SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
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
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.
Yes X No
As of May 10, 2000, there were 18,694,974 shares of common stock, par
value $.02 per share, outstanding.
2
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
December 31, March 31, 2000
(In thousands except for share data and par 1999 (Unaudited)
values)
Assets
Current:
Cash and cash equivalents $ 57,447 $ 35,569
Accounts receivable, net 31,023 44,056
Expendable parts and fuel inventory, 4,114 4,637
net
Prepaid expenses and other current 6,347 20,021
assets
Notes receivable 6,239 4,743
Deferred tax asset 2,850 2,850
Total current assets 108,020 111,876
Property and equipment at cost, net of
accumulated depreciation and amortization 133,160 133,713
Intangible assets, net of accumulated 2,232 2,179
amortization
Debt issuance costs, net of accumulated 3,309 3,068
amortization
Aircraft deposits 38,690 40,690
Other assets 8,342 9,477
Total assets $ 293,753 $ 301,003
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 5,343 $ 6,877
Current portion of long-term debt 4,758 4,548
Current portion of capital lease 1,627 1,584
obligations
Accrued liabilities 35,852 39,878
Total current liabilities 47,580 52,887
Long-term debt, less current portion 87,244 86,870
Capital lease obligations, less current 5,543 5,170
portion
Deferred tax liability 12,459 12,619
Deferred credits, net 15,403 16,105
Total liabilities 168,229 173,651
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares issued
21,083,927 and 21,194,456 respectively;
shares outstanding 18,628,261 and 421 423
18,671,290 respectively
Additional paid-in capital 89,126 89,869
Less: Common stock in treasury, at cost,
2,455,666 shares and 2,523,166 shares, (34,106) (35,303)
respectively
Retained earnings 70,083 72,363
Total stockholders' equity 125,524 127,352
Total liabilities and stockholders' $ 293,753 $ 301,003
equity
See accompanying notes to the condensed consolidated financial
statements.
3
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
(In thousands, except for per share data) 1999 2000
Operating revenues:
Passenger $ 71,842 $ 90,734
Other 1,162 1,765
Total operating revenues 73,004 92,499
Operating expenses:
Salaries and related costs 19,661 24,259
Aircraft fuel 6,639 13,132
Aircraft maintenance and materials 6,052 8,076
Aircraft rentals 10,378 12,720
Traffic commissions and related fees 11,879 13,244
Facility rents and landing fees 4,013 4,463
Depreciation and amortization 1,935 2,581
Other 6,770 9,484
Total operating expenses 67,327 87,959
Operating income 5,677 4,540
Other income (expense):
Interest expense (1,214) (1,725)
Interest income 1,047 1,059
Other, net 25 (74)
Total other income (expense) (142) (740)
Income before income tax provision and cumulative
effect of accounting change 5,535 3,800
Income tax provision 1,772 1,520
Income before cumulative effect of
accounting change 3,763 2,280
Cumulative effect of accounting change, net of (888) -
income tax
Net income $ 2,875 $ 2,280
Income per share:
Basic:
Income before cumulative effect of accounting $0.19 $0.12
change
Cumulative effect of accounting change (0.04) -
Net income $0.15 $0.12
Diluted:
Income before cumulative effect of accounting $0.18 $0.12
change
Cumulative effect of accounting change (0.04) -
Net income $0.14 $0.12
Weighted average shares used in computation:
-basic 19,445 18,628
-diluted 22,613 21,524
See accompanying notes to the condensed consolidated financial
statements.
4
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
(In thousands) 1999 2000
Cash flows from operating activities:
Net income $ 2,875 $2,280
Adjustments to reconcile net income to net cash
used in
operating activities:
Depreciation and amortization 2,008 2,769
Write off of preoperating costs 1,486 -
Amortization of deferred credits (231) (348)
Capitalized interest (net) (453) (583)
Other 313 291
Changes in operating assets and liabilities:
Accounts receivable (3,721) (12,517)
Expendable parts and fuel inventory (404) (523)
Prepaid expenses and other current assets (8,933) (13,661)
Accounts payable (334) 2,529
Accrued liabilities 1,409 3,975
Net cash used in operating activities (5,985) (15,788)
Cash flows from investing activities:
Purchases of property and equipment (1,687) (2,718)
Proceeds from sale-leaseback - 43
Funding obligation for regional terminal (5,936) -
Payments for aircraft deposits and other (500) (2,000)
Net cash used in investing activities (8,123) (4,675)
Cash flows from financing activities:
Proceeds from bridge loan 5,936 -
Payments of long-term debt (584) (585)
Payments of capital lease obligations (326) (416)
Deferred financing costs (242) 135
Purchase of treasury stock - (1,196)
Proceeds from exercise of stock options 1,118 647
Net cash provided by (used in) financing 5,902 (1,415)
activities
Net decrease in cash and cash equivalents (8,206) (21,878)
Cash and cash equivalents, beginning of period 64,412 57,447
Cash and cash equivalents, end of period $ 56,206 $ 35,569
See accompanying notes to the condensed consolidated financial
statements.
