SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
As of August 10, 1999, there were 18,671,272 shares of common stock,
par value $.02 per share, outstanding.
2
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands except for per share data and December 31, June 30, 1999
par values) 1998 (Unaudited)
Assets
Current:
Cash and cash equivalents $ 64,412 $44,612
Short term investments 63 65
Accounts receivable, net 30,210 38,589
Expendable parts and fuel inventory, 3,377 3,791
net
Prepaid expenses and other current 3,910 10,597
assets
Deferred tax asset 2,534 2,534
Total current assets 104,506 100,188
Property and equipment at cost, net of
accumulated depreciation and amortization 88,326 110,300
Preoperating costs, net of accumulated
amortization 1,486 -
Intangible assets, net of accumulated 2,382 2,358
amortization
Debt issuance costs, net of accumulated
amortization 3,420 3,653
Aircraft deposits 21,060 32,731
Other assets 6,446 7,744
Total assets $ 227,626 $ 256,974
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 5,262 $ 4,126
Current portion of long-term debt 3,450 3,948
Current portion of capital lease 1,334 1,633
obligations
Accrued liabilities 26,330 35,310
Total current liabilities 36,376 45,017
Long-term debt, less current portion 63,289 75,941
Capital lease obligations, less current 1,446 4,606
portion
Deferred tax liability 6,238 6,238
Deferred credits, net 9,900 14,206
Total liabilities 117,249 146,008
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares issued
20,821,001 and 20,991,323 respectively;
shares outstanding 19,348,501 and 416 419
18,659,719 respectively
Additional paid-in capital 85,215 86,627
Less: Common stock in treasury, at cost,
1,472,500 and 2,331,604 shares respectively (17,069) (31,838)
Retained earnings 41,815 55,758
Total stockholders' equity 110,377 110,966
Total liabilities and stockholders' $ 227,626 $ 256,974
equity
See accompanying notes to the condensed consolidated financial
statements.
3
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
(In thousands, except for per share data) 1998 1999
Operating revenues:
Passenger $ 74,815 $ 90,972
Other 944 1,425
Total operating revenues 75,759 92,397
Operating expenses:
Salaries and related costs 16,507 20,651
Aircraft fuel 5,738 7,980
Aircraft maintenance and materials 5,928 6,314
Aircraft rentals 8,951 11,341
Traffic commissions and related fees 11,395 13,946
Facility rents and landing fees 3,122 4,569
Depreciation and amortization 1,461 2,176
Other 5,299 6,919
Total operating expenses 58,401 73,896
Operating income 17,358 18,501
Other income (expense):
Interest expense (946) (1,338)
Interest income 1,497 848
Debt conversion expense (1,410) -
Other, net 32 (49)
Total other income (expense) (827) (539)
Income before income tax provision 16,531 17,962
Income tax provision 7,439 6,894
Net income $9,092 $11,068
Income per share:
Basic $0.48 $0.58
Diluted $0.42 $0.51
Weighted average shares used in computation:
-basic 18,805 19,177
-diluted 22,246 22,224
See accompanying notes to the condensed consolidated financial
statements.
4
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months ended June 30,
(In thousands, except for per share data) 1998 1999
Operating revenues:
Passenger $131,508 $162,814
Other 2,306 2,587
Total operating revenues 133,814 165,401
Operating expenses:
Salaries and related costs 31,177 40,312
Aircraft fuel 10,803 14,620
Aircraft maintenance and materials 11,597 12,366
Aircraft rentals 17,218 21,720
Traffic commissions and related fees 20,513 25,825
Facility rents and landing fees 5,929 8,581
Depreciation and amortization 2,848 4,111
Other 10,496 13,689
Total operating expenses 110,581 141,224
Operating income 23,233 24,177
Other income (expense):
Interest expense (2,148) (2,497)
Interest income 1,937 1,895
Debt conversion expense (1,410) -
Other, net 61 (79)
Total other income (expense) (1,560) (681)
Income before income tax provision and cumulative effect
of accounting change 21,673 23,496
Income tax provision 9,599 8,665
Income before cumulative effect of
accounting change 12,074 14,831
Cumulative effect of accounting change, net of income - (888)
tax
Net income $12,074 $13,943
Income per share:
Basic
Income before cumulative effect of accounting $0.71 $0.77
change
Cumulative effect of accounting change - (0.05)
Net income $0.71 $0.72
Diluted
Income before cumulative effect of accounting
change $0.58 $0.68
Cumulative effect of accounting change - (0.04)
Net income $0.58 $0.64
Weighted average shares used in computation:
-basic 16,994 19,310
-diluted 22,115 22,560
See accompanying notes to the condensed consolidated financial
statements.
5
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
(In thousands) 1998 1999
Cash flows from operating activities:
Net income $ 12,074 $ 13,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization 2,497 4,147
Write off of preoperating costs - 1,486
Amortization of intangibles and preoperating 350 88
costs
Provision for uncollectible accounts and inventory
obsolescence 70 30
Amortization of deferred credits (224) (323)
ESOP termination costs - 197
Loss on disposal of fixed assets 199 372
Amortization of debt discount and finance 233 33
cost
Debt conversion expense 1,410 -
Interest on debt conversion 200 -
Interest on credit due from manufacturer (362) (162)
Capitalized interest (731) (713)
Gain on ineffective hedge position - (211)
Other - 13
Changes in operating assets and liabilities:
Accounts receivable (6,861) (8,121)
Expendable parts and fuel inventory (382) (414)
Prepaid expenses and other current assets (4,748) (5,581)
Preoperating costs (5) -
Accounts payable 4,320 (656)
Accrued liabilities 8,703 8,880
Net cash provided by operating activities 16,743 13,008
Cash flows from investing activities:
Purchases of property and equipment (6,032) (23,368)
Note receivable from executive officer - (1,250)
Maturities of short term investments 9,808 -
Funding obligation for regional terminal - (7,751)
Reimbursement from MWAA of regional terminal - 7,751
funding
Refund of aircraft lease deposits and other 120 3
Payments for aircraft deposits and other (500) (11,000)
Net cash provided by (used in) investing 3,396 (35,615)
activities
Cash flows from financing activities:
Proceeds from bridge loan - 7,751
Stock repurchase - (14,966)
Proceeds from spare engine financing 1,318 4,494
Proceeds from issuance of long-term debt - 14,700
Payments of long-term debt (503) (1,513)
Repayments of the bridge loan - (7,751)
Payments of capital lease obligations (1,981) (744)
Deferred financing costs (870) (321)
Proceeds from exercise of stock options 1,587 1,157
Net cash provided by (used in) financing (449) 2,807
activities
Net increase (decrease) in cash and cash 19,690 (19,800)
equivalents
Cash and cash equivalents, beginning of period 39,167 64,412
Cash and cash equivalents, end of period $ 58,857 $ 44,612
See accompanying notes to the condensed consolidated financial
statements.
