SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
45200 Business Court, Dulles, Virginia 20166
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (703) 650-6000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
As of May 10, 2001, there were 43,060,042 shares of common stock, par
value $.02 per share, outstanding.
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
December 31, 2000 March 31, 2001
(In thousands except for share and per share data) (Unaudited)
Assets
Current:
Cash and cash equivalents $ 86,117 $ 71,921
Short term investments 35,100 29,320
Accounts receivable, net 29,052 15,477
Expendable parts and fuel inventory,net 6,188 6,836
Prepaid expenses and other current assets 8,055 40,649
Deferred tax asset 13,973 13,973
Total current assets 178,485 178,176
Property and equipment at cost, net of
accumulated depreciation and amortization 142,840 153,493
Intangible assets, net of accumulated
amortization 2,045 2,029
Debt issuance costs, net of accumulated
amortization 2,912 3,636
Aircraft deposits 46,420 41,710
Other assets 9,998 4,825
Total assets $ 382,700 $ 383,869
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 19,724 $ 20,594
Current portion of long-term debt 4,344 4,367
Current portion of capital lease obligations 1,512 1,563
Accrued liabilities 53,044 58,390
Accrued aircraft early retirement charge 27,843 2,597
Total current liabilities 106,467 87,511
Long-term debt, less current portion 63,080 62,682
Capital lease obligations, less current
portion 4,009 3,607
Deferred tax liability 18,934 18,934
Deferred credits, net 22,037 31,107
Total liabilities 214,527 203,841
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares
issued 47,704,720 and 47,922,726
respectively; shares outstanding 954 958
42,658,388 and 42,876,394 respectively
Additional paid-in capital 117,284 119,510
Less: Common stock in treasury, at cost,
5,046,332 shares. (35,303) (35,303)
Retained earnings 85,238 94,863
Total stockholders' equity 168,173 180,028
Total liabilities and
stockholders' equity $ 382,700 $ 383,869
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
(In thousands, except for per share data) 2000 2001
Operating revenues:
Passenger $ 90,734 $ 131,696
Other 1,765 1,758
Total operating revenues 92,499 133,454
Operating expenses:
Salaries and related costs 24,259 36,991
Aircraft fuel 13,132 20,457
Aircraft maintenance and materials 8,076 11,157
Aircraft rentals 12,720 20,205
Traffic commissions and related fees 13,244 3,873
Facility rents and landing fees 4,463 7,424
Depreciation and amortization 2,581 3,400
Other 9,484 14,468
Total operating expenses 87,959 117,975
Operating income 4,540 15,479
Other income (expense):
Interest expense (1,725) (1,266)
Interest income 1,059 1,871
Other, net (74) (43)
Total other income (expense) (740) 562
Income before income tax provision 3,800 16,041
Income tax provision 1,520 6,416
Net income $ 2,280 $ 9,625
Income per share:
Basic:
Net income $0.06 $0.23
Diluted:
Net income $0.06 $0.22
Weighted average shares outstanding:
-Basic 37,256 42,750
-Diluted 43,048 44,638
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
(In thousands) 2000 2001
Cash flows from operating activities:
Net income $ 2,280 $ 9,625
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,769 3,359
Amortization of deferred credits (348) (703)
Capitalized interest (net) (583) (173)
Other 291 144
Changes in operating assets and liabilities:
Accounts receivable (12,517) 12,960
Expendable parts and fuel inventory (523) (648)
Prepaid expenses and other current assets (13,661) (26,542)
Accounts payable 2,529 11,422
Accrued liabilities 3,975 (20,881)
Net cash used in operating activities (15,788) (11,437)
Cash flows from investing activities:
Purchases of property and equipment (2,718) (13,884)
Proceeds from sales of assets - 112
Proceeds from sale-leaseback 43 -
Purchases of short term investments (3,300) (3,125)
Maturities of short term investments 11,050 8,905
Refunds of aircraft deposits - 8,000
Payments of aircraft deposits and other (2,000) (3,500)
Net cash provided by (used in) investing activities 3,075 (3,492)
Cash flows from financing activities:
Payments of long-term debt (585) (375)
Payments of capital lease obligations (416) (351)
Deferred financing costs and other 135 (696)
Purchase of treasury stock (1,196) -
Proceeds from exercise of stock options 647 2,155
