SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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 of incorporation) (IRS Employer
Identification No.)
45200 Business Court, Dulles, Virginia 20166
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (703) 650-6000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock par value $ .02 NASDAQ National Market
(Title of Class) (Name of each exchange
on which registered)
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__
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ____
The aggregate market value of voting stock held by nonaffiliates of
the registrant as of March 1, 2001 was approximately $744,500,000.
As of March 1, 2001 there were 47,800,568 shares of common stock of
the registrant issued and 42,754,236 shares of common stock were
outstanding.
Documents Incorporated by Reference
Certain portions of the document listed below have been incorporated
by reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
Proxy Statement for 2001 Annual Meeting of Shareholders
Part III, Items 10-13
2
PART I
Item 1. Business
General
This Annual Report on Form 10-K contains forward looking
statements. Statements in the Summary of Company Business Strategy
and Management's Discussion and Analysis of Operations and Financial
Condition sections of this filing, together with other statements
beginning with such words as "believes", "intends", "plans", and
"expects" include forward-looking statements that are based on
management's expectations given facts as currently known by
management on the date this was first filed with the SEC. Actual
results may differ materially. Factors that could cause the
Company's future results to differ materially from the expectations
described here include the ability of the Company to obtain
favorable financing terms for its aircraft, the ability of the
aircraft manufacturers to deliver aircraft on schedule, unexpected
costs or delays in the implementation of new service, the ability of
the Company to successfully retire the Company's turboprop fleet,
the ability to hire and retain employees, the weather, the impact of
labor issues or strikes at United Airlines, Inc. or Delta Air Lines,
Inc. on those companies' utilization and support of the Company's
operations, airport and airspace congestion, changes in and
satisfaction of regulatory requirements including requirements
relating to fleet expansion, and general economic and industry
conditions. A number of risks and uncertainties exist with regard
to the Company's agreement with UAL Corporation ("UAL"), parent of
United Airlines, Inc. ("United") to acquire - through subsidiaries -
the three regional airlines that are currently wholly-owned by US
Airways Group, Inc. ("US Airways") which could cause actual results
to differ materially from these projected results. Such factors
relating to the transaction include, among others, UAL's termination
rights, ability to reach agreement with UAL on the ultimate purchase
price, ability to obtain regulatory approval with respect to the
transaction, financing of the final purchase price, unanticipated
unreimbursed costs, ability of the three companies to operate as
fully independent corporations, ability to resolve any conflicting
provisions in collective bargaining agreements obligating any
company involved in the transaction, potential turboprop fleet
transition issues, satisfactory resolution of amendable union
contracts, operational issues involving any of the three airlines,
and the impact of these new operations on existing operations. The
Company undertakes no obligation to update any of the forward-
looking information included in this release, whether as a result of
new information, future events, changes in expectations or
otherwise.
Atlantic Coast Airlines Holdings, Inc. ("ACAI"), is the
holding company of Atlantic Coast Airlines ("ACA"), and Atlantic
Coast Jet, Inc. ("ACJet") collectively, (the "Company"), which
together are regional airlines, serving 53 destinations in 24 states
in the Eastern and Midwestern United States as of March 1, 2001 with
650 scheduled non-stop flights system-wide every weekday. ACA
markets itself as "United Express" and is the only code-sharing
regional airline for United Airlines, Inc. ("United") operating as
United Express in the Eastern United States. ACJet markets itself
as a Delta Connection carrier with Delta Air Lines, Inc. ("Delta")
operating predominately in the Northeastern United States. As of
March 1, 2001, the Company operated a fleet of 108 aircraft (58
regional jets and 50 turboprop aircraft) having an average age of
approximately four years. The Company plans to combine the
operations of ACJet into the operations of ACA during the first half
of 2001. This combination is contingent on the Company receiving
the required approvals from the Federal Aviation Administration and
the Department of Transportation.
3
Marketing Agreements
United Express:
The Company's United Express Agreements ("UA Agreements")
define the Company's relationship with United. The UA Agreements
authorize the Company to use United's "UA" flight designator code to
identify the Company's flights and fares in the major airline
Computer Reservation Systems ("CRS"), including United's "Apollo"
reservation system, to use the United Express logo and exterior
aircraft paint schemes and uniforms similar to those of United, and
to otherwise advertise and market the Company's association with
United.
In November 2000, the Company and United restated the UA
Agreements, effectively changing from a prorated fare arrangement to
a fee-per-departure arrangement. Under the fee-per-departure
structure, the Company is contractually obligated to operate the
flight schedule, for which United pays the Company an agreed amount
per departure regardless of the number of passengers carried, with
incentive payments based on operational performance. The Company
thereby assumes the risks associated with operating the flight
schedule and United assumes the risk of scheduling, marketing, and
selling seats to the traveling public. The restated UA Agreements
are for a term of ten years. The restated UA Agreements give ACA
the authority to operate 128 regional jets in the United Express
operation.
Pursuant to the restated UA Agreements, United provides a
number of additional services to ACA at no cost. These include
customer reservations, customer service, pricing, scheduling,
revenue accounting, revenue management, frequent flyer
administration, advertising, provision of ground support services at
most of the airports served by both United and ACA, provision of
ticket handling services at United's ticketing locations, and
provision of airport signage at airports where both ACA and United
operate.
The UA Agreements do not prohibit United from serving, or
from entering into agreements with other airlines who would serve,
routes served by the Company, but state that United may terminate
the UA Agreements if ACAI and ACA enter into a similar arrangement
with any other carrier other than Delta without United's approval.
The UA Agreements limit the ability of ACAI and ACA to
merge with another company or dispose of certain assets or aircraft
without offering United a right of first refusal to acquire the
Company or such assets or aircraft, and provide United a right to
terminate the UA Agreements if ACAI or ACA merge with or are
controlled or acquired by another carrier. The UA agreements provide
United with the right to assume ACA's ownership or leasehold
interest in certain aircraft in the event ACA breaches specified
provisions of the UA agreements, or fails to meet specified
performance standards.
4
On March 2, 2001, the Company announced it entered
into an agreement with UAL, parent of United to acquire-through
subsidiaries-the three regional airlines that are currently wholly-
owned by US Airways. The three carriers are Allegheny Airlines,
Piedmont Airlines and PSA Airlines. Closing of the acquisition from
US Airways, which would be contingent upon and occur at the same
time as closing of the proposed United/US Airways merger, is subject
to regulatory approvals and to termination rights by UAL. The
aggregate purchase price for the three carriers, initially set at
$200 million, will be paid at closing in the form of a promissory
note due in 18 months. Under the terms of the agreement, the Company
will not remit principal or interest payments or accrue interest on
the note until and if an agreement is finalized. The ultimate
purchase price for each of the three regional carriers will be
negotiated during the 18-month term of the promissory note. If
agreement cannot be reached on an ultimate purchase price as to any
or all of the three carriers, the Company's acquisition of that
carrier will be unwound. The ultimate purchase price paid by the
Company may vary substantially from the amount of the promissory
note, and there can be no assurances that the Company will retain
any or all of the three carriers. If closing occurs on the initial
purchase of the three carriers but the Company is not the ultimate
purchaser of at least one of the carriers, the Company will receive
a fee of up to $10.5 million. The results of operations, and any
capital requirements of the three regional carriers, are not
expected to contribute to the Company's results of operations or
impact its financial position until and if an ultimate purchase
price is agreed to and the acquisition can no longer be unwound.
Delta Connection:
In September, 1999, the Company reached a ten year
agreement with Delta to operate regional jet aircraft as part of the
Delta Connection program on a fee-per-block hour basis. The Company
began Delta Connection revenue service on August 1, 2000. The
Company's Delta Connection Agreement ("DL Agreement") defines the
Company's relationship with Delta. The Company is compensated by
Delta on a fee-per-block hour basis. Under the fee-per-block hour
structure, the Company is contractually obligated to operate the
flight schedule, for which Delta pays the Company an agreed amount
per block hour flown regardless of passenger revenue with additional
incentive payments based on operational performance. The Company
thereby assumes the risks associated with operating the flight
schedule and Delta assumes the risks of scheduling, marketing, and
selling seats to the traveling public.
By operating as part of the Delta Connection program, the
Company is able to use Delta's "DL" flight designator to identify
ACJet's flights and fares in the major Computer Reservation Systems,
including Delta's "Deltamatic" reservation system, and to use the
Delta Connection logo and exterior aircraft paint schemes and
uniforms similar to those of Delta.
Pursuant to the DL Agreement, Delta, at its expense,
provides a number of support services to ACJet. These include
customer reservations, customer service, ground handling, station
operations, pricing, scheduling, revenue accounting, revenue
management, frequent flyer administration, advertising and other
passenger, aircraft and traffic servicing functions in connection
with the ACJet operation.
Delta may terminate the DL Agreement at any time if the
Company fails to maintain certain performance standards for the
Company's Delta Connection operation and, subject to certain rights
by the Company, may terminate without cause, effective no earlier
than August 1, 2002, by providing 180 days notice to the Company.
In January 2001, the Company reached an agreement with
United and Delta to place 20 CRJ's originally ordered for the Delta
Connection program in the United Express program.
5
The DL Agreement requires the Company to obtain Delta's
approval if it chooses to enter into a code-sharing arrangement with
another carrier, to list its flights under any other code, or to
operate flights for any other carrier, except with respect to such
arrangements with United or non-U.S. code-share partners of United
or in certain other circumstances. The DL Agreement does not
prohibit Delta from serving, or from entering into agreements with
other airlines who would serve, routes flown by the Company. The DL
Agreement also restricts the ability of the Company to dispose of
aircraft subject to the agreement without offering Delta a right of
first refusal to acquire such aircraft, and provides that Delta may
terminate the agreement if, among other things, the Company merges
with or sells its assets to another entity, is acquired by another
entity or if any person acquires more than a specified percentage of
its stock.
Agreements with Other Airlines:
As of March 1, 2001 the Company has code-sharing
arrangements with Lufthansa German Airlines ("Lufthansa") and Air
Canada, both involving certain United Express flights. Such
international code-sharing arrangements permit both airlines to
place their respective airline codes on certain flights operated by
the other, and provide a wide range of benefits for passengers
including schedule coordination, through ticketing and frequent
flyer participation. The revenue benefits from these arrangements
inures to United, and any such arrangements as may be made in the
future with respect to the Company's Delta Connection flights would
inure to Delta, due to the nature of the Company's agreements with
these two airlines. Thus the Company's primary role under these
arrangements is to obtain regulatory approvals for the relationships
and to operate the flights.
Markets
As of March 1, 2001, the Company scheduled 650 non-stop
flights system-wide per weekday as compared to 561 system-wide as of
March 1, 2000. The Company's United Express operation is centered
around Washington's Dulles and Chicago's O'Hare airports. The Delta
Connection operation is focused at New York's LaGuardia and Boston's
Logan airports.
6
The following tables set forth the destinations served by
the Company as of March 1, 2001:
United Express Service
Washington-Dulles (To/From)
Akron/Canton, OH Lynchburg, VA
Albany, NY** Mobile, AL*
Allentown, PA Nashville, TN*
Baltimore, MD New York, NY
(Kennedy)
Binghamton, NY New York, NY
(LaGuardia)*
Buffalo, NY** Newark, NJ**
Burlington, VT* Newport News, VA
Charleston, SC** Norfolk, VA**
Charleston, WV** Philadelphia, PA
Charlottesville, VA Pittsburgh, PA
Cleveland, OH* Portland, ME*
Columbia, SC * Providence, RI*
Columbus, OH** Raleigh-Durham, NC**
Dayton, OH Richmond, VA
Detroit, MI Roanoke, VA
Greensboro, NC** Rochester, NY
Greenville/Spartanburg, SC* Savannah, GA*
Harrisburg, PA Shanandoah, VA
Indianapolis, IN* State College, PA
Jacksonville, FL* Stewart, NY
Knoxville, TN Syracuse, NY
Louisville, KY* Westchester County, NY
Chicago-O'Hare (To/From)
Akron/Canton, OH* Peoria, IL*
Charleston, SC* Roanoke, VA*
Charleston, WV* Savannah, GA *
Columbia, SC* Sioux Falls, SD*
Fargo, ND* Springfield/Branson, MO*
Greenville, SC* Tulsa, OK*
Mobile, AL* Wilkes-Barre/Scranton, PA*
* Denotes all regional jet service
** Denotes mixture of regional jet and turboprop service
7
Delta Connection Service
New York LaGuardia (To/From)
Birmingham, AL* Indianapolis, IN*
Columbia, SC * Nashville, TN*
Columbus, OH* Raleigh-Durham, NC*
Dayton, OH* Richmond, VA*
Greensboro, NC* Savannah, GA *
Greenville/Spartanburg, SC*
Boston Logan (To/From)
Burlington, VT* Newark, NJ* (service
starts 5/1/01)
Columbia, SC * Philadelphia, PA*
Montreal, Quebec Canada* Raleigh-Durham, NC*
New York, NY (Kennedy)*
* Denotes all regional jet service
Fleet Description
Fleet Expansion: As of March 1, 2001, the Company
operated a fleet of 40 Canadair Regional Jets ("CRJs"), 18 Fairchild
Dornier 328 regional jets ("328JET"), and 50 turboprop aircraft,
consisting of 32 British Aerospace Jetstream-41 ("J-41s") and 18
British Aerospace Jetstream-32 aircraft ("J-32s").
As of March 1, 2001, the Company had a total of 56 CRJs on
firm order from Bombardier, Inc., in addition to the 40 already
delivered, and held options for 80 additional CRJs. The Company
also had 44 328JETs on firm order, in addition to the 18 already
delivered, and held options for an additional 83 aircraft. The
future delivery schedule of the remaining 100 firm ordered regional
jet aircraft undelivered as of March 1, 2001 is as follows: 28
aircraft are scheduled for delivery during the remainder of 2001, 30
aircraft in 2002 and 42 aircraft in 2003.
<PAGE > 8
Fleet Composition: The following table describes the
Company's fleet of aircraft, scheduled firm deliveries and options
as of March 1, 2001:
Number of Passenger Average Firm
Aircraft Capacity Age in Deliveries Options
Years
Canadair Regional 40 50 1.8 56 80
Jets
Fairchild Dornier 18 32 0.4 44 83
328JET
British Aerospace 32 29 6.2 - -
J-41
British Aerospace 18 19 10.9 _-_ _-_
J-32
108 4.4 100 163
During 2000, the Company began early retiring the leased
19-seat J-32 aircraft from the fleet. As of March 1, 2001, ten J-
32s had been removed from service. The remaining 18 J-32s will be
removed from service during the remainder of 2001. The early
retirement of the 28 leased J-32 aircraft resulted in the Company
recording a $29.0 million (pre-tax) restructuring charge during
2000. During March 2001, the Company reached agreement with the
lessor for the early return and lease termination of all of the J-
32's and as a result paid a lease termination fee which consisted
of $19.1 million in cash, and the application of $5.2 million in
credits due from the lessor. The Company believes that the remainder
of the accrual will be adequate to provide for costs necessary to
meet aircraft return conditions. The early termination of these
leases and the return of these aircraft prior to lease expiration
will enable the Company to satisfy its lease obligations and does
not require the Company to assume the risks and efforts required to
maintain and remarket the aircraft. The Company does not expect to
incur any additional charges against earnings for the early
retirement of the J-32 fleet.
In January 2001, the Company reached an agreement with
United and Delta to place 20 CRJ's originally ordered for the Delta
Connection program in the United Express program.
The Company is evaluating plans to early retire the 32 J-
41 turboprop aircraft from its fleet beginning in 2002. Adoption of
a plan to retire the J-41 turboprop fleet would likely result in a
substantial charge to future earnings. The Company is unable at
this time to quantify the amount of any such retirement charge, as a
formal plan has not yet been adopted.
Fuel
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing
prices in quantities sufficient to meet its future requirements.
During 2000, the Company hedged a portion of its exposure to jet
fuel price fluctuations by entering into commodity swap contracts
for approximately 8.4% of its fuel requirements for the United
Express program. Delta Air Lines, Inc. bears the economic risk of
fuel price fluctuations for the fuel requirements of the Company's
Delta Connection program, and United Airlines bears such risk for
the Company's United Express program beginning on December 1, 2000.
As such, the Company reasonably expects that its results of
operations will no longer be directly affected by fuel price
volatility.
9
Competition
The airline industry is highly competitive, and there are
few barriers to entry in the markets served by the Company.
Furthermore, larger carriers can impact the markets served by the
Company through fare discounting as well as flight schedule
modifications. Competition in the markets served by the Company
from other air carriers varies by location, type of aircraft (both
turboprop and jet), and in certain cities, comes from carriers which
serve the same destinations as the Company but through different
hubs. Under the Company's fixed fee arrangements with United and
Delta, United and Delta are responsible for establishing routes and
fee structure, and the Company's revenue is not directly related to
passenger revenue earned by United or Delta on its flights.
However, the overall system benefit to those airlines is likely to
affect the Company in such areas as future growth opportunities.
The Company attempts to address competition by the level of service
it provides passengers traveling on flights it operates.
Slots
Slots are reservations for takeoffs and landings at
specified times and are required by governmental authorities to
operate at certain airports. The Company has rights to and utilizes
takeoff and landing slots at Chicago-O'Hare and LaGuardia, Kennedy
and White Plains, New York airports. The Company also uses slot
exemptions at Chicago-O'Hare, which differ from slots in that they
allow service only to designated cities and are not transferable to
other airlines without the approval of the U.S. Department of
Transportation ("DOT"). Airlines may acquire slots by governmental
grant, by lease or purchase from other airlines, or by loan when
another airline does not use a slot but desires to avoid
governmental reallocation of a slot for lack of use. All leased and
loaned slots are subject to renewal and termination provisions.
Under rules presently in effect, all slot regulation is scheduled to
end at Chicago-O'Hare after July 1, 2002 and at LaGuardia and
Kennedy after January 1, 2007. The rules also provide that, in
addition to those slots currently held by carriers, operators of
regional jet aircraft may apply for, and the Secretary of
Transportation must grant, additional slots at Chicago, LaGuardia,
and Kennedy in order to permit the carriers to offer new service,
increase existing service or upgrade to regional jet service in
qualifying smaller communities. There is no limit on the number of
slots a carrier may request.
