EXPRESSJET HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended March 31, 2003
		or
[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from__________ to__________

Commission File Number 1-31300

EXPRESSJET HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		76-0517977 (I.R.S. Employer Identification No.)

1600 Smith Street, Dept. HQSCE Houston, Texas (Address of principal executive offices)		77002 (Zip Code)

713-324-2639
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

X Yes

As of April 21, 2003, 64,000,000 shares of common stock were outstanding.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

EXPRESSJET HOLDINGS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)

		Three Months Ended March 31,
		Three Months Ended March 31,

		2003			2002

Operating Revenue................................................	$	306,562		$	265,245

Operating Expenses:
Wages, salaries and related costs.....................		66,492			58,905
Aircraft rentals.................................................		57,449			46,763
Aircraft fuel......................................................		30,403			22,230
Maintenance, materials and repairs....................		29,912			24,453
Other rentals and landing fees...........................		23,534			22,502
Ground handling...............................................		20,206			17,704
Depreciation and amortization...........................		4,795			7,914
Outside services..............................................		9,499			6,398
Hull and war risk related insurance.....................		1,014			4,344
Other operating expenses.................................		19,896			18,487

		263,200			229,700

Operating Income..................................................		43,362			35,545

Nonoperating Income (Expense):
Interest expense, net........................................		(2,220	)		(4,430	)
Interest income................................................		459			1,090
Capitalized interest...........................................		245			344
Other, net........................................................		(1	)		100

		(1,517	)		(2,896	)

Income before Income Taxes and Dividends.............		41,845			32,649
Income Tax Expense.............................................		16,093			12,615

Income before Dividends........................................		25,752			20,034

Dividends on Mandatorily Redeemable Preferred Stock of Subsidiary....................................................		(175	)		-

Net Income...........................................................	$	25,577		$	20,034

Basic and Diluted Earnings per Common Share.......	$	0.40		$	0.37

Shared Used in Computing Basic and Diluted Earnings per Common Share.............................		64,000			54,000

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EXPRESSJET HOLDINGS, INC.,AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS		March 31,			December 31,
		2003			2002

		(Unaudited)
Current Assets:
Cash and cash equivalents.........................	$	144,418		$	120,930
Accounts receivable, net............................		2,506			1,526
Amounts due from Continental Airlines, Inc.		8,988			17,419
Spare parts and supplies, net.....................		25,355			26,842
Prepayments and other..............................		10,551			10,775
Deferred income taxes...............................		-			2,299

Total Current Assets...............................		191,818			179,791

Property and Equipment:
Owned property and equipment:
Flight equipment.....................................		198,887			188,366
Other.....................................................		91,688			89,859

		290,575			278,225
Less: Accumulated depreciation.............		(71,863	)		(68,130	)

		218,712			210,095

Capital Leases:
Flight equipment.....................................		10,643			10,643
Other.....................................................		4,358			4,358

		15,001			15,001
Less: Accumulated amortization.............		(2,782	)		(2,518	)

		12,219			12,483

Total Property and Equipment..................		230,931			222,578

Deferred Income Taxes...................................		627			8,835
Reorganization Value In Excess of Amounts
Allocable to Identifiable Assets, net.............		12,789			12,789
Airport Operating Rights, net...........................		4,631			4,693
Note Receivable.............................................		5,000			5,000
Other Assets, net...........................................		454			462

Total Assets..........................................	$	446,250		$	434,148

(continued on next page)

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EXPRESSJET HOLDINGS, INC.,AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)

LIABILITIES AND		March 31,			Dec 31,
STOCKHOLDERS' EQUITY		2003			2002

		(Unaudited)
Current Liabilities:
Current maturities of note payable to Continental Airlines, Inc..........................	$	74,380		$	73,551
Current maturities of capital leases.............		2,213			2,174
Accounts payable.....................................		7,296			8,153
Accrued payroll and related costs...............		30,615			18,260
Accrued other liabilities..............................		41,344			45,648
Deferred income taxes...............................		5,586			-

Total Current Liabilities...........................		161,434			147,786

Note Payable to Continental Airlines, Inc..........		225,132			251,961

Capital Leases...............................................		3,826			4,394

Other Long Term Liabilities..............................		9,977			9,705

Mandatorily Redeemable Preferred Stock of Subsidiary................................................		5,000			5,000

Stockholders’ Equity:
Special Voting Preferred stock - $.01 par, one share authorized, issued, and outstanding............................................		-			-
Preferred stock - $.01 par, one share authorized, issued, and outstanding.........		-			-
Common stock - $.01 par, 200,000,000 shares authorized, 64,000,000 shares issued and outstanding...........................		640			640
Additional paid-in capital............................		159,743			159,743
Accumulated deficit...................................		(119,502	)		(145,081	)

Total Stockholders’ Equity......................		40,881			15,302

Total Liabilities and Stockholders’ Equity..	$	446,250		$	434,148

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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EXPRESSJET HOLDINGS, INC.,AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

		Three Months Ended March 31,

		2003			2002


Net Cash Flows from Operating Activities............................	$	63,603		$	29,043

Cash Flows from Investing Activities:
Capital expenditures....................................................		(13,754	)		(12,077	)
Proceeds from the transfer of flight equipment to Continental Airlines, Inc. ...........................................		326			10,697
Proceeds from disposition of equipment.........................		17			664

Net cash used in investing activities...........................		(13,411	)		(716	)

Cash Flows from Financing Activities:
Payments on note payable to Continental Airlines, Inc....		(26,000	)		-
Payments on capital lease obligations...........................		(529	)		(493	)
Dividends paid on mandatorily redeemable preferred stock…………………………………………………………		(175	)		-