Net cash (used in) provided by financing activities (1,415) 733
Net decrease in cash and cash equivalents (14,128) (14,196)
Cash and cash equivalents, beginning of period 39,897 86,117
Cash and cash equivalents, end of period $ 25,769 $ 71,921
See accompanying notes to the condensed consolidated financial statements.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Atlantic Coast Airlines Holdings, Inc. ("ACAI")
and its wholly-owned subsidiaries, Atlantic Coast Airlines ("ACA") and
Atlantic Coast Jet, Inc. ("ACJet"), (together, the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished in these unaudited
condensed consolidated financial statements includes normal recurring
adjustments and reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of such consolidated
financial statements. Results of operations for the three-month period
presented are not necessarily indicative of the results to be expected
for the full year ending December 31, 2001. Certain amounts as
previously reported have been reclassified to conform to the current year
presentation. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in accordance
with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements, and the notes thereto,
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
2. OTHER COMMITMENTS
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 Canadair Regional Jet ("CRJ") aircraft.
On July 6, 2000 the Company entered into six interest rate forward
transactions maturing between August 2000 and January 2001 as an interest
rate hedge relating to the delivery of six aircraft. These transactions
settled shortly before the aircraft were scheduled to be delivered and
had an aggregate notional value of $51 million. The Company settled five
of the six interest rate forward transactions in 2000. The sixth
interest rate forward transaction settled January 3, 2001, and had a
notional value of $8.5 million, resulting in a payment to the
counterparty of $722,000.
In February 1999, the Company entered into an asset-based lending
agreement with two financial institutions that provided 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.
With the change in the United Express agreement 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 was limited to the value of certain rotable
spare parts, to a maximum of $8.0 million. On May 2, 2001 the asset-
based lending agreement was amended to add an additional $8.4 million to
the borrowing base, collateralized by the value of certain fixed assets.
The line of credit will expire on September 30, 2001, or upon termination
of the United Express 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 2000
or to date in 2001. As of May 2, 2001, the Company has pledged $15.6
million of this line of credit as collateral for letters of credit issued
on behalf of the Company by a financial institution. This effectively
commits most of the line of credit. The Company anticipates replacing
this existing line of credit on or before September 30, 2001 when the
current line expires.
As of March 31, 2001, the Company had firm orders for 54 CRJs in addition
to the 42 previously delivered, and options for 80 additional CRJs. The
Company also had 42 Fairchild Dornier 328JET regional jet aircraft
("328JET") on firm order in addition to the 20 already delivered, and
held options for an additional 83 aircraft. The future delivery schedule
of the remaining 96 firm ordered regional jet aircraft as of March 31,
2001 is as follows: 24 aircraft are scheduled for delivery during the
remainder of 2001, 30 aircraft in 2002, and 42 aircraft in 2003.
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 is contingent upon and would 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 on an ultimate purchase price for each of the three
regional carriers is finalized. The ultimate purchase price 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.
3. ADOPTION OF FASB STATEMENT 133
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.
The Company adopted Statement No. 133 effective January 1, 2001. The
impact of adopting this statement has not had a material impact on the
Company's financial position or results of operations for the first
quarter of 2001.
4. INCOME TAXES
The Company's effective tax rate for federal and state income taxes was
40% for the first quarter of 2001 and 2000.