The ability of regional carriers to obtain slots at
LaGuardia in large numbers led to an increase in flight activity at
the airport that exceeded the capacity of LaGuardia. As a result,
and to reduce airport congestion and delays, the FAA implemented a
slot lottery system resulting in a decrease in the operation of new
regional jet service to and from LaGuardia including ACJet services
operated for Delta. In addition, ACA is unable to increase service
at LaGuardia given limits on the number of slots and the impact of
the slot lottery. The slot lottery is a temporary measure, and the
FAA is considering implementing a long term solution that could
involve increasing landing and other fees to discourage operations
during peak hours. To the extent other airports experience
significant flight delays, the FAA or local airport operators could
seek to impose similar peak period pricing systems or other demand-
reducing strategies which could impede the Company's ability to
serve any such impacted airport.
10
Employees
As of March 1, 2001, the Company had 3,015 full-time and
377 part-time employees, classified as follows:
Classification Full- Part-
Time Time
Pilots 1,110 1
Flight attendants 475 1
Station personnel 600 327
Maintenance personnel 377 9
Management,
administrative and
Clerical personnel 453 39
Total employees 3,015 377
The Company's pilots are represented by the Airline Pilots
Association ("ALPA"), flight attendants are represented by the
Association of Flight Attendants ("AFA"), and mechanics are
represented by the Aircraft Mechanics Fraternal Association
("AMFA").
The ALPA collective bargaining agreement became amendable
in February 2000 and the Company and ALPA began meetings on a new
contract. In January 2001, the Company agreed to a new four-and-a-
half year contract with ALPA which was subsequently ratified and
became effective on February 9, 2001. This agreement provides for
improvements in pay rates, benefits, training and other areas. The
collective bargaining agreement covers pilots flying for both the
Atlantic Coast Airlines/United Express operation, as well as the
Atlantic Coast Jet/Delta Connection operation. The new agreement
provides for substantial increases in pilot compensation which the
Company believes are consistent with industry trends.
ACA's collective bargaining agreement with AFA was
ratified in October, 1998. The agreement is for a four-year
duration and becomes amendable in October 2002. ACJet has an
agreement with AFA for a five-year duration covering ACJet flight
attendants on terms substantially similar to the terms of the
contract between ACA and AFA. The ACJet agreement becomes amendable
in March 2005.
The collective bargaining agreement with AMFA was ratified
in June, 1998. The agreement is for a four-year duration and
becomes amendable in June 2002. This agreement covers all
mechanics working for the Company.
The Company believes that certain of the Company's
unrepresented labor groups are from time to time approached by
unions seeking to represent them. However, the Company has not
received any official notice of organizing activity and there have
been no representation applications filed with the National
Mediation Board by any of these groups. The Company believes that
the wage rates and benefits for non-union employee groups are
comparable to similar groups at other regional airlines.
The Company continues to commit additional resources to
its employee recruiting and retention efforts and is hiring
personnel to accommodate its growth plans. However, due to industry
hiring demands, a competitive local labor market in Northern
Virginia and normal attrition, there can be no assurance that the
Company will be able to continue to meet its hiring requirements.
11
Pilot Training
The Company performs pilot training with state-of-the-
art, full motion simulators and conducts training in accordance
with FAA Part 121 regulations. The Company has entered into
agreements with Pan Am International Flight Academy ("PAIFA")
which allow the Company to train CRJ, J-41 and J-32 pilots at
PAIFA's facility near Washington-Dulles. In 1999, PAIFA acquired
from a third party the existing training facility where the Company
has been conducting J-41 and J-32 training, and added a CRJ
simulator at the facility in December 1999. The Company has
committed to purchase an annual minimum number of CRJ and J-41
simulator training hours at agreed rates, with commitments
originally extending ten and three years, respectively. Under this
commitment, a new CRJ simulator will be acquired in July 2001. The
Company's payment obligations over the remaining nine years total
approximately $16 million. 328JET training is presently being
conducted in Dallas, Texas at a facility arranged in conjunction
with the acquisition of the aircraft. The Company is negotiating
with PAIFA to have PAIFA install a 328JET simulator at its
Washington-Dulles facility.
Regulation
Economic. The Department of Transportation ("DOT") has
extensive authority to issue certificates authorizing carriers to
engage in air transportation, establish consumer protection
regulations, prohibit certain unfair or anti-competitive pricing
practices, mandate conditions of carriage and make ongoing
determinations of a carrier's fitness, willingness and ability to
provide air transportation. The DOT can bring proceedings for the
enforcement of its regulations under applicable federal statutes,
which proceedings may result in civil penalties, revocation of
operating authority or criminal sanctions.
The Company's ACA and ACJet subsidiaries hold certificates
of public convenience and necessity, issued by the DOT, that
authorizes the subsidiaries to conduct air transportation of
persons, property and mail between all points in the United States,
its territories and possessions. These certificates require that
ACA and ACJet maintain DOT-prescribed minimum levels of insurance,
comply with all applicable statutes and regulations and remain
continuously "fit" to engage in air transportation. In addition to
this authority, ACA and ACJet are authorized to engage in air
transportation between the United States and Canada.
Based on conditions in the industry, or as a result of
Congressional directives or statutes, the DOT from time to time
proposes and adopts new regulations or amends existing regulations
in which new or amended regulations may impose additional regulatory
burdens and costs on the Company.
Due to an increase in passenger traffic, weather, air
traffic control caused delays and interruptions in service related
to labor disputes, members of Congress have proposed passenger
rights legislation as well as legislation to address competition
issues. Imposition of new laws and regulations on air carriers
could increase the cost of operation and or limit carrier management
discretion, although the final form of pending legislative, if any
is adopted as law, is uncertain.
12
Safety. The FAA extensively regulates the safety-related
activities of air carriers. The Company is subject to the FAA's
jurisdiction with respect to aircraft maintenance and operations,
equipment, ground facilities, flight dispatch, communications,
training, weather observation, flight personnel, airport security,
the transportation of hazardous materials and other matters
affecting air safety. To ensure compliance with its regulations,
the FAA requires that airlines under its jurisdiction obtain an
operating certificate and operations specifications for the
particular aircraft and types of operations conducted by such
airlines. The Company's ACA and ACJet subsidiaries possess
operating certificates issued by the FAA and related authorities
authorizing them to conduct operations with turboprop and turbojet
equipment in the case of ACA and turbojet equipment in the case of
ACJet. The Company, like all carriers, requires specific FAA
authority to add aircraft to its fleet. ACA and ACJet's authority
to conduct operations is subject to suspension, modification or
revocation for cause. The FAA has authority to bring proceedings to
enforce its regulations, which proceedings may result in civil or
criminal penalties or revocation of operating authority.
From time to the time and with varying degrees of
intensity, the FAA conducts inspections of air carriers. Such
inspections may be scheduled or unscheduled and may be triggered by
specific events involving either the specific carrier being
inspected or other air carriers. In addition, the FAA may require
airlines to demonstrate that they have the capacity to properly
manage growth and safely operate increasing numbers of aircraft.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance
directives and other mandatory orders. These relate to, among other
things, the inspection of aircraft and the mandatory removal and
replacement of parts or structures. In addition, the FAA from time
to time amends its regulations and such amended regulations may
impose additional regulatory burdens on the Company, such as the
required installation of new safety-related items. Depending upon
the scope of the FAA's orders and amended regulations, these
requirements may cause the Company to incur substantial,
unanticipated expenses which may not be reimbursable under the
Company's marketing agreements. The FAA enforces its maintenance
regulations by the imposition of civil penalties, which can be
substantial.
The FAA requires air carriers to adopt and enforce
procedures designed to safeguard property, ensure airport security
and screen passengers to protect against terrorist acts. The FAA,
from time to time, imposes additional security requirements on air
carriers and airport authorities based on specific threats or world
conditions or as otherwise required. The Company incurs substantial
expense in complying with current security requirements and it
cannot predict what additional security requirements may be imposed
in the future or the cost of complying with such requirements.
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the
transportation of hazardous materials. The Company has policies
against accepting hazardous materials or other dangerous goods for
transportation. Employees of the Company are trained in the
recognition of hazardous materials and dangerous goods through a FAA
approved training course. The Company may ship aircraft and other
parts and equipment, some of which may be classified as hazardous
materials, using the services of third party carriers, both ground
and air. In acting in the capacity of a shipper of hazardous
materials, the Company must comply with applicable regulations. The
FAA enforces its hazardous material regulations by the imposition of
civil penalties, which can be substantial.
13
Other Regulation. In the maintenance of its aircraft
fleet and ground equipment, the Company handles and uses many
materials that are classified as hazardous. The Environmental
Protection Agency and similar local agencies have jurisdiction over
the handling and processing of these materials. The Company is also
subject to the oversight of the Occupational Safety and Health
Administration concerning employee safety and health matters. The
Company is subject to the Federal Communications Commission's
jurisdiction regarding the use of radio frequencies.
Federal law generally preempts airports from imposing
unreasonable local noise rules that restrict air carrier operations.
However, under certain circumstances airport operators may implement
reasonable and nondiscriminatory local noise abatement procedures,
which procedures could impact the ability of the Company to serve
certain airports, particularly in off-peak hours.
Seasonality
Seasonal factors such as winter snow storms,
thunderstorms, and hurricanes have the ability to affect the
Company's capacity, completion factor, profitability and cash
generation.
As a whole, the Company's principal geographic areas of
operations usually experience more adverse weather during the year
as compared to other geographical regions, causing a greater
percentage of the Company's and other airlines' flights to be
canceled.
Item 2. Properties
Leased Facilities
Airports
The Company leases gate and ramp facilities at all of the
airports ACA serves and leases ticket counter and office space at
those locations where ticketing is handled by Company personnel. In
most instances, gate and ramp facilities for ACJet are provided by
Delta. Payments to airport authorities for ground facilities are
generally based on a number of factors, including space occupied as
well as flight and passenger volume. In May 1999, the Company took
occupancy of a new 69,000 square foot passenger concourse at
Washington-Dulles dedicated solely to regional airline operations.
The 36-gate concourse, designed to support the Company's expanding
United Express operation, is owned by the Metropolitan Washington
Airports Authority and leased to the Company under a 15 year lease.
Corporate Offices
In December 2000, the Company moved into a newly built
three-story office building encompassing 77,000 square feet of space
under a ten year operating lease. This new facility houses the
executive, administrative and system control departments. The
Company's previously leased headquarters facility, comprised of
79,000 square feet, is being transformed into an employee training
and services center. The Company renegotiated this lease for a new
seven year term expiring in January 2008. Together, these two
properties will provide the necessary facilities for the Company's
continued growth.
14
Maintenance Facilities
The FAA's safety regulations mandate periodic inspection
and maintenance of commercial aircraft. The Company performs most
line maintenance, service and inspection of its aircraft and engines
at its maintenance facilities using its own personnel.
The Company performs maintenance functions at its 90,000
square foot aircraft maintenance facility at Washington-Dulles
airport and at its 34,000 square foot hangar facility in Columbia,
SC. The Washington-Dulles facility is comprised of 60,000 square
feet of hangar space and 30,000 square feet of support space and
includes hangar, shop and office space necessary to maintain the
Company's fleet. The Company is currently in the process of
expanding the Washington-Dulles facility to add 22,400 square feet
of additional support space to accommodate the planned growth of the
aircraft fleet. The cost of this expansion, estimated at $4
million, will be reflected through increases in the Company's lease
rates for the facility. The expansion does not change the original
lease term of 15 years.
Item 3. Legal Proceedings
The Company is a party to routine litigation and to FAA
civil action proceedings, all of which are viewed to be 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 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal quarter ended
December 31, 2000, to a vote of the security holders of the Company
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock, par value $.02 per share (the
"Common Stock"), is traded on the NASDAQ National Market
("NASDAQ/NM") under the symbol "ACAI". Trading of the Common Stock
commenced on July 21, 1993.
On January 25, 2001, the Company announced a 2-for-1
common stock split payable as a stock dividend on February 23, 2001
to shareholders of record on February 9, 2001.
15
The following table sets forth the reported high and low
closing sale prices of the Common Stock on the NASDAQ/NM, adjusted
for the two for one stock dividend issued February 23, 2001, for the
periods indicated:
1999 High Low
First quarter $17.50 $12.125
Second quarter $15.50 $7.938
Third quarter $10.75 $8.75
Fourth quarter $11.875 $8.844
2000
First quarter $13.375 $8.125
Second quarter $16.313 $11.50
Third quarter $19.188 $13.00
Fourth quarter $21.875 $13.438
2001
First quarter $23.50 $18.25
(through March 1, 2001)
As of March 1, 2001, the closing sales price of the Common
Stock on NASDAQ/NM was $18.25 per share and there were approximately
184 holders of record of Common Stock.
The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any Common Stock cash dividends
in the foreseeable future. The Company intends to retain earnings
to finance the growth of its operations. The payment of Common
Stock cash dividends in the future will depend upon such factors as
earnings levels, capital requirements, the Company's financial
condition, the applicability of any restrictions imposed upon the
Company subsidiaries by certain of its financing agreements, the
dividend restrictions imposed by the Company's line of credit, and
other factors deemed relevant by the Board of Directors. In
addition, ACAI is a holding company and its only significant asset
is its investment in its subsidiaries, ACA and ACJet.
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1,
2004 (the "Notes"), pursuant to Rule 144A under the Securities Act
of 1933, and received net proceeds of approximately $55.6 million
related to the sale of the Notes. The Notes were convertible into
shares of Common Stock, of the Company by the holders at any time
after sixty days following the latest date of original issuance
thereof and prior to maturity, unless previously redeemed or
repurchased, at a conversion price of $4.50 per share, subject to
certain adjustments. On May 15, 2000, the Company called the
remaining $19.8 million principal amount of Notes outstanding, for
redemption at 104% of face value effective July 3, 2000. The
holders elected to convert all of the Notes into common stock and
approximately 4.4 million shares were issued in exchange for the
Notes during the period May 25, 2000 to June 6, 2000, resulting in
an addition to paid in capital of approximately $19.8 million offset
by a reduction of approximately $471,000 for the unamortized debt
issuance costs relating to the Notes in connection with their
conversion.
16
The Company's Board of Directors has approved the purchase
of up to $40 million of outstanding shares in open market or private
transactions. As of March 10, 2001, the Company has purchased
2,128,000 shares of its common stock at an average price of $8.64
per share. The Company has approximately $21.6 million remaining of
the $40 million authorization.
Item 6. Selected Financial Data
The following selected financial data under the caption
"Consolidated Financial Data" and "Consolidated Balance Sheet Data"
relating to the years ended December 31, 1996, 1997, 1998, 1999 and
2000 have been derived from the Company's consolidated financial
statements. The following selected operating data under the caption
"Selected Operating Data" have been derived from Company records.
The data should be read in conjunction with "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and
the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.
17
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share amounts and
operating data)
Consolidated Financial Data: Years ended December 31,
1996 1997 1998 1999 2000
Operating revenues:
Passenger revenues $179,370 $202,540 $285,243 $342,079 $442,695
Total operating revenues 182,484 205,444 289,940 347,365 452,526
Operating expenses:
Salaries and related costs 44,438 49,661 68,135 84,554 107,831
Aircraft fuel 17,124 17,766 23,978 34,072 64,433
Aircraft maintenance and 16,841 16,860 22,730 24,357 36,750
materials
Aircraft rentals 29,137 29,570 36,683 45,215 59,792
Traffic commissions and 28,550 32,667 42,429 54,521 56,623
related fees
Facility rent and landing 8,811 10,376 13,475 17,875 20,284
fees
Depreciation and 2,846 3,566 6,472 9,021 11,193
amortization
Other 14,900 16,035 23,347 28,458 42,537
Restructuring/aircraft early (426) - - - 28,996
retirement charges (reversals)
(1)
Total operating expenses 162,221 176,501 237,249 298,073 428,439
Operating income 20,263 28,943 52,691 49,292 24,087
Interest expense (1,013) (3,450) (4,207) (5,614) (6,030)
Interest income 341 1,284 4,145 3,882 5,033
Debt conversion expense (2) - - (1,410) - -
Other income (expense), net 17 62 326 (85) (278)
Total other expense, net (655) (2,104) (1,146) (1,817) (1,275)
Income before income tax
expense and cumulative
effect of accounting change 19,608 26,839 51,545 47,475 22,812
Income tax provision 450 12,339 21,133 18,319 7,657
Income before cumulative
effect of accounting change 19,158 14,500 30,412 29,156 15,155
Cumulative effect of - - - (888) -
accounting change, net (3)
Net income $19,158 $14,500 $30,412 $28,268 $15,155
18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
(Dollars in thousands, except per share amounts and operating data)
Years ended December 31,
1996 1997 1998 1999 2000
Income per share:
Basic:
Income before $.57 $0.47 $.84 $.77 $.38
cumulative effect of
accounting change
Cumulative effect of - - - (0.02) -
accounting change
Net income per share $.57 $0.47 $.84 $.75 $.38
(4)
Diluted:
Income before $.54 $0.40 $.71 $.68 $.36
cumulative effect of
accounting change
Cumulative effect of - - - (0.02) -
accounting change
Net income per share $.54 $0.40 $.71 $.66 $.36
(4)
Weighted average number of
shares used in computation
(in thousands) (4)
Basic 33,924 31,294 36,256 37,928 40,150
Diluted 35,680 39,024 44,372 44,030 43,638
Selected Operating Data:
Departures 137,924 146,069 170,116 186,571 199,050
Revenue passengers 1,462,241 1,666,975 2,534,077 3,234,713 3,778,811
carried
Revenue passenger 358,725 419,977 792,934 1,033,912 1,271,273
miles (000s) (5)
Available seat miles 771,068 861,222 1,410,763 1,778,984 2,203,839
(000s) (6)
Passenger load 46.5% 48.8% 56.2% 58.1% 57.7%
factor (7)
Breakeven passenger 41.4% 41.8% 45.8% 49.7% 50.8%
load factor (8)
Revenue per $0.237 $0.239 $0.206 $0.195 $0.205
available seat mile
Cost per available $0.211 $0.205 $0.168 $0.168 $0.181
seat mile (9)
Average yield per $0.500 $0.482 $0.360 $0.331 $0.348
revenue passenger mile
(10)
Average fare $123 $122 $113 $106 $117
Average passenger 245 252 313 320 336
trip length (miles)
Aircraft in service 57 65 74 84 105
(end of period)
Destinations served 39 43 53 51 53
(end of period)
Consolidated Balance
Sheet Data:
Working capital $17,782 $45,028 $68,130 $60,440 $72,018
Total assets 64,758 148,992 227,626 293,753 382,700
Long-term debt and
capital leases, less 5,673 76,145 64,735 92,787 67,089
current portion
Total stockholders' 34,637 34,805 110,377 125,524 168,173
equity
19
1. In 2000, the Company recorded an operating charge of $28,996,000
($17,398,000 net of income tax benefits) for the present value of future
lease and other costs associated with the early retirement of 28 J-32
turboprop aircraft.
