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, 2002
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 01, 2002, there were 45,115,491 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, March 31, 2002
(In thousands except for share and 2001 (Unaudited)
per share data)
Assets
Current:
Cash and cash equivalents $ 173,669 $ 5,362
Short term investments 7,300 164,035
Accounts receivable, net 8,933 8,233
Expendable parts and fuel inventory,net 10,565 11,459
Prepaid expenses and other current assets 19,365 61,594
Deferred tax asset 6,806 7,549
Total current assets 226,638 258,232
Property and equipment at cost, net of
accumulated depreciation and amortization 171,528 185,957
Intangible assets, net of accumulated
amortization 1,941 1,891
Debt issuance costs, net of accumulated
amortization 3,415 3,348
Aircraft deposits 44,810 36,510
Other assets 4,093 5,243
Total assets $ 452,425 $ 491,181
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 21,750 $ 20,815
Current portion of long-term debt 4,639 4,664
Current portion of capital lease
obligations 1,359 1,380
Accrued liabilities 55,570 64,737
Accrued aircraft early retirement charge 4,661 4,651
Total current liabilities 87,979 96,247
Long-term debt, less current portion 58,441 58,018
Capital lease obligations, less current
portion 2,202 1,848
Deferred tax liability 17,448 22,574
Deferred credits, net 45,063 49,745
Accrued aircraft early retirement charge,
less current portion 19,226 19,226
Other long-term liabilities 766 956
Total liabilities 231,125 248,614
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 130,000,000; shares
issued 49,229,202 and 50,084,280
respectively; shares outstanding
44,182,870 and 45,037,948 respectively 985 1,002
Additional paid-in capital 136,058 142,989
Less: Common stock in treasury, at cost,
5,046,332 shares (35,303) (35,303)
Retained earnings 119,560 133,879
Total stockholders' equity 221,300 242,567
Total liabilities and
stockholders' equity $ 452,425 $ 491,181
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) 2001 2002
Operating revenues:
Passenger $ 131,696 $ 170,691
Other 1,758 2,275
Total operating revenues 133,454 172,966
Operating expenses:
Salaries and related costs 36,991 45,752
Aircraft fuel 20,457 23,835
Aircraft maintenance and materials 11,157 13,871
Aircraft rentals 20,205 26,672
Traffic commissions and related fees 3,873 5,061
Facility rents and landing fees 7,424 10,625
Depreciation and amortization 3,400 4,599
Other 14,468 18,853
Total operating expenses 117,975 149,268
Operating income 15,479 23,698
Other income (expense):
Interest income 1,871 1,554
Interest expense (1,266) (1,131)
Other, net (43) (55)
Total other income 562 368
Income before income tax provision 16,041 24,066
Income tax provision 6,416 9,747
Net income $ 9,625 $ 14,319
Income per share:
Basic:
Net income $0.23 $0.32
Diluted:
Net income $0.22 $0.31
Weighted average shares outstanding:
-Basic 42,750 44,677
-Diluted 44,638 46,367
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) 2001 2002
Cash flows from operating activities:
Net income $ 9,625 $ 14,319
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,359 4,790
Loss on disposal of assets - 44
Amortization of deferred credits (703) (1,145)
Capitalized interest (net) (173) (500)
Other 144 1,367
Changes in operating assets and liabilities:
Accounts receivable 12,960 3,943
Expendable parts and fuel inventory (648) (939)
Prepaid expenses and other current assets (26,542) (42,268)
Accounts payable 11,422 258
Accrued liabilities (20,881) 14,428
Net cash used in operating activities (11,437) (5,703)
Cash flows from investing activities:
Purchases of property and equipment (13,884) (8,870)
Proceeds from sales of assets 112 28
Purchases of short term investments (3,125) (197,055)
Sales of short term investments 8,905 40,320
Refunds of aircraft deposits 8,000 1,400
Payments of aircraft deposits and other (3,500) (3,470)
Net cash used in investing activities (3,492) (167,647)
Cash flows from financing activities:
Payments of long-term debt (375) (398)
Payments of capital lease obligations (351) (333)
Deferred financing costs and other (696) (10)
Proceeds from exercise of stock options 2,155 5,784
Net cash provided by financing activities 733 5,043
Net decrease in cash and cash equivalents (14,196) (168,307)
Cash and cash equivalents, beginning of period 86,117 173,669
Cash and cash equivalents, end of period $ 71,921 $ 5,362
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 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. On July
1, 2001, ACAI combined the operations of its ACJet subsidiary into the
operations of ACA. All significant intercompany accounts and
transactions have been eliminated in consolidation. The information
furnished in these unaudited condensed consolidated financial statements
reflect 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, 2002. Certain amounts as previously reported
have been reclassified to conform to the current period 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, 2001.