5. INCOME PER SHARE
Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted income per share is
computed by dividing net income by the weighted average number of common
shares outstanding and common stock equivalents, which consist of shares
subject to stock options computed using the treasury stock method. In
addition, under the if-converted method, dilutive convertible securities
are included in the denominator while related interest expense, net of
tax, for convertible debt is added to the numerator. A reconciliation of
the numerator and denominator used in computing basic and diluted income
per share is as follows:
Three months ended March 31,
(in thousands except for per share data) 2000 2001
Income (basic) $2,280 $9,625
Interest expense on 7% Convertible Notes,
net of tax effect 208 -
Income (diluted) $2,488 $9,625
Weighted average shares outstanding (basic) 37,256 42,750
Incremental shares related to stock options 1,388 1,888
Incremental shares related to 7% Convertible Notes 4,404 -
Weighted average shares outstanding (diluted) 43,048 44,638
6. AIRCRAFT EARLY RETIREMENT CHARGE
During 2000, the Company began retiring early the leased 19-
seat British Aerospace J-32 turboprop ("J-32") aircraft from the fleet.
As of May 1, 2001, 14 J-32s had been removed from service. The remaining
14 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 and does
not expect to incur any additional charges against earnings for the early
retirement of the J-32 fleet.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Quarter Operating Statistics
Increase
Three months ended March 31, 2000 2001 (Decrease)
Revenue passengers carried 765,929 937,698 22.4%
Revenue passenger miles ("RPMs")(000's) 247,605 339,632 37.2%
Available seat miles ("ASMs") (000's) 482,832 689,540 42.8%
Passenger load factor 51.3% 49.3% (2.0)pts
Revenue per ASM (cents) 18.8 19.1 1.6%
Yield (cents) 36.6 38.8 6.0%
Cost per ASM (cents) 18.2 17.1 (6.0)%
Average passenger segment (miles) 323 362 12.1%
Revenue departures (completed) 46,637 53,145 14.0%
Revenue block hours 60,096 73,816 22.8%
Aircraft utilization (block hours) 8.6 8.7 1.2%
Average cost per gallon of fuel (cents) $105.8 $108.5 2.6%
Aircraft in service (end of period) 86 112 30.2%
Revenue per departure $1,948 $2,487 27.7%
Comparison of three months ended March 31, 2001, to three months ended
March 31, 2000.
Results of Operations
Forward Looking Statements
The following Management's Discussion and Analysis contains
forward-looking statements and information that are based on management's
current expectations as of the date of this document. When used herein,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions, as they relate to the Company's management, are intended to
identify such forward-looking statements. Such forward-looking
statements are subject to risks, uncertainties, assumptions and other
factors that may cause the actual results of the Company to be materially
different from those reflected in such forward-looking statements.
Factors that could cause the Company's future results to differ
materially from the expectations described here include the 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, general economic and industry conditions, and the factors
discussed below and in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000. 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 does not intend to update
these forward-looking statements prior to its next required filing with
the Securities and Exchange Commission.
General
In the first quarter of 2001, the Company posted net income of
$9.6 million, compared to income of $2.3 million for the first quarter of
2000. Operating income for the three months ended March 31, 2001 was
$15.5 million as compared to $4.5 million for the three months ended
March 31, 2000. Unit revenues, revenue per ASM ("RASM"), increased 1.6%
to 19.1 cents, while unit costs, operating cost per ASM ("CASM")
decreased 6.0% to 17.1 cents compared to the first quarter 2000. This
resulted in operating margin increasing to 11.6% for the first quarter of
2001 from 4.9% for the first quarter of 2000. Total passengers increased
22.4% in the first quarter of 2001 to 937,698 passengers, compared to the
first quarter of 2000.
Operating Revenues
The Company's operating revenues increased 44.3% to $133.5
million in the first quarter of 2001 compared to $92.5 million in the
first quarter of 2000. The increase resulted from a 42.8% increase in
ASMs to 689,540 in the first quarter of 2001 from 482,832 in the first
quarter of 2000, as well as a 27.7% increase in the revenue per departure
to $2,487 in the first quarter of 2001 from $1,948 in the first quarter
of 2000. Revenues for the first quarter of 2001 were recognized under
fee-per-departure agreements as compared to a proration of fare agreement
for revenues for the first quarter of 2000. Whereas quarterly revenues
under a proration of fare agreement normally reflected seasonal and
passenger demand trends, with lower revenue during the first and fourth
quarters and higher revenue during the second and third quarters, fee-per-
departure agreements generally minimize seasonality effects on revenue.
