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, 1998
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
Formerly known as Atlantic Coast Airlines, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
As of November 9, 1998, there were 19,218,538 shares of common stock,
par value $.02 per share, outstanding.
EXPLANATORY NOTE
The purpose of this amendment is to correct the Condensed Consolidated
Statements of Operations for the nine months ended September 30, 1998
and 1997. As previously filed, aircraft fuel expense for 1997 appeared
in the 1998 column and aircraft fuel expense for 1998 appeared in the
1997 column. Because of this problem, the summation of total operating
expenses did not foot to the total shown. This amended version corrects
the error.
Item 1, Part 1 of Form 10-Q is hereby amended and restated as follows:
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Balance Sheets
December 31, September 30,
(In thousands except for share data and par 1997 1998
values) (Unaudited)
Assets
Current:
Cash and cash equivalents $ 39,167 $ 52,430
Short term investments 10,737 63
Accounts receivable, net 21,621 31,018
Expendable parts and fuel inventory, 2,477 3,053
net
Prepaid expenses and other current 2,855 8,479
assets
Total current assets 76,857 95,043
Property and equipment at cost, net of
accumulated depreciation and amortization 40,638 70,949
Preoperating costs, net of accumulated
amortization 2,004 1,615
Intangible assets, net of accumulated 2,613 3,612
amortization
Deferred tax asset 688 688
Debt issuance costs, net of accumulated
amortization 3,051 3,055
Aircraft deposits 19,040 19,420
Other assets 4,101 4,975
Total assets $ 148,992 $ 199,357
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 4,768 $ 5,417
Current portion of long-term debt 1,851 3,038
Current portion of capital lease 1,730 1,411
obligations
Accrued liabilities 23,331 32,003
Total current liabilities 31,680 41,869
Long-term debt, less current portion 73,855 51,279
Capital lease obligations, less current 2,290 1,705
portion
Deferred credits 6,362 7,224
Total liabilities 114,187 102,077
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares issued
16,006,514 and 20,671,997 respectively;
shares outstanding 14,270,198 and 320 413
19,199,497 respectively
Additional paid-in capital 40,151 79,846
Less: Common stock in treasury, at cost, (17,069) (17,069)
1,472,500 shares
Retained earnings 11,403 34,090
Total stockholders' equity 34,805 97,280
Total liabilities and stockholders' $ 148,992 $ 199,357
equity
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30,
(In thousands, except for per share 1997 1998
data)
Operating revenues:
Passenger $ 54,159 $ 76,890
Other 705 1,210
Total operating revenues 54,864 78,100
Operating expenses:
Salaries and related costs 12,039 17,598
Aircraft fuel 4,514 6,434
Aircraft maintenance and materials 4,908 5,982
Aircraft rentals 7,745 9,543
Traffic commissions and related fees 8,937 10,641
Depreciation and amortization 877 1,532
Other 6,790 9,315
Total operating expenses 45,810 61,045
Operating income 9,054 17,055
Other income (expense):
Interest expense (1,142) (712)
Interest income 494 1,079
Other, net (55) (28)
Total other income (expense) (703) 339
Income before income tax provision 8,351 17,394
Income tax provision 3,507 6,781
Net income $ 4,844 $ 10,613
Net income per share:
-basic $0.34 $0.55
-diluted $0.26 $0.49
Weighted average shares used in
computation:
-basic 14,189 19,198
-diluted 21,149 22,244
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Nine months ended September 30,
(In thousands, except for per share 1997 1998
data)
Operating revenues:
Passenger $147,209 $ 208,398
Other 1,989 3,516
Total operating revenues 149,198 211,914
Operating expenses:
Salaries and related costs 35,772 48,776
Aircraft fuel 13,041 17,237
Aircraft maintenance and materials 11,916 17,579
Aircraft rentals 22,855 26,760
Traffic commissions and related fees 23,975 31,154
Depreciation and amortization 2,363 4,380
Other 19,217 25,740
Total operating expenses 129,139 171,626
Operating income 20,059 40,288
Other income (expense):
Interest expense (1,792) (2,860)
Interest income 787 3,016
Debt conversion expense - (1,410)
Other, net (68) 33
Total other income (expense) (1,073) (1,221)
Income before income tax provision 18,986 39,067
Income tax provision 7,555 16,380
Net income $ 11,431 $ 22,687