2. OTHER COMMITMENTS
On September 28, 2001, the Company entered into an asset-based lending
agreement with a financial institution that provided the Company with a
line of credit for up to $25 million. The line of credit, which will
expire on October 15, 2003, replaced a previous $35 million line of
credit. The interest rate on this line is LIBOR plus .875% to 1.375%
depending on the Company's fixed charges coverage ratio. The Company has
pledged $16.2 million of this line of credit as collateral for letters of
credit issued on behalf of the Company by a financial institution. The
available borrowing under the line of credit is limited to the value of
the bond letter of credit on the Company's Dulles, Virginia hangar
facility plus the value of 60% of the book value of certain rotable spare
parts. As of March 31, 2002 the amount of available credit under the
line was $8.8 million net of the pledged amount. As of March 31, 2002
there were no outstanding borrowings on the $25 million line of credit.
As of March 31, 2002, the Company had firm orders for 36 Canadair
Regional Jets ("CRJs") in addition to the 60 previously delivered, and
options for 80 additional CRJs. The Company also had 32 Fairchild
Dornier 328JET regional jet aircraft ("328JET") on firm order in addition
to the 33 already delivered, and held options for an additional 81
aircraft. The future delivery schedule of the remaining 68 firm ordered
regional jet aircraft as of March 31, 2002 was as follows: 16 CRJs and
ten 328JETs are scheduled for delivery during the remainder of 2002; 20
CRJs and 22 328JETs in 2003. These delivery schedules have been affected
by the events described in the following paragraphs.
On April 2, 2002, Fairchild Dornier, GmbH ("Fairchild"), the manufacturer
of the 328JET, filed for the opening of insolvency under the German
Insolvency Code due to its inability to pay debts when due. The company
is presently being managed by a court appointed interim trustee in
insolvency, who under German law is in charge to maintain the business
and to ascertain whether a formal insolvency proceeding should be opened.
A court decision regarding the opening is expected by approximately the
end of June. Subsequent to its filing, Fairchild obtained interim
financing that it projects will allow it to continue its operations
through June 30, 2002. Fairchild has indicated that it is seeking a long-
term solution to its reorganization prior to that date, and that its
alternatives include an investment in or sale of the company; the sale of
its four individual business units to separate investors; or, the
liquidation of one or more of its business units. Its business units
are: (i) 328JET production; (ii) development of the 728/928 family of
aircraft; (iii) aircraft support and maintenance; and (iv) production of
aircraft components for Airbus. It reports that it is in negotiations
with strategic investors regarding these various alternatives. The
Company is unable to predict whether Fairchild will be successful in
finding a buyer for all of its operations or for the 328JET production
and the aircraft support divisions that are of interest to the Company.
The Company was scheduled to take delivery of ten additional 328JETs for
the remainder of 2002 and 22 328JETs in 2003. Fairchild has ceased all
aircraft deliveries to the Company under the present contractual
arrangements. The insolvency trustee (once appointed) has the right
under the German Insolvency Code to accept or reject its obligations to
the Company, and the Company has the right to request that Fairchild
indicate its intentions, after which Fairchild would have a reasonable
time to respond. If the agreements are accepted, Fairchild would have to
fulfill all obligations in full, and if they are rejected, the Company
would have an unsecured claim for any damages arising from the failure to
perform. Fairchild's interim insolvency trustee has informally advised
the Company that he anticipates that Fairchild will reject the
agreements, including its obligation to deliver the remaining 32
undelivered 328JET aircraft, and its obligation to purchase the Company's
owned J-41s and to reimburse the Company with respect to certain J-41
lease obligations, but that Fairchild remains interested in fulfilling
all or any part of the Company's aircraft order on new terms to be agreed
upon. The Company is presently engaged in negotiations with Fairchild on
terms by which it may acquire additional 328JETs, and is also negotiating
with other manufacturers of regional jet aircraft for orders of aircraft
in lieu of undelivered 328JETs.
At the time of its insolvency filing, Fairchild had significant current
and future obligations to the Company in connection with the order of
328JET aircraft. These include obligations: to deliver 32 firm ordered
328JETs and 81 additional option 328JETs with certain financing support;
to pay the Company any difference between the lease payments, if any,
received from remarketing the 26 J-41 aircraft leased by the Company and
the lease payment obligations of the Company on those aircraft; to
purchase five J-41 aircraft owned by the Company at their net book value
at the time of retirement; to assume certain crew training costs; and to
provide spares, warranty, engineering, and related support. As of May 1,
2002, Fairchild has missed the delivery of three 328JETs. The Company
believes it has secured rights to Fairchild's equity interest in the
delivered 328JETs that it may proceed against in the event that Fairchild
fails to fulfill certain of these obligations. The Company is obligated
to make payments to third parties for certain training and other matters,
estimated at $1.5 million, that were due to be paid by Fairchild at the
time of its insolvency filing. The Company intends to claim the right to
offset these and other obligations from Fairchild against amounts the
Company owes Fairchild to the extent permitted by law. The Company may
be required to take a charge for all or a portion of these third party
expenses to the extent that it does not prevail in its offset claim. The
Company believes its cost to operate the current 328JET fleet will
increase in the near term due to costs incurred for maintenance repairs
that otherwise would have been covered by manufacturer's warranty and the
costs and availability of spare parts until replacement suppliers can be
found.