6
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Atlantic Coast Airlines Holdings, Inc. ("ACAI") and its
subsidiary, Atlantic Coast Airlines ("ACA"), (ACAI and ACA, together, the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished in the
condensed consolidated financial statements includes normal recurring
adjustments and reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of such condensed
consolidated financial statements. Results of operations for the three
and six month periods presented are not necessarily indicative of the
results to be expected for the year ending December 31, 1999. Certain
amounts as previously reported have been reclassified to conform to the
current year presentation. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements, and the notes thereto, included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
2. OTHER - COMMITMENTS
On July 2, 1998, the Company entered into a series of interest rate swap
contracts having an aggregate notional amount of $51.8 million to hedge
its exposure, by approximately 50%, to interest rate changes until
permanent financing for six Canadair 50-seat regional jet ("RJ") aircraft
scheduled for delivery between October 1998 and April 1999, was secured.
During the first six months of 1999, the Company settled the remaining
four swap contracts, paying the counterparty approximately $154,000. The
Company also recognized a gain of approximately $210,000 from the
ineffective portion of one of the interest rate swap contracts that
settled in the first half of 1999. The Company is amortizing the
effective portion of hedge gains and losses over the term of the related
aircraft leases.
On May 4, 1999, the Company entered into two interest rate swap contracts
having an aggregate notional amount of $13 million to hedge its exposure
by approximately 37%, to interest rate changes until permanent financing
for two RJ aircraft scheduled for delivery in October and November 1999,
is secured. Had the two contracts settled as of June 30, 1999, the
counterparty would have been obligated to make a payment of $85,000 to
the Company.
7
In April 1999, the Company entered into commodity swap transactions to
hedge price changes on approximately 18,700 barrels of jet fuel per month
during the period from July through September 1999. The contracts provide
for an average fixed price of 45.5 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. Also in April 1999, the
Company entered into a call option contract to hedge price changes on
approximately 19,300 barrels of crude oil per month during the period
from October through December 1999. The contract provides for a premium
payment of approximately $75,400 and sets a cap on the maximum price
equal to approximately 42 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 June 1999, the Company entered into commodity
swap transactions to hedge price changes on approximately 36,700 barrels
of jet fuel per month during the period from July through September 1999.
The contracts provide for an average fixed price of 41.55 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 now hedged approximately 60% of its
jet fuel requirements for the third quarter of 1999 and 20% for the
fourth quarter of 1999.
The Metropolitan Washington Airport Authority ("MWAA"), in coordination
with the Company, has built an approximately 69,000 square foot regional
passenger concourse at Washington Dulles International Airport,
("Washington-Dulles"). The facility opened on May 2, 1999. The Company
has agreed to obtain its own interim financing from a third party lender
to fund a portion of the total program cost of the regional concourse for
approximately $15 million. The Company's remaining obligation as of June
30, 1999 is approximately $5.0 million. MWAA has agreed to replace the
Company's interim financing with the proceeds of bonds or, if obtained,
Passenger Facility Charges ("PFC") funds, no later than one year
following the substantial completion date of the project.
In February 1999, the Company entered into an asset-based lending
agreement with two financial institutions that provides the Company with
a $15 million bridge loan for the construction of the regional terminal
at Washington-Dulles and a line of credit for up to $35 million depending
on the amount of assigned ticket receivables and the value of certain
rotable spare parts. The $35 million line of credit replaces a previous
$20 million line of credit. The interest rate on this line is LIBOR plus
from .75% to 1.75% depending on the Company's fixed charges coverage
ratio.
During the first half of 1999, the Company borrowed $7.8 million on the
bridge loan and recorded a receivable from MWAA for $7.8 million. In May
1999, MWAA received authorization to use $10.0 million of PFC revenues
for the Regional Terminal project. Accordingly, MWAA paid the Company
$7.8 million, and the Company repaid its borrowings on the bridge loan.
As of June 30, 1999 there are no outstanding borrowings on the bridge
loan and no amounts due from MWAA. Subsequent to June 30, 1999 the
Company has funded to MWAA an additional $2.2 million and recorded a note
receivable from MWAA. No additional amounts were drawn on the bridge
loan for this additional funding, however the Company may do so in the
future as desired.
8
As of June 30, 1999, the Company had firm commitments to acquire 23
additional RJs from Bombardier, Inc. In addition, the Company had
options to acquire a further 27 RJs. The value of the remaining 23
undelivered aircraft on firm order was approximately $410 million. The
Company requires United's approval to operate additional jet aircraft as
United Express beyond the 43 total regional jets including the 20 RJ's
already in service. (See Note 9 - "Subsequent Events")
On July 12, 1999 the Company announced that it had placed a conditional
order for 55 328JET and 428JET feeder jet aircraft, and had acquired
options for an additional 55 aircraft, from Fairchild Aerospace
Corporation. The order is conditioned on the Company receiving approval
from United to operate the feeder jets as United Express. The Company at
its option may waive the condition and enter into commitments for firm
delivery positions under the Fairchild agreement. The value of the
aircraft in the conditional order (excluding option aircraft) is
approximately $700 million.
3. NOTE RECEIVABLE
Included in prepaid expenses and other current assets as of June 30, 1999
is a promissory note from an executive officer of the Company with a
balance of $1.25 million dated as of May 24, 1999. The note accrues
interest on the outstanding balance at 7.75% payable quarterly. The note
is payable in full no later than May 25, 2000. The Company has the right
to offset the balance due on the note by certain amounts that may be
payable if the officer's employment terminates.
4. INCOME TAXES
For the second quarter 1999, the Company had a combined effective tax
rate for state and federal taxes of 38.4%. The Company's combined
statutory tax rate for state and federal taxes is approximately 40%. The
Company's first and second quarter 1999 effective tax rates were
positively affected by the application of certain 1998 and prior, state
tax credits that were determined realizable in 1999.