2. In connection with the induced conversion of a portion of the 7%
Convertible Subordinated Notes, the Company recorded a non-cash, non-
operating charge of approximately $1.4 million in 1998.
3. In 1999, the Company recorded a charge of $888,000 for the
cumulative effect, net of income taxes, of a change in accounting for
preoperating costs in connection with the implementation of Statement of
Position 98-5.
4. All per share calculations have been restated to reflect a 2 for 1
common stock split distributed on February 23, 2001.
5. "Revenue passenger miles" or "RPMs" represent the number of miles
flown by revenue passengers.
6. "Available seat miles" or "ASMs" represent the number of seats
available for passengers multiplied by the number of scheduled miles the
seats are flown.
7. "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles
by available seat miles.
8. "Breakeven passenger load factor" represents the percentage of seats
needed to be filled by revenue passengers for the airline to break even
after operating expenses, less other revenues and excluding restructuring
and write-offs of intangible assets.
9. "Operating cost per available seat mile" represents total operating
expenses, excluding restructuring and aircraft early retirement charges,
divided by available seat miles.
10. "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.
20
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
General
Atlantic Coast Airlines Holdings, Inc. ("ACAI") operates
through its wholly-owned subsidiaries, Atlantic Coast Airlines ("ACA"),
and Atlantic Coast Jet, Inc. ("ACJet") (together, the "Company"). ACJet
began revenue service on August 1, 2000. In 2000, the Company recorded
net income of $15.2 million compared to $28.3 million for 1999, and $30.4
million for 1998. The 2000 results include a restructuring charge of
$17.4 million, net of income taxes, related to the planned early
retirement of 28 leased 19-seat J-32 turboprop aircraft. The 1999 net
results include the cumulative effect of an accounting change, net of
income taxes, of $888,000 related to the adoption of Statement of
Position 98-5, which resulted in the write-off of remaining unamortized
regional jet implementation preoperating costs. The 1998 net results
reflect a one time, non-cash, non-operating charge of $840,000, net of
income taxes, related to the induced conversion of a portion of the 7%
Convertible Subordinated Notes. Excluding these unusual items, net
income for 2000, 1999, and 1998 would have been $32.6 million, $29.2
million, and $31.3 million, respectively. For 2000, the Company's
available seat miles ("ASM") increased 24% with the addition of 14
Canadair Regional Jet ("CRJ") aircraft and 14 Fairchild Dornier 328JET
("328JET) aircraft, net of the reduction of seven J-32 turboprop aircraft
during the year. The number of total passengers increased 17%, and
revenue passenger miles ("RPM) increased 23%.
Results of Operations
The Company earned income of $15.2 million (including a $29
million pre-tax operating charge related to the early retirement of 28 J-
32 turboprop aircraft) or $.36 per diluted share in 2000 compared to
$28.3 million or $.66 per diluted share in 1999, and $30.4 million or
$.71 per diluted share in 1998. During 2000, the Company generated
operating income of $24.1 million (including a $29 million operating
charge related to the early retirement of 28 J-32 turboprop aircraft),
compared to $49.3 million for 1999 and $52.7 million for 1998. Excluding
the 2000 aircraft early retirement charge, operating margins for 2000,
1999 and 1998 were 11.7%, 14.2% and 18.2% respectively.
The 51.1% decrease in operating income from 1999 to 2000 is a
reflection of the J-32 retirement charge of $29 million. Excluding this
charge, operating income increased 7.7%, which reflects a 5.1% increase
in unit revenue (total revenue per ASM) from $0.195 to $0.205, an
increase of 7.7% in unit costs (cost per ASM) from $0.168 to $.181 and a
23.9% increase in ASM's.
The 6.5% decrease in operating income from 1998 to 1999
reflects a 5.4% decrease in unit revenue (total revenue per ASM) from
$.206 to $.195, while unit cost (cost per ASM) remained the same at
$0.168 for both years, partially offset by a 26.1% increase in ASM's.
21
Fiscal Year 1999 vs. 2000
Operating Revenues
The Company's operating revenues increased 30.3% to $452.5
million in 2000 compared to $347.4 million in 1999. The increase
resulted from a 23.9% increase in ASMs, together with an increase in
revenue per ASMs of 5.1%. The increase in ASMs reflects the addition of
fourteen CRJ aircraft and fourteen 328JET aircraft in 2000, and the full
year effect in 2000 of adding ten CRJ aircraft during 1999, offset by the
removal of seven J-32 aircraft during 2000. Revenue passengers increased
16.8% in 2000 compared to 1999, which combined with the increase in the
average passenger stage length resulted in a 23% increase in RPMs.
The 86% increase in other revenues year over year includes
amounts paid by Delta Air Lines related to certain pilot training for the
Delta Connection operation.
Operating Expenses
Excluding the $29 million aircraft early retirement charge, the
Company's operating expenses increased 34.0% to $ 399.4 million in 2000
compared to $298 million in 1999. This increase was due primarily to: an
89% increase in total fuel costs as a result of a 49% increase in the
average price per gallon of jet fuel, coupled with a 20% increase in the
average fuel burn rate to 222 gallons per hour; a 23.9% increase in ASMs;
and expenses for the certification and start up of the ACJet operation.
The increase in ASMs, passengers and burn rates reflects the addition of
fourteen CRJs and fourteen 328JETs into scheduled service, net of the
retirement of seven J-32s during 2000.
A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 1999
and 2000 is as follows:
Year Ended December 31,
1999 2000
Percent of Cost Percent of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 24.3% 4.8 23.8% 4.9 %
Aircraft fuel 9.8% 1.9 14.2% 2.9
Aircraft maintenance 7.0% 1.4 8.1% 1.7
and materials
Aircraft rentals 13.0% 2.5 13.2% 2.7
Traffic commissions and 15.7% 3.1 12.5% 2.6
related fees
Facility rent and landing fees 5.2% 1.0 4.5% .9
Depreciation and amortization 2.6% .5 2.5% .5
Other 8.2% 1.6 9.4% 1.9
Aircraft early retirement charge - - 6.4% 1.3
Total 85.8% 16.8 94.7% 19.4
Costs per ASM increased 15.5% to 19.4 cents in 2000 compared to
16.8 cents for 1999, primarily due to a 49% increase in the year over
year price per gallon of jet fuel, the expenses associated with the
certification and start-up of ACJet, flight crew training costs, and the
aircraft early retirement charge. Excluding the aircraft early
retirement charge, costs per ASM increased 7.7% to 18.1 cents during 2000
compared to 16.8 cents for 1999.
22
Salaries and related costs per ASM increased 2.1% to 4.9 cents
in 2000 compared to 4.8 cents in 1999. In absolute dollars, salaries and
related expenses increased 27.5% from $84.6 million in 1999 to $107.8
million in 2000. The increase primarily resulted from the net addition
of 780 full and part time employees during 2000 to support the 28
regional jet aircraft added during 2000.
The cost per ASM of aircraft fuel increased to 2.9 cents in
2000 compared to 1.9 cents in 1999. The total price per gallon of fuel
increased 48.9% to $1.11 in 2000 compared to 74.6 cents in 1999. In
absolute dollars, aircraft fuel expense increased 89.1% from $34.1
million in 1999 to $64.4 million in 2000, reflecting the higher cost per
gallon fuel price, a 5.8% increase in block hours and the higher fuel
consumption per hour of regional jet aircraft versus a turboprop aircraft
which resulted in a 20% increase in the system average burn rate (gallons
used per block hour flown).
The cost per ASM of aircraft maintenance and materials
increased to 1.7 cents in 2000 compared to 1.4 cents in 1999. In
absolute dollars, aircraft maintenance and materials expense increased
50.9% from $24.4 million in 1999 to $36.8 million in 2000. The increased
expense resulted from the increase in the size of the total fleet, the
continual increase in the average age of the turboprop fleets, the
gradual expiration of manufacturer's warranties on the CRJs, and the
reversal in 1999 of approximately $1.5 million in life limited parts
repair expense accruals related to CRJ engines that were no longer
required based on the introduction of a maintenance contract covering the
GE engines operating on the CRJ fleet.
The cost per ASM of aircraft rentals increased slightly to 2.7
cents in 2000 compared to 2.5 cents in 1999. During 2000, the Company
took delivery of 28 additional regional jet aircraft, all of which were
lease financed. In absolute dollars, aircraft rental expense increased
32.2% to $59.8 million as compared to $45.2 million in 1999 due to the
additional aircraft added to the fleet.
The cost per ASM of traffic commissions and related fees
decreased to 2.6 cents in 2000 as compared to 3.1 cents in 1999. Delta
is responsible for travel agent commissions and related fees and
effective December 1, 2000, United is responsible for travel agent
commissions and program fee expense as a result of the restated UA
agreement. In absolute dollars, traffic commissions and related fees
increased 3.9% to $56.6 million in 2000 from $54.5 million in 1999. The
increase resulted from an increase in passenger revenues and passenger
volumes, offset by a reduction in the commission rates payable to travel
agents.
The cost per ASM of facility rent and landing fees decreased to
.9 cents for 2000 from 1.0 cent for 1999. In absolute dollars, facility
rent and landing fees increased 13.5% to $20.3 million for 2000 from
$17.9 million in 1999. The increase in absolute dollars for facility
rent and landing fees is a result of a 6.7% increase in the number of
departures, and the heavier landing weight of the regional jets.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for 2000 and 1999. In absolute dollars, depreciation
and amortization expense for 2000 increased 24.1% to $11.2 million from
$9 million in 1999. The absolute increase results in part from the full
year effect of purchasing two CRJ aircraft and rotable spare parts in
1999 for approximately $59 million.
23
The cost per ASM of other operating expenses increased to 1.9
cents for 2000 from 1.6 cents in 1999. In absolute dollars, other
operating expenses increased 49.5% to $42.5 million for 2000 from $28.5
million in 1999. The increased costs result primarily from the 16.8%
increase in revenue passengers which resulted in higher passenger
handling costs, training expenses for new flight crews, and 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. The Company expects pilot training costs to continue to
increase as the remaining firm ordered CRJ and 328JET aircraft are
received.
In 2000, the Company recorded an operating charge of 1.3 cents
per ASM for costs associated with the early retirement of 28 J-32
turboprop aircraft. In absolute dollars, the amount of the charge was
$29 million. The charge includes the estimated cost of contractual
obligations to meet aircraft return conditions as well as a lease
termination fee. The retirement of the J-32 fleet is expected to be
completed by December 31, 2001.
Interest expense increased from $5.6 million in 1999 to $6
million in 2000. The increase is the result of the full year effect of
the debt outstanding for the purchase of two CRJs in 1999 partially
offset by the impact of the conversion of the Company's 7% notes into
equity during the first half of 2000.
Interest income increased from $3.9 million in 1999 to $5
million in 2000. This is primarily the result of the Company's
significantly higher cash balances during 2000 as compared to 1999.
The Company recorded a provision for income taxes of $7.7
million for 2000, compared to a provision for income taxes of $18.3
million in 1999. The 2000 effective tax rate is approximately 33.6% as
compared to the 1999 effective tax rate of approximately 38.6%. This
decrease is due to a favorable state income tax ruling resulting in the
application of one time state tax credits, and the realization of certain
tax benefits that were previously reserved, which together reduced income
tax expense by approximately $1.4 million for 2000. The effective tax
rates reflect non-deductible permanent differences between taxable and
book income.
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 amortizing such costs to expense ratably
over four years. Effective January 1, 1999, the Company recorded a
charge for the remaining unamortized balance of approximately $888,000,
net of $598,000 of income taxes, associated with previously deferred
preoperating costs.
24
Fiscal Year 1998 vs. 1999
Operating Revenues
The Company's operating revenues increased 19.8% to $347.4
million in 1999 compared to $289.9 million in 1998. The increase
resulted from a 26.1% increase in ASMs, and an increase in load factor of
1.9 points, partially offset by an 8% decrease in revenue per passenger
mile (yield). The increase in ASMs reflects the addition of ten CRJ
aircraft in 1999 and the full year effect of adding nine CRJ aircraft
during 1998. The reduction in yield was caused principally by additional
competition by US Airways at the Company's Dulles hub, complications from
the implementation of the Orion yield management system in the first and
second quarters of 1999, and a 2.1% increase in the average passenger
stage length from 313 miles in 1998 to 320 miles for 1999. Revenue
passengers increased 27.6% in 1999 compared to 1998, which combined with
the increase in the average passenger stage length resulted in a 30.4%
increase in RPMs. Operating revenues as a whole in 1999 were negatively
impacted by more severe weather during 1999 as compared to 1998 including
two hurricanes in September 1999 that impacted air transportation in the
Eastern United States.
Operating Expenses
The Company's operating expenses increased 25.6% to $298.1
million in 1999 compared to $237.2 million in 1998 due primarily to the
26.1% increase in ASMs, the 27.6% increase in passengers, and a 10.6%
increase in the average price per gallon of jet fuel.
A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 1998
and 1999 is as follows:
Year Ended December 31,
1998 1999
Percent of Cost Percent of Cost
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 23.5% 4.8 24.3% 4.8
Aircraft fuel 8.3% 1.7 9.8% 1.9
Aircraft maintenance 7.8% 1.6 7.0% 1.4
and materials
Aircraft rentals 12.7% 2.6 13.0% 2.5
Traffic commissions and 14.6% 3.0 15.7% 3.1
related fees
Facility rent and landing fees 4.6% 1.0 5.2% 1.0
Depreciation and amortization 2.2% .5 2.6% .5
Other 8.1% 1.6 8.2% 1.6
Total 81.8% 16.8 85.8% 16.8
Costs per ASM remained the same at 16.8 cents in 1999 when
compared to 1998. Total operating expenses in absolute dollars increased
25.6% in 1999 to $298.1 million versus $237.2 million in 1998. ASM's for
1999 increased 26.1% to 1.8 billion as compared to 1.4 billion in 1998.
Salaries and related costs per ASM remained the same at 4.8
cents in 1999 when compared to 1998. In absolute dollars, salaries and
related expenses increased 24.1% from $68.1 million in 1998 to $84.6
million in 1999. The increase primarily resulted from the net addition
of 331 full and part time employees during 1999 to support the additional
aircraft.
25
The cost per ASM of aircraft fuel increased to 1.9 cents in
1999 compared to 1.7 cents in 1998. The total price per gallon of fuel
increased 10.6% to 74.6 cents in 1999 compared to 67.4 cents in 1998. In
absolute dollars, aircraft fuel expense increased 42.1% from $24 million
in 1998 to $34.1 million in 1999 reflecting the higher cost per gallon
fuel price, a 9.5% increase in block hours and the higher fuel
consumption per hour of a CRJ aircraft versus a turboprop aircraft which
resulted in a 17.4% increase in the system average burn rate (gallons
used per block hour flown).
The cost per ASM of aircraft maintenance and materials
decreased to 1.4 cents in 1999 compared to 1.6 cents in 1998. The
decreased maintenance expense per ASM resulted primarily from the
addition of the CRJ aircraft. In addition to generating higher ASMs, the
CRJ aircraft are covered by manufacturer's warranty for up to three years
on certain components. During the third quarter of 1999, the Company
reversed approximately $1.5 million in life limited parts repair expense
accruals related to CRJ engines that was no longer required based on the
maintenance services and terms provided under a new engine maintenance
agreement. The Company has not incurred any heavy maintenance repair
costs related to the CRJ aircraft in 1998 or 1999. The CRJ cost savings
were partially offset by the increasing costs of the turboprop aircraft
as they aged. In absolute dollars, aircraft maintenance and materials
expense increased 7.2% from $22.7 million in 1998 to $24.4 million in
1999.
The cost per ASM of aircraft rentals decreased to 2.5 cents in
1999 compared to 2.6 cents in 1998. During 1999, the Company took
delivery of ten additional CRJ aircraft, eight of which were lease
financed. In absolute dollars, aircraft rental expense increased 23.3%
to $45.2 million as compared to $36.7 million in 1998 due to the
additional aircraft added to the fleet.
The cost per ASM of traffic commissions and related fees
increased to 3.1 cents in 1999 as compared to 3.0 cents in 1998. The
increase did not reflect the reduced (from 8% to 5%) agency commission
rate for domestic travel adopted in late 1999. Since substantially all
of the Company's passenger revenues were derived from interline sales,
the Company did not realize the savings from this reduction until
February 2000. Related fees include program fees paid to United and CRS
segment booking fees for reservations. In absolute dollars, traffic
commissions and related fees increased 28.5% to $54.5 million in 1999
from $42.4 million in 1998.
The cost per ASM of facility rent and landing fees remained the
same at 1.0 cent for 1999 when compared to 1998. In absolute dollars,
facility rent and landing fees increased 32.7% to $17.9 million for 1999
from $13.5 million in 1998. The absolute increase was the result of the
Company's new regional terminal at Washington's Dulles airport, continued
expansion of the Company's business to new markets and increased landing
fees due to the heavier CRJ aircraft.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for 1999 and 1998. In absolute dollars, depreciation
and amortization expense for 1999 increased 39.4% to $9.0 million from
$6.5 million in 1998. The absolute increase resulted from the purchase
of two CRJ aircraft and rotable spare parts in 1999 for approximately $59
million and the full year effect of purchasing two CRJ aircraft and
rotable spare parts in 1998.
The cost per ASM of other operating expenses remained the same
at 1.6 cents for 1999 and 1998. In absolute dollars, other operating
expenses increased 21.9% to $28.5 million for 1999 from $23.3 million in
1998. This absolute increase was caused primarily by continued increases
in crew accommodations, training, and other costs related to the general
expansion of the Company's business. During the fourth quarter 1998, the
Company began to pay for new hire training.
26
Interest expense increased from $4.2 million in 1998 to $5.6
million in 1999. The increase was the result of the issuance of new debt
to acquire two new CRJ aircraft in 1999, and the full year effect of the
debt outstanding for the purchase of two CRJs and one J-41 in 1998.
Interest income decreased from $4.1 million in 1998 to $3.9
million in 1999. This was primarily the result of the Company's lower
cash balances during 1999 as compared to 1998.