Quarterly comparison of revenue per departure for 2001 to 2000
results will in part reflect this reversal of historical seasonality
trends. Therefore, the revenue per departure increase in the first
quarter of 2001 is not necessarily indicative of the results to be
expected for other quarters, or the full year ending December 31, 2001.
The increase in capacity as measured in ASMs is the result of
service expansion utilizing additional 50 seat Canadair Regional Jet
("CRJs"), and the addition of 20 32 seat Fairchild Dornier 328JET
("328JET") aircraft, partially offset by the removal of eleven British
Aerospace J-32 Turboprop ("J-32") aircraft. The Company was operating 42
CRJs as of March 31, 2001 as compared to 26 as of March 31, 2000. The 20
328JET aircraft were placed in revenue service beginning during the third
quarter of 2000, continuing through the first quarter of 2001.
Operating Expenses
The Company's operating expenses increased 34.1% in the first
quarter of 2001 compared to the first quarter of 2000 due primarily to: a
55.8% increase in total fuel costs as a result of a 2.6% increase in the
average price per gallon of jet fuel, coupled with a 23.7% increase in
the average fuel burn rate to 255 gallons per hour; a 42.8% increase in
ASMs; and a 58.8% increase in aircraft rental expense, all partly offset
by a 70.8% decrease in traffic commissions and related fees. The
increase in ASMs, fuel burn rate, and aircraft rental reflects the
addition of 16 CRJs and 20 328JETs into scheduled service, net of the
early retirement of eleven J32s, since the end of the first quarter of
2000. A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the three months ended March 31, 2000, and
2001 is as follows:
Three Months ended March 31,
2000 2001
Percent Percent
of Cost of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 26.2% 5.0 27.6% 5.3
Aircraft fuel 14.2% 2.7 15.3% 3.0
Aircraft maintenance and materials 8.7% 1.7 8.4% 1.6
Aircraft rentals 13.8% 2.6 15.1% 2.9
Traffic commissions and related fees 14.3% 2.8 2.9% 0.6
Facility rents and landing fees 4.8% 0.9 5.6% 1.1
Depreciation and amortization 2.8% 0.5 2.5% 0.5
Other 10.3% 2.0 10.8% 2.1
Total 95.1% 18.2 88.2% 17.1
Cost per ASM decreased 6.0% on a year-over-year basis to 17.1
cents during the first quarter of 2001 primarily due to a 42.8% increase
in ASMs and a 70.8% decrease in the year-over-year traffic commissions
and related fees. Many of these fees are no longer borne by the Company
as a result of the restatement of the United Express agreement, which
went into effect on December 1, 2000. Under the restated agreement, the
Company is responsible for fees associated with the major airline
Computer Reservation Systems.
Salaries and related costs per ASM increased 6.0% to 5.3 cents
in the first quarter of 2001 compared to 5.0 cents in the first quarter
of 2000. In absolute dollars, salaries and related costs increased 52.5%
from $24.3 million in the first quarter of 2000 to $37.0 million in the
first quarter of 2001. The increase resulted primarily from the addition
of 790 full and part time employees to support the 36 regional jet
aircraft added during 2000 and 2001.
The cost per ASM of aircraft fuel increased to 3.0 cents in the
first quarter of 2001 compared to 2.7 cents in the first quarter of 2000.
In absolute dollars, aircraft fuel expense increased 55.8% from $13.1
million in the first quarter of 2000 to $20.5 million in the first
quarter of 2001. The increased fuel expense resulted from a 2.6% increase
in the average cost per gallon of fuel from $1.058 to $1.085, a 22.8%
increase in block hours, and the higher fuel consumption per hour of
regional jet aircraft versus turboprop aircraft which resulted in a 23.7%
increase in the system average burn rate (gallons used per block hour
flown).