Production of the CRJ was halted for approximately a three week period
during the second quarter of 2002 as a result of a strike against
Bombardier, Inc. by a union representing approximately 7,500 employees.
Production was resumed as of May 6, 2002, following a vote by the workers
to accept a new contract offer and to end the strike. The Company's CRJ
deliveries have been delayed as a result of the work stoppage, and the
Company is in discussions with Bombardier regarding a revised delivery
schedule. Initial indications are that four aircraft scheduled for
delivery in April and May will be delayed approximately three to four
weeks past their original delivery dates and that subsequently scheduled
deliveries may be similarly delayed. The Company is scheduled to take
delivery of 16 CRJs for the remainder of 2002 and 20 CRJs in 2003.
3. ADOPTION OF FASB STATEMENTS 142 and 144
On July 5, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 141, "Business
Combinations", and Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 addresses the
accounting for acquisitions of businesses and is effective for
acquisitions occurring on or after July 1, 2001. Statement No. 142
includes requirements to test goodwill and indefinite life intangible
assets for impairment rather than amortize them. Statement No. 142 is
effective for fiscal years beginning after December 15, 2001. The
Company adopted Statement No. 142 beginning January 1, 2002. 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
2002. In the three months ended March 31, 2001, the Company amortized
approximately $44,000 in goodwill and certain other intangible assets.
The Company's goodwill and indefinite life intangible balance as of
January 1, 2002 was $1.7 million, which is no longer subject to
amortization.
On October 3, 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets", which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. Statement No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". Statement No. 144
includes requirements related to the classification of assets as held for
sale, including the establishment of six criteria that must be satisfied
prior to this classification. Statement No. 144 also includes guidance
related to the recognition and calculation of impairment losses for long-
lived assets. Statement No. 144 is effective for fiscal years beginning
after December 15, 2001. The Company adopted Statement No. 144 on
January 1, 2002. 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 2002.
4. INCOME TAXES
The Company's effective tax rate for federal and state income taxes was
40.5% and 40.0% for the three months ended March 31, 2002 and 2001,
respectively.
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. 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) 2001 2002
Income (basic and diluted) $ 9,625 $ 14,319
Weighted average shares outstanding (basic) 42,750 44,677
Incremental shares related to stock options 1,888 1,690
Weighted average shares outstanding (diluted) 44,638 46,367
6. SUPPLEMENTAL CASH FLOW INFORMATION
Quarter Ended March 31,
(in thousands)
Cash paid during the period for : 2001 2002
Interest $ 489 $ 895
Income taxes 210 471
7. AIRCRAFT EARLY RETIREMENT CHARGE
During the fourth quarter of 2001, the Company recorded an aircraft early
retirement charge of $23.5 million ($14.0 million after tax) for the
early retirement of nine leased British Aerospace Jetstream-41 turboprop
aircraft ("J-41s"), which the Company plans to remove from service prior
to year-end 2002. The Company anticipates taking additional charges
during 2002 of approximately $48 million pre-tax ($28.4 million after-
tax) for the retirement of its remaining J-41 turboprop aircraft. The
Company's contractual commitments with Fairchild Dornier GmbH ("Fairchild
Dornier"), the manufacturer of the 328JETs, call for Fairchild Dornier to
pay the Company any difference between the lease payments, if any,
received from remarketing the 26 J-41 turboprop aircraft leased by the
Company and the lease payment obligations of the Company on those
aircraft, and to purchase the five J-41 aircraft owned by the Company at
their net book value at the time of retirement. While Fairchild
Dornier's ability to fulfill this commitment is doubtful as a result of
its filing for insolvency in April 2002, the Company has not changed its
plan to retire its turboprop fleet from the United Express operation. If
the Company subsequently concludes that it is not able to complete its
fleet restructuring plan with regard to the first nine aircraft by the
end of 2002, it may be required to reverse the aircraft early retirement
charge previously recorded. The timing of the additional charges for the
remaining turboprop aircraft will also depend on the Company's ability to
complete its fleet restructuring plan by the end of 2003.
8. AIR TRANSPORTATION SAFETY AND SYSTEM STABILIZATION ACT
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act ("the Stabilization
Act"). The Stabilization Act provides cash grants to commercial air
carriers as compensation for (1) direct losses incurred beginning with
the terrorist attacks on September 11, 2001 as a result of any FAA
mandated ground stop order issued by the Secretary of Transportation (and
for any subsequent order which continues or renews such a stoppage), and
(2) incremental losses incurred during the period beginning September 11,
2001 and ending December 31, 2001 as a direct result of such attacks.
The Company is entitled to receive cash grants under these provisions.
The exact amount of the Company's compensation will be based on the
lesser of actual losses incurred or a statutory limit based on the total
amount allocable to all airlines. The Company is in the process of
submitting its final claim for compensation due under the Act. The
Company received $9.7 million in government compensation under these
provisions, which was recognized as non-operating income under
"government compensation" for the third and fourth quarters 2001, and
which represented the government's estimate of approximately 85% of the
Company's allocation based on preliminary data. The Company will
recognize any remaining compensation as non-operating income during the
period it is determined the Company is entitled to such amounts. All
amounts received as government compensation are subject to audit and
adjustment by the federal government.