From March 20 through April 8, 1998, the Company temporarily
reduced the conversion price on its 7% Convertible Subordinated Notes due
July 1, 2004 (the "Notes") from $4.5 to $4.43 for holders of the Notes.
During this temporary period, $31.7 million of the Notes converted into
approximately 7.2 million shares of common stock. As a result of this
temporary price reduction, the Company recorded a $1.4 million charge to
other expense during 1998 representing the fair value of the additional
shares distributed upon conversion.
The Company recorded a provision for income taxes of $18.3
million for 1999, compared to a provision for income taxes of $21.1
million in 1998. The 1999 effective tax rate was approximately 38.6% as
compared to the 1998 effective tax rate of approximately 41%. The
reduction in the 1999 effective rate was the result of the application of
state tax credits applied in 1999. The effective tax rates reflect non-
deductible permanent differences between taxable and book income.
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 amortizing such costs to expense ratably
over four years. Effective January 1, 1999, the Company recorded a
charge for the remaining unamortized balance of approximately $888,000,
net of $598,000 of income taxes, associated with previously deferred
preoperating costs.
27
Outlook
This Outlook section and the Liquidity and Capital
Resources section below contain forward-looking statements. The
Company's actual results may differ materially. Factors that could cause
the Company's future results to differ materially from the expectations
described here include the ability of the Company to obtain favorable
financing terms for its aircraft, the ability of the aircraft
manufacturers to deliver aircraft on schedule, unexpected costs or delays
in the implementation of new service, the ability of the Company to
successfully retire the Company's turboprop fleet, the ability to hire
and retain employees, the weather, the impact of labor issues or strikes
at United Airlines, Inc. or Delta Air Lines, Inc. on those companies'
utilization and support of the Company's operations, airport and airspace
congestion, changes in and satisfaction of regulatory requirements
including requirements relating to fleet expansion, and general economic
and industry conditions. A number of risks and uncertainties exist with
regard to the Company's agreement with UAL Corporation ("UAL"), parent of
United Airlines, Inc. ("United") to acquire - through subsidiaries - the
three regional airlines that are currently wholly-owned by US Airways
Group, Inc. ("US Airways") which could cause actual results to differ
materially from these projected results. Such factors relating to the
transaction include, among others, UAL's termination rights, ability to
reach agreement with UAL on the ultimate purchase price, ability to
obtain regulatory approval with respect to the transaction, financing of
the final purchase price, unanticipated unreimbursed costs, ability of
the three companies to operate as fully independent corporations, ability
to resolve any conflicting provisions in collective bargaining agreements
obligating any company involved in the transaction, potential turboprop
fleet transition issues, satisfactory resolution of amendable union
contracts, operational issues involving any of the three airlines, and
the impact of these new operations on existing operations. The Company
undertakes no obligation to update any of the forward-looking information
included in this release, whether as a result of new information, future
events, changes in expectations or otherwise.
Effective December 1, 2000, the Company now operates all of its
flights under guaranteed fee-per-departure or fee-per-block hour
agreements with United and Delta, respectively. Under these types of
arrangements, the Company is contractually obligated to operate the
flight schedule, for which the Company is then compensated at an agreed
amount per departure or block hour regardless of passenger ticket
revenue. In addition, the Company may receive additional incentive
payments based on operational performance. As a result, the Company
assumes the risk associated with operating the flight schedule, and
United and Delta assume the risk of scheduling, marketing, and selling
seats to the traveling public.
The Company provides all regional jet service for its Delta
Connection operations and is continuing its transformation to all
regional jet service for its existing United Express operation. In
addition to the 40 CRJs and 18 328JETs in service as of March 1, 2001,
the Company has firm orders for an additional 56 CRJs and 44 328JETs and
option orders for 80 CRJs and 83 328JETs and long-term marketing
agreements with United Airlines, Inc. and Delta Air Lines, Inc. to fly
the firm ordered jet aircraft in United Express and Delta Connection
service. In January 2001, the Company reached an agreement with United
and Delta to place 20 CRJ's originally ordered for the Delta Connection
program in the United Express program.
During 2000, the Company early retired seven J-32 turboprop
aircraft, has finalized plans to early retire the remaining 21 J-32s by
the end of 2001, and is evaluating plans to early retire its fleet of 32
J-41 turboprop aircraft beginning in 2002. The addition of the firm
ordered regional jets, net of the removal from service of all of the
turboprop aircraft, will allow the Company to grow capacity as measured
in ASM's, based on planned aircraft delivery dates, by approximately 40%
in 2001 and 35% in 2002. With the restructuring charge taken on the J-32
turboprop aircraft in 2000, their exit from the fleet is anticipated not
to have any impact on future earnings.
The Company is evaluating plans to early retire the 32 J-41
turboprop aircraft from its fleet beginning in 2002. Adoption of a plan
to retire the J-41 turboprop fleet would likely result in a substantial
charge to future earnings. The Company is unable at this time to
quantify the amount of any such retirement charge, as a formal plan has
not yet been adopted.
ACJet commenced revenue service with 328JETs during the third
quarter of 2000 and added CRJs during the fourth quarter of 2000. ACJet
incurred approximately $7.8 million in start-up expenses from inception
through commencement of revenue service, which were expensed as incurred.
The Company will recover $5.2 million of these costs, which will be
recorded as revenue over the next three years. The Company plans to
combine the operations of ACJet into the operations of ACA during the
first half of 2001. This combination is contingent on the Company
receiving the required approvals from the Federal Aviation Administration
and the Department of Transportation.
28
During 2000, United Airlines and US Airways announced plans for
a merger, with United Airlines being the successor company. The two
companies have recently stated that they continue to await governmental
approvals for the merger to proceed and anticipate the closing to be
delayed beyond the previously announced date of April 2, 2001. On March
2, 2001, the Company announced it entered into an agreement with UAL to
acquire-through subsidiaries-the three regional airlines that are
currently wholly-owned by US Airways. The three carriers are Allegheny
Airlines, Piedmont Airlines and PSA Airlines. Closing of the acquisition
from US Airways, which would be contingent upon and occur at the same
time as closing of the proposed United/US Airways merger, is subject to
regulatory approvals and to termination rights by UAL. The aggregate
purchase price for the three carriers, initially set at $200 million,
will be paid at closing in the form of a promissory note due in 18
months. Under the terms of the agreement, the Company will not remit
principal or interest payments or accrue interest on the note until and
if an agreement is finalized. The ultimate purchase price for each of the
three regional carriers will be negotiated during the 18-month term of
the promissory note. If agreement cannot be reached on an ultimate
purchase price as to any or all of the three carriers, the Company's
acquisition of that carrier will be unwound. The ultimate purchase price
paid by the Company may vary substantially from the amount of the
promissory note, and there can be no assurances that the Company will
retain any or all of the three carriers. If closing occurs on the
initial purchase of the three carriers but the Company is not the
ultimate purchaser of at least one of the carriers, the Company will
receive a fee of up to $10.5 million. The results of operations, and any
capital requirements of the three regional carriers, are not expected to
contribute to the Company's results of operations or impact its financial
position until and if an ultimate purchase price is agreed to and the
acquisition can no longer be unwound.
Slots are reservations for takeoffs and landings at specified
times and are required by governmental authorities to operate at certain
airports. The Company has rights to and utilizes takeoff and landing
slots at Chicago-O'Hare and LaGuardia, Kennedy and White Plains, New York
airports. The Company also uses slot exemptions at Chicago-O'Hare, which
differ from slots in that they allow service only to designated cities
and are not transferable to other airlines without the approval of the
U.S. Department of Transportation ("DOT"). Airlines may acquire slots by
governmental grant, by lease or purchase from other airlines, or by loan
when another airline does not use a slot but desires to avoid
governmental reallocation of a slot for lack of use. All leased and
loaned slots are subject to renewal and termination provisions. Under
rules presently in effect, all slot regulation is scheduled to end at
Chicago-O'Hare after July 1, 2002 and at LaGuardia and Kennedy after
January 1, 2007. The rules also provide that, in addition to those slots
currently held by carriers, operators of regional jet aircraft may apply
for, and the Secretary of Transportation must grant, additional slots at
Chicago, LaGuardia, and Kennedy in order to permit the carriers to offer
new service, increase existing service or upgrade to regional jet service
in qualifying smaller communities. There is no limit on the number of
slots a carrier may request. The Company still expects to apply for
additional slots as permitted by the new rules.
The ability of regional carriers to obtain slots at LaGuardia
in large numbers led to an increase in flight activity at the airport
that exceeded the capacity of LaGuardia. As a result, and to reduce
airport congestion and delays, the FAA implemented a slot lottery system
resulting in a decrease in the operation of new regional jet service to
and from LaGuardia including ACJet services operated for Delta. In
addition, ACA is unable to increase service at LaGuardia given limits on
the number of slots and the impact of the slot lottery. The slot lottery
is a temporary measure, and the FAA is considering implementing a long-
term solution that could involve increasing landing and other fees to
discourage operations during peak hours. To the extent other airports
experience significant flight delays, the FAA or local airport operators
could seek to impose similar peak period pricing systems or other demand-
reducing strategies which could impede the Company's ability to serve any
such impacted airport.
29
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing prices
in quantities sufficient to meet its future requirements. During 2000,
the Company hedged a portion of its exposure to jet fuel price
fluctuations by entering into commodity swap contracts for approximately
8.4% of its fuel requirements for the United Express program. Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program, and United
Airlines bears such risk for the Company's United Express program
beginning on December 1, 2000. As such, the Company expects that its
results of operations will no longer be directly affected by fuel price
volatility.
The Company's regional jet fleet is comprised of new aircraft
with an average age of less than one and one-half years. Since
maintenance expense on new aircraft is lower in the early years of
operation due to manufacturers' warranties and the generally lower
failure rates of major components, the Company's maintenance expense for
regional jet aircraft will increase in future periods.
In 2000, the Company has executed a seven year engine services
agreement with GE Engine Services, Inc. ("GE") covering the scheduled and
unscheduled repair of ACA's CF34-3B1 jet engines, operated on the 43 CRJs
already delivered or on order for the United Express operation. This
agreement was amended in July 2000 to cover 23 additional CRJ aircraft,
bringing the total number of CRJ aircraft covered under the agreement to
66. Under the terms of the agreement, the Company pays a set dollar
amount per engine hour flown on a monthly basis to GE and GE assumes the
responsibility to repair the engines when required at no additional
expense to the Company, subject to certain exclusions. The Company
expenses the amount paid to GE based on the monthly rates stipulated in
the agreement, as engine hours are flown. The Company's future
maintenance expense on CRJ engines covered under the new agreement will
escalate based on contractual rate increases, intended to match the
timing of actual maintenance events that are due pursuant to the terms.
The Company has signed a similar agreement covering engines for up to 80
328JETs with Pratt & Whitney, and also anticipates signing a similar
agreement for the remaining regional jets on order.
In 1999, the Company commenced a replacement project of its
computer software systems. The Company engaged IBM to define functional
requirements, evaluate vendor packages, and select and implement software
solutions. New systems will include general ledger, payroll, accounts
payable, accounts receivable, human resources administration, and
maintenance. Implementation is scheduled to be completed during 2001.
The Company anticipates spending approximately $8.8 million on this
project, the majority of which will be capitalized and amortized over
five years. In 1999, the Company expensed approximately $400,000 related
to replacement software selection and capitalized $2.3 million in
acquisition and implementation costs. In 2000, an additional $5.2
million was capitalized, bringing the total capitalized costs to date to
$7.5 million.
30
Liquidity and Capital Resources
As of December 31, 2000, the Company had cash, cash
equivalents, and short-term investments of $121.2 million and working
capital of $72 million compared to $57.4 million and $60.4 million,
respectively, as of December 31, 1999. During the year ended December
31, 2000, cash and cash equivalents increased $46.2 million, reflecting
net cash provided by operating activities of $93.9 million, net cash used
in investing activities of $43.8 million (related to aircraft purchase
deposits, purchases of aircraft and equipment and increases in short term
investments) and net cash used in financing activities of $3.9 million.
The increase in cash provided by operating activities is primarily due to
the restated UA Agreements, effective December 1, 2000, in which the
Company is now paid weekly in advance for monthly revenue as compared to
receiving monthly revenue 30 to 60 days after the end of a month. Net
cash used in financing activities was mainly related to payments of long-
term debt and capital lease obligations and purchases of treasury stock.
In order to minimize total aircraft rental expense over the
entire life of the related aircraft leveraged lease transactions, the
Company has uneven semiannual lease payment dates of January 1 and July 1
for its CRJ aircraft. Currently, approximately 46.1% of the Company's
annual lease payments are due in January and 27.8% are due in July.
As of December 31, 1999, the Company had cash, cash
equivalents, and short-term investments of $57.4 million and working
capital of $60.4 million compared to $64.4 million and $68.1 million,
respectively, as of December 31, 1998. During the year ended December
31, 1999, cash and cash equivalents decreased $24.5 million, reflecting
net cash provided by operating activities of $49.9 million, net cash used
in investing activities of $89.8 million (related to aircraft purchase
deposits, purchases of aircraft and equipment and increases in short term
investments) and net cash provided by financing activities of $15.4
million. Net cash provided by financing activities increased due to the
issuance of $37.2 million of long-term debt principally to acquire two
CRJ aircraft, partially offset by the Company's common stock repurchase
program.
Other Financing
In February 1999, the Company entered in to an asset-based
lending agreement with two financial institutions that provides the
Company with 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 line of credit will expire on September 30, 2001, 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. There were no
borrowings on the line during 1999 or 2000. The Company pledged $3.0
million of this line of credit as collateral for letters of credit issued
on behalf of the Company by a financial institution. With the change in
the United Express agreement going from a prorate arrangement to a fee-
per-departure payment in advance arrangement effective December 1, 2000,
the Company's ticket receivable available for assignment has been reduced
to zero. As such, the available borrowing under the line of credit is
limited to the value of certain rotable spare parts. The Company
anticipates replacing this existing line of credit with a smaller more
economical line of credit when the current line expires on September 30,
2001. As of March 1, 2001, the available amount of credit under the line
was $5 million.
31
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7% Convertible Subordinated Notes due July 1, 2004
("the Notes"). The Notes are convertible into shares of Common Stock
unless previously redeemed or repurchased, at a conversion price of $4.5
per share, subject to certain adjustments. In January 1998,
approximately $5.9 million of the Notes were converted, pursuant to their
original terms, into 1,321,652 shares of Common Stock. From March 20,
1998 to April 8, 1998, the Company temporarily reduced the conversion
price from $4.5 to $4.43 for holders of the Notes. During this period,
$31.7 million of the Notes converted into approximately 7.2 million
shares of Common Stock. As a result of this temporary price reduction,
the Company recorded a non-cash, non-operating charge to earnings during
the second quarter of 1998 of $1.4 million representing the fair value of
the additional shares distributed upon conversion. Interest on the Notes
is payable on April 1 and October 1 of each year. On May 15, 2000, the
Company called the remaining $19.8 million principal amount of Notes
outstanding, for redemption at 104% of face value, effective July 3,
2000. The Noteholders elected to convert all of the Notes into common
stock and approximately 4.4 million shares were issued in exchange for
the Notes during the period May 25, 2000 to June 6, 2000, resulting in an
addition to paid in capital of approximately $19.8 million offset by a
reduction of approximately $471,000 for the unamortized debt issuance
costs relating to the Notes in connection with their conversion.
In September 1997, approximately $112 million of pass through
certificates were issued in a private placement by separate pass through
trusts, which purchased with the proceeds, equipment notes (the
"Equipment Notes") issued in connection with (i) leveraged lease
transactions relating to four J-41s and six CRJs, all of which were
leased to the Company (the "Leased Aircraft"), and (ii) the financing of
four J-41s owned by the Company (the "Owned Aircraft"). The Equipment
Notes issued with respect to the Owned Aircraft are direct obligations of
ACA, guaranteed by ACAI and are included as debt obligations in the
accompanying consolidated financial statements. The Equipment Notes
issued with respect to the Leased Aircraft are not obligations of ACA or
guaranteed by ACAI.
Other Commitments
The Company's Board of Directors has approved the purchase of
up to $40 million of the Company's outstanding common stock in open
market or private transactions. As of March 10, 2001, the Company has
purchased 2,128,000 shares of its common stock at an average price of
$8.64 per share. The Company has approximately $21.6 million remaining
of the $40 million authorization.
Aircraft
The Company has significant lease obligations for aircraft that
are classified as operating leases and therefore are not reflected as
liabilities on the Company's balance sheet. The remaining terms of such
leases range from one to sixteen and three quarters years. The Company's
total rent expense in 2000 under all non-cancelable aircraft operating
leases was approximately $59.8 million. As of December 31, 2000, the
Company's minimum annual rental payments for 2001 under all non-
cancelable aircraft operating leases with remaining terms of more than
one year were approximately $83.6 million.
32
As of March 1, 2001, the Company had a total of 56 Canadair
Regional Jets ("CRJs") on order from Bombardier, Inc., and held options
for 80 additional CRJs. The Company also has a firm order with Fairchild
Aerospace Corporation for 44 Fairchild Dornier 32 seat regional jet
("328JET") aircraft, and options for 83 additional 328JETs. Of the 100
firm ordered aircraft deliveries, 28 are scheduled for 2001, 30 are
scheduled for 2002, and 42 are scheduled for 2003. The Company is
obligated to purchase and finance (including leveraged leases) the 100
firm ordered aircraft at an approximate capital cost of $1.7 billion.
The Company anticipates leasing all of its year 2001 aircraft deliveries
on terms similar to previously delivered regional jet aircraft. Aircraft
orders are subject to price escalation formulas based on certain indices
designed to reflect increased costs in the production of the aircraft.
During 2000 and during the first quarter of 2001, the rate of escalation
has increased, and such increases will be reflected in future aircraft
cost or lease rates. On March 13, 2001 and March 15, 2001 the Company
acquired through leveraged lease transactions its 19th and 20th 328JET
aircraft. On March 14, 2001 the Company acquired through leveraged lease
transactions its 41st CRJ aircraft. The lease terms are for
approximately 16.8 years.
During 1999, the Company announced orders for a total of 85
aircraft from Fairchild Aerospace Corporation, including 40 328JETs (32
seat capacity) and 45 428Jets (44 seat capacity). The 428Jets were an
aircraft under development, with initial deliveries scheduled for 2003.
