EXPRESSJET HOLDINGS INC - 10-Q Quarterly Report

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 September 30,
		Three Months Ended September 30,

		2003			2002

Operating Revenue................................................	$	343,629		$	270,149

Operating Expenses:
Wages, salaries and related costs.....................		73,703			58,075
Aircraft rentals.................................................		64,205			50,688
Aircraft fuel......................................................		38,288			26,046
Maintenance, materials and repairs....................		33,508			24,070
Other rentals and landing fees...........................		27,267			21,207
Ground handling...............................................		23,614			18,429
Outside services..............................................		5,829			4,934
Depreciation and amortization...........................		5,265			6,088
Aircraft related and other insurance....................		1,987			4,678
Other operating expenses.................................		22,984			18,549

		296,650			232,764

Operating Income..................................................		46,979			37,385

Nonoperating Income (Expense):
Interest expense, net........................................		(2,578	)		(3,153	)
Interest income................................................		455			845
Capitalized interest...........................................		298			234
Other, net........................................................		(15	)		62

		(1,840	)		(2,012	)

Income before Income Taxes and Dividends.............		45,139			35,373
Income Tax Expense.............................................		17,328			13,724

Income before Dividends........................................		27,811			21,649

Dividends on Mandatorily Redeemable Preferred Stock of Subsidiary....................................................		-			(173	)

Net Income...........................................................	$	27,811		$	21,476

Basic Earnings per Common Share........................	$	0.48		$	0.34

Diluted Earnings per Common Share.......................	$	0.48		$	0.34

Shares Used in Computing Basic Earnings per Common Share................................................		58,069			64,000
Shares Used in Computing Diluted Earnings per Common Share................................................		58,132			64,000

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

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

		Nine Months Ended September 30,
		Nine Months Ended September 30,

		2003			2002

Operating Revenue................................................	$	970,494		$	805,094

Operating Expenses:
Wages, salaries and related costs.....................		209,000			176,142
Aircraft rentals.................................................		182,911			145,662
Aircraft fuel......................................................		103,841			72,986
Maintenance, materials and repairs....................		96,657			72,584
Other rentals and landing fees...........................		74,983			64,681
Ground handling...............................................		65,824			54,851
Outside services..............................................		21,939			16,561
Depreciation and amortization...........................		14,911			21,900
Aircraft related and other insurance....................		4,076			13,850
Security fee reimbursement...............................		(3,034	)		-
Other operating expenses.................................		63,974			56,551

		835,082			695,768

Operating Income..................................................		135,412			109,326

Nonoperating Income (Expense):
Interest expense, net........................................		(6,770	)		(11,294	)
Interest income................................................		1,493			2,937
Capitalized interest...........................................		846			833
Other, net........................................................		(46	)		108

		(4,477)			(7,416	)

Income before Income Taxes and Dividends.............		130,935			101,910
Income Tax Expense.............................................		50,303			39,631

Income before Dividends........................................		80,632			62,279

Dividends on Mandatorily Redeemable Preferred Stock of Subsidiary....................................................		(352	)		(319	)

Net Income...........................................................	$	80,280		$	61,960

Basic Earnings per Common Share........................	$	1.29		$	1.03

Diluted Earnings per Common Share.......................	$	1.29		$	1.03

Shares Used in Computing Basic Earnings per Common Share................................................		62,001			60,081
Shares Used in Computing Diluted Earnings per Common Share................................................		62,005			60,081

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

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

ASSETS		September 30,			December 31,
		2003			2002

		(Unaudited)
Current Assets:
Cash and cash equivalents.........................	$	168,283		$	120,930
Restricted cash.........................................		3,200			-
Accounts receivable, net............................		2,911			1,526
Amounts due from Continental Airlines, Inc.		2,746			17,419
Spare parts and supplies, net.....................		25,750			26,842
Prepayments and other..............................		13,129			10,775
Deferred income taxes...............................		-			2,299

Total Current Assets...............................		216,019			179,791

Property and Equipment:
Owned property and equipment:
Flight equipment.....................................		189,545			188,366
Other.....................................................		99,488			89,859

		289,033			278,225
Less: Accumulated depreciation.............		(57,110	)		(68,130	)

		231,923			210,095

Capital Leases:
Flight equipment.....................................		10,643			10,643
Other.....................................................		4,342			4,358

		14,985			15,001
Less: Accumulated amortization.............		(3,303	)		(2,518	)

		11,682			12,483

Total Property and Equipment..................		243,605			222,578

Deferred Income Taxes...................................		11,077			8,835
Reorganization Value In Excess of Amounts
Allocable to Identifiable Assets, net.............		12,789			12,789
Airport Operating Rights, net...........................		4,505			4,693
Note Receivable.............................................		5,000			5,000
Other Assets, net...........................................		4,567			462