In addition to the compensation described above, the Stabilization Act,
among other things, provides U.S. air carriers with the option to
purchase certain war risk liability insurance from the United States
government on an interim basis at rates that are more favorable than
those available from the private market; authorizes the federal
government to reimburse air carriers for the increased cost of war risk
insurance premiums for a limited but undetermined period of time as a
result of the terrorist attacks of September 11, 2001; and authorizes the
federal government, pursuant to new regulations, to provide loan
guarantees to air carriers in the aggregate amount of $10 billion.
Since September 11, the Company has purchased hull war risk coverage
through the private insurance market through September 24, 2002, and has
purchased liability war risk coverage from the United States government
through May 19, 2002 and anticipates renewing the government insurance
for as long as the coverage is available. The government subsequently
authorized air carriers to apply for reimbursement under the
Stabilization Act for increased insurance costs incurred during the
period October 1, 2001 to October 30, 2001, and the Company applied for,
received, and recorded as a reduction in insurance expense, $652,000 in
such reimbursements during the fourth quarter of 2001. The airline and
insurance industries, together with the United States and other
governments, are continuing to evaluate both the cost and options for
providing coverage of aviation insurance. Recently, an industry-led
group announced a proposal to create a mutual insurance company, to be
called Equitime, to cover war risk and terrorism risk, which would
initially seek support through government guarantees. Equitime would
provide a competitive alternative to insurance being offered by the
traditional insurance market, which opposes this initiative. Equitime's
organizers project that it may be available to provide insurance as early
as July 2002 to up to 70 U.S. carriers. The Company has not been
actively involved in the formation of Equitime and is unable to
anticipate whether this source of insurance will be made available and,
if so, whether it will offer competitive rates. The Company anticipates
that it will follow industry practices with respect to sources of
insurance. With respect to federal loan guarantees, the Company is
evaluating the terms and conditions imposed by the government and has not
yet determined whether to make application for any such facility.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Quarter Operating Statistics
Increase
Three months ended March 31, 2001 2002 (Decrease)
Revenue passengers carried 937,698 1,450,201 54.7%
Revenue passenger miles ("RPMs")(000's) 339,632 601,637 77.1%
Available seat miles ("ASMs") (000's) 689,540 1,057,332 53.3%
Passenger load factor 49.3% 56.9% 7.6 pts
Revenue per ASM (cents) 19.1 16.1 (15.7)%
Yield (cents) 38.8 28.4 (26.8)%
Cost per ASM (cents) 17.1 14.1 (17.5)%
Average passenger segment (miles) 362 415 14.6%
Revenue departures (completed) 53,145 66,403 24.9%
Revenue block hours 73,816 98,708 33.7%
Aircraft utilization (block hours per day) 8.7 9.7 11.5%
Average cost per gallon of fuel (cents) 108.5 83.9 (22.7)%
Aircraft in service (end of period) 112 124 10.7%
Operating margin 11.6% 13.7% 2.1 pts
Revenue per departure $2,487 $2,571 3.4%
Comparison of three months ended March 31, 2002, to three months ended
March 31, 2001.
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 costs and
other effects of enhanced security measures and other possible government
orders; changes in and satisfaction of regulatory requirements including
requirements relating to fleet expansion; changes in levels of service
agreed to by the Company with its code share partners due to market
conditions; the ability of these partners to manage their operations and
cash flow; the ability and willingness of these partners to continue to
deploy the Company's aircraft and to utilize and pay for scheduled
service at agreed rates; the ability of these partners to force changes
in rates; willingness of the federal government to continue to provide
war risk insurance at favorable rates; increased cost and reduced
availability of insurance generally; changes in existing service; final
calculation and auditing of government compensation; unexpected costs or
delays in the implementation of new service; adverse weather conditions;
satisfactory resolution of union contracts becoming amendable during 2002
with the Company's aviation maintenance technicians and ground service
equipment mechanics, and the Company's flight attendants; ability to hire
and retain employees; availability and cost of funds for financing new
aircraft; the ability of Fairchild Dornier to successfully restructure
its business under German insolvency law and to fulfill its contractual
obligations to the Company; ability of the Company to obtain aircraft
from Fairchild Dornier or from alternative vendors in a time frame
consistent with its targeted 328JET delivery schedule; further delays in
delivery of CRJ aircraft from Bombardier, Inc. due to the recently
resolved work stoppage at Bombardier, or for other reasons; airport and
airspace congestion; ability to successfully retire turboprop aircraft;
flight reallocations and potential service disruptions due to labor
actions by employees of Delta Air Lines or United Airlines; general
economic and industry conditions; additional acts of war or terrorism;
and, the factors discussed below and in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001. The Company does not
intend to update these forward-looking statements prior to its next
required filing with the Securities and Exchange Commission.
