 2002:
Range of Exercise Prices $6 - 8 $9 - 14 $15 - 19 $20 - 27
- ------------------------ ------ ------- -------- --------
Options outstanding:
Weighted-Average Remaining Contractual Life 5.1 years 4.6 years 5.6 years 6.0 years
Weighted-Average Exercise Price $ 7.97 $ 9.47 $ 15.80 $ 26.04
Number 196,000 1,207,925 575,700 408,150
Options exercisable:
Weighted-Average Exercise Price $ 7.97 $ 9.44 $ 15.82 $ 26.07
Number 196,000 1,190,592 536,334 406,150
In November 2002, in connection with the guaranteed term loan agreement (See
"Note 5 - Debt"), the Company issued 1,478,059 warrants to the Air Traffic
Stabilization Board and 194,089 warrants to other loan participants. The
66
warrants provide for the purchase of shares of the Company's common stock at an
exercise price of $3.53 per share and a term of ten years. Upon valid exercise,
the holders of the warrants are entitled to the representative shares assigned
to the warrants which expire in November 2012. For accounting purposes, the
warrants were valued at $7.4 million, or $4.44 per share. This estimate was made
using the Black-Scholes warrant pricing model with the following
weighted-average assumptions for 2002: risk-free interest rate of 3.32%;
expected market price volatility of 0.68; weighted-average expected warrant life
of 10 years; and no dividends.
The Black-Scholes warrant valuation model was developed for use in estimating
the fair value of traded warrants which have no vesting restrictions and are
fully transferable. In addition, warrant valuation models use highly subjective
assumptions, including the expected stock price volatility. Because the
Company's warrants have characteristics significantly different from those of
traded warrants, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its warrants.
As of December 31, 2002, the Company has 6,699,305 common stock shares reserved
for issuance in relation to its outstanding stock options, warrants, and
convertible redeemable preferred stock. (See "Note 10 - Redeemable Preferred
Stock.")
10. Redeemable Preferred Stock
In the last half of 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 Series B Preferred is convertible into shares of the Company's common stock
at a conversion rate of 6,381.62 shares of common stock per share of Series B
Preferred, at a conversion price of $15.67 per share of common stock, subject to
antidilution adjustments. The Series B Preferred is optionally redeemable by the
Company under certain conditions, but the Company must redeem the Series B
Preferred no later than September 20, 2015. Optional redemption by the Company
may occur at 103.6% of the liquidation amount beginning September 20, 2003,
decreasing 0.3% of the liquidation amount per year to 100.0% of the liquidation
amount plus cumulative unpaid dividends, if any, at the mandatory redemption
date of September 20, 2015. Shares of Series B Preferred have the right to vote
on or consent to only the following matters (in addition to any voting rights
otherwise required by law): (1) amendments to the Company's Articles of
Incorporation which are adverse to the holders of Series B Preferred; (2) if six
quarterly dividends go unpaid, the owner of Series B Preferred, together with
the owner of Series A Preferred (as defined below) and the owners of any other
preferred stock ranking equal to Series B Preferred, will be entitled to elect
at the next annual shareholders meeting 25% of the Company's Board of Directors,
but no less than two directors; and (3) increases in the number of authorized
shares of Series B Preferred and authorizations of preferred stock ranking
senior to Series B Preferred. Votes will be allocated among holders of preferred
stock based on the percentage owned by each holder of the total liquidation
amount of all series of preferred stock.
Also, in the last half of 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. The Series A Preferred is
optionally redeemable by the Company under certain conditions, but the Company
must redeem the Series A Preferred in equal semiannual payments beginning
December 28, 2010, and ending December 28, 2015. Optional redemption by the
Company may occur at a redemption premium of 50.0% of the dividend rate
beginning December 28, 2003, decreasing 10.0% per year to 20.0% of the dividend
67
rate commencing December 28, 2006, and to 0.0% after the seventh year after
issuance plus cumulative unpaid dividends, if any. Prior to the third
anniversary of issuance, the Company may redeem the Series A Preferred with net
proceeds of a public offering of the Company's common stock. Shares of Series A
Preferred have the right to vote on or consent to only the following matters (in
addition to any voting rights otherwise required by law): (1) amendments to the
Company's Articles of Incorporation which are adverse to the holders of Series A
Preferred; (2) if three semiannual dividends go unpaid, the owner of Series A
Preferred, together with the owner of Series B Preferred and the owners of any
other preferred stock ranking equal to Series A Preferred, will be entitled to
elect at the next annual shareholders' meeting, 25% of the Company's Board of
Directors, but no less than three directors; (3) approval of (a) an acquisition
by the Company or one of its subsidiaries of assets and liabilities from a third
party the net asset value of which equals 10% of the Company's net consolidated
assets in its most recent publicly available balance sheet, or (b) a merger by
the Company or one of its subsidiaries with a third party involving an
acquisition or disposition of more than 10% of the Company's consolidated net
assets in its most recent publicly available balance sheet (other than a
disposition of all the Company's L-1011 or Boeing 727 aircraft) that, in either
case, results in a downgrade of the Company's credit rating by Moody's to "C1"
or by Standard & Poor's to "C+," unless the Company offers to redeem the Series
A Preferred prior to that transaction at a price equal to the liquidation amount
plus accrued and unpaid dividends to the redemption date; and (4) increases in
the number of authorized shares of Series A Preferred and authorizations of
preferred stock ranking senior to Series A Preferred. Votes will be allocated
among holders of preferred stock based on the percentage owned by each holder of
the total liquidation amount of all series of preferred stock. The Company has
the right on any date on which dividends are payable to exchange in whole but
not in part subordinated notes for shares of Series A Preferred; the principal
amount of any exchanged subordinated notes will equal the liquidation amount of
the shares of Series A Preferred, plus any accrued and unpaid dividends.