In August 2000 Fairchild Aerospace announced that it would not proceed
with development of the 428Jets. In January 2001, the Company reached a
series of agreements with Fairchild resolving all issues relating to the
initial order. Under the new agreements, the Company revised its order
for 328JETs to a total of 62 aircraft. The Company also placed an order
for 30 additional CRJs with Bombardier Aerospace in August 2000, which
are included in the 100 firm ordered aircraft described above.
During 2000, the Company began early retiring the leased 19-
seat J-32 aircraft from the fleet. As of March 1, 2001, ten J-32s had
been removed from service. The remaining 18 J-32s will be removed from
service during the remainder of 2001. The early retirement of the 28
leased J-32 aircraft resulted in the Company recording a $29.0 million
(pre-tax) restructuring charge during 2000. During March 2001, the
Company reached agreement with the lessor for the early return and lease
termination of all of the J-32's and as a result paid a lease termination
fee which consisted of $19.1 million in cash, and the application of $5.2
million in credits due from the lessor. The Company believes that the
remainder of the accrual will be adequate to provide for costs necessary
to meet aircraft return conditions. The early termination of these
leases and the return of these aircraft prior to lease expiration will
enable the Company to satisfy its lease obligations and does not require
the Company to assume the risks and efforts required to maintain and
remarket the aircraft. The Company does not expect to incur any
additional charges against earnings for the early retirement of the J-32
fleet.
The Company is evaluating plans to early retire the 32 J-41
turboprop aircraft from its fleet beginning in 2002. Adoption of a plan
to retire the J-41 turboprop fleet would likely result in a substantial
charge to future earnings. The Company is unable at this time to
quantify the amount of any such retirement charge, as a formal plan has
not yet been adopted.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and
other mandatory orders. These relate to, among other things, the
inspection of aircraft and the mandatory removal and replacement of parts
or structures. In addition, the FAA from time to time amends its
regulations and such amended regulations may impose additional regulatory
burdens on the Company, such as the required installation of new safety-
related items. Depending upon the scope of the FAA's orders and amended
regulations, these requirements may cause the Company to incur
substantial, unanticipated expenses which may not be reimbursable under
the Company's marketing agreements. The FAA enforces its maintenance
regulations by the imposition of civil penalties, which can be
substantial.
33
Capital Equipment and Debt Service
In 2001 the Company anticipates capital spending of
approximately $27.8 million consisting of $13.8 million in rotable spare
parts, $7.4 million for spare engines and equipment, and $6.6 million for
other capital assets, and expects to finance these capital expenditures
out of working capital.
Principal payments on long term debt for 2001 are estimated to
be approximately $4.3 million reflecting borrowings related to the
purchase of four CRJ aircraft acquired in 1998 and 1999 and five J-41s
acquired in 1997 and 1998. The foregoing amount does not include
additional debt that may be required for the financing of new CRJs,
328JETs, spare parts and spare engines.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations and other available
equipment financing will be sufficient to meet its working capital needs,
expected operating lease commitments, capital expenditures, and debt
service requirements for the next twelve months.
Inflation
Inflation has not had a material effect on the Company's
operations.
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, and 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, effective
January 1, 2001. The impact of adopting this statement is not expected
to have a material impact on the Company's financial results.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results in changes in
interest rates, and the availability of jet fuel.
34
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing prices
in quantities sufficient to meet its future requirements. During 2000,
the Company hedged a portion of its exposure to jet fuel price
fluctuations by entering into commodity swap contracts for approximately
8.4% of its fuel requirements for the United Express program. Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program, and United
Airlines bears such risk for the Company's United Express program
beginning on December 1, 2000. As such, the Company reasonably expects
that its results of operations will no longer be directly affected by
fuel price volatility.
The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. From time to time 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. During 1998, 1999 and 2000, the Company
settled eight, seven and eight hedge transactions, respectively, paying
the counterparty $3.0 million in 1998, receiving $119,000 in 1999 and
paying the counterparty $379,000 in 2000. In 1999, the Company
recognized a gain of $211,000 on the settlement of one contract,
representing the ineffective portion of a hedge. At December 31, 2000
the Company had one interest rate hedge transaction open with a notional
value of $8.5 million. The Company settled this contract on January 3,
2001 by paying the counterparty $722,000.
As of March 1, 2001, the Company had firm commitments to
purchase 100 additional jet aircraft. The Company expects to finance
these commitments using a combination of debt and leveraged leases.
Changes in interest rates will impact the actual cost to the Company for
these transactions. Aircraft orders are also subject to price escalation
formulas based on certain indices designed to reflect increased costs in
the production of the aircraft. During 2000 and during the first quarter
of 2001 the rate of escalation has increased, and such increases will be
reflected in future aircraft cost or lease rates.
The Company does not have significant exposure to changing
interest rates on its long-term debt as the interest rates on such debt
are fixed. Likewise, the Company does not hold long-term interest
sensitive assets and therefore is not exposed to interest rate
fluctuations for its assets. The Company does not purchase or hold any
derivative financial instruments for trading purposes.
35
Item 8. Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 36
Consolidated Balance Sheets as of December 31, 1999 and 2000 37
Consolidated Statements of Operations for the years ended 38
December 31, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity for the years 39
ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended 40
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements 41
36
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Coast Airlines Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Atlantic
Coast Airlines Holdings, Inc. and subsidiaries as of December 31, 1999
and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Atlantic Coast Airlines Holdings, Inc. and subsidiaries as of December
31, 1999 and 2000, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
2000, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1 to the consolidated financial statements,
effective January 1, 1999, the Company changed its method of accounting
for preoperating costs.
KPMG LLP
McLean, VA
January 25, 2001, except as to Note 12,
which is as of March 2, 2001
37
Atlantic Coast Airlines Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except for share data and par values)
December 31, 1999 2000
Assets
Current:
Cash and cash equivalents $ 39,897 $ 86,117
Short term investments 17,550 35,100
Accounts receivable, net 31,023 29,052
Expendable parts and fuel inventory, net 4,114 6,188
Prepaid expenses and other current assets 6,347 8,055
Notes receivable 6,239 -
Deferred tax asset 2,850 13,973
Total current assets 108,020 178,485
Property and equipment at cost, net of
accumulated depreciation and amortization 133,160 142,840
Intangible assets, net of accumulated 2,232 2,045
amortization
Debt issuance costs, net of accumulated 3,309 2,912
amortization
Aircraft deposits 38,690 46,420
Other assets 8,342 9,998
Total assets $ 293,753 $382,700
Liabilities and Stockholders' Equity
Current:
Current portion of long-term debt $ 4,758 $ 4,344
Current portion of capital lease 1,627 1,512
obligations
Accounts payable 5,343 19,724
Accrued liabilities 35,852 53,044
Accrued aircraft early retirement charge - 27,843
Total current liabilities 47,580 106,467
Long-term debt, less current portion 87,244 63,080
Capital lease obligations, less current 5,543 4,009
portion
Deferred tax liability 12,459 18,934
Deferred credits, net 15,403 22,037
Total liabilities 168,229 214,527
Stockholders' equity:
Preferred Stock: $.02 par value per share;
shares authorized - -
5,000,000; no shares issued or
outstanding in 1999 or 2000
Common stock: $.02 par value per share;
shares authorized 65,000,000 in 1999 and
in 2000; shares issued 42,167,854 in 1999
and 47,704,720 in 2000; shares outstanding 843 954
37,256,522 in 1999 and 42,658,388 in 2000
Class A common stock: nonvoting; par value;
$.02 stated value per share; shares - -
authorized 6,000,000; no shares issued or
outstanding
Additional paid-in capital 88,704 117,284
Less: Common stock in treasury, at cost,
4,911,332 shares in 1999 and 5,046,332
shares in 2000 (34,106) (35,303)
Retained earnings 70,083 85,238
Total stockholders' equity 125,524 168,173
Total liabilities and stockholders' $ 293,753 $382,700
equity
Commitments and Contingencies
See accompanying notes to consolidated financial statements.
38
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except for per share data)
Years ended December 31, 1998 1999 2000
Operating revenues:
Passenger $ 285,243 $ 342,079 $ 442,695
Other 4,697 5,286 9,831
Total operating revenues 289,940 347,365 452,526
Operating expenses:
Salaries and related costs 68,135 84,554 107,831
Aircraft fuel 23,978 34,072 64,433
Aircraft maintenance and materials 22,730 24,357 36,750
Aircraft rentals 36,683 45,215 59,792
Traffic commissions and related fees 42,429 54,521 56,623
Facility rents and landing fees 13,475 17,875 20,284
Depreciation and amortization 6,472 9,021 11,193
Other 23,347 28,458 42,537
Aircraft early retirement charge - - 28,996
Total operating expenses 237,249 298,073 428,439
Operating income 52,691 49,292 24,087
Other income (expense):
Interest expense (4,207) (5,614) (6,030)
Interest income 4,145 3,882 5,033
Debt conversion expense (1,410) - -
Other income (expense), net 326 (85) (278)
Total other expense, net (1,146) (1,817) (1,275)
Income before income tax provision and
cumulative effect of accounting change 51,545 47,475 22,812
Income tax provision 21,133 18,319 7,657
Income before cumulative effect of 30,412 29,156 15,155
accounting change
Cumulative effect of accounting
change, net of income tax - (888) -
benefit of $598
Net income $ 30,412 $ 28,268 $ 15,155
Income per share:
Basic:
Income before cumulative effect of $.84 $.77 $.38
accounting change
Cumulative effect of accounting change - (.02) -
Net income $.84 $.75 $.38
Diluted:
Income before cumulative effect of $.71 $.68 $.36
accounting change
Cumulative effect of accounting change - (.02) -
Net income $.71 $.66 $.36
Weighted average shares used in
computation:
Basic 36,256 37,928 40,150
Diluted 44,372 44,030 43,638
See accompanying notes to consolidated financial statements.
39
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except
for share data) Common Stock Add'l Treasury Stock Retained
-------------- Paid-In --------------- Earnings
Shares Amount Capital Shares Amount
Balance Dec. 31, 1997 32,013,028 $640 $39,831 2,945,000 $(17,069) $11,403
Exercise of common 1,144,044 23 2,456 - - -
stock options
Tax benefit of stock - - 4,239 - - -
option exercise
Amortization of
Deferred compensation - - 574 - - -
Conversion of debt 8,484,930 170 37,698 - - -
Net income - - - - - 30,412
Balance Dec. 31, 1998 41,642,002 $833 $84,798 2,945,000 $(17,069) $41,815
Exercise of common 525,852 10 1,574 - - -
stock options
Tax benefit of stock - - 1,835 - - -
option exercise
Purchase of treasury - - - 1,993,000 (17,192) -
stock
ESOP share - - 60 (26,668) 155 -
contributions
Amortization of
deferred compensation - - 437 - - -
Net income - - - - - 28,268
Balance Dec. 31, 1999 42,167,854 $843 $88,704 4,911,332 $(34,106) $70,083
Exercise of common 1,132,432 23 3,919 - - -
stock options
Tax benefit of stock - - 4,952 - - -
option exercise
Purchase of treasury - - - 135,000 (1,197) -
stock
Conversion of debt 4,404,434 88 19,261 - - -
Amortization of - - 448 - - -
deferred compensation
Net income - - - - - 15,155
Balance Dec. 31, 2000 47,704,720 $954 $117,284 5,046,332 $(35,303) $85,238
See accompanying notes to consolidated financial statements.
40
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 1998 1999 2000
Cash flows from operating activities:
Net income $ 30,412 $ 28,268 $ 15,155
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,829 9,109 11,544
Write-off of preoperating costs - 1,486 -
Amortization of intangibles and 690 176 183
preoperating costs
Provision for uncollectible 124 564 503
accounts receivable
Provision for inventory 86 110 237
obsolescence
Amortization of deferred credits (801) (1,114) (1,599)
Amortization of debt issuance costs 465 354 297
Capitalized interest, net (1,640) (1,683) (2,554)
Deferred tax provision (benefit) 4,392 5,905 (4,648)
Net loss on disposal of fixed 247 380 -
assets
Amortization of debt discount and 70 73 56
finance costs
Debt conversion expense 1,410 - -
Contribution of stock to the ESOP - 214 -
Gain on ineffective hedge position - (211) -
position
Gain on early termination of - (291) (3)
capital lease
Amortization of deferred 574 437 469
compensation
Changes in operating assets and
liabilities:
Accounts receivable (6,077) (3,572) 6,564
Expendable parts and (990) (847) (2,310)
fuel inventory
Prepaid expenses and
other current assets (2,512) (2,660) (1,866)
Accounts payable 423 2,139 22,300
Accrued liabilities 7,028 11,013 49,601
Net cash provided by 39,730 49,850 93,929
operating activities
Cash flows from investing activities:
Purchase of property and equipment (51,020) (59,669) (19,146)
Proceeds from sales of fixed assets 1,318 6,608 585
Purchases of short term investments - (17,550) (74,705)
Maturities of short term investments 10,677 66 57,155
Refund of deposits 120 3 4,600
Payments for aircraft and other (832) (19,270) (12,330)
deposits
Net cash used in (39,737) (89,812) (43,841)
investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term 29,650 37,203 -
debt
Payments of long-term debt (2,248) (4,189) (4,758)
Payments of capital lease obligations (2,656) (1,839) (1,647)
Proceeds from receipt of deferred 96 37 173
credits and other
Deferred financing costs (2,069) (157) (381)
Proceeds from exercise of stock 2,479 1,584 3,942
options
Purchase of treasury stock - (17,192) (1,197)
Net cash provided by 25,252 15,447 (3,868)
(used in) financing activities
Net increase (decrease) in cash and 25,245 (24,515) 46,220
cash equivalents
Cash and cash equivalents, beginning 39,167 64,412 39,897
of year
Cash and cash equivalents, end of year $ 64,412 $ 39,897 $ 86,117
See accompanying notes to consolidated financial statements.
41
Summary of
Accounting (a)Basis of Presentation
Policies
The accompanying 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"). All significant
intercompany accounts and transactions have been
eliminated in consolidation. ACA's flights are
operated under a code sharing agreement with
United Airlines, Inc. ("United") and are
identified as United Express flights in computer
reservation systems. As of December 31, 2000,
ACA provided scheduled air transportation service
as United Express for passengers to destinations
in states in the Eastern and Midwestern United
States. ACJet's flights are operated under a
code sharing agreement with Delta Air Lines, Inc.
("Delta") and are identified as Delta Connection
flights in computer reservation systems. ACJet
commenced scheduled operations on August 1, 2000,
to various destinations in the Eastern United
States.
(b)Cash, Cash Equivalents and Short-Term Investments
The Company considers investments with an
original maturity of three months or less when
purchased to be cash equivalents. Investments
with an original maturity greater than three
months and less than one year are considered
short-term investments. In addition, the Company
holds investments in tax-free Industrial Revenue
Bonds ("IRB") having initial maturities up to 30
years. The IRB's are secured by letters of
credit and come up for auction on a weekly basis.
As such, the Company considers securities of this
type to be short-term investments. All short-
term investments are considered to be available
for sale. Due to the short maturities associated
with the Company's investments, the amortized
cost approximates fair market value.
Accordingly, no adjustment has been made to
record unrealized holding gains and losses.
(c)Airline Revenues
Passenger and cargo revenues are recorded as
operating revenues at the time transportation is
provided. Under the Company's fee-per-departure
agreements, transportation is considered provided
when the flight has been completed. Under the
proration of fare agreement in effect with United
for periods prior to and through November 2000,
transportation was considered provided when the
passenger flew. Substantially all of the
passenger tickets used by the Company's
passengers are sold by other air carriers.
ACA participates in United's Mileage Plus
frequent flyer program, and ACJet participates in
the Delta SkyMiles frequent flyer program. The
Company does not accrue for incremental costs for
mileage accumulation or redemption relating to
these programs because the Company operates under
agreements, which utilize fixed rate structures.
42
(d)Accounts and Notes Receivable
Accounts receivable are stated net of allowances
for uncollectible accounts of approximately
$773,000 and $755,000 at December 31, 1999 and
2000, respectively. Amounts charged to expenses
for uncollectible accounts in 1998, 1999 and 2000
were $124,000, $564,000 and $503,000,
respectively. Write-off of accounts receivable
were $29,000, $156,000 and $521,000 in 1998, 1999
and 2000, respectively. Accounts receivable as
of December 31, 1999 and 2000 included
approximately $2.9 million and $3.3 million,
respectively, related to manufacturers credits to
be applied towards future spare parts purchases
and training expenses.
The note receivable balance at December 31, 1999
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. The note was paid in full during
the first quarter of 2000.
(e)Concentrations of Credit Risk
The Company provides commercial air
transportation in the Eastern and Midwestern
United States. Substantially all of the
Company's passenger tickets are sold by other air
carriers. Prior to the change from a proration
of fare agreement to a fee-per-departure
agreement, the Company had a significant
concentration of its accounts receivable with
other air carriers with no collateral. At
December 31, 1999 and 2000, accounts receivable
from air carriers totaled approximately $27.6
million and $18.6 million, respectively. Of the
total amount, approximately $23.2 million and
$13.3 million at December 31, 1999 and 2000,
respectively, were due from United. Under the
fee-per-departure agreements, the Company
receives payment in advance from both United and
Delta. Historically, accounts receivable losses
have not been significant.
43
(f)Risks and Uncertainties
United Express:
The Company's United Express Agreements ("UA
Agreements") define the Company's relationship
with United. The UA Agreements authorize the
Company to use United's "UA" flight designator
code to identify the Company's flights and fares
in the major airline Computer Reservation Systems
("CRS'), including United's "Apollo" reservation
system, to use the United Express logo and
exterior aircraft paint schemes and uniforms
similar to those of United, and to otherwise
advertise and market the Company's association
with United.
In November 2000, the Company and United restated
the UA Agreements, effectively changing from a
prorated fare arrangement to a fee-per-departure
arrangement. Under the fee-per-departure
structure, the Company is contractually obligated
to operate the flight schedule, for which United
pays the Company an agreed amount per departure
regardless of the number of passengers carried,
with incentive payments based on operational
performance. The Company thereby assumes the
risks associated with the flight schedule and
United assumes the risk of scheduling, marketing,
and selling seats to the traveling public. The
restated UA Agreements are for a term of ten
years. The restated UA Agreements give ACA the
authority to operate 128 regional jets in the
United Express operation.