General
Net income in the first quarter was $14.3 million, or $.31 per
share on a diluted basis compared to $9.6 million or $.22 per share on a
diluted basis for the same period last year. The principal reason for
the increase in net income was the 24.9% increase in revenue departures.
Total operating revenues increased 29.6% to $173.0 million for the three
months ended March 31, 2002 from $133.5 million for the three months
ended March 31, 2001.
Operating Revenues
Passenger revenues increased 29.6% to $170.7 million for the
three months ended March 31, 2002 from $131.7 million for the three
months ended March 31, 2001. The increase was primarily due to a 24.9%
increase in revenue departures which together with the impact of a 14.9%
increase in the average passenger segment and a 11.5% increase in
aircraft utilization resulted in a 53.3% increase in available seat
miles ("ASMs") to 1.1 billion in the first quarter of 2002 from 700
million in the first quarter of 2001. Revenue per departure increased to
$2,571 in the first quarter of 2002 from $2,487 in the first quarter of
2001.
The increase in capacity as measured in ASMs is the result of
service expansion utilizing 18 additional 50-seat Canadair Regional Jet
("CRJs"), and the addition of 13 32 seat Fairchild Dornier 328JET
("328JET") aircraft, partially offset by the removal from service of 17
British Aerospace J-32 Turboprop ("J-32") aircraft and one British
Aerospace J-41 Turboprop ("J-41") aircraft. The Company was operating 60
CRJs, 33 328JETs and 31 J-41s as of March 31, 2002 as compared to 42
CRJs, 20 328JETs, 32 J-41s and 17 J-32s as of March 31, 2001.
Operating Expenses
A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the three months ended March 31, 2001, and
2002 is as follows:
Three Months ended March 31,
2001 2002
Percent of Cost Percent of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 27.7% 5.3 26.5% 4.3
Aircraft fuel 15.3% 3.0 13.8% 2.3
Aircraft maintenance and materials 8.4% 1.6 8.0% 1.3
Aircraft rentals 15.1% 2.9 15.4% 2.5
Traffic commissions and related fees 2.9% 0.6 2.9% 0.5
Facility rents and landing fees 5.6% 1.1 6.1% 1.0
Depreciation and amortization 2.6% 0.5 2.7% 0.4
Other 10.8% 2.1 10.9% 1.8
Total 88.4% 17.1 86.3% 14.1
Total operating expenses increased 26.5% to $149.3 million for
the quarter ended March 31, 2002 compared to $118.0 million for the
quarter ended March 31, 2001 primarily due to the 24.9% increase in
departures. This increase in departures, along with the fleet changeover
to higher seat capacity regional jets led to a 53.3% increase in ASMs to
1.1 billion in the first quarter of 2002 from 700 million in the first
quarter of 2001. As a result, cost per ASM decreased 17.5% on a year-
over-year basis to 14.1 cents during the first quarter of 2002. Costs
per ASM changes that are not primarily attributable to the changes in
capacity are as follows:
Salaries and related costs per ASM decreased 18.9% to 4.3 cents
in the first quarter of 2002 compared to 5.3 cents in the first quarter
of 2001. The Company suspended its employee bonus plans during the first
quarter of 2002 due to the events of September 11. The Company has
reinstated its bonus plans effective with the second quarter 2002. For
the three months ended March 31, 2001, the Company incurred $2.2 million
in expenses related to its bonus plans.
The cost per ASM of aircraft fuel decreased to 2.3 cents in the
first quarter of 2002 compared to 3.0 cents in the first quarter of 2001.
The higher fuel consumption per hour of regional jet aircraft versus
turboprop aircraft resulted in a 12.9% increase in the system average
burn rate (gallons used per block hour flown) which was more than offset
by the 22.7% decrease in the average cost per gallon of fuel from $1.09
in the first quarter of 2001 to $.84 in the first quarter of 2002.
Although the cost per ASM of facility rents and landing fees
decreased from 1.1 cents for the first quarter of 2001 to 1.0 cent for
the first quarter of 2002, in absolute dollars, facility rents and
landing fees increased 43.1% from $7.4 million in the first quarter of
2001 to $10.6 million in the first quarter of 2002. This increase is a
result of a 24.9% increase in number of departures, the heavier landing
weight of the regional jets, and higher landing fees imposed by airports
to recover costs due to the events of September 11.
The cost per ASM of other operating expenses decreased to 1.8
cents in the first quarter of 2002 from 2.1 cents in the first quarter of
2001. In absolute dollars, other operating expenses increased 30.3% from
$14.5 million in the first quarter of 2001 to $18.9 million in the first
quarter of 2002. The increased costs result primarily from additional
passenger screening, insurance and security costs associated with the
events of September 11, and increases in the costs associated with ground
handling.
The Company's statutory tax rate for federal and state income
taxes was 40.5% in the first quarter of 2002. This compares with a
statutory tax rate for federal and state income taxes of 40.0% for the
first quarter of 2001.
Outlook and Business Risks
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.
