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 September 30, 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 November 1, 2002, there were 45,194,115 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, September 30,
(In thousands except for share 2001 2002
and per share data) (Unaudited)
Assets
Current:
Cash and cash equivalents $ 173,669 $ 12,156
Short term investments 7,300 186,455
Accounts receivable, net 8,933 10,804
Expendable parts and fuel inventory,net 10,565 14,770
Prepaid expenses and other current assets 19,365 54,337
Deferred tax asset 6,806 10,352
Total current assets 226,638 288,874
Property and equipment at cost, net of
accumulated depreciation and amortization 171,528 195,452
Intangible assets, net of accumulated
amortization 1,941 1,852
Debt issuance costs, net of accumulated
amortization 3,415 3,193
Aircraft deposits 44,810 45,210
Other assets 4,093 4,586
Total assets $ 452,425 $ 539,167
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 21,750 $ 20,767
Current portion of long-term debt 4,639 4,805
Current portion of capital lease
obligations 1,359 1,424
Accrued liabilities 55,570 77,360
Accrued aircraft early retirement charge 4,661 5,123
Total current liabilities 87,979 109,479
Long-term debt, less current portion 58,441 55,017
Capital lease obligations, less current
portion 2,202 1,122
Deferred tax liability 17,448 25,846
Deferred credits, net 45,063 55,194
Accrued aircraft early retirement charge,
less current portion 19,226 21,551
Other long-term liabilities 766 1,334
Total liabilities 231,125 269,543
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 130,000,000; shares
issued 49,229,202 and 50,254,184
respectively; shares outstanding
44,182,870 and 45,194,115 respectively 985 1,005
Additional paid-in capital 136,058 144,389
Less: Common stock in treasury, at cost,
5,046,332 and 5,060,069 shares
respectively (35,303) (35,586)
Retained earnings 119,560 159,816
Total stockholders' equity 221,300 269,624
Total liabilities and
stockholders' equity $ 452,425 $ 539,167
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30,
(In thousands, except for per share data) 2001 2002
Operating revenues:
Passenger $ 146,766 $ 192,220
Other 885 2,813
Total operating revenues 147,651 195,033
Operating expenses:
Salaries and related costs 40,376 51,389
Aircraft fuel 23,469 31,156
Aircraft maintenance and materials 12,365 19,655
Aircraft rentals 23,730 28,293
Traffic commissions and related fees 4,141 5,517
Facility rents and landing fees 8,416 11,197
Depreciation and amortization 4,082 5,534
Other 15,177 21,673
Aircraft early retirement charge - 7,568
Total operating expenses 131,756 181,982
Operating income 15,895 13,051
Other income (expense):
Interest income 1,665 1,436
Interest expense (1,163) (1,061)
Government compensation 4,633 -
Other, net 401 19
Total other income 5,536 394
Income before income tax provision 21,431 13,445
Income tax provision 8,680 4,945
Net income $ 12,751 $ 8,500
Income per share:
Basic:
Net income $ 0.29 $ 0.19
Diluted:
Net income $ 0.28 $ 0.19
Weighted average shares outstanding:
-Basic 43,775 45,194
-Diluted 45,426 45,484
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Nine months ended September 30,
(In thousands, except for per share data) 2001 2002
Operating revenues:
Passenger $ 423,635 $ 548,522
Other 3,691 7,670
Total operating revenues 427,326 556,192
Operating expenses:
Salaries and related costs 117,170 146,253
Aircraft fuel 66,092 82,809
Aircraft maintenance and materials 35,739 53,616
Aircraft rentals 65,675 82,356
Traffic commissions and related fees 12,038 15,786
Facility rents and landing fees 23,286 32,696
Depreciation and amortization 11,257 15,067
Other 43,826 59,423
Aircraft early retirement charge - 2,804
Total operating expenses 375,083 490,810
Operating income 52,243 65,382
Other income (expense):
Interest income 5,691 3,154
Interest expense (3,650) (3,284)
Government compensation 4,633 944
Other, net 318 620
Total other income 6,992 1,434
Income before income tax provision 59,235 66,816
Income tax provision 23,910 26,560
Net income $ 35,325 $ 40,256
Income per share:
Basic:
Net income $ 0.82 $ 0.89
Diluted:
Net income $ 0.78 $ 0.87
Weighted average shares outstanding:
-Basic 43,235 44,997
-Diluted 45,030 46,136
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
(In thousands) 2001 2002
Cash flows from operating activities: $ 35,325 $ 40,256
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 11,425 15,641
Loss on disposal of assets 147 360
Amortization of deferred credits (2,649) (3,616)
Capitalized interest (net) (1,303) (419)
Other 1,995 2,127
Changes in operating assets and liabilities:
Accounts receivable 16,732 5,419
Expendable parts and fuel inventory (4,873) (4,552)
Prepaid expenses and other current assets (8,565) (35,090)
Accounts payable 8,487 4,692
Accrued liabilities (1,381) 29,049
Net cash provided by operating activities 55,340 53,867
Cash flows from investing activities:
Purchases of property and equipment (27,874) (28,025)
Proceeds from sales of assets - 28
Purchases of short term investments (69,715) (488,975)
Sales of short term investments 64,160 309,820
Refunds of aircraft deposits 13,600 3,400
Payments of aircraft deposits and other (6,000) (14,170)
Net cash used in investing activities (25,829) (217,922)
Cash flows from financing activities:
Payments of long-term debt (2,914) (3,258)
Payments of capital lease obligations (1,634) (1,015)
Deferred financing costs and other (49) 57
Purchase of treasury stock - (283)
Proceeds from exercise of stock options 7,679 7,041
Net cash provided by financing activities 3,082 2,542
Net increase (decrease) in cash and cash equivalents 32,593 (161,513)
Cash and cash equivalents, beginning of period 86,117 173,669
Cash and cash equivalents, end of period $118,710 $ 12,156
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"), (collectively, 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 and on July 9, 2002 converted Atlantic Coast Jet,
Inc. into a limited liability corporation named Atlantic Coast Jet, LLC.
Neither Atlantic Coast Jet, LLC., nor its predecessor, ACJet, have had
any activity since June 30, 2001. All significant intercompany accounts
and transactions have been eliminated in consolidation. The information
furnished in these unaudited condensed consolidated financial statements
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 nine 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 $25.0 million. The line of credit, which will
expire on October 15, 2003, carries an interest rate of LIBOR plus .875%
to 1.375% depending on the Company's fixed charges coverage ratio. The
Company has pledged $15.7 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 September 30, 2002 the value of the
collateral supporting the line was sufficient for the amount of available
credit under the line to be $25.0 million. There have been no borrowings
on the line of credit. The amount available for borrowing at September
30, 2002 was $9.3 million, after deducting $15.7 million which has been
pledged as collateral for letters of credit.