5. STOCK REPURCHASE PLAN
On April 21, 1999, the Company's Board of Directors approved a plan to
repurchase up to $20 million or five percent of its then current
outstanding shares in the open market over a twelve month period. During
the second quarter of 1999, the Company repurchased 871,500 shares of its
common stock at an average price of $17.17 per share.
9
6. INCOME PER SHARE
The computation of basic income per share is determined by dividing net
income by the weighted average number of common shares outstanding.
Diluted income per share is computed by dividing net income by the
weighted average number of common shares outstanding and common stock
equivalents, which consist of shares subject to stock options computed
using the treasury stock method. In addition, under the if-converted
method, dilutive convertible securities are included in the denominator
while related interest expense, net of tax, for convertible debt is added
to the numerator. A reconciliation of the numerator and denominator used
in computing basic and diluted income per share is as follows:
Three Months Six Months
Ended June 30, Ended June 30,
(in thousands) 1998 1999 1998 1999
Income (basic) $9,092 $11,068 $12,074 $13,943
Interest expense on 7%
Convertible Notes net of tax 326 208 805 416
effect
Income (diluted) $9,418 $11,276 $12,879 $14,359
Weighted average shares
outstanding (basic) 18,805 19,177 16,994 19,310
Incremental shares related to
stock options 951 845 943 1,048
Incremental shares related to 7%
Convertible Notes 2,490 2,202 4,178 2,202
Weighted average shares
outstanding (diluted) 22,246 22,224 22,115 22,560
7. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
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 became effective January 1, 1999. The Company had
previously deferred certain start-up costs related to the introduction of
the RJs and was amortizing such costs to expense ratably over four years.
In January 1999, the Company recorded a charge for the remaining
unamortized balance of approximately $888,000, net of $598,000 of income
tax, associated with previously deferred preoperating costs.
10
8. EMPLOYEE STOCK OWNERSHIP PLAN
Effective June 1, 1998, the Board of Directors of the Company voted to
terminate the Employee Stock Ownership Plan (the "ESOP"). The Company
received a determination letter from the IRS on March 15, 1999 which
notified the Company that the termination of the ESOP does not adversely
affect the qualifications of the plan for federal tax purposes. In
preparing for the final distribution of ESOP shares to participants, it
was discovered that a misallocation of shares had occurred in years 1993
through 1997 resulting in eligible participants not receiving shares that
they were entitled to. The Company contributed the required number of
additional shares to the ESOP during the second quarter of 1999 when the
final calculation was determined, and recognized approximately $250,000
in expense.
9. SUBSEQUENT EVENTS
On July 2, 1999, the Company entered into interest rate swap contracts
having an aggregate notional amount of $7 million to hedge its exposure
by approximately 40%, to interest rate changes until permanent financing
for the RJ aircraft scheduled for delivery in December 1999, is secured.
In August 1999, the Company announced it had reached agreement with
Bombardier Aerospace of Montreal to acquire an additional 20 regional
jets for an approximate aggregate value of $365 million. With this
additional order, the Company now has firm orders for 43 RJ's and options
for an additional 27 RJ's. Delivery of the first of these 20 additional
jets is scheduled for September 2000, with completion expected before the
end of 2002. These additional 20 regional jets result in the Company
having aircraft on order which exceed the current authorized number of
jet aircraft the Company is allowed to operate as United Express. In
order to pursue other business opportunities to fly these 20 additional
RJ's, the Company has formed a separate wholly-owned subsidiary
corporation which is expected to operate the newly-ordered aircraft.
11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Second Quarter Operating Statistics
Increase
Three months ended June 30, 1998 1999 (Decrease
)
Revenue passengers carried 646,217 861,355 33.3%
Revenue passenger miles ("RPMs") 203,319 277,781 36.6%
(000's)
Available seat miles ("ASMs") (000's) 334,588 454,967 36.0%
Passenger load factor 60.8% 61.1% 0.3 pts
Break-even passenger load factor 1 46.7% 48.6% 1.9 pts
Revenue per ASM (cents) 22.4 20.0 (10.7%)
Yield (cents) 36.8 32.7 (11.1%)
Cost per ASM (cents) 17.5 16.2 (7.4%)
Average passenger fare $115.77 $105.62 (8.8%)
Average passenger segment (miles) 315 322 2.2%
Revenue departures (completed) 40,814 48,608 19.1%
Revenue block hours 55,420 64,373 16.2%
Aircraft utilization (block hours) 8.9 9.0 1.1%
Average cost per gallon of fuel (cents) 67.8 68.2 0.6%
Aircraft in service (end of period) 69 80 15.9%
Comparison of three months ended June 30, 1999, to three months ended
June 30, 1998.
Results of Operations
The following Management's Discussion and Analysis contains
forward-looking statements and information that are based on management's
current expectations as of the date of this document. When used herein,
the words "anticipate", "believe", "estimate" and "expect" and similar
expressions, as they relate to the Company's management, are intended to
identify such forward-looking statements. Such forward-looking statements
are subject to risks, uncertainties, assumptions and other factors that
may cause the actual results of the Company to be materially different
from those reflected in such forward-looking statements. Such factors
include, among others, the costs of implementing jet service, the
response of the Company's competitors to the Company's business strategy,
the ability of the Company to obtain favorable financing terms for its
12
aircraft, market acceptance of the Company's jet service, routes and
schedules offered by the Company, the ability to identify, implement and
profitably operate new business opportunities, the success of the
Company's and other third party's Year 2000 remediation efforts, the cost
of fuel, the weather, general economic conditions, changes in and
satisfaction of regulatory requirements, aircraft remarketing and fleet
rationalization costs, and the factors discussed below and in the
Company's Annual Report on Form 10-K for the year ended December 31,
1998. The Company does not intend to update these forward-looking
statements prior to its next required filing with the Securities and
Exchange Commission.