The events of September 11, together with the slowing economy
that started in 2001, had a significant effect on the U.S. airline
industry that continues into 2002. These events continue to cause
changes in government regulation, declines and shifts in passenger
demand, increased insurance costs and tightened credit markets which
affect the operations and financial condition of participants in the
industry including the Company, its code share partners, and aircraft
manufacturers. Although these events have generally increased the
importance of regional jets to the industry, these circumstances continue
to raise substantial risks and uncertainties, including those discussed
below, which may impact the Company, its code share partners, and
aircraft manufacturers, in ways that the Company is not currently able to
predict.
On April 2, 2002, Fairchild Dornier, GmbH ("Fairchild"), the
manufacturer of the 328JET, filed for the opening of insolvency under the
German Insolvency Code due to its inability to pay debts when due. The
company is presently being managed by a court appointed interim trustee
in insolvency, who under German law is in charge to maintain the business
and to ascertain whether a formal insolvency proceeding should be opened.
A court decision regarding the opening is expected by approximately the
end of June. Subsequent to its filing, Fairchild obtained interim
financing that it projects will allow it to continue its operations
through June 30, 2002. Fairchild has indicated that it is seeking a long-
term solution to its reorganization prior to that date, and that its
alternatives include an investment in or sale of the company; the sale of
its four individual business units to separate investors; or, the
liquidation of one or more of its business units. Its business units
are: (i) 328JET production; (ii) development of the 728/928 family of
aircraft; (iii) aircraft support and maintenance; and (iv) production of
aircraft components for Airbus. It reports that it is in negotiations
with strategic investors regarding these various alternatives. The
Company is unable to predict whether Fairchild will be successful in
finding a buyer for all of its operations or for the 328JET production
and the aircraft support divisions that are of interest to the Company.
The Company was scheduled to take delivery of ten additional 328JETs for
the remainder of 2002 and 22 328JETs in 2003. Fairchild has ceased all
aircraft deliveries to the Company under the present contractual
arrangements. The insolvency trustee (once appointed) has the right
under the German Insolvency Code to accept or reject its obligations to
the Company, and the Company has the right to request that Fairchild
indicate its intentions, after which Fairchild would have a reasonable
time to respond. If the agreements are accepted, Fairchild would have to
fulfill all obligations in full, and if they are rejected, the Company
would have an unsecured claim for any damages arising from the failure to
perform. Fairchild's interim insolvency trustee has informally advised
the Company that he anticipates that Fairchild will reject the
agreements, including its obligation to deliver the remaining 32
undelivered 328JET aircraft, and its obligation to purchase the Company's
owned J-41s and to reimburse the Company with respect to certain J-41
lease obligations, but that Fairchild remains interested in fulfilling
all or any part of the Company's aircraft order on new terms to be
agreed. The Company is presently engaged in negotiations with Fairchild
on terms by which it may acquire additional 328JETs, and is also
negotiating with other manufacturers of regional jet aircraft for orders
of aircraft in lieu of undelivered 328JETs.
At the time of its insolvency filing, Fairchild had significant
current and future obligations to the Company in connection with the
order of 328JET aircraft. These include obligations: to deliver 32 firm
ordered 328JETs and 81 additional option 328JETs with certain financing
support; to pay the Company any difference between the lease payments, if
any, received from remarketing the 26 J-41 aircraft leased by the Company
and the lease payment obligations of the Company on those aircraft; to
purchase five J-41 aircraft owned by the Company at their net book value
at the time of retirement; to assume certain crew training costs; and to
provide spares, warranty, engineering, and related support. As of May 1,
2002, Fairchild has missed the delivery of three 328JETs. The Company
believes it has secured rights to Fairchild's equity interest in the
delivered 328JETs that it may proceed against in the event that Fairchild
fails to fulfill certain of these obligations. The Company is obligated
to make payments to third parties for certain training and other matters,
estimated at $1.5 million, that were due to be paid by Fairchild at the
time of its insolvency filing. The Company intends to claim the right to
offset these and other obligations from Fairchild against amounts the
Company owes Fairchild, to the extent permitted by law. The Company may
be required to take a charge for all or a portion of these third party
expenses to the extent that it does not prevail in its offset claim. The
Company believes its cost to operate the current 328JET fleet will
increase in the near term due to costs incurred for maintenance repairs
that otherwise would have been covered by manufacturer's warranty and the
costs and availability of spare parts until replacement suppliers can be
found.
Production of the CRJ was halted for approximately a three week
period during the second quarter of 2002 as a result of a strike against
Bombardier, Inc. by a union representing approximately 7,500 employees.
Production was resumed as of May 6, 2002, following a vote by the workers
to accept a new contract offer and to end the strike. The Company's CRJ
deliveries have been delayed as a result of the work stoppage, and the
Company is in discussions with Bombardier regarding a revised delivery
schedule. Initial indications are that four aircraft scheduled for
delivery in April and May will be delayed approximately three to four
weeks past their original delivery dates and that subsequently scheduled
deliveries may be similarly delayed. The Company is scheduled to take
delivery of 16 CRJs for the remainder of 2002 and 20 CRJs in 2003.