In July 2002, Fairchild Dornier GmbH ("Fairchild"), the manufacturer of
the 32-seat Fairchild Dornier 328JET ("328JET"), opened formal insolvency
proceedings in Germany. Fairchild had been operating under the guidance
of a court appointed interim trustee since April 2002. Fairchild has
notified the Company that it has rejected the Company's purchase
agreement contract covering the remaining 30 328JETs the Company had on
firm order for its United Express operation, two 328JETs on firm order
for the Private Shuttle operation, and options to acquire 81 additional
aircraft. The Company has negotiated for the purchase of 25 additional
50-seat Bombardier CRJ200s ("CRJs") to replace the two delivered and 30
undelivered 32-seat 328JETs for its United Express operation. The two
previously delivered 328JETs will be redeployed in the Company's Private
Shuttle operation. The Company now has firm orders for 52 additional
CRJs as of November 1, 2002, and continues to hold options for an
additional 80 CRJs.
At the time of the opening of formal insolvency proceedings, Fairchild
had significant current and future obligations to the Company in
connection with the order of 328JET aircraft. These include obligations:
to deliver 30 328JETs the Company had on firm order for its United
Express operation, two 328JETs on firm order for the Private Shuttle
operation, and 81 additional option 328JETs; to provide financing
support; to pay the Company the difference between the sublease payments,
if any, received from remarketing 26 British Aerospace J-41 Turboprop ("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. In August 2002, the Company filed its
claim in the Fairchild insolvency proceeding.
The Company believes it has a security interest in Fairchild's equity
interest in 32 delivered 328JETs, under which its rights to proceed
against this collateral apply upon termination of the applicable lease
unless other arrangements are made with the other interested parties.
The Company's balance sheet as of September 30, 2002 includes a
receivable for $1.2 million with respect to deposits placed with
Fairchild for undelivered aircraft. The Company holds a bond from an
independent insurance company which was delivered to secure this deposit,
and has made a demand for payment under this bond. Fairchild's
insolvency trustee has made a claim for the collateral posted with the
insurance company, and the insurance company has withheld payment of the
bond. The matter is presently the subject of motions filed with the U.S.
bankruptcy court for the Western District of Texas. The Company's
balance sheet as of September 30, 2002 also includes approximately $1.0
million due from Fairchild, resulting from payments made or owed by the
Company to third parties for certain training and other matters that were
to be paid by Fairchild. The Company believes it has the right to offset
these and other obligations from Fairchild against amounts the Company
owes Fairchild, to the extent permitted by law. Fairchild disputes this
right, and Fairchild's wholly owned U.S. subsidiary Dornier Aviation of
North America ("DANA") has filed suit against the Company claiming
amounts allegedly due for certain spare parts, late payment charges, and
consignment inventory carrying charges. The Company may be required to
take a charge for all or a portion of these third party expenses, or the
amount of the deposits secured by the bond, to the extent that it does
not prevail in its claims. The Company's costs to operate its current
fleet of 33 328JETs increased in the second and third quarters, and may
continue to increase in the near future, 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.
Additionally, as a result of Fairchild's rejection of the purchase
contract, the Company does not expect Fairchild to satisfy its obligation
to pay the difference in the sublease payments, if any, received from
remarketing the 26 J-41 aircraft leased by the Company on those aircraft
and the amount due under the Company's aircraft leases.
3. ADOPTION OF FASB STATEMENTS 141, 142, 144, and 146
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 effect
of adopting these statements has not had a material impact on the
Company's financial position or results of operations for the first nine
months of 2002. In the nine months ended September 30, 2001, the Company
amortized approximately $132,000 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". 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.
Under Statement No. 144, the Company is required to evaluate the book
value of its long-lived assets as compared to estimated fair market
value. The Company now estimates that the fair market value of four of
the five owned J-41 aircraft will be in the aggregate $2.4 million below
book value when the aircraft are retired from the fleet. As a result,
the Company is recognizing $2.4 million in additional depreciation
charges related to such aircraft over their remaining estimated service
lives. In the third quarter of 2002, the Company recognized $0.5 million
in additional depreciation expense.
On July 30, 2002, the Financial Accounting Standards Board issued FASB
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", which is effective for exit or disposal activities that are
initiated after December 31, 2002. Statement No. 146 requires that
liabilities for the costs associated with exit or disposal activities be
recognized when the liabilities are incurred, rather than when an entity
commits to an exit plan. The Company plans to adopt Statement No. 146 on
January 1, 2003. The new rules will change the timing of liability and
expense recognition related to exit or disposal activities, but not the
ultimate amount of such expenses. Existing accounting rules permit the
accrual of such costs for firmly committed plans which will be executed
within twelve months. Accordingly, to the extent that the Company's
plans to early retire J-41 turboprop aircraft extend beyond the end of
2003, the adoption of Statement No. 146 will cause the Company to record
costs associated with such individual early retired aircraft in the month
they are retired, as opposed to the current accounting treatment of
taking a charge for these aircraft in the period in which the retirement
plan is initiated. See note 7 of Notes to Condensed Consolidated
Financial Statements.
4. INCOME TAXES
The Company's effective tax rate for federal and state income taxes was
36.8% for the three months ended September 30, 2002, and 39.8% for the
nine months ended September 30, 2002, as compared to 40.5% and 40.4% for
the three and nine months ended September 30, 2001, respectively. In the
third quarter of 2002, the Company adjusted its 2002 tax rate to an
annualized rate of 40% to reflect lower estimates for current year state
income tax expense brought about by schedule changes, and, in addition,
recorded a credit related to the settlement of an audit of prior year's
state income tax returns in the amount of $166,000.
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 September 30,
(in thousands) 2001 2002
Income (basic and diluted) $ 12,751 $ 8,500
Weighted average shares outstanding (basic) 43,775 45,194
Incremental shares related to stock options 1,651 290
Weighted average shares outstanding (diluted) 45,426 45,484
Nine months ended September 30,
(in thousands) 2001 2002
Income (basic and diluted) $ 35,325 $ 40,256
Weighted average shares outstanding (basic) 43,235 44,997
Incremental shares related to stock options 1,795 1,139
Weighted average shares outstanding (diluted) 45,030 46,136
6. SUPPLEMENTAL CASH FLOW INFORMATION
Nine months ended September 30,
(in thousands) 2001 2002
Cash paid during the period for:
Interest $ 3,257 $ 3,104
Income taxes 2,998 23,767
7. AIRCRAFT EARLY RETIREMENT CHARGE
In the second quarter of 2002, the Company revised the retirement
schedule for its leased J-41s due to delays in regional jet deliveries
resulting from the failure of German aircraft manufacturer Fairchild to
deliver 328JET aircraft following its filing for insolvency in April
2002. To reflect the revised retirement dates of the leased J-41s, the
Company recorded an aircraft early retirement charge of $7.6 million
($4.5 million after tax) in the third quarter of 2002 related to
scheduled aircraft retirements by the third quarter of 2003. In the
second quarter of 2002, the Company recorded a $4.8 million ($2.8 million
after tax) credit to income to reverse a portion of its prior aircraft
early retirement charge of $23.0 million ($13.8 million after tax)
recorded in the fourth quarter of 2001. The Company presently
anticipates recording an additional charge of approximately $16.0 million
($9.5 million after tax) during the fourth quarter of 2002, relating to J-
41 aircraft which are expected to be retired by the fourth quarter of
2003. The Company estimates that it will expense approximately $24.0
million to retire the remaining J-41s as they are retired during 2004.
