<PAGE 1>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State of incorporation) (IRS Employer
Identification No.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock par value $ .02 NASDAQ
National Market
(Title of Class)
(Name of each exchange
on which registered)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ____
The aggregate market value of voting stock held by nonaffiliates of
the registrant as of March 1, 1999 was approximately $358,046,414.
As of March 1, 1999 there were 20,925,359 shares of Common Stock of
the registrant issued and 19,452,859 shares of Common Stock were
outstanding.
Documents Incorporated by Reference
Certain portions of the document listed below have been incorporated
by reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
Proxy Statement for 1999 Annual Meeting of Shareholders
Part III, Items 10-13
<PAGE 2>
PART I
Item 1. Business
General
This Annual Report on Form 10-K contains forward looking
statements. Statements in the Summary of Company Business Strategy
and Management's Discussion and Analysis of Operations and Financial
Condition sections of this filing, together with other statements
beginning with such words as "believes", "intends", "plans", and
"expects" include forward-looking statements that are based on
management's expectations given facts as currently known by
management. Actual results may differ materially. Factors that
could cause the Company's future results to differ materially from
the expectations described herein include the response of the
Company's competitors to the Company's business strategy, market
acceptance of regional jet ("RJ") service to new destinations, the
cost of fuel, the weather, satisfaction of regulatory requirements
and general economic and industry conditions.
Atlantic Coast Airlines Holdings, Inc. ("ACAI"), is the
holding company of Atlantic Coast Airlines ("ACA"), together, (the
"Company"), a large regional airline, serving 51 destinations in 24
states in the Eastern and Midwestern United States as of March 1,
1999 with 530 scheduled non-stop flights system-wide every weekday.
The Company markets itself as "United Express" and is the only code-
sharing regional airline for United Airlines, Inc. ("United")
operating as United Express in the Eastern United States. The
Company caters primarily to business travelers with its principle
operations at Washington-Dulles International Airport ("Washington-
Dulles"), which serves the Northern Virginia and Washington, D.C.
markets. In August 1998, the Company began operating as United
Express from Chicago's O'Hare International Airport ("Chicago-
O'Hare") and, as of December 31, 1998, served six cities from
Chicago-O'Hare. The Company coordinates its schedules with United,
particularly at Washington-Dulles, where United operates 75 daily
departures to 32 destinations in the U.S., Europe and Latin America
and at Chicago-O'Hare, where United operates 519 daily departures to
105 destinations in the U.S., Europe, Asia and Latin America. As of
March 1, 1999, the Company operated a fleet of 75 aircraft (15
regional jets and 60 turboprop aircraft) having an average age of
approximately five years.
Summary of Company Business Strategy
The Company's long-term corporate objective is to achieve
sustained earnings growth by focusing its resources in the following
areas:
1. Continue to capitalize on and grow the Company's
identity with United: The Company intends to capitalize on and
promote its code-sharing relationship with United, which has already
contributed significantly to the Company's growth. The Company
markets itself as "United Express" under its United Express
Agreements ("Agreements") with United. The Agreements, as further
described under "United Express Agreement", provide the Company with
a shared market identity with United, allow the Company to list its
flights under United's two letter flight designator code in airline
Computer Reservation Systems ("CRSs") and other published schedules
and to award United's "Mileage Plus" frequent flyer miles to its
passengers. The Company coordinates its schedules with United, and
participates with United in cooperative advertising and marketing
agreements. In most cities served by the Company other than
Washington-Dulles and Chicago-O'Hare, United provides all airport
facilities and related ground support services to the Company. The
Company also participates in United's "Apollo" reservation system
and all major CRSs, uses the United Express logo and has exterior
aircraft paint schemes similar to those of United.
<PAGE 3>
2. Continued implementation of the regional jet fleet:
During 1998, the Company placed into service nine additional 50-seat
RJs, confirmed the delivery for five of the six outstanding
conditionally ordered RJs, and converted an additional 20 option
orders to firm deliveries. This brings the total number of firm
ordered RJs to 43 with remaining option RJs totaling 27. The future
delivery schedule of the remaining undelivered firm ordered RJ
aircraft is as follows: For 1999, one RJ was delivered in January
and eight additional RJs are scheduled for delivery between March
and December. Nine aircraft are scheduled for delivery in 2000 and
eleven are scheduled for delivery in 2001.
The Company has utilized the RJ to complement its route
system by initiating service from Washington-Dulles to markets
beyond the economic operating range of turboprop aircraft and
selectively deploying the RJ to its existing turboprop routes in the
short-haul, high-density East Coast markets. This has provided
additional connecting passengers to the Company's turboprop flights
and to United's jets flying from Washington-Dulles.
During 1998, the Company also initiated RJ service at
Chicago's O'Hare airport providing connecting service to United's
large hub operation. Operating as United Express with all RJ
aircraft, as of March 1, 1999 the Company offered non-stop flights
from Chicago-O'Hare to Charleston, WV; Springfield, MO; Wilkes-
Barre/Scranton, PA; Sioux Falls, SD; Fargo, ND; and Peoria, IL.
3. Continue to emphasize operational safety and
efficiency: During the last four years, the Company has worked with
the Federal Aviation Administration ("FAA") to develop a prototype
Crew Resource Management ("CRM") training program for the airline
industry called Advanced Crew Resource Management ("ACRM"). The
research team concluded that developing and training ACRM procedures
has a significant advantage over traditional CRM training methods
like those being used at most commercial airlines. The Company and
the research team developed specific ACRM procedures allowing the
crews to use ACRM skills on a daily basis. The Company anticipates
that it will continue to work with the FAA on developing new methods
for training and evaluating the effectiveness of pilot performance.
The Company equipped its turboprop aircraft with an
automated aircraft time reporting system which enables the Company
to more efficiently communicate with flight crews and further
automate the flight tracking process. The Company intends to
install an automatic aircraft time reporting system in its RJs as
early as the fourth quarter 1999. This system improves the
timeliness and accuracy of flight information communicated and
displayed to the Company's passengers.
The Company has initiated the utilization of global
positioning satellite technology ("GPS") and flight management
systems ("FMS") onboard its aircraft. With the entire fleet of
regional jets and turboprop aircraft equipped with FMS, the Company
believes it has improved safety and efficiency. The first 22 of 96
GPS routes between Dulles and other markets were implemented in 1998
with the remaining routes expected to be implemented in the second
quarter 1999. These routes, combined with the continued success of
FMS procedure development for Washington-Dulles, have reduced the
number of required miles flown by ACA aircraft while reducing pilot
and air traffic controller workload. In 1999, the Company intends
to implement more FMS procedures at Washington-Dulles which will
increase the capacity and efficiency of Washington-Dulles' airspace.
<PAGE 4>
In 1998 the Company signed an agreement for participation
in an airline safety program called Flight Operational Quality
Assurance ("FOQA"). FOQA programs obtain and analyze certain data,
recorded during flights, to improve many aspects of flight
operations, including flight crew performance, training programs,
operating and Air Traffic Control ("ATC") procedures, airport
maintenance and design as well as aircraft design.
Markets
As of March 1, 1999, the Company scheduled 232 non-stop
flights from Washington-Dulles which was more flights from that
airport than any other airline. During 1998, the Company accounted
for more passenger boardings from Washington-Dulles than any airline
other than United. On a combined basis, the Company and United
generated approximately 57% of passenger traffic at Washington-
Dulles during 1998.
The Company's top four airports based on frequency of
operations are Washington-Dulles, Chicago O'Hare, New York-JFK and
Newark. During 1998, the Company added new routes from Washington-
Dulles and commenced operations at Chicago-O'Hare. The Company
increased operations in existing Washington-Dulles markets by 22
daily departures and added new service to six cities: Indianapolis,
IN; Greenville/Spartanburg, SC; and Savannah, GA with RJs, and
Wilkes-Barre/Scranton, PA; Wilmington, NC; and Worcester, MA with
turboprop aircraft. During 1998, the Company also replaced or
complemented turboprop service with RJ service in the following
markets: Charleston, SC; Charleston, WV; Portland, ME; Raleigh-
Durham, NC; Detroit, MI; and Hartford, CT. The Company commenced
operations at Chicago-O'Hare on August 3, 1998 with non-stop RJ
service to Charleston, WV. Additional Chicago-O'Hare non-stop all
RJ service was added to: Springfield/Branson, MO; Wilkes-
Barre/Scranton, PA; Fargo, ND; Sioux Falls, SD; and Peoria, IL. In
1998, the Company ceased operations to Worcester, MA. In January
1999, the Company ceased operations to Atlanta, GA and Tampa, FL.
<PAGE 5>
The following table sets forth the destinations served by
the Company as of March 1, 1999:
Washington-Dulles (To/From)
Albany, NY Manchester, NH
Allentown, PA Nashville, TN
Baltimore, MD New York, NY (Kennedy)
Binghamton, NY New York, NY (LaGuardia)
Buffalo, NY Newark, NJ
Burlington, VT** Newport News, VA
Charleston, SC** Norfolk, VA
Charleston, WV** Philadelphia, PA
Charlottesville, VA Pittsburgh, PA
Cleveland, OH Portland, ME*
Columbia,SC (Effective Providence, RI
5/25/99)*
Columbus, OH** Raleigh-Durham, NC**
Dayton, OH** Richmond, VA
Detroit, MI** Roanoke, VA
Fort Myers, FL* Rochester, NY
Greensboro, NC Savannah, GA*
Greenville/Spartanburg, SC* State College, PA
Harrisburg, PA Stewart, NY
Hartford, CT** Syracuse, NY
Indianapolis, IN* Westchester County, NY
Jacksonville, FL* Wilkes-Barre/Scranton,
PA
Knoxville, TN Wilmington, NC
Lynchburg, VA
Chicago-O'Hare (To/From)
Charleston, WV* Sioux Falls, SD*
Fargo, ND* Springfield/Branson, MO*
Peoria, IL* Wilkes-Barre/Scranton,
PA*
Savannah, GA (Effective 5/17/99)
*
Other Routes Served
New York, NY (Kennedy) to: Boston, MA; Baltimore, MD; Rochester, NY
Boston, MA to Stewart, NY
* Denotes all RJ service
** Denotes mixture of RJ and turboprop service
<PAGE 6>
United Express Agreements
The Company's United Express Agreements ("Agreements")
define the Company's relationship with United. The Agreements
authorize the Company to use United's "UA" flight designator code to
identify its flights and fares in the major CRSs, including United's
"Apollo" reservation system, to use the United Express logo and
exterior aircraft paint schemes and uniforms similar to those of
United, and to otherwise advertise and market its association with
United.
In December 1998, the Company and United agreed to a ten
year extension of the Agreements. Prior to March 31, 2004, United
may terminate the Agreements at any time if the Company fails to
maintain certain performance standards, and may terminate without
cause after March 31, 2004 by providing one year's notice to the
Company. If by January 2, 2001 United has not given the Company the
ability to operate regional jets of 44 seats or less seating
capacity as United Express, in addition to its allocation of 50 seat
regional jets, the Company may terminate the Agreements as of March
31, 2004. The Company would be required to provide notice of
termination prior to January 2, 2002, which notice would be void if
United ultimately grants such authority prior to January 2, 2002.
Under the terms of the Agreements, the Company pays United
monthly fees based on the total number of revenue passengers boarded
by the Company on its flights for the month. The fee per passenger
is subject to periodic increases during the duration of the ten year
extension period.
Company passengers may participate in United's "Mileage
Plus" frequent flyer program and are eligible to receive a certain
minimum number of United frequent flyer miles for each of the
Company's flights. Mileage Plus members are also eligible to redeem
their awards on the Company's route system. In 1998, approximately
56% of the Company's passengers participated in United's "Mileage
Plus" frequent flyer program. The Company limits the number of
"Mileage Plus" tickets that may be used on its flights and believes
that the displacement, if any, of revenue passengers is minimal.
The Agreements also provide for coordinated schedules and
through-fares. A through-fare is a fare offered by a major air
carrier to prospective passengers who, in order to reach a
particular destination, transfer between the major carrier and its
code-sharing partner. Generally, these fares are less expensive than
purchasing the combination of local fares. United establishes all
through-fares and allows the Company a portion of these fares on a
fixed rate or formula basis subject to periodic adjustment. The
Agreements also provide for interline baggage handling, and for
reduced airline fares for eligible United and Company personnel and
their families.
Pursuant to the Agreements, United provides a number of
additional services to the Company. These include publication of the
fares, rules and related information that are part of the Company's
contracts of carriage for passengers and freight; publication of the
Company's flight schedules and related information; provision of
toll-free reservations services; provision of ground support
services at most of the airports served by both United and the
Company; provision of ticket handling services at United's ticketing
locations; provision of airport signage at airports where both the
Company and United operate; provision of United ticket stock and
related documents; provision of expense vouchers, checks and cash
disbursements to Company passengers inconvenienced by flight
cancellations, diversions and delays; and cooperation in the
development and execution of advertising, promotion, and marketing
efforts featuring United Express and the relationship between United
and the Company.
<PAGE 7>
The Agreements require the Company to obtain United's
consent to operate service between city pairs as "United Express".
If the Company experiences net operating expenses that exceed
revenues for three consecutive months on any required route, the
Company may withdraw from that route if United and the Company are
unable to negotiate an alternative mutually acceptable level of
service for that route. The Agreements also require the Company to
obtain United's approval if it chooses to enter into code-sharing
arrangements with other carriers, but do not prohibit United from
competing, or from entering into agreements with other airlines who
would compete, on routes served by the Company.
The Agreements restrict the ability of the Company to
merge with another company or dispose of certain assets or aircraft
without offering United a right of first refusal to acquire the
Company or such assets or aircraft. United also has a right of first
refusal with respect to issuance by the Company of shares of its
Common Stock if, as a result of the issuance, certain of the
Company's stockholders and their permitted transferees do not own at
least 50% of the Company's Common Stock after such issuance. Because
the holdings of these stockholders and their permitted transferees
are currently substantially less than 50%, management believes that
such a right is unlikely to be exercised.
Fleet Description
Fleet Expansion: As of March 1, 1999, the Company
operated a fleet of 15 RJs and 60 turboprop aircraft, consisting of
32 British Aerospace Jetstream-41 ("J-41s") and 28 British Aerospace
Jetstream-32 ("J-32s").
As of March 1, 1999, the Company had a total of 28 RJs on
order from Bombardier, Inc., in addition to the 15 already
delivered, and held options for 27 additional RJs. During 1998, the
Company converted five of the six conditional orders and converted
20 option aircraft to firm orders. Of the remaining 28 firm
aircraft deliveries, eight are scheduled for the remainder of 1999,
nine are scheduled for 2000, and eleven are scheduled for 2001.
Fleet Composition: The following table describes the
Company's fleet of aircraft, scheduled deliveries and options as of
March 1, 1999:
Number of Passenger Average Future
Aircraft Capacity Age in Scheduled
Years Deliveries
/
Options
Canadair 15 50 1.0 28/27
Regional Jets
British 32 29 4.2 -
Aerospace J-41
British 28 19 9.1 -
Aerospace J-32
75 5.4 28/27
The Company is continually assessing its fleet
requirements, including the feasibility of operating less than 50-
seat regional jets. The Company requires United's approval for the
addition of regional jet aircraft that exceed its current
allocation.
<PAGE 8>
The Company previously announced that it is exploring
alternatives to accelerate the retirement of its fleet of 28 leased
19 seat J-32 aircraft. The Company is assessing plans to target the
phase-out of the J-32 from its United Express operation by the end
of 2001. As of March 1, 1999, the Company has J-32 operating lease
commitments with remaining lease terms ranging from three to seven
years and related minimum lease payments of approximately $47
million. The Company intends to complete its analysis of a phase-
out plan, including quantification of any one-time fleet
rationalization charge, during 1999.
Lufthansa Agreement
The Company has a code-sharing agreement with Lufthansa
German Airlines ("Lufthansa"), which permits Lufthansa to place its
airline code on flights operated by the Company. Additionally,
Lufthansa is a member of the STAR Alliance, a global airline
alliance, comprised of United, Air Canada, Ansett, SAS, Thai and
Varig. The United Express-Lufthansa agreement provides a wide range
of benefits for code-share passengers including the ability to check-
in once at their initial departure city and receive boarding passes
and seat assignments for the flights on both carriers while their
luggage is automatically checked through to their final destination.
Members of the Lufthansa Miles & More frequent flyer program receive
mileage credit for these flights.
The following markets served by the Company now carry both
the United (UA) and Lufthansa (LH) designator codes on selected
flights: Washington-Dulles to: Charlottesville, VA; Cleveland, OH;
Charleston, WV; Fort Myers, FL; Greensboro, NC; Greenville, SC;
Jacksonville, FL; Nashville, TN; Newport News, VA; Norfolk, VA;
Pittsburgh, PA; Raleigh-Durham, NC; Richmond, VA; Roanoke, VA;
Savannah, GA; and Syracuse, NY; Chicago-O'Hare to; Springfield, MO.
Fuel
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing
prices in quantities sufficient to meet its future requirements.
During 1998, the Company purchased approximately 50% of its fuel
from United Aviation Fuels Corporation ("UAFC"), an affiliate of
United, utilizing fixed price forward purchase agreements for the
delivery of 33,000 barrels of jet fuel per month at Washington-
Dulles. For the first six months of 1999, the Company has hedged
the price it will ultimately record as fuel expense for
approximately 80% of its anticipated fuel requirements by entering
into contracts with independent counterparties that reduce the
Company's exposure to upward movements in the price per gallon of
jet fuel. The Company has also contracted with UAFC and other fuel
suppliers to provide jet fuel at the airports it serves at
prevailing market prices.