5
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Atlantic Coast Airlines Holdings, Inc. ("ACAI")
and its wholly-owned subsidiaries, Atlantic Coast Airlines ("ACA") and
Atlantic Coast Jet, Inc. ("ACJet"), (together, the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in these unaudited
condensed consolidated financial statements includes normal recurring
adjustments and reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of such consolidated
financial statements. Results of operations for the three month period
presented are not necessarily indicative of the results to be expected
for the year ending December 31, 2000. Certain amounts as previously
reported have been reclassified to conform to the current year
presentation. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements, and the notes thereto, included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
2. OTHER COMMITMENTS
The Company periodically enters into a series of put and call contracts
as an interest rate hedge designed to limit its exposure to interest rate
changes on the anticipated issuance of permanent financing relating to
the delivery of aircraft. In August 1999, the Company entered into a
series of three put and call contracts having an aggregate notional
amount of $23 million. These contracts mature between March and May
2000. As such, effective gains or losses realized when permanent
financing is obtained will be amortized over the term of the related
aircraft lease or will be depreciated as part of the aircraft acquisition
cost for owned aircraft. In March 2000, the Company settled the first set
of contracts and received approximately $138,000 from the counterparty.
The Company would have realized no gain or loss had the remaining two
contracts settled on March 31, 2000.
In October 1999, the Company entered into commodity swap transactions to
hedge price changes on approximately 13,300 barrels of crude oil per
month for the period April to June 2000, and on approximately 23,300
barrels of crude oil per month for the period July through September
2000. The contracts provide for an average fixed price equal to
approximately 52.6 cents per gallon for the second quarter of 2000 and 51
cents per gallon for the third quarter of 2000. With these transactions
and taking into account that Delta Air Lines, Inc. bears the economic
risk of fuel price fluctuations for future fuel requirements associated
with the Delta Connection program, the Company has limited its exposure
to fuel price increases on approximately 14% of its anticipated jet fuel
requirements for the second quarter 2000; 27% for the third quarter 2000;
and 18%, for the fourth quarter of 2000. Had the commodity swap
transactions settled on March 31, 2000, the Company would have realized a
reduction of approximately $761,000 in fuel expense.
6
In February 1999, the Company entered into an asset-based lending
agreement with a financial institution that provides the Company with a
$15 million bridge loan for the construction of the regional terminal at
Washington-Dulles and a line of credit for up to $35 million depending on
the amount of assigned ticket receivables and the value of certain
rotable spare parts. The $35 million line of credit replaces a previous
$20 million line of credit and will expire on September 30, 2000, or upon
termination of the United Express marketing agreement, whichever is
sooner. The interest rate on this line is LIBOR plus .75% to 1.75%
depending on the Company's fixed charges coverage ratio. At March 31,
2000 the interest rate was LIBOR plus 1.25%. The Company pledged $2.9
million of this line of credit as collateral to secure letters of credit
issued on behalf of the Company by a financial institution. As of March
31, 2000, the available amount of credit under the line was $32.1
million. Although there can be no assurances, the Company anticipates
that it will be able to renew this line of credit prior to its expiration
on terms at least as favorable as the current facility. As of March 31,
2000 there were no outstanding borrowings on either the $35 million line
of credit or the $15 million bridge loan.
As of March 31, 2000, the Company had firm orders for 40 Canadair
Regional Jets ("CRJs") in addition to the 26 previously delivered, and
options for 27 additional CRJs. The delivery schedule for the 40 firm
orders is as follows: twelve during the remainder of 2000, eighteen in
2001, and ten in 2002. Twenty of the 40 firm ordered aircraft are for the
United Express operation and 20 are for the Delta Connection operation.
The value of the remaining 40 undelivered aircraft on firm order is
approximately $740 million.
The Company as of March 31, 2000 also has a firm order with Fairchild
Aerospace Corporation for 25 Fairchild Dornier 32 seat 328JET regional
jet aircraft ("328JET") and a conditional order for 15 328JET and 40
Fairchild Dornier 44 seat 428JET regional jet aircraft ("428JET"), and
options for an additional 85 328JET/428JET jet aircraft. The delivery
schedule for the 25 firm orders for the Delta Connection operation is
fourteen in 2000 and eleven in 2001. The value of the aircraft on firm
order is approximately $275 million and the value of the aircraft in the
conditional order (excluding the option aircraft) is approximately $700
million. The conditional portion of the Fairchild Aerospace order is
contingent on the Company receiving United's approval to operate the
328JET/428JET aircraft in the United Express operation. The Company at
its option may waive the condition and enter into commitments for firm
delivery positions under the Fairchild agreement.
3. NOTES RECEIVABLE
Included in notes receivable at December 31, 1999 and March 31, 2000 is a
note from the Metropolitan Washington Airports Authority for $4.7 million
related to the financing of the construction costs of the regional
terminal at Washington-Dulles airport. This note was paid in full in
April 2000. The note receivable balance at December 31, 1999 also
includes a promissory note from an executive officer of the Company dated
as of May 24, 1999 with a balance, including accrued interest, of $1.5
million. This note was paid in full during the first quarter of 2000.