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 provided 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 was entitled to receive cash grants under these provisions.
The Company has complied with the requirements of the Stabilization Act
and submitted its final claim. The Company and the Airline Stabilization
Review Team have reached agreement on $10.7 million as the total amount
the Company was eligible to receive as direct compensation under the
Stabilization Act. The Company has received payment of this amount from
the government. All amounts received as government compensation are
subject to additional audit by the federal government for the next five
years.
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 and authorizes the federal
government to reimburse air carriers for the increased cost of war risk
insurance premiums for a period of thirty days as a result of the
terrorist attacks of September 11, 2001. Since September 2001, the
Company has purchased hull war risk coverage through the private
insurance market through September 24, 2003, and has purchased liability
war risk coverage from the United States government through December 15,
2002, and anticipates renewing the government insurance for as long as
the coverage is available. On June 18, 2002, the government issued the
Company a new policy with a premium calculation that significantly
reduces the cost of this type of war insurance for regional airlines.
Item 2. Management's Discussion and Analysis of Financial
Condition and 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", "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. Such
factors include, among others: the costs and other effects of enhanced
security measures and other possible government orders; changes in and
the cost of satisfying regulatory requirements; changes in levels of
service agreed to by the Company with its code share partners due to
market conditions; the ability and timing of agreeing upon rates with
these partners; the ability of these partners to manage their operations
and cash flow, and 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 United Airlines to secure and
implement its business strategies including negotiating favorable terms
with its unions and securing government loan guarantees and to satisfy
its obligations when due; unexpected costs or delays in the
implementation of new service; satisfactory resolution of union contracts
now amendable with the Company's maintenance technicians and ground
service equipment mechanics, as well as the Company's flight attendants;
availability and cost of funds for financing new aircraft; availability
and cost of product support for the Company's 328JET aircraft; whether
the Company is able to recover or realize on its claims against Fairchild
Dornier in its insolvency proceedings and unexpected costs arising from
the insolvency of Fairchild Dornier; possible delays in delivery of CRJ
aircraft from Bombardier, Inc.; ability to execute the early retirement
schedule for the Company's turboprop aircraft at the cost currently
estimated by management; general economic and industry conditions;
additional acts of war; and risks and uncertainties arising from the
events of September 11 and from the slow economy which may impact the
Company, its code share partners, and aircraft manufacturers in ways that
the Company is not currently able to predict. These and other factors
are more fully disclosed under the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in ACAI's
Annual Report on Form 10-K for the year ended December 31, 2001 and in
its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2002
and June 30, 2002. This Form 10-Q should be read in conjunction with
those previous filings.
Third Quarter Operating Statistics
(excluding aircraft early retirement charge)
Increase
Three months ended September 30, 2001 2002 (Decrease)
Revenue passengers carried 1,326,042 1,922,839 45.0%
Revenue passenger miles ("RPMs") (000's) 502,932 752,873 49.7%
(000's)
Available seat miles ("ASMs") (000's) 843,777 1,106,478 31.1%
Passenger load factor 59.6% 68.0% 8.4 pts
Revenue per ASM (cents) 17.4 17.4 (0.0)%
Cost per ASM (cents)1 15.6 15.8 1.3%
Average passenger segment (miles) 379 392 3.4%
Revenue departures (completed) 60,451 72,563 20.0%
Revenue block hours 85,414 103,301 20.9%
Aircraft utilization (block hours) 8.1 8.8 8.6%
Average cost per gallon of fuel (cents) 101.1 102.5 1.4%
Aircraft in service (end of period) 116 130 12.1%
Revenue per departure $2,428 $2,649 9.1%
1"Cost per ASM (cents)" excludes the aircraft early retirement charge.
Comparison of three months ended September 30, 2002, to three months
ended September 30, 2001.
Results of Operations
General
Net income in the third quarter of 2002 was $8.5 million or
$.19 per share on a diluted basis, compared to $12.8 million or $.28 per
share on a diluted basis for the same period last year. Excluding the
aircraft early retirement charge taken in the third quarter of 2002 and
government compensation associated with the Airline Stabilization Act
recorded in 2001, net income for the third quarter 2002 was $13.0 million
or $.29 per share compared to $10.0 million or $.22 per share in the
third quarter of 2001. The primary reason for the increase in net income
(excluding special items) was the 20.0% increase in revenue departures.
In the third quarter, the Company changed its effective tax rate as more
fully described below. Diluted earnings per share for the three months
ending September 30, 2002 were favorably affected by a reduction in the
number of diluted shares due to the exercise price of a significant
number of employee stock options being above the Company's average stock
price for the quarter. Total operating revenues increased 32.1% to
$195.0 million for the three months ended September 30, 2002 from $147.7
million for the three months ended September 30, 2001, while total
operating expenses, excluding the aircraft early retirement charge,
increased 32.4% to $174.4 million.
Operating Revenues
Passenger revenues increased 31.0% to $192.2 million for the
three months ended September 30, 2002 from $146.8 million for the three
months ended September 30, 2001. The increase was the result of a 20.0%
increase in revenue departures and a 9.1% increase in revenue per
departure to $2,649 in the third quarter of 2002 from $2,428 in the third
quarter of 2001. Revenues for the third quarter were affected by changes
made to the model used for estimating rates payable for service to new
United Express markets. During the third quarter, final rate
calculations for these new markets were agreed upon following an
adjustment to the model recently identified by United to more accurately
reflect actual operating costs. The resulting change in estimate caused
a reduction of $0.9 million in revenue associated with flights operated
during the first half of 2002 (see "Outlook and Business Risks").
The increase in capacity as measured in ASMs is the result of
service expansion utilizing 16 additional 50-seat CRJ200 ("CRJs"), and
the addition of six 32-seat Fairchild Dornier 328JET ("328JET") aircraft,
partially offset by the removal from service of seven 19-seat British
Aerospace J-32 Turboprop ("J-32") aircraft and one 29-seat British
Aerospace J-41 Turboprop ("J-41") aircraft, along with a 6.2% increase in
the average aircraft stage length and a 8.6% increase in aircraft
utilization, resulting in the 31.1% increase in ASMs to 1.1 billion in
the third quarter of 2002 from 844 million in the third quarter of 2001.
The Company was operating 67 CRJs, 33 328JETs and 30 J-41s as of
September 30, 2002 as compared to 51 CRJs, 27 328JETs, 31 J-41s and seven
J-32s as of September 30, 2001.
Other revenue increased 217.0% to $2.8 million for the three
months ended September 30, 2002 from $0.9 million for the three months
ended September 30, 2001. This increase is primarily the result of
additional charter revenue due to the launch of the Company's Private
Shuttle operation in February of 2002.
