SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 10, 1999, there were 18,550,758 shares of common stock,
par value $.02 per share, outstanding.
THIS DOCUMENT IS A COPY OF THE FORM 10Q FILED ON NOVEMBER 16,1999
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
2
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
<CAPTION
(In thousands except for share data and par December 31, September 30,
values) 1998 1999
(Unaudited)
Assets
Current:
Cash and cash equivalents $ 64,412 $43,272
Short term investments 63 65
Accounts receivable, net 30,210 36,143
Expendable parts and fuel inventory, 3,377 4,078
net
Prepaid expenses and other current 3,910 14,271
assets
Deferred tax asset 2,534 2,534
Total current assets 104,506 100,363
Property and equipment at cost, net of
accumulated depreciation and amortization 88,326 111,819
Preoperating costs, net of accumulated
amortization 1,486 -
Intangible assets, net of accumulated 2,382 2,296
amortization
Debt issuance costs, net of accumulated
amortization 3,420 3,528
Aircraft deposits 21,060 39,453
Other assets 6,446 8,002
Total assets $ 227,626 $265,461
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 5,262 $ 5,454
Current portion of long-term debt 3,450 4,110
Current portion of capital lease 1,334 1,824
obligations
Accrued liabilities 26,330 34,940
Total current liabilities 36,376 46,328
Long-term debt, less current portion 63,289 74,130
Capital lease obligations, less current 1,446 5,909
portion
Deferred tax liability 6,238 6,238
Deferred credits, net 9,900 15,486
Total liabilities 117,249 148,091
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares issued
20,821,001 and 21,004,690 respectively;
shares outstanding 19,348,501 and 416 419
18,549,024 respectively
Additional paid-in capital 85,215 86,788
Less: Common stock in treasury, at cost,
1,472,500 and 2,455,666 shares respectively (17,069) (34,046)
Retained earnings 41,815 64,209
Total stockholders' equity 110,377 117,370
Total liabilities and stockholders' $ 227,626 $265,461
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 September 30,
(In thousands, except for per share data) 1998 1999
Operating revenues:
Passenger $ 76,890 $ 89,758
Other 1,210 1,264
Total operating revenues 78,100 91,022
Operating expenses:
Salaries and related costs 17,598 21,763
Aircraft fuel 6,434 8,715
Aircraft maintenance and materials 5,982 5,272
Aircraft rentals 9,543 11,625
Traffic commissions and related fees 10,641 14,633
Facility rents and landing fees 3,768 4,590
Depreciation and amortization 1,532 2,350
Other 5,547 7,542
Total operating expenses 61,045 76,490
Operating income 17,055 14,532
Other income (expense):
Interest expense (712) (1,408)
Interest income 1,079 882
Other, net (28) (27)
Total other income (expense) 339 (553)
Income before income tax provision 17,394 13,979
Income tax provision 6,781 5,628
Net income $10,613 $8,351
Income per share:
Basic $0.55 $0.45
Diluted $0.49 $0.40
Weighted average shares used in computation:
-basic 19,198 18,655
-diluted 22,244 21,632
See accompanying notes to the condensed consolidated financial
statements.
4
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months ended September 30,
(In thousands, except for per share data) 1998 1999
Operating revenues:
Passenger $208,398 $252,571
Other 3,516 3,851
Total operating revenues 211,914 256,422
Operating expenses:
Salaries and related costs 48,776 62,074
Aircraft fuel 17,237 23,335
Aircraft maintenance and materials 17,579 17,638
Aircraft rentals 26,760 33,344
Traffic commissions and related fees 31,154 40,459
Facility rents and landing fees 9,698 13,171
Depreciation and amortization 4,380 6,461
Other 16,042 21,231
Total operating expenses 171,626 217,713
Operating income 40,288 38,709
Other income (expense):
Interest expense (2,860) (3,905)
Interest income 3,016 2,777
Debt conversion expense (1,410) -
Other, net 33 (106)
Total other income (expense) (1,221) (1,234)
Income before income tax provision and cumulative effect
of accounting change 39,067 37,475
Income tax provision 16,380 14,293
Income before cumulative effect of
accounting change 22,687 23,182
Cumulative effect of accounting change, net of income - (888)
tax
Net income $22,687 $22,294
Income per share:
Basic
Income before cumulative effect of accounting $1.28 $1.21
change
Cumulative effect of accounting change - (0.04)
Income per share $1.28 $1.17
Diluted
Income before cumulative effect of accounting
change $1.07 $1.07
Cumulative effect of accounting change - (0.04)
Income per share $1.07 $1.03
Weighted average shares used in computation:
-basic 17,737 19,089
-diluted 22,143 22,159
See accompanying notes to the condensed consolidated financial
statements.