Total Assets..........................................	$	497,562		$	434,148

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

LIABILITIES AND		September 30,			December 31,
STOCKHOLDERS' EQUITY		2003			2002

		(Unaudited)
Current Liabilities:
Current maturities of long-term debt and Capital leases....................................................	$	2,864		$	2,174
Current maturities of note payable to Continental Airlines, Inc........................................		66,722			73,551
Accounts payable...................................................		3,752			8,153
Accrued payroll and related costs............................		36,069			18,260
Accrued other liabilities...........................................		52,810			45,648
Deferred income taxes............................................		48,620			-

Total Current Liabilities.........................................		210,837			147,786


Long-term Debt and Capital Leases...............................		24,385			9,394

Note Payable to Continental Airlines, Inc.......................		153,064			251,961

4.25% Senior Convertible Notes due 2023......................		137,200			-

Other Long-term Liabilities............................................		10,295			9,705

Stockholders’ Equity (Deficit):
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, 54,164,875 and 64,000,000 shares issued and outstanding........................................		542			640
Additional paid-in capital..........................................		159,807			159,743
Accumulated deficit................................................		(198,568	)		(145,081	)

Total Stockholders’ Equity (Deficit)........................		(38,219	)		15,302

Total Liabilities and Stockholders’ Equity (Deficit)............................................................	$	497,562		$	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)

		Nine Months Ended September 30,

		2003			2002


Net Cash Flows from Operating Activities.......................	$	170,756		$	129,890

Cash Flows from Investing Activities:
Capital expenditures................................................		(38,168	)		(38,513	)
Proceeds from the transfer of flight equipment to Continental Airlines, Inc. ......................................		1,621			15,341
Proceeds from disposition of equipment.....................		145			1,424

Net cash used in investing activities.......................		(36,402	)		(21,748	)

Cash Flows from Financing Activities:
Gross proceeds from convertible debt offering.............		137,200			-
Repurchase of common stock..................................		(133,770	)		-
Proceeds from long-term debt...................................		17,297			-
Gross proceeds from issuance of common stock.......		-			160,000
Payments related to IPO underwriting discounts and other expenses..............................................		(34	)		(14,612	)
Payments on note payable to Continental Airlines, Inc......................................................................		(105,726	)		(176,800	)
Payments on capital lease obligations.......................		(1,616	)		(1,506	)
Dividends paid on mandatorily redeemable preferred stock...................................................................		(352	)		(319	)

Net cash used in financing activities.......................		(87,001	)		(33,237	)

Net Increase in Cash and Cash Equivalents....................		47,353			74,905

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

Cash and Cash Equivalents – End of Period ...................	$	168,283		$	146,782

Supplemental Cash Flow Information:
Interest paid............................................................	$	5,717		$	11,294
Income taxes paid...................................................	$	144		$	8,107

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 principal 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 such agreement. In addition, this capacity purchase agreement covers all of our existing fleet and our regional jets currently subject to firm aircraft orders. As of September 30, 2003, Continental owned 30.9% of our outstanding common stock and one share of our series of preferred stock designated special voting preferred stock. Pursuant to its rights, Continental has elected three directors to our board of directors (“Board”), and thus can indirectly influence many of our corporate decisions.

We have prepared the unaudited quarterly consolidated financial statements included herein 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 our opinion, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position, the results of our operations and our cash flows for the periods indicated. 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 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 period’s financial statements to conform to the current year presentation.

Note 1 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2003 and 2002:

		Three Months Ended September 30,				Nine Months Ended September 30,
		Three Months Ended September 30,				Nine Months Ended September 30,

(In thousands)		2003		2002		2003		2002

Numerator for basic earnings per share – net income..................................................	$	27,811	$	21,476	$	80,280	$	61,960

Denominator for basic earnings per share - weighted average shares.........................		58,069		64,000		62,001		60,081
Employee stock options...............................		63		-		4		-

Denominator for diluted earnings per share - adjusted and assumed conversions..........		58,132		64,000		62,005		60,081

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Options to purchase 971,000 and 975,500 shares of our common stock were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2003 and 984,500 shares for the three and nine months ended September 30, 2002. These options' exercise prices were greater than the average market price of the common shares. Furthermore, we also excluded approximately 7.5 million shares of potential common stock equivalents related to our senior convertible notes (see Note 8 – 4.25% Senior Convertible Notes due 2023) from our computation of diluted earnings per share for the three and nine months ended September 30, 2003 as these shares are not currently convertible in accordance with the terms of the notes.

Note 2 – Income Taxes

At December 31, 2002, we had federal net operating loss carryforwards of approximately $105.2 million, which expire between 2004 and 2020.