Operating Expenses
A summary of operating expenses, excluding the aircraft early
retirement charge, as a percentage of operating revenues and in terms of
cost per ASM for the three months ended September 30, 2001, and 2002 is
as follows:
Three Months ended September 30,
2001 2002
Percent Percent
of Cost of Cost
Operating Per ASM Operating Per ASM
Revenue (cents) Revenue (cents)
Salaries and related costs 27.3% 4.8 26.4% 4.6
Aircraft fuel 15.9% 2.8 16.0% 2.8
Aircraft maintenance and materials 8.4% 1.4 10.1% 1.8
Aircraft rentals 16.1% 2.8 14.5% 2.6
Traffic commissions and related fees 2.8% 0.5 2.8% 0.5
Facility rents and landing fees 5.7% 1.0 5.7% 1.0
Depreciation and amortization 2.7% 0.5 2.8% 0.5
Other 10.3% 1.8 11.1% 2.0
Total 89.2% 15.6 89.4% 15.8
Total operating expenses, excluding the aircraft early
retirement charge, increased 32.4% to $174.4 million for the quarter
ended September 30, 2002 compared to $131.8 million for the quarter ended
September 30, 2001 primarily due to the 20.0% increase in revenue
departures. As explained above, ASMs increased 31.1% to 1.1 billion in
the third quarter of 2002 from 844 million in the third quarter of 2001.
As a result, cost per ASM (excluding the aircraft early retirement
charge) increased 1.3% on a year-over-year basis to 15.8 cents during the
third quarter of 2002. Costs per ASM changes that are not primarily
attributable to the changes in capacity are as follows:
The cost per ASM of aircraft fuel was 2.8 cents in the third
quarter of 2002 and the third quarter of 2001. The higher fuel
consumption per hour of regional jet aircraft versus turboprop aircraft
resulted in an 8.3% increase in the system average burn rate (gallons
used per block hour flown). In addition, the average cost per gallon of
fuel increased 1.4% from $1.01 in the third quarter of 2001 to $1.03 in
the third quarter of 2002. These increases were offset by the larger
seat capacity of regional jet aircraft.
The cost per ASM of maintenance increased 28.6% due primarily
to increased maintenance costs on the Company's fleet of 328JETs,
increased scheduling of routine airframe maintenance during the period,
the continuing expiration of manufacturer's warranty on the Company's CRJ
fleet, and increased cost accruals for amounts which may be claimed by a
vendor under a power-by-the-hour agreement for certain engine repair
work. (See "Outlook and Business Risks", below.)
Although the cost per ASM of facility rents and landing fees
remained at 1.0 cent for the third quarter of 2002, in absolute dollars,
facility rents and landing fees increased 33.0% from $8.4 million in the
third quarter of 2001 to $11.2 million in the third quarter of 2002.
This increase is a result of a 20.0% increase in the number of revenue
departures, the heavier landing weight of the regional jets, and higher
rents and landing fees imposed by airports to recover costs in the
aftermath of the events of September 11.
The cost per ASM of other operating expenses increased 11.1% to
2.0 cents in the third quarter of 2002 from 1.8 cents in the third
quarter of 2001. In absolute dollars, other operating expenses increased
42.8% from $15.2 million in the third quarter of 2001 to $21.7 million in
the third quarter of 2002. The increased costs result primarily from
additional property taxes, higher aircraft insurance costs associated
with the events of September 11, increased legal costs related to the
Fairchild bankruptcy and other events, and increased training costs.
During the third quarter of 2002, the Company recorded a $7.6
million (pre-tax) charge for early retirement of J-41 aircraft. See note
7 of Notes to Condensed Consolidated Financial Statements.
The Company's effective tax rate was 36.8% in the third quarter
of 2002 compared to 40.5% in the third quarter of 2001. In the third
quarter of 2002, the Company adjusted its 2002 tax rate to an annualized
rate of 40% to reflect lower estimates for current year state income tax
expense brought about by schedule changes, and, in addition, recorded a
credit related to the settlement of an audit of prior year's state income
tax returns in the amount of $166,000. Excluding this item, the adjusted
effective tax rate for the third quarter of 2002 was approximately 38%.
Nine Months Operating Statistics
(excluding aircraft early retirement charge)
Increase
Nine months ended September 30, 2001 2002 (Decrease)
Revenue passengers carried 3,548,473 5,157,965 45.4%
Revenue passenger miles ("RPMs") (000's) 1,319,413 2,074,263 57.2%
Available seat miles ("ASMs") (000's) 2,294,521 3,229,145 40.7%
Passenger load factor 57.5% 64.2% 6.7 pts
Revenue per ASM (cents) 18.5 17.0 (8.1)%
Cost per ASM (cents)1 16.3 15.1 (7.4)%
Average passenger segment (miles) 372 402 8.1%
Revenue departures (completed) 171,643 208,119 21.3%
Revenue block hours 239,091 303,178 26.8%
Aircraft utilization (block hours) 7.9 8.9 12.7%
Average cost per gallon of fuel (cents) 104.8 93.9 (10.4)%
Aircraft in service (end of period) 116 130 12.1%
Revenue per departure $2,471 $2,636 6.7%
1"Cost per ASM (cents)" excludes the aircraft early retirement charge.
Comparison of nine months ended September 30, 2002, to nine months ended
September 30, 2001.
Results of Operations
General
Net income for the nine months ended September 30, 2002 was
$40.3 million, or $.87 per share on a diluted basis compared to $35.3
million or $.78 per share on a diluted basis for the same period last
year. Excluding aircraft early retirement charges and government
compensation associated with the Airline Stabilization Act, net income
for the nine months ended September 30, 2002 was $41.4 million or $.90
per share compared to $32.6 million or $.72 per share for the nine months
ended September 30, 2001. The principal reason for the increase in net
income was the 21.3% increase in revenue departures. Total operating
revenues increased 30.2% to $556.2 million for the nine months ended
September 30, 2002 from $427.3 million for the nine months ended
September 30, 2001.
Operating Revenues
Passenger revenues increased 29.5% to $548.5 million for the
nine months ended September 30, 2002 from $423.6 million for the nine
months ended September 30, 2001. The increase was primarily due to a
21.3% increase in revenue departures, and a 6.7% increase in revenue per
departure to $2,636 in the first nine months of 2002 from $2,471 in the
first nine months of 2001.
The increase in capacity as measured in ASMs is the result of
several factors. These include: fleet additions of 16 50-seat CRJs, and
six 32-seat 328JET aircraft, partially offset by the removal from service
of seven 19-seat J-32 Turboprop aircraft and one 29-seat J-41 Turboprop
aircraft; an 11.6% increase in the average aircraft stage length; and a
12.7% increase in aircraft utilization. Combined, these factors resulted
in the 40.7% increase in ASMs to 3.2 billion in the first nine months of
2002 from 2.3 billion in the first nine months of 2001.
Other revenue increased 108.0% to $7.7 million for the nine
months ended September 30, 2002 from $3.7 million for the nine months
ended September 30, 2001. This increase is primarily the result of
additional charter revenue due to the launch of the Company's Private
Shuttle operation in February of 2002.