Net income per share:
-basic $0.71 $1.28
-diluted $0.64 $1.07
Weighted average shares used in
computation:
-basic 16,070 17,737
-diluted 18,825 22,143
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
(In thousands) 1997 1998
Cash flows from operating activities:
Net income $ 11,431 $22,687
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,045 3,858
Amortization of intangibles and preoperating
costs 319 522
Amortization of deferred credits (83) (550)
Debt conversion expense - 1,410
Capitalized interest - (1,241)
Other 628 633
Changes in operating assets and
liabilities:
Accounts receivable (5,095) (8,273)
Expendable parts and fuel inventory (822) (615)
Prepaid expenses and other current assets (55) (6,764)
Preoperating costs (1,555) (5)
Accounts payable 226 649
Accrued liabilities 3,529 8,653
Other assets - 93
Net cash provided by operating activities 10,568 21,057
Cash flows from investing activities:
Purchases of property and equipment (23,265) (32,194)
Proceeds from sale-leaseback - 1,318
Purchases of short term investments (16,333) -
Maturities of short term investments - 10,678
Refund of aircraft lease deposits and other 250 120
Payments for aircraft deposits and other (17,137) (500)
Net cash used in investing activities (56,485) (20,578)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 73,930 16,767
Payments of long-term debt (3,047) (1,787)
Payments of capital lease obligations (1,957) (2,320)
Deferred financing costs (1,667) (1,625)
Proceeds from receipt of deferred credits 848 96
Proceeds from exercise of stock options 292 1,653
Purchase of treasury stock (16,944) -
Net cash provided by financing activities 51,455 12,784
Net increase in cash and cash equivalents 5,538 13,263
Cash and cash equivalents, beginning of period 21,470 39,167
Cash and cash equivalents, end of period $ 27,008 $
52,430
See accompanying notes to the condensed consolidated financial
statements.
ATLANTIC COAST AIRLINES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
by Atlantic Coast Airlines Holdings, Inc. ("ACAI") and its subsidiary,
Atlantic Coast Airlines ("ACA"), (ACAI and ACA, together, the "Company"),
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished in the consolidated
financial statements includes normal recurring adjustments and reflects
all adjustments which are, in the opinion of management, necessary for a
fair presentation of such consolidated financial statements. Results of
operations for the three and nine month periods presented are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998. Certain amounts as previously reported have been
reclassified to conform to the current year presentation. Certain
information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements, and the
notes thereto, included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
2. OTHER - COMMITMENTS
During the fourth quarter of 1997, the Company entered into an agreement
with Aero International (Regional) for the purchase of one additional
Jetstream 41 ("J-41") aircraft which was delivered under an interim
manufacturer financing arrangement until third party financing could be
obtained. On September 28, 1998, the Company purchased this aircraft
through a combination of cash and secured debt financing.
The Company completed third party financings for seven 50 seat Canadair
Regional Jets ("CRJ's) during the first nine months of 1998. The Company
entered into leveraged operating lease transactions for terms of 16.5
years at the time of delivery for six aircraft, and purchased one
aircraft delivered in September through a combination of cash and secured
debt financing.
The combined total additional debt related to the CRJ and J-41 aircraft
acquisitions is approximately $16.8 million with repayment terms of 8 to
16.5 years.
On September 8, 1998, the Company exercised options for ten additional
CRJ aircraft, bringing the total number of firm aircraft on order as of
September 30, 1998 to 21. In addition, the Company has options to acquire
an additional 27 aircraft. Of the 21 firm CRJ orders, one was delivered
on October 28, 1998, one is scheduled for delivery during the remainder
of the fourth quarter, nine are scheduled for delivery in 1999, seven are
scheduled for delivery in 2000 and three are scheduled for delivery in
2001. The value of the undelivered aircraft is approximately $370
million.