The cost per ASM of aircraft maintenance and materials
decreased to 1.6 cents in the first quarter of 2001 compared to 1.7 cents
in the first quarter of 2000. In absolute dollars, aircraft maintenance
and materials expense increased 38.2% from $8.1 million in the first
quarter of 2000 to $11.2 million in the first quarter of 2001. The
increased expense resulted from the increase in the size of the total
fleet, the gradual expiration of manufacturer's warranties on the CRJs
and resulting addition of the aircraft under the Company's maintenance
agreement with GE, and the continual increase in the average age of the
turboprop fleet.
The cost per ASM of aircraft rentals increased to 2.9 cents in
the first quarter of 2001 compared to 2.6 cents in the first quarter of
2000. In absolute dollars, aircraft rentals increased 58.8% from $12.7
million in the first quarter of 2000 to $20.2 million in the first
quarter of 2001, reflecting the addition of sixteen CRJ aircraft and
twenty 328JET aircraft since March 31, 2000, net of the removal of 11 J-
32 turboprop aircraft.
The cost per ASM of traffic commissions and related fees
decreased 78.6% to 0.6 cents for the first quarter of 2001 compared to
2.8 cents for the first quarter of 2000. In absolute dollars, traffic
commissions and related fees decreased 70.8% from $13.2 million in the
first quarter of 2000 to $3.9 million in the first quarter of 2001. Many
of these fees are no longer borne by the Company as a result of the
restatement of the United Express agreement, which went into effect on
December 1, 2000. Under the restated agreement, the Company is
responsible for fees associated with the major airline Computer
Reservation Systems, while traffic commissions are borne by United.
The cost per ASM of facility rents and landing fees increased
22.2% from 0.9 cents for the first quarter of 2000 to 1.1 cents for the
first quarter of 2001. In absolute dollars, facility rents and landing
fees increased 66.3% from $4.5 million in the first quarter of 2000 to
$7.4 million in the first quarter of 2001. The increase in absolute
dollars for facility rents and landing fees is a result of a 14% increase
in number of departures, the heavier landing weight of the regional jets,
and the Company's occupation of its new corporate headquarters building
as of December 1, 2000.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for the first quarter of 2001 and the first quarter of
2000. In absolute dollars, depreciation and amortization increased 31.7%
from $2.6 million in the first quarter of 2000 to $3.4 million in the
first quarter of 2001 primarily as a result of additional rotable spare
parts associated with the regional jets.
The cost per ASM of other operating expenses increased to 2.1
cents in the first quarter of 2001 from 2.0 cents in the first quarter of
2000. In absolute dollars, other operating expenses increased 52.6% from
$9.5 million in the first quarter of 2000 to $14.5 million in the first
quarter of 2001. The increased costs result primarily from training
expenses for new flight crews to support additional aircraft.
As a result of the foregoing changes in operating expenses and
a 42.8% increase in ASMs, total cost per ASM decreased to 17.1 cents in
the first quarter of 2001 compared to 18.2 cents in the first quarter of
2000. In absolute dollars, total operating expenses increased 34.1% from
$88.0 million in the first quarter of 2000 to $118.0 million in the first
quarter of 2001.
The Company's effective tax rate for federal and state income
taxes was 40% for the first quarter of 2001 and 2000.
Outlook
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth in the MD&A section
under Forward Looking Statements.
As of May 1, 2001, the Company was operating a fleet of 110
aircraft comprised of 43 CRJs, 21 328JETs, 32 J41s and 14 J32s. The
Company does not expect to incur any additional charges against earnings
for the early retirement in 2001 of the remaining 14 J-32 aircraft in the
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 likely will 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.
As of May 1, 2001, the Company had firm orders for 53 CRJ's in
addition to the 43 previously delivered, and options for an additional 80
CRJ's. The Company also had firm orders for 41 328JETS in addition to
the 21 previously delivered, and options for an additional 83 328JETs.