7
4. INCOME TAXES
For the first quarter 2000, the Company had a combined effective tax rate
for state and federal taxes of 40%, and a combined statutory tax rate for
state and federal taxes of approximately 40%. The Company's first quarter
1999 effective tax rate was 32% reflecting the application of certain
1998 and prior years state tax credits that were determined realizable in
1999.
5. INCOME PER SHARE
Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted income per share is
computed by dividing net income by the weighted average number of common
shares outstanding and common stock equivalents, which consist of shares
subject to stock options computed using the treasury stock method. In
addition, under the if-converted method, dilutive convertible securities
are included in the denominator while related interest expense, net of
tax, for convertible debt is added to the numerator. A reconciliation of
the numerator and denominator used in computing basic and diluted income
per share is as follows:
Three months ended March 31,
(in thousands except for per share data) 1999 2000
Income (basic) $2,875 $2,280
Interest expense on 7% Convertible Notes net of tax 208 208
effect
Income (diluted) $3,083 $2,488
Weighted average shares outstanding (basic) 19,445 18,628
Incremental shares related to stock options 966 694
Incremental shares related to 7% Convertible 2,202 2,202
Notes
Weighted average shares outstanding (diluted) 22,613 21,524
6. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
The American Institute of Certified Public Accountants issued Statement
of Position 98-5 on accounting for start-up costs, including preoperating
costs related to the introduction of new fleet types by airlines. The new
accounting guidelines were effective for 1999. The Company had previously
deferred certain start-up costs related to the introduction of the CRJs
and was expensing such costs ratably over four years. In January 1999,
the Company recorded a charge for the remaining unamortized balance of
approximately $888,000; net of $598,000 of income tax, associated with
previously deferred preoperating costs.
8
7. DELTA CONNECTION AGREEMENT
In 1999, the Company reached a ten year agreement with Delta Air Lines,
Inc. to operate regional jet aircraft as part of the Delta Connection
program on a fee-per-departure basis. Under the fee-per-departure
structure, the Company bears the risk to operate the flight schedule, and
Delta assumes the risk of marketing and selling seats to the traveling
public. Delta may terminate the agreement at any time if the Company
fails to maintain certain performance standards, and may terminate
without cause, effective no earlier than two years after commencement of
operations, by providing 180 days notice to the Company. The Delta
Connection agreement provides the Company with certain rights in the
event of termination without cause. The Company has ordered 20 CRJs from
Bombardier Aerospace of Montreal and 25 328JET jets from Fairchild
Aerospace Corporation for this new venture. The Company established a
new subsidiary, Atlantic Coast Jet, Inc. ("ACJet"), to operate as Delta
Connection. ACJet is currently in the application and approval process
with the applicable federal agencies to obtain authority to conduct
scheduled passenger air transportation of jet aircraft. The Company took
delivery of the first two 328JET aircraft in April 2000. These two
aircraft were financed under temporary leases with Fairchild Aerospace
Corporation until FAA certification for ACJet is received, at which time
permanent financing will be obtained. Initial Delta Connection service to
various destinations in the Northeast United States is expected to begin
no sooner than June 2000, subject to satisfactory resolution of
regulatory requirements and other start-up considerations. The Company
can make no assurances that its ACJet subsidiary will receive all
necessary regulatory approvals by this date.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Quarter Operating Statistics
Increase
Three months ended March 31, 1999 2000 (Decrease)
Revenue passengers carried 649,872 765,929 17.9%
Revenue passenger miles ("RPMs") 209,272 247,605 18.3%
(000's)
Available seat miles ("ASMs") (000's) 396,133 482,832 21.9%
Passenger load factor 52.8% 51.3% (1.5)pts
Break-even passenger load factor(1) 48.7% 48.7% 0.0 pts
Revenue per ASM (cents) 18.1 18.8 3.9%
Yield (cents) 34.3 36.6 6.7%
Cost per ASM (cents) 17.0 18.2 7.1%
Average passenger fare $110.55 $118.46 7.2%
Average passenger segment (miles) 322 323 0.3%
Revenue departures (completed) 42,783 46,637 9.0%
Revenue block hours 56,993 60,096 5.4%
Aircraft utilization (block hours) 8.9 8.6 (3.4%)
Average cost per gallon of fuel (cents) 65.5 105.8 61.5%
Aircraft in service (end of period) 76 86 13.2%
1 "Break-even passenger load factor" represents the percentage of ASMs
which must be flown by revenue passengers for the airline to break-even
at the operating income level.
Comparison of three months ended March 31, 2000, to three months ended
March 31, 1999.