In conjunction with our initial public offering (“IPO”) completed on April 23, 2002, the tax basis of our tangible and intangible assets was increased to fair value. The increased tax basis should result in additional tax deductions being available to us over a period of 15 years. In accordance with our tax agreement with Continental, to the extent we generate taxable income sufficient to realize the additional tax deductions, we will be required to pay Continental a percentage of the amount of tax savings actually realized, excluding the effect of any loss carrybacks. We will be required to pay Continental 100% of the first third of the anticipated tax benefit, 90% of the second third, and 80% of the last third. However, if the tax benefits are not realized by the end of 2018, we will be obligated to pay Continental 100% of any benefit realized after that date. Since these future payments are solely dependent on our ability to generate sufficient taxable income to realize these deferred tax assets, they are recorded as an obligation to Continental within the deferred tax accounts, and the portion we may retain in the future is offset by a valuation allowance. This valuation allowance and the long-term portion of the obligation to Continental offsets the step-up in basis of assets in our long-term deferred tax asset account.

Our tax agreement with Continental provides that Continental will reimburse us for any net increase in our cash tax payments resulting from any decreased availability of net operating loss carryovers related to the basis increase at the time our payment occurs. The resulting receivable and/or payable with Continental related to the impact on net operating losses resulting from the basis increase is recorded within the deferred tax accounts since its performance is dependent on our ability to generate taxable income.

No valuation allowance was established on our net operating loss carryforwards, or on our receivable from Continental for reimbursing carryforward losses utilized resulting from the basis increase, because we believe our taxable income will be sufficient to utilize substantially all of these assets within the next several years.

We believe that our IPO created a change in ownership limitation on the utilization of our carryforward tax attributes, primarily net operating losses. This limitation, under Section 382 of the Internal Revenue Code, will limit our utilization of these attributes to offset up to approximately $43.3 million of post-change taxable income per year. We do not expect this limitation to have any impact on our financial condition.

Our tax agreement with Continental increases our exposure to Continental’s financial health. If it is determined that any of the tax benefits related to the basis increase should not have been available at the time of utilization and, as a result, we are required to pay additional taxes and/or penalties, then we could be adversely affected if Continental were insolvent, bankrupt, or otherwise unable to pay us under its indemnification for these amounts.

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Note 3 – 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 market price on the date of grant, no compensation expense has been recognized under APB 25.

The following tables illustrate 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 and nine months ended September 30, 2003 and 2002 (in thousands, except for per share data):

		Three Months Ended September 30,
		Three Months Ended September 30,

		2003			2002

Net income as reported................................................	$	27,811		$	21,476
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net ...................................................		(616	)		(815	)

Pro forma....................................................................	$	27,195		$	20,661


Basic earnings per share
As reported ...........................................................	$	0.48		$	0.34
Pro forma...............................................................	$	0.47		$	0.32

Diluted earnings per share
As reported ...........................................................	$	0.48		$	0.34
Pro forma...............................................................	$	0.47		$	0.32

		Nine Months Ended September 30,
		Nine Months Ended September 30,

		2003			2002

Net income as reported................................................	$	80,280		$	61,960
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net ...................................................		(2,080	)		(1,712	)

Pro forma....................................................................	$	78,200		$	60,248


Basic earnings per share
As reported ...........................................................	$	1.29		$	1.03
Pro forma...............................................................	$	1.26		$	1.00

Diluted earnings per share
As reported ...........................................................	$	1.29		$	1.03
Pro forma...............................................................	$	1.26		$	1.00

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

On May 7, 2003, our stockholders approved the 2003 ExpressJet Holdings, Inc. Employee Stock Purchase Plan (“ESPP”), which authorized the sale of one million shares of our common stock in accordance with the ESPP. Under the plan, all of our employees are eligible to purchase shares of our common stock at 85% of the lower of the fair market value on the first or last day of the purchase period. Our first purchase period began on July 1, 2003. Employees may sell shares obtained under the ESPP six months after the end of the plan period in which the shares were purchased.

Note 4 – Security Fee Reimbursement

On April 16, 2003, President Bush signed into law the Emergency Wartime Supplemental Appropriation Act 2003 (“Wartime Act”), which was included as part of a larger bill to fund the war in Iraq. Highlights of the Wartime Act affecting us are as follows:

$2.3 billion for reimbursement of airline security fees that had been paid or

[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended September 30, 2003
		or
[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from__________ to__________

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)


PART I.	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements:
	Consolidated Statements of Operations (Unaudited): Three and nine months ended September 30, 2003 and 2002	3
	Consolidated Balance Sheets: September 30, 2003 (Unaudited) and December 31, 2002	5
	Consolidated Condensed Statements of Cash Flows (Unaudited): Nine months ended September 30, 2003 and 2002	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	29
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 2.	Changes in Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 5.	Other Information	31
Item 6.	Exhibits and Reports on Form 8-K	32
	Signatures	33
	Index to Exhibits	34