The Company's unsecured senior notes contain certain financial covenants which
limit the Company's ability to pay preferred stock dividends. As of December 31,
2002, the Company was restricted from paying preferred stock dividends under the
covenant. Therefore, accrued preferred dividends of $2.485 million as of
December 31, 2002 have been combined with the preferred stock in the
accompanying balance sheets.
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11. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2002 2001 2000
--------------------------------------------------------------
Numerator:
Net loss $ (169,264,000) $ (76,317,000) $ (15,324,000)
Preferred stock dividends (5,720,000) (5,568,000) (375,000)
----------------- ---------------- ----------------
Loss available to common shareholders -
numerator for basic and diluted earnings per
share $ (174,984,000) $ (81,885,000) $ ( 15,699,000)
================= ================ ===== ==========
Denominator:
Denominator for basic and diluted earnings
per share - adjusted weighted average shares 11,711,906 11,464,125 11,956,532
================= ================ ================
Basic loss per share $ (14.94) $ (7.14) $ (1.31)
================= ================ ================
Diluted loss per share $ (14.94) $ (7.14) $ (1.31)
================= ================ ================
In accordance with FASB Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," 1,914,486, 1,914,486, and 533,545 common stock equivalent
shares upon conversion of convertible redeemable preferred stock in 2002, 2001,
and 2000, respectively, have been excluded from the computation of diluted
earnings per share because their effect would be antidilutive. In addition, the
impact of 59,400, 553,025, and 626,521 employee stock options in 2002, 2001, and
2000, respectively, was not included in the computation of diluted earnings per
share because their effect would be antidilutive. In 2002 the impact of the
1,672,148 incremental shares from the assumed exercise of warrants issued in
conjunction with the guaranteed term loan were not included in the computation
of diluted earnings per share because their effect would be antidilutive.
12. Commitments and Contingencies
In 2000, the Company entered into a purchase agreement with the Boeing Company
to purchase directly from Boeing 10 new Boeing 757-300s and 20 new Boeing
737-800s. The Boeing 737-800 aircraft are powered by General Electric CFM56-7B27
engines, and the Boeing 757-300 aircraft are powered by Rolls-Royce RB211-535
E4C engines. The Company also received purchase rights for an additional 50
aircraft. The manufacturer's list price is $73.6 million for each 757-300 and
$52.4 million for each 737-800, subject to escalation. The Company's purchase
price for each aircraft is subject to various discounts. To fulfill its purchase
obligations, the Company has arranged for each of these aircraft, including the
engines, to be purchased by third parties that will, in turn, enter into
long-term operating leases with the Company. As of December 31, 2002, the
Company had taken delivery of 13 Boeing 737-800s and 10 Boeing 757-300s obtained
directly from Boeing. All remaining aircraft to be purchased directly from
Boeing are scheduled for delivery between July 2004 and December 2004. Aircraft
pre-delivery deposits are required for these purchases, and the Company has
funded these deposits using operating cash and primarily short-term deposit
finance facilities. As of December 31, 2002, the Company had $21.2 million in
pre-delivery deposits outstanding for these aircraft, of which $8.4 million was
provided by deposit finance facilities. Upon delivery of the aircraft,
pre-delivery deposits funded with operating cash will be returned to the
Company, and those funded with deposit facilities will be used to repay those
facilities.
69
In 2001, the Company entered into an agreement to exercise purchase rights on
two Boeing 757-300 aircraft to be delivered in May and June 2003. The Company
has purchase rights remaining for eight Boeing 757-300 aircraft and 40 Boeing
737-800 aircraft.
The Company has operating lease agreements in place to lease 14 new Boeing
737-800s from International Lease Finance Corporation ("ILFC"). As of December
31, 2002, the Company had taken delivery of 12 Boeing 737-800s that are being
leased from ILFC. The remaining aircraft under these operating lease agreements
are currently scheduled for delivery in June 2003 and November 2003.
The Company has an agreement with General Electric to purchase four spare
engines, which are scheduled for delivery between 2003 and 2006.
The Company intends to finance all of these future aircraft and engine
deliveries with operating leases. However, no such leases are in place as the
Company has not received the aircraft or engines. The Company derived payments
for these expected future lease obligations using leases for comparable aircraft
currently in place. These estimated future payments follow:
Expected
Future
Lease
Obligations
-----------
(in thousands)
2003 $ 5,155
2004 33,716
2005 56,440
2006 60,708
2007 56,011
Thereafter 604,780
---------
$ 816,810
=========
In 2001, the Company entered into short-term operating leases with BATA to lease
back nine Boeing 727-200 aircraft, all of which have terminated. The Company is
subject to lease return conditions on these nine operating leases upon delivery
of any related aircraft to a third-party by BATA. On January 31, 2003, BATA
entered into a lease agreement with a third party lessee on one of the nine
aircraft. The return conditions set forth in the short-term operating lease were
satisfied by the completion of a cargo configuration on the aircraft. Management
believes it is reasonably possible that a lessee or buyer will be identified for
the remaining eight aircraft. The Company estimates that it could incur
approximately $6.0 million of expense to meet the return conditions, if all
eight of the aircraft were leased by BATA to third parties. If the aircraft are
leased as cargo carriers, it is likely the lease return conditions will be
satisfied by completing the cargo configuration on the aircraft. No liability
70
was recorded for these return conditions as of December 31, 2002 as it is not
probable that it will be paid.