Marketing
The Company's advertising and promotional programs
emphasize the Company's close affiliation with United, including
coordinated flight schedules and the ability of the Company's
passengers to participate in United's "Mileage Plus" frequent flyer
program. The Company's services are marketed primarily by means of
listings in CRSs and the Official Airlines Guide, advertising and
promotions, and through direct contact with travel agencies and
corporate travel departments. For the year ended December 31, 1998,
approximately 72% of the Company's passenger revenue was derived
from ticket sales generated through travel agencies and corporate
travel departments. In marketing to travel agents, the Company
relies on personal contacts and direct mail campaigns, provides
familiarization flights and hosts group presentations and other
functions to acquaint travel agents with the Company's services.
Many of these activities are conducted in cooperation with United
marketing representatives. In addition, the Company and United
jointly run radio and print advertising in markets served by the
Company.
<PAGE 9>
The Company participates in United's electronic ticketing
program. This program allows customers to travel on flights of
United and the Company without the need for a paper ticket. The
primary benefit of this program is improved customer service and
reduced ticketing costs. For the year ended December 31, 1998, 43.5%
of the Company's passengers utilized electronic tickets up from
25.6% for the year ended December 31, 1997.
Competition
The Company competes primarily with regional and major air
carriers as well as with ground transportation. The Company's
competition from other air carriers varies by location, type of
aircraft (both turboprop and jet), and in certain cities, comes from
carriers which serve the same destinations as the Company but
through different hubs. The Company believes that its ability to
compete in its market areas is strengthened by its code-sharing
relationship with United, which has a substantial presence at
Washington-Dulles, thereby enhancing the importance of the "UA"
flight designator code on the East Coast. The Company competes with
other airlines by offering frequent flights. In addition, the
Company's competitive position benefits from the large number of
participants in United's "Mileage Plus" frequent flyer program who
fly regularly to or from the markets served by the Company.
In late 1998, US Airways announced its intention to
increase activity at Washington-Dulles utilizing its mainline
service, lowfare MetroJet product, and its US Airways Express
affiliates. US Airways has since implemented or announced service
to eight of the Company's markets using both jet and turboprop
equipment. In two of the Company's existing markets, MetroJet will
provide the service at a significantly lower fare structure. The
Company continually monitors the effects competition has on its
routes, fares and frequencies. The Company believes that it can
compete effectively with US Airways, however there can be no
assurances that US Airways expansion at Washington-Dulles will not
have a material adverse effect on the Company's results of
operations or financial position.
In early 1999, United announced its intention to increase
its level of activity at Washington-Dulles by 60% beginning in April
and May 1999. The Company believes that United's announced increase
will add approximately 7,000 additional daily seat departures to the
United/United Express operation at Washington-Dulles. The Company,
in concert with United, also announced either increased frequencies
or upgraded equipment, or both, in all of its markets affected by
the US Airways expansion.
The Airline Deregulation Act of 1978 ("Deregulation Act")
eliminated many regulatory constraints on airline competition,
thereby freeing airlines to set prices and, with limited exceptions,
to establish domestic routes without the necessity of seeking
government approval. The airline industry is highly competitive,
and there are few barriers to entry in the Company's markets.
Furthermore, larger carriers with greater resources can impact the
Company's markets through fare discounting as well as flight
schedule modifications.
<PAGE 10>
Yield Management
The Company closely monitors its inventory and pricing of
available seats by use of a computerized yield management system.
Effective with flights departing after January 31, 1999, the Company
upgraded its yield management system to United's enhanced revenue
management system, "Orion". This system represents the latest in
revenue management technology and is designed to manage entire
passenger itineraries rather than individual flight legs. The
Company now is able to expand the number of booking classes
available on its flights. These expanded booking classes will allow
the Company to broaden the number of fare categories offered to
customers, while simplifying booking procedures. Orion uses an
advanced derivative of IBM's "Deep Blue" computer technology to
process the large number of complex calculations involved in this
analysis. Orion replaces the PROS IV yield management system that
the Company had implemented in the second quarter 1997.
Slots
Slots are reservations for takeoffs and landings at
specified times and are required by governmental authorities to
operate at certain airports. The Company utilizes takeoff and
landing slots at Chicago-O'Hare and the LaGuardia, Kennedy and White
Plains, New York airports. The Company also uses slot exemptions at
Chicago-O'Hare, which differ from slots in that they allow service
only to designated cities and are not transferable to other airlines
without the approval of the U.S. Department of Transportation
("DOT"). Airlines may acquire slots by governmental grant, by lease
or purchase from other airlines, or by loan when another airline
does not use a slot but desires to avoid governmental reallocation
of a slot for lack of use. All leased and loaned slots are subject
to renewal and termination provisions.
As of March 1, 1999 the Company utilized 18 slots at
LaGuardia, 15 slots at Kennedy, 30 slots or slot exemptions at
Chicago-O'Hare, and six slots at White Plains. These slots can be
withdrawn without compensation under certain circumstances.
Employees
As of March 1, 1999, the Company had 1,918 full-time and
296 part-time employees, classified as follows:
Classification Full- Part-
Time Time
Pilots 750 -
Flight attendants 224 -
Station personnel 441 267
Maintenance personnel 208 4
Administrative and 285 25
clerical personnel
Management 10 -
Total employees 1,918 296
<PAGE 11>
The Company's pilots are represented by the Airline Pilots
Association ("ALPA"), its flight attendants by the Association of
Flight Attendants ("AFA"), and its mechanics by the Aircraft
Mechanics Fraternal Association ("AMFA").
The ALPA collective bargaining agreement was amended on
February 26, 1997 and is amendable after three years. The amended
contract modified work rules to allow more flexibility, includes
regional jet pay rates, and transfers pilots into the Company's
employee benefit plans.
The AMFA was certified as the collective bargaining
representative elected by mechanics and related employees of the
Company in 1994. On June 22, 1998, the Company's mechanics ratified
an initial four year contract. The new contract includes a pay
scale comparable to the Company's peers in the regional airline
industry, and a one-time signing bonus, and allows the mechanics to
participate in the Company's employee benefit plans.
The Company's contract with the AFA became amendable on
April 30, 1997. An agreement was negotiated and agreed to between
the Company and AFA during 1998, and was ratified by the Company's
flight attendants on October 11, 1998. The new agreement is for a
four year duration and provides for a higher than previously
provided starting pay rate and a pay scale and per diem rate
comparable to the Company's peers in the regional airline industry.
The Company believes that the wage rates and benefits for
other employee groups are comparable to similar groups at other
regional airlines. The Company also believes that the incremental
costs as a result of the new and amended contracts will not have any
material effect on the Company's financial position or results of
its operations over the life of the agreements. The Company is
unaware of any significant organizing activities by labor unions
among its other non-union employees at this time.
As the Company continues to pursue its growth strategy,
its employee staffing needs and recruitment efforts are expected to
increase commensurately. Due to competitive local labor markets and
normal attrition to the major airlines, there can be no assurance
that the Company will be able to satisfy its hiring requirements.
The Company has committed additional resources to its employee
recruiting and retention efforts. In 1998, the Company began to pay
for new hire pilot training. Annual turnover of Company pilots was
approximately 10% during 1998, compared to 11% during 1997.
Pilot Training
The Company performs pilot training in state-of-the-art,
full motion simulators and conducts training in accordance with FAA
Part 121 regulations. In 1993, the Company initiated an Advanced
Qualification Program ("AQP") to enhance pilot performance in both
technical and CRM skills. The FAA has recognized the Company's
leadership in CRM training and selected the Company to participate
in a FAA sponsored training grant called ACRM. The Company and the
grant team were successful in introducing improvements in CRM and
AQP training that have benefited not only the Company, but also the
entire airline industry.
In December 1998, the Company entered into an agreement
with Pan Am International Flight Academy ("PAIFA") to provide
simulator training for the Company's RJ program. Under terms of the
agreement, PAIFA will develop a comprehensive training facility to
be based near the Company's headquarters in Loudoun County, VA.
This facility is expected to be completed during the fourth quarter
of 1999. The Company has committed to purchase an annual minimum
number of simulator training hours for a period of ten years at a
guaranteed fixed price once the facility receives FAA certification.
The Company's payment obligations for the next ten years are
approximately $13 million.
<PAGE 12>
Regulation
Economic. With the passage of the Deregulation Act, much
of the regulation of domestic airline routes and rates was
eliminated. DOT still has extensive authority to issue certificates
authorizing carriers to engage in air transportation, establish
consumer protection regulations, prohibit certain unfair or anti-
competitive pricing practices, mandate conditions of carriage and
make ongoing determinations of a carrier's fitness, willingness and
ability to provide air transportation. The DOT can also bring
proceedings for the enforcement of its regulations under applicable
federal statutes, which proceedings may result in civil penalties,
revocation of operating authority or criminal sanctions.
The Company holds a certificate of public convenience and
necessity, issued by the DOT, that authorizes it to conduct air
transportation of persons, property and mail between all points in
the United States, its territories and possessions. This
certificate requires that the Company maintain DOT-prescribed
minimum levels of insurance, comply with all applicable statutes and
regulations and remain continuously "fit" to engage in air
transportation.
Based on conditions in the industry, or as a result of
Congressional directives or statutes, the DOT from time to time
proposes and adopts new regulations or amends existing regulations
which new or amended regulations may impose additional regulatory
burdens and costs on the Company.
The DOT has also enacted rules establishing guidelines for
setting reasonable airport charges and procedural rules for
challenging such charges. The DOT has adopted a compliance policy
regarding the increasing use of ticketless travel and the consumer-
related notices that must be supplied to passengers before travel.
The DOT has also proposed rules to implement a statutory directive
and a Presidential Commission recommendation to improve notice to
families of passengers involved in aviation accidents. The DOT is
considering the means by which it will require domestic and
international carriers to collect additional passenger-related
information, including emergency contact names and telephone numbers
and other identifying information. The DOT has estimated that the
cost to the industry of obtaining this information from each
passenger could be significant.
Safety. The FAA extensively regulates the safety-related
activities of air carriers. The Company is subject to the FAA's
jurisdiction with respect to aircraft maintenance and operations,
equipment, ground facilities, flight dispatch, communications,
training, weather observation, flight personnel and other matters
affecting air safety. To ensure compliance with its regulations,
the FAA requires that airlines under its jurisdiction obtain an
operating certificate and operations specifications for the
particular aircraft and types of operations conducted by such
airlines. The Company possesses an Air Carrier Certificate issued
by the FAA and related authorities authorizing it to conduct
operations with turboprop and turbojet equipment. The Company's
authority to conduct operations is subject to suspension,
modification or revocation for cause. The FAA has authority to
bring proceedings to enforce its regulations, which proceedings may
result in civil or criminal penalties or revocation of operating
authority.
<PAGE 13>
From time to the time, the FAA conducts inspections of air
carriers with varying degrees of intensity. The Company underwent
an intensive, two-week FAA Regional Aerospace Inspection Program
("RASIP") audit during the fourth quarter of 1997. The final audit
report consisted of recommendations and minor findings, none of
which resulted in civil penalties. The Company responded to the
findings and believes that it has met and continues to meet the
required standards for safety and operational performance. The
Company's airline operations will continue to be audited by the FAA
for compliance with applicable safety regulations.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance
directives and other mandatory orders relating to, among other
things, inspection of aircraft and the mandatory removal and
replacement of parts that have failed or may fail in the future. In
addition, the FAA from time to time amends its regulations. Such
amended regulations may impose additional regulatory burdens on the
Company such as the installation of new safety-related items.
Depending upon the scope of the FAA's order and amended regulations,
these requirements may cause the Company to incur substantial,
unanticipated expenses.
The FAA requires air carriers to adopt and enforce
procedures designed to safeguard property, ensure airport security
and screen passengers to protect against terrorist acts. The FAA,
from time to time, imposes additional security requirements on air
carriers and airport authorities based on specific threats or world
conditions or as otherwise required. The Company incurs substantial
expense in complying with current security requirements and it
cannot predict what additional security requirements may be imposed
in the future or the cost of complying with such requirements.
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the
transportation of hazardous materials. The Company neither accepts
nor ships hazardous materials or other dangerous goods. Employees of
the Company are trained in hazardous materials and dangerous goods
recognition through a FAA approved training course. The FAA
enforces its hazardous material regulations by the imposition of
civil penalties, which can be substantial.
Other Regulation. In the maintenance of its aircraft
fleet and ground equipment, the Company handles and uses many
materials that are classified as hazardous. The Environmental
Protection Agency and similar local agencies have jurisdiction over
the handling and processing of these materials. The Company is also
subject to the oversight of the Occupational Safety and Health
Administration concerning employee safety and health matters. The
Company is subject to the Federal Communications Commission's
jurisdiction regarding the use of radio frequencies.
The Airport Noise Control Act ("ANCA") requires that
airlines phase-out the operation of certain types of aircraft. None
of the Company's aircraft are subject to the phase-out provisions of
ANCA. While ANCA generally preempts airports from imposing
unreasonable local noise rules that restrict air carrier operations,
airport operators may implement reasonable and nondiscriminatory
local noise abatement procedures, which procedures could impact the
ability of the Company to serve certain airports, particularly in
off-peak hours. Certain local noise rules adopted prior to ANCA
were grandfathered under the statute.
<PAGE 14>
Federal Excise Taxes. Ticketing airlines are obligated to
collect a U.S. transportation excise tax on passenger ticket sales.
This tax, known as the aviation trust tax or the "ticket tax" is
used to defray the cost of FAA operations and other aviation
programs. Beginning on October 1, 1997, a revised formula for
determining the ticket tax took effect. Under this revised formula,
the ticket tax is now comprised of a percentage of the passenger
ticket price plus a flat fee for each segment flown, and will be
adjusted annually. For the period from October 1, 1997 through
September 30, 1998, the ticket tax was equal to nine percent of
passenger ticket price plus $1 per segment. Beginning October 1,
1998, the ticket tax was eight percent of passenger ticket price
plus $2 per segment.
Seasonality
As is common in the industry, the Company experiences
lower demand for its product during the period of December through
February. Because the Company's services and marketing efforts are
focused on the business traveler, this seasonality of demand is
somewhat greater than for airlines which carry a larger proportion
of leisure travelers. In addition, the Company's principal
geographic area of operations experiences more adverse weather
during this period, causing a greater percentage of the Company's
and other airlines' flights to be canceled. These seasonal factors
have combined in the past to reduce the Company's capacity, traffic,
profitability, and cash generation for this three month period as
compared to the rest of the year.
Item 2. Properties
Leased Facilities
Airports
The Company leases gate and ramp facilities at all of the
airports it serves and leases ticket counter and office space at
those locations where ticketing is handled by Company personnel.
Payments to airport authorities for ground facilities are generally
based on a number of factors, including space occupied as well as
flight and passenger volume. In June 1998, the Company announced
that the Metropolitan Washington Airports Authority ("MWAA") in
coordination with the Company, will build a 69,000 square foot
passenger concourse at Washington-Dulles dedicated solely to
regional airline operations. The 36-gate concourse, designed to
support the Company's expanding United Express operation, is
scheduled to open in May 1999. MWAA will provide the permanent
financing for the $18 million concourse through passenger facility
charges and/or airport facility bonds, with the Company agreeing to
provide short term interim financing for up to $15 million of
construction costs. (See Management's Discussion and Analysis -
Other Commitments)
Corporate Offices
The Company's leased headquarters in Dulles, VA provides
over 45,000 square feet in one building for the executive,
administrative, training and system control departments. The Company
believes that these facilities are adequate to conduct its current
and planned operations.
Maintenance Facilities
The FAA's safety regulations mandate periodic inspection
and maintenance of commercial aircraft. The Company performs most
line maintenance, service and inspection of its aircraft and engines
at its maintenance facilities using its own personnel.
<PAGE 15>
In February 1998, the Company occupied its new 90,000
square foot aircraft maintenance facility comprised of 60,000 square
feet of hangar space and 30,000 square feet of support space at
Washington-Dulles. The Company has consolidated all maintenance
functions to this facility which includes hangar, shop and office
space necessary to maintain the Company's growing fleet.
Item 3. Legal Proceedings
The Company is a party to routine litigation and FAA
proceedings incidental to its business, none of which is likely to
have a material effect on the Company's financial position or the
results of its operations.
The Company was a party to an action pending in the United
States District Court for the Southern District of Ohio, Peter J.
Ryerson, administrator of the estate of David Ryerson, v. Atlantic
Coast Airlines, Case No. C2-95-611. In September and October 1998,
this action and all related litigation was settled, the cost of
which was covered by insurance and was not borne by the Company.
The Company is also a party to an action pending in the
United States Court of Appeals for the Fourth Circuit known as Afzal
v. Atlantic Coast Airlines (No. 98-1011). This action is an appeal
of the December 1997 decision granted in favor of the Company in a
case claiming wrongful termination of employment brought in the
United States District Court for the Eastern District of Virginia
known as Afzal v. Atlantic Coast Airlines (Civil Action No. 96-1537-
A). The Company does not expect the outcome of this case to have
any material adverse effect on its financial condition or results of
its operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal quarter ended
December 31, 1998, to a vote of the security holders of the Company
through the solicitation of proxies or otherwise.
<PAGE 16>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock, par value $.02 per share (the
"Common Stock"), is traded on the Nasdaq National Market
("Nasdaq/NM") under the symbol "ACAI". Trading of the Common Stock
commenced on July 21, 1993.
On 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, which was obtained at the Company's 1998 Annual Meeting.
References in the Company's Annual Report on Form 10-K related to
Common Shares, including price, number of shares, etc. have been
adjusted to reflect the stock split.
The following table sets forth the reported high and low
closing sale prices of the Common Stock on the Nasdaq/NM for the
periods indicated:
1997 High Low
First quarter $ 8.50 $ 5.94
Second quarter $ 8.63 $ 6.13
Third quarter $11.00 $ 7.75
Fourth quarter $15.94 $ 9.25
1998
First quarter $25.38 $15.56
Second quarter $33.00 $23.50
Third quarter $35.00 $17.00
Fourth quarter $30.50 $13.25
1999
First quarter
(through March 1, 1999) $35.00 $26.81
As of March 1, 1999, the closing sales price of the Common
Stock on Nasdaq/NM was $30.875 per share and there were
approximately 121 holders of record of Common Stock.