Pursuant to the restated UA Agreements, United
provides a number of additional services to ACA
at no cost. These include customer reservations,
customer service, pricing, scheduling, revenue
accounting, revenue management, frequent flyer
administration, advertising, provision of ground
support services at most of the airports served
by both United and ACA, provision of ticket
handling services at United's ticketing
locations, and provision of airport signage at
airports where both ACA and United operate.
The UA Agreements do not prohibit United from
serving, or from entering into agreements with
other airlines who would serve, routes served by
the Company, but state that United may terminate
the UA Agreements if ACAI and ACA enter into a
similar arrangement with any other carrier other
than Delta without United's approval.
The UA Agreements limit the ability of ACAI and
ACA to merge with another company or dispose of
certain assets or aircraft without offering
United a right of first refusal to acquire the
Company or such assets or aircraft, and provide
United a right to terminate the UA Agreements if
ACAI or ACA merge with or are controlled or
acquired by another carrier. The UA agreements
provide United with the right to assume ACA's
ownership or leasehold interest in certain
aircraft in the event ACA breaches specified
provisions of the UA agreements, or fails to meet
specified performance standards.
44
Delta Connection:
In September 1999, the Company reached a ten year
agreement with Delta Air Lines, Inc. ("Delta") to
operate regional jet aircraft as part of the
Delta Connection program on a fee-per-block hour
basis. The Company's Delta Connection Agreement
("DL Agreement") defines the Company's
relationship with Delta. The Company is
compensated by Delta on a fee-per-block hour
basis regardless of the amount of passenger
ticket revenue. Under the fee-per-block hour
structure, the Company is contractually obligated
to operate the flight schedule, for which Delta
pays the Company an agreed amount per block hour
flown regardless of passenger revenue with
additional incentive payments based on
operational performance. The Company thereby
assumes the risks of operating the flight
schedule and Delta assumes the risks of
scheduling, marketing, and selling seats to the
traveling public.
By operating as part of the Delta Connection
program, the Company is able to use Delta's "DL"
flight designator to identify the Company's
flights and fares in the major Computer
Reservation Systems, including Delta's "Deltamatic"
reservation system, and to use the Delta Connection
logo and exterior aircraft paint schemes and
uniform similar to those of Delta.
Pursuant to the DL Agreement, Delta, at its
expense, provides a number of support services to
ACJet. These include customer reservations,
customer service, ground handling, station
operations, pricing, scheduling, revenue
accounting, revenue management, frequent flyer
administration, advertising and other passenger,
aircraft and traffic servicing functions in
connection with the ACJet operation.
Delta may terminate the DL Agreement at any time
if ACJet fails to maintain certain performance
standards and, subject to certain rights by the
Company, may terminate without cause, effective
no earlier than two years after commencement of
operations, by providing 180 days notice to the
Company.
The DL Agreement requires the Company to obtain
Delta's approval if it chooses to enter into a
code-sharing arrangement with another carrier, to
list its flights under any other code, or to
operate flights for any other carrier, except
with respect to such arrangements with United or
non-U.S. code-shares partners of United or in
certain other circumstances. The DL Agreement
does not prohibit Delta from serving, or from
entering into agreements with other airlines who
would serve, routes served by the Company. The
DL Agreement also restricts the ability of the
Company to dispose of aircraft subject to the
agreement without offering Delta a right of first
refusal to acquire such aircraft, and provides
that Delta may terminate the agreement if, among
other things, the Company merges with or sells
its assets to another entity, is acquired by
another entity or if any person acquires more
than a specified percentage of its stock.
45
Collective Bargaining Agreements:
The Company's pilots are represented by the
Airline Pilots Association ("ALPA"), flight
attendants are represented by the Association of
Flight Attendants ("AFA"), and mechanics are
represented by the Aircraft Mechanics Fraternal
Association ("AMFA").
The ALPA collective bargaining agreement became
amendable in February 2000 and the Company and
ALPA began meetings on a new contract. In early
2001, the Company's pilots ratified a new four-
and-a-half year agreement. This agreement
provides for improvements in pay rates, benefits,
training and other areas. The collective
bargaining agreement covers pilots flying for
both the Atlantic Coast Airlines/United Express
operation, as well as the Atlantic Coast
Jet/Delta Connection operation. The new agreement
provides for substantial increases in pilot
compensation which the Company believes are
consistent with industry trends.
ACA's collective bargaining agreement with AFA
was ratified in October 1998. The agreement is
for a four-year duration and becomes amendable in
October 2002. ACJet has an agreement with AFA
for a five-year duration covering ACJet flight
attendants on terms substantially similar to the
terms of the contract between ACA and AFA. The
ACJet agreement becomes amendable in March 2005.
The collective bargaining agreement with AMFA was
ratified in June, 1998. The agreement is for a
four-year duration and becomes amendable in June
2002. This agreement covers all mechanics
working for the Company.
The Company believes that certain of the
Company's unrepresented labor groups are from
time to time approached by unions seeking to
represent them. However, the Company has not
received any official notice of organizing
activity and there have been no representation
applications filed with the National Mediation
Board by any of these groups. The Company
believes that the wage rates and benefits for non-
union employee groups are comparable to similar
groups at other regional airlines.
46 (g)Use of Estimates
The preparation of financial statements in
accordance with accounting principles generally
accepted in the United States of America requires
management to make certain estimates and
assumptions regarding valuation of assets,
recognition of liabilities for costs such as
aircraft maintenance, differences in timing of
air traffic billings from United and other
airlines, operating revenues and expenses during
the period and disclosure of contingent assets
and liabilities at the date of the consolidated
financial statements. Actual results could
differ from those estimated.
(h)Expendable Parts
Expendable parts and supplies are stated at the
lower of cost or market, less an allowance for
obsolescence of $428,000 and $665,000 as of
December 31, 1999 and 2000, respectively.
Expendable parts and supplies are charged to
expense as they are used. Amounts charged to
costs and expenses for obsolescence in 1998, 1999
and 2000 were $86,000, $110,000 and $237,000,
respectively.
(i)Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using the straight-line
method over the estimated useful lives of the
related assets which range from five to sixteen
and one half years. Capital leases and leasehold
improvements are amortized over the shorter of
the estimated life or the remaining term of the
lease.
Amortization of capital leases and leasehold
improvements is included in depreciation expense.
The Company periodically evaluates whether events
and circumstances have occurred which may impair
the estimated useful life or the recoverability
of the remaining balance of its long-lived
assets. If such events or circumstances were to
indicate that the carrying amount of these assets
would not be recoverable, the Company would
estimate the future cash flows expected to result
from the use of the assets and their eventual
disposition. If the sum of the expected future
cash flows (undiscounted and without interest
charges) is less than the carrying amount of the
asset, an impairment loss would be recognized by
the Company.
47
(j)Preoperating Costs
Preoperating costs represent the cost of
integrating new types of aircraft. Prior to 1999,
such costs, which consist primarily of flight
crew training and aircraft ownership related
costs, were deferred and amortized over a period
of four years on a straight-line basis. 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.
During 1997 the Company capitalized approximately
$2.1 million of these costs related to the
introduction of the regional jet ("CRJ") into the
Company's fleet. Accumulated amortization of
preoperating costs at December 31, 1998 was
$571,000. On January 1, 1999, the Company wrote-
off the remaining unamortized preoperating costs
balance of approximately $1.5 million, before
income tax benefit of $598,000, in accordance
with the implementation of Statement of Position
98-5 ("SOP 98-5"). Also, in accordance with SOP
98-5, approximately $2.2 million of preoperating
costs incurred during 1999 and approximately $5.6
million of preoperating costs incurred during
2000 for the start up of ACJet were expensed as
incurred.
(k)Intangible Assets
Goodwill of approximately $3.2 million,
representing the excess of cost over the fair
value of net assets acquired in the acquisition
of ACA, is being amortized by the straight-line
method over twenty years. Costs incurred to
acquire slots are being amortized by the straight-
line method over twenty years. The primary
financial indicator used by the Company to assess
the recoverability of its intangible assets is
undiscounted future cash flows from operations.
The amount of impairment, if any, is measured
based on projected future cash flows using a
discount rate reflecting the Company's average
cost of funds. Accumulated amortization of
intangible assets at December 31, 1999 and 2000
was $1.4 million and $1.6 million, respectively.
(l)Maintenance
The Company's maintenance accounting policy is a
combination of expensing certain events as
incurred and accruing for certain maintenance
events at rates it estimates will be sufficient
to cover maintenance cost for the aircraft. For
the J-32 and J41 aircraft, the Company accrues
for airframe component and engine repair costs on
a per flight hour basis. For the CRJ aircraft,
the Company accrued for the replacement of major
engine life limited parts on a per cycle basis
until July 1999. The Company accrues for
auxiliary power units ("APU") costs on a per APU
hour basis. All other maintenance costs are
expensed as incurred.
48
The Company has executed a seven year engine
services agreement with GE Engine Services, Inc.
("GE") covering the scheduled and unscheduled
repair of ACA's CF34-3B1 jet engines operated on
43 CRJs already delivered or on order for the
United Express operation. This agreement was
amended in July 2000 to cover 23 additional CRJ
aircraft, bringing the total number of CRJ
aircraft covered under the agreement to 66.
Under the terms of the agreement, the Company
pays a set dollar amount per engine hour flown
on a monthly basis to GE and GE assumes the
responsibility to repair the engines when
required at no additional expense to the
Company, subject to certain exclusions. The
Company expenses the amount paid to GE based on
the monthly rates stipulated in the agreement,
as engine hours are flown. The Company's future
maintenance expense on CRJ engines covered under
the new agreement will escalate based on
contractual rate increases, intended to match
the timing of actual maintenance events that are
due pursuant to the terms. The Company has
signed a similar agreement covering engines for
up to 80 328JETs with Pratt & Whitney.
During the third quarter of 1999, the Company
reversed approximately $1.5 million in life
limited parts repair expense accruals related to
CRJ engines that are no longer required based on
the maintenance services and terms contained in
the GE engine maintenance agreement.
(m)Deferred Credits
The Company accounts for incentives provided by
the aircraft manufacturers as deferred credits
for leased aircraft. These credits are amortized
on a straight-line basis as a reduction to lease
expense over the respective lease term. The
incentives are credits that may be used to
purchase spare parts, pay for training expenses,
satisfy aircraft return conditions or be applied
against future rental payments.
(n)Income Taxes
The Company accounts for income taxes using the
asset and liability method. Under the asset and
liability method, deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between
the financial statement carrying amounts for
existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
expected to apply to taxable income in future
years in which those temporary differences are
expected to be recovered or settled.
49
(o)Stock-Based Compensation
The Company accounts for its stock-based
compensation plans using the intrinsic value
method prescribed under Accounting Principles
Board (APB) No. 25. As such, the Company records
compensation expense for stock options and awards
only if the exercise price is less than the fair
market value of the stock on the measurement
date.
(p)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, dilutive convertible securities are
included in the denominator while interest on
convertible debt, net of tax, is added back to
the numerator. On January 25, 2001, the Company
announced a 2-for-1 common stock split payable
as a stock dividend on February 23, 2001 to
shareholders of record on February 9, 2001. All
share and income per share information has been
adjusted for all years presented to reflect the
stock split.
A reconciliation of the numerator and denominator
used in computing income per share is as follows
(in thousands, except per share amounts):
1998 1999 2000
Basic Diluted Basic Diluted Basic Diluted
Share calculation:
Average number of common
shares outstanding 36,256 36,256 37,928 37,928 40,150 40,150
Incremental shares due - 1,752 - 1,698 - 1,616
to assumed exercise of
options
Incremental shares due
to assumed conversion - 6,364 - 4,404 - 1,872
of convertible debt
Weighted average common
shares outstanding 36,256 44,372 37,928 44,030 40,150 43,638
Adjustments to net
income:
Income before cumulative
effect of accounting $30,412 $30,412 $29,156 $29,156 $15,155 $15,155
change
Interest expense on
convertible debt, - 1,202 - 831 - 416
net of tax
Income before
cumulative effect
of accounting
change available to $30,412 $31,614 $29,156 $29,987 $15,155 $15,571
common shareholders
Income before
cumulative effect
of accounting $ .84 $ .71 $ .77 $ .68 $ .38 $ .36
change per share
50
(q) Reclassifications
Certain prior year amounts as previously reported
have been reclassified to conform to the current
year presentation.
(r) Interest Rate Hedges
The Company has periodically used swaps to hedge
the effects of fluctuations in interest rates
associated with aircraft financings. These
transactions meet the requirements for current
hedge accounting. The effective portions of
hedging gains and losses resulting from the
interest rate swap contracts are deferred until
the contracts are settled and then amortized over
the aircraft lease term or capitalized as part of
acquisition cost, if purchased, and depreciated
over the life of the aircraft. The ineffective
portions of hedging gains and losses are recorded
as incurred.
(s) Segment Information
In 1998, the Company adopted the provisions of
Financial Accounting Standards Board Statement
No. 131, "Disclosure about Segments of an
Enterprise and Related Information (SFAS 131).
SFAS 131 establishes standards for reporting
information about operating segments and related
disclosures about products and services.
Operating segments are defined as components of
an enterprise about which separate financial
information is available that is regularly
evaluated by chief operating decision makers in
deciding how to allocate resources or in
assessing performance.
The Company has adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and
Related Information." The statement requires
disclosures related to components of a company
for which separate financial information is
available that is evaluated regularly by a
company's chief operating decision maker in
deciding the allocation of resources and
assessing performance. The Company is engaged
in one line of business, the scheduled and
chartered transportation of passengers, which
constitutes nearly all of its operating revenues.
51
2. Property Property and equipment consist of the following:
and
Equipment
(in thousands)
December 31, 1999 2000
Owned aircraft and improvements $ 92,868 $ 92,931
Improvements to leased aircraft 5,005 5,771
Flight equipment, primarily 41,285 51,199
rotable spare parts
Maintenance and ground equipment 7,426 9,310
Computer hardware and software 4,804 11,345
Furniture and fixtures 957 1,329
Leasehold improvements 3,191 4,282
155,536 176,167
Less: Accumulated depreciation 22,376 33,327
and amortization
$133,160 $142,840
In 1999, the Company commenced a replacement
project of its computer software systems. The
Company anticipates spending approximately
$8.8 million on this project, the majority of which
will be capitalized and amortized over five years.
In 1999, the Company expensed approximately
$400,000 related to replacement software selection
and capitalized $2.3 million in acquisition and
implementation costs. In 2000, the Company
capitalized an additional $5.2 million of costs
incurred during the year, bringing the total
capitalized costs to date to $7.5 million.
3. Accrued Accrued liabilities consist of the following:
Liabilities
(in thousands)
December 31, 1999 2000
Payroll and employee benefits $ 10,482 $ 13,038
Air traffic liability 723 3,075
Interest 1,442 1,021
Aircraft rents 1,526 8,109
Passenger related expenses 7,980 9,692
Maintenance costs 3,016 2,880
Fuel 3,964 7,049
Other 6,719 8,180
$ 35,852 $ 53,044
52
4. Debt In February 1999, the Company entered into an asset-
based lending agreement with two financial
institutions that provided 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 line of credit
replaced a previous $20 million line of credit and
will expire on September 30, 2001, 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.
During 1999, the Company borrowed $7.8 million on
the bridge loan and provided funding to the
Metropolitan Washington Airports Authority ("MWAA")
for the construction of the regional terminal of
$12.5 million. In May 1999, MWAA paid the Company
$7.8 million, and the Company repaid its borrowings
on the bridge loan. As of December 31, 1999 there
were no outstanding borrowings on the bridge loan.
A note receivable from MWAA of $4.7 million was
recorded at December 31, 1999. No additional
amounts were drawn on the bridge loan for this
additional $4.7 million funding. The bridge loan
was effectively cancelled upon completion of the
regional terminal in May 2000.
The Company has pledged approximately $3.0 million
of the line of credit as collateral for letters of
credit issued on behalf of the Company. At
December 31, 2000 and December 31, 1999, the
Company's remaining available borrowing limit was
approximately $5 million and $19.8 million,
respectively. There was no balance outstanding
under the line of credit at December 31, 1999 or
December 31, 2000.
In July 1997, the Company issued $57.5 million
aggregate principal amount of 7% Convertible
Subordinated Notes due July 1, 2004 ("the Notes").
The Notes are convertible into shares of Common
Stock unless previously redeemed or repurchased, at
a conversion price of $4.50 per share, subject to
certain adjustments. In January 1998,
approximately $5.9 million of the Notes were
converted, pursuant to their original terms, into
1,321,652 shares of Common Stock. From March 20,
1998 to April 8, 1998, the Company temporarily
reduced the conversion price from $4.50 to $4.43
for holders of the Notes. During this period,
$31.7 million of the Notes converted into
approximately 7.2 million shares of Common Stock.
As a result of this temporary price reduction, the
Company recorded a non-cash, non-operating charge
to earnings during the second quarter of 1998 of
$1.4 million representing the fair value of the
additional shares distributed upon conversion.
Interest on the Notes is payable on April 1 and
October 1 of each year. On May 15, 2000, the
Company called the remaining $19.8 million
principal amount of Notes outstanding, for
redemption at 104% of face value effective July 3,
2000. The Noteholders elected to convert all of
the Notes into common stock and approximately 4.4
million shares were issued in exchange for the
Notes during the period May 25, 2000 to June 6,
2000, resulting in an addition to paid in capital
of approximately $19.8 million offset by a
reduction of approximately $471,000 for the
unamortized debt issuance costs relating to the
Notes in connection with their conversion.
53
Long-term debt consists of the following:
(in thousands) 1999 2000
December 31,
Convertible subordinated notes, principal
due July 1, 2004, interest payable in
semi-annual installments on the $19,820 -
outstanding principal with interest at
7%, unsecured.
Equipment Notes associated with Pass
Through Trust Certificates, due
January 1, 2008 and January 1,
2010, principal payable annually through
January 1, 2006 and semi-annually 14,346 13,304
thereafter through maturity, interest
payable semi-annually at 7.49%
throughout term of notes, collateralized
by four J-41 aircraft.
Notes payable to supplier, due between May
15, 2000 and January 15, 2001, principal 621 -
payable monthly with interest of 6.74%
and 7.86%, unsecured.
Notes payable to institutional lenders, due
between October 23, 2010 and May 15,
2015, principal payable semiannually 53,629 50,952
with interest ranging from 5.65% to
7.63% through maturity, collateralized
by four CRJ aircraft.
Note payable to institutional lender, due
October 2, 2006, principal payable 3,586 3,168
semiannually with interest at 6.56%,
collateralized by one J41 aircraft.