In the second quarter of 1998, the Company announced that the
Metropolitan Washington Airport Authority ("MWAA") in coordination with
the Company, will build an approximately 70,000 square foot regional
passenger concourse at Washington Dulles International Airport. The
facility is scheduled to open during the second quarter of 1999. The
facility will be designed, financed, constructed, operated and maintained
by MWAA, and will be leased to the Company. The lease rate will be
determined based upon final selection of funding methods and rates, and
on the final scope of the project. MWAA has agreed to fund the
construction through the proceeds of bonds and, subject to approval by
the FAA, passenger facility charges ("PFC"). Until MWAA obtains bond
funding or funding through PFCs, the Company has agreed to obtain its own
interim financing from a third party lender to fund a portion of the
total program cost of the regional concourse not to exceed $15 million.
MWAA has agreed to replace the Company's interim financing with the
proceeds of bonds or, if obtained, PFC funds, no later than one year
following the substantial completion date of the project. If MWAA
replaces the interim financing with bond financing, the Company's lease
cost will increase by the debt service amount. The Company expects to
obtain financing commitments for this obligation during the fourth
quarter of 1998.
In July 1997, the Company entered into a series of interest rate swap
contracts having an aggregate notional amount of $39.8 million. The swaps
were executed by purchasing six contracts maturing between March and
September 1998 with a third party as the counterparty. The interest rate
hedge was designed to limit approximately 40% of the Company's exposure
to interest rate changes until permanent financing for the six CRJ
aircraft scheduled for delivery between March and September 1998 was
secured. During the first nine months of 1998, the Company settled the
six contracts, paying the counterparty approximately $2.3 million, and is
amortizing this cost over the life of the related aircraft leases or has
capitalized the cost as part of the aircraft acquisition cost for owned
aircraft.
In July 1998, the Company entered into six additional interest rate swap
contracts having an aggregate notional amount of $51.8 million. The
swaps were executed by purchasing six contracts maturing between October
1998 and April 1999. The interest rate hedge is designed to limit
approximately 50% of the Company's exposure to interest rate changes
until permanent financing for six additional CRJ aircraft, which are
scheduled for delivery between October 1998 and April 1999, is secured.
Gains or losses resulting from the interest rate swap contracts will be
deferred until the contracts are settled and then amortized over the
aircraft lease term or capitalized as part of acquisition cost, if
purchased, and depreciated over the life of the aircraft. The Company
would have been obligated to pay the counterparty approximately $3.5
million had these contracts settled on September 30, 1998 or
approximately $1.4 million had these contracts settled on November 4,
1998.
During the first half of 1998, the Company entered into contracts to
purchase aircraft fuel at a fixed price from United Aviation Fuels
Corporation, a wholly owned subsidiary of United Airlines. The Company
has remaining commitments to purchase 33,000 barrels of fuel per month,
during October through December 1998, at a delivered price per gallon
including taxes and into-plane fees of 63.4 cents per gallon.
In September 1998, the Company entered into a call option to
hedge price changes on approximately 17,000 barrels of jet fuel per month
during the period from January 1999 to June 1999. The contract provides
for a premium payment of approximately $151,000 and sets a cap on the
maximum price equal to 46.30 cents per gallon of jet fuel excluding taxes
and into-plane fees, with the premium and any gains on this contract to
be recognized as a component of fuel expense during the hedge period. In
October 1998 and in November 1998, the Company entered into commodity
swap transactions to hedge price changes. Each swap contract is for
approximately 17,000 barrels of jet fuel per month during the period from
January 1999 to June 1999. The contracts require monthly cash settlements
in which the Company pays a fixed price of 46.05 cents per gallon for the
October contract and a fixed price of 42.65 cents per gallon for the
November contract, and receives a floating rate per gallon based on
market prices (these prices exclude taxes and into-plane fees). Any gains
or losses are recognized as a component of fuel expense during the hedge
period. With these three transactions the Company has hedged
approximately 52% of its jet fuel requirements for the first half of
1999.
3. INCOME TAXES
For the third quarter 1998, the Company had a combined effective tax rate
for state and federal taxes of 39%, and a combined statutory tax rate for
state and federal taxes of approximately 41%. The reduced effective rate
in the third quarter of 1998 is primarily due to a credit of
approximately $424,000 recorded in the third quarter of 1998 related to
differences between the estimated state income tax expense for the 1997
tax year and the final 1997 state income tax expense as filed on the
returns.