Results of Operations
The following Management's Discussion and Analysis contains
forward-looking statements and information that are based on management's
current expectations as of the date of this document. When used herein,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions, as they relate to the Company's management, are intended to
identify such forward-looking statements. Such forward-looking statements
are subject to risks, uncertainties, assumptions and other factors that
may cause the actual results of the Company to be materially different
from those reflected in such forward-looking statements. Factors that
could cause the Company's future results to differ materially from the
expectations described here include the response of the Company's
competitors to the Company's business strategy, market acceptance of new
regional jet service, the costs of implementing jet service, the cost of
fuel, the amount and timing of ACJet's start-up costs, the ability to
obtain FAA regulatory approval for ACJet to conduct air transportation on
a timely basis, the ability of the Company to obtain favorable financing
terms for its aircraft, the ability of the aircraft manufacturer's to
deliver aircraft on schedule, the ability to identify, implement and
profitably operate new business opportunities, the ability to hire and
retain employees, the weather, changes in and satisfaction of regulatory
requirements including requirements relating to fleet expansion, general
economic and industry conditions, and the factors discussed below and in
the Company's Annual Report on Form 10-K for the year ended December 31,
1999. The Company does not intend to update these forward-looking
statements prior to its next required filing with the Securities and
Exchange Commission.
10
General
In the first quarter of 2000, the Company posted net income of
$2.3 million compared to income of $3.8 million, excluding the cumulative
effect of an accounting charge of $888,000 prescribed by Statement of
Position 98-5, for the first quarter of 1999. Pretax income for the three
months ended March 31, 2000 was $3.8 million as compared to $5.5 million
for the three months ended March 31, 1999.
Operating Revenues
The Company's operating revenues increased 26.7% to $92.5
million in the first quarter of 2000 compared to $73.0 million in the
first quarter of 1999. The increase resulted from a 21.9% increase in
ASMs coupled with a 6.7% increase in yield, partially offset by a 1.5
percentage point decrease in load factor.
The increase in ASM's is the result of continued service
expansion utilizing the Canadair 50 seat Regional Jet ("CRJ"). The
Company was operating 26 CRJs as of March 31, 2000 as compared to 16 as
of March 31, 1999. The average aircraft stage length for the first
quarter 2000 increased to 279 miles, from 274 miles for the first quarter
1999.
The quarter over quarter percentage increase in yield is
primarily the result of generally higher business fares realized by
airlines as a result of the near industry-wide implementation of a fuel
surcharge in February 2000, and improved yield management using United's
Orion system compared to the first quarter 1999. Total passengers
increased 17.9% in the first quarter of 2000 compared to the first
quarter of 1999.
Other revenues increased 52% reflecting the reimbursement from
Delta Air Lines, Inc. of amounts incurred related to pilot training for
the Delta Connection operation.
Operating Expenses
The Company's operating expenses increased 30.6% in the first
quarter of 2000 compared to the first quarter of 1999 due primarily to: a
61.5% increase in the price of jet fuel coupled with a 16.2% increase in
the average fuel burn rate to 207 gallons per hour; a 21.9% increase in
ASMs; a 17.9% increase in passengers carried; and continued expenses for
the certification and start-up of the ACJet operation. The increase in
ASMs, passengers and burn rate reflects the net addition of ten CRJs into
scheduled service since the end of the first quarter of 1999. A summary
of operating expenses as a percentage of operating revenues and cost per
ASM for the three months ended March 31, 1999, and 2000 is as follows:
11
Three Months ended March 31,
1999 2000
Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 26.9% 5.0 26.2% 5.0
Aircraft fuel 9.1% 1.7 14.2% 2.7
Aircraft maintenance and 8.3% 1.5 8.7% 1.7
materials
Aircraft rentals 14.2% 2.6 13.8% 2.6
Traffic commissions and related 16.3% 3.0 14.3% 2.8
fees
Facility rents and landing fees 5.5% 1.0 4.8% 0.9
Depreciation and amortization 2.7% 0.5 2.8% 0.5
Other 9.3% 1.7 10.3% 2.0
Total 92.2% 17.0 95.1% 18.2
Cost per ASM increased 7.1% on a year-over-year basis to 18.2
cents during the first quarter of 2000 primarily due to a 61.5% increase
in the year over year price per gallon of jet fuel and the continued
expenses associated with the certification and start-up of ACJet.
Salaries and related costs per ASM remained unchanged at 5.0
cents in the first quarter of 2000 compared to the first quarter of 1999.
In absolute dollars, salaries and related costs increased 23.4% from
$19.7 million in the first quarter of 1999 to $24.3 million in the first
quarter of 2000. The increase resulted primarily from additional flight
crews, customer service personnel and maintenance personnel to support
the Company's already increased and future level of operations.
The cost per ASM of aircraft fuel increased to 2.7 cents in the
first quarter of 2000 compared to 1.7 cents in the first quarter of 1999.
In absolute dollars, aircraft fuel expense increased 97.8% from $6.6
million in the first quarter of 1999 to $13.1 million in the first
quarter of 2000. The increased fuel expense resulted from the 61.5%
increase in the average cost per gallon of fuel from 65.5 cents to $1.06
including applicable taxes and into-plane fees and the 16.2% increase in
the average burn rate per hour of jet fuel. The Company did not hedge any
of its jet fuel requirements in the first quarter of 2000 as compared to
hedging approximately 80% of its jet fuel requirements for the first
quarter of 1999. The Company incurred approximately $550,000 in
additional fuel costs during the first quarter of 1999 as a result of its
fuel hedging activity. There can be no assurance that future increases in
fuel prices will not adversely affect the Company's operating expenses.