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.
13. Segment Disclosures
The Company identifies its segments on the basis of similar products and
services. Through the first half of 2002, the Company identified two reportable
segments. The airline segment derived its revenues primarily from the sale of
scheduled service or charter air transportation and the ATALC segment derived
its revenues from the sale of vacation packages, including air transportation,
hotels and other ground arrangements.
On July 1, 2002, the Company outsourced the management operations of two of its
ATALC brands, ATA Vacations and Travel Charter International ("TCI"), to
Milwaukee-based The Mark Travel Corporation ("MTC"). MTC creates, advertises,
takes reservations and delivers the services of ATA Vacations and TCI. MTC
receives revenue from the package sales, and the Company receives a royalty fee
from MTC. As a result of the outsourcing arrangement, this segment has a less
material effect on the consolidated financial statements, and is no longer
considered a reportable segment as of December 31, 2002.
The Company's revenues are derived principally from customers domiciled in the
United States. The most significant component of the Company's property and
equipment is aircraft and related improvements and parts. All aircraft are
registered in the United States. The Company therefore considers all property
and equipment to be domestic.
The U.S. Government is the only customer that accounted for more than 10.0% of
consolidated revenues. U.S. Government revenues accounted for 13.9%, 13.1% and
14.6% of consolidated revenues for 2002, 2001 and 2000, respectively.
14. Fuel Price Risk Management
During 2002, 2001, and 2000, the Company entered into fuel hedge contracts to
minimize the risk of fuel price fluctuation. During these years, the Company
hedged fuel using heating oil swap agreements, which establish specific swap
prices for designated periods.
71
Effective January 1, 2001, the Company adopted FASB Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended ("FAS 133"). FAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value must be immediately
recognized in earnings.
In accordance with FAS 133, the Company accounted for its heating oil swap
agreements as cash flow hedges. Upon the adoption of FAS 133, the fair value of
the Company's fuel hedging contracts representing the amount the Company would
pay if the agreements were terminated was $0.6 million. The Company recorded
this amount, net of income taxes of $0.2 million, in other assets and other
current liabilities, respectively, with a corresponding entry of the net fair
value in accumulated other comprehensive income on the consolidated balance
sheet. All changes in fair value of the heating oil swap agreements during 2002
and 2001 were effective for purposes of FAS 133, so these valuation changes were
recognized throughout these years in other comprehensive loss and were included
in earnings as a component of fuel expense only upon settlement of each
agreement. During 2002, the Company recognized hedging gains of $0.5 million on
settled contracts in fuel expense. During 2001, the Company recognized losses on
settled contracts in fuel expense of $2.6 million.
15. Fleet Impairment
Effective January 1, 2002, the Company adopted FASB Statement of Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("FAS 144"), which superseded FASB Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of ("FAS 121"). However, the Company
continues to account for the fleet and related assets that were impaired prior
to January 1, 2002 and classified as held for sale under FAS 121, as required by
FAS 144.
In 2001, the Company decided to retire its Boeing 727-200 fleet earlier than
originally planned, and all of these aircraft were removed from revenue service
by the middle of 2002. In 2001, the Company performed an impairment review and
determined that this fleet and related rotable parts and inventory were
impaired. In 2001, the Company recorded an asset impairment charge of $44.5
million ($35.2 million in the third quarter and $9.3 million in the fourth
quarter) to reduce the carrying amount of the Boeing 727-200 aircraft and
related assets to their estimated fair value, including those aircraft
underlying the investment in BATA. During 2002, the Company recorded an
additional impairment charge of $35.9 million ($14.8 million in the second
quarter, $18.8 million in the third quarter, and $2.3 million in the fourth
quarter) to further reduce the carrying amount of these assets. The current
estimate of this fleet's fair value is based on quoted market prices. The
carrying amount of one Boeing 727-200 aircraft not yet transferred to BATA and
related assets are classified as long-term assets held for sale in the
accompanying balance sheet in accordance with FAS 121.
In 2001, the Company also determined that the Lockheed L-1011-50 and 100 fleet
and related rotable parts and inventory were impaired under FAS 121, and
recorded an impairment charge of $67.8 million in the fourth quarter of 2001. In
the fourth quarter of 2002, the Company recorded an additional impairment charge
of $7.6 million in accordance with FAS 144 to further reduce the carrying amount
of the Lockheed L-1011-50 and 100 aircraft and related assets. The Company
estimated this fleet's fair value using discounted cash flow analysis. The
carrying amount of these assets is classified as assets held for use and appears
72
in the property and equipment section of the accompanying consolidated balance
sheets. The assets are being depreciated in conjunction with the planned fleet
retirement schedule.
16. Goodwill and Other Intangible Assets
The Company has no material intangible assets other than goodwill. The Company's
goodwill is related to its ATALC, ATA Cargo and Chicago Express subsidiaries
acquired in 1999. Prior to the adoption of FAS 142 by the Company in the first
quarter of 2002, the Company amortized goodwill on a straight-line basis over 20
years in accordance with APB 17. The Company recorded no goodwill amortization
expense in 2002 and $1.3 million in both 2001 and 2000.