Total 92,002 67,424
Less: Current Portion 4,758 4,344
$87,244 $63,080
As of December 31, 2000, maturities of long-term
debt are as follows:
(in thousands)
2001 $ 4,344
2002 4,639
2003 4,900
2004 5,153
2005 6,019
Thereafter 42,369
$67,424
The Company has various financial covenant
requirements associated with its debt and United
marketing agreements. These covenants require the
Company to meet certain financial ratio tests,
including tangible net worth, net earnings, current
ratio and debt service levels.
54
5. Obligations The Company leases certain equipment for
Under noncancellable terms of more than one year. The net
Capital book value of the equipment under capital leases at
Leases December 31, 1999 and 2000, is $7.2 million and $5.5
million, respectively. The leases were capitalized
at the present value of the lease payments. The
weighted average interest rate for these leases is
approximately 7.6 %.
At December 31, 2000, the future minimum payments, by
year and in the aggregate, together with the present
value of the net minimum lease payments, are as
follows:
(in thousands)
Year Ending December 31,
2001 $ 2,008
2002 1,919
2003 1,723
2004 772
2005 -
Future minimum lease payments 6,422
Amount representing interest 901
Present value of minimum lease 5,521
payments
Less: Current maturities 1,512
$ 4,009
6. Operating Future minimum lease payments under noncancellable
Leases operating leases at December 31, 2000 are as follows:
(in thousands)
Year ending December 31, Aircraft Other Total
2001 $ 83,601 $ 5,365 $ 88,966
2002 83,603 5,301 88,904
2003 81,930 5,392 87,322
2004 81,602 5,449 87,051
2005 80,508 5,529 86,037
Thereafter 629,180 44,672 673,852
Total minimum
Lease payments $ 1,040,424 $ 71,708 $ 1,112,132
Certain of the Company's leases require aircraft to
be in a specified maintenance condition at lease
termination or upon return of the aircraft.
The Company's lease agreements generally provide that
the Company pays taxes, maintenance, insurance and
other operating expenses applicable to leased assets.
Operating lease expense related to aircraft was $36.7
million, $45.2 million, and $59.8 million for the
years ended December 31, 1998, 1999, and 2000,
respectively.
7. Stockholders' Stock Splits
Equity
On April 14, 1998, the Company declared a 2-for-1
common stock split payable as a stock dividend on May
15, 1998. The stock dividend was contingent on
shareholder approval to increase the number of
authorized Common Shares from 15,000,000 to
65,000,000 shares. Shareholder approval was obtained
on May 5, 1998.
On January 25, 2001, the Company announced a 2-for-1
common stock split payable as a stock dividend on
February 23, 2001 to shareholders of record on
February 9, 2001. The effect of these stock splits
is reflected in the accompanying financial
statements, calculation of income per share, and
stock option table presented below as of and for the
years ended December 31, 1998, 1999 and 2000.
Stock Option Plans
The Company's 1992 Stock Option Plan has 3.0 million
shares of which a majority had been granted by 1995.
The Company's 1995 Stock Incentive Plan has 5.0
million shares of which the majority had been granted
by year end 1999. In 2000, the Company's
shareholders approved a new 2000 Stock Incentive Plan
for 4.0 million shares. These three shareholder
approved plans provide for the issuance of incentive
stock and non qualified stock options to purchase
common stock of the Company and restricted stock
awards to certain employees and directors of the
Company. In addition, during 2000 the Company's Board
of Directors approved stock option programs for 2.4
million shares. The Board approved programs provide
for the issuance of non qualified stock options to
purchase common stock of the Company to certain
employees. Executive officers and directors of the
Company are not eligible to participate in the Board
authorized stock option programs. Under the plans
and programs, options are granted by the Chief
Executive Officer of the Company with approval from
the Compensation Committee of the Board of Directors
and vest over a period ranging from three to five
years.
A summary of the status of the Company's stock option
plan awards, including restricted stock awards as of
December 31, 1998, 1999 and 2000 and changes during
the periods ending on those dates is presented below:
56
1998 1999 2000
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Options outstanding at
beginning of year 4,113,844 $ 2.57 3,719,798 $ 3.76 4,445,642 $ 6.14
Granted 1,278,000 $ 8.19 1,470,000 $11.44 1,338,000 $12.51
Exercised 1,144,046 $ 2.17 525,852 $ 3.07 1,132,432 $ 3.46
Canceled 528,000 $ 8.63 218,304 $ 8.85 77,216 $10.84
Options outstanding at 3,719,798 $ 3.76 4,445,642 $ 6.14 4,573,994 $ 8.58
end of year
Options exercisable at 1,745,756 $ 1.94 2,320,412 $ 3.03 2,132,823 $ 5.02
year-end
Options available for 1,306,364 54,668 5,193,884
granting at year end
Weighted-average fair
value of options $5.52 $6.57 $7.45
granted during the
year
The Company awarded a total of 67,000 shares of
restricted stock to certain employees during 2000.
These shares vest over three years and have a
provision for accelerated vesting if the Company's
stock price appreciates by 25% during the first year
of vesting. The Company recognized $78,000 in
compensation expense in 2000 due to these restricted
stock awards. In February 2001, the Company's stock
price met the threshold for accelerated vesting and
as a result, these restricted shares now vest 100% in
April 2001. The Company will recognize approximately
$1.1 million in compensation expense during the first
and second quarters of 2001 as a result of the
accelerated vesting schedule. In 1998, the Company
awarded a total of 200,000 shares of restricted stock
to certain employees. These shares vest over three
to five years. The Company recognized $281,000,
$343,000 and $301,000 in compensation expense for
1998, 1999 and 2000 respectively, associated with the
1998 restricted stock awards and $293,000, $94,000
and $90,000 for 1998, 1999 and 2000 respectively,
associated with stock option awards.
The following table summarizes information about
stock options outstanding at December 31, 2000:
57
Options Outstanding Options Exercisable
Weighted-
Number average Weighted- Number Weighted-
outstanding remaining average exercis- average
Range of exercise at contractual exercise able exercise
price 12/31/00 life in price 12/31/00 price
years
$0.00 - $2.30 882,372 3.0 $ .48 724,601 $ .58
$2.31 - $4.61 487,662 5.7 $ 3.21 487,662 $ 3.21
$4.62 - $6.91 225,214 6.8 $ 5.56 225,214 $ 5.56
$6.92 - $9.21 269,666 7.8 $7.97 210,200 $7.75
$9.22 - $11.52 673,700 8.6 $10.08 157,200 $10.08
$11.53 - $13.82 1,626,380 8.7 $12.68 241,446 $12.23
$13.83 - $16.12 220,000 7.9 $15.01 86,500 $14.93
$16.13 - $18.42 186,000 9.8 $16.61 - -
$18.43 - $20.73 - - - - -
$20.74 - $23.03 3,000 9.9 $20.97 - -
4,573,994 7.1 $8.58 2,132,823 $ 5.02
The Company uses the Black-Scholes option model to
estimate the fair value of options. A risk-free
interest rate of 4.73%, 6.61% and 6% for 1998, 1999
and 2000, respectively, a volatility rate of 55%, 65%
and 65% for 1998, 1999 and 2000, respectively, with
an expected life of 6.5 years for 1998, 6.7 years for
1999 and 4.0 years for 2000 were assumed in
estimating the fair value. No dividend rate was
assumed for any of the years.
The following summarizes the pro forma effects
assuming compensation for such awards had been
recorded based upon the estimated fair value. The
proforma information disclosed below does not include
the impact of awards made prior to January 1, 1995
(in thousands, except per share data):
1998 1999 2000
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net Income $ 30,412 $ 27,201 $ 28,268 $ 23,931 $ 15,155 $ 12,009
Basic earnings
per share $ .84 $ .75 $ .75 $ .63 $ .38 $ .30
Diluted
earnings
per share $ .71 $ .64 $ .66 $ .56 $ .36 $ .28
Preferred Stock
The Board of Directors of the Company is authorized
to provide for the issuance by the Company of
preferred stock in one or more series and to fix the
rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including,
without limitation, dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption
or repurchase, redemption or repurchase prices,
limitations or restrictions thereon, liquidation
preferences and the number of shares constituting any
series or the designation of such series, without any
further vote or action by the stockholders.
58
8. Employee Employee Stock Ownership Plan
Benefit
Plans The Company established an Employee Stock Ownership
Plan (the "ESOP") covering substantially all
employees. For each of the years 1992 through 1995,
the Company made contributions to the ESOP which were
used in part to make loan and interest payments.
Shares of common stock acquired by the ESOP were
allocated to each employee based on the employee's
annual compensation.
Effective June 1, 1998, the Board of Directors of the
Company voted to terminate the Plan. On March 15,
1999, the Internal Revenue Service issued a
determination letter notifying the Company that the
termination of the Plan does not adversely affect the
Plan's qualification for federal tax purposes. Upon
termination of the Plan, a participant becomes 100%
vested in his or her account. In preparing for the
final distribution of ESOP shares to participants, it
was determined that a misallocation of shares had
occurred in years 1993 through 1997 resulting in
certain eligible participants not receiving some of
their entitled shares. The Company contributed the
required number of additional shares to the ESOP
during the second and third quarters of 1999 when the
final calculation was determined and recognized
approximately $250,000 in expense. The Company filed
a request for a compliance statement under the IRS's
Voluntary Compliance Resolution Program to obtain
Service approval of the Company's response to the
share misallocation issue. In September 1999, the
ESOP trustee began distribution of the ESOP assets
per participant's direction. In 2000, additional ESOP
shares were distributed as participants were located.
The ESOP will continue until all participants are
located and any remaining assets are properly
distributed. The number of shares remaining in the
Plan as of December 31, 2000 was 29,074.
401K Plan
Effective January 1, 1992, the Company adopted a
401(k) Plan (the "Plan"). The Plan covers
substantially all full-time employees who meet the
Plan's eligibility requirements. Employees may elect
a salary reduction contribution of up to 15% of their
annual compensation not to exceed the maximum amount
allowed by the Internal Revenue Service.
59
Effective October 1, 1994, the Plan was amended to
require the Company to make contributions to the Plan
for eligible pilots in exchange for certain
concessions. These contributions are in excess of
any discretionary contributions made for the pilots
under the original terms of the plan. These
contributions are 100% vested and equal to 3% of the
first $15,000 of each eligible pilot's compensation
plus 2% of compensation in excess of $15,000. The
plan limits the Company's contributions for the
pilots to 15% of the Company's adjusted net income
before extraordinary items for such plan year. The
Company's obligations to make contributions with
respect to all plan years in the aggregate is limited
to $2.5 million. Contribution expense was
approximately $552,000, $640,000, and $650,000 for
1998, 1999 and 2000, respectively.
The Plan allows the Company to make discretionary
matching contributions for non-union employees,
pilots and mechanics, respectively, equal to 25% of
salary contributions up to 4% of total compensation.
Effective with the ratification of the pilot's new
union agreement, the Company's match for pilots is
variable depending upon the pilot's length of service
and the Company's operational performance. The
Company's matching percentage for a pilot can range
from one to seven percent of eligible contributions.
The Company's matching contribution, if any, vests
ratably over five years. Contribution expense was
approximately $235,000, $303,000 and $374,000 for
1998, 1999 and 2000, respectively.
Profit Sharing Programs
The Company has profit sharing programs which result
in periodic payments to all eligible employees.
Profit sharing compensation, which is based on
attainment of certain performance and financial
goals, was approximately $3.9 million, $4.5 million,
and $4.5 million in 1998, 1999 and 2000,
respectively.
60
9. Income The provision (benefit) for income taxes includes the
Taxes following components:
(in thousands)
Year Ended December 31, 1998 1999 2000
Federal:
Current $ 13,580 $ 10,420 $ 11,295
Deferred 3,591 5,602 (4,267)
Total federal provision 17,171 16,022 7,028
State:
Current 3,161 1,993 1,010
Deferred 801 304 (381)
Total state provision 3,962 2,297 629
Total provision on income
before accounting change $ 21,133 $ 18,319 $ 7,657
Income tax benefit
due to change in
accounting method - $ (598) -
Total provision $ 21,133 $ 17,721 $ 7,657
A reconciliation of income tax expense at the
applicable federal statutory income tax rate of 35%
to the tax provision recorded is as follows:
(in thousands)
Year ended December 31, 1998 1999 2000
Income tax expense
at statutory rate $18,041 $16,616 $7,984
Increase (decrease)
in tax expense due to:
Permanent differences
and other 517 89 (487)
State income taxes, net
of federal benefit 2,575 1,614 160
Income tax expense $21,133 $18,319 $7,657
Deferred income taxes result from temporary
differences which are the result of provisions of the
tax laws that either require or permit certain items
of income or expense to be reported for tax purposes
in different periods than for financial reporting
purposes. The Company's 2000 effective tax rate was
positively affected by the receipt of a favorable
ruling request which allowed the Company to obtain
additional tax credits to offset income tax and the
realization of certain tax benefits that were
previously reserved which together reduced income tax
expense by approximately $1.4 million.
The following is a summary of the Company's deferred
income taxes as of December 31, 1999, and 2000:
(in thousands)
December 31, 1999 2000
Deferred tax assets:
Engine maintenance accrual $ 751 $ 679
Intangible assets 900 735
Air traffic liability 564 672
Allowance for bad debts 369 302
Deferred aircraft rent 323 1,737
Deferred credits 3,166 2,830
Accrued compensation 716 944
Accrued aircraft early retirement - 11,599
charge
Start up and organizational costs - 2,204
Other 1,278 867
Total deferred tax assets 8,067 22,569
Deferred tax liabilities:
Depreciation and amortization (17,595) (26,534)
Accrued expenses and other (81) (996)
Total deferred tax liabilities (17,676) (27,530)
Net deferred income tax
assets (liabilities) $ (9,609) $(4,961)
No valuation allowance was established in either
1999 or 2000 as the Company believes it is more
likely than not that the deferred tax assets will be
realized.
61
10.
Commitments Aircraft
and
Contingencies As of December 31, 2000, the Company had a total of
58 Canadair Regional Jets ("CRJs") on order from
Bombardier, Inc., and held options for 80 additional
CRJs. The Company also had a firm order with
Fairchild Aerospace Corporation for 48 Fairchild
Dornier 32 seat regional jets ("328JET") aircraft,
and options for 83 additional 328JETs. Of the 106
firm aircraft deliveries, 34 are scheduled for 2001,
30 are scheduled for 2002, and 42 are scheduled for
2003. The Company is obligated to purchase and
finance (including leveraged leases) the 106 firm
ordered aircraft at an approximate capital cost of
$1.8 billion. The Company anticipates leasing all
of its year 2001 aircraft deliveries on terms
similar to previously delivered regional jet
aircraft.
During 1999 the Company announced orders for a total
of 85 aircraft from Fairchild Aerospace Corporation,
including 40 328Jets (32 seat capacity) and 45
428Jets (44 seat capacity). The 428Jets were an
aircraft under development, with initial deliveries
scheduled for 2003. In August 2000 Fairchild
Aerospace announced that it would not proceed with
development of the 428Jets. The Company reached a
series of agreements with Fairchild in January 2001
resolving all issues relating to the initial order.
Under the new agreements, the Company revised its
order for 328Jets to a total of 62 aircraft. The
Company also placed an order for 30 additional CRJs
with Bombardier Aerospace in August 2000.
Training
The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA") which allow
the Company to train CRJ, J-41 and J-32 pilots at
PAIFA's facility near Washington-Dulles. In 1999,
PAIFA acquired from a third party the existing
training facility where the Company has been
conducting J-41 and J-32 training, and added a CRJ
simulator at the facility in December 1999. The
Company has committed to purchase an annual minimum
number of CRJ and J-41 simulator training hours at
agreed rates, with commitments originally extending
ten and three years, respectively. The Company's
payment obligations over the remaining nine years
total approximately $16 million. FRJ training is
presently being conducted in Dallas, Texas at a
facility arranged in conjunction with the
acquisition of the aircraft. The Company is
negotiating with PAIFA to have PAIFA install a
328JET simulator as well as a second CRJ simulator
at its Washington-Dulles facility.
At December 31, 2000, the Company's minimum payment
obligations under the PAIFA agreements are as
follows:
(in thousands)
Year ended December 31,
2001 $3,611
2002 3,631
2003 1,371
2004 1,391
2005 1,178
Thereafter 4,888
$ 16,070
62
Derivative Financial Instruments
The Company has periodically entered 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 the CRJ
aircraft. During 1998, 1999 and 2000, the Company
settled eight, seven and eight hedge transactions,
respectively, paying the counterparty $3.0 million
in 1998, receiving $119,000 in 1999 and paying the
counterparty $379,000 in 2000. In 1999, the Company
recognized a gain of $211,000 on the settlement of
one contract, representing the ineffective portion
of a hedge. At December 31, 2000 the Company had one
interest rate hedge transaction open with a notional
value of $8.5 million. It settled on January 3,
2001 resulting in a payment to the counterparty of
$722,000. The Company would have paid the
counterparty $610,000 had the contract settled on
December 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 provided 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. Had the commodity swap
transactions settled on December 31, 1999, the
Company would have recognized a reduction of
approximately $597,000 in fuel expense. Effective
December 1, 2000, under the United Airlines and
Delta Air Lines agreements, the Company no longer
bears the risk associated with fuel price volatility
for its operations. Accordingly, no fuel hedging
transactions were entered for 2001, and there were
no fuel hedging transactions open as of December 31,
2000.
63
11. Aircraft During 2000, the Company recorded an aircraft early
Early retirement operating charge of $29 million ($17.4
Retirement million net of income tax) for the early lease
Charge termination of its 28 19-seat Jetstream 32 turboprop
aircraft, which will be removed from service prior
to December 31, 2001. The charge includes the
estimated cost of contractual obligations to meet
aircraft return conditions, as well as a lease
termination fee, which fee was calculated including
such factors as the discounted present value cost of
future lease obligations from the planned out of
service date to the lease termination date, and
miscellaneous costs and benefits of early return to
the lessor.
12. Subsequent
Events On March 2, 2001, the Company announced it has
entered into an agreement with UAL Corporation
("UAL"), parent of United to acquire-through
subsidiaries-the three regional airlines that are
currently wholly-owned by US Airways Group, Inc.
("US Airways"). The three carriers are Allegheny
Airlines, Piedmont Airlines and PSA Airlines.