General
In the second quarter of 1999 the Company posted net income of
$11.1 million compared to net income of $9.1 million for the second
quarter of 1998. In the three months ended June 30, 1999, the Company
earned pretax income of $18.0 million compared to $16.5 million in the
three months ended June 30, 1998. Unit revenues, revenue per ASM
("RASM"), decreased 10.7% to 20 cents year over year, while unit costs,
operating cost per ASM ("CASM"), decreased 7.4% to 16.2 cents year over
year. This resulted in operating margin decreasing to 20% for the second
quarter of 1999 from 22.9% for the second quarter of 1998. Total
passengers increased 33.3% in the second quarter of 1999 compared to the
second quarter of 1998 to 861,355 passengers.
Operating Revenues
The Company's operating revenues increased 22% to $92.4 million
in the second quarter of 1999 compared to $75.8 million in the second
quarter of 1998. The increase resulted from a 36% increase in ASMs and a
slight increase in load factor of 0.3 percentage points, partially offset
by an 11.1% decrease in yield (ratio of passenger revenue to revenue
passenger miles).
The increase in ASMs is the result of service expansion
utilizing additional Canadair 50 seat Regional Jets ("RJs"). The Company
was operating 20 RJs as of June 30, 1999 as compared to nine as of June
30, 1998. The scheduling in 1999 of RJs on routes previously flown by
turboprop aircraft has led to a reduction in average aircraft stage
length compared to this year's first quarter. The average aircraft stage
length for all aircraft in the fleet remained essentially unchanged on a
year over year basis at 271 miles as compared to 269 miles. The average
aircraft stage length of the RJ decreased 16.1% to 431 miles for the
second quarter of 1999 as compared to 514 miles for the second quarter of
1998.
The year over year percentage reduction in yield is
attributable to additional competition at the Company's Washington-Dulles
hub, general industry yield weakness, issues associated with utilizing
United's Orion yield management system beginning in February 1999 and an
increase of 2.2% in the average passenger trip length to 322 miles.
13
Operating Expenses
The Company's operating expenses increased 26.5% in the second
quarter of 1999 compared to the second quarter of 1998 due primarily to a
36.0% increase in ASMs and a 33.3% increase in passengers carried. The
increase in ASMs reflects the net addition of eleven RJs into scheduled
service since the end of the second quarter of 1998. A summary of
operating expenses as a percentage of operating revenues and cost per ASM
for the three months ended June 30, 1998, and 1999 is as follows:
Three Months ended June 30
1998 1999
Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 21.8% 4.9 22.4% 4.5
Aircraft fuel 7.6% 1.7 8.6% 1.8
Aircraft maintenance and 7.8% 1.8 6.8% 1.4
materials
Aircraft rentals 11.8% 2.7 12.3% 2.5
Traffic commissions and related 15.0% 3.4 15.1% 3.1
fees
Facility rents and landing fees 4.2% 1.0 4.9% 1.0
Depreciation and amortization 1.9% 0.4 2.4% 0.4
Other 7.0% 1.6 7.5% 1.5
Total 77.1% 17.5 80.0% 16.2
Cost per ASM decreased 7.4% on a year-over-year basis to 16.2
cents during the second quarter of 1999 primarily due to the introduction
of eleven RJs since the end of the second quarter of 1998. The RJ
produces approximately 4.5 times more ASM's on a daily basis than one of
the Company's average-sized turboprops.
Salaries and related costs per ASM decreased 8.2% to 4.5 cents
in the second quarter of 1999 compared to 4.9 cents in the second quarter
of 1998. In absolute dollars, salaries and related costs increased 25.1%
from $16.5 million in the second quarter of 1998 to $20.7 million in the
second quarter of 1999. The increase resulted primarily from additional
flight crews, customer service personnel and maintenance personnel to
support the Company's increased level of operations.
The cost per ASM of aircraft fuel increased 5.9% to 1.8 cents
for the second quarter of 1999 as compared to 1.7 cents for the second
quarter of 1998. In absolute dollars, aircraft fuel expense increased
39.1% from $5.7 million in the second quarter of 1998 to $8.0 million in
the second quarter of 1999. The increased fuel expense resulted from the
16.2% increase in revenue block hours, a 0.6% increase in the average
cost per gallon of fuel from 67.8 cents to 68.2 cents including
applicable taxes and into-plane fees, and the delivery of additional RJ
aircraft which burn more fuel than the J-41 and J-32 turboprop aircraft
on a per ASM basis. The Company had hedged approximately 80% of its
anticipated jet fuel requirements for the second quarter of 1999 at an
average price, excluding taxes and into-plane fees, of approximately 42.5
cents per gallon. The Company incurred approximately $45,000 in
additional fuel costs during the second quarter of 1999 as a result of
its fuel hedging activity. There can be no assurance that future
increases in fuel prices will not adversely affect the Company's
operating expenses. The Company has entered into additional hedge
transactions to minimize its exposure to fuel price increases during the
remainder of 1999. See "Other Commitments".
14
The cost per ASM of aircraft maintenance and materials
decreased 22.2% to 1.4 cents in the second quarter of 1999 compared to
1.8 cents in the second quarter of 1998. The large decrease in per ASM
cost is due to the addition of eleven 50-seat RJs, which are currently
covered by manufacturer's warranties, since the second quarter of 1998.
In absolute dollars, aircraft maintenance and materials expense increased
6.5% from $5.9 million in the second quarter of 1998 to $6.3 million in
the second quarter of 1999. The increased expense resulted from the
increase in the size of the RJ fleet and an increase in the average age
of the turboprop fleet. In the second quarter, the Company did not incur
any significant charges for engine or airframe overhauls of its RJ fleet.
The cost per ASM of aircraft rentals decreased 7.4% to 2.5
cents for the second quarter of 1999 compared to 2.7 cents for the second
quarter of 1998. This decrease is the result of leasing eight additional
RJ aircraft which generally have lower per ASM ownership costs than the
turboprop aircraft and the purchase of three CRJ aircraft during this
period which would reduce aircraft rental expense per ASM. In absolute
dollars, aircraft rentals increased 26.7% from $9.0 million in the second
quarter of 1998 to $11.3 million in the second quarter of 1999,
reflecting the addition of the eight leased RJ aircraft.
The cost per ASM of traffic commissions and related fees
decreased to 3.1 cents in the second quarter of 1999 compared to 3.4
cents in the second quarter of 1998. This is the result of RASM
decreasing 10.6% on a year over year basis. In absolute dollars, traffic
commissions and related fees increased 22.4% from $11.4 million in the
second quarter of 1998 to $13.9 million in the second quarter of 1999.