The Company provides service for its Delta Connection
operations exclusively with regional jets and is continuing its
transformation of its existing United Express operation to an all
regional jet fleet. During the first quarter of 2002, the Company
initiated operations of its Private Shuttle charter operation with two
regional jet aircraft. In addition to the 60 CRJs and 33 328JETs in
service as of March 31, 2002, the Company had firm orders for an
additional 36 CRJs and options for 80 CRJs from Bombardier Inc., and firm
orders for an additional 32 328JETs and options for 81 328JETs from
Fairchild Dornier, with the order of 328JETs now in doubt as a result of
the Fairchild insolvency. The Company also has long-term marketing
agreements with United to fly 66 of its 68 firm ordered jet aircraft in
United Express service. Under these agreements, the Company is dependent
on United and Delta for substantially all of its revenue and for
providing certain services necessary to schedule and operate its
aircraft, and is dependent on Bombardier and Fairchild for delivering
aircraft to support the Company's expected future growth and for other
support described in this report on Form 10-Q and in the Company's 2001
annual report on Form 10-K. Continued business or operational
difficulties, liquidity problems or bankruptcy of any of these entities
could materially impact the Company's operations and financial condition.
The Company's Delta Connection service commenced revenue
service with 328JETs during the third quarter of 2000. Approximately
$7.8 million in start-up expenses from inception through commencement of
revenue service were incurred, which were expensed as incurred. Delta is
reimbursing the Company for $5.2 million of these costs, and the amounts
are being recorded as revenue through July 2003. As of March 31, 2002
the Company has recorded $2.5 million of this revenue including $0.5
million in the first quarter of 2002 and 2001. The Company and Delta
continue to negotiate the fee-per-block-hour rates to be used in 2002.
Until 2002 rates are agreed, the Company will use the cost plus
methodology agreed upon for 2001 to record revenue in the first quarter
of 2002.
During the fourth quarter of 2001, the Company recorded an
aircraft early retirement charge of $23.5 million ($14.0 million after
tax) for the early retirement of nine leased British Aerospace Jetstream-
41 turboprop aircraft ("J-41s"), which the Company plans to remove from
service prior to year-end 2002. The Company anticipates taking
additional charges during 2002 of approximately $48 million pre-tax
($28.4 million after-tax) for the retirement of its remaining J-41
turboprop aircraft. The Company's contractual commitments with Fairchild
Dornier GMBH ("Fairchild Dornier"), the manufacturer of the 328JETs, call
for Fairchild Dornier to pay the Company for any difference between the
lease payments, if any, received from remarketing the 26 J-41 turboprop
aircraft leased by the Company and the lease payment obligations of the
Company on those aircraft, and to purchase the five J-41 aircraft owned
by the Company at their net book value at the time of retirement. While
Fairchild Dornier's ability to fulfill this commitment is doubtful as a
result of its filing for insolvency in April 2002, the Company has not
changed its plan to retire its turboprop fleet from the United Express
operation. If the Company subsequently concludes that it is not able to
complete its fleet restructuring plan with regard to the first nine
aircraft by the end of 2002, it may be required to reverse the aircraft
early retirement charge previously recorded. The timing of the
additional charges for the remaining turboprop aircraft will also depend
on the Company's ability to complete its fleet restructuring plan by the
end of 2003.
Liquidity and Capital Resources
As of March 31, 2002, the Company had cash, cash equivalents
and short-term investments of $169.4 million and working capital of $162
million compared to $181.0 million and $138.7 million respectively as of
December 31, 2001. During the first three months of 2002, cash and cash
equivalents decreased by $168.3 million, reflecting net cash used in
operating activities of $5.7 million, net cash used in investing
activities of $167.6 million and net cash provided by financing
activities of $5.0 million. The net cash used in operating activities is
primarily the result of $42.3 million increase in prepaid expenses
resulting from the Company's scheduled, semi-annual aircraft lease
payments; partially offset by net income for the period of $14.3 million,
non-cash depreciation and amortization expenses of $4.8 million, and an
increase of $14.4 million in accrued liabilities resulting from increases
in payroll and corporate income tax liability. The net cash used in
investing activities consisted primarily of purchases of short-term
investments. Financing activities consisted primarily of payments on
long-term debt and capital lease obligations offset by the proceeds from
the exercise of stock options.
Other Financing
On September 28, 2001, the Company entered into an asset-based
lending agreement with a financial institution that provided the Company
with a line of credit for up to $25 million. The new line of credit,
which will expire on October 15, 2003, replaced a previous $35 million
line of credit. The interest rate on this line is LIBOR plus .875% to
1.375% depending on the Company's fixed charges coverage ratio. The
Company has pledged $16.2 million of this line of credit as collateral
for letters of credit issued on behalf of the Company by a financial
institution. The available borrowing under the line of credit is limited
to the value of the bond letter of credit on the Company's Dulles,
Virginia hangar facility plus the value of 60% of the book value of
certain rotable spare parts. As of March 31, 2002 the amount of
available credit under the line was $8.8 million net of the pledged
amount. As of March 31, 2002 there were no outstanding borrowings on the
$25 million line of credit.