As required by FAS 142, the Company performed its first annual goodwill
impairment test in the fourth quarter of 2002. By this time, the Company had
outsourced the management of two of its ATALC brands to MTC. The Company
continues to manage the other ATALC brands including the Key Tours Canadian Rail
programs, Key Tours Las Vegas ground operations and the Kodiak Call Center
(collectively "KTI brands"). (See further discussion in Note 13, "Segment
Disclosures.") Based on guidance provided in FAS 142, the Company identified two
FAS 142 reporting units. In the goodwill impairment review, the Company
determined that the goodwill related to Chicago Express, ATA Cargo and the MTC
reporting unit was not impaired. However, the estimated fair value of the KTI
reporting unit was lower than the carrying amount and an impairment loss of $6.9
million was recorded in the fourth quarter of 2002. The fair values of all of
the Company's reporting units were estimated using discounted future cash flows,
since market quotes were not readily available.
17. Related Party Transactions
J. George Mikelsons, the Company's Chairman and Chief Executive Officer, is the
sole owner of Betaco, Inc., a Delaware corporation ("Betaco"). Betaco currently
owns two airplanes, a Cessna Citation II and a Lear Jet, and three helicopters,
a Bell 206B Jet Ranger III, an Aerospatiale 355F2 Twin Star and a Bell 206L-3
LongRanger. The two airplanes and the Twin Star helicopter are leased or
subleased to ATA. The Jet Ranger III and LongRanger helicopters are leased to
American Trans Air ExecuJet, Inc. ("ExecuJet"). Execujet used the Jet Ranger III
for third-party charter flying and subleases the LongRanger to an Indianapolis
television station.
The lease for the Cessna Citation currently requires a monthly payment of
$37,500 for a term beginning July 25, 1999, and ending on July 24, 2004. The
lease for the Lear Jet requires a monthly payment of $33,600 for a term
beginning December 24, 2001, and ending December 23, 2003. The lease for the
JetRanger III currently requires a monthly payment of $3,500 for a term
beginning June 15, 1993, and ending November 1, 2005. The lease for the
LongRanger requires a monthly payment of $7,350 for a term beginning December
11, 2001, and ending October 31, 2005. The Company believes that the current
terms of the leases and subleases with Betaco for this equipment are no less
favorable to the Company than those that could be obtained from third parties.
The lease for the Aerospatiale 355F2 Twin Star requires a monthly payment of
$9,000 for a term beginning January 1, 2002, and ending October 31, 2005. Lease
payments under this lease were suspended on February 13, 2003, and will be
reinstated only upon the Twin Star being certificated for commercial use with an
operational plan that demonstrates significant operational revenue for the
Company.
Since 1996, the Company and Mr. Mikelsons have had an arrangement pursuant to
which the Company provides certain domestic employees of Mr. Mikelsons with
salary, health insurance and other non-cash benefits. Every quarter, the Company
invoices Mr. Mikelsons for the full amount of such benefits. Historically, the
timing of payments from Mr. Mikelsons to the Company has been inconsistent.
Beginning in 2003, Mr. Mikelsons reimburses the Company prior to the pay date
for these employees.
73
The Company pays approximately $269,000 in annual compensation, plus associated
non-cash benefits, to five employees who serve as the crew for two boats owned
by Betaco and another company owned by Mr. Mikelsons. Under an agreement dated
as of July 1, 2002, the Company agreed to pay for these employees in exchange
for its use of the boats for business purposes (e.g., the entertainment of
clients, customers and vendors of the Company). To the extent that, for any
fiscal year, the crew's compensation, plus associated non-cash benefits, exceeds
75% of the amount that would have been charged by an outside third party under a
fair market rental contract for the Company's actual use of the boats, Mr.
Mikelsons shall be responsible for paying the difference.
As of December 31, 2002, Mr. Mikelsons owes $685,451 to the Company pursuant to
the arrangements relating to the domestic employees and the crew for the two
boats. In 2002, the Company has also paid Mr. Mikelsons a total of $120,000 in
connection with the use of the boats by ATA prior to the July 1, 2002,
agreement. While there have been other business uses by the Company, Mr.
Mikelsons has determined not to seek reimbursement for them.
18. Recently Issued Accounting Pronouncements
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13 and Technical Corrections ("FAS 145"). FAS 145 rescinds both FASB
Statements of Financial Accounting Standards No. 4, Reporting Gains and Losses
from Extinguishment of Debt, ("FAS 4"), and an amendment to FAS 4, FASB
Statement of Financial Accounting Standards No. 64, Extinguishments of Debt Made
to Satisfy Sinking Fund Requirements ("FAS 64"). FAS 4 required that all gains
and losses from the extinguishment of debt be aggregated and, if material, be
classified as an extraordinary item, net of the related income tax effect. Upon
the adoption of FAS 145, all gains and losses on the extinguishment of debt for
periods presented in the financial statements will be classified as
extraordinary items only if they meet the criteria of APB Opinion 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("APB 30"). The provisions of FAS 145 related to the rescission of
FAS 4 and FAS 64 shall be applied for fiscal years beginning after May 15, 2002.