Net used in financing activities...................................		(26,704	)		(493	)

Net Increase in Cash and Cash Equivalents........................		23,488			27,834

Cash and Cash Equivalents – Beginning of Period...............		120,930			71,877

Cash and Cash Equivalents – End of Period........................	$	144,418		$	99,711

Supplemental Cash Flow Information:
Interest paid................................................................	$	2,220		$	4,430
Income taxes paid.......................................................	$	29		$	11,481

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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EXPRESSJET HOLDINGS, INC.,AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

We are a regional U.S. air carrier engaged in the business of transporting passengers, cargo and mail. Our sole asset is all of the issued and outstanding shares of capital stock of XJT Holdings, Inc., the sole owner of the issued and outstanding shares of common stock of ExpressJet Airlines, Inc., which operates as Continental Express (together, "ExpressJet", "we", "us" and "our"). We are economically dependent upon Continental Airlines, Inc. (“Continental”) for our operations and cash flows as all of our flying is currently performed on behalf of Continental pursuant to a capacity purchase agreement, and substantially all of our revenue is received under that agreement. In addition, this capacity purchase agreement covers all of our existing fleet and all of our regional jets currently subject to firm aircraft orders. Continental owns 53.1% of our outstanding common stock and one share of our series of preferred stock called special voting preferred stock; therefore, Continental has elected five directors to our board of directors (“Board”), and thus can indirectly influence many of our corporate decisions.

We have prepared the quarterly consolidated financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Some required information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to these rules and regulations. In the Company’s opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position as of March 31, 2003 and the results of our operations and our cash flows for the periods ended March 31, 2003 and 2002. These adjustments are of a normal, recurring nature. All intercompany transactions have been eliminated in consolidation. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2002 (the “2002 10-K”). The results of operations for the three-month periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2003.

Certain reclassifications have been made in the prior year’s financial statements to conform to the presentation for the three months ended March 31, 2003.

Note 1 – Aircraft Purchase Agreement and Capacity Purchase Agreement

As of March 31, 2003, we had firm commitments of 74 Empresa Brasileira de Aeronautica S.A. (“Embraer”)regional jets with an estimated aggregate cost of $1.5 billion and options to purchase an additional 100 Embraer regional jets exercisable through 2008. Effective February 26, 2003, we amended our aircraft purchase agreement with Embraer to slow the pace of regional jet deliveries. Under the amendment, we modified our scheduled deliveries in 2003 to 36 (12 of which were delivered in the first quarter of 2003), from our original plan for 48 deliveries. Additionally, we will take 21 aircraft deliveries in 2004, down from 36, and increase our aircraft deliveries to 21 and eight for 2005 and 2006, up from two and zero for these years, respectively. We do not have any obligation to take any of these firm aircraft that are not financed by a third party and leased either to Continental or us.

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We currently derive substantially all of our revenue under a capacity purchase agreement with Continental. Under this agreement, we operate flights on behalf of Continental, which controls and is responsible for scheduling, pricing and managing seat inventories and is entitled to all revenue associated with the operation of the aircraft. As a result, we are entitled to receive a payment for each scheduled block hour calculated using our negotiated price that will remain in place through December 31, 2004. Effective March 27, 2003, in connection with the amendment to the aircraft purchase agreement we amended our capacity purchase agreement with Continental to extend by one year the first date on which they may exercise their right to terminate the capacity purchase agreement without cause to January 1, 2007. The amendment also extended by one year our exclusivity as Continental’s sole provider of regional jet service in their hubs to December 31, 2006.

These amendments did not have an impact on our results of operations during the first three months ended March 31, 2003, as the change in the delivery schedule will begin in July 2003.

Note 2 – Stock Plans and Awards

We account for our stock-based compensation arrangements using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 - "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under APB 25, if the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Since our stock options have all been granted with exercise prices at fair value, no compensation expense has been recognized under APB 25.

The following table illustrates the effect on net income and earnings per share assuming the compensation costs for our stock option and purchase plans had been determined using the fair value method at the grant dates amortized on a pro rata basis over the vesting period as required under Statement of Financial Accounting Standard No. 123 – “Accounting for Stock-Based Compensation” for the three months ended March 31, 2003 and 2002 (in thousands, except for per share data):

		Three Months Ended March 31,
		Three Months Ended March 31,

		2003			2002

Net income as reported................................................	$	25,577		$	20,034
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net .....................................................		(558	)		(146	)

Pro forma....................................................................	$	25,019		$	19,888


Basic earnings per share
As reported ................................................................	$	0.40		$	0.37
Pro forma....................................................................	$	0.39		$	0.37

Diluted earnings per share
As reported ................................................................	$	0.40		$	0.37
Pro forma....................................................................	$	0.39		$	0.37

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The pro forma effect on net income per share is not representative of the pro forma effects in future years.

Note 3 – Commitments and Contingencies

Purchase Commitments

As shown in the following table, our aircraft fleet consisted of 200 regional jets at March 31, 2003. Our aircraft purchase orders and options as of March 31, 2003 are also shown below.

Type	Total Aircraft	Leased	Firm Orders	Options	Seats in Standard Configuration

Regional Jets:
ERJ-145XR...............	30	30	74	100	50
ERJ-145...................	140	140	-


PART I.	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements:
	Consolidated Statements of Operations (Unaudited): Three months ended March 31, 2003 and 2002	3
	Consolidated Balance Sheets: March 31, 2003 (Unaudited) and December 31, 2002	4
	Consolidated Condensed Statements of Cash Flows (Unaudited): Three months ended March 31, 2003 and 2002	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	21
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 2.	Changes in Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits and Reports on Form 8-K	23
	Signature	25
	Certifications	26
	Index to Exhibits	28