The continued delivery of these additional jet aircraft into the United
Express and Delta Connection programs will expand the Company's business
into new markets and increase capacity in existing markets.
During the first quarter of 2000, ACJet was engaged in pre-
operating activities related to the start up of its Delta Connection
operations. An operating certificate was subsequently approved and
issued by the Federal Aviation Administration ("FAA"), and ACJet
commenced revenue service in the third quarter of 2000. The Company
plans to combine the operations of ACJet into the operations of ACA in
2001. Following the proposed combination, the Company would operate both
its United Express and its Delta Connection programs through ACA. The
combination is contingent on the Company receiving the required approvals
from the FAA and the Department of Transportation.
Under the Company's United Express agreement, United pays the
Company an agreed amount per departure, and under the Company's Delta
Connection agreement, Delta pays the Company an agreed amount per block
hour flown, both regardless of passenger revenue, and both with
additional incentive payments based on operational performance. Both
agreements provide that the rates will be adjusted from time to time.
During the first quarter 2001, the Company and United established rates
to be in effect for the Company's United Express flights throughout 2001.
For Delta Connection flights, the Company and Delta continue to evaluate
operating history for this new service being provided by the Company, and
rates presently being utilized for 2001 are consistent with those rates
that were agreed to and used in 2000 and may be subject to adjustment.
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 end of the second quarter of 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 is contingent upon and would 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.
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. 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. As
such, the Company expects that its results of operations will no longer
be directly affected by fuel price volatility.
Liquidity and Capital Resources
As of March 31, 2001, the Company had cash, cash equivalents
and short-term investments of $101.2 million and working capital of $90.7
million compared to $121.2 million and $729 million respectively as of
December 31, 2000. During the first three months of 2001, cash and cash
equivalents decreased by $14.2 million, reflecting net cash used in
operating activities of $11.4 million, net cash used in investing
activities of $3.5 million, and net cash provided by financing activities
of $.7 million. The net cash used in operating activities is primarily
the result of net income for the period of $9.6 million, non-cash
depreciation and amortization expenses of $3.4 million, and a $13 million
decrease in accounts receivable, offset by a $26.5 million increase in
prepaid expenses related to aircraft rent and a $20.9 million decrease in
accrued liabilities related to the payment of lease termination fees for
the retirement of J-32 aircraft. In order to minimize the costs related
to aircraft leveraged lease transactions, the Company has uneven
semiannual lease payment dates of January 1 and July 1. Approximately 44%
of the Company's annual aircraft lease payments are due in January and
29% in July. The decrease in accounts receivable is primarily the result
of the new UA agreement under which the Company receives payment in
advance instead of in arrears. The decrease in accrued liabilities is
primarily the result of paying the lessor the lease termination fee
relating to the J-32 turboprop early retirement. (See "Aircraft",
below.) The net cash used in investing activities consisted primarily of
purchases of property and equipment. Financing activities consisted
primarily of payments on long-term debt and capital lease obligations
offset by the exercise of stock options.
Other Financing
In February 1999, the Company entered into an asset-based
lending agreement with two financial institutions that provided 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. With the change in the United Express agreement 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 was limited to the value of certain rotable
spare parts, to a maximum of $8.0 million. On May 2, 2001 the asset-
based lending agreement was amended to add an additional $8.4 million to
the borrowing base, collateralized by the value of certain fixed assets.
The line of credit will expire on September 30, 2001, or upon termination
of the United Express 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 2000
or to date in 2001. As of May 2, 2001, the Company has pledged $15.6
million of this line of credit as collateral for letters of credit issued
on behalf of the Company by a financial institution. This effectively
commits most of the line of credit. The Company anticipates replacing
this existing line of credit on or before September 30, 2001 when the
current line expires.
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 May 1, 2001 the Company has
purchased 2,128,000 shares of its common stock at an average price of
$8.64 per share. None of these shares were purchased in 2001. The
Company has approximately $21.6 million remaining of the $40 million
authorization.