The Company has entered into additional hedge transactions to reduce its
exposure to fuel price increases during the remainder of 2000. See "Other
Commitments".
The cost per ASM of aircraft maintenance and materials
increased to 1.7 cents in the first quarter of 2000 compared to 1.5 cents
in the first quarter of 1999. In absolute dollars, aircraft maintenance
and materials expense increased 33.5% from $6.1 million in the first
quarter of 1999 to $8.1 million in the first quarter of 2000. The
increased expense resulted from the increase in the size of the total
fleet, escalating rates for the GE engine maintenance contract covering
the CRJ fleet, and the continual increase in the average age of the jet
and turboprop fleets.
12
The cost per ASM of aircraft rentals remained the same at 2.6
cents for the first quarter of 2000 compared to the first quarter of
1999. In absolute dollars, aircraft rentals increased 22.6% from $10.4
million in the first quarter of 1999 to $12.7 million in the first
quarter of 2000, reflecting the addition of the ten CRJ aircraft.
The cost per ASM of traffic commissions and related fees
decreased to 2.8 cents in the first quarter of 2000 compared to 3.0 cents
in the first quarter of 1999. In absolute dollars, traffic commissions
and related fees increased 11.5% from $11.9 million in the first quarter
of 1999 to $13.2 million in the first quarter of 2000. The increase
resulted from a 26.3% increase in passenger revenues and a 17.9% increase
in revenue passengers. These increases were partially offset by a
reduction in the travel agency commission rate.
The cost per ASM of facility rents and landing fees decreased
from 1.0 cents in the first quarter of 1999 to 0.9 cents in the first
quarter of 2000. In absolute dollars, facility rents and landing fees
increased 11.2% from $4.0 million in the first quarter of 1999 to $4.5
million in the first quarter of 2000. The increased costs result
primarily from the 9.0% increase in the number of departures and the
addition of the new Washington-Dulles regional terminal which the Company
occupied effective May 1999.
The cost per ASM of depreciation and amortization remained
unchanged at 0.5 cents. In absolute dollars, depreciation and
amortization increased 33.4% from $1.9 million in the first quarter of
1999 to $2.6 million in the first quarter of 2000 primarily as a result
of additional rotable spare parts associated with the CRJs and the
purchase of two CRJs in the second half of 1999.
The cost per ASM of other operating expenses increased to 2.0
cents in the first quarter of 2000 from 1.7 cents in the first quarter of
1999. In absolute dollars, other operating expenses increased 40.1% from
$6.8 million in the first quarter of 1999 to $9.5 million in the first
quarter of 2000. The increased costs result primarily from the 17.9%
increase in revenue passengers which resulted in higher passenger
handling costs and approximately $1.6 million in continued expenses for
ACJet pre-operating activities including regulatory compliance, employee
recruitment, training, establishment of operating infrastructure,
establishment of third party contractual arrangements, and aircraft
proving runs.
As a result of the foregoing changes in operating expenses and
a 21.9% increase in ASMs, total cost per ASM increased to 18.2 cents in
the first quarter of 2000 compared to 17.0 cents in the first quarter of
1999. In absolute dollars, total operating expenses increased 30.6% from
$67.3 million in the first quarter of 1999 to $88.0 million in the first
quarter of 2000.
The Company's combined effective tax rate for state and federal
taxes during the first quarter of 2000 was approximately 40% as compared
to 32% for the first quarter of 1999. This increase is due to the
application of certain 1998 and prior, state tax credits that were
determined realizable in 1999. The Company anticipates its effective tax
rate for the remainder of 2000 to be approximately 40%.
13
In January 1999, the Company recorded a charge for the
remaining unamortized balance of approximately $888,000, net of income
tax, associated with previously deferred preoperating costs.
Outlook
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth above on pages 9 and
10. As of May 1, 2000, the Company was operating a fleet of 90 aircraft
comprised of 27 CRJs, three 328JETs, 32 J41s and 28 J32s. (The 328JET
aircraft are not currently being operated in revenue service and include
one interim plane on loan from Fairchild.) As of May 1, 2000 the Company
has firm, conditional and option orders for an additional 66 CRJs and 163
328JET and 428JET regional jets. The continued delivery of these
additional jet aircraft into the United Express and Delta Connection
programs will expand the Company's business into new markets and increase
capacity in existing markets. In general, service to new markets and
increased capacity to existing markets will result in increased operating
expense that may not be immediately offset by increases in operating
revenues.
The Company continues to assess plans to phase out the 28
leased 19 seat J32 aircraft used in the United Express operation by the
end of 2001. The Company continues to analyze its phase-out plan,
including quantification of expected costs related to the removal of the
J32 from the fleet. The timing of approval by United to operate the
328JET/428JET jet aircraft as United Express will also be a factor in
analyzing the J32 phase-out plan.