The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any Common Stock cash dividends
in the foreseeable future. The Company intends to retain earnings to
finance the growth of its operations. The payment of Common Stock
cash dividends in the future will depend upon such factors as
earnings levels, capital requirements, the Company's financial
condition, the applicability of any restrictions imposed upon the
Company's subsidiary by certain of its financing agreements, the
dividend restrictions imposed by the Company's $35 million line of
credit, and other factors deemed relevant by the Board of Directors.
In addition, ACAI is a holding company and its only significant
asset is its investment in its subsidiary, ACA.
<PAGE 17>
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1,
2004 (the "Notes"), pursuant to Rule 144A under the Securities Act
of 1933, and received net proceeds of approximately $55.6 million
related to the sale of the Notes. The Notes are convertible into
shares of Common Stock, par value $0.02 of the Company by the
holders at any time after sixty days following the latest date of
original issuance thereof and prior to maturity, unless previously
redeemed or repurchased, at a conversion price of $9 per share,
subject to certain adjustments. The Company may not call the Notes
for redemption prior to July 1, 2000.
In January 1998, $5.9 million face amounts of Notes were
converted at the option of several holders into 660,826 shares of
the Company's Common Stock. On March 3, 1998, the Company notified
holders of the Notes that the Company was temporarily reducing the
conversion price in order to induce the holders to redeem their
Notes for Common Stock During the reduced conversion price period,
which was effective from March 20 through April 8, 1998, $31.7
million of the Notes were converted to common stock, resulting in
the issuance of 3,576,782 common shares. The reduced conversion
price caused approximately 56,174 additional common shares to be
issued to converting Note holders, resulting in a charge of
approximately $1.4 million. As of March 1, 1999, approximately
$19.8 million principal amount of Notes were outstanding, which were
convertible into approximately 2.2 million shares of Common Stock.
In July 1997, the Company repurchased 1.46 million shares
of the Company's Common Stock from British Aerospace for $16.9
million using a portion of the proceeds received from the issuance
of the Notes.
Item 6. Selected Financial Data
The following selected financial data under the caption
"Consolidated Financial Data" and "Consolidated Balance Sheet Data"
relating to the years ended December 31, 1994, 1995, 1996, 1997 and
1998 have been derived from the Company's consolidated financial
statements. The following selected operating data under the caption
"Selected Operating Data" have been derived from Company records.
The data should be read in conjunction with "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and
the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.
<PAGE 18>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share amounts and operating data)
Consolidated Financial Data: Years ended December 31,
1994 1995 1996 1997 1998
Operating revenues:
Passenger revenues $156,047 $153,918 $179,370 $202,540 $285,243
Total operating 158,919 156,968 182,484 205,444 289,940
revenues
Operating expenses:
Salaries and related 41,590 40,702 44,438 49,661 68,135
costs
Aircraft fuel 15,189 13,303 17,124 17,766 23,978
Aircraft maintenance 22,345 15,252 16,841 16,860 22,730
and materials
Aircraft rentals 35,565 25,947 29,137 29,570 36,683
Traffic commissions 25,913 25,938 28,550 32,667 42,429
and related fees
Facility rent and 9,598 7,981 8,811 10,376 13,475
landing fees
Depreciation and 2,329 2,240 2,846 3,566 6,472
amortization
Other 15,569 13,281 14,900 16,035 23,347
Write-off of 6,000 - - - -
intangible assets
Restructuring charges 8,099 (521) (426) - -
(reversals)
Total operating 182,197 144,123 162,221 176,501 237,249
expenses
Operating income (loss) (23,278) 12,845 20,263 28,943 52,691
Interest expense (2,153) (1,802) (1,013) (3,450) (4,207)
Interest income - 66 341 1,284 4,145
Debt conversion - - - - (1,410)
expense (1)
Other income 295 181 17 62 326
(expense), net
Total non operating (1,858) (1,555) (655) (2,104) (1,146)
expenses
Income (loss) before
income tax expense (25,136) 11,290 19,608 26,839 51,545
and extraordinary
item
Income tax provision - (1,212) 450 12,339 21,133
(benefit)
Income (loss) before (25,136) 12,502 19,158 14,500 30,412
extraordinary item
Extraordinary item (2) - 400 - - -
Net Income (loss) $(25,136) $12,902 $19,158 $14,500 $30,412
<PAGE 19>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share amounts and operating data)
Years ended December 31,
1994 1995 1996 1997 1998
Income (loss) per share:
Basic:
Income (loss) before $(1.84) $0.73 $1.13 $0.93 $1.68
extraordinary item
Extraordinary item - 0.03 - - -
Net income (loss) per $(1.84) $0.76 $1.13 $0.93 $1.68
share
Diluted:
Income (loss) before $(1.84) $0.65 $1.08 $0.80 $1.42
extraordinary item
Extraordinary item - 0.02 - - -
Net income (loss) per $(1.84) $0.67 $1.08 $0.80 $1.42
share
Weighted average number
of shares used
in computation (in 13,716 16,684 16,962 15,647 18,128
thousands) 13,716 19,742 17,840 19,512 22,186
Basic
Diluted
Selected Operating Data:
Departures 134,804 131,470 137,924 146,069 170,116
Revenue passengers 1,545,520 1,423,463 1,462,241 1,666,975 2,534,077
carried
Revenue passenger 393,013 348,675 358,725 419,977 792,934
miles (000s) (3)
Available seat miles 885,744 731,109 771,068 861,222 1,410,763
(000s) (4)
Passenger load 44.3% 47.7% 46.5% 48.8% 56.2%
factor (5)
Breakeven passenger 47.0% 43.9% 41.4% 41.8% 45.8%
load factor (6)
Revenue per $0.179 $0.215 $0.237 $0.239 $0.206
available seat mile
Cost per available $0.189 $0.198 $0.211 $0.205 $0.168
seat mile (7)
Average yield per $0.397 $0.441 $0.500 $0.482 $0.360
revenue passenger mile
(8)
Average fare $101 $108 $123 $122 $113
Average passenger 254 245 245 252 313
trip length (miles)
Aircraft in service 56 54 57 65 74
(end of period)
Destinations served 42 41 39 43 53
(end of period)
Consolidated Balance
Sheet Data:
Working capital $(4,488) $4,552 $17,782 $45,028 $68,130
(deficiency)
Total assets 40,095 47,499 64,758 148,992 227,626
Long-term debt and
capital leases, less 6,675 7,054 5,673 76,145 64,735
current
portion
Redeemable Series A,
Cumulative, 3,825 3,825 - - -
Convertible,
Preferred Stock
Total stockholders' 1,922 14,561 34,637 34,805 110,377
equity
<PAGE 20>
[FN]
1. In connection with the induced conversion of a portion of the 7%
Convertible Subordinated Notes ("Notes"), the Company recorded a non-cash,
non-operating charge of approximately $1.4 million. No similar charges were
recognized for the period from 1994 to 1997.
2. In connection with the early extinguishment of certain senior notes, in
1995 the Company recorded an extraordinary gain of $400,000 associated with
the extinguished debt. No similar extinguishments were recognized in 1994,
1996, 1997 or 1998.
3. "Revenue passenger miles" or "RPMs" represent the number of miles flown by
revenue passengers.
4. "Available seat miles" or "ASMs" represent the number of seats available
for passengers multiplied by the number of scheduled miles the seats are
flown.
5. "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles by
available seat miles.
6. "Breakeven passenger load factor" represents the percentage of seats needed
to be filled by revenue passengers for the airline to break even after
operating expenses, less other revenues and excluding restructuring and
write-offs of intangible assets. Had restructuring and write-offs of
intangible assets been included for the years ended December 31, 1994, 1995,
1996, 1997 and 1998, this percentage would have been 51.0%, 43.8%, 41.3%,
41.8% and 45.8%, respectively.
7. "Operating cost per available seat mile" represents total operating
expenses excluding restructuring and write-offs of intangible assets divided
by available seat miles. Had restructuring and write-offs of intangible assets
been included for the years ended December 31, 1994, 1995, 1996, 1997 and
1998, cost per available seat mile would have been $0.206, $0.197, $0.210,
$0.205 and $0.168, respectively.
8. "Average yield per revenue passenger mile" represents the average passenger
revenue received for each mile a revenue passenger is carried.
<PAGE 21>
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
In 1998, Atlantic Coast Airlines Holdings, Inc. ("ACAI")
and its wholly-owned subsidiary, Atlantic Coast Airlines ("ACA"),
together (the "Company"), recorded a profit of $30.4 million
compared to a profit of $14.5 million for 1997, and $19.2 million in
1996. The increased profitability from 1997 to 1998 is primarily
the result of the Company's growth and operating margin improvement.
For 1998, the Company's available seat miles ("ASM") increased 64%
with the addition of nine Regional Jets ("RJs") during the year.
Passenger acceptance of the RJ and the related increase in
connecting traffic to turboprop flights resulted in a 52% increase
in total passengers and an 89% increase in revenue passenger miles
("RPM").
The reduction in net income from 1996 to 1997 is primarily
due to an increase in the Company's provision for income taxes of
approximately $12.3 million in 1997 as compared to approximately
$500,000 for 1996. The increase in tax expense was primarily
attributable to higher levels of taxable income that could not be
offset by net operating loss carryforwards that were fully utilized
in 1996.
Results of Operations
The Company earned net income of $31.8 million (excluding
a non-cash, non-operating charge of $1.4 million) or $1.49 per
diluted share in 1998 compared to net income of $14.5 million or
$0.80 per diluted share in 1997, and $19.2 million or $1.08 per
diluted share in 1996. Net income was $30.4 million or $1.42 per
diluted share including the $1.4 million charge. During 1998, the
Company generated operating income of $52.7 million compared to
$28.9 million for 1997, and $20.3 million for 1996. Operating
margins for 1998, 1997 and 1996 were 18.2%, 14.1% and 11.1%,
respectively.
The improvement in operating income from 1997 to 1998
reflects a 63.8% increase in ASMs partially offset by a 13.8%
decrease in unit revenue (revenue per ASM) from $0.239 to $0.206 and
a 18% decrease in unit cost (cost per ASM) from $0.205 to $0.168.
The improvement in operating income from 1996 to 1997
reflects a 0.8% increase in unit revenue (revenue per ASM) from
$0.237 to $0.239 coupled with an 11.7% increase in ASMs and a 2.8%
decrease in unit cost (cost per ASM).
Fiscal Year 1997 vs. 1998
<PAGE 22>
Operating Revenues
The Company's operating revenues increased 41.1% to $289.9
million in 1998 compared to $205.4 million in 1997. The increase
resulted from a 63.8% increase in ASMs, and an increase in load
factor of 7.4 points, partially offset by a 25.3% decrease in
revenue per revenue passenger mile (yield). The reduction in yield
is caused principally by a 24.2% increase in the average passenger
stage length from 252 miles in 1997 to 313 miles for 1998. Revenue
passengers
increased 52% in 1998 compared to 1997, which combined with the
increase in the average passenger stage length resulted in an 88.8%
increase in RPMs.
Operating Expenses
The Company's operating expenses increased 34.4% to $237.2
million in 1998 compared to $176.5 million in 1997 due primarily to
the 63.8% increase in ASMs and the 52% increase in passengers. The
increase in ASMs reflects the addition of nine RJ aircraft in 1998
and the full year effect of adding five RJs and five British
Aerospace Jetstream-41 ("J-41") aircraft during 1997.
A summary of operating expenses as a percentage of
operating revenue and operating cost per ASM for the years ended
December 31, 1997 and 1998 is as follows:
Year Ended December 31,
1997 1998
Percent Cost Percent Cost
of of
Operating per Operating per ASM
ASM
Revenues (cents Revenue (cents)
) s
Salaries and related 24.2% 5.8 23.5% 4.8
costs
Aircraft fuel 8.6% 2.1 8.3% 1.7
Aircraft maintenance 8.2% 2.0 7.8% 1.6
and materials
Aircraft rentals 14.4% 3.4 12.7% 2.6
Traffic commissions and 15.9% 3.8 14.6% 3.0
related fees
Facility rent and 5.1% 1.1 4.6% 1.0
landing fees
Depreciation and 1.7% .4 2.2% .5
amortization
Other 7.8% 1.9 8.1% 1.6
Total 85.9% 20.5 81.8% 16.8
Costs per ASM decreased 18% to 16.8 cents in 1998 compared
to 20.5 cents in 1997 primarily due to a 63.8% increase in ASMs in
1998 compared to 1997, offset by a 52% increase in passengers
carried. The increase in ASMs reflects the addition of nine RJ
aircraft during 1998 and the full year effect of adding five RJs and
five J-41 aircraft during 1997.
Salaries and related costs per ASM decreased 17.2% to 4.8
cents in 1998 compared to 5.8 cents in 1997. In absolute dollars,
salaries and related expenses increased 37.2% from $49.7 million in
1997 to $68.1 million in 1998. The increase primarily resulted from
the addition of 609 full and part time employees during 1998 to
support the additional aircraft.
The cost per ASM of aircraft fuel decreased to 1.7 cents
in 1998 compared to 2.1 cents in 1997. The total price per gallon
of fuel decreased 15% to 67.4 cents in 1998 compared to 79.3 cents
in 1997. In absolute dollars, aircraft fuel expense increased 35%
from $17.8 million in 1997 to $24 million in 1998 reflecting a 23%
increase in block hours and the higher fuel consumption per hour of
a RJ aircraft versus a turboprop aircraft.
The cost per ASM of aircraft maintenance and materials
decreased to 1.6 cents in 1998 compared to 2.0 cents in 1997. The
decreased maintenance expense per ASM resulted primarily from the
addition of the RJ aircraft. In addition to generating higher ASMs,
the RJ aircraft are covered by manufacturer's warranty for up to
three years on certain components. The Company did not record any
heavy maintenance repair costs related to the RJ aircraft. The RJ
cost savings are partially offset by the increasing costs of the
turboprop aircraft as they age. In absolute dollars, aircraft
maintenance and materials expense increased 34.8% from $16.9 million
in 1997 to $22.7 million in 1998.
<PAGE 23>
The cost per ASM of aircraft rentals decreased to 2.6
cents in 1998 compared to 3.4 cents in 1997. The decreased unit
costs reflect the full year effect of refinancing to lower rental
rates, eleven used J-41 aircraft, and the purchase of three used J-
41s all during the second half of 1997 and the refinancing of three
J-41s, combined with the purchases of two RJs and one J41 aircraft
during 1998. In absolute dollars, aircraft rental expense increased
24.1% to $36.7 million as compared to $29.6 million in 1997 due to
the additional aircraft added to the fleet.
The cost per ASM of traffic commissions and related fees
decreased to 3.0 cents in 1998 as compared to 3.8 cents in 1997.
The decrease reflects the reduced (from 10% to 8%) agency commission
rate for domestic travel adopted in late 1997. Since substantially
all passenger revenues are derived from interline sales, the Company
did not begin to realize the savings from this reduction until
February 1998. In addition, the Company's percentage of tickets
sold by travel agents decreased year over year by approximately ten
percentage points due principally to the acceptance of electronic
ticketing by the travelling public. Related fees include program
fees paid to United and CRS segment booking fees for reservations.
In absolute dollars, traffic commissions and related fees increased
29.9% to $42.4 million in 1998 from $32.7 million in 1997.
The cost per ASM of facility rent and landing fees
decreased to 1.0 cent in 1998 compared to 1.1 cents in 1997. In
absolute dollars, facility rent and landing fees increased 29.9% to
$13.5 million for 1998 from $10.4 million in 1997. The absolute
increase is the result of expansion of the Company's business to new
markets and increased landing fees due to the heavier RJ aircraft.
The cost per ASM of depreciation and amortization
increased to 0.5 cents in 1998 compared to 0.4 cents in 1997. In
absolute dollars, depreciation and amortization expense for 1998
increased 81.5% to $6.5 million from $3.6 million in 1997. The
absolute increase results from the purchase of two RJ aircraft, a J-
41 aircraft and RJ rotable spare parts in 1998 for approximately $51
million and the full year effect of purchasing four J-41 aircraft
and rotable spare parts in late 1997.
The cost per ASM of other operating expenses decreased to
1.6 cents in 1998 compared to 1.9 cents in 1997. In absolute
dollars, other operating expenses increased 45.6% to $23.3 million
for 1998 from $16.0 million in 1997. This absolute increase is
caused primarily by increases in crew accommodations and training
costs related to the general expansion of the Company's business and
increased distressed passenger expenses. During the fourth quarter
1998, the Company began to pay for new hire training. Due to the
scheduled addition of six additional RJs in the first five months of
1999, the Company incurred new hire pilot training costs of
approximately $678,000 in the fourth quarter 1998. The Company
expects pilot training costs to continue to increase as the
remaining firm ordered RJ aircraft are received.
As a result of the foregoing expense items, total
operating expenses were $237.2 million for 1998, an increase of
34.4% compared to $176.5 million in 1997. Total ASMs increased
63.8% year over year causing the cost per ASM to decrease from 20.5
cents in 1997 to 16.8 cents in 1998.
<PAGE 24>
Interest expense increased from $3.4 million in 1997 to
$4.2 million in 1998. During the first part of 1998, the Company
accepted for conversion into common stock approximately $38 million
of its 7% Convertible Subordinated Notes ("Notes"). The reduced
interest costs resulting from the debt conversion partially offset
the full year effect of the debt outstanding for the purchase of
four J-41s in 1997, and the issuance of new debt to acquire two RJs
and one J-41 in 1998.
Interest income increased from $1.3 million in 1997 to
$4.1 million in 1998. This is primarily the result of the Company's
significantly higher cash balances during 1998 as compared to 1997
and the capitalization of interest on the Company's outstanding
aircraft deposits with the manufacturers.