4. STOCK DIVIDEND
On April 14, 1998, the Company declared a 2-for-1 stock split payable as
a stock dividend on May 15, 1998. The stock dividend was contingent on
shareholder approval to increase the number of authorized Common Shares
from 15,000,000 to 65,000,000 shares. Shareholder approval was obtained
on May 5, 1998. The effect of this stock split is reflected in the
calculation of income per share and shareholders' equity as presented
herein for the prior year information and the three and nine month
periods ended September 30, 1998.
5. INCOME PER SHARE
The computation of basic income per share is computed by dividing net
income by the weighted average number of common shares outstanding.
Diluted income per share is computed by dividing net income by the
weighted average number of common shares outstanding and common stock
equivalents, which consist of shares subject to stock options computed
using the treasury stock method. In addition, under the if-converted
method, dilutive convertible securities are included in the denominator
while related interest expense, net of tax, for convertible debt is added
to the numerator. A reconciliation of the numerator and denominator used
in computing basic and diluted income per share is as follows:
Three Months Nine Months
Ended September Ended September
30, 30,
(in thousands) 1997 1998 1997 1998
Net income (basic) 4,844 10,613 11,431 22,687
Interest expense on 7% Convertible
Notes net of tax effect 597 183 597 979
Net income (diluted) 5,441 10,796 12,028 23,666
Weighted average shares outstanding 14,189 19,198 16,070 17,737
(basic)
Incremental shares related to 726 844 677 894
stock options
Incremental shares related to 7%
Convertible Notes 6,234 2,202 2,078 3,512
Weighted average shares 21,149 22,244 18,825 22,143
outstanding (diluted)
6. DEBT CONVERSION
The Company temporarily reduced the conversion price of its 7%
Convertible Subordinated Notes ("Notes") during the period March 25 -
April 8, 1998. During this period, holders of $31.7 million of the Notes
submitted their Notes for conversion to common stock. These Notes were
converted into 1.8 million (pre stock dividend) shares of common stock,
which includes an additional 28,087 pre stock dividend shares issued as
the result of the reduced conversion price. The Company recorded a one-
time non-cash, non-operating charge of approximately $1.4 million during
the second quarter of 1998 as the fair market value of these additional
shares.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income",
which requires, effective January 1, 1998, that comprehensive income and
the associated income tax expense or benefit be reported in financial
statements with the same prominence as other financial statements with an
aggregate amount of comprehensive income reported in that statement. For
the periods presented in this Form 10-Q, the Company did not have any
separately reported components of comprehensive income and therefore, no
separate Statement of Comprehensive Income is presented.
The American Institute of Certified Public Accountants has issued
Statement of Position 98-5 on accounting for start-up costs, including
preoperating costs related to the introduction of new fleet types by
airlines. The new accounting guidelines will take effect for fiscal
years beginning after December 15, 1998. The Company has deferred
certain start-up costs related to the introduction of the CRJs and is
amortizing such costs to expense ratably over four years. The Company
will be required to expense any remaining unamortized amounts as of
January 1, 1999 as a cumulative effect of a change in accounting
principle. The Company estimates the remaining unamortized balance for
deferred start-up costs will be approximately $1.5 million on January 1,
1999.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not designated
as hedging instruments, or for the ineffective portion of a hedging
instrument, the change in fair value will affect current period earnings.
The Company will adopt Statement No. 133 during its first quarter of
fiscal 2000 and is currently assessing the impact this statement will
have on interest rate swaps and any future hedging contracts that may be
entered into by the Company.
8. STOCKHOLDERS' EQUITY
The Company's shareholders amended the 1995 stock option plan which
provides for the issuance of options to purchase Common Stock of the
Company to certain employees and directors of the Company. After
reflecting the change for the stock dividend, the amendment increased the
aggregate number of shares of Common Stock that can be issued under the
1995 plan from 1,500,000 to 2,500,000. As of September 30, 1998, 780,682
shares are available for grant.
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.
December 10, 1998 By: /S/ Paul H. Tate
Paul H. Tate
Senior Vice President and Chief
Financial Officer
December10, 1998 By: /S/ Kerry B. Skeen
Kerry B. Skeen
President and Chief Executive
Officer
_______________________________
1 "Break-even passenger load factor" represents the percentage of ASMs
which must be flown by revenue passengers for the airline to break-even
at the operating income level.
2 "Break-even passenger load factor" represents the percentage of ASMs
which must be flown by revenue passengers for the airline to break-even
at the operating income level.