Upon adoption in January 2003, the Company expects it will be required to
classify any material gains or losses on debt extinguishment as a separate line
item before income from continuing operations for all periods presented. The
provisions of FAS 145 also relate to the rescission of FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers, ("FAS 44"), the amendment of
FASB Statement No. 13, Accounting for Leases, ("FAS 13"), and Technical
Corrections, which became effective as of May 15, 2002 and are not expected to
have a material impact on the Company.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities, ("FAS
146"). FAS 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring). FAS
146 generally requires companies to recognize costs associated with exit
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan and is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company does not expect this
standard to have a material impact on the Company.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
74
Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also expands the disclosure required
to be made by a guarantor about its obligations under certain guarantees that it
has issued. Initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified. The
disclosure requirements are effective immediately. The Company does not expect
this interpretation to have a material impact on the Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. The related disclosure
requirements are effective immediately. The Company does not expect this
interpretation to have a material impact on the Company.
19. Selected Supplemental Quarterly Data (Unaudited)
Financial Statements and Supplementary Data
ATA Holdings Corp. and Subsidiaries
2002 Quarterly Financial Summary
(Unaudited)
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 3/31 6/30 (1) 9/30 (1) 12/31 (1)
- -------------------------------------------------------------------------------------------------------
Operating revenues $ 330,570 $ 318,541 $ 317,289 $ 310,970
Operating expenses 320,512 377,834 376,933 362,128
Operating income (loss) 10,058 (59,293) (59,644) (51,158)
Other expenses (7,416) (9,690) (7,723) (9,348)
Income (loss) before income taxes 2,642 (68,983) (67,367) (60,506)
Income taxes (credits) 762 (13,585) (6,746) (5,381)
Preferred stock dividends 375 2,485 375 2,485
Income (loss) available to common shareholders $ 1,505 $ (57,883) $ (60,996) $ (57,610)
Net income (loss) per common share - basic $ 0.13 $ (4.92) $ (5.18) $ (4.90)
Net income (loss) per common share - diluted $ 0.12 $ (4.92) $ (5.18) $ (4.90)
75
Financial Statements and Supplementary Data
ATA Holdings Corp. and Subsidiaries
2001 Quarterly Financial Summary
(Unaudited)
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 3/31 6/30 9/30 (1) 12/31 (1)
- -------------------------------------------------------------------------------------------------------
Operating revenues $ 347,485 $ 358,895 $ 321,469 $ 247,635
Operating expenses 349,719 342,336 317,017 358,282
Operating income (loss) (2,234) 16,559 4,452 (110,647)
Other expenses (5,459) (5,828) (4,048) (8,862)
Income (loss) before income taxes (7,693) 10,731 404 (119,509)
Income taxes (credits) (3,309) 4,200 16 (40,657)
Preferred stock dividends 375 2,333 375 2,485
Income (loss) available to common shareholders $ (4,759) $ 4,198 $ 13 $ (81,337)
Net income (loss) per common share - basic $ (0.42) $ 0.37 $ 0.00 $ (7.05)
Net income (loss) per common share - diluted $ (0.42) $ 0.33 $ 0.00 $ (7.05)
(1) Operating results for the years ended December 31, 2002 and 2001 include
several non-recurring or unusual charges. See "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - State
of the Industry and the Company;" "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 15 - Fleet Impairment;" and
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 16 - Goodwill and Other Intangible Assets."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No change of auditors or disagreements on accounting methods have occurred which
would require disclosure hereunder.
76
PART III
Item 10. Directors and Officers of the Registrant
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 12, 2003.
Item 11. Executive Compensation
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 12, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 12, 2003.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's proxy statement for the annual
meeting of stockholders to be held on May 12, 2003.
Item 14. Controls and Procedures
On March 21, 2003, 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, as amended, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on this evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the controls and procedures were
effective.
Since March 21, 2003, there have not been any significant changes in the
internal controls or in other factors that could significantly affect the
internal controls.
77
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8:
o Consolidated Balance Sheets for the years ended December 31,
2002 and 2001
o Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000
o Consolidated Statements of Changes in Redeemable Preferred
Stock, Common Stock and Other Shareholders' Equity
(Deficit)for the years ended December 31, 2002, 2001 and
2000
o Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000
o Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
The following consolidated financial information for the years 2002,
2001 and 2000 is included in Item 15d:
o Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits
Exhibits are filed as a separate section of this report as set forth
in the Index to Exhibits attached to this report.
(b) Reports on Form 8-K filed during the quarter ending December 31, 2002:
Report filed on October 29, 2002, furnishing items under Item 9.
Regulation FD Disclosure.
Report filed on November 14, 2002, furnishing items under Item 7.
Financial Statements and Exhibits and Item 9. Regulation FD
Disclosure.
Report filed on November 18, 2002, furnishing items under Item 5.
Other Events and Item 7. Financial Statements and Exhibits.
78
Report filed on November 20, 2002, furnishing items under Item 5.
Other Events, Item 7. Financial Statements and Exhibits and Item 9.
Regulation FD Disclosure.
(c) Exhibits
See the Index to Exhibits attached to this report.
(d) Financial Statement Schedule
See Schedule II - Valuation and Qualifying Accounts.