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, 2002 the Company has
purchased 2,141,737 shares of its common stock. The Company has
approximately $21.3 million remaining of the $40 million authorization.
The Company's contract with the Association of Flight
Attendants ("AFA"), which was ratified in October 1998, becomes amendable
in October 2002. The Company's contract with Aircraft Mechanics
Fraternal Association ("AMFA"), which was ratified in June 1998, becomes
amendable in June 2002. The Company expects to begin discussions with
both unions in the near term.
Aircraft
As of May 1, 2002, the Company had firm orders for 36 Canadair
Regional Jets ("CRJs") in addition to the 60 previously delivered, and
options for 80 additional CRJs. The Company also had 32 Fairchild
Dornier 328JET regional jet aircraft ("328JET") on firm order in addition
to the 33 already delivered, and held options for an additional 81
aircraft, which order is now subject to cancellation as described above.
The Company is obligated to purchase and finance (including the possible
use of leveraged leases) the 68 firm ordered aircraft at an approximate
capital cost of $1.1 billion. The Company anticipates leasing all of its
remaining year 2002 CRJ aircraft deliveries on terms similar to
previously delivered CRJ aircraft. With respect to 328JETs, the Company
anticipates that if it agrees to acquire additional aircraft on new
terms, financing terms will be established as part of the acquisition
package with German institutional investors with an interest in the
success of the Fairchild reorganization.
Capital Equipment and Debt Service
Capital expenditures for the first three months of 2002 were
$8.8 million, compared to $13.9 million for the same period in 2001.
Capital expenditures for 2002 consisted primarily of the purchase of $6.8
million in rotable spare parts for the regional jet aircraft and $0.8
million for improvements to aircraft. These improvements include
$425,000 for enhanced ground proximity warning systems. Other capital
expenditures included facility leasehold improvements, ground equipment,
and computer and office equipment. In addition, the Company purchased
one 328JET for use in its charter operations through the application of
certain deposits previously placed with Fairchild.
For the remainder of 2002, the Company anticipates spending
approximately $24.3 million for rotable spare parts related to the
regional jets, ground service equipment, facilities, computers and
software.
Debt service including capital leases for the three months
ended March 31, 2002 was $730,000 compared to $726,000 in the same period
of 2001.
The Company believes that, in the absence of further terrorist
attacks or other unusual circumstances, its cash and short term
investments together with cash flow from operations and other available
financing, will be sufficient to meet its working capital needs, capital
expenditures, and debt service requirements for the next twelve months.
Recent Accounting Pronouncements
On July 5, 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 141, "Business
Combinations", and Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 addresses the
accounting for acquisitions of businesses and is effective for
acquisitions occurring on or after July 1, 2001. Statement No. 142
includes requirements to test goodwill and indefinite life intangible
assets for impairment rather than amortize them. Statement No. 142 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted Statement No. 142 beginning in the first quarter of 2002. 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 2002.
On October 3, 2001, the Financial Accounting Standards Board
issued FASB Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. Statement No. 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". Statement No. 144
includes requirements related to the classification of assets as held for
sale, including the establishment of six criteria that must be satisfied
prior to this classification. Statement No. 144 also includes guidance
related to the recognition and calculation of impairment losses for long
lived assets. Statement No. 144 is effective for fiscal years beginning
after December 15, 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 2002
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
regional jet aircraft. As of March 31, 2002, the Company had no open
hedge transactions.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED MARCH 31, 2002
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation and FAA civil
action proceedings incidental to its business, none of which the Company
believes are likely to have a material effect on the Company's financial
position. The Company is also subject to DOT and U.S. Customs Service
administrative proceedings relating to its post-September 11 operations,
the maximum fines for which are substantial. While the Company is
commencing its review of these matters, based on preliminary information,
the Company believes that these actions may result in fines or penalties
but does not believe the proceedings are likely to have a material effect
on the Company's operations or financial position.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
3.1 Restated Certificate of Incorporation of the
Company (incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the three-month period
ended June 30, 2001).
3.2 Restated
By-laws of the Company (incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the three
month period ended June 30, 1998).
(b) Reports on Form 8-K
Form 8-K filed on January 30, 2002 to announce that
officers of the Company would be making a presentation to
investors and analysts
Form 8-K filed on February 11, 2002 to announce that an
officer of the Company would be making a presentation to
investors and analysts
Form 8-K filed on February 11, 2002 to announce that an
officer of the Company would be making a presentation to
investors and analysts
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 14, 2002 By: /S/ Richard J. Surratt
Richard J. Surratt
Executive Vice President, Treasurer,
and Chief Financial Officer
Exhibit Index
Exhibit
Number Description of Exhibit
3.1 Restated Certificate of Incorporation of the
Company (incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the three-month period
ended June 30, 2001).
3.2 Restated By-laws of the Company (incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the three month period ended June 30, 1998).