Operating Expenses
A summary of operating expenses, excluding the aircraft early
retirement charge, as a percentage of operating revenues and in terms of
cost per ASM for the nine months ended September 30, 2001 and 2002 is as
follows:
Nine Months ended September 30,
2001 2002
Percent Percent
of Cost of Cost
Operating Per ASM Operating Per ASM
Revenue (cents) Revenue (cents)
Salaries and related costs 27.4% 5.1 26.3% 4.5
Aircraft fuel 15.5% 2.9 14.9% 2.6
Aircraft maintenance and materials 8.4% 1.5 9.6% 1.7
Aircraft rentals 15.4% 2.9 14.8% 2.5
Traffic commissions and related fees 2.8% 0.5 2.8% 0.5
Facility rents and landing fees 5.4% 1.0 5.9% 1.0
Depreciation and amortization 2.6% 0.5 2.7% 0.5
Other 10.3% 1.9 10.7% 1.8
Total 87.8% 16.3 87.7% 15.1
Total operating expenses, excluding the aircraft early
retirement charge, increased 30.1% to $488.0 million for the nine months
ended September 30, 2002 compared to $375.1 million for the nine months
ended September 30, 2001 primarily due to the 21.3% increase in revenue
departures. As explained above, ASMs increased 40.7% to 3.2 billion in
the nine months ending September 30, 2002 from 2.3 billion in the nine
months ending September 30, 2001. As a result, cost per ASM (excluding
the aircraft early retirement charge) decreased 7.4% on a year-over-year
basis to 15.1 cents during the nine months ended September 30, 2002.
Cost per ASM changes that are not primarily attributable to the changes
in capacity are as follows:
Salaries and related costs per ASM decreased 11.8% to 4.5 cents
in the first nine months of 2002 compared to 5.1 cents for the first nine
months of 2001. The Company suspended its cash employee bonus plans
during the first quarter of 2002 due to the events of September 11. The
Company reinstated its cash bonus plans effective April 1, 2002. For the
nine months ended September 30, 2002 and September 30, 2001, the Company
incurred $6.0 million and $4.7 million, respectively, in expenses related
to its bonus plans.
The cost per ASM of aircraft fuel decreased to 2.6 cents in the
first nine months of 2002 compared to 2.9 cents in the first nine months
of 2001. The higher fuel consumption per hour of regional jet aircraft
versus turboprop aircraft resulted in a 10.3% increase in the system
average burn rate (gallons used per block hour flown), which was more
than offset by the effects of a 10.5% decrease in the average cost per
gallon of fuel from $1.05 in the first nine months of 2001 to $.94 in the
first nine months of 2002, and the larger seat capacity of regional jet
aircraft verses turboprop aircraft.
The cost per ASM of maintenance increased 13.3% due primarily
to increased maintenance costs on the Company's fleet of 328JETs, the
continuing expiration of manufacturer's warranty on the Company's CRJ
fleet, and increased cost accruals for amounts which may be claimed by a
vendor under a power-by-the-hour agreement for certain engine repair
work. (See "Outlook and Business Risks", below.)
Although the cost per ASM of facility rents and landing fees
remained 1.0 cent for the first nine months of 2002, in absolute dollars,
facility rents and landing fees increased 40.4% from $23.3 million in the
first nine months of 2001 to $32.7 million in the first nine months of
2002. This increase is a result of a 21.3% increase in the number of
revenue departures, the heavier landing weight of the regional jets, and
higher rents and landing fees imposed by airports to recover costs in the
aftermath of the events of September 11.
The cost per ASM of other operating expenses decreased to 1.8
cents in the first nine months of 2002 from 1.9 cents in the first nine
months of 2001. In absolute dollars, other operating expenses increased
35.6% from $43.8 million in the first nine months of 2001 to $59.4
million in the first nine months of 2002. The increased costs result
primarily from additional property taxes, higher aircraft insurance costs
associated with the events of September 11, increased legal costs related
to the Fairchild bankruptcy and other events, and increased training
costs.
Other Income (expense)
In the first nine months of 2002, the Company recorded the
following items in other income: $0.9 million in government compensation
under the Air Transportation Safety and System Stabilization Act; $1.1
million to write-off capitalized interest costs related to 328JET
aircraft that were to be delivered; and $0.6 million to write-off a
deferred credit from a settlement payment made by Fairchild Dornier
related to a turboprop retirement.
The Company's effective tax rate for federal and state income
taxes was 39.8% for the nine months ended September 30, 2002, and 40.4%
for the nine months ended September 30, 2001. In the third quarter of
2002, the Company adjusted its 2002 tax rate to an annualized rate of 40%
to reflect changes in lower state income tax expense brought about by
schedule changes, and, in addition, recorded a credit related to the
settlement of an audit of prior year's state income tax returns in the
amount of $166,000.
Outlook and Business Risks
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth above under Forward-
Looking Statements.
The U.S. airline industry continues to experience depressed
demand and shifts in passenger demand, increased insurance costs,
constantly changing and increased government regulations and tightened
credit markets, evidenced by higher credit spreads and reduced capacity.
These factors are directly affecting the operations and financial
condition of participants in the industry including the Company, its code
share partners, and aircraft manufacturers. Although the steps taken by
the major U.S. carriers to return to profitability have generally
increased the importance of regional jets to the industry, the ongoing
losses incurred by the industry continue to raise substantial risks and
uncertainties. As discussed below, these risks may impact the Company,
its code share partners, and aircraft manufacturers in ways that the
Company is not currently able to predict.
Under the Company's United Express Agreement, United pays the
Company an agreed amount per departure. Under the Company's Delta
Connection Agreement, Delta pays the Company an agreed amount per block
hour flown. Under both agreements, payments to the Company are based on
the Company's costs, without regard to actual on-board passenger revenue.
The Company receives additional incentive payments based on operational
performance. Both agreements also provide that the rates will be adjusted
annually to reflect changes in costs. During any period when the Company
and a code-share partner have not agreed to rates for the year, the
Company records revenue applying rate assumptions that management
believes to be conservative.
In the first quarter of 2002, the Company and United
established rates to be in effect for the Company's United Express
flights throughout 2002 and the Company has used those agreed upon rates
to record revenue for 2002. Revenues for United Express markets not
previously operated by the Company and for existing markets where the
Company assumed station handling responsibilities for United were based
on estimates using a model developed by United. During the third
quarter, final rate calculations for these markets were agreed upon
following an adjustment to the model identified by United to more
accurately reflect actual operating costs. The resulting change in
estimate caused a reduction of $0.9 million in revenue recorded during
the first half of 2002. During the second quarter of 2002, the Company
and Delta agreed to rates to be effective for all of 2002. After
recording estimated revenues in the first quarter 2002 prior to the
establishment of final rates with Delta, the Company recorded additional
revenue of $3.4 million in the second quarter as a result of changes to
initial estimates.