From March 20 through April 8, 1998, the Company
temporarily reduced the conversion price from $9 to $8.86 for
holders of the Notes. During this temporary period, $31.7 million
of the Notes converted into approximately 3.6 million shares of
common stock. As a result of this temporary price reduction, the
Company recorded a $1.4 million charge to other expense during 1998
representing the fair value of the additional shares distributed
upon conversion.
The Company recorded a provision for income taxes of
$21.1 million for 1998, compared to a provision for income taxes of
$12.3 million in 1997. The 1998 effective tax rate of approximately
41% and the 1997 effective tax rate of approximately 46% are higher
than the statutory federal and state rates. The higher effective
tax rates reflect non-deductible permanent differences between
taxable and book income. Net operating loss carryforwards were
fully utilized in 1996.
Fiscal Year 1996 vs. 1997
Operating Revenues
The Company's operating revenues increased 12.6% to $205.4
million in 1997 compared to $182.5 million in 1996. The increase
resulted from an 11.7% increase in ASMs, an increase in load factor
of 2.3 points, partially offset by a 3.6% decrease in yield.
The reduction in yield is related in part to the
reinstatement of the federal excise ticket tax from March 7, 1997
through the remainder of the year. During 1996, this tax was only
in effect from August 27, 1996 to December 31, 1996. Total
passengers increased 14.0% in 1997 compared to 1996 as a result of
the 11.7% increase in ASMs and 2.3 point increase in load factor.
Operating Expenses
The Company's operating expenses increased 8.8% to $176.5
million in 1997 compared to $162.2 million in 1996 due primarily to
an 11.7% increase in ASMs, and a 14.0% increase in passengers. The
increase in ASMs reflects the net addition of five J-41 and five RJ
aircraft during 1997.
<PAGE 25>
A summary of operating expenses as a percentage of
operating revenue and operating cost per ASM for the years ended
December 31, 1996 and 1997 is as follows:
Year Ended December 31,
1996 1997
Percent Cost Percent Cost
of of
Operating per Operating per ASM
ASM
Revenues (cents) Revenues (cents)
Salaries and related 24.4% 5.8 24.2% 5.8
costs
Aircraft fuel 9.4% 2.2 8.6% 2.1
Aircraft maintenance 9.2% 2.2 8.2% 2.0
and materials
Aircraft rentals 16.0% 3.8 14.4% 3.4
Traffic commissions and 15.6% 3.7 15.9% 3.8
related fees
Facility rent and 4.8% 1.1 5.1% 1.1
landing fees
Depreciation and 1.5% .4 1.7% .4
amortization
Other 8.2% 1.9 7.8% 1.9
Total (before
reversals of 89.1% 21.1 85.9% 20.5
restructuring
charges)
Costs per ASM before reversals of restructuring charges
decreased 2.8% to 20.5 cents in 1997 compared to 21.1 cents in 1996
primarily due to an 11.7% increase in ASMs in 1997 compared to 1996,
offset by a 14.0% increase in passengers carried. The increase in
ASMs resulted from the net addition of five J-41 aircraft and five
50-seat RJ aircraft along with a 1.2% improvement in daily aircraft
block hour utilization.
Salaries and related costs per ASM remained unchanged at
5.8 cents in 1997 compared to 1996. In absolute dollars, salaries
and related expenses increased 11.9% from $44.4 million in 1996 to
$49.7 million in 1997. The increase resulted from additional flight
payroll related to a contractual increase in May 1996 and February
1997 and a 10.7% increase in profit sharing expense year over year.
The cost per ASM of aircraft fuel decreased to 2.1 cents
in 1997 compared to 2.2 cents in 1996. The total cost of fuel per
gallon decreased 4.2% to 79.3 cents in 1997 compared to 82.8 cents
in 1996. In absolute dollars, aircraft fuel expense increased 4.1%
from $17.1 million in 1996 to $17.8 million in 1997.
The cost per ASM of aircraft maintenance and materials
decreased to 2.0 cents in 1997 compared to 2.2 cents in 1996. The
decreased maintenance expense resulted primarily from the receipt of
performance guarantee fees from an overhaul vendor. In absolute
dollars, aircraft maintenance and materials expense increased 0.6%
from $16.8 million in 1996 to $16.9 million in 1997.
The cost per ASM of aircraft rentals decreased to 3.4
cents in 1997 compared to 3.8 cents in 1996. The decreased unit
costs reflect the refinancing to lower rental rates of eleven used J-
41 aircraft and the purchase by the Company of three used J-41s.
All of these transactions were accomplished in the second half of
1997. In absolute dollars, aircraft rentals increased 1.7% from
$29.1 million in 1996 to $29.6 million in 1997.
<PAGE 26>
The cost per ASM of traffic commissions and related fees
increased to 3.8 cents in 1997 compared to 3.7 cents in 1996. The
increased commissions reflect the contractual increases in program
fees paid to United and a higher percentage of tickets sold by
travel agencies. Commission rates as a percent of total passenger
revenue fluctuate based on the mix of commissionable and non-
commissionable tickets, and have changed due to a cap on the total
amount of commission that travel agents can earn. Commissions as a
percentage of total passenger revenue averaged 7.3% in 1997 and 7.4%
in 1996. Related fees include program fees to United and segment
booking fees for reservations. In absolute dollars, traffic
commissions and related fees increased 14.3% from $28.6 million in
1996 to $32.7 million in 1997.
The cost per ASM of facility rent and landing fees
remained unchanged at 1.1 cents in 1997 compared to 1996. In
absolute dollars, facility rent and landing fees increased 17.8% to
$10.4 million for 1997 from $8.8 million in 1996. This absolute
increase is the result of expansion of the Company's business to new
markets and increased landing fees due to the heavier RJ aircraft.
The cost per ASM of depreciation and amortization remained
unchanged at 0.4 cents in 1997 compared to 1996. Absolute increases
in depreciation expense were offset by increases in ASMs. The
absolute increase results primarily from the purchase of four J-41
aircraft (one of these aircraft was new to the fleet in 1997),
additional rotable spare parts associated with additional J-41
aircraft, improvements to aircraft, leasehold improvements and
purchases of computer equipment. In absolute dollars, depreciation
and amortization expense increased 28.6% from $2.8 million in 1996
to $3.6 million in 1997.
The cost per ASM of other operating expenses remained
unchanged at 1.9 cents in 1997 compared to 1996. Absolute increases
were offset by increased ASMs. The absolute increase in expenses
are primarily attributable to increased training and distressed
passenger expenses. In absolute dollars, other operating expenses
increased 7.6% from $14.9 million in 1996 to $16 million in 1997.
As a result of the foregoing expense items, total
operating expenses before reversals of restructuring charges were
approximately $176.5 million for 1997, an increase of 8.5% compared
to $162.6 million in 1996. Total ASMs increased 11.7% year over
year and the cost per ASM decreased from 21.1 cents for 1996 to 20.5
cents for 1997.
The Company reversed excess restructuring reserves of
$426,000 in 1996 (0.1 cents per ASM). The Company established the
reserves with a charge of $8.1 million in 1994. The reversals
reflected remaining unused reserves for pilot requalification,
return conditions, spare parts reconciliation and miscellaneous
professional fees. As of December 31, 1996, there were no remaining
reserves related to the restructuring.
Interest expense, net of interest income, was $2.2 million
in 1997 and $672,000 in 1996. The increased expense reflects the
Company's issuance in July 1997 of $57.5 million of 7% convertible
debt and $16.4 million of equipment notes associated with pass
through trust certificates issued in September 1997 reduced by a
significant increase in the Company's cash balances in 1997 and use
of proceeds from the convertible debt to repay higher interest
bearing debt.
The Company recorded a provision for income taxes of
approximately $12.3 million for 1997, compared to a provision for
income taxes of approximately $500,000 in 1996. The 1996 effective
tax rate of approximately 2.3% was significantly less than the
statutory federal and state rates due principally to the full
utilization of net operating loss carryforwards and the elimination
of
the valuation allowance. The 1997 effective tax rate of
approximately 46% is higher than the statutory federal and state
rates primarily due to permanent differences.
<PAGE 27>
Outlook
This Outlook section and the Liquidity and Capital
Resources section below contain forward-looking statements. The
Company's actual results may differ significantly from the results
discussed in forward-looking statements. Factors that could cause
the Company's future results to differ materially from the
expectations described here include the response of the Company's
competitors to the Company's business strategy, market acceptance of
RJ service to new destinations, the cost of fuel, the weather,
satisfaction of regulatory requirements and general economic and
industry conditions.
A central element of the Company's business strategy is
expansion of its jet aircraft fleet. At December 31, 1998, the
Company had firm commitments to acquire 29 additional 50-seat RJs.
The Company believes that the continued implementation of these
aircraft will expand the Company's business into new markets. In
general, service to new markets may result in increased operating
expenses that may not be immediately offset by increases in
operating revenues.
In the fourth quarter of 1998, the Company began using
United's "ORION" revenue management system for flights departing
after January 31, 1999 and beyond. The PROS IV revenue management
system, which has been in operation since May 1997 at the Company,
was no longer used as of that date. ORION allows the Company to
take advantage of state of the art "Origin and Destination" revenue
maximization capabilities. As with the previous system, revenue
management analysts will continue to monitor forecasts and make
adjustments for changes in demand and behavior. The ORION system is
designed to optimize all of the passenger itineraries that flow over
the entire United/United Express network. Management believes that
ORION will further promote maximization of passenger revenue,
although there can be no assurance that this will occur.
As a result of the recent addition of new RJs, the
Company's maintenance expense on these aircraft were not material
due to manufacturers' warranties and the generally lower failure
rates of major components due to the newness of the aircraft. The
current average age of the Company's RJ fleet is approximately one
year. The Company's maintenance expense for RJ aircraft will
increase in future periods when substantial airframe and engine
repair costs are incurred. The Company has fixed, "not to exceed"
airframe maintenance cost per hour flown rates guaranteed by the
manufacturer. To date, the Company's actual airframe maintenance
cost per hour flown has not exceeded the guaranteed rate.
In late 1998, US Airways announced its intention to
increase activity at Washington-Dulles utilizing its mainline
service, lowfare MetroJet product, and its US Airways Express
affiliates. US Airways has since implemented or announced service
to eight of the Company's markets using both jet and turboprop
equipment. In two of the Company's existing markets, MetroJet will
provide the service at a significantly lower fare structure. The
Company continually monitors the effects competition has on its
routes, fares and frequencies. The Company believes that it can
compete effectively with US Airways, however there can be no
assurances that US Airways' expansion at Washington-Dulles will not
have a material adverse effect on the Company's results of
operations or financial position.
In early 1999, United announced its intention to increase
its level of activity at Washington-Dulles by 60% beginning in April
and May 1999. The Company believes that United's announced increase
will add approximately 7,000 additional daily seat departures to the
United/United Express operation at Washington-Dulles. The Company,
in concert with United, also announced either increased frequencies
or upgraded equipment, or both, in all of its markets affected by
the US Airways expansion.
<PAGE 28>
Liquidity and Capital Resources
The Company's balance sheet improved significantly during
1998 compared to 1997. As of December 31, 1998, the Company had
cash and cash equivalents of $64.4 million and working capital of
$68.1 million compared to $39.2 million and $45.2 million,
respectively, as of December 31, 1997. During the year ended
December 31, 1998, cash and cash equivalents increased $25.2
million, reflecting net cash provided by operating activities of
$39.7 million, net cash used in investing activities of $39.7
million (related to purchases of aircraft and equipment and
decreases in short term investments) and net cash provided by
financing activities of $25.2 million. Net cash provided by
financing activities increased principally due to the issuance of
long term debt to acquire two RJ and one J-41 aircraft.
The Company's balance sheet also improved significantly
during 1997 compared to 1996. As of December 31, 1997, the Company
had cash and cash equivalents of $39.2 million and working capital
of $45.2 million compared to $21.5 million and $17.8 million,
respectively, as of December 31, 1996. During the year ended
December 31, 1997, cash and cash equivalents increased $17.7
million, reflecting net cash provided by operating activities of
$21.3 million, net cash used in investing activities of $55.2
million (related to deposits for the RJs, purchases of equipment and
increases in short term investments) and net cash provided by
financing activities of $51.6 million. Net cash provided by
financing activities increased principally due to the receipt of net
proceeds of $55.6 million in July 1997 from the issuance of
convertible notes due 2004 partially offset by the $16.9 million
purchase of the Company's common stock from British Aerospace in
July 1997.
Other Financing
On February 8, 1999, the Company entered into an asset-
based lending agreement with two financial institutions that
provides the Company with a line of credit of up to $35 million,
depending on the amount of assigned ticket receivables and the value
of certain rotable spare parts. This line replaced a previous $20
million line. Borrowings under the line of credit can provide the
Company a source of working capital until proceeds from ticket
coupons are received. The line is collateralized by all of the
Company's receivables and certain rotable spare parts. There were
no borrowings under the previous line during 1998. The Company
pledged $2.9 million of this line of credit as collateral to secure
letters of credit issued on behalf of the Company by a financial
institution.
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7% Convertible Subordinated Notes due July 1,
2004 ("the Notes"). The Notes are convertible into shares of Common
Stock unless previously redeemed or repurchased, at a conversion
price of $9 per share, (after giving effect to the stock split on
May 15, 1998) subject to certain adjustments. Interest on the Notes
is payable on April 1 and October 1 of each year. The Notes are not
redeemable by the Company until July 1, 2000.
<PAGE 29>
In January 1998, approximately $5.9 million of the Notes
were converted, pursuant to their original terms, into 660,826
shares of Common Stock. From March 20, 1998 to April 8, 1998, the
Company temporarily reduced the conversion price from $9 to $8.86
for holders of the Notes. During this period, $31.7 million of the
Notes converted into approximately 3.6 million shares of Common
Stock. As a result of this temporary price reduction, the Company
recorded a non-cash, non-operating charge to earnings during the
second quarter of 1998 of $1.4 million representing the fair value
of the additional shares distributed upon conversion.
In September 1997, approximately $112 million of pass
through certificates were issued in a private placement by separate
pass through trusts, which purchased with the proceeds, equipment
notes (the "Equipment Notes") issued in connection with (i)
leveraged lease transactions relating to four J-41s and six RJs, all
of which were leased to the Company (the "Leased Aircraft"), and
(ii) the financing of four J-41s owned by the Company (the "Owned
Aircraft"). The Equipment Notes issued with respect to the Owned
Aircraft are direct obligations of ACA, guaranteed by ACAI and are
included as debt obligations in the accompanying consolidated
financial statements. The Equipment Notes issued with respect to the
Leased Aircraft are not obligations of ACA or guaranteed by ACAI.
With respect to one RJ leased aircraft, at December 31,
1997 (the "Prefunded Aircraft"), the proceeds from the sale of the
Equipment Notes were deposited into collateral accounts, to be
released at the closing of a leveraged lease related to the
Prefunded Aircraft. In January 1998, an equity investor purchased
this aircraft and entered into a leveraged lease with the Company
and the collateral accounts were released.
Other Commitments
In July 1997, the Company entered into a series of put and
call contracts having an aggregate notional amount of $39.8 million.
The contracts matured between March and September 1998. The
contracts were entered into as an interest rate hedge designed to
limit the Company's exposure to interest rate changes on the
anticipated issuance of permanent financing relating to the delivery
of aircraft in 1998. During 1998, the Company settled these
contracts, paying the counterparty approximately $2.3 million, and
is amortizing this cost over the life of the related aircraft leases
or is depreciating the cost as part of the aircraft acquisition cost
for owned aircraft. On July 2, 1998, the Company entered into
additional put and call contracts having an aggregate notional
amount of $51.8 million to hedge its exposure, to interest rate
changes on the anticipated issuance of permanent financing for six
RJ aircraft scheduled for delivery between October 1998 and April
1999. In the fourth quarter 1998, the Company settled two
contracts, paying the counterparty approximately $700,000, and is
amortizing this cost over the life of the related aircraft lease for
the leased aircraft and is depreciating the cost as part of the
aircraft acquisition cost for the owned aircraft. The Company would
have been obligated to pay the counterparty approximately $1.5
million had the remaining contracts settled on December 31, 1998.
<PAGE 30>
In September and December 1998, the Company entered into
call option contracts to hedge price changes on approximately 34,000
barrels of jet fuel per month during the period from January 1999 to
June 1999. The contracts provide for a premium payment of
approximately $273,000 and sets a cap on the average maximum price
equal to 40.625 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 period in
which the Company purchases fuel. In October and November 1998, the
Company entered into commodity swap transactions to hedge price
changes on approximately 34,000 additional barrels of jet fuel per
month during the period from January 1999 to June 1999. The
contracts provide for an average fixed price of 44.35 cents per
gallon of jet fuel with any gains or losses recognized as a
component of fuel expense during the period in which the Company
purchases fuel. With these transactions, the Company has hedged
approximately 80% of its jet fuel requirements for the first half of
1999. Had the commodity swap transactions settled on December 31,
1998, the Company would have incurred approximately $900,000 in
additional fuel expense.
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 69,000
square foot regional passenger concourse at Washington-Dulles. The
facility is scheduled to open in May 1999. The new facility will
offer improved passenger amenities and operational enhancements, and
will provide additional space to support the Company's expanded
operations resulting from the introduction of RJs. 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.
MWAA has agreed to fund the construction through the proceeds of
bonds and, subject to approval by the FAA, passenger facility
charges ("PFC"). In order to obtain the most favorable permanent
financing, the Company 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 for approximately $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 PFC funding rather than bond
financing, the Company's lease cost will be significantly lower. The
Company obtained financing for this obligation from two banks in
February 1999 and has borrowed $4.5 million through March 1, 1999.
MWAA has agreed to reimburse principal borrowings but the Company
will be responsible for all interest costs.