During the first quarter of 2000, ACJet was engaged in pre-
operating activities including regulatory compliance, employee
recruitment, training, establishment of operating infrastructure,
establishment of third party contractual arrangements, and aircraft
proving runs. During the quarter, ACJet was issued a certificate of
public convenience and necessity by the DOT. The effectiveness of the
DOT certificate is conditioned upon the issuance by the FAA of an
operating certificate to ACJet, an application for which is pending. In
order to obtain FAA approval, ACJet must demonstrate that it has the
necessary organization and technical ability to safely provide air
transportation, and must satisfy certain environmental requirements.
Initial Delta Connection service to various destinations in the Northeast
United States is expected to begin no sooner than June 2000, subject to
satisfactory resolution of regulatory requirements and other start-up
considerations. The Company can make no assurances that its ACJet
subsidiary will receive all necessary regulatory approvals by this date.
A number of competitive and regulatory developments are
affecting the markets in which the Company competes. During the first
half of 1999 US Airways began to expand its operations at Washington-
Dulles. US Airways operated in five of the Company's Washington-Dulles
markets as of December 31, 1998 and by December 31, 1999 had increased
their presence to 21 of the Company's markets. Although the US Airways
service generally utilized fare levels similar to that implemented by the
Company, two of the implemented markets were served by MetroJet, which
offered fares lower than those typically offered by the Company.
14
During April and May 1999, United significantly increased the
number of flights it operated at Washington-Dulles. In July 1999, United
and the Company revised their Dulles flight schedules to increase
connections and to thereby take greater advantage of United's increased
capacity. As of May 1, 2000, United operated 114 daily departures from
Washington Dulles, a 65% increase from December 31, 1998. The Company and
United either increased frequencies or upgraded equipment, or both, in
markets affected by the US Airways expansion.
In the first quarter of 2000, US Airways began reducing some of
its MetroJet, Shuttle and US Airways Express operations at Washington-
Dulles. By March 2000 US Airways had ceased MetroJet service in the
Birmingham, AL; Columbus, OH; Milwaukee, WI and St. Louis, MO to
Washington-Dulles markets. The Company competed directly with MetroJet
in the Columbus to Washington-Dulles market.
By March 2000 US Airways Express had ceased service in the
Indianapolis to Washington-Dulles market, and reduced frequency in the
Wilkes-Barre/Scranton, PA; Wilmington, NC; Newport News, VA;
Philadelphia, PA; State College, PA; and Bristol/Kingsport/Johnson City,
TN to Washington-Dulles markets. The Company competes or had competed
directly with US Airways Express in the Indianapolis, Newport News,
Philadelphia and State College to Washington-Dulles markets.
Further, in April 2000 US Airways withdrew hourly Shuttle
service in the Boston and New York-LaGuardia to Washington-Dulles markets
and replaced both with less frequent service using a combination of
mainline and US Airways Express regional jet service. The Company
competes directly with US Airways Express in the New York-LaGuardia to
Washington-Dulles market.
As of May 1, US Airways had also withdrawn or announced
intention to withdraw MetroJet service from the Atlanta, GA and Raleigh-
Durham, NC to Washington-Dulles markets during the second quarter.
MetroJet competes directly with the Company in the Raleigh-Durham to
Washington-Dulles market.
As of May 1, US Airways Express had also ceased or announced
intention to cease service in the Elmira, NY and Newburgh-Stewart, NY to
Washington-Dulles markets, and reduced or announced intention to reduce
frequency in the Greensboro, NC and Pittsburgh, PA to Washington-Dulles
markets in the second quarter. The Company competes or had competed
directly with US Airways Express in the Newburgh-Stewart, Greensboro and
Pittsburgh to Washington-Dulles markets.
Four of the nation's busiest airports are subject to FAA
regulations limiting the number of hourly take off and landings. The
Company conducts flight operations at three of the four airports--New
York's LaGuardia and JF Kennedy (JFK) airports and Chicago's O'Hare
airport. The right to conduct a take off or landing during a certain
time of the day is called a slot. Legislation granting the Secretary of
Transportation authority to grant exemptions from these FAA rules was
recently enacted. As a result the DOT has provisionally granted
exemptions from the FAA rules to all carriers that qualify under the
statute for an exemption. Essentially a carrier is entitled to exemption
slots to serve LaGuardia, JFK and O'Hare if the carrier operates with
small equipment (less than 71 seats) to defined small airports if the
carrier did not previously provide such service. Also carriers that had
not previously served any of the three airports or did not offer more
than 10 flights per day to such airport can do so by operating up to 10
flights per day at each airport to communities of any size. In addition,
the legislation provides that all FAA slot controls will be eliminated at
O'Hare after July 1, 2002 and after January 1, 2007 for LaGuardia and
JFK.
15
The Company is one of several regional carriers that will be
in a position to provide additional service at each of the three airports
with regional jet aircraft. This legislation adds significantly to the
number of potential regional jet opportunities available to both the
United Express and Delta Connection operations and to the Company's
competitors. The Company filed as a Delta Connection carrier to conduct
additional operations at LaGuardia. In addition to the opportunities the
new law affords the Company it will also increase competitive pressure
at these airports, the effect of which cannot be determined at this
time. During 2000 the Company will continue to assess and respond to
competitive opportunities as they may develop as a result of this
legislation.