The Company continues to work closely with its two major
partners, United Airlines and Delta Air Lines, to provide value and cost
efficiencies in the current difficult airline environment. For United,
the Company continues to add CRJs into Chicago's O'Hare airport allowing
United to offer all jet United Express service from Chicago O'Hare as of
August 2002. FAA slot restrictions at Chicago's O'Hare airport were
eliminated effective July 2002, which removed a barrier to the Company's
providing additional service there. At Delta's request, the Company
moved its 328JET flights operating from New York's LaGuardia airport to
Cincinnati, Ohio effective November 1, 2002. These network changes will
allow Delta to more closely match aircraft capacity with route demand.
The block times for flights out of Cincinnati will on average be shorter
than those previously flown out of New York's LaGuardia airport. The
rate per block hour flown charged to Delta will not be adjusted at this
time. The Company anticipates that its operating costs at Cincinnati
will be lower than the costs in New York.
The amounts the Company received as compensation for its
flights from both United and Delta are, by contract, based on rates reset
each year effective January 1. These rates are based on the Company's
estimate of its costs for the coming year, plus a margin that is defined
by the Company's contracts with United and Delta. The Company has
implemented a number of cost reduction initiatives over the past year.
Likewise, United and Delta are attempting to reduce their operating costs
in response to market conditions and, in United's case, as an effort to
avoid a bankruptcy reorganization. Both partners have asked the Company
to explore ways to reduce further costs of their respective programs, and
management anticipates that the rate setting process for 2003 will
require the Company to ensure that it is performing its services at the
optimum value and cost to its partners.
During the third quarter 2002 United announced that it would
likely file for reorganization under Chapter 11 of the United States
Bankruptcy Code during the fourth quarter unless it is able to secure
adequate concessions from interested parties as well as an adequate loan
guarantee from the Air Transportation Stabilization Board ("ATSB").
Subsequently United has made a series of announcements regarding
agreements with certain of its existing lenders to defer certain
payments, negotiations with its labor unions and the status of its
federal loan guarantee application, and continues to announce that a
bankruptcy filing is a possibility but not a certainty. Should United
file for Chapter 11, it will have the opportunity to elect either to
affirm all of the terms of the Company's United Express Agreement, or to
reject the agreement in its entirety. United would not have the right to
reject portions of the agreement or to unilaterally amend its terms,
although it may seek to negotiate changes prior to making a decision on
whether to affirm or reject the contract. A bankruptcy filing would also
necessitate an interim agreement regarding the status of services and
payments under the United Express Agreement at the time of a filing and
through the bankruptcy period. Although a bankruptcy filing could lead
to unforeseen expenses, risks and uncertainties, management believes that
the Company's services and facilities contribute essential elements to
United's operations.
In July 2002, Fairchild, the manufacturer of the 32-seat
328JET, opened formal insolvency proceedings in Germany. Fairchild had
been operating under the guidance of a court appointed interim trustee
since April 2002. Fairchild has notified the Company that it has
rejected the Company's purchase agreement covering the remaining 30
328JETs the Company had on firm order for its United Express operation,
two 328JETs on firm order for the Company's Private Shuttle operation,
and options to acquire 81 additional aircraft. At the time of the
opening of formal insolvency proceedings, Fairchild had significant
current and future obligations to the Company in connection with the
order of 328JET aircraft. These include obligations: to deliver 30
328JETs the Company had on firm order for its United Express operation,
two 328JETs on firm order for the Private Shuttle operation, and 81
additional option 328JETs with certain financing support; to pay the
Company the difference between the sublease payments, if any, received
from remarketing 26 J-41 Turboprop 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. In August 2002, the
Company filed its claim in the Fairchild insolvency proceeding. The
Fairchild insolvency trustee has recently indicated that he does not
believe that funds will be available for claims by unsecured creditors
unless the Fairchild business is sold.
The Company believes it has a security interest in Fairchild's
equity interest in 32 delivered 328JETs, under which its right to proceed
against this collateral will apply upon termination of the applicable
lease unless other arrangements are made with the other interested
parties. The Company's balance sheet as of September 30, 2002 includes a
receivable for $1.2 million with respect to deposits placed with
Fairchild for undelivered aircraft. The Company holds a bond from an
independent insurance company that was delivered to secure this deposit,
and has made a demand for payment under this bond. Fairchild's
insolvency trustee has made a claim for the collateral posted with the
insurance company, and the insurance company has withheld payment of the
bond. The matter is presently with the U.S. bankruptcy court for the
Western District of Texas. The Company's balance sheet as of September
30, 2002 also includes approximately $1.0 million due from Fairchild,
resulting from payments made or owed by the Company to third parties for
certain training and other matters that were to be paid by Fairchild.
The Company believes it has the right to offset this and other
obligations from Fairchild against amounts the Company owes Fairchild, to
the extent permitted by law. Fairchild disputes this right, and
Fairchild's wholly owned U.S. subsidiary, Dornier Aviation of North
America ("DANA"), has filed suit against the Company claiming amounts
allegedly due for certain spare parts, late payment charges, and
consignment inventory carrying charges. The Company may be required to
take a charge for all or a portion of these third party expenses, or the
amount of the deposits secured by the bond, to the extent that it does
not prevail in its claims.
The Company's costs to operate its current fleet of 33 328JETs
increased in the second and third quarters, and may continue to increase
in the near future, 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. Additionally, as a result of
Fairchild's rejection of the purchase contract, the Company does not
expect Fairchild to satisfy its obligation to pay the difference in the
sublease payments, if any, received from remarketing the 26 J-41 aircraft
leased by the Company on those aircraft and the amount due under the
Company's aircraft leases.
On June 4, 2002, the Company and United agreed to an amendment
to the Company's United Express Agreement authorizing the Company to
operate an additional 25 CRJs in lieu of 32 328JETs that were to have
been delivered by Fairchild, with the additional aircraft to be placed in
service no later than April 30, 2004. The Company entered into
agreements with Bombardier for the purchase of 25 additional 50-seat CRJs
to replace the two delivered and 30 undelivered 32-seat 328JETs for its
United Express operation. The Company now has firm orders for 52
additional CRJs as of November 1, 2002, and continues to hold options for
an additional 80 CRJs. Since resumption of deliveries after the
settlement of a labor action, Bombardier has generally been one month
behind the original delivery schedule for deliveries scheduled for the
second half of 2002. Bombardier has advised that deliveries scheduled
for the first four months of 2003 will be made during the original
contract months, but has not confirmed the delivery schedule for
subsequent months. As of November 1, 2002, the Company is scheduled to
take delivery of 5 CRJs in the last two months of 2002, 35 CRJs in 2003
and 12 CRJs in 2004.
The Company has generally financed its new aircraft deliveries
through leverage lease structures involving investments by institutional
or industrial investors who provide debt and equity capital to finance
the Company's aircraft. This type of financing has been more difficult
to obtain since September 11, both in terms of cost and sources of funds.
Although the Company has substantially finalized funding arrangements for
aircraft deliveries through the end of the first quarter of 2003, the
availability of funding, particularly equity funding, which provides
approximately 20% of the aircraft acquisition cost, remains uncertain.