Aircraft
The Company has significant lease obligations for aircraft
including seven additional RJ leveraged leases entered into in 1998
that are classified as operating leases and therefore are not
reflected as liabilities on the Company's balance sheet. The
remaining terms of such leases range from two to sixteen and a half
years. The Company's total rent expense in 1998 under all non-
cancelable aircraft operating leases with remaining terms of more
than one year was approximately $37.5 million. As of December 31,
1998, the Company's minimum rental payments for 1999 under all non-
cancelable aircraft operating leases with remaining terms of more
than one year were approximately $42 million.
As of March 1, 1999, the Company had a total of 28 RJs on
order from Bombardier, Inc., in addition to the 15 already
delivered, and held options for 27 additional RJs. During 1998, the
Company converted five of the six conditional orders and converted
20 option aircraft to firm orders. Of the remaining 28 firm
aircraft deliveries, eight are scheduled for the remainder of 1999,
nine are scheduled for 2000, and eleven are scheduled for 2001.
<PAGE 31>
The Company is obligated to purchase and finance
(including leveraged leases) the 28 firm ordered aircraft at an
approximate capital cost of $520 million.
The Company previously announced that it is exploring
alternatives to accelerate the retirement of its fleet of 28 leased
19 seat J-32 aircraft. The Company is assessing plans to target the
phase-out of the J-32 from its United Express operation by the end
of 2001. As of March 1, 1999, the Company has J-32 operating lease
commitments with remaining lease terms ranging from three to seven
years and related minimum lease payments of approximately $47
million. The Company intends to complete its analysis of a phase-
out plan including quantifications of any one-time fleet
rationalization charge during 1999.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance
directives and other mandatory orders relating to, among other
things, inspection of aircraft and the mandatory removal and
replacement of parts that have failed or may fail in the future. In
addition, the FAA from time to time amends its regulations. Such
amended regulations may impose additional regulatory burdens on the
Company such as the installation of new safety-related items.
Depending upon the scope of the FAA's order and amended regulations,
these requirements may cause the Company to incur substantial,
unanticipated expenses.
Capital Equipment and Debt Service
In 1999 the Company anticipates capital spending of
approximately $51 million consisting of $47 million to own two RJ
aircraft, rotable spare parts, spare engines and equipment, and $4
million for other capital assets. The Company anticipates that it
will be able to arrange financing for the aircraft and spares on
generally favorable terms, although there is no certainty that such
financing will be available or in place before the commencement of
deliveries.
Debt service for 1999 is estimated to be approximately $10
million reflecting borrowings related to the purchase of two RJ
aircraft, five J-41s acquired in 1997 and 1998 and interest due on
the remaining 7% Convertible Subordinated Notes. The foregoing
amount does not include additional debt that may be required for the
financing of the RJs, spare parts and engines.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the $35 million credit
facility, and other available equipment financing will be sufficient
to meet its working capital needs, expected operating lease
commitments, capital expenditures, and debt service requirements for
the next twelve months.
Inflation
Inflation has not had a material effect on the Company's
operations.
<PAGE 32>
Year 2000 Readiness
Background
The "Year 2000 problem" refers to the potential
disruptions arising from the inability of computer and embedded
microprocessor systems to process or operate with data inputs
involving the years beginning with 2000 and, to a lesser extent,
involving the year 1999. As used by the Company, "year 2000 ready"
means that a system will function in the year 2000 without
modification or adjustment, or with a one-time manual adjustment.
State of Readiness
The Company is highly reliant on information technology
("IT") systems and non-IT embedded technologies of third party
vendors and contractors and governmental agencies, such as the CRS
systems, United, aircraft and parts manufacturers, the FAA, the DOT,
and MWAA and other local airport authorities. The Company sent
questionnaires to these third party vendors, contractors and
government agencies. For all mission critical and key vendors, the
Company has received a response and has assessed which of their
systems may be affected by year 2000 issues and what the status of
their remediation plans are. All mission critical and key vendors
have stated that they will be year 2000 compliant by June 30, 1999.
In cases where the Company has not received assurances from non
critical third parties that their systems are year 2000 ready, it is
initiating further mail or phone correspondence. The Company also
has surveyed its internal IT and non-IT systems and embedded
operating systems to evaluate and prioritize those which are not
year 2000 ready. The Company has completed remediation and testing
of approximately 97% of its internal IT and non-IT systems, and
expects the Company's remaining IT systems to be remediated and
tested by April 30, 1999.
Costs
The Company has utilized existing resources and has not
incurred any significant costs to evaluate or remediate year 2000
issues to date. The Company does not utilize older mainframe
computer technology in any of its internal IT systems. In addition,
most of its hardware and software were acquired within the last few
years, and many functions are operated by third parties or the
government. Because of this, the Company believes that the cost to
modify its own non-year 2000 ready systems or applications will not
have a material effect on its financial position or the results of
its operations.
Risks
The Company's year 2000 compliance efforts are heavily
dependent on year 2000 compliance by governmental agencies, United,
CRS vendors and other critical vendors and suppliers. The failure
of any one of these mission critical functions (which the Company
believes to be the most likely worst case scenario), such as a shut-
down of the air traffic control system, could result in the
reduction or suspension of the Company's operations and could have a
material adverse effect on the
Company's financial position and results of its operations. The
failure of other systems could cause disruptions in the Company's
flight operations, service delivery and/or cash flow. Until it has
fully completed its evaluation of all internal IT and non-IT
systems, the Company cannot accurately estimate all risks of its
Year 2000 issue. The Company may identify internal systems that
present a risk of Year 2000 related disruption. Any such disruption
could have a material adverse effect upon the Company's financial
condition and results of operations.
<PAGE 33>
Contingency Plans
The Company is in the process of developing year 2000
contingency plans. The Company intends to closely monitor the year
2000 compliance efforts of the third parties upon which it is
heavily reliant and its own internal remediation efforts. While
certain of the Company's systems could be handled manually, under
certain scenarios the Company may not be able to operate in the
absence of certain systems, in which cases the Company would need to
reduce or suspend operations until such systems were restored to
operational status. Any such reduction or suspension could have a
material adverse effect upon the Company's financial condition and
results of operations.
Recent Accounting Pronouncements
The American Institute of Certified Public Accountants
issued Statement of Position 98-5 on accounting for start-up costs,
including preoperating costs related to the introduction of new
fleet types by airlines. The new accounting guidelines will take
effect for fiscal years beginning after December 15, 1998. The
Company has previously deferred certain start-up costs related to
the introduction of the RJs 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. In January 1999, the
Company recorded a charge for the remaining unamortized balance of
approximately $1.5 million associated with preoperating costs.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
The Company's principal market risk results from changes
in jet fuel pricing and in interest rates.
For 1999, the Company has hedged its exposure to jet fuel
price fluctuations by entering into jet fuel option contracts for
approximately 40% of its estimated 1999 fuel requirements. The
option contracts are designed to provide protection against sharp
increases in the price of jet fuel. Based on the Company's 1999
projected fuel consumption of 45 million gallons, a one-cent
increase in the average annual price per gallon of jet fuel would
increase the Company's annual aircraft fuel expense by approximately
$366,000.
The Company's exposure to market risk associated with
changes in interest rates relates to the Company's commitment to
acquire regional jets. 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
aircraft. At December 31, 1998 the Company had four swap contracts
outstanding related to the delivery of the next four RJs. A one
percentage point decrease in interest rates from the Company's call
contracts would increase the Company's annual aircraft lease or
ownership costs associated with these contracts by $160,000.
<PAGE 34>
As of March 1, 1999, the Company has commitments to
purchase 28 additional RJ aircraft. The Company expects to finance
this commitment using a combination of debt, leveraged leases and
single entity operating leases. Changes in interest rates will
impact the actual cost to the Company for these transactions in the
future.
The Company does not have significant exposure to changing
interest rates on its long-term debt as the interest rates on such
debt are fixed. Likewise, the Company does not hold long-term
interest sensitive assets and therefore is not exposed to interest
rate fluctuations for its assets. The Company does not purchase or
hold any derivative financial instruments for trading purposes.
<PAGE 35>
Item 8. Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report for the years ended December 36
31, 1997 and 1998
Report of Independent Certified Public Accountants for the 37
year ended December 31, 1996
Consolidated Balance Sheets as of December 31, 1997 and 38
1998
Consolidated Statements of Operations for the years ended 39
December 31, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the 40
years ended December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended 41
December 31, 1996, 1997 and 1998
Notes to Consolidated Financial Statements 42
<PAGE 36>
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Coast Airlines Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Atlantic Coast Airlines Holdings, Inc. and subsidiary as of December
31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then
ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Atlantic Coast Airlines Holdings, Inc. and subsidiary as
of December 31, 1997 and 1998 and the results of their operations
and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Washington, D.C.
January 27, 1999
<PAGE 37>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Atlantic Coast Airlines Holdings, Inc.
We have audited the accompanying consolidated statements of income,
stockholders'equity and cash flows
of Atlantic Coast Airlines Holdings, Inc. and subsidiary, as of
December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of
operations and the cash flows of Atlantic Coast Airlines Holdings, Inc.
and subsidiary at
December 31, 1996 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Washington, D.C.
January 24, 1997, except for Note 18,
The date which is May 29, 1997
<PAGE 38>
(In thousands, except for share data and par values)
December 31, 1997 1998
Assets
Current:
Cash and cash equivalents $ $
39,167 64,412
Short term investments 10,737 63
Accounts receivable, net 22,321 30,210
Expendable parts and fuel inventory, net 2,477 3,377
Prepaid expenses and other current 2,006 3,910
assets
Deferred tax asset - 2,534
Total current assets 76,708 104,506
Property and equipment at cost, net of
accumulated depreciation and amortization 40,638 88,326
Preoperating costs, net of accumulated 2,004 1,486
amortization
Intangible assets, net of accumulated 2,613 2,382
amortization
Deferred tax asset 688 -
Debt issuance costs, net of accumulated 3,051 3,420
amortization
Aircraft deposits 19,040 21,060
Other assets 4,250 6,446
Total assets $ $
148,992 227,626
Liabilities and Stockholders' Equity
Current:
Current portion of long-term debt $ $
1,851 3,450
Current portion of capital lease 1,730 1,334
obligations
Accounts payable
4,768 5,262
Accrued liabilities
23,331 26,330
Total current liabilities 31,680 36,376
Long-term debt, less current portion 73,855 63,289
Capital lease obligations, less current 2,290 1,446
portion
Deferred tax liability - 6,238
Deferred credits, net 6,362 9,900
Total liabilities 114,187 117,249
Stockholders' equity:
Preferred Stock: $.02 par value per share;
shares authorized - -
5,000,000; no shares issued or outstanding
in 1997 or 1998
Common stock: $.02 par value per share;
shares authorized 15,000,000 in 1997 and
65,000,000 in 1998; shares issued 16,006,514
in 1997 and 20,821,001 in 1998; shares 175 416
outstanding 14,534,014 in 1997 and
19,348,501 in 1998
Class A common stock: nonvoting; par value;
$.02 stated value per share; shares - -
authorized 6,000,000; no shares issued or
outstanding
Additional paid-in capital 40,296 85,215
Less: Common stock in treasury, at cost,
1,472,500 shares in 1997 and in 1998
(17,069) (17,069)
Retained earnings
11,403 41,815
Total Stockholders' Equity 34,805 110,377
Total Liabilities and Stockholders' $ $
Equity 148,992 227,626
Commitments and Contingencies
See accompanying notes to consolidated financial statements.
<PAGE 39>
(In thousands, except for per share data)
Years ended December 31,
1996 1997 1998
Operating revenues:
Passenger $ $ $
179,370 202,540 285,243
Other 3,114 2,904 4,697
Total operating revenues 182,484 205,444 289,940
Operating expenses:
Salaries and related costs 44,438 49,661 68,135
Aircraft fuel 17,124 17,766 23,978
Aircraft maintenance and materials 16,841 16,860 22,730
Aircraft rentals 29,137 29,570 36,683
Traffic commissions and related fees 28,550 32,667 42,429
Facility rents and landing fees 8,811 10,376 13,475
Depreciation and amortization 2,846 3,566 6,472
Other 14,900 16,035 23,347
Restructuring charges (reversals)
(426) - -
Total operating expenses 162,221 176,501 237,249
Operating income 20,263 28,943 52,691
Other income (expense):
Interest expense
(1,013) (3,450) (4,207)
Interest income 341 1,284
4,145
Debt conversion expense - - (1,410)
Other income (expense), net 17 62 326
Total other expense
(655) (2,104) (1,146)
Income before income tax
provision 19,608 26,839 51,545
Income tax provision 450 12,339 21,133
Net income $19,158 $14,500 $30,412
Income per share:
Basic $1.13 $0.93 $1.68
Diluted $1.08 $0.80 $1.42
Weighted average shares used in
computation: 16,962 15,647 18,128
Basic 17,840 19,512 22,186
Diluted
See accompanying notes to consolidated financial statements.
<PAGE 40>
(In thousands, except
for share data) Common Stock Addit Treasury Stock Retained
------------- ional --------------- Earnings
------------- Paid- -------------- (Deficit)
-- In Shares
Shares Capit Amount
Amount al
Balance, December 31, 8,356,411 167 36,774 12,500 (125) (22,255)
1995
Exercise of common 142,499 3 351 - - -
stock options
Tax benefit of stock - - 564 - - -
option exercise
Net Income - - - - - 19,158
Balance December 31, 8,498,910 170 37,689 12,500 (125) (3,097)
1996
Exercise of common 240,597 5 1,250 - - -
stock options
Tax benefit of stock - - 1,357 - - -
option exercise
Purchase of treasury - - - 1,460,000 (16,944) -
stock
Net Income - - - - - 14,500
Balance December 31, 8,739,507 $175 $40,296 $1,472,500 $(17,069) $11,403
1997
Exercise of common 286,011 6 2,473 - - -
stock options
Tax benefit of stock - - 4,239 - - -
option exercise
Amortization of
deferred - - 574 - - -
compensation
Stock split 9,673,901 193 (193) - - -
Conversion of debt 2,121,582 42 37,826 - -
Net Income - - - - - 30,412
Balance December 31, 20,821,001 $416 $85,215 1,472,500 $(17,069) $41,815
1998
See accompanying notes to consolidated financial statements.
<PAGE 41>
(In thousands)
Years ended December 31,
1996 1997 1998
Cash flows from operating activities:
Net income $ 19,158 $ 14,500 $ 30,412
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 2,434 3,111 5,829
Amortization of intangibles and 412 455 690
preoperating costs
Provision for uncollectible 387 168 124
accounts receivable
Provision for inventory 50 63 86
obsolescence
Amortization of deferred credits (27) (243) (801)
Amortization of debt issuance - 181 465
costs
Capitalized interest, net - - (1,640)
Deferred tax (benefit) provision (1,640) 2,452 4,392
Net loss on disposal of fixed 1 450 247
assets
Amortization of debt discount and 46 76 70
finance costs
Debt conversion expense - - 1,410
Deferred compensation - - 574
Changes in operating assets and
liabilities:
Accounts receivable (1,741) (5,829) (6,077)
Expendable parts and 41 (781) (990)
fuel inventory
Prepaid expenses and (796) 403
other current assets (2,512)
Preoperating costs - (2,057) -
Accounts payable 238 998 423
Accrued liabilities 1,590 7,313 7,028
Net cash provided by 20,153 21,260 39,730
operating activities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment (2,128) (26,005) (51,020)
Proceeds from sales of fixed assets - -
1,318
Maturities of short term -
investments (10,737) 10,677
Refund of aircraft deposits - - 120
Payments for aircraft and other (61) (18,447) (832)
deposits
Net cash used in (2,189) (55,189) (39,737)
investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term 486 75,220 29,650
debt
Payments of long-term debt (1,234) (3,241) (2,248)
Payments of capital lease (1,171) (2,258) (2,656)
obligations
Proceeds from receipt of deferred 513 809 96
credits and other
Deferred financing costs (239) (3,215) (2,069)
Payment of convertible preferred (335) - -
stock dividend
Redemption of convertible preferred (3,825) - -
stock
Proceeds from exercise of stock 915 1,255 2,479
options
Purchase of treasury stock - (16,944) -
Net cash (used in) (4,890) 51,626 25,252
provided by financing activities
Net increase in cash and cash 13,074 17,697 25,245
equivalents
Cash and cash equivalents, beginning 8,396 21,470 39,167
of year
Cash and cash equivalents, end of year $ 21,470 $ 39,167 $ 64,412
See accompanying notes to consolidated financial statements.
<PAGE 42>
1. Summary of (a)
Accounting Basis of Presentation
Policies
The accompanying consolidated financial
statements include the accounts of Atlantic Coast
Airlines Holdings, Inc. ("ACAI") and its wholly-
owned subsidiary, Atlantic Coast Airlines
("ACA"), together, (the "Company"). All
significant intercompany accounts and
transactions have been eliminated in
consolidation. As of December 31, 1998, the
Company operated in the air transportation
industry providing scheduled service for
passengers to 53 destinations in 24 states in the
Eastern and Midwestern United States. All of the
Company's flights are currently operated under a
code sharing agreement with United Airlines, Inc.
("United") and are identified as United Express
flights in computer reservation systems.
(b)Cash, Cash Equivalents and Short-Term Investments
The Company considers investments with an
original maturity of three months or less when
purchased to be cash equivalents. Investments
with an original maturity greater than three
months and less than one year are considered
short-term investments. All short-term
investments are considered to be available for
sale. Due to the short maturities associated
with the Company's investments, the amortized
cost approximates fair market value.
Accordingly, no adjustment has been made to
record unrealized holding gains and losses.
(c)Airline Revenues
Passenger fares and cargo revenues are recorded
as operating revenues at the time transportation
is provided. Substantially all of the Company's
passenger tickets are sold by other air
carriers. The value of unused passenger tickets
sold by the Company, which is minimal, is
included in current liabilities. The Company
participates in United's Mileage Plus frequent
flyer program. The Company does not accrue for
incremental costs for mileage accumulation
relating to this program because the Company
believes such costs are immaterial. Incremental
costs for awards redeemed on the Company's
flights are expensed as incurred.