Aircraft
As of May 1, 2001, the Company had a total of 53 CRJs on order
from Bombardier, Inc., and held options for 80 additional CRJs. The
Company also had on order with Fairchild Aerospace Corporation 41
328JETs, and held options on an additional 83 328JETs. Of the 94 firm
aircraft deliveries, 22 are scheduled for the remainder of 2001, 30 are
scheduled for 2002, and 42 are scheduled for 2003. The Company is
obligated to purchase and finance (including the possible use of
leveraged leases) the 94 firm ordered aircraft at an approximate capital
cost of $1.6 billion. The Company anticipates leasing all of its year
2001 aircraft deliveries on terms similar to previously delivered CRJ
aircraft.
During 2000, the Company began retiring early the leased
19-seat J-32 aircraft from the fleet. As of May 1, 2001, 14 J-32s had
been removed from service. The remaining 14 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 and does not expect to incur any
additional charges against earnings for the early retirement of the J-32
fleet. 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.
Capital Equipment and Debt Service
Capital expenditures for the first three months of 2001 were
$13.9 million compared to $2.7 million for the same period in 2000.
Capital expenditures for 2001 consisted primarily of the purchase of $9.6
million in rotable spare parts for the regional jet aircraft, and $1.4
million for improvements to aircraft, which included $872,000 for the
addition of smoke detectors to the J-41 aircraft. Other capital
expenditures included facility leasehold improvements, ground equipment,
and computer and office equipment. For the remainder of 2001, the
Company anticipates spending approximately $13 million for rotable spare
parts related to the regional jet and J-41 aircraft, ground service
equipment, facilities, computers and software.
Debt service including capital leases for the three months
ended March 31, 2001 was $725,000 compared to $1.0 million in the same
period of 2000.
The Company believes that, in the absence of unusual
circumstances, its cash on hand, cash flow from operations, and other
available equipment financing, will be sufficient to meet its working
capital needs, capital expenditures, and debt service requirements for
the next twelve months.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not
designated as hedging instruments, and for the ineffective portion of a
hedging instrument, the change in fair value will affect current period
earnings.
The Company adopted Statement No. 133 effective January 1,
2001. The impact of adopting this statement has not had a material
impact on the Company's financial position or results of operations for
the first quarter of 2001.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk arises from changes in
interest rates. 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. 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 31, 2001, the Company had no open
hedge transactions.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED MARCH 31, 2001
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation and FAA civil
action proceedings, all of which are incidental to its business, and none
of which the Company believes are likely to have a material effect on the
Company's financial position or the results of its operations.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.45 Form of Aircraft Purchase Agreement between
Fairchild Dornier GmbH and Atlantic Coast Airlines
dated effective December 20, 2000 (supersedes
Exhibits 10.45 and 10.45(1) filed as an Exhibit to
the Annual Report on Form 10-K for the year ended
December 31, 2000. Confidential treatment is being
sought for portions of this exhibit).
10.70 (Note 1)Transaction Term Sheet between Atlantic Coast
Airlines Holdings, Inc. and UAL Corporation, dated
March 2, 2001 (incorporated by reference from Exhibit
99(a) filed as an Exhibit to the Report on Form 8-K
filed on March 2, 2001).
(b) Reports on Form 8-K
Forms 8-K were filed on January 23, 2001, February 5 and
14, 2001 and March 5 and 20, 2001, in each case to
announce that an officer of the Company would be making a
presentation to investors and analysts.
Form 8-K filed on March 2, 2001 to announce the Company's
agreement with UAL Corporation to acquire up to three
regional airlines and separately to state then-current
earnings expectations.
Notes:
(1) Filed as an Exhibit to the Current Report on Form 8-K filed on March
2, 2001.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
May 15, 2001 By: /S/ Thomas J. Moore
Thomas J. Moore
President and Chief
Operating Officer
May 15, 2001 By: /S/ David W. Asai
David W. Asai
Vice President, and Controller
(Principal Accounting Officer)