79
Item 15d. Valuation and Qualifying Accounts Schedule II
(Dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- -------- -------- -------- --------
Additions
---------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts - Deductions - Balance at
Description Period Expenses Describe Describe End of Period
- -------------------------------------- -------- -------- -------- -------- -------------
Year ended December 31, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts 1,511 2,431 - 2,751 (1) 1,191
Allowance for obsolescence - Inventory 10,291 3,466 - 645 (2) 13,112
-------- -------- ----- -------- --------
Totals $ 11,802 $ 5,897 $ - $ 3,396 $ 14,303
======== ======== ===== ======== ========
Year ended December 31, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts 1,191 2,213 - 1,878 (1) 1,526
Allowance for obsolescence - Inventory 13,112 3,481 - 5,688 (2) 10,905
-------- -------- ----- -------- --------
Totals $ 14,303 $ 5,694 $ - $ 7,566 $ 12,431
======== ======== ===== ======== ========
Year ended December 31, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts 1,526 2,605 - 1,756 (1) 2,375
Allowance for obsolescence - Inventory 10,905 4,258 - 433 (2) 14,730
Valuation allowance for deferred tax asset - 43,324 - - 43,324
-------- -------- ----- -------- --------
Totals $ 12,431 $ 50,187 $ - $ 2,189 $ 60,429
======== ======== ===== ======== ========
(1) Uncollectible accounts written off, net of recoveries.
(2) Reduction of obsolescence allowance in 2001 of $5.4 million resulted from
the FAS 121 impairment write down of Lockheed L-1011-50 and 100 inventory
and Boeing 727-200 inventory. The reduction in 2002 and 2000, and the
remainder of the 2001 reduction in obsolescence allowance, related to
inventory items transferred to flight equipment or sold.
80
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: March 31, 2003 /s/ J. George Mikelsons
J. George Mikelsons
Chairman and Chief Executive Officer
On behalf of the Registrant and as Director
Date: March 31, 2003 /s/ James W. Hlavacek
James W. Hlavacek
Executive Vice President and
Chief Operating Officer
Director
Date: March 31, 2003 /s/ David M. Wing
David M. Wing
Executive Vice President and
Chief Financial Officer
Director
Date: March 31, 2003 /s/ Robert A. Abel
Robert A. Abel
Director
Date: March 31, 2003 /s/ Claude E. Willis
Claude E.Willis
Director
Date: March 31, 2003 /s/ Andrejs P. Stipnieks
Andrejs P. Stipnieks
Director
Index to Exhibits
Exhibit No.
2.1 Agreement and Plan of Merger between INDUS Acquisition Company and Amtran,
Inc. (incorporated by reference to Annex A to the Preliminary Proxy
Statement on Schedule 14A filed by Amtran, Inc. on June 29, 2001).
3.(i)(a) Restated Articles of Incorporation of Amtran, Inc. (incorporated by
reference to Exhibit 3(a) to Amtran, Inc.'s Registration Statement on S-1
dated March 16, 1993, File No. 33-59630).
3.(i)(b) Articles of Amendment to the Restated Articles of Incorporation adopted
as of September 19, 2000. (incorporated by reference to Exhibit 3.(i)(b) to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
3.(i)(c) Articles of Amendment to the Restated Articles of Incorporation adopted
as of December 28, 2000. (incorporated by reference to Exhibit 3.(i)(c) to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
3(ii)Bylaws of Amtran, Inc., as amended, (incorporated by reference to Exhibit
3(b) to Amtran, Inc.'s Registration Statement on S-1 dated March 16, 1993,
File No. 33-59630).
4.1 Indenture dated as of July 24, 1997, by and among Amtran, Inc., as issuer,
American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA Vacations,
Inc., Amber Travel, Inc., American Trans Air Training Corporation, American
Trans Air ExecuJet, Inc. and Amber Air Freight Corporation, as guarantors,
and First Security Bank, N.A., as trustee (incorporated by reference to
Exhibit 4.1 to Amtran, Inc.'s Registration Statement on S-4 dated October
6, 1997, File No. 333-37283).
4.2 Indenture dated as of December 11, 1998, by and among Amtran, Inc., as
issuer, American Trans Air, Inc., Ambassadair Travel Club, Inc., ATA
Vacations, Inc., Amber Travel, Inc., American Trans Air Training
Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight
Corporation, as guarantors, and First Security Bank, N.A., as trustee
(incorporated by reference to Exhibit 4.4 to Amtran, Inc.'s Registration
Statement on S-3 dated August 26, 1998, File No. 333-52655).
4.3 First Supplemental Indenture dated as of December 11, 1998, by and among
Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club,
Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training
Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight
Corporation, as guarantors, and First Security Bank, N.A., as trustee, to
the Indenture dated as of December 11, 1998 (incorporated by reference to
Exhibit 4.4 to Amtran, Inc.'s Registration Statement on S-3 dated August
26, 1998, File No. 333-52655).
4.4 First Supplemental Indenture dated as of December 21, 1999, by and among
Amtran, Inc., as issuer, American Trans Air, Inc., Ambassadair Travel Club,
Inc., ATA Vacations, Inc., Amber Travel, Inc., American Trans Air Training
Corporation, American Trans Air ExecuJet, Inc. and Amber Air Freight
Corporation, Chicago Express Airlines, Inc., as guarantors, and First
Security Bank, N.A., as trustee, to the Indenture dated as of July 24, 1997
(incorporated by reference to Exhibit 4.1 to Amtran, Inc.'s Registration
Statement on S-4 dated January 25, 2000, File No. 333-95371).