The increase resulted from a 21.6% increase in passenger revenues and a
33.3% increase in revenue passengers.
The cost per ASM of facility rents and landing fees remained
unchanged at 1.0 cents. In absolute dollars, facility rents and landing
fees increased 46.3% from $3.1 million in the second quarter of 1998 to
$4.6 million in the second quarter of 1999. The increased costs result
primarily from the 19.1% increase in the number of departures and the
Company's occupancy of its new regional terminal at Washington Dulles on
May 2, 1999.
The cost per ASM of depreciation and amortization remained the
same at 0.4 cents for the second quarters of 1999 and 1998. In absolute
dollars, depreciation and amortization increased 48.9% from $1.5 million
in the second quarter of 1998 to $2.2 million in the second quarter of
1999 primarily as a result of the purchase of two RJs in the second half
of 1998 and one RJ in the second quarter of 1999 and additional rotable
spare parts and engines associated with the RJs.
15
The cost per ASM of other operating expenses decreased to 1.5
cents in the second quarter of 1999 from 1.6 cents in the second quarter
of 1998. In absolute dollars, other operating expenses increased 30.6%
from $5.3 million in the second quarter of 1998 to $6.9 million in the
second quarter of 1999. The increased costs result primarily from the
33.3% increase in revenue passengers which resulted in higher passenger
handling costs.
As a result of the foregoing changes in operating expenses, and
a 36.0% increase in ASMs, total cost per ASM decreased to 16.2 cents in
the second quarter of 1999 compared to 17.5 cents in the second quarter
of 1998. In absolute dollars, total operating expenses increased 26.5%
from $58.4 million in the second quarter of 1998 to $73.9 million in the
second quarter of 1999.
The Company's combined effective tax rate for state and federal
taxes during the second quarter of 1999 was approximately 38.4% as
compared to 45% for the second quarter of 1998. This decrease is due to
the non deductibility for taxes of a one time non-cash, non-operating
charge recorded in the second quarter of 1998 related to the temporary
reduction in the conversion price for holders of the Company's 7%
Convertible Subordinated Notes and the application of certain 1998 and
prior, state tax credits that were determined realizable in 1999. The
Company anticipates its effective tax rate for the remainder of 1999 to
be approximately 40%.
16
Six Months Operating Statistics
Increase
(Decrease)
Six months ended June 30, 1998 1999 % Change
Revenue passengers carried 1,111,210 1,511,227 36.0%
Revenue passenger miles ("RPMs") 342,915 487,053 42.0%
(000's)
Available seat miles ("ASMs") (000's) 619,569 851,100 37.4%
Passenger load factor 55.3% 57.2% 1.9 pts
Break-even passenger load factor 2 45.6% 48.7% 3.1 pts
Revenue per ASM (cents) 21.2 19.1 (9.9%)
Yield (cents) 38.4 33.4 (13.0%)
Cost per ASM (cents) 17.8 16.6 (6.7%)
Average passenger fare $118.35 $107.74 (9.0%)
Average passenger segment (miles) 309 322 4.2%
Revenue departures 79,800 91,391 14.5%
Revenue block hours 106,657 121,366 13.8%
Aircraft utilization (block hours) 8.7 8.7 0%
Average cost per gallon of fuel (cents) 68.4 66.9 (2.2%)
Aircraft in service (end of period) 69 80 15.9%
Comparison of six months ended June 30, 1998, to six months ended June
30, 1999.
Results of Operations
General
In the first half of 1999, the Company posted net income of
$13.9 million compared to net income of $12.1 million for the first half
of 1998. For the six months ended June 30, 1999, the Company earned
pretax income of $23.5 million compared to $21.7 million for the six
months ended June 30, 1998. Unit revenues, RASM, decreased 9.9% to 19.1
cents period over period, while unit costs, CASM, decreased 6.7% to 16.6
cents period over period. This resulted in the operating margin
decreasing to 14.6% for the first half of 1999 from 17.4% for the first
half of 1998.
Operating Revenues
The Company's operating revenues increased 23.6% to $165.4
million in the first half of 1999 compared to $133.8 million in the first
half of 1998. The increase resulted from a 37.4% increase in ASMs and an
increase in load factor of 1.9 percentage points, partially offset by a
13.0% decrease in yield.
17
The increase in ASM's is the result of service expansion
utilizing the RJ. The Company was operating 20 RJ's as of June 30, 1999
as compared to nine as of June 30, 1998. The longer stage length of the
RJ results in the average aircraft stage length for the first half of
1999 increasing 3.4% over the first half of 1998 to 273 miles.
The year over year percentage reduction in yield is primarily
the result of the 4.2% increase in the average passenger trip length to
322 miles, issues associated with utilizing United's Orion yield
management system beginning in February 1999, additional competition at
the Company's Washington-Dulles hub, general industry yield weakness, and
the unusually high number of weather cancellations during the first
quarter of 1999 that particularly disrupted high yield business
travelers. Total passengers increased 36.0% in the first half of 1999
compared to the first half of 1998.
Operating Expenses
The Company's operating expenses increased 27.7% in the first
half of 1999 compared to the first half of 1998 due primarily to a 37.4%
increase in ASMs and a 36.0% increase in passengers carried. The increase
in ASMs reflects the net addition of eleven RJ's into scheduled service
since the end of the first half of 1998.
A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the six months ended June 30, 1998, and
1999 is as follows:
1998 1999
Percent Cost Percent Cost
of of
Operating Per ASM Operating per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 23.3% 5.0 24.4% 4.7
Aircraft fuel 8.1% 1.7 8.8% 1.7
Aircraft maintenance and 8.6% 1.9 7.5% 1.5
materials
Aircraft rentals 12.9% 2.8 13.1% 2.6
Traffic commissions and related 15.3% 3.3 15.6% 3.0
fees
Facility rents and landing fees 4.4% 0.9 5.2% 1.0
Depreciation and amortization 2.1% 0.5 2.5% 0.5
Other 7.9% 1.7 8.3% 1.6
Total 82.6% 17.8 85.4% 16.6
Cost per ASM decreased 6.7% to 16.6 cents during the first half
of 1999 compared to 17.8 cents during the first half of 1998 primarily
due to the introduction of eleven RJs since the end of the first half of
1998. The RJ produces approximately 4.5 times more ASM's on a daily
basis than one of the Company's average-sized turboprops.