Fuel price increases in the second half of 1999 and to date in
2000 have had a material impact on cost of operations throughout the
airline industry. In February 2000, most airlines implemented a fuel
surcharge of $10 each way on most domestic non-sale airfares. The
Company's results will continue to be affected by fuel price volatility.
During the first quarter 2000, none of the Company's exposure to fuel
price increases was hedged. In October 1999, the Company entered into
commodity swap transactions to hedge price changes on approximately
13,300 barrels of crude oil per month for the second quarter 2000 and on
approximately 23,300 barrels of crude oil per month for the third quarter
2000. The contracts provide for an average fixed price equal to
approximately 52.6 cents per gallon for the second quarter of 2000 and 51
cents per gallon for the third quarter of 2000. With these transactions
and taking into account that Delta Air Lines, Inc. bears the economic
risk of fuel price fluctuations for future fuel requirements associated
with the Delta Connection program, the Company has limited its exposure
to fuel price increases on approximately 14% of its anticipated jet fuel
requirements for the second quarter 2000; 27% for the third quarter 2000;
and 18% for the fourth quarter of 2000.
Liquidity and Capital Resources
As of March 31, 2000, the Company had cash, cash equivalents
and short-term investments of $35.6 million and working capital of $59.0
million compared to $56.3 million and $71.5 million respectively as of
March 31, 1999. During the first three months of 2000, cash and cash
equivalents decreased by $21.9 million, reflecting net cash used in
operating activities of $15.8 million, net cash used in investing
activities of $4.7 million, and net cash used in financing activities of
$1.4 million. The net cash used in operating activities is primarily the
result of net income for the period of $2.3 million, and non cash
depreciation and amortization expenses of 2.8 million, offset by a $13.7
million increase in prepaid expenses related to aircraft rent and a $12.5
million increase in receivables due to the increase in passenger
revenues. In order to minimize the costs related to the aircraft
leveraged lease transactions, the Company has uneven semiannual lease
payment dates of January 1 and July 1. Approximately 37% of the Company's
annual aircraft lease payments are due in January and 26% in July. The
net cash used in investing activities consisted primarily of purchases of
property and equipment and deposits for aircraft progress payments.
Financing activities consisted primarily of payments on long term debt
and capital lease obligations and purchase of treasury stock.
16
Other Financing
In February 1999, the Company entered into an asset-based
lending agreement with a financial institution that provides the Company
with a $15 million bridge loan for the construction of the regional
terminal at Washington-Dulles and a line of credit for up to $35 million
depending on the amount of assigned ticket receivables and the value of
certain rotable spare parts. The $35 million line of credit replaces a
previous $20 million line of credit and will expire on September 30,
2000, or upon termination of the United Express marketing agreement,
whichever is sooner. The interest rate on this line is LIBOR plus .75%
to 1.75% depending on the Company's fixed charges coverage ratio. At
March 31, 2000 the interest rate was LIBOR plus 1.25%. The Company
pledged $2.9 million of this line of credit as collateral to secure
letters of credit issued on behalf of the Company by a financial
institution. As of March 31, 2000, the available amount of credit under
the line was $32.1 million. Although there can be no assurances, the
Company anticipates that it will be able to renew this line of credit
prior to its expiration on terms at least as favorable as the current
facility. As of March 31, 2000 there were no outstanding borrowings on
either the $35 million line of credit or the $15 million bridge loan.
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1,
2004 (the "Notes"), receiving net proceeds of approximately $55.6
million. The Notes are convertible into shares of Common Stock, par
value $0.02, of the Company by the holders at any time prior to
maturity, unless previously redeemed or repurchased, at a conversion
price of $9 per share, subject to certain adjustments. As of May 1,
2000, approximately $19.8 million principal amount of Notes were
outstanding, which were convertible into approximately 2.2 million
shares of Common Stock. The Company may redeem the remaining Notes
beginning on July 3, 2000 by calling the Notes at 104% of face value
declining one percent per year until maturity on July 1, 2004, in which
case the holders will have an opportunity to convert the Notes at their
face amount prior to redemption. The Board of Directors of the Company
has approved the redemption of all outstanding Notes in accordance with
their terms. Prior notice of any redemption of Notes is required to be
made to the trustee and all holders of record of Notes. The Notes are
convertible until five business days before the effective date of any
redemption.
Other Commitments
On April 21, 1999, the Company's Board of Directors approved a
plan to purchase up to $20 million or five percent of the then current
outstanding shares in open market or private transactions over a twelve
month period. As of April 21, 2000, the Company had purchased 1,064,000
shares of its common stock at an average price of $17.28 per share for a
total of $18.4 million.
17
The Company periodically enters into a series of put and call
contracts as an interest rate hedge designed to limit its exposure to
interest rate changes on the anticipated issuance of permanent financing
relating to the delivery of aircraft. In August 1999, the Company
entered into a series of three put and call contracts having an aggregate
notional amount of $23 million. These contracts mature between March and
May 2000. As such, effective gains or losses realized when permanent
financing is obtained will be amortized over the term of the related
aircraft lease or will be depreciated as part of the aircraft acquisition
cost for owned aircraft. In March 2000, the Company settled the first set
of contracts and received approximately $138,000 from the counterparty.