4.5 Pass Through Trust Agreement, dated as of March 28, 2002, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 2002-1A Pass
Through Trust and the issuance of 8.328% Initial American Trans Air 2002-1A
Pass Through Certificates and 8.328% Exchange American Trans Air 2002-1A
Pass Through Certificates (incorporated by reference to Exhibit 4.5 to ATA
Holdings Corp.'s Registration Statement on Form S-4 dated November 22,
2002, File No. 333-101423).
4.6 Pass Through Trust Agreement, dated as of March 28, 2002, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 2002-1B Pass
Through Trust and the issuance 10.699% Initial American Trans Air 2002-1 B
Pass Through Certificates and 10.699% Exchange American Trans Air 2002-1B
Pass Through Certificates (incorporated by reference to Exhibit 4.6 to ATA
Holdings Corp.'s Registration Statement on Form S-4 dated November 22,
2002, File No. 333-101423).
4.7 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1G-O Pass Through
Trust and the issuance of 8.039% Initial American Trans Air 2000-1G-O Pass
Through Trust Certificates and 8.039% Exchange American Trans Air 2000-1G-O
Pass Through Certificates (incorporated by reference to Exhibit 4.5 to
Amtran, Inc.'s Registration Statement on S-4 dated August 11, 2000, File
No. 333-43606).
4.8 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1G-S Pass Through
Trust and the issuance of 8.039% Initial American Trans Air 2000-1G-S Pass
Through Certificates and 8.039% Exchange American Trans Air 2000-1G-S Pass
Through Certificates (incorporated by reference to Exhibit 4.6 to Amtran,
Inc.'s Registration Statement on S-4 dated August 11, 2000, File No.
333-43606).
4.9 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1C-O Pass Through
Trust and the issuance of 9.644% Initial American Trans Air 2000-1C-O Pass
Through Certificates and 9.644% Exchange American Trans Air 2000-1C-O Pass
Through Certificates (incorporated by reference to Exhibit 4.7 to Amtran,
Inc.'s Registration Statement on S-4 dated August 11, 2000, File No.
333-43606).
4.10 Pass Through Trust Agreement, dated as of February 15, 2000, between
American Trans Air, Inc. and Wilmington Trust Company, as Trustee, made
with respect to the formation of American Trans Air 2000-1C-S Pass Through
Trust and the issuance of 9.644% Initial American Trans Air 2000-1C-S Pass
Through Certificates and 9.644% Exchange American Trans Air 2000-1C-S Pass
Through Certificates (incorporated by reference to Exhibit 4.8 to Amtran,
Inc.'s Registration Statement on S-4 dated August 11, 2000, File No.
333-43606).
4.11 Purchase and Investor Rights Agreement dated as of December 13, 2000,
between Amtran, Inc. and Boeing Capital Corporation. (incorporated by
reference to Exhibit 4.9 to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642).
4.12 Purchase and Investor Rights Agreement dated as of September 19, 2000,
between Amtran, Inc. and International Lease Finance Corporation.
(incorporated by reference to Exhibit 4.10 to Amtran, Inc.'s Annual Report
on 10-K dated April 2, 2001, File No. 000-21642).
4.13 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 1996-1A Pass
Through Trust and the issuance of 7.37% American Trans Air 1996-1A Pass
Through Trust Certificates. (incorporated by reference to Exhibit 4.11 to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.14 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 1996-1B Pass
Through Trust and the issuance of 7.64% American Trans Air 1996-1B Pass
Through Trust Certificates. (incorporated by reference to Exhibit 4.12 to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.15 Pass Through Trust Agreement, dated as of December 16, 1996, among Amtran,
Inc., American Trans Air, Inc. and Wilmington Trust Company, as Trustee,
made with respect to the formation of American Trans Air 1996-1C Pass
Through Trust and the issuance of 7.82% American Trans Air 1996-1C Pass
Through Trust Certificates. (incorporated by reference to Exhibit 4.13 to
Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.16 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1A-O
Pass Through Trust and the issuance of 6.99% American Trans Air 1997-1A-O
Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.14
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.17 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1A-S
Pass Through Trust and the issuance of 6.99% American Trans Air 1997-1A-S
Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.15
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.18 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1B-O
Pass Through Trust and the issuance of 7.19% American Trans Air 1997-1B-O
Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.16
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.19 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1B-S
Pass Through Trust and the issuance of 7.19% American Trans Air 1997-1B-S
Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.17
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.20 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1C-O
Pass Through Trust and the issuance of 7.46% American Trans Air 1997-1C-O
Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.18
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.21 Pass Through Trust Agreement, dated as of December 23, 1997, between
Amtran, Inc., American Trans Air, Inc. and Wilmington Trust Company, as
Trustee, made with respect to the formation of American Trans Air 1997-1C-S
Pass Through Trust and the issuance of 7.46% American Trans Air 1997-1C-S
Pass Through Trust Certificates. (incorporated by reference to Exhibit 4.19
to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001, File No.
000-21642).
4.22 Form of Common Stock Certificate of Amtran, Inc. (incorporated by reference
to Exhibit 4 to Amtran, Inc.'s Registration Statement on S-1 dated March
16, 1993, File No. 33-59630).
4.23 Form of Series A1 Preferred Stock Certificate of Amtran, Inc. (incorporated
by reference to Exhibit 4.21 to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642).
4.24 Form of Series B Preferred Stock Certificate of Amtran, Inc. (incorporated
by reference to Exhibit 4.22 to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642).