The Company may be forced to utilize its own funds for equity investments
or to seek alternative sources of funding a portion of its aircraft
deliveries.
In June 2002 the Company reconfirmed its commitment to United
to remove its remaining J-41 turboprop aircraft from service no later
than April 30, 2004. The Company has long-term lease commitments for 25
of these J-41 aircraft and owns 5 J-41 aircraft. The Company has already
expensed $23.0 million (pre-tax) in 2001 and $2.8 million (pre-tax) for
the first nine months of 2002 for retirement of these aircraft. The
Company presently anticipates recording an additional charge of
approximately $16.0 million (pre-tax) during the fourth quarter of 2002,
relating to J-41 aircraft which are expected to be retired by the fourth
quarter of 2003. The Company estimates that it will expense approximately
$24.0 million (pre-tax) to retire the remaining J-41s as they are retired
during 2004. The Company plans to actively remarket the J-41s through
leasing, subleasing or outright sale of the aircraft. Outright sale of a
leased aircraft may require the Company to make payments to the lessor to
cover shortfalls between sale prices and lease stipulated loss values.
Fairchild had the obligation to purchase five J-41 aircraft
owned by the Company at their net book value at the time of their
retirement. As a result of Fairchild's rejection of the purchase
contract, the Company does not expect Fairchild to satisfy this
obligation. The Company is required to evaluate the book value of its
long-lived assets as compared to estimated fair market value. The
Company now estimates that the fair market value of four of the five
owned J-41 aircraft will be, in the aggregate, $2.4 million below book
value when the aircraft are retired from the fleet. As a result, the
Company is recognizing $2.4 million in additional depreciation charges
related to such aircraft over their remaining estimated service lives.
In the third quarter of 2002, the Company recognized $0.5 million in
additional depreciation expense. See note 3 of Notes to Condensed
Consolidated Financial Statements.
In 2000, the Company executed a seven-year engine services
agreement with GE Engine Services, Inc. ("GE") covering the scheduled and
unscheduled repair of ACA's CRJ jet engines, operated on the 43 CRJs
already delivered or on order at that time for the United Express
operation. This agreement was amended in July 2000 to cover 23
additional CRJ aircraft, bringing the total number of CRJ aircraft
covered under the agreement to 66. Under the terms of the agreement, the
Company pays a set dollar amount per engine hour flown on a monthly basis
to GE and GE assumes the responsibility to repair the engines when
required at no additional expense to the Company, subject to certain
exclusions. The Company's future maintenance expense on CRJ engines
covered under the agreement will escalate based on contractual rate
increases, intended to match the timing of actual maintenance events that
are due pursuant to the terms. The Company expenses aircraft maintenance
based upon the amount paid to GE under the agreement, as engine hours are
flown. To date, the time between scheduled repair work has been longer
and therefore the costs of maintaining these engines has been lower than
anticipated at the time the original contract and rates were agreed. The
Company has been in negotiations with GE to reduce the base rate in the
agreement to reflect the actual operating performance of the engines, to
add the remaining ordered aircraft to the agreement, and to extend the
term. The Company has disputed the appropriateness of certain contract
rate adjustments and in the fourth quarter of 2001 sought other rate
concessions from GE in the context of negotiating with GE for an
adjustment in rates and for an extension of the contract to cover a
longer term and to cover the remaining CRJ aircraft on order. Consistent
with its understanding at the time, the Company reduced the amounts it
paid GE under the agreement and correspondingly reduced the amounts it
expensed for engine maintenance. The Company continues to negotiate with
GE and other vendors in order to reach an acceptable maintenance
agreement. Accordingly, the Company currently is not adding engines
beyond the 66 covered aircraft and anticipates that the adjustments
described above will continue to be disputed. The Company recorded $4.8
million to maintenance expense in the second quarter 2002 and $1.3
million in the third quarter of 2002, which represents amounts that GE
may seek to collect under the agreement. In addition, the Company
believes that, if it so elects, it has the right to remove any or all
engines from this agreement at any time. GE does not agree with the
Company's interpretation of the agreement, and if the Company is not able
to reach acceptable terms for amending its agreement with GE, then the
Company intends to file for arbitration under the terms of the contract
to resolve the question of whether the Company may remove all engines
from the contract.
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 not be
directly affected by fuel price volatility.
Liquidity and Capital Resources
As of September 30, 2002, the Company had cash, cash
equivalents and short-term investments of $198.6 million and working
capital of $179.4 million compared to $181.0 million and $138.7 million
respectively as of December 31, 2001. During the first nine months of
2002, cash and cash equivalents decreased by $161.5 million, reflecting
net cash provided by operating activities of $53.9 million, net cash used
in investing activities of $217.9 million and net cash provided by
financing activities of $2.5 million. The net cash provided by operating
activities is primarily the result of net income for the period of $40.3
million, non-cash depreciation and amortization expenses of $15.6
million, and a $29.0 million increase in accrued liabilities, offset by a
$35.1 million increase in prepaid expenses. The increase in accrued
liabilities is the result of increases in various accruals, including a
$6.1 million expense recorded in the second and third quarters of 2002 to
fully accrue for disputed amounts which may be claimed to be due by a
vendor under a power-by-the-hour agreement for certain engine repair
work, an increase in accruals for aircraft early retirement charges of
$2.8 million, a $5.4 million increase in accruals for fuel costs and a
$10.2 million increase in accrued payroll costs. The increase in prepaid
expenses is primarily the result of the Company making its semi-annual
aircraft rent payments in January and July 2002. The net cash used in
investing activities consisted primarily of purchases of property and
equipment, net purchases of short-term investments and payments for
aircraft deposits. 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 $25.0 million. The line of credit,
which will expire on October 15, 2003, carries an interest rate of LIBOR
plus .875% to 1.375% depending on the Company's fixed charges coverage
ratio. The Company has pledged $15.7 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 September 30, 2002 the value of
the collateral supporting the line was sufficient for the amount of
available credit under the line to be $25.0 million. There have been no
borrowings on the line of credit. The amount available for borrowing at
September 20, 2002 was $9.3 million, after deducting $15.7 million which
has been pledged as collateral for letters of credit.
Other Commitments
The Company's Board of Directors has approved the repurchase of
up to $40.0 million of the Company's outstanding common stock in open
market or private transactions. As of November 1, 2002 the Company has
repurchased 2,171,837 shares of its common stock and has approximately
$21.0 million remaining of the $40.0 million authorized for repurchase.
The Company's contract with Aircraft Mechanics Fraternal
Association ("AMFA"), which was ratified in June 1998, became amendable
in June 2002, and its contract with the Association of Flight Attendants
("AFA"), which was ratified in October 1998, became amendable in October
2002. The Company has entered into initial discussions with AMFA and
with AFA regarding a new agreement. These negotiations are in the
preliminary stages and management does not anticipate that either
contract will be resolved during 2002 or that there will be a material
effect on the Company's operations for the foreseeable future. Labor
relations are generally regulated by the Railway Labor Act ("RLA").