The Company would have realized no gain or loss had the remaining two
contracts settled on March 31, 2000.
In October 1999, the Company entered into commodity swap
transactions to hedge price changes on approximately 13,300 barrels of
crude oil per month for the period April to June 2000, and on
approximately 23,300 barrels of crude oil per month for the period July
through September 2000. The contracts provide for an average fixed price
equal to approximately 52.6 cents per gallon for the second quarter of
2000 and 51 cents per gallon for the third quarter of 2000. With these
transactions and taking into account that Delta Air Lines, Inc. bears the
economic risk of fuel price fluctuations for future fuel requirements
associated with the Delta Connection program, the Company has limited its
exposure to fuel price increases on approximately 14% of its anticipated
jet fuel requirements for the second quarter 2000; 27% for the third
quarter 2000; and 18%, for the fourth quarter of 2000. Had the commodity
swap transactions settled on March 31, 2000, the Company would have
realized a reduction of approximately $761,000 in fuel expense.
Aircraft
As of May 1, 2000, the Company had a total of 39 CRJs on order
from Bombardier, Inc., and held options for 27 additional CRJs. The
Company also had on order with Fairchild Aerospace Corporation, 23
328JETs, and a conditional order for 15 328JETs and 40 428JETs, and held
options for 85 additional 328JET/428JETs. Of the 62 firm aircraft
deliveries, 23 are scheduled for the remainder of 2000, 29 are scheduled
for 2001, and ten are scheduled for 2002. The Company is obligated to
purchase and finance (including the possible use of leveraged leases) the
62 firm ordered aircraft at an approximate capital cost of $1.0 billion.
The Company anticipates leasing all of its year 2000 aircraft deliveries
on terms similar to previously delivered CRJ aircraft.
As previously announced, the Company is exploring alternatives
to accelerate the retirement of its fleet of 28 leased 19 seat J-32
aircraft. The Company tentatively plans to remove at least six J-32s
from ACA's fleet during 2000 and the remainder in 2001. As of March 31,
2000, the Company had J-32 operating lease commitments with remaining
lease terms ranging from less than one year to six years and related
minimum lease payments of approximately $40.7 million. The Company has
not yet finalized its analysis of a phase-out plan, including
quantification of any one-time fleet rationalization charge.
18
Capital Equipment and Debt Service
Capital expenditures for the first three months of 2000 were
$2.7 million compared to $1.7 million for the same period in 1999.
Capital expenditures for 2000 have consisted primarily of the purchase of
rotable spare parts for the CRJ and J-41 aircraft, facility leasehold
improvements, ground equipment, and computer and office equipment. For
the remainder of 2000, the Company anticipates spending approximately $19
million for rotable spare parts related to the regional jet and J-41
aircraft, ground service equipment, facilities, computers and software.
Debt service including capital leases for the three months
ended March 31, 2000 was $1.0 million compared to $910,000 in the same
period of 1999.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the asset-based credit
facility, and other available equipment financing, will be sufficient to
meet its working capital needs, capital expenditures, and debt service
requirements for the next twelve months.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not designated
as hedging instruments, or for the ineffective portion of a hedging
instrument, the change in fair value will affect current period earnings.
In July 1999, the FASB issued Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement
No. 133" which defers the effective date of Statement No. 133 by one
year. Therefore, the Company will adopt Statement No. 133 during its
first quarter of fiscal 2001 and is currently assessing the impact this
statement will have on interest rate swaps and any other applicable
transactions that may be entered into by the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results from changes in jet
fuel pricing and in interest rates.
19
For 2000, the Company has hedged a portion of its exposure to
jet fuel price fluctuations by entering into commodity swap contracts for
approximately 8% of its estimated 2000 fuel requirements for the United
Express program. The swap contracts are designed to provide protection
against sharp increases in the price of jet fuel. In addition, Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program. Based on the
Company's projected fuel consumption for the year 2000, a one-cent
increase in the average annual price per gallon of jet fuel would
increase the Company's annual aircraft fuel expense by approximately
$530,000.
The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. The Company has entered into put and call contracts designed to
limit the Company's exposure to interest rate changes until permanent
financing is secured upon delivery of the Bombardier regional jet
aircraft. At March 31, 2000 the Company had two swap contracts
outstanding related to the delivery of the next two CRJs. A one-
percentage point decrease in interest rates from the Company's call
contracts would increase the Company's aircraft lease or ownership costs
associated with these contracts by approximately $200,000.
20
. ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED MARCH 31, 2000
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation and FAA civil
action proceedings, all of which are incidental to its business, and none
of which the Company believes are likely to have a material effect on the
Company's financial position or the results of its operations.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None to report.
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
May 12, 2000 By: /S/ Richard J. Surratt
Richard J. Surratt
Senior Vice President and Chief
Financial Officer
May 12, 2000 By: /S/ Kerry B. Skeen
Kerry B. Skeen
Chairman and Chief Executive
Officer