5
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
(In thousands) 1998 1999
Cash flows from operating activities:
Net income $ 22,687 $ 22,294
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,858 6,511
Write off of preoperating costs - 1,486
Amortization of intangibles and 522 132
preoperating costs
Provision for uncollectible accounts and
inventory obsolescence 50 55
Amortization of deferred credits (550) (581)
ESOP termination costs - 214
Gain on disposal of fixed assets 211 380
Amortization of debt discount and finance 37 52
cost
Debt conversion expense 1,410 -
Interest on debt conversion 162 -
Interest on credit due from manufacturer (442) (247)
Capitalized interest (1,241) (1,190)
Gain on ineffective hedge position - (211)
Other 708 171
Changes in operating assets and
liabilities:
Accounts receivable (8,273) (3,181)
Expendable parts and fuel inventory (615) (700)
Prepaid expenses and other current assets (6,764) (8,753)
Preoperating costs (5) -
Accounts payable 649 1,163
Accrued liabilities 8,653 8,560
Net cash provided by operating activities 21,057 26,155
Cash flows from investing activities:
Purchases of property and equipment (32,194) (26,249)
Note receivable from executive officer - (1,260)
Maturities of short term investments 10,678 -
Funding provided for regional terminal - (10,801)
Reimbursement of regional terminal funding - 7,751
Refund of aircraft lease deposits and other 120 3
Payments for aircraft deposits and other (500) (17,270)
Net cash used in investing activities (21,896) (47,826)
Cash flows from financing activities:
Proceeds from bridge loan - 7,751
Stock repurchases - (17,192)
Proceeds from spare engine financing 1,318 6,546
Proceeds from issuance of long-term debt 16,767 14,708
Payments of long-term debt (1,787) (3,162)
Payments on the bridge loan - (7,751)
Payments of capital lease obligations (2,320) (1,275)
Deferred financing costs (1,529) (284)
Proceeds from exercise of stock options 1,653 1,190
Net cash provided by financing activities 14,102 531
Net increase (decrease) in cash and cash 13,263 (21,140)
equivalents
Cash and cash equivalents, beginning of period 39,167 64,412
Cash and cash equivalents, end of period $ 52,430 $ 43,272
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
subsidiaries, Atlantic Coast Airlines ("ACA") and Atlantic Coast Jet,
Inc. ("ACJet"), (ACAI, ACA and ACJet, 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 nine 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 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 an interest rate
swap contract 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. On August 25, 1999, the Company entered into
three interest rate swap contracts having an aggregate notional amount of
$23 million to hedge its exposure by approximately 44%, to interest rate
changes until permanent financing for three RJ aircraft scheduled for
delivery in March, April and May 2000, is secured.
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
provided for an average fixed price of 45.5 cents per gallon of jet fuel.
In June 1999, the Company entered into commodity swap transactions to
hedge price
7
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. During the
third quarter 1999, the Company recognized gains of approximately
$950,000 as a reduction of fuel expense. 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. With this transaction, the Company has hedged
approximately 20% of its projected jet fuel requirements 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
September 30, 1999 is approximately $1.9 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
.75% to 1.75% depending on the Company's fixed charges coverage ratio.
During the first nine months of 1999, the Company borrowed $7.8 million
on the bridge loan and recorded a receivable from MWAA for $10.9 million.
In May 1999, MWAA paid the Company $7.8 million, and the Company repaid
its borrowings on the bridge loan. As of September 30, 1999 there are no
outstanding borrowings on the bridge loan. A note receivable from MWAA of
$3.1 million is recorded at September 30, 1999. No additional amounts
were drawn on the bridge loan for this additional $3.1 million funding.
However, the Company may do so in the future as desired.
The Company has firm orders for 45 RJs in addition to the 21 previously
delivered, and options for an additional 27 RJs. The delivery schedule
for the 45 firm orders is as follows: two are scheduled for the fourth
quarter of 1999, fifteen in 2000, eighteen in 2001, and ten in 2002.
Twenty-two of the 45 firm ordered aircraft are for the United Express
operation, 20 for the Delta Connection operation (see footnote 9), and
8
three remain unallocated as of November 1, 1999. The value of the
remaining 45 undelivered aircraft on firm order is approximately $830
million.
The Company also has a firm order for 25 328JET feeder jet aircraft and a
conditional order for 55 328JET and 428JET feeder jet aircraft, and
options for an additional 85 feeder jet aircraft, from Fairchild
Aerospace Corporation. The delivery schedule for the 25 firm orders for
the Delta Connection operation is as follows: fourteen in 2000 and eleven
in 2001. The value of the aircraft on firm order is approximately $275
million and 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 conditional portion of the Fairchild order is contingent 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.
During the third quarter of 1999, the Company executed a seven year
engine services agreement with GE Engine Services, Inc. ("GE") covering
the scheduled and unscheduled repair of ACA's CF34-3B1 jet engines
operated on the 43 RJs already delivered or on order for the United
Express operation. Under the terms of the agreement, the Company will pay
a set dollar amount per engine hour flown on a monthly basis to GE and GE
assumes the responsibility to repair the engines when required at no
additional expense to the Company, subject to certain exclusions. The
Company intends to expense the amount due based on the monthly rates
stipulated in the agreement, as engine hours are flown.
3. NOTE RECEIVABLE
Included in prepaid expenses and other current assets as of September 30,
1999 is a promissory note from an executive officer of the Company dated
as of May 24, 1999 with a balance including accrued interest of $1.26
million. 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 third quarter 1999, the Company had a combined effective tax rate
for state and federal taxes of 40.3%. The Company's combined statutory
tax rate for state and federal taxes is approximately 40%. The Company's
annualized 1999 effective tax rate is positively affected by the
application of certain 1998 and prior, state tax credits that were
determined realizable in 1999.