4.25 Form of 1996 Class A American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.11).
4.26 Form of 1996 Class B American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.12).
4.27 Form of 1996 Class C American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.13).
4.28 Form of 1997 Class A American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.14).
4.29 Form of 1997 Class B American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.16).
4.30 Form of 1997 Class C American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.18).
4.31 Form of 2000 Class G American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.5).
4.32 Form of 2000 Class C American Trans Air, Inc. Pass Through Certificates
(included in Exhibit 4.7).
4.33 Amtran, Inc. hereby agrees to furnish to the Commission, upon request,
copies of certain additional instruments relating to long-term debt of the
kind described in Item 601(b)(4)(iii)(A) of Regulation S-K.
10.1 1993 Incentive Stock Plan for Key Employees of Amtran, Inc. and its
Subsidiaries (incorporated by reference to Exhibit 10(r)(r) to Amtran,
Inc.'s Registration Statement on S-1 dated March 16, 1993, File No.
33-59630).
10.2 1996 Incentive Stock Plan for Key Employees of Amtran, Inc. and its
Subsidiaries (incorporated by reference to Amtran, Inc.'s Registration
Statement on S-8 dated June 20, 1997, File No. 333-29715).
10.3 2000 Incentive Stock Plan for Key Employees of Amtran, Inc. and its
Subsidiaries (incorporated by reference to Exhibit A to Amtran, Inc.'s
Proxy Statement dated April 5, 2000).
10.4 Stock Option Plan for Non-Employee Directors (incorporated by reference to
Appendix A to Amtran, Inc.'s Proxy Statement dated April 15, 1994).
10.5 Aircraft General Terms Agreement dated as of June 30, 2000, between The
Boeing Company ("Boeing") and American Trans Air, Inc.; Purchase Agreement
Number 2285 dated as of June 30, 2000, between Boeing and American Trans
Air, Inc.; Purchase Agreement Number 2262 dated as of June 30, 2000,
between Boeing and American Trans Air, Inc. (incorporated by reference to
Exhibit 10.5 to Amtran, Inc.'s Annual Report on 10-K dated April 2, 2001,
File No. 000-21642). *
10.6(a) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(a) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(b) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(b) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(c) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(c) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(d) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(d) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(e) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(e) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(f) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(f) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(g) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(g) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(h) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(h) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(i) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(i) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(j) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(j) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(k) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(k) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(l) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(l) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(m) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(m) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.6(n) Aircraft Lease Agreement dated as of September 20, 2000, between Amtran,
Inc. and International Lease Finance Corporation. (incorporated by
reference to Exhibit 10.6(n) to Amtran, Inc.'s Annual Report on 10-K dated
April 2, 2001, File No. 000-21642). *
10.7 Aircraft Financing Agreement dated as of December 6, 2000, between Amtran,
Inc. and General Electric Capital Corporation. (incorporated by reference
to Exhibit 10.7 to Amtran, Inc.'s Annual Report on 10-K dated April 2,
2001, File No. 000-21642). *
10.8 Limited Liability Company Agreement dated as of March 13, 2001, between
Amtran, Inc. and Boeing Capital Corporation to form BATA Leasing LLC.
(incorporated by reference to Exhibit 10.1.1 to Amtran, Inc.'s Quarterly
Annual Report on 10-Q dated May 15, 2001, File No. 000-21642). *
10.9 Purchase and Voting Agreement dated as of May 16, 2001 between Amtran,
Inc., and ILFC (incorporated by reference to Exhibit 99.2 to the 8-K dated
May 16, 2001).
10.10Commitment Letter dated June 18, 2001, from Salomon Smith Barney Inc., and
Citicorp USA, Inc. to Amtran, Inc. (incorporated by reference to Exhibit 2
to the Schedule 13D filed by Amtran, Inc., J. George Mikelsons and INDUS
Acquisition Company on June 21, 2001).
10.11$168,000,000 Loan Agreement dated as of November 30, 2002 among American
Trans Air, Inc., as Borrower, ATA Holdings Corp., as Parent, GOVCO
Incorporated, as Primary Tranche A Lender, Citibank, N.A., as Alternate
Tranche A Lender, Citicorp North America, Inc., as GOVCO Administrative
Agent, Citibank, N.A., as Tranche B Lender, BearingPoint, Inc, as Loan
Administrator, Citibank, N.A., as Collateral Agent, Citibank, N.A., as
Agent, and the Air Transportation Stabilization Board. *
10.12Mortgage and Security Agreement dated as of November 20, 2002 made by
American Trans Air, Inc. in favor of Citibank, N.A., as the Collateral
Agent.
21 Subsidiaries of Amtran, Inc.
23 Consent of Independent Auditors.
99.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Portions of these exhibits have been omitted pursuant to a request for
confidential treatment and filed separately with the Securities and Exchange
Commission.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-52655) of ATA Holdings Corp. and Subsidiaries and in the related
Prospectus, in the Registration Statement (Form S-8 No. 33-65708) pertaining to
the 1993 Incentive Stock Plan for Key Employees of ATA Holdings Corp. and
Subsidiaries and in the Registration Statement (Form S-3 No. 333-86791) of ATA
Holdings Corp. and Subsidiaries and in the related Prospectus of our report
dated January 24, 2003, with respect to the consolidated financial statements
and schedule of ATA Holdings Corp. and Subsidiaries, included in the Annual
Report (Form 10-K) for the year ended December 31, 2002.
ERNST & YOUNG LLP
Indianapolis, Indiana
March 25, 2003