Closing of the acquisition from US Airways, which
would be contingent upon and occur at the same time
as closing of the proposed United/US Airways
merger, is subject to regulatory approvals and to
termination rights by UAL.
The aggregate purchase price for the three
carriers, initially set at $200 million, will be
paid at closing in the form of a promissory note
due in 18 months. Under the terms of the agreement,
the Company will not remit principal or interest
payments or accrue interest on the note until and
if an agreement is finalized. The ultimate
purchase price for each of the three regional
carriers will be negotiated during the 18-month
term of the promissory note. If agreement cannot
be reached on an ultimate purchase price as to any
or all of the three carriers, the Company's
acquisition of that carrier will be unwound. The
ultimate purchase price paid by the Company may
vary substantially from the amount of the
promissory note, and there can be no assurances
that the Company will retain any or all of the
three carriers. If closing occurs on the initial
purchase of the three carriers but ACAI is not the
ultimate purchaser of at least one of the carriers,
the Company will receive a fee of up to $10.5
million. The results of operations, and any capital
requirements of the three regional carriers, are
not expected to contribute to the Company's results
of operations or impact its financial position
until and if an ultimate purchase price is agreed
to and the acquisition can no longer be unwound.
64
13. Litigation The Company is a party to routine litigation and to
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.
14. Financial Statement of Financial Accounting Standards No.
Instruments 107, "Disclosure of Fair Value of Financial
Instruments" requires the disclosure of the fair
value of financial instruments. Some of the
information used to determine fair value is
subjective and judgmental in nature; therefore,
fair value estimates, especially for less
marketable securities, may vary. The amounts
actually realized or paid upon settlement or
maturity could be significantly different.
Unless quoted market price indicates otherwise, the
fair values of cash and cash equivalents, short-
term investments, accounts receivable and accounts
payable generally approximate market because of the
short maturity of these instruments. The Company
has estimated the fair value of long term debt
based on quoted market prices, when available, or
by discounted expected future cash flows using
current rates offered to the Company for debt with
similar maturities.
The estimated fair values of the Company's
financial instruments, none of which are held for
trading purposes, are summarized as follows
(brackets denote liability):
(in thousands) December 31, 1999 December 31, 2000
Carrying Estimated Carrying Estimated
Amount Fair Amount Fair
Value Value
Cash and cash
equivalents $39,897 $39,897 $86,117 $86,117
Short-term 17,550 17,550 35,100 35,100
investments
Accounts 31,023 31,023 29,052 29,052
receivable
Accounts payable (5,343) (5,343) (19,724) (19,724)
Long-term debt (92,002) (124,484) (67,424) (68,061)
See note 10 for information regarding the fair value of
derivative financial instruments.
65
15. Supplemental disclosures of cash flow information:
Supplemental
Cash Flow Year ended December 31,
Information (in thousands)
1998 1999 2000
Cash paid during the
period for:
- Interest $3,665 $4,532 $6,410
- Income taxes 15,426 8,193 8,944
The following non cash investing and financial
activities took place in 1998, 1999 and 2000:
In September and December 1998, the Company
received $352,000 of manufacturers credits which
were applied against the purchase price of two CRJs
purchased in 1998 from the manufacturer. The
credits will be utilized primarily through the
purchase of rotable parts and other fixed assets,
expendable parts, and pilot training.
In 1998, the Company acquired $3.0 million
consisting primarily of rotable parts and other
fixed assets and expendable parts under capital
lease obligations and through the use of
manufacturer credits.
In 1998, the note holders elected to convert $37.8
million of the Company's Notes to common stock
resulting in recognition of $1.4 million of debt
conversion expense.
On September 29, and November 19, 1998 the Company
issued long-term promissory notes for $12.7 million
and $12.9 million respectively, for the acquisition
of two new CRJ aircraft. The promissory notes
mature on March 29, 2015 and May 19, 2015
respectively, and are collateralized by the CRJ
aircraft delivered with principal and interest, at
rates of 5.65% and 5.88%, payable on a semiannual
basis through maturity.
In 1998, the Company capitalized $1.6 million in
interest related to a $15 million deposit with a
manufacturer.
During 1999, the Company received $755,000 of
manufacturers credits which were applied against
the purchase price of the two CRJs purchased in
1999 from the manufacturer. The credits will be
utilized primarily through the purchase of rotable
parts and other fixed assets, expendable parts, and
pilot training.
66
On April 23, and October 5, 1999 the Company
issued long-term promissory notes for $14.7 million
and $14.8 million respectively, for the acquisition
of two new CRJ aircraft. The promissory notes
mature on October 23, 2010 and October 5, 2011
respectively, and are collateralized by the CRJ
aircraft delivered with principal and interest, at
rates of 6.62% and 7.63%, payable on a semiannual
basis through maturity.
In 1999, the Company capitalized $1.8 million in
interest related to $38.7 million on deposit with
aircraft manufacturers.
In 2000, the Company capitalized $2.7 million in
interest related to $46.4 million on deposit with
aircraft manufacturers.
In 2000, the remaining $19.8 million principal
amount of Notes outstanding were converted into
common stock of the Company resulting in a $19.3
million increase to paid in capital.
16. Recent In June 1998, the FASB issued Statement No. 133,
Accounting "Accounting for Derivative Instruments and Hedging
Pronouncements 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, effective
January 1, 2001. The impact of adopting this
statement is not expected to have a material impact
on the Company's financial results.
67
17. Selected (in thousands, except per share amounts)
Quarterly
Financial
Data
(Unaudited)
Quarter Ended
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
Operating revenues $92,499 $116,332 $115,356 $128,339
Operating income 4,540 20,629 2,226 (3) (3,308) (3)
Net income (loss) 2,280 12,029 2,666 (3) (1,821) (3)
Net income (loss)
per share
Basic $ .06 $ 0.31 $ 0.06 $ (.04)
Diluted $ .06 $ 0.28 $ 0.06 $ (.04)
Weighted average
shares outstanding
Basic 37,256 38,746 42,144 42,404
Diluted 43,048 43,542 43,864 42,404
Quarter Ended
March 31, June 30, September 30 December 31,
1999 1999 1999 1999
Operating revenues $73,004 $92,397 $91,022 $90,943
Operating income 5,677 18,501 14,531 10,583
Net income 2,875 (1) 11,068 8,351 5,974
Net income per
share(2)
Basic $ 0.07 $ 0.29 $ 0.22 $ 0.16
Diluted $ 0.07 $ 0.25 $ 0.20 $ 0.14
Weighted average
shares outstanding (2)
Basic 38,890 38,354 37,310 37,186
Diluted 45,226 44,448 43,264 43,154
(1) Includes the $888,000, net of income taxes, charge for the
cumulative effect of an accounting change. Without this charge,
basic and diluted income per share would have been $0.10 and
$0.09, respectively.
(2) Share and per share calculations have been restated to reflect
the two for one stock split distributed on February 23, 2001.
(3) In the third and fourth quarters of 2000, the Company
recorded aircraft early retirement charges. The amount of the
charges was $8.7 million (pre-tax) in the third quarter, and $20.3
million (pre-tax) in the fourth quarter.
Note: The sum of the four quarters may not equal the totals for the
year due to rounding of quarterly results.
68
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None to report.
PART III
The information required by this Part III (Items 10, 11, 12 and
13) is hereby incorporated by reference from the Company's definitive
proxy statement which is expected to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934 not later than 120 days after the
end of the fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements listed in the index
in Part II, Item 8, are filed as part of this report.
2. Consolidated Financial Statement Schedules
Reference is hereby made to the Consolidated Financial
Statements and the Notes thereto included in this filing
in Part II, Item 8.
3. Exhibits
Exhibit
Number Description of Exhibit
3.1 (note 9) Restated Certificate of Incorporation of the Company.
3.2 (note 9) Restated By-laws of the Company.
4.1 (note 7) Specimen Common Stock Certificate.
4.2 (note 13) Stockholders' Agreement, effective as of October 15,
1991, among the Company, the stockholders and the holder
of warrants of the Company named on the signature pages
thereto and a trust established pursuant to the Atlantic
Coast Airlines, Inc. Employee Stock Ownership Plan,
together with Amendment and Second Amendment thereto
dated as of February 24, 1992 and May 1, 1992
respectively.
4.3 (note 13) Registration Rights Agreement, dated as of September 30,
1991, among the Company and the stockholders named on
the signature pages thereto (the "Stockholders
Registration Rights Agreement").
69
4.4 (note 13) Form of amendment to the Stockholders Registration
Rights Agreement.
4.19 (note 8) Rights Agreement between Atlantic Coast Airlines
Holdings, Inc. and Continental Stock Transfer & Trust
Company dated as of January 27, 1999.
10.1 (notes 13 and 16)
Atlantic Coast Airlines, Inc. 1992 Stock Option Plan.
10.4 (note 11) Restated Atlantic Coast Airlines 401(k) Plan, as amended
through February 3, 1997.
10.4(a) (note 10)Amendment to the Atlantic Coast Airlines 401(k) Plan
effective May 1, 1997
10.6 (notes 1 & 15)
United Express Agreement, dated as of November 22, 2000,
as amended as of February 6, 2001, among United Airlines,
Inc., Atlantic Coast Airlines and the Company.
10.7 (notes 13 & 14)
Agreement to Lease British Aerospace Jetstream-41 Aircraft,
dated December 23, 1992, between British Aerospace, Inc. and
Atlantic Coast Airlines.
10.8 (notes 5 & 14)
Delta Connection Agreement, dated as of September 9, 1999
among Delta Air Lines, Inc., Atlantic Coast Airlines
Holdings, Inc. and Atlantic Coast Jet, Inc.
10.12(a) (notes 4 & 16)
Amended and Restated Severance Agreement, dated as of
December 28, 1999, between the Company and Kerry B. Skeen.
10.12(b) (notes 4 & 16)
Amended and Restated Severance Agreement, dated as of
December 28, 1999, between the Company and Thomas J. Moore.
10.12(c) (notes 4 & 16)
Form of Severance Agreement substantially similar to
agreements with Richard J. Surratt and with Michael S. Davis,
both restated as of December 28, 1999.
10.12(d) (notes 6 & 16)
Executive Officer Note.
10.13(a) (note 11)
Form of Indemnity Agreement. The Company has entered into
substantially identical agreements with the individual
members of its Board of Directors.
10.21 (note 12) Acquisition Agreement, dated as of December 30, 1994, by
and among Jetstream Aircraft, Inc., JSX Capital
Corporation, and Atlantic Coast Airlines.
10.21(a) (note 11)
Amendment Number One to Acquisition Agreement, dated as of
June 17, 1996, by and among Jetstream Aircraft, Inc., JSX
Capital Corporation, and Atlantic Coast Airlines.
10.23 (note 7) Amended and Restated Loan and Security Agreement dated
February 8, 1999 between Atlantic Coast Airlines and
Fleet Capital Corporation.
10.24 (notes 7 and 16)
Atlantic Coast Airlines, Inc. 1995 Stock Incentive Plan, as
amended as of May 5, 1998.
10.245 (notes 3 and 16)
2000 Stock Incentive Plan of Atlantic Coast Airlines Holding,
Inc.
10.25(a) (notes 7 and 16)
Form of Incentive Stock Option Agreement. The Company enters
into this agreement with employees who have been granted
incentive stock options pursuant to the Stock Incentive
Plans.
10.25(b) (notes 7 & 16)
Form of Incentive Stock Option Agreement. The Company enters
into this agreement with corporate officers who have
been granted incentive stock options pursuant to the
Stock Incentive Plans.
10.25(c) (notes 7 & 16)
Form of Non-Qualified Stock Option Agreement. The Company
enters into this agreement with employees who have been
granted non-qualified stock options pursuant to the Stock
Incentive Plans.
10.25(d) (notes 7 & 16)
Form of Non-Qualified Stock Option Agreement. The Company
enters into this agreement with corporate officers who have
been granted non-qualified stock options pursuant to the
Stock Incentive Plans.
70
10.25(e) (notes 7 & 16)
Form of Restricted Stock Agreement. The Company entered into
this agreement with corporate officers who were granted
restricted stock pursuant to the Stock Incentive Plans.
10.27 (notes 4 & 16)
Form of Split Dollar Agreement and Agreement of Assignment of
Life Insurance Death Benefit as Collateral. The Company
has entered into substantially identical agreements with
Kerry B. Skeen, Thomas J. Moore, Michael S. Davis and
Richard J. Surratt.
10.31 (note 1 & 16)
Summary of Senior Management Incentive Plan. The Company
has adopted a plan as described in this exhibit for 2001
and for the three previous years.
10.32 (note 1 & 16)
Summary of Management Incentive Plan and Share the
Success Program. The Company has adopted plans as
described in this exhibit for 2001 and for the three
previous years.
10.40A (notes 7 & 14)
Purchase Agreement between Bombardier Inc. and Atlantic Coast
Airlines Relating to the Purchase of Canadair Regional
Jet Aircraft dated January 8, 1997, as amended through
December 31, 1998.
10.40A(1) (notes 5 & 14)
Contract Change Orders No. 13, 14, and 15, dated April 28,
1999, July 29, 1999, and September 24, 1999, respectively,
amending the Purchase Agreement between Bombardier Inc.
and Atlantic Coast Airlines relating to the purchase of
Canadair Regional Jet Aircraft dated January 8, 1997.
10.41 (notes 5 & 14)
Purchase Agreement between Bombardier Inc. and Atlantic Coast
Airlines relating to the Purchase of Canadair Regional
Jet Aircraft dated July 29, 1999, as amended through
September 30, 1999.
10.45 (note 6) Aircraft Purchase Agreement between Dornier Luftfahrt
GmbH and Atlantic Coast Airlines dated effective March
31, 1999 (superseded by contracts entered into during
January 2001, to be filed as an Exhibit to the Quarterly
Report on Form 10-Q for the three-month period ended
March 31, 2001).
10.45(1) (note 5)First Amendment dated effective September 10, 1999, to
the Aircraft Purchase Agreement between Dornier
Luftfahrt GmbH and Atlantic Coast Airlines dated
effective March 31, 1999 (superseded by contracts
entered into during January 2001, to be filed as an
Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended March 31, 2001).
10.50(a) (note 10)
Form of Purchase Agreement, dated September 19, 1997, among
the Company, Atlantic Coast Airlines, Morgan Stanley & Co.
Incorporated and First National Bank of Maryland, as
Trustee.
10.50(b) (note 10)
Form of Pass Through Trust Agreement, dated as of September
25, 1997, among the Company, Atlantic Coast Airlines, and
First National Bank of Maryland, as Trustee.
10.50(c) (note 10)
Form of Pass Through Trust Certificate.
10.50(d) (note 10)
Form of Participation Agreement, dated as of September 30,
1997, Atlantic Coast Airlines, as Lessee and Initial Owner
Participant, State Street Bank and Trust Company of
Connecticut, National Association, as Owner Trustee, the
First National Bank of Maryland, as Indenture Trustee,
Pass-Through Trustee, and Subordination Agent,
including, as exhibits thereto, Form of Lease Agreement,
Form of Trust Indenture and Security Agreement, and Form
of Trust Agreement.
10.50(e) (note 10)
Guarantee, dated as of September 30, 1997, from the
Company.
71
10.70 (note 2) Transaction Term Sheet -Summary of Principal Terms and
Conditions between the Company and United Air Lines,
Inc. dated as of March 2, 2001 relating to the
acquisition of three airlines from USAirways Group, Inc.
10.80 (note 10) Ground Lease Agreement Between The Metropolitan
Washington Airports Authority And Atlantic Coast
Airlines dated as of June 23, 1997.
10.85 (note 7) Lease Agreement Between The Metropolitan Washington
Airports Authority and Atlantic Coast Airlines, with
amendments as of January 1, 1999.
10.90 (notes 10 & 14)
Schedules and Exhibits to ISDA Master Agreement between the
Company and Bombardier Inc. dated as of July 11, 1997
(the Company entered into substantially similar
arrangements for interest rate hedges that were
outstanding as of December 31, 2000).
21.1 (note 1) Subsidiaries of the Company.
23.1 (note 1) Consent of KPMG LLP.
Notes
(1) Filed as an Exhibit to this Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.
(2) Filed as an Exhibit to the Current Report on Form 8-K filed on
March 2, 2001.
(3) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended June 30, 2000.
(4) Filed as an Exhibit to the Amended Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1999.
(5) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended September 30, 1999.
(6) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1999.
(7) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(8) Filed as Exhibit 99.1 to Form 8-A (File No. 000-21976),
incorporated herein by reference.
(9) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1998.
(10) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, incorporated herein by
reference.
(11) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, incorporated herein by
reference.
(12) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, incorporated herein by
reference.
(13) Filed as an Exhibit to Form S-1, Registration No. 33-62206,
effective July 20, 1993, incorporated herein by reference.
(14) Portions of this document have been omitted pursuant to a request
for confidential treatment that has been granted.
(15) Portions of this document have been omitted pursuant to a request
for confidential treatment that is pending.
(16) This document is a management contract or compensatory plan or
arrangement.
72
Reports on Form 8-K:
11/14/00 Salomon Smith Barney Transportation Conference Presentation
11/29/00 Announcement of new 10-year fee-per-departure agreement with
United Airlines
01/23/01 Raymond James Growth Airline Conference Presentation
02/05/01 Goldman Sachs Air Carrier Conference Presentation
02/14/01 Deutsche Banc Alex. Brown 2001 Global Transportation Conference
Presentation
03/02/01 Agreement with UAL Corporation to acquire three regional
airlines currently wholly owned by US Airways Group, Inc.
03/05/01 Raymond James & Associates 2001 Institutional Investors
Conference Presentation
03/20/01 ING Barings 3rd Annual Global Transportation and Logistics
Conference Presentation
73
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 27, 2000.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
By /S/
:
/ Kerry B. Skeen
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 2000.
Name Title
/S/ Chairman of the Board of
Directors
Kerry B. Skeen and Chief Executive Officer
(principal executive officer)
/S/ Director, President and
Thomas J. Moore Chief Operating Officer
/S/ Senior Vice President, Treasurer
and
Richard J. Surratt Chief Financial Officer
(principal financial officer)
/S/ Vice President, and Controller
David W. Asai (principal accounting officer)
/S/ /S/
C. Edward Acker Robert E. Buchanan
Director Director
/S/ /S/
Susan MacGregor Coughlin Daniel L. McGinnis
Director Director
/S/ /S/
James C. Miller III Judy Shelton
Director Director
/S/
John M. Sullivan
Director