(d)Accounts Receivable
Accounts receivable are stated net of allowances
for uncollectible accounts of approximately
<PAGE 43>
$269,000 and $364,000 at December 31, 1997 and
1998, respectively. Amounts charged to costs and
expenses for uncollectible accounts in 1996, 1997
and 1998 were $387,000, $168,000 and $124,000,
respectively. Write-off of accounts receivable
were $650,000, $186,000 and $29,000 in 1996, 1997
and 1998, respectively. Accounts receivable
included approximately $700,000 and $3.6 million
related to manufacturers credits to be applied
towards future spare parts purchases and RJ pilot
training expenses for the years ended December
31, 1997 and 1998, respectively.
(e)Concentrations of Credit Risk
The Company provides commercial air
transportation in the Eastern and Midwestern
United States. Substantially all of the Company's
passenger tickets are sold by other air carriers.
The Company has a significant concentration of
its accounts receivable with other air carriers
with no collateral. At December 31, 1997 and
1998, accounts receivable from air carriers
totaled approximately $18.7 million and $24.4
million, respectively. Such accounts receivable
serve as collateral to a financial institution in
connection with the Company's line of credit
arrangement. (See note 4). Of the total amount,
approximately $14.8 million and $20.8 million
at December 31, 1997 and 1998, respectively,
were due from United. Historically, accounts
receivable losses have been insignificant.
(f)Risks and Uncertainties
The airline industry is highly competitive and
volatile. The Company competes primarily with
other air carriers and, particularly with
respect to its shorter flights, with ground
transportation. Airlines primarily compete on
the basis of pricing, scheduling and type of
equipment. The Company's operations are
primarily dependent upon business-related travel
and are not subject to wide seasonal
fluctuation. However, some seasonal decline does
occur during portions of the winter months due
to lesser demand. The ability of the Company to
compete with ground transportation and other air
carriers depends upon public acceptance of its
aircraft and the provision of convenient,
frequent and reliable service to its markets at
reasonable rates.
The Company operates under code-sharing and
other marketing agreements with United, which
expire on March 31, 2009, unless earlier
terminated by United (the "Agreements"). Prior
to March 31, 2004, United may terminate the
Agreements at any time if the Company fails to
maintain certain performance standards, and may
terminate without cause after March 31, 2004 by
providing one year's notice to the Company. If
<PAGE 44>
by January 2, 2001 United has not given the
Company the abiltiy to operate regional jets of
44 seats or less seating capacity as United
Express, in addition to its allocation of 50
seat regional jets, the Company may terminate
the Agreements as of March 31, 2004. The Company
would be required to provide notice of
termination prior to January 2, 2002, which
notice would be void if United ultimately grants
such authority prior to January 2, 2002. Under
the terms of the Agreements, the Company pays
United monthly fees based on the total number of
revenue passengers boarded by the Company on its
flights for the month. The fee per passenger is
subject to periodic increases during the
duration of the ten year extension period. The
agreement allows the Company to operate under
United's colors, utilize the "United Express"
name and identify its flights using United's
designator code. The Company believes that its
relationship with United substantially enhances
its ability to compete for passengers. The loss
of the Company's affiliation with United could
have a material adverse effect on the Company's
business.
The Agreements require the Company to obtain
United's consent to operate service between city
pairs as "United Express". If the Company
experiences net operating expenses that exceed
revenues for three consecutive months on any
required route, the Company may withdraw from
that route if United and the Company are unable
to negotiate an alternative mutually acceptable
level of service for that route. The Agreements
also require the Company to obtain United's
approval if it chooses to enter into code-
sharing arrangements with other carriers, but do
not prohibit United from competing, or from
entering into agreements with other airlines who
would compete, on routes served by the Company.
The Agreements may be canceled if the Company
fails to meet certain financial tests or
performance standards or fails to maintain
certain minimum flight frequency levels.
The Company's pilots are represented by the
Airline Pilots Association ("ALPA"), its flight
attendants by the Association of Flight
Attendants ("AFA"), and its mechanics by the
Aircraft Mechanics Fraternal Association
("AMFA").
The ALPA collective bargaining agreement was
amended on February 26, 1997 and becomes
amendable again in February 2000. The current
contract modified work rules to allow more
flexibility, includes regional jet pay rates,
and transfers pilots into the Company's employee
benefit plans.
The AMFA was certified as the collective
bargaining representative elected by mechanics
and related employees of the Company in 1994.
On June 22, 1998, the Company's mechanics
ratified an initial four year contract. The new
contract includes a pay scale comparable to the
regional airline industry and a one-time signing
bonus, and allows the mechanics to participate
in the Company's employee benefit plans.
<PAGE 45>
The Company's contract with the AFA became
amendable on April 30, 1997. An agreement was
negotiated and agreed to between the Company and
AFA during 1998, and was ratified by the
Company's flight attendants on October 11, 1998.
The new agreement is for a four year duration
and provides for a higher starting pay rate and
a pay scale and per diem rate comparable to the
regional airline industry.
The Company believes that the wage rates and
benefits for other employee groups are
comparable to similar groups at other regional
airlines. The Company is unaware of significant
organizing activities by labor unions among
other non-union employees at this time.
(g)Use of Estimates
The preparation of financial statements in
accordance with generally accepted accounting
principles requires management to make certain
estimates and assumptions regarding valuation of
assets, recognition of liabilities for costs such
as aircraft maintenance, differences in timing of
air traffic billings from United and other
airlines, operating revenues and expenses during
the period and disclosure of contingent assets
and liabilities at the date of the consolidated
financial statements. Actual results could
differ from those estimated.
(h)Expendable Parts
Expendable parts and supplies are stated at the
lower of cost or market, less an allowance for
obsolescence of $232,600 and $318,000 as of
December 31, 1997 and 1998, respectively.
Expendable parts and supplies are charged to
expense as they are used. Amounts charged to
costs and expenses for obsolescence in 1996, 1997
and 1998 were $49,950, $62,652 and $86,000,
respectively.
(i)Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed on the straight-line
method over the estimated useful lives of the
related assets which range from five to sixteen
and one half years. Capital leases and leasehold
improvements are amortized over the remaining
life of the lease. Amortization of capital leases
and leasehold improvements is included in
depreciation expense.
<PAGE 46>
The Company periodically evaluates whether events
and circumstances have occurred which may impair
the estimated useful life or the recoverability
of the remaining balance of its long-lived
assets. If such events or circumstances were to
indicate that the carrying amount of these assets
would not be recoverable, the Company would
estimate the future cash flows expected to result
from the use of the assets and their eventual
disposition. If the sum of the expected future
cash flows (undiscounted and without interest
charges) is less than the carrying amount of the
asset, an impairment loss would be recognized by
the Company.
(j)Preoperating Costs
Preoperating costs represent the cost of
integrating new types of aircraft. Such costs,
which consist primarily of flight crew training
and aircraft ownership related costs, are
deferred and amortized over a period of four
years on a straight-line basis.
During 1997 the Company capitalized approximately
$2.1 million of these costs related to the
introduction of the regional jet ("RJ") into the
Company's fleet. Accumulated amortization of
preoperating costs at December 31, 1997 and 1998
were $53,000 and $571,000, respectively. In
1997, the J-41 preoperating costs were completely
amortized. In 1999, the Company will write-off
the remaining unamortized preoperating costs
balance (See Note 16).
(k)Intangible Assets
Goodwill of approximately $3.2 million,
representing the excess of cost above the fair
value of net assets acquired in the acquisition
of ACA, is being amortized by the straight-line
method over twenty years. The primary financial
indicator used by the Company to assess the
recoverability of its goodwill is undiscounted
future cash flows from operations. The amount of
impairment, if any, is measured based on
projected future cash flows using a discount rate
reflecting the Company's average cost of funds.
Costs incurred to acquire slots are being
amortized by the straight-line method over twenty
years. Accumulated amortization of intangible
assets at December 31, 1997 and 1998 was $1.1
million and $1.3 million, respectively.
(l)Maintenance
The Company's maintenance accounting policy is a
combination of expensing events as incurred and
accruing for certain maintenance events. For the
J-41 and J-32 aircraft, the Company accrues for
airframe components and certain engine repair
costs on a per flight hour basis. For the RJ
<PAGE 47>
aircraft, the Company accrues for the replacement
of major engine life limited parts on a per cycle
basis and for APU repairs on a per APU hour
basis. All other maintenance costs are expensed
as incurred.
(m)Deferred Credits
The Company accounts for incentives provided by
the aircraft manufacturers as deferred credits
for leased aircraft. These credits are amortized
on a straight-line basis as a reduction to lease
expense over the respective lease term. The
incentives are credits that may be used to
purchase spare parts, pay for pilot training
expenses, satisfy aircraft return conditions or
be applied against future rental payments.
(n)Income Taxes
The Company accounts for income taxes using the
asset and liability method. Under the asset and
liability method, deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between
the financial statement carrying amounts for
existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
expected to apply to taxable income in future
years in which those temporary differences are
expected to be recovered or settled.
(o)Stock-Based Compensation
The Company accounts for its stock-based
compensation plans using the intrinsic value
method prescribed under Accounting Principles
Board (APB) No. 25. Under these principles, the
Company records compensation expense for stock
options and awards only if the exercise price is
less than the fair market value of the stock on
the measurement date.
<PAGE 48>
(p)Income Per Share
Basic income per share is computed by dividing
net income, after deducting any preferred
dividend requirements, by the weighted average
number of common shares outstanding. Diluted
income per share is computed by dividing net
income, after deducting any preferred dividend
requirements, by the weighted average number of
common shares outstanding and common stock
equivalents, which consist of shares subject to
stock options computed using the treasury stock
method. In addition, dilutive convertible
securities are included in the denominator while
interest, on convertible debt, net of tax, is
added back to the numerator.
In 1996, the dilutive effect of convertible
preferred stock is included in the calculation
of diluted income per share. In 1997, the
calculation included the dilutive effect of new
convertible debt, but not the convertible
preferred stock as it was redeemed in 1996. In
1998, the calculation included the dilutive
effect of the convertible debt issued in 1997
<PAGE 49>
A reconciliation of the numerator and denominator
used in computing income per share is as follows
(in thousands, except per share amounts):
1996 1997 1998
Basic Diluted Basic Diluted Basic Diluted
Share calculation:
Average number of common
shares 16,962 16,962 15,647 15,647 18,128 18,128
Outstanding
Incremental
shares due to - 622 - 701 - 876
assumed exercise of
options
Incremental shares
due to assumed - 256 - - - -
conversion of
preferred stock
Incremental shares
due to assumed - - - 3,164 - 3,182
conversion of
convertible debt
Weighted average
common shares 16,962 17,840 15,647 19,512 18,128 22,186
Outstanding
Adjustments to net
income:
Net income $19,158 $19,158 $14,500 $14,500 $30,412 $30,412
Preferred dividend
requirements based
on average number (64) - - - - -
of preferred shares
Interest expense on - - - 1,187 - 1,202
convertible debt,
net of tax
Net income available
to common
shareholders $19,094 $19,158 $14,500 $15,687 $30,412 $31,614
Net income per
share $1.13 $1.08 $0.93 $0.80 $1.68 $1.42
(q)Reclassifications
Certain prior year amounts as previously
reported have been reclassified to conform to
the current year presentation.
(r)Interest rate hedges
The Company has periodically used swaps to hedge
the effects of fluctuations in interest rates
associated with aircraft financings. These
transactions meet the requirements for current
hedge accounting. Gains and losses resulting
from the interest rate swap contracts are
deferred until the contracts are settled and
then amortized over the aircraft lease term or
capitalized as part of acquisition cost, if
purchased, and depreciated over the life of the
aircraft.
<PAGE 50>
(s)Segment Information
In 1998, the Company adopted the provisions of
Financial Accounting Standards Board Statement
No. 131, "Disclosure about Segments of an
Enterprise and Related Information (SFAS 131).
SFAS 131 establishes standards for reporting
information about operating segments and related
disclosures about products and services.
Operating segments are defined as components of
an enterprise about which separate financial
information is available that is regularly
evaluated by chief operating decision makers in
deciding how to allocate resources or in
assessing performance.
The Company's chief decision makers assess
operating and financial performance based on the
consolidated results of the Company and
accordingly, no further disclosure of segment
information is considered necessary.
Substantially all of the Company's revenues and
operating activity relate to passenger airline
transportation service. The Company does not
have any international service.
2. Property Property and equipment consist of
and the following:
Equipment
(in thousands) 1997 1998
December 31,
Owned aircraft and improvements $ $
18,916 58,912
Improvements to leased aircraft 3,521 4,949
Flight equipment, primarily 18,456 27,420
rotable spare parts
Maintenance and ground equipment 4,166 5,850
Computer hardware and software 2,029 2,408
Furniture and fixtures 445 753
Leasehold improvements 1,831 2,144
49,364 102,436
Less: Accumulated depreciation 8,726 14,110
and amortization
$ 40,638 $88,326
<PAGE 51>
3. Accrued Accrued liabilities consist of the
Liabilities following:
(in thousands)
December 31,
1997 1998
Payroll and employee benefits $ 6,914 $ 9,597
Air traffic liability 1,404 516
Interest 1,352 1,061
Aircraft rents 1,644 2,118
Passenger related expenses 2,441 3,233
Maintenance costs 3,589 3,866
Fuel 977 2,260
Taxes payable 2,704 -
Other 2,306 3,679
$23,331 $26,330
4. Debt On November 1, 1995, the Company entered into a
line of credit agreement with a financial
institution which, based on a specified percentage
of outstanding interline receivables (financing
base), provides for borrowings of up to $20
million. The line of credit is collateralized by
accounts receivable and general intangibles and
will expire on September 30, 2000, or upon
termination of the United Express marketing
agreement, whichever is sooner. Interest is
payable monthly at an annual rate of prime plus 1%
(9% at December 31, 1998). The Company has pledged
approximately $5.8 million of this line as
collateral to secure letters of credit issued on
behalf of the Company. At December 31, 1998, the
Company's remaining available borrowing limit was
approximately $7.5 million. There was no balance
outstanding under the line of credit at December
31, 1997 or December 31, 1998. On February 8, 1999,
the Company replaced the $20 million line of credit
agreement with a new line of credit with two
financial institutions which provides for
borrowings up to $35 million. See footnote 15 for
additional information regarding this matter.
<PAGE 52>
Long-term debt consists of the following:
(in thousands)
December 31, 1997 1998
Convertible subordinated notes, principal
due July 1, 2004, interest payable in
semi-annual installments on the $57,500 $19,820
outstanding principal with interest at
7%, unsecured.
Equipment Notes associated with Pass
Through Trust Certificates, due
January 1, 2008 and January 1,
2010, principal payable annually through
January 1, 2006 and semi-annually 16,431 15,388
thereafter through maturity, interest
payable semi-annually at 7.49%
throughout term of notes, collateralized
by J-41 aircraft.
Notes payable to supplier, due December
1999, principal and interest payable in
monthly installments of $14,027, with 331 161
interest at 8%, collateralized by flight
equipment, spare engines and parts, and
ground equipment.
Notes payable to supplier, due between May
15, 2000 and January 15, 2001, principal 1,225 1,839
payable monthly with interest of 6.74%
and 7.86%, unsecured.
Notes payable to institutional lenders, due
between March 29 and May 19, 2015,
principal payable semiannually with - 25,556
interest of 5.65% and 5.88% through
maturity, collateralized by RJ aircraft.
Note payable to institutional lender,
principal payable monthly with interest 217 -
at 6.61%, unsecured.
Note payable to institutional lender, due
October 2, 2006, principal payable - 3,975
semiannually with interest at 6.56%,
collateralized by J41 aircraft.
Other 2 -
Total 75,706 66,739
Less: Current Portion 1,851 3,450
$73,855 $63,289
In September 1997, approximately $112 million of
pass through certificates were issued in a private
placement by separate pass through trusts, which
used the proceeds to purchase equipment notes (the
"Equipment Notes") issued in connection with (i)
leveraged lease transactions relating to four J-41s
and six RJs (delivered or expected to be delivered),
all of which are leased to the Company (the "Leased
Aircraft"), and (ii) the financing of four J-41s
owned by the Company (the "Owned Aircraft"). The
Equipment Notes issued with respect to the Owned
Aircraft are direct obligations of ACA, guaranteed
by ACAI and are included as debt obligations in the
accompanying financial statements. These borrowings
carry a weighted average interest rate of
approximately 7.49% with three Equipment Notes
maturing on January 1, 2008, and one Equipment Note
maturing January 1, 2010. The Equipment Notes
issued with respect to the Leased Aircraft are
neither debt obligations of ACA nor guaranteed by
ACAI.
<PAGE 53>
With respect to one RJ leased aircraft, at December
31, 1997 (the "Prefunded Aircraft"), the proceeds
from the sale of the Equipment Notes were deposited
into collateral accounts, to be released at the
closing of a leveraged lease related to the
Prefunded Aircraft. In January 1998, an equity
investor purchased this aircraft and entered into a
leveraged lease with the Company and the collateral
accounts were released.
In July 1997, the Company issued $57.5 million
aggregate principal amount of 7% Convertible
Subordinated Notes due July 1, 2004 ("the Notes").
The Notes are convertible into 6.4 million shares
of Common Stock, $9 per share, (after giving effect
to the stock split on May 15, 1998) subject to
certain adjustments. Interest on the Notes is
payable on April 1 and October 1 of each year. The
Notes are not redeemable by the Company until July
1, 2000. Thereafter, the Notes will be redeemable,
at any time, on at least 15 days notice at the
option of the Company, in whole or in part, at the
redemption prices set forth in the Indenture dated
July 2, 1997, in each case, together with accrued
interest. The Notes are unsecured and subordinated
in right of payment in full to all existing and
future Senior Indebtedness as defined in the
Indenture. The holders of the Notes have certain
registration rights with respect to the Notes and
the underlying Common Stock.
In January 1998, approximately $5.9 million of the
Notes were converted, pursuant to their original
terms, into 660,826 shares of Common Stock. From
March 20, 1998 to April 8, 1998, the Company
temporarily reduced the conversion price from $9 to
$8.86 for holders of the Notes. During this
period, $31.7 million of the Notes converted into
approximately 3.6 million shares of Common Stock.
As a result of this temporary price reduction, the
Company recorded a non-cash, non-operating charge
to earnings during the second quarter of 1998 of
$1.4 million representing the fair value of the
additional shares distributed upon conversion.
On April 1, 1997, the Company executed an $11
million short-term promissory note for deposits
related to the acquisition of RJs. The promissory
note was paid in full on July 2, 1997 from the
proceeds of the Notes issued on July 2, 1997 as
described above. During 1997, the Company retired
$3.1 million of certain high interest rate debt
with the proceeds of the Notes.
On September 29, and November 19, 1998 the Company
issued long-term promissory notes for $12.7 million
and $12.9 million respectively, for the acquisition
of two new RJ aircraft. The promissory notes
mature on March 29, 2015 and May 19, 2015
respectively, and are collateralized by the RJ
aircraft delivered, with principal and interest at
rates of 5.65% and 5.88%, payable on a semi-annual
basis through maturity.
<PAGE 54>
On September 29, 1998, the Company issued a long-
term promissory note for approximately $4 million
for the acquisition of one Jetstream 41 ("J-41)
aircraft that was delivered in December 1997 under
an interim manufacturer financing arrangement. The
promissory note matures on October 2, 2006 and is
collateralized by the J-41 aircraft delivered with
principal and interest, at a rate of 6.56%, payable
semiannually through maturity.
As of December 31, 1998, maturities of long-term
debt are as follows:
(in thousands)
1999 $ 3,450
2000 3,439
2001 2,575
2002 2,742
2003 2,865
Thereafter 51,668
$66,739
The Company has various financial covenant
requirements associated with its debt and United
marketing agreements. These covenants require
meeting certain financial ratio tests, including
tangible net worth, net earnings, current ratio and
debt service levels.
5. Obligations The Company leases certain equipment for
Under noncancellable terms of more than one year. The net
Capital book value of the equipment under capital leases at
Leases December 31, 1997 and 1998, is $4.5 million and $3.0
million, respectively. The leases were capitalized
at the present value of the lease payments. The
weighted average interest rate for these leases is
approximately 8 %.
At December 31, 1998, the future minimum payments, by
year and in the aggregate, together with the present
value of the net minimum lease payments, are as
follows:
<PAGE 55>
(in thousands)
Year Ending December 31,
1999 $ 1,501
2000 686
2001 453
2002 358
2003 161
Future minimum lease payments 3,159
Amount representing interest 379
Present value of minimum lease 2,780
payments
Less: Current maturities 1,334
$ 1,446
6. Operating Future minimum lease payments under noncancellable
Leases operating leases at December 31, 1998 are as follows:
(in thousands)
Year ending December 31, Aircraft
Other Total
1999 $42,322 $2,789 $45,111
2000 42,057 2,640 44,697
2001 40,684 2,498 43,182
2002 39,992 2,060 42,052
2003 38,257 2,078 40,335
Thereafter 259,880 29,108 288,988
Total minimum $463,192 $41,173 $504,365
lease payments
Certain of the Company's leases require aircraft to
be in a specified maintenance condition at lease
termination or upon return of the aircraft.
The Company's lease agreements generally provide that
the Company pay taxes, maintenance, insurance and
other operating expenses applicable to leased assets.
Operating lease expense related to aircraft was $33.8
million; $35.7 million; and $37.5 million for the
years ended December 31, 1996, 1997 and 1998,
respectively.
7. Stockholders' Stock Split
Equity
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
in the stock option table presented below as of and
for the years ended December 31, 1996, 1997 and 1998,
respectively.
<PAGE 56>
Stock Option Plans
The Company has two nonqualified stock option plans
which provide for the issuance of options to purchase
common stock of the Company to certain employees and
directors of the Company. Under the plans, options
are granted by the compensation committee of the
board of directors and vest over a one, three or five
year period, commencing one year after the date of
the grant.
In 1998, the Company's shareholders approved the
addition of one million shares to the Company's stock
based compensation plans. The Company has reserved
4,000,000 shares of common stock for issuance upon
the exercise of options and stock awards granted
under the plans.
A summary of the status of the Company's stock
options awarded as of December 31, 1996, 1997 and
1998 and changes during the periods ending on those
dates is presented below:
1996 1997 1998
Weighted- Weighted- Weighted-
average average average
Shares Shares Shares
exercise exercise exercise
price price price
Options outstanding at 1,459,116 $1.43 1,916,784 $3.16 2056922 $5.14
beginning of year
Granted 791,000 $5.71 684,000 $8.91 539000 $19.42
Exercised 284,998 $1.24 481,194 $2.60 572023 $4.33
Canceled 48,334 $3.92 62,668 $5.45 260000 $17.25
Options outstanding at 1,916,784 $3.16 2056922 $5.14 1763899 $7.97
end of year
Options exercisable at 1,062,887 $1.67 916,568 $2.27 872,878 $3.88
year-end
Options available for 1,649,514 1,028,182 649,182
granting at year end
Weighted-average fair
value of options $4.25 $6.49 $11.88
granted during the
year
The Company awarded 100,000 shares of restricted
stock to certain employees during 1998. These shares
vest over three years. The Company recognized
$281,000 in compensation expense associated with
these awards and $293,000 associated with other
stock options awards during 1998. No such expense was
recognized in the years ended 1996 and 1997.
The Company uses the Black Sholes stock option model
to estimate fair value. A risk-free interest rate of
5.25%, 5.8% and 4.73% for 1996, 1997 and 1998,
respectively, a volatility rate of 71%, 50% and 55%
for 1996, 1997 and 1998, respectively, with an
expected life of 7.5 years for 1996 and 1997 and 6.5
years for 1998, was assumed in estimating the fair
value. No dividend rate was assumed for any of the
years.
<PAGE 57>
The following table summarizes information about
stock options outstanding at December 31, 1998:
<CAPTION
Options Outstanding Options Exercisable
Weighted-
Number average Weighted- Number Weighted-
outstand remainin average exercisa average
Range of exercise ing at g exercise ble exercise
price 12/31/98 contract price 12/31/98 price
ual life
(years)
$0.00 - $3.23 527,666 3.9 $ 1.13 527,666 $ 1.13
$3.23 - $6.45 290,113 7.4 $ 5.20 134,114 $ 4.82
$6.45 - $9.68 415,181 8.2 $ 7.63 108,502 $ 7.83
$9.68 - $12.90 246,939 8.8 $11.08 76,930 $11.05
$12.90 - $16.13 86,000 9.7 $14.43 1,666 $15.25
$16.13 - $19.35 68,000 9.1 $17.25 24,000 $17.25
$19.35 - $22.58 1,000 9.8 $20.00 - $ 0.00
$22.58 - $29.03 49,500 9.9 $24.61 - $ 0.00
$29.03 - $32.25 79,500 9.4 $30.24 - $ 0.00
1,763,899 7.1 $ 7.97 872,878 $ 3.88
The following summarizes the pro forma effects
assuming compensation for such awards had been
recorded based upon the estimated fair value. The
proforma information disclosed below does not include
the impact of awards made prior to January 1, 1995
(in thousands, except per share data):
<PAGE 58>
1996 1997 1998
As Pro As Pro As Pro
Reporte Forma Report Forma Reporte Forma
d ed d
Net Income $ $ $ $ $ $
19,158 18,117 14,500 13,436 30,412 27,201
Basic
earnings $ $ $ $ $ $
per share 1.13 1.07 0.93 0.86 1.68 1.50
Diluted
earnings $ $ $ $ $ $
per share 1.08 1.02 0.80 0.75 1.42 1.28
Preferred Stock
The Board of Directors of the Company is authorized
to provide for the issuance by the Company of
preferred stock in one or more series and to fix the
rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including,
without limitation, dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption
or repurchase, redemption or repurchase prices,
limitations or restrictions thereon, liquidation
preferences and the number of shares constituting any
series or the designation of such series, without any
further vote or action by the stockholders.
8. Employee Employee Stock Ownership Plan
Benefit
Plans The Company established an Employee Stock Ownership
Plan (the "ESOP") covering substantially all
employees. For each of the years 1992 through 1995,
the Company made contributions to the ESOP which were
used in part to make loan and interest payments. No
contributions were made to the ESOP in 1996, 1997 or
1998. Shares of common stock acquired by the ESOP
are to be allocated to each employee based on the
employee's annual compensation. The number of shares
allocated to the plan at December 31, 1998 was
1,110,754.
Effective June 1, 1998, the Board of Directors of the
Company voted to terminate the Plan. On March 15,
1999, the Internal Revenue Service issued a
determination letter notifying the Company that the
termination of the Plan does not adversely affect the
Plan's qualification for federal tax purposes. Upon
termination of the Plan, a participant becomes 100%
vested in his or her account. The interest of each
participant will be distributed to such participant
or his or her beneficiary at the time prescribed by
the Plan terms. As a result of this termination, no
new participants were eligible to join the Plan
during 1998.
<PAGE 59>
401K Plan
Effective January 1, 1992, the Company adopted a
401(k) Plan (the "Plan"). The Plan covers
substantially all full-time employees who meet the
Plan's eligibility requirements. Employees may elect
a salary reduction contribution up to 17% through
June 30, 1998 and 15% thereafter of their annual
compensation not to exceed the maximum amount allowed
by the Internal Revenue Service.
Effective October 1, 1994, the Plan was amended to
require the Company to make contributions to the Plan
for eligible pilots in exchange for certain
concessions. These contributions are in excess of
any discretionary contributions made for the pilots
under the original terms of the plan. These
contributions are 100% vested and equal to 3% of the
first $15,000 of each eligible pilot's compensation
plus 2% of compensation in excess of $15,000. The
Company's contributions for the pilots shall not
exceed 15% of the Company's adjusted net income
before extraordinary items for such plan year. The
Company's obligations to make contributions with
respect to all plan years in the aggregate is limited
to $2.5 million. Contribution expense was
approximately $370,000, $445,000, and $552,000 for
1996, 1997 and 1998, respectively.
Effective June 1, 1995 and October 1, 1998, the Plan
was amended to allow the Company to make a
discretionary matching contribution for non-union
employees, pilots and mechanics equal to 25% of
salary contributions up to 4% of total compensation.
The Company's matching contribution, if any, vests
ratably over five years. Contribution expense was
approximately $29,000, $133,000 and $235,000 for
1996, 1997 and 1998, respectively. Effective April
1, 1997, all eligible pilots were included under the
terms of the Plan.
Profit Sharing Programs
The Company has profit sharing programs which result
in periodic payments to all eligible employees.
Profit sharing compensation, which is based on
attainment of certain performance and financial
goals, was approximately $2.6 million, $3.6 million,
and $3.9 million in 1996, 1997 and 1998,
respectively.
<PAGE 60>
9. Income The provision (benefit) for income taxes includes the
following components:
Taxes
(in thousands)
Year Ended December 31,
1996 1997 1998
Federal:
Current $ $ $
1,699 7,342 13,580
Deferred (1,344) 1,907 3,591
Total federal 355 9,249 17,171
provision
State:
Current 391 2,545 3,161
Deferred (296) 545 801
Total state provision 95 3,090 3,962
Total provision $ 450 $ 12,339 $ 21,133
A reconciliation of income tax expense at the
applicable federal statutory income tax rate of 35%
to the tax provision recorded is as follows:
(in thousands)
Year ended December
31, 1996 1997 1998
Income tax expense
at statutory rate $ 6,863 $ 9,394 $18,041
Increase (decrease)
in tax expense due to:
Change in
valuation (1,640) - -
allowance
Utilization of
net operating (5,811) - -
loss
carryforward
Permanent
differences 58 937 517
and other
State income
taxes, net 980 2,008 2,575
of federal
benefit
Income tax expense $ 450 $12,339 $21,133
Deferred income taxes result from temporary
differences which are the result of provisions of the
tax laws that either require or permit certain items
of income or expense to be reported for tax purposes
in different periods than for financial reporting
purposes.
<PAGE 61>
The following is a summary of the Company's deferred
income taxes as of December 31, 1997, and 1998:
(in thousands)
December 31,
1997 1998
Deferred tax assets:
Engine maintenance $ 1,489 $ 1,268
accrual
Intangible assets 1,139 934
Air traffic liability 746 503
Allowance for bad debts 150 146
Deferred aircraft rent - 530
Deferred credits 1,940 2,335
Accrued vacation 392 534
Other 323 582
Total deferred tax 6,179 6,832
assets
Deferred tax liabilities:
Depreciation and (4,614) (9,756)
amortization
Preoperating costs (828) (596)
Other (49) (184)
Total deferred tax (5,491) (10,536)
liabilities
Net deferred income tax $ 688 $(3,704)
assets (liabilities)
No valuation allowance was established in either
1997 or 1998 as the Company believes it is more
likely than not that the deferred tax assets can be
realized.
The Tax Reform Act of 1986 enacted an alternative
minimum tax ("AMT") system, generally effective for
taxable years beginning after December 31, 1986.
The Company is not subject to alternative minimum
tax for the year ended December 31, 1998. An AMT
tax credit carryover of approximately $564,000 was
fully utilized in 1997.
10. Aircraft
Commitments
and
As of December 31, 1998, the Company had a total of
Contingencie 29 RJs on order from Bombardier, Inc., and held
s options for 27 additional RJs. Of the remaining firm
aircraft deliveries, nine are scheduled for delivery
in 1999, nine in 2000 and eleven in 2001. The
Company is obligated to purchase and finance
(including leveraged leases) the 29 firm ordered
aircraft at an approximate capital cost of $539
million.
The Company is continually assessing its fleet
requirements, including the feasibility of operating
less than 50-seat regional jets. The Company
requires United's approval for the addition of
regional jet aircraft that exceed its current
allocation.
<PAGE 62>
The Company previously announced that it is
exploring alternatives to accelerate the retirement
of its fleet of 28 leased 19 seat J-32 aircraft.
The Company is assessing plans to target the phase-
out of the J-32 from its United Express operation by
the end of 2001. As of March 1, 1999, the Company
has J-32 operating lease commitments with remaining
lease terms ranging from three to seven years and
related minimum lease payments of approximately $47
million. The Company intends to complete its
analysis of a phase-out plan, including
quantification of any one-time fleet rationalization
charge, during 1999.
Training
The Company has entered into an agreement with Pan
Am International Flight Academy ("PAIFA") whereby
PAIFA will develop a RJ simulator training facility.
The Company has committed to purchase an annual
minimum number of simulator training hours for a
period of ten years at a guaranteed fixed price once
the facility receives Federal Aviation
Administration ("FAA") certification.
At December 31, 1998, the Company's payment
obligations are as follows:
(in thousands)
Year ended December 31,
1999 $ -
2000 1,748
2001 1,331
2002 1,351
2003 1,371
Thereafter 7,457
$13,258
Derivative Financial Instruments
In July 1997, the Company entered into a series of
put and call contracts having an aggregate notional
amount of $39.8 million. The contracts matured
between March and September 1998. The contracts were
entered into as an interest rate hedge designed to
limit the Company's exposure to interest rate
changes on the anticipated issuance of permanent
financing relating to the delivery of aircraft in
1998. During 1998, the Company settled these
contracts, paying the counterparty approximately
$2.3 million, and is amortizing this cost over the
life of the related aircraft leases or is
depreciating the cost as part of the aircraft
acquisition cost for owned aircraft. On July 2,
1998, the Company entered into additional put and
call contracts having an aggregate notional amount
of $51.8 million to hedge its exposure to interest
rate changes on the anticipated issuance of
permanent financing for six RJ aircraft scheduled
for delivery between October 1998 and April 1999.
<PAGE 63>
In the fourth quarter 1998, the Company settled two
contracts, paying the counterparty approximately
$700,000, and is amortizing this cost over the life
of the related aircraft lease for the leased
aircraft and is depreciating the cost as part of the
aircraft acquisition cost for the owned aircraft.
The Company would have been obligated to pay the
counterparty approximately $1.5 million had the
remaining contracts settled on December 31, 1998.
In September and December 1998, the Company entered
into call option contracts to hedge price changes on
approximately 34,000 barrels of jet fuel per month
during the period from January 1999 to June 1999.
The contracts provide for a premium payment of
approximately $273,000 and set a cap on the average
maximum price equal to 40.625 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
period in which the Company purchases fuel. In
October and November 1998, the Company entered into
commodity swap transactions to hedge price changes
on approximately 34,000 additional barrels of jet
fuel per month during the period from January 1999
to June 1999. The contracts provide for an average
fixed price of 44.35 cents per gallon of jet fuel
with any gains or losses recognized as a component
of fuel expense during the period in which the
Company purchases fuel. With these transactions, the
Company has hedged approximately 80% of its jet fuel
requirements for the first half of 1999. Had the
commodity swap transactions settled on December 31,
1998, the Company would have incurred approximately
$900,000 in additional fuel expense.
11. The Company wrote off the remaining accruals for
Restructuring restructuring costs of $426,000 as of December 31,
Charges 1996 related to a fleet simplification plan
initiated in 1994. No similar costs were recorded
in 1997 or 1998.
12. Litigation The Company is a party to routine litigation and
FAA proceedings incidental to its business, none of
which is likely to have a material effect on the
Company's financial position or the results of its
operations.
The Company was a party to an action pending in the
United States District Court for the Southern
District of Ohio, Peter J. Ryerson, administrator
of the estate of David Ryerson, v. Atlantic Coast
Airlines, Case No. C2-95-611. In September and
October 1998, this action and all related
litigation was settled, the cost of which was
covered by insurance and was not borne by the
Company.
<PAGE 64>
The Company is also a party to an action pending in
the United States Court of Appeals for the Fourth
Circuit known as Afzal v. Atlantic Coast Airlines,
Inc. (No. 98-1011). This action is an appeal of
the December 1997 decision granted in favor of the
Company in a case claiming wrongful termination of
employment brought in the United States District
Court for the Eastern District of Virginia known as
Afzal v. Atlantic Coast Airlines, Inc. (Civil
Action No. 96-1537-A). The Company does not expect
the outcome of this case to have any material
adverse effect on its financial condition or
results of its operations.
13. Financial In December 1995, the Company adopted Statement of
Financial Accounting Standards No. 107, "Disclosure
Instruments of Fair Value of Financial Instruments" (SFAS 107).
SFAS 107 requires the disclosure of the fair value
of financial instruments; however, this information
does not represent the aggregate net fair value of
the Company. Some of the information used to
determine fair value is subjective and judgmental
in nature; therefore, fair value estimates,
especially for less marketable securities, may
vary. The amounts actually realized or paid upon
settlement or maturity could be significantly
different.
Unless quoted market price indicates otherwise, the
fair values of cash and cash equivalents, short
term investments, accounts receivable and accounts
payable generally approximate market because of the
short maturity of these instruments. The Company
has estimated the fair value of long term debt
based on quoted market prices.
The estimated fair values of the Company's
financial instruments, none of which are held for
trading purposes, are summarized as follows
(brackets denote liability):
(in thousands) December 31, December 31,
1997 1998
Carrying Estimated Carrying Estimated
Amount Fair Amount Fair
Value Value
Cash and cash
equivalents $39,167 $39,167 $64,412 $64,412
Short-term
investments 10,737 10,737 63 63
Long-term debt (75,706)(120,125) (66,739) (101,975)
See note 10 for information regarding the fair value of
derivative financial instruments.
14. Supplemental disclosures of cash flow
Supplemental information:
Cash Flow Year ended December 31,
(in thousands)
Cash paid during the
Information period for: 1996 1997 1998
- Interest $883 $1,778 $3,665
- Income taxes 1,319 5,767 15,426
<PAGE 65>
The following non cash investing and financial
activities took place in 1996, 1997 and 1998:
In 1996, the Company acquired $1.2 million in
rotable parts, ground equipment, telephone system
upgrades and Director's and Officer's Liability
Insurance under capital lease obligations and by
issuing notes. These purchases were financed by
suppliers and outside lenders.
In 1997, the Company acquired $2.9 million in
rotable parts, spare engines, market planning
software and other fixed assets and expendable
parts under capital lease obligations and through
the use of manufacturers credits. As of December
31, 1997, there was a remaining balance of $700,000
in earned, but unused manufacturer credits which is
reflected in accounts receivable.
In November 1997, the Company received $4.3 million
in additional manufacturers credits pursuant to the
terms of aircraft agreements of which $261,000 was
received in cash by the end of 1997 leaving a
balance of $4.1 million due from the manufacturer
as of December 31, 1997. Such amount has been
classified as other assets.
In September and December 1998, the Company
received $352,000 of manufacturers credits which
were applied against the purchase price of two RJs
purchased in 1998 from the manufacturer. The
credits will be utilized primarily through the
purchase of rotable parts and other fixed assets,
expendable parts, and pilot training.
In 1998, the Company acquired $3.0 million
consisting primarily of rotable parts and other
fixed assets and expendable parts under capital
lease obligations and through the use of
manufacturer credits. As of December 31, 1998,
there was a remaining balance of approximately
$607,000 in earned, but unused manufacturer credits
which is reflected in accounts receivable.
In 1998, the note holders elected to convert $37.8
million of the Company's Notes to common stock
resulting in a recognition of $1.4 million of debt
conversion expense.
In April 1998, the Company declared a 2-for-1 stock
split payable as a stock dividend. Pursuant to
this dividend, $193,000 was transferred from
additional paid-in capital to common stock to
properly maintain the par value per share.
<PAGE 66>
On September 29, and November 19, 1998 the Company
issued long-term promissory notes for $12.7 million
and $12.9 million respectively, for the acquisition
of two new RJ aircraft. The promissory notes
mature on March 29, 2015 and May 19, 2015
respectively, and are collateralized by the RJ
aircraft delivered with principal and interest, at
rates of 5.65% and 5.88%, payable on a semiannual
basis through maturity.
In 1998, the Company capitalized $1.7 million in
interest related to a $15 million deposit with a
manufacturer.
15. SubsequentIn February 1999, the Company entered into an
Events asset-based lending agreement with two financial
institutions that provides the Company with a line
of credit of up to $35 million, depending on the
amount of assigned ticket receivables and the value
of certain rotable spare parts. Borrowings under
the line of credit can provide the Company a source
of working capital until proceeds from ticket
coupons are received. The line is collateralized
by all of the Company's receivables and certain
rotable spare parts. The Company pledged $2.9
million of this line of credit as collateral to
secure letters of credit issued on behalf of the
Company by a financial institution.
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 69,000 square
foot regional passenger concourse at Washington
Dulles International Airport. The facility is
scheduled to open in May 1999. The new facility
will offer improved passenger amenities and
operational enhancements, and will provide
additional space to support the Company's expanded
operations resulting from the introduction of RJs.
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. MWAA has agreed to fund the
construction through the proceeds of bonds and,
subject to approval by the FAA, passenger facility
charges ("PFC"). In order to obtain the most
favorable permanent financing, the Company 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 for approximately
$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 PFC funding rather than bond financing, the
Company's lease cost will be significantly lower.
The Company obtained financing for this obligation
from two banks in February 1999 and has borrowed
$4.5 million through March 1, 1999. MWAA has
agreed to reimburse principal borrowings but the
Company will be responsible for all interest costs.
<PAGE 67>
16. Recent The American Institute of Certified Public
Accounting Accountants issued Statement of Position 98-5 on
Pronouncement accounting for start-up costs, including
s 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
previously deferred certain start-up costs related
to the introduction of the RJs 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. In January 1999, the Company recorded a
charge for the remaining unamortized balance of
approximately $1.5 million associated with
preoperating costs.
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.
<PAGE 68>
17. Selected
Quarterly
Financial
Data (in thousands, except per share amounts)
(Unaudited)
Quarter Ended
March 31, June 30, September December 31,
1998 1998 30, 1998
1998
Operating $58,055 $75,759 $78,100 $78,026
revenues
Operating 5,875 17,358 17,055 12,403
income
Net income 2,983 9,092 10,613 7,725
Net income
per share
Basic $ 0.20 $ 0.48 $ 0.55 $ 0.40
Diluted $ 0.16 $ 0.42<FN>1 $ 0.49 $ 0.36
Weighted
average 22,034 22,246 22,244 22,289
shares
outstanding
Quarter Ended
<CAPTION
March 31, June 30, September December 31,
1997 1997 30, 1997
1997
Operating $41,114 $53,220 $54,864 $56,246
revenues
Operating 1,037 9,968 9,054 8,884
income
Net income 703 5,885 4,844 3,068
Net income
per share
Basic $ 0.04 $ 0.35 $ 0.34 $ 0.21
Diluted $ 0.04 $ 0.33 $ 0.26 $ 0.17
Weighted
average 17,002 17,675 21,149 21,545
shares
outstanding
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Reference is hereby made to the Company's Form 8-K Item 4,
filed October 29, 1997.
<PAGE 69>
PART III
The information required by this Part III (Items 10, 11, 12 and
13) is hereby incorporated by reference from the Company's definitive
proxy statement which is expected to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934 not later than 120 days after the
end of the fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements listed in the index
in Part II, Item 8, are filed as part of this report.
2. Consolidated Financial Statement Schedules
Reference is hereby made to the Consolidated Financial
Statements and the Notes thereto included in this filing
in Part II, Item 8.
3. Exhibits
Exhibit
Number Description of Exhibit
3.1 (note 3) Restated Certificate of Incorporation of the Company.
3.2 (note 3) Restated By-laws of the Company.
4.1 (note 1) Specimen Common Stock Certificate.
4.2 (note 9) Stockholders' Agreement, effective as of October 15,
1991, among the Company, the stockholders and the holder
of warrants of the Company named on the signature pages
thereto and a trust established pursuant to the Atlantic
Coast Airlines, Inc. Employee Stock Ownership Plan,
together with Amendment and Second Amendment thereto
dated as of February 24, 1992 and May 1, 1992
respectively.
4.3 (note 9) Registration Rights Agreement, dated as of September 30,
1991, among the Company and the stockholders named on
the signature pages thereto (the "Stockholders
Registration Rights Agreement").
4.4 (note 9) Form of amendment to the Stockholders Registration
Rights Agreement.
4.17 (note 5) Indenture, dated as of July 2, 1997, between the Company
and First Union National Bank of Virginia
4.18 (note 6) Registration Rights Agreement, dated as of July 2, 1997,
by and among the Company, Alex. Brown & Sons
Incorporated and the Robinson-Humphrey Company, Inc.
<PAGE 70>
4.19 (note 2) Rights Agreement between Atlantic Coast Airlines
Holdings, Inc. and Continental Stock Transfer & Trust
Company dated as of January 27, 1999
10.1 (note 9) Atlantic Coast Airlines, Inc. 1992 Stock Option Plan.
10.2 (note 6) Restated Atlantic Coast Airlines, Inc. Employee Stock
Ownership Plan, effective October 11, 1991, as amended
through December 31, 1996.
10.4 (note 6) Restated Atlantic Coast Airlines 401(k) Plan, as amended
through February 3, 1997.
10.4(a) (note 4) Amendment to the Atlantic Coast Airlines 401(k) Plan
effective May 1, 1997
10.6 (notes 9 & 10) United
Express Agreement, dated October 1, 1991, among United
Airlines, Inc., Atlantic Coast Airlines and the Company,
together with Amendment No. 1, dated as of April 1,
1993.
10.6(a) (note 4) Third Amendment to United Express Agreement, dated March
3, 1998, among United Airlines, Inc., Atlantic Coast
Airlines and the Company.
10.6(b) notes 1 & 11 Fourth
Amendment to the United Express Agreement, dated
December 11, 1998, among United Airlines, Inc., Atlantic
Coast Airlines and the Company.
10.7 (notes 9 & 10) Agreement
to Lease British Aerospace Jetstream-41 Aircraft, dated
December 23, 1992, between British Aerospace, Inc. and
Atlantic Coast Airlines.
10.12(b) (note 1) Amended
and Restated Severance Agreement, dated as of January
20, 1999, between the Company and Kerry B. Skeen.
10.12(c) (note 1) Amended
and Restated Severance Agreement, dated as of January
20, 1999, between the Company and Thomas J. Moore.
10.12(h) (note 1) Form of
Severance Agreement. The Company has entered into
substantially identical agreements with Michael S.
Davis, renewed as of January 1, 1999, and with Paul H.
Tate, renewed as of February 1, 1999.
10.13(a) (note 6) Form of
Indemnity Agreement. The Company has entered into
substantially identical agreements with the individual
members of its Board of Directors.
10.21 (note 8) Acquisition Agreement, dated as of December 30, 1994, by
and among Jetstream Aircraft, Inc., JSX Capital
Corporation, and Atlantic Coast Airlines.
10.21(a) (note 6) Amendment
Number One to Acquisition Agreement, dated as of June
17, 1996, by and among Jetstream Aircraft, Inc., JSX
Capital Corporation, and Atlantic Coast Airlines.
10.23 (note 1) Amended and Restated Loan and Security Agreement dated
February 8, 1999 between Atlantic Coast Airlines and
Fleet Capital Corporation.
10.24 (note 1) Stock Incentive Plan of 1995, as amended as of May 5,
1998.
10.25(a) (note 1) Form of
Incentive Stock Option Agreement. The Company enters
into this agreement with employees who have been granted
incentive stock options pursuant to the Stock Incentive
Plans.
10.25(b) (note 1) Form of
Incentive Stock Option Agreement. The Company enters
into this agreement with corporate officers who have
been granted incentive stock options pursuant to the
Stock Incentive Plans.
10.25(c) (note 1)Form of Non-Qualified Stock Option Agreement. The
Company enters into this agreement with employees who
have been granted non-qualified stock options pursuant
to the Stock Incentive Plans.
10.25(d) (note 1) Form of
Non-Qualified Stock Option Agreement. The Company enters
into this agreement with corporate officers who have
been granted non-qualified stock options pursuant to the
Stock Incentive Plans.
<PAGE 71>
10.25(e) (note 1) Form of
Restricted Stock Agreement. The Company entered into
this agreement with corporate officers who were granted
restricted stock pursuant to the Stock Incentive Plans.
10.27 (note 7) Split Dollar Agreement, dated as of December 29, 1995,
between the Company and Kerry B. Skeen.
10.27(a) (note 6) Form of
Split Dollar Agreement. The Company has entered into
substantially identical agreements with Thomas J. Moore
and with Michael S. Davis, both dated as of July 1,
1996, and with Paul H. Tate, dated as of February 1,
1998.
10.29 (note 7) Agreement of Assignment of Life Insurance Death Benefit
As Collateral, dated as of December 29, 1995, between
the Company and Kerry B. Skeen.
10.29(a) (note 6) Form of
Agreement of Assignment of Life Insurance Death Benefit
As Collateral. The Company has entered into
substantially identical agreements with Thomas J. Moore
and with Michael S. Davis, both dated as of July 1,
1996, and with Paul H. Tate, dated as of February 1,
1998.
10.31 (note 6) Summary of Senior Management Bonus Program. The Company
has adopted a plan in substantially the form as outlined
in this exhibit for 1999 and 1998.
10.32 (note 4) Summary of "Share the Success" Profit Sharing Plan. The
Company has adopted a plan in substantially this form
for 1999 and for the three previous years. (what about
the change from 3 bonus groups to three - was this
filed?)
10.40A (notes 1, 10 & 11)Purchase Agreement between Bombardier Inc. and
Atlantic Coast Airlines Relating to the Purchase of
Canadair Regional Jet Aircraft dated January 8, 1997, as
amended through December 31, 1998.
10.50(a) (note 4)Form of Purchase Agreement, dated September 19, 1997,
among the Company, Atlantic Coast Airlines, Morgan
Stanley & Co. Incorporated and First National Bank of
Maryland, as Trustee.
10.50(b) (note 4)Form of Pass Through Trust Agreement, dated as of
September 25, 1997, among the Company, Atlantic Coast
Airlines, and First National Bank of Maryland, as
Trustee.
10.50(c) (note 4)Form of Pass Through Trust Certificate.
10.50(d) (note 4)Form of Participation Agreement, dated as of September
30, 1997, Atlantic Coast Airlines, as Lessee and Initial
Owner Participant, State Street Bank and Trust Company
of Connecticut, National Association, as Owner Trustee,
the First National Bank of Maryland, as Indenture
Trustee, Pass-Through Trustee, and Subordination Agent,
including, as exhibits thereto, Form of Lease Agreement,
Form of Trust Indenture and Security Agreement, and Form
of Trust Agreement.
10.50(e) (note 4)Guarantee, dated as of September 30, 1997, from the
Company.
10.80 (note 4) Ground Lease Agreement Between The Metropolitan
Washington Airports Authority And Atlantic Coast
Airlines dated as of June 23, 1997.
10.85 (note 1) Lease Agreement Between The Metropolitan Washington
Airports Authority and Atlantic Coast Airlines, with
amendments as of March 12, 1999.
10.90 (notes 4 & 10) Schedules
and Exhibits to ISDA Master Agreement between the
Company and Bombardier Inc. dated as of July 11, 1997
(the Company entered into substantially similar
arrangements for interest rate hedges that are presently
outstanding).
<PAGE 72>
21.1 (note 1) Subsidiaries of the Company.
23.1 (note 1) Consent of KPMG Peat Marwick.
23.2 (note 1) Consent of BDO Seidman.
Notes
(1) Filed as an Exhibit to this Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(2) Filed as Exhibit 99.1 to Form 8-A (File No. 000-
21976), incorporated herein by reference.
(3) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1998.
(4) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, incorporated herein by
reference.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1997, incorporated herein by
reference.
(6) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, incorporated herein by
reference.
(7) Filed as an Exhibit to the Annual report on Form 10-K for the
fiscal year ended December 31, 1995, incorporated herein by
reference.
(8) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, incorporated herein by
reference.
(9) Filed as an Exhibit to Form S-1, Registration No. 33-62206,
effective July 20, 1993, incorporated herein by reference.
(10) Portions of this document have been omitted pursuant to a request
for confidential treatment that has been granted.
(11) Portions of this document have been omitted pursuant to a request
for confidential treatment that is pending.
(b) Reports on Form 8-K.
None.
<PAGE 73>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 18, 1999.
ATLANTIC COAST AIRLINES, INC.
By /S/
:
/ C. Edward Acker
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 16, 1998.
Name Title
/S/ Chairman of the Board of
Directors
C. Edward Acker
/S/ Director, President
Kerry B. Skeen and Chief Executive Officer
(principal executive officer)
/S/ Director, Executive Vice
President
Thomas J. Moore and Chief Operating Officer
/S/ Senior Vice President, Treasurer
and
Paul H. Tate Chief Financial Officer
(principal financial officer)
/S/ Vice President, Financial
Planning and Controller
David W. Asai (principal accounting officer)
/S/ /S/
John Sullivan Susan M. Coughlin
Director Director
/S/ /S/
Robert Buchanan James Kerley
Director Director
/S/ /S/
Joseph Elsbury James Miller
Director Director
_______________________________
1 Excluding a non-cash, non-operating charge to earnings during the
second quarter of 1998 of $1.4 million representing the fair value of the
additional shres distributed upon conversion.