Salaries and related costs per ASM decreased 6.0% to 4.7 cents
in the first half of 1999 compared to the first half of 1998. In absolute
dollars, salaries and related costs increased 29.3% from $31.2 million in
the first half of 1998 to $40.3 million in the first half of 1999. The
increase resulted primarily from additional flight crews, customer
service personnel and maintenance personnel to support the Company's
increased level of operations.
18
The cost per ASM of aircraft fuel remained the same at 1.7
cents for the first half of 1999 and 1998. In absolute dollars, aircraft
fuel expense increased 35.3% from $10.8 million in the first half of 1998
to $14.6 million in the first half of 1999. The increased fuel expense
resulted from the 13.8% increase in revenue block hours, partially offset
by a 2.2% decrease in the average cost per gallon of fuel from 68.4 cents
to 66.9 cents including taxes and into-plane fees. This benefit was
partially offset by the delivery of additional RJ aircraft which burn
more fuel than the J-41 and J-32 turboprop aircraft on a per ASM basis.
The Company had hedged approximately 77% of its jet fuel requirements for
the first half of 1999 at an average price, excluding taxes and into-
plane fees, of approximately 42.5 cents per gallon. The Company incurred
approximately $595,000 in additional fuel costs during the first half of
1999 as a result of its fuel hedging activity. There can be no assurance
that future increases in fuel prices will not adversely affect the
Company's operating expenses. The Company has entered into additional
hedge transactions to minimize its exposure to fuel price increases
during the remainder of 1999. See "Other Commitments".
The cost per ASM of aircraft maintenance and materials
decreased 21% to 1.5 cents in the first half of 1999 compared to the
first half of 1998. In absolute dollars, aircraft maintenance and
materials expense increased 6.6% from $11.6 million in the first half of
1998 to $12.4 million in the first half of 1999. The increased expense
resulted from the increase in the size of the RJ fleet and an increase in
the average age of the turboprop fleet. In the first half of 1999, the
Company did not incur any significant charges for engine or airframe
overhauls of its RJ fleet.
The cost per ASM of aircraft rentals decreased to 2.6 cents for
the first half of 1999 compared to 2.8 cents for the first half of 1998.
This decrease is the result of leasing eight additional RJ aircraft which
generally have lower per ASM ownership costs than the turboprop aircraft
and the purchase of three RJ aircraft during this period which reduce
aircraft rental expense per ASM. In absolute dollars, aircraft rentals
increased 26.1% from $17.2 million in the first half of 1998 to $21.7
million in the first half of 1999 reflecting the addition of the eight
leased RJ aircraft.
The cost per ASM of traffic commissions and related fees
decreased to 3.0 cents in the first half of 1999 compared to 3.3 cents in
the first half of 1998. This is the result of RASM decreasing 9.9% on a
year over year basis. In absolute dollars, traffic commissions and
related fees increased 25.9% from $20.5 million in the first half of 1998
to $25.8 million in the first half of 1999. The increase resulted from a
23.8% increase in passenger revenues and a 36.0% increase in passengers.
19
The cost per ASM of facility rents and landing fees increased
11% from 0.9 cent in the first half of 1998 to 1.0 cent for the first
half of 1999. In absolute dollars, facility rents and landing fees
increased 44.7% from $5.9 million in the first half of 1998 to $8.6
million in the first half of 1999. The increased costs result primarily
from the 14.5% increase in the number of departures which includes the
addition of the Chicago-O'Hare hub operation and to a lessor extent, the
Company's occupancy of the new regional terminal at Washington-Dulles on
May 2, 1999.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents. In absolute dollars, depreciation and amortization
increased 44.3% from $2.8 million in the first half of 1998 to $4.1
million in the first half of 1999 primarily as a result of additional
rotable spare parts and engines associated with the RJs and the purchase
of two RJs in the second half of 1998 and one in the first half of 1999.
The cost per ASM of other operating expenses decreased to 1.6
cents in the first half of 1999 from 1.7 cents in the first half of 1998.
In absolute dollars, other operating expenses increased 30.4% from $10.5
million in the first half of 1998 to $13.7 million in the first half of
1999. The increased costs result primarily from the 36% increase in
revenue passengers which resulted in higher passenger handling costs.
As a result of the foregoing changes in operating expenses, and
a 37.4% increase in ASMs, total cost per ASM decreased to 16.6 cents in
the first half of 1999 compared to 17.8 cents in the first half of 1998.
In absolute dollars, total operating expenses increased 27.7% from $110.6
million in the first half of 1998 to $141.2 million in the first half of
1999.
The Company's combined effective tax rate for state and federal
taxes during the first half of 1999 was approximately 36.9% as compared
to 44.3% for the first half of 1998. This decrease is due to the non
deductibility for taxes of a one time non-cash, non-operating charge
recorded in the second quarter of 1998 related to the temporary reduction
in the conversion price for holders of the Company's 7% Convertible
Subordinated Notes and the application of certain 1998 and prior, state
tax credits that were determined realizable in 1999. The Company
anticipates its effective tax rate for the remainder of 1999 to be
approximately 40%.
Outlook
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth above on pages 11
and 12.
20
As of August 12, 1999, the Company was operating as United
Express a fleet of 80 aircraft comprised of 20 RJ's, 32 J41's and 28
J32's. In August 1999, the Company announced it had reached agreement
with Bombardier Aerospace of Montreal to acquire an additional 20
regional jets. With this additional order, the Company now has firm
orders for 43 RJ's in addition to the 20 previously delivered, and
options for an additional 27 RJ's. The Company has United approval to
operate, as United Express, 43 of the 63 delivered and firm ordered
aircraft. The Company has formed a separate wholly-owned subsidiary
corporation which is expected to operate the 20 newly-ordered Bombardier
aircraft. The delivery schedule for the 43 firm orders is as follows:
three are scheduled for the fourth quarter of 1999, thirteen in 2000,
seventeen in 2001, and ten in 2002. The continued introduction of these
additional RJ aircraft will expand the Company's current business into
new markets and may increase capacity in existing markets. The 20 newly
ordered aircraft will be used to pursue new business opportunities.
In general, service to new markets and increased capacity to
existing markets will result in increased operating expense that may not
be immediately offset by increases in operating revenues. The new
subsidiary may incur start-up expenses and will require DOT and FAA
approvals to conduct scheduled air transportation. There can be no
assurances that the Company's new subsidiary will be able to operate the
20 additional RJ's profitably.
The Company has placed a conditional aircraft order with
Fairchild Aerospace Corporation ("Fairchild") to acquire 25 32-seat
328JET and 30 44-seat 428JET feeder jet aircraft. The Company requires
United's approval to operate more than 43 jet aircraft as United Express.
The Fairchild order is conditioned on the Company receiving United's
approval to operate the feeder jets as United Express. The Company at its
option may waive the condition and enter into commitments for firm
delivery positions under the Fairchild agreement. Deliveries of the
328JET could begin in the first quarter of 2000, if the Company receives
United's approval or otherwise waives the contract condition.
The Company continues to assess plans to phase out the 28
leased 19 seat J32 aircraft from the United Express operation by the end
of 2001. The Company continues to analyze its phase-out plan, including
quantification of expected costs related to the removal of the J32 from
the fleet. The timing of approval by United to operate the feeder jet
aircraft as United Express will also be a factor in analyzing the J32
phase-out plan.
During the first half of 1999 US Airways announced and began to
implement new service from Washington-Dulles to various cities. New and
announced service includes operations as mainline US Airways, MetroJet,
Shuttle, and US Airways Express. As of August 1, 1999, the Company served
44 cities out of Washington-Dulles. US Airways service existed in 7 of
the Company's markets as of December 31, 1998 and 20 as of August 1,
1999, and will exist in 22 of the Company's markets at some time during
the third quarter of 1999 once all announced service has been
implemented. Generally this service has utilized fare structures similar
to that implemented by the Company. Two of the implemented markets are
served by MetroJet, which offers fares lower than that which has
typically been offered by the Company. The increased competition by US
Airways and other airlines in the Company's markets could adversely
affect the Company's results of operations or financial position. The
Company continually monitors and responds to the effects competition has
on its routes, fares and frequencies, and believes that it can compete
effectively with US Airways. However, there can be no assurances that US
Airways' continued expansion at Washington-Dulles will not have a
material adverse effect on the Company's future results of operations or
financial position in the current or any future quarters.
21
During April and May, 1999, United significantly increased the
number of flights it operated at Washington-Dulles. In July, 1999, United
and the Company revised their Dulles flight schedules to increase
connections and to thereby take greater advantage of United's increased
capacity. As of August 1, 1999, United operated 117 daily departures from
Washington Dulles, a 70% increase from December 31, 1998. During 1999,
the Company and United have either increased frequencies or upgraded
equipment, or both, in markets affected by the US Airways expansion.
Liquidity and Capital Resources
As of June 30, 1999, the Company had cash, cash equivalents and
short-term investments of $44.7 million and working capital of $55.2
million compared to $59.8 million and $52.9 million respectively as of
June 30, 1998. During the first six months of 1999, cash and cash
equivalents decreased by $19.8 million, reflecting net cash provided by
operating activities of $13.0 million, net cash used in investing
activities of $35.6 million, and net cash provided by financing
activities of $2.8 million. The net cash provided by operating activities
is primarily the result of net income for the period of $13.9 million, an
increase of 8.9 million in accrued liabilities resulting from the
increased operation and non cash depreciation and amortization expenses
of $4.1 million, offset by an $5.6 million increase in prepaid expenses
related to aircraft rent and a $8.1 million increase in receivables due
to the increase in passenger revenues. In order to minimize total
aircraft rental expense over the entire life of the related aircraft
leveraged lease transactions, the Company has uneven semiannual lease
payment dates of January 1 and July 1. Approximately 33% of the Company's
annual lease payments are due in January and 30% in July. The net cash
used in investing activities consisted primarily of the purchase of one
regional jet and spare engines and parts, and aircraft deposits related
to the Fairchild aircraft order. Financing activities consisted
primarily of issuance of long term debt for the acquisition of an RJ
aircraft and spare engines, and proceeds from the exercise of stock
options, offset by the repurchase of the Company's stock under the stock
repurchase program and payments on long term debt and capital lease
obligations.
22
Other Financing
In February 1999, the Company entered into an asset-based
lending agreement with two financial institutions that provides the
Company with a $15 million bridge loan to fund the Company's obligation
to MWAA for construction costs on the Company's regional terminal at
Washington-Dulles International Airport and a line of credit for up to
$35 million depending on the amount of assigned ticket receivables and
the value of certain rotable spare parts. The $35 million line of credit
replaces a previous $20 million line of credit. The interest rate on this
line is LIBOR plus from .75% to 1.75% depending on the Company's fixed
charges coverage ratio. During the first half of 1999, the Company drew
$7.8 million of the $15 million bridge loan. Upon reimbursement from
MWAA, the Company repaid the loan. As of June 30, 1999 the outstanding
balance on the bridge loan was zero. Subsequent to June 30, 1999 the
Company has funded to MWAA an additional $2.2 million and recorded a note
receivable from MWAA. No additional amounts were drawn on the bridge
loan for this additional funding, however the Company may do so in the
future as desired.
The Company has pledged $2.9 million of the line of credit as
collateral to secure letters of credit issued on behalf of the Company by
a financial institution. As of June 30, 1999, the available amount of
credit under the $35 million line was $33.6 million.
Other Commitments
In April 1999, the Company entered into commodity swap
transactions to hedge price changes on approximately 18,700 barrels of
jet fuel per month during the period from July through September 1999.
The contracts provide for an average fixed price of 45.5 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. Also in
April 1999, the Company entered into a call option contract to hedge
price changes on approximately 19,300 barrels of crude oil per month
during the period from October through December 1999. The contract
provides for a premium payment of approximately $75,400 and sets a cap on
the maximum price equal to approximately 42 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 June 1999, the Company
entered into commodity swap transactions to hedge price changes on
approximately 36,700 barrels of jet fuel per month during the period from
July through September 1999. The contracts provide for an average fixed
price of 41.55 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 60% of its jet fuel requirements for the third quarter of
1999 and 20% for the fourth quarter of 1999. Had these transactions
settled on June 30, 1999 the counterparties would have been required to
pay the Company approximately $622,000.
23
On May 4, 1999, the Company entered into two interest rate swap
contracts having an aggregate notional amount of $13 million to hedge its
exposure by approximately 37%, to interest rate changes until permanent
financing for two RJ aircraft scheduled for delivery in October and
November 1999, is secured. On July 2, 1999, the Company entered into
interest rate swap contracts having an aggregate notional amount of $7
million to hedge its exposure by approximately 40%, to interest rate
changes until permanent financing for the RJ aircraft scheduled for
delivery in December 1999 is secured. The counterparty would have been
obligated to pay the Company approximately $85,000 had these contracts
settled on June 30, 1999.
Aircraft
As of August 12, 1999, the Company had firm commitments to
acquire 43 additional RJs from Bombardier, Inc. In addition, the Company
had options to acquire a further 27 RJs. The value of the remaining 43
undelivered aircraft on firm order is approximately $775 million.
The Company has a conditional order for 55 328JET and 428JET
feeder jet aircraft, and options for an additional 55 feeder jet
aircraft, from Fairchild Aerospace Corporation. The value of the
aircraft in the conditional order (excluding the option aircraft) is
approximately $700 million. The Company requires United's approval to
operate more than 43 jet aircraft as United Express. The Fairchild order
is conditioned on the Company receiving United's approval to operate the
feeder jets as United Express. The Company at its option may waive the
condition and enter into commitments for firm delivery positions under
the Fairchild agreement.
The Company has approximately $26.5 million on deposit with the
aircraft manufacturers related to its aircraft orders. The deposit
related to the order with Fairchild is fully refundable if the
conditional order is cancelled due to lack of United approval. The
Company intends to use a combination of debt and lease financing to
acquire these aircraft.
Capital Equipment and Debt Service
Capital expenditures for the first six months of 1999 were
$23.4 million compared to $6.0 million for the same period in 1998.
Capital expenditures for 1999 have consisted primarily of the purchase of
one regional jet, spare jet engines, rotable spare parts for the RJ and J-
41 aircraft, facility leasehold improvements, ground equipment, and
computer and office equipment. For the remainder of 1999, the Company
anticipates spending approximately $35 million for: one RJ aircraft, (a
portion of the purchase price to be mortgage debt financed), rotable
spare parts related to the RJ and J-41 aircraft, ground service
equipment, facilities, computers and software.
24
Debt service including capital leases, but excluding the
Regional Terminal bridge loan, for the six months ended June 30, 1999 was
$2.2 million compared to $2.5 million in the same period of 1998.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the asset-based credit
facility including the bridge loan, and other available equipment
financing, will be sufficient to meet its working capital needs, capital
expenditures, and debt service requirements for the next twelve months.
YEAR 2000
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 had stated their intent to be year 2000 compliant by June 30,
1999. The Company has not received final verification of year 2000
compliance from the FAA and United Airlines. The Company is in constant
contact with both of these mission critical vendors and is closely
monitoring their progress. 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 all of
its internal IT and non-IT systems as of April 30, 1999.
25
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's cost to modify its own non-year 2000 ready systems or
applications did not have a material effect on its financial position or
the results of its operations.
Risks
The Company's remaining 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 vendors and suppliers to
become year 2000 compliant or for one to experience a year 2000 failure
in one or more systems (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
Contingency Plans
The Company is still in the process of developing year 2000
contingency plans and expects to finalize them by the end of October
1999. The Company continues 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
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.
26
In July 1999, the FASB issued Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement
No. 133" which defers the effective date of Statement No. 133 by one
year. Therefore, the Company will adopt Statement No. 133 during its
first quarter of fiscal 2001 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 3. Quantitative and Qualitative Disclosures about Market Risk
For the remainder of 1999, the Company has hedged a portion of
its exposure to jet fuel price fluctuations by entering into jet fuel
option contracts for approximately 60% of its estimated fuel requirements
for the third quarter of 1999 and 20% for the fourth quarter of 1999.
Based on the Company's projected fuel consumption of approximately 23
million gallons for the remainder of 1999, a one cent increase in the
average price of jet fuel would increase the Company's aircraft fuel
expense for the remainder of 1999 by approximately $138,000.
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 outstanding, three interest rate swap contracts
having an aggregate notional amount of $20 million to hedge its exposure
by approximately 38%, to interest rate changes until permanent financing
for three RJ aircraft scheduled for delivery in October, November and
December 1999, is secured. A one basis point decrease in interest rates
from the strike price of the Company's call contracts would increase the
Company's annual aircraft lease or ownership costs associated with these
contracts by approximately $90,000.
.
27
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED June 30, 1999
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation incidental to its
business, none of which the Company believes is likely to have a material
effect on the Company's financial position.
The Company was a party to an action in the United States
District Court for the Eastern District of Virginia, Afzal v. Atlantic
Coast Airlines, Civil Action No. 96-1537-A. This action was settled in
July 1999.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held in
Herndon, Virginia on May 19, 1999. Of the 19,531,623 shares of common
stock outstanding on the record date, 14,778,854 were present by proxy.
Those shares were voted on the matters before the meeting as follows:
1. Election of Directors For Withheld
C. Edward Acker 14,765,867 12,987
Kerry B. Skeen 14,762,087 16,767
Thomas J. Moore 14,759,612 19,242
Robert E. Buchanan 14,766,418 12,436
Susan MacGregor Coughlin 14,766,168 12,686
Joseph W. Elsbury 14,766,014 12,840
James J. Kerley 14,763,513 15,341
James C. Miller 14,766,589 12,265
John M. Sullivan 14,766,618 12,236
2. To ratify appointment of KPMG, LLP as the Company's independent
auditors for the current year.
For Against Abstain
14,764,615 1,351 12,888
28
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.45 Fairchild Aerospace Contract
10.12(D) Executive Officer Note
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None to report.
29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
August 16, 1999 By: /S/ Paul H. Tate
Paul H. Tate
Senior Vice President and Chief
Financial Officer
August 16, 1999 By: /S/ Kerry B. Skeen
Kerry B. Skeen
President and Chief Executive
Officer
_______________________________
1 "Break-even passenger load factor" represents the percentage of ASMs
which must be flown by revenue passengers for the airline to break-even
at the operating income level.
1 "Break-even passenger load factor" represents the percentage of ASMs
which must be flown by revenue passengers for the airline to break-even
at the operating income level.