9
5. STOCK PURCHASE PLAN
On April 21, 1999, the Company's Board of Directors approved a plan to
purchase up to $20 million or five percent of its then current
outstanding shares in open market or private transactions over a twelve-
month period. The Company purchased 871,500 shares of its common stock
during the second quarter of 1999 at an average price of $17.17 per
share, and an additional 125,000 shares during the third quarter of 1999
at an average price of $17.81 per share.
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 Nine Months
Ended September 30, Ended September 30,
(in thousands) 1998 1999 1998 1999
Income (basic) $10,613 $8,351 $22,687 $22,294
Interest expense on 7%
Convertible Notes net of tax 183 208 979 623
effect
Income (diluted) $10,796 $8,559 $23,666 $22,917
Weighted average shares
outstanding (basic) 19,198 18,655 17,737 19,089
Incremental shares related to
stock options 844 775 894 868
Incremental shares related to 7%
Convertible Notes 2,202 2,202 3,512 2,202
Weighted average shares
outstanding (diluted) 22,244 21,632 22,143 22,159
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 an after tax charge for the
remaining unamortized balance of approximately $888,000, ($1,486,000
pretax), 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 a few of the eligible participants not
receiving some of their entitled shares. The Company contributed the
required number of additional shares to the ESOP during the second and
third quarters of 1999 when the final calculation was determined and
recognized approximately $250,000 in expense. The Company has filed a
request for a compliance statement under the IRS's Voluntary Compliance
Resolution Program to obtain Service approval of the Company's response
to the share misallocation issue. In September 1999, the ESOP trustee
distributed the ESOP assets per participant's direction. The ESOP will
continue until all participants are located and any remaining assets are
properly distributed.
9. DELTA CONNECTION AGREEMENT
The Company has reached a ten year agreement with Delta Air Lines, Inc.
to operate regional jet aircraft as part of the Delta Connection program
on a fee-per-departure basis. Under the fee-per-departure structure, the
Company bears the risk to operate the flight schedule, and Delta assumes
the risk of marketing and selling seats to the traveling public. Delta
may terminate the agreement at any time if the Company fails to maintain
certain performance standards, and may terminate without cause, effective
no earlier than two years after commencement of operations, by providing
180 days notice to the Company. The Delta Connection Agreement provides
the Company with certain rights in the event of termination without
cause. The Company has ordered 20 50-seat Canadair regional jets from
Bombardier Aerospace of Montreal and 25 328JET feeder jets from Fairchild
for this new venture. The Company has established a new subsidiary,
Atlantic Coast Jet, Inc. ("ACJet"), d.b.a. Delta Connection, which is now
in the application and approval process with the applicable federal
agencies to obtain authority to conduct scheduled passenger air
transportation of jet aircraft. Initial Delta Connection service to
various destinations in the Northeast United States is expected to begin
no sooner than April 2000, subject to satisfactory resolution of
regulatory requirements and other start-up considerations. The Company
can make no assurances that its ACJet subsidiary will receive all
necessary regulatory approvals by this date.
11
10. SUBSEQUENT EVENTS
In October 1999, the Company entered into commodity swap transactions to
hedge price changes on approximately 13,300 barrels of crude oil per
month for the period April to June 2000, and on approximately 23,300
barrels of crude oil per month for the period July through September
2000. The contracts provide for an average fixed price equal to
approximately 52.6 cents per gallon for the second quarter of 2000 and 51
cents per gallon for the third quarter of 2000. With these transactions
and taking into account that Delta Air Lines, Inc. bears the economic
risk of fuel price fluctuations for future fuel requirements associated
with the Delta Connection program, the Company has hedged approximately
20% of its anticipated jet fuel requirements for the fourth quarter of
1999; 11% for the second quarter 2000; 22% for the third quarter 2000;
and 15%, for the fourth quarter of 2000.
In October 1999, the Company funded an additional $870,000 to MWAA as
part of its obligation for the construction of the regional passenger
concourse at Washington Dulles Airport. The Company's remaining
obligation is approximately $1.0 million.
12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Third Quarter Operating Statistics
Increase
Three months ended September 30, 1998 1999 (Decrease
)
Revenue passengers carried 712,556 879,748 23.5%
Revenue passenger miles ("RPMs") 221,746 280,186 26.3%
(000's)
Available seat miles ("ASMs") (000's) 381,503 456,899 19.8%
Passenger load factor 58.1% 61.3% 3.2 pts
Break-even passenger load factor 1 45.2% 51.4% 6.2 pts
Revenue per ASM (cents) 20.2 19.6 (3.0%)
Yield (cents) 34.7 32.0 (7.8%)
Cost per ASM (cents) 16.0 16.7 (4.4%)
Average passenger fare $107.91 $102.03 (5.4%)
Average passenger segment (miles) 311 318 2.3%
Revenue departures - scheduled 46,085 49,575 7.6%
Revenue departures - completed 44,884 47,379 5.6%
Revenue block hours 59,264 63,339 6.9%
Aircraft utilization (block hours) 9.6 8.9 (7.3%)
Average cost per gallon of fuel (cents) 2 67.9 74.2 9.3%
Aircraft in service (end of period) 72 80 11.1%
Comparison of three months ended September 30, 1999, to three months
ended September 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 amount and timing of Delta Connection start-up costs, obtaining
regulatory approval for ACJet to conduct air transportation, the ability
of the Company to obtain favorable financing terms for its aircraft, the
13
ability of aircraft manufacturers to deliver aircraft on schedule, 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 third quarter of 1999 the Company posted net income of
$8.4 million compared to net income of $10.6 million for the third
quarter of 1998. In the three months ended September 30, 1999, the
Company earned pretax income of $14.0 million compared to $17.4 million
in the three months ended September 30, 1998. Unit revenues, revenue per
ASM ("RASM"), decreased 3.0% to 19.6 cents year over year, while unit
costs, operating cost per ASM ("CASM"), increased 4.4% to 16.7 cents year
over year. This resulted in operating margin decreasing to 16% for the
third quarter of 1999 from 21.8% for the third quarter of 1998. Total
passengers increased 23.5% in the third quarter of 1999 compared to the
third quarter of 1998 to 879,748 passengers.
Operating Revenues
The Company's operating revenues increased 16.5% to $91.0
million in the third quarter of 1999 compared to $78.1 million in the
third quarter of 1998. The increase resulted from a 19.8% increase in
ASMs and an increase in load factor of 3.2 percentage points, partially
offset by a 7.8% decrease in yield (ratio of passenger revenue to revenue
passenger miles). Operating revenues were negatively affected by severe
hurricane weather during the third quarter of 1999, while operating
revenues during the third quarter of 1998 were positively impacted by a
work stoppage by labor at Northwest Airlines.
The increase in ASMs is the result of service expansion
utilizing additional Canadair 50 seat Regional Jets ("RJs"). The Company
was operating in revenue service 20 RJs as of September 30, 1999 as
compared to eleven as of September 30, 1998. The scheduling in 1999 of
RJs on routes previously flown by turboprop aircraft has led to the
average aircraft stage length for all aircraft in the fleet remaining
essentially unchanged on a year over year basis at 272 miles as compared
to 271 miles. The average aircraft stage length of the RJ decreased 8.6%
to 433 miles for the third quarter of 1999 as compared to 474 miles for
the third quarter of 1998.
The year over year percentage reduction in yield is
attributable to additional competition at the Company's Washington-Dulles
14
hub, general industry yield weakness, and an increase of 2.3% in the
average passenger trip length to 318 miles.
Operating Expenses
The Company's operating expenses increased 25.3% in the third
quarter of 1999 compared to the third quarter of 1998 due primarily to a
19.8% increase in ASMs, a 23.5% increase in passengers carried and a 9.3%
increase in the price per gallon of jet fuel coupled with a 16.1%
increase in the average fuel burn rate to 186 gallons per block hour. The
increase in ASMs reflects the net addition of nine RJs into scheduled
service since the end of the third quarter of 1998. A summary of
operating expenses as a percentage of operating revenues and cost per ASM
for the three months ended September 30, 1998, and 1999 is as follows:
Three Months ended September 30
1998 1999
Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 22.5% 4.6 23.9% 4.8
Aircraft fuel 8.2% 1.7 9.6% 1.9
Aircraft maintenance and 7.7% 1.6 5.8% 1.2
materials
Aircraft rental 12.2% 2.5 12.8% 2.5
Traffic commissions and related 13.6% 2.8 16.1% 3.2
Facility rents and landing fees 4.8% 1.0 5.0% 1.0
Depreciation and amortization 2.1% 0.4 2.6% 0.5
Other 7.1% 1.4 8.2% 1.6
Total 78.2% 16.0 84.0% 16.7
Cost per ASM increased 4.4% on a year-over-year basis to 16.7
cents during the third quarter of 1999 even though the Company added nine
RJs in revenue service since the end of the third 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. The increase in CASM was
partially due to our flight completion factor decreasing by 1.8 points
principally the result of severe hurricane weather during the third
quarter and scheduled aircraft utilization decreasing 4.1% to 9.3 hours
primarily as a result of new aircraft banking operations at IAD. Aircraft
utilization was positively impacted in the third quarter of 1998 by the
work stoppage by labor at Northwest Airlines, which enabled the Company
to schedule extra flights in certain markets.
Salaries and related costs per ASM increased 4.3% to 4.8 cents
in the third quarter of 1999 compared to 4.6 cents in the third quarter
of 1998. In absolute dollars, salaries and related costs increased 23.7%
from $17.6 million in the third quarter of 1998 to $21.8 million in the
third 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.
15
The cost per ASM of aircraft fuel increased 11.8% to 1.9 cents
for the third quarter of 1999 as compared to 1.7 cents for the third
quarter of 1998. In absolute dollars, aircraft fuel expense increased
35.5% from $6.4 million in the third quarter of 1998 to $8.7 million, net
of gains on fuel hedges, in the third quarter of 1999. The increased fuel
expense resulted from the 6.9% increase in revenue block hours, a 9.3%
increase in the average cost per gallon of fuel from 67.9 cents to 74.2
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 60% of its anticipated jet fuel requirements for the third
quarter of 1999 at an average price, excluding taxes and into-plane fees,
of approximately 43.5 cents per gallon. The Company realized
approximately $950,000 in fuel expense savings during the third 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 for
the remainder of 1999 and the year 2000. See "Other Commitments".
The cost per ASM of aircraft maintenance and materials
decreased 25% to 1.2 cents in the third quarter of 1999 compared to 1.6
cents in the third quarter of 1998. The large decrease in per ASM cost is
due to the addition of nine 50-seat RJs, which are currently covered by
manufacturer's warranties, since the third quarter of 1998 and the
reversal in the third quarter of 1999 of approximately $1.5 million of
maintenance accruals for major RJ engine repairs which are no longer
required as a result of the Company's new long-term maintenance agreement
with GE Engine Services. This agreement, entered into in September 1999,
provides for GE to perform all required maintenance on the RJ engine
fleet covered by the agreement. In absolute dollars, aircraft maintenance
and materials expense decreased 11.9% from $6.0 million in the third
quarter of 1998 to $5.3 million in the third quarter of 1999. Without the
reversal of the engine repair accrual, aircraft maintenance and materials
expense increased 13.2% in absolute dollars to $6.8 million.
The cost per ASM of aircraft rentals remained the same at 2.5
cents for the third quarter of 1999. In absolute dollars, aircraft
rentals increased 21.8% from $9.5 million in the third quarter of 1998 to
$11.6 million in the third quarter of 1999, reflecting the addition of
seven leased RJ aircraft.
The cost per ASM of traffic commissions and related fees
increased to 3.2 cents in the third quarter of 1999 compared to 2.8 cents
in the third quarter of 1998. In absolute dollars, traffic commissions
and related fees increased 37.5% from $10.6 million in the third quarter
of 1998 to $14.6 million in the third quarter of 1999. Approximately
$600,000 of costs relating to the third quarter of 1998 was not billed
until 1999 as a result of a billing error related to a third party
software program's inability to properly process electronic tickets.
These costs were expensed in 1999 when the error was identified,
investigated and resolved. The remaining increase results from a 16.7%
16
increase in passenger revenues and a 23.5% 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 21.8% from $3.8 million in the third quarter of 1998 to
$4.6 million in the third quarter of 1999. The increased costs result
primarily from the 5.6% 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 increased by
25% to 0.5 cents for the third quarter of 1999 from 0.4 cents for the
third quarter of 1998. In absolute dollars, depreciation and amortization
increased 53.4% from $1.5 million in the third quarter of 1998 to $2.4
million in the third quarter of 1999 primarily as a result of the
purchase of two RJs in the last four months of 1998 and one RJ in the
second quarter of 1999 and additional rotable spare parts and engines
associated with the RJs.
The cost per ASM of other operating expenses increased to 1.6
cents in the third quarter of 1999 from 1.4 cents in the third quarter of
1998. In absolute dollars, other operating expenses increased 36% from
$5.5 million in the third quarter of 1998 to $7.5 million in the third
quarter of 1999. The increased costs result primarily from one time costs
associated with the Company's replacement of core information systems and
legal settlements, the Company beginning to incur start-up costs
associated with the new Delta Connection agreement, and the 23.5%
increase in revenue passengers which results in higher passenger handling
costs.
As a result of the foregoing changes in operating expenses, and
a 19.8% increase in ASMs, total cost per ASM increased to 16.7 cents in
the third quarter of 1999 compared to 16.0 cents in the third quarter of
1998. In absolute dollars, total operating expenses increased 25.3% from
$61 million in the third quarter of 1998 to $76.5 million in the third
quarter of 1999.
The Company's combined effective tax rate for state and federal
taxes during the third quarter of 1999 was approximately 40.3% as
compared to 39% for the third quarter of 1998. The Company anticipates
its effective tax rate for the remainder of 1999 to be approximately 40%.
17
Nine Months Operating Statistics
Increase
(Decrease)
Nine months ended September 30, 1998 1999 % Change
Revenue passengers carried 1,823,766 2,390,975 31.1%
Revenue passenger miles ("RPMs") 564,661 767,221 35.9%
(000's)
Available seat miles ("ASMs") (000's) 1,001,072 1,307,999 30.7%
Passenger load factor 56.4% 58.7% 2.3 pts
Break-even passenger load factor 1 45.5% 49.7% 4.2 pts
Revenue per ASM (cents) 20.8 19.3 (7.2%)
Yield (cents) 36.9 32.9 (10.8%)
Cost per ASM (cents) 17.1 16.6 (2.9%)
Average passenger fare $114.27 $105.64 (7.6%)
Average passenger segment (miles) 310 321 3.6%
Revenue departures - scheduled 130,541 145,369 11.4%
Revenue departures - completed 124,684 138,770 11.3%
Revenue block hours 165,921 184,705 11.3%
Aircraft utilization (block hours) 9.4 9.1 (3.2%)
Average cost per gallon of fuel (cents)2 68.2 69.5 1.9%
Aircraft in service (end of period) 72 80 11.1%
Comparison of nine months ended September 30, 1998, to nine months ended
September 30, 1999.
Results of Operations
General
For the first nine months of 1999, the Company posted net
income of $22.3 million compared to net income of $22.7 million for the
first nine months of 1998. For the nine months ended September 30, 1999,
the Company earned pretax income of $37.5 million compared to $39.1
million for the nine months ended September 30, 1998. Unit revenues,
RASM, decreased 7.2% to 19.3 cents period over period, while unit costs,
CASM, decreased 2.9% to 16.6 cents period over period. This resulted in
the operating margin decreasing to 15.1% for the first nine months of
1999 from 19.0% for the first nine months of 1998.
18
Operating Revenues
The Company's operating revenues increased 21% to $256.4
million for the first nine months of 1999 compared to $211.9 million in
the first nine months of 1998. The increase resulted from a 30.7%
increase in ASMs and an increase in load factor of 2.3 percentage points,
partially offset by a 10.8% decrease in yield.
The increase in ASM's is the result of service expansion
utilizing the RJ. The Company was operating 20 RJs in revenue service as
of September 30, 1999 as compared to eleven as of September 30, 1998.
The longer stage length of the RJ results in the average aircraft stage
length for the first nine months of 1999 increasing 2.3% over the first
nine months of 1998 to 272 miles.
The year over year percentage reduction in yield is primarily
the result of the 3.6% increase in the average passenger trip length to
321 miles, issues associated with utilizing United's Orion yield
management system during the first half of 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
and third quarters of 1999 that particularly disrupted high yield
business travelers. Total passengers increased 31.1% in the first nine
months of 1999 compared to the first nine months of 1998.
Operating Expenses
The Company's operating expenses increased 26.9% for the first
nine months of 1999 compared to the first nine months of 1998 due
primarily to a 30.7% increase in ASMs and a 31.1% increase in passengers
carried. The increase in ASMs reflects the net addition of nine RJs into
scheduled service since the end of the third quarter of 1998.
A summary of operating expenses as a percentage of operating revenues and
cost per ASM for the nine months ended September 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 23.0% 4.9 24.2% 4.7
Aircraft fuel 8.1% 1.7 9.1% 1.8
Aircraft maintenance and 8.3% 1.7 6.9% 1.3
materials
Aircraft rentals 12.6% 2.7 13.0% 2.6
Traffic commissions and related 14.7% 3.1 15.8% 3.1
fees
Facility rents and landing fees 4.6% 1.0 5.1% 1.0
Depreciation and amortization 2.2% 0.4 2.5% 0.5
Other 7.5% 1.6 8.3% 1.6
Total 81.0% 17.1 84.9% 16.6
19
Cost per ASM decreased 2.9% to 16.6 cents during the first nine
months of 1999 compared to 17.1 cents during the first nine months of
1998 primarily due to the introduction of nine RJs in revenue service
since the end of the third 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 4.1% to 4.7 cents
in the first nine months of 1999 compared to the first nine months of
1998. In absolute dollars, salaries and related costs increased 27.3%
from $48.8 million in the first nine months of 1998 to $62.1 million in
the first nine months 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 first nine months of 1999 as compared to 1.7 cents for the first
nine months of 1998. In absolute dollars, aircraft fuel expense increased
35.4% from $17.2 million in the first nine months of 1998 to $23.3
million in the first nine months of 1999. The increased fuel expense
resulted from the 11.3% increase in revenue block hours, a 1.9% increase
in the average cost per gallon of fuel from 68.2 cents to 69.5 cents
including 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 70% of its jet
fuel requirements for the first nine months of 1999 at an average price,
excluding taxes and into-plane fees, of approximately 43.8 cents per
gallon. The Company realized net savings of approximately $355,000 in
fuel costs during the first nine months 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 and the
year 2000. See "Other Commitments".
The cost per ASM of aircraft maintenance and materials
decreased 23.5% to 1.3 cents in the first nine months of 1999 compared to
the first nine months of 1998. In absolute dollars, aircraft maintenance
and materials expense increased 0.3% in the first nine months of 1999 to
$17.6 million.
The cost per ASM of aircraft rentals decreased to 2.6 cents for
the first nine months of 1999 compared to 2.7 cents for the first nine
months of 1998. This decrease is the result of leasing six 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 24.6% from $26.8 million in the first nine
months of 1998 to $33.3 million in the first nine months of 1999
reflecting the addition of the six leased RJ aircraft.
20
The cost per ASM of traffic commissions and related fees
remained the same at 3.1 cents in the first nine months of 1999 and 1998,
respectively. In absolute dollars, traffic commissions and related fees
increased 29.9% from $31.2 million in the first nine months of 1998 to
$40.5 million in the first nine months of 1999. The increase resulted
from a 21.2% increase in passenger revenues and a 31.1% increase in
passengers.
The cost per ASM of facility rents and landing fees remained
the same at 1.0 cents. In absolute dollars, facility rents and landing
fees increased 35.8% from $9.7 million in the first nine months of 1998
to $13.2 million in the first nine months of 1999. The increased costs
result primarily from the 11.3% increase in the number of departures
which includes the addition of the Chicago-O'Hare hub operation and the
Company's occupancy of the new regional terminal at Washington-Dulles on
May 2, 1999.
The cost per ASM of depreciation and amortization increased to
0.5 cents for the first nine months of 1999 compared to 0.4 cents for the
first nine months of 1998. In absolute dollars, depreciation and
amortization increased 47.5% from $4.4 million in the first nine months
of 1998 to $6.5 million in the first nine months 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 last four months of 1998 and one
in the second quarter of 1999.
The cost per ASM of other operating expenses remained the same
at 1.6 cents in the first nine months of 1999 and 1998. In absolute
dollars, other operating expenses increased 32.3% from $16.0 million in
the first nine months of 1998 to $21.2 million in the first nine months
of 1999. The increased costs result primarily from the 31.1% increase in
revenue passengers which resulted in higher passenger handling costs, one
time expenses incurred for closure of the Company's ESOP, replacement of
core information systems and legal fees, and the beginning of start-up
costs for the Delta Connection agreement.
As a result of the foregoing changes in operating expenses, and
a 30.7% increase in ASMs, total cost per ASM decreased to 16.6 cents in
the first nine months of 1999 compared to 17.1 cents in the first nine
months of 1998. In absolute dollars, total operating expenses increased
26.9% from $171.6 million in the first nine months of 1998 to $217.7
million in the first nine months of 1999.
The Company's combined effective tax rate for state and federal
taxes during the first nine months of 1999 was approximately 38.1% as
compared to 41.9% for the first nine months 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
21
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 12
and 13.
On October 21, 1999, the Company announced that effective
January 1, 2000, President and CEO Kerry Skeen will become Chairman of
the Board of Directors while retaining his role as Chief Executive
Officer. C. Edward Acker will retire as Chairman on that date, but will
remain a member of the Board. Thomas Moore, presently Executive Vice-
president and Chief Operating Officer, will become President and COO on
January 1, 2000.
As of November 12, 1999, the Company's Atlantic Coast Airlines
("ACA") subsidiary, DBA United Express, was operating a fleet of 81
aircraft comprised of 21 RJs, 32 J41's and 28 J32's. The Company has
United approval to operate, as United Express, 43 regional jets. The
Company has also placed a conditional aircraft order with Fairchild
Aerospace Corporation ("Fairchild") to acquire 15 32-seat 328JET and 40
44-seat 428JET feeder jet aircraft. The Company requires United's
approval to operate these additional 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 conditionally
ordered 328JET could begin in the first quarter of 2001, if the Company
receives United's approval or otherwise waives the contract condition.
The Company has reached a ten year agreement with Delta Air
Lines, Inc. to operate regional jet aircraft as part of the Delta
Connection program on a fee-per-departure basis. Under the fee-per-
departure structure, the Company bears the risk to operate the flight
schedule, and Delta assumes the risk of marketing and selling seats to
the traveling public. Delta may terminate the agreement at any time if
the Company fails to maintain certain performance standards, and may
terminate without cause, effective no earlier than two years after
commencement of operations, by providing 180 days notice to the Company.
The Delta Connection Agreement provides the Company with certain rights
in the event of termination without cause. The Company has ordered 20 50-
seat Canadair regional jets from Bombardier Aerospace of Montreal and 25
328JET feeder jets from Fairchild for this new venture. The Company has
established a new subsidiary, Atlantic Coast Jet, Inc. ("ACJet"), d.b.a.
Delta Connection, which is now in the application and approval process
with the applicable federal agencies to obtain authority to conduct
scheduled passenger air transportation of jet aircraft. Initial Delta
Connection service to various destinations in the Northeast United States
is expected to begin no sooner than April 2000, subject to satisfactory
resolution of regulatory requirements and other start-up considerations.
The Company can make no assurances that its ACJet subsidiary will
22
receive all necessary regulatory approvals by this date or that aircraft
will be delivered on time. The Company expects to incur approximately
$3.0 million in additional start-up expenses for ACJet during the next
six months.
The continued introduction of these additional RJ aircraft
will expand ACA's current business into new markets and may increase
capacity in existing markets. 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. ACJet will incur start-up expenses and will require DOT and FAA
approvals to conduct scheduled air transportation. Initially, the Company
will incur expenses in excess of the expected revenues from the fee-per-
departure structure until additional aircraft enter the fleet. There can
be no assurances that ACJet will be able to operate profitably.
The Company continues to assess plans to phase out the 28
leased 19 seat J32 aircraft used in 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 November 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 November
1, 1999. 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 and other competitors. However, there can be
no assurances that US Airways' and other competitors' 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.
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 November 1, 1999, United operated 112 daily departures
from Washington Dulles, a 62% increase from December 31, 1998. During
1999, the Company and United have either increased frequencies or
23
upgraded equipment, or both, in markets affected by the US Airways
expansion.
During the third quarter of 1999, the Company executed a seven
year engine services agreement with GE Engine Services, Inc. ("GE")
covering the scheduled and unscheduled repair of ACA's CF34-3B1 jet
engines operated on the 43 RJs already delivered or on order for the
United Express operation. Under the terms of the agreement, the Company
will pay a set dollar amount per engine hour flown on a monthly basis to
GE and GE assumes the responsibility to repair the engines when required
at no additional expense to the Company, subject to certain exclusions.
The Company intends to expense the amount due based on the monthly rates
stipulated in the agreement, as engine hours are flown. During the third
quarter, the Company reversed approximately $1.5 million in life limited
parts repair expense accruals related to these engines that are no longer
required based on the maintenance services and terms contained in the new
engine maintenance agreement. The Company's future maintenance expense on
regional jet engines covered under the new agreement will escalate based
on contractual rate increases, intended to match the timing of actual
maintenance events that are due pursuant to the terms. Accordingly,
maintenance costs recognized on these RJ engines during 2000 will be
greater than those recorded historically.
Liquidity and Capital Resources
As of September 30, 1999, the Company had cash, cash
equivalents and short-term investments of $43.3 million and working
capital of $54.0 million compared to $64.5 million and $68.1 million
respectively as of December 31, 1998. During the first nine months of
1999, cash and cash equivalents decreased by $21.1 million, reflecting
net cash provided by operating activities of $26.2 million, net cash used
in investing activities of $47.8 million, and net cash provided by
financing activities of $0.5 million. The net cash provided by operating
activities is primarily the result of net income for the period of $22.3
million, an increase of $8.6 million in accrued liabilities resulting
from increased operations and non cash depreciation and amortization
expenses of $6.5 million, offset by an $8.8 million increase in prepaid
expenses related to aircraft rent and a $3.2 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 generally occurring on 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 payments of $17.3 million of additional aircraft deposits
related to the Bombardier and Fairchild aircraft orders. Financing
activities consisted primarily from the 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
24
stock under the stock repurchase program and payments on long term debt
and capital lease obligations.
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 nine months 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 September 30, 1999 the
outstanding balance on the bridge loan was zero. Subsequent to the
initial reimbursement from MWAA, the Company has loaned to MWAA an
additional $3.9 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's remaining obligation to MWAA for interim financing of the
regional terminal is approximately $1.0 million.
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 September 30, 1999, the available amount
of credit under the $35 million line was $32.1 million.
Other Commitments
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 October, the Company
entered into commodity swap transactions to hedge price changes on
approximately 13,300 barrels of crude oil per month for the period April
to June 2000 and on approximately 23,300 barrels of crude oil per month
for the period July through September 2000. The contracts provide for an
average fixed price equal to approximately 52.6 cents per gallon for the
second quarter of 2000 and 51 cents per gallon for the third quarter of
2000. With these transactions and taking into account that Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for future
fuel requirements associated with the Delta Connection program, the
Company has hedged approximately 20% of its anticipated jet fuel
requirements for the fourth quarter of 1999; 11% for the second quarter
2000; 22% for the third quarter 2000; and 15%, for the fourth quarter of
2000. Had these
25
contracts and transactions settled on September 30, 1999 the
counterparties would have been required to pay the Company approximately
$494,000.
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. On August 25, 1999, the Company
entered into three interest rate swap contracts having an aggregate
notional amount of $23 million to hedge its exposure by approximately
44%, to interest rate changes until permanent financing for three RJ
aircraft scheduled for delivery in March, April and May 2000, is secured.
The contracts entered into on May 4, 1999 relating to the aircraft
delivered in October and November 1999 have been closed out with the
counterparty paying the Company approximately $274,000. Neither the
counterparty nor the Company would have been obligated to pay any amounts
had the remaining contracts settled on September 30, 1999.
Aircraft
The Company now has firm orders for 45 RJs in addition to the
21 previously delivered, and options for an additional 27 RJs. The
delivery schedule for the 45 firm orders is as follows: two are scheduled
for the fourth quarter of 1999, fifteen in 2000, eighteen in 2001, and
ten in 2002. Twenty-two of the 45 firm ordered aircraft are for the
United Express operation, 20 are for the Delta Connection operation, and
three remain unallocated at this time. The value of the remaining 45
undelivered aircraft on firm order is approximately $810 million.
The Company also has a firm order for 25 328JET feeder jet
aircraft and a conditional order for 55 328JET and 428JET feeder jet
aircraft, and options for an additional 85 feeder jet aircraft, from
Fairchild Aerospace Corporation. The value of the aircraft on firm order
is approximately $275 million and 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 conditional portion of the Fairchild
order is contingent 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 $36.7 million on deposit with the
aircraft manufacturers related to its aircraft orders. The deposit
amounts totaling $11.0 million related to the conditional order with
Fairchild is fully refundable if the order is cancelled due to lack of
26
United's 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 nine months of 1999 were
$26.2 million compared to $32.2 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 $22 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.
Debt service including capital leases, but excluding the
Regional Terminal bridge loan, for the nine months ended September 30,
1999 was $4.4 million compared to $4.1 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. All mission
critical and key vendors have stated they are year 2000 compliant. The
Company is in constant contact with all of these mission critical vendors
and is closely monitoring their status. In cases where the Company has
not received assurances from non critical third parties that their
systems are year 2000 ready, it is continuing mail or phone
correspondence and has
27
developed a contingency plan to handle these non critical situations. 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 had completed remediation and testing of all of
its internal IT and non-IT systems as of 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'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 final 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 continues to develop its year 2000 contingency
plans and continues to refine them as more information is received from
third parties upon which it is heavily reliant. The Company continues to
closely monitor the completed year 2000 compliance efforts of the third
parties 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.
28
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.
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 and into 2000, the Company has hedged
a portion of ACA's exposure to jet fuel price fluctuations by entering
into jet fuel option contracts for approximately 20% of its estimated
fuel requirements for the fourth quarter of 1999 and 11% and 18%,
respectively for the second and third quarters of 2000. The Company bears
no fuel price risk for the ACJet operation per the terms of the Delta
Connection Agreement. Based on the Company's projected fuel consumption
for 2000, a one-cent increase in the average price of jet fuel would
increase the Company's aircraft fuel expense for 2000 by approximately
$620,000.
The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. As of November 01, 1999, the Company has outstanding, four interest
rate swap contracts having an aggregate notional amount of $30 million to
hedge its exposure by approximately 43%, to interest rate changes until
permanent financing for four RJ aircraft scheduled for delivery in
December 1999, and March, April and May, 2000 are 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.
29
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED September 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.
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.
None to report.
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.8 Delta Connection Agreement, dated as of September 9, 1999
among Delta Air Lines, Inc., Atlantic Coast Airlines Holdings,
Inc. and Atlantic Coast Jet, Inc.
10.12(b)(1) Amendment Number One to Severance
Agreement, dated as of August 12, