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 June 30,
		Three Months Ended June 30,

		2004			2003

Operating Revenue................................................	$	370,849		$	320,303

Operating Expenses:
Wages, salaries and related costs.....................		77,285			68,805
Aircraft rentals.................................................		69,590			61,257
Aircraft fuel and related taxes............................		46,893			37,919
Maintenance, materials and repairs...................		36,763			33,237
Ground handling...............................................		26,625			22,004
Other rentals and landing fees...........................		22,159			24,182
Outside services..............................................		6,638			6,611
Depreciation and amortization...........................		5,834			4,851
Aircraft related and other insurance....................		2,521			1,075
Security fee reimbursement..............................		—			(3,034	)
Other operating expenses.................................		26,390			18,325

		320,698			275,232

Operating Income..................................................		50,151			45,071

Nonoperating Income (Expense):
Interest expense..............................................		(3,004	)		(1,972	)
Interest income................................................		723			579
Capitalized interest..........................................		114			303
Other, net........................................................		10			(30	)

		(2,157	)		(1,120	)

Income before Income Taxes and Dividends.............		47,994			43,951
Income Tax Expense.............................................		18,334			16,882

Income before Dividends........................................		29,660			27,069

Dividends on Mandatorily Redeemable Preferred Stock of Subsidiary...................................................		—			(177	)

Net Income Applicable to Common Stockholders.....	$	29,660		$	26,892

Basic Earnings per Common Share........................	$	0.55		$	0.42

Diluted Earnings per Common Share......................	$	0.55		$	0.42

Shares Used in Computing Basic Earnings per Common Share................................................		54,202			64,000
Shares Used in Computing Diluted Earnings per Common Share................................................		54,216			64,004

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

Table of Contents

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

		Six Months Ended June 30,
		Six Months Ended June 30,

		2004			2003

Operating Revenue................................................	$	734,883		$	626,865

Operating Expenses:
Wages, salaries and related costs.....................		156,474			135,297
Aircraft rentals.................................................		137,201			118,706
Aircraft fuel and related taxes............................		90,045			70,718
Maintenance, materials and repairs...................		74,815			63,149
Ground handling...............................................		51,140			42,210
Other rentals and landing fees...........................		42,650			47,716
Outside services..............................................		16,677			16,110
Depreciation and amortization...........................		11,596			9,646
Aircraft related and other insurance....................		4,950			2,089
Security fee reimbursement..............................		—			(3,034	)
Other operating expenses.................................		50,561			35,825

		636,109			538,432

Operating Income..................................................		98,774			88,433

Nonoperating Income (Expense):
Interest expense..............................................		(6,040	)		(4,192	)
Interest income................................................		1,366			1,038
Capitalized interest..........................................		233			548
Other, net........................................................		133			(31	)

		(4,308	)		(2,637	)

Income before Income Taxes and Dividends.............		94,466			85,796
Income Tax Expense.............................................		36,086			32,975

Income before Dividends........................................		58,380			52,821

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

Net Income Applicable to Common Stockholders.....	$	58,380		$	52,469

Basic Earnings per Common Share........................	$	1.08		$	0.82

Diluted Earnings per Common Share......................	$	1.08		$	0.82

Shares Used in Computing Basic Earnings per Common Share................................................		54,199			64,000
Shares Used in Computing Diluted Earnings per Common Share................................................		54,230			64,000

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

Table of Contents

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

ASSETS		June 30,			December 31,
		2004			2003

		(Unaudited)
Current Assets:
Cash and cash equivalents.........................	$	236,674		$	189,892
Restricted cash.........................................		3,200			3,200
Accounts receivable, net............................		4,306			4,510
Spare parts and supplies, net.....................		27,015			25,538
Prepayments and other..............................		7,377			10,400

Total Current Assets...............................		278,572			233,540

Property and Equipment:
Owned property and equipment:
Flight equipment.....................................		197,065			193,523
Other.....................................................		109,030			101,828

		306,095			295,351
Less: Accumulated depreciation.............		(68,250	)		(59,001	)

		237,845			236,350

Capital Leases:
Flight equipment.....................................		8,515			10,643
Other.....................................................		4,375			4,375

		12,890			15,018
Less: Accumulated amortization.............		(4,169	)		(4,216	)

		8,721			10,802

Total Property and Equipment..................		246,566			247,152

Reorganization Value In Excess of Amounts
Allocable to Identifiable Assets, net.............		12,789			12,789
Airport Operating Rights, net...........................		4,317			4,443
Note Receivable.............................................		5,000			5,000
Debt Issuance Cost, net..................................		3,998			4,159
Other Assets, net...........................................		2,506			3,088

Total Assets..........................................	$	553,748		$	510,171

(continued on next page)

Table of Contents

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

LIABILITIES AND		June 30,			December 31,
STOCKHOLDERS' EQUITY (DEFICIT)		2004			2003

		(Unaudited)
Current Liabilities:
Current maturities of long-term debt .........................	$	865		$	865
Current maturities of note payable to Continental Airlines, Inc. ......................................		106,909			67,112
Current maturities of capital lease obligations............		1,200			1,795
Accounts payable...................................................		1,765			4,678
Accrued payroll and related costs............................		57,130			40,128
Amounts due to Continental Airlines, Inc., net...........		6,525			5,588
Deferred income taxes............................................		8,945			30,433
Accrued other liabilities...........................................		55,891			68,213

Total Current Liabilities.........................................		239,230			218,812


Long-term Debt............................................................		20,732			21,164

Note Payable to Continental Airlines, Inc.......................		72,712			126,060

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

Capital Lease Obligations.............................................		2,172			2,599

Deferred Income Taxes.................................................		19,229			1,777

Other Long-term Liabilities............................................		13,798			12,846

Stockholders’ Equity (Deficit):
Preferred stock - $.01 par, 10,000,000 shares authorized, one share issued and outstanding........		—			—
Common stock - $.01 par, 200,000,000 shares authorized, 54,334,059 and 54,164,875 shares issued and outstanding........................................		543			542
Deferred compensation............................................		(1,563	)		—
Additional paid-in capital..........................................		161,985			159,841
Accumulated deficit................................................		(112,290	)		(170,670	)

Total Stockholders’ Equity (Deficit)........................		48,675			(10,287	)

Total Liabilities and Stockholders’ Equity (Deficit)............................................................	$	553,748		$	510,171

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

Table of Contents

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

		Six Months Ended June 30,

		2004			2003


Net Cash Flows from Operating Activities....................................	$	72,812		$	107,472

Cash Flows from Investing Activities:
Capital expenditures............................................................		(11,737	)		(22,467	)
Proceeds from the transfer of flight equipment to Continental Airlines, Inc.....................................................		—			1,247
Proceeds from disposition of equipment.................................		245			33

Net cash used in investing activities...................................		(11,492	)		(21,187	)

Cash Flows from Financing Activities:
Gross proceeds from debt financing.......................................		—			10,703
Payments on note payable to Continental Airlines, Inc............		(13,551	)		(98,545	)
Payments on long-term debt and capital lease obligations.......		(1,455	)		(1,068	)
Payments related to IPO underwriting discounts and other expenses.................................................................		—			(34	)
Proceeds from issuance of common stock.............................		468			—
Dividends paid on mandatorily redeemable preferred stock...............................................................................		—			(175	)

Net cash used in financing activities...................................		(14,538	)		(89,119	)


Net Increase (Decrease) in Cash and Cash Equivalents................		46,782			(2,834	)

Cash and Cash Equivalents – Beginning of Period.......................		189,892			120,930

Cash and Cash Equivalents – End of Period................................	$	236,674		$	118,096

Supplemental Cash Flow Information:
Interest paid........................................................................	$	6,036		$	4,192
Income taxes paid (including payments under our tax agreement with Continental Airlines, Inc.).....................	$	48,581		$	136

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

Table of Contents

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"). All of our flying is currently performed on behalf of Continental Airlines, Inc. (“Continental”) pursuant to a capacity purchase agreement, and substantially all of our revenue is received under that agreement. We provide all of Continental’s regional jet service out of New York/Newark, Houston and Cleveland. We are economically dependent upon Continental for our operations and cash flows. In addition, the capacity purchase agreement covers all of our existing fleet and all of our regional jets currently subject to firm aircraft orders.

We prepared the unaudited quarterly consolidated financial statements included in this report 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 2003 annual report on Form 10-K. The results of operations for the periods presented are not necessarily indicative of the results to be expected in the future.

Certain reclassifications have been made in the prior periods’ 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 six months ended June 30, 2004 and 2003 (in thousands):

		Three Months Ended June 30,				Six Months Ended June 30,
		Three Months Ended June 30,				Six Months Ended June 30,

		2004		2003		2004		2003

Numerator for basic earnings per share – net income.............................................................................	$	29,660	$	26,892	$	58,380	$	52,469
Denominator for basic earnings per share – weighted average shares....................................................		54,202		64,000		54,199		64,000
Employee stock options..........................................................		12		4		22		—
Restricted stock.....................................................................		2		—		9		—

Denominator for diluted earnings per share – adjusted and assumed conversions.....................................		54,216		64,004		54,230		64,000

Table of Contents

We excluded 132,500 shares of restricted stock issued in May 2004 from the weighted average shares used in computing basic earnings per share as these shares were not vested as of June 30, 2004.

We excluded options to purchase 1.1 million and 1.0 million shares of our common stock from the computation of diluted earnings per share for the three and six months ended June 30, 2004, respectively, and 1.0 million and 1.3 million shares for the three and six months ended June 30, 2003, respectively. These options' exercise prices were greater than the average market price of the common shares for the respective periods. We also excluded approximately 7.5 million shares of potential common stock equivalents related to our senior convertible notes from our computation of diluted earnings per share for the three and six months ended June 30, 2004, as these shares are not currently convertible under the terms of the notes.

Note 2 – Stock Plans and Awards

We account for our stock-based compensation arrangements using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 - "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. We have two stock-based compensation plans: the ExpressJet Holdings, Inc. 2002 Stock Incentive Plan (the “Incentive Plan”) and the ExpressJet Holdings, Inc. 2003 Employee Stock Purchase Plan (the “ESPP”).

The Incentive Plan permits us to grant stock options and restricted stock to our outside directors and our employees. Under APB 25, if the exercise price of our stock options equals the fair market value 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 market value, no compensation expense has been recognized under APB 25. We recognize compensation expense related to our restricted stock in accordance with the provisions of APB 25. The total compensation expense to be incurred for each restricted stock grant will equal the product of the number of shares issued and the closing price of our common stock on the issuance date. Under APB 25, we do not recognize compensation expense related to the ESPP.

On May 5, 2004, our board of directors approved the issuance of 132,500 shares of restricted stock to various employees and non-employee directors pursuant to the Incentive Plan. Restricted shares granted to our employees vest ratably over a four-year period. Restricted shares granted to our non-employee directors vest over six months.

Under our ESPP, we issued 36,684 shares of our common stock at $12.75 per share during the first half of 2004 related to the purchase period of July to December 2003. In July 2004, we issued 36,286 shares of our common stock at $10.32 per share related to the January to June 2004 purchase period.

The following table illustrates the effect on net income and earnings per share assuming the compensation costs for our stock options, restricted stock and ESPP had been determined using the fair value method, prorated over the vesting periods at the grant dates, as required under Statement of Financial Accounting Standard No. 123 – “Accounting for Stock-Based Compensation” for the three and six months ended June 30, 2004 and 2003 (in thousands, except for per share data):

Table of Contents

		Three Months Ended June 30,						Six Months Ended June 30,
		Three Months Ended June 30,						Six Months Ended June 30,

		2004			2003			2004			2003

Net income as reported.............................................................	$	29,660		$	26,892		$	58,380		$	52,469
Add: Total stock-based compensation expense included in reported net income, net of related tax effects................................................................		71			—			71			—
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effect........................		(652	)		(645	)		(1,264	)		(1,464)

Pro forma................................................................................	$	29,079		$	26,247		$	57,187		$	51,005

Basic earnings per share
As reported.........................................................................	$	0.55		$	0.42		$	1.08		$	0.82
Pro forma...........................................................................	$	0.54		$	0.41		$	1.06		$	0.80

Diluted earnings per share
As reported.........................................................................	$	0.55		$	0.42		$	1.08		$	0.82
Pro forma...........................................................................	$	0.54		$	0.41		$	1.05		$	0.80

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

Note 3 – Note Payable to Continental Airlines, Inc.

At June 30, 2004, our note payable to Continental, including current maturities, had an outstanding balance of $179.6 million. The note accrues interest based on the three-month LIBOR plus 1.25% per annum, subject to a cap of 5.4% in 2003 and 6.7% in 2004. There is no interest rate cap after 2004. The quarterly payment on the note for principal and interest is $27.9 million, payable through the earlier of March 31, 2007 or until the principal balance and any accrued unpaid interest are paid in full. During 2003, we made discretionary prepayments of $83.3 million, of which a portion was due that year. For the six months ended June 30, 2004, no discretionary prepayments were made. Total quarterly payments made during the six months ended June 30, 2004, net of prepayments made in prior periods, was $15.9 million, of which $13.6 million related to principal. The note is an unsecured general obligation and is subordinated in right of payment to all of our future senior indebtedness.

Table of Contents

Note 4 – Income Taxes

At December 31, 2003, we had federal net operating loss carryforwards of approximately $60.7 million, which expire between 2004 and 2020.

In conjunction with our initial public offering (“IPO”) in April 2002, the tax basis of our tangible and intangible assets was adjusted to fair value. This adjustment to tax basis should result in additional tax deductions being available to us through 2017. In accordance with our tax agreement with Continental, to the extent we generate taxable income sufficient to realize the additional tax deductions, we are required to pay Continental a percentage of the amount of tax savings actually realized, excluding the effect of any loss carrybacks. We are required to pay Continental 100% of the first third of the anticipated tax benefit, 90% of the second third, and 80% of the last third. However, if the tax benefits are not realized by the end of 2018, we will be obligated to pay Continental 100% of any benefit realized after that date. Since these future payments depend solely on our ability to generate sufficient taxable income to realize the deferred tax assets associated with these tax benefits, they are recorded as an obligation to Continental within our deferred tax accounts, and the portion we may retain in the future is offset by a valuation allowance. At the IPO, the valuation allowance and the obligation to Continental offset the step-up in basis of assets in our long-term deferred tax asset account. During the six months ended June 30, 2004, we made net payments to Continental under the tax agreement of approximately $39.6 million. No payment was made to Continental under the agreement during the six months ended June 30, 2003.

The tax agreement requires Continental to 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 is recorded within the deferred tax asset account since its performance is dependent on our ability to generate taxable income.

We believe that our IPO created a change in ownership limitation on the utilization of our federal carryforward tax attributes, primarily net operating losses. Section 382 of the Internal Revenue Code limits our utilization of these attributes to offset up to approximately $43.3 million of post-change taxable income per year. This limitation did not have any impact on our financial condition for the six months ended June 30, 2004 or 2003.

Our tax agreement increases our exposure to Continental’s financial condition. If it is determined that any of the tax benefits related to the basis increa

[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended June 30, 2004
		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 six months ended June 30, 2004 and 2003	1
	Consolidated Balance Sheets: June 30, 2004 (Unaudited) and December 31, 2003	3
	Consolidated Condensed Statements of Cash Flows (Unaudited): Six months ended June 30, 2004 and 2003	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	22
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits and Reports on Form 8-K	25
	Signatures	27
	Index to Exhibits	28