Under the RLA, collective bargaining agreements do not expire but,
rather, become amendable. The wage rates, benefits and work rules
contained in a contract that has become amendable remain in place and
represent the status quo until a successor agreement is in place. The
parties may not resort to self-help, such as strikes or lockouts, until
the RLA processes for collective bargaining have been exhausted. It is
impossible to predict how long the RLA processes will take, but if an
early agreement cannot be reached it is not unusual for these processes
to last 18 months or more.
The Company believes that certain of the Company's
unrepresented labor groups are being solicited by unions seeking to
represent them. However, the Company has not received any official
notice of organizing activity and there have been no representation
applications filed with the National Mediation Board by any of these
groups. The Company believes that the wage rates and benefits for non-
union employee groups are comparable to similar groups at other regional
airlines.
Aircraft
As of November 1, 2002, the Company was operating a fleet of
132 aircraft comprised of 69 50-seat CRJs, 33 32-seat 328JETs and 30 J-
41s, and had firm orders for 52 CRJs, and options for 80 additional CRJs.
The Company is obligated to purchase and finance (including the possible
use of leveraged leases) the 52 firm ordered aircraft at an approximate
capital cost of $1 billion. The Company anticipates leasing all of its
remaining year 2002 CRJ aircraft deliveries on terms similar to
previously delivered CRJ aircraft. One CRJ was damaged in October 2002
as a result of being struck by a shuttle bus not being operated by the
Company. It is anticipated that this aircraft will be out of operation
through the first quarter of 2003. The Company expects the repair costs
to be covered by insurance proceeds. The Company does not currently
anticipate the loss of use of this aircraft to have a material affect on
its results of operations during this time.
Capital Equipment and Debt Service
Capital expenditures for the first nine months of 2002 were
$28.0 million, compared to $27.9 million for the same period in 2001.
Capital expenditures for 2002 consisted primarily of the purchase of
$20.1 million in rotable spare parts for the regional jet aircraft, $2.5
million in computers and telecom equipment and $1.6 million for
improvements to aircraft. Other capital expenditures included facility
leasehold improvements, ground equipment, and office equipment.
For the remainder of 2002, the Company anticipates spending
approximately $10.0 million for rotable spare parts related to the
regional jets, ground service equipment, facilities, computers and
software.
Debt service including capital leases for the nine months ended
September 30, 2002 was $4.3 million compared to $4.5 million in the same
period of 2001.
The Company believes that, subject to the contingencies
addressed above, and in the absence of other unusual circumstances
affecting the commercial airline industry, 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 at least 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 January 1, 2002. The effect
of adopting these statements has not had a material impact on the
Company's financial position or results of operations for the first nine
months of 2002. In the nine months ended September 30, 2001, the Company
amortized approximately $132,000 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. See note 7 of Notes to Condensed Consolidated Financial
Statements.
On October 3, 2001, the Financial Accounting Standards Board
issued FASB Statement No. 144, "Accounting 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.
Under Statement No. 144, the Company is required to evaluate the book
value of its long-lived assets as compared to estimated fair market
value. The Company now estimates that the fair market value of four of
the five owned J-41 aircraft will be in the aggregate $2.4 million below
book value when the aircraft are retired from the fleet. As a result,
the Company is recognizing $2.4 million in additional depreciation
charges related to such aircraft over their remaining estimated service
lives. In the third quarter of 2002, the Company recognized $0.5 million
in additional depreciation expense. See note 7 of Notes to Condensed
Consolidated Financial Statements.
On July 30, 2002, the Financial Accounting Standards Board
issued FASB Statement No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities", which is effective for exit or disposal
activities that are initiated after December 31, 2002. Statement No.
146 requires that liabilities for the costs associated with exit or
disposal activities be recognized when the liabilities are incurred,
rather than when an entity commits to an exit plan. The Company plans to
adopt Statement No. 146 on January 1, 2003. The new rules will change
the timing of liability and expense recognition related to exit or
disposal activities, but not the ultimate amount of such expenses.
Existing accounting rules permit the accrual of such costs for firmly
committed plans which will be executed within twelve months.
Accordingly, to the extent that the Company's plans to early retire J-41
turboprop aircraft extend beyond the end of 2003, the adoption of
Statement No. 146 will cause the Company to record costs associated with
such individual early retired aircraft in the month they are retired, as
opposed to the current accounting treatment of taking a charge for these
aircraft in the period in which the retirement plan is initiated. The
Company anticipates recording approximately $14.0 million (after tax) in
expense during 2004 as the remaining leased British Aerospace J-41
turboprop aircraft are removed from service. These costs would have been
recognized as an aircraft early retirement charge in the first quarter of
2003 prior to the adoption of Statement No. 146. See note 7 of Notes to
Condensed Consolidated Financial Statements.
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 September 30, 2002, the Company had no open
hedge transactions.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Management
necessarily applied its judgment in assessing the costs and benefits of
such controls and procedures which, by their nature, can provide only
reasonable assurance regarding management's control objectives. It
should be noted that the design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how
remote. Based upon the foregoing evaluation, the principal executive
officer and principal financial officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them
to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's
periodic SEC reports. In addition, the Company reviewed its internal
controls, and there have been no significant changes in our internal
controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED SEPTEMBER 30, 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 could be substantial. Based on information
available to the Company at this time, the Company believes that the
ultimate fines or penalties assessed against the Company as a result of
these proceedings will be significantly reduced and are not 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
10.12(e) (note 1 & 19)
Form of
Letter Agreement entered into with senior executive
officers regarding restoration of reduction in base
salary. (This document is a management contract or
compensatory plan or arrangement.)
10.41A(1) Contract Change Orders No. 1, 2, 3, 4, 5 and 6 dated
September 24, 1999, August 2, 2000, December 6, 2000,
November 7, 2001, December 20, 2001 and July 19, 2002,
respectively, amending the Purchase Agreement between
Bombardier Inc. and Atlantic Coast Airlines relating to
the purchase of Canadair Regional Jet Aircraft dated
July 29, 1999. (Confidential treatment has been
requested for portions of this document)
(b) Reports on Form 8-K
Form 8-K filed on August 13, 2002 to announce that the
Company submitted to the Securities and Exchange
Commission certifications of its principal executive
officer and principal financial officer under the Sarbanes-
Oxley Act of 2002.
Form 8-K filed on November 12, 2002 to announce that an
officer of the Company would make a presentation to
investors .
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.
November 14, 2002 By: /S/ Richard J. Surratt
Richard J. Surratt
Executive Vice President, Treasurer,
and Chief Financial Officer
CERTIFICATIONS
I, Kerry B. Skeen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic Coast
Airlines Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
___/s/ Kerry B. Skeen___
Kerry B. Skeen
Chairman and Chief Executive Officer
I, Richard J. Surratt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic Coast
Airlines Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
_/s/ Richard J. Surratt__
Richard J. Surratt
Executive Vice President, Treasurer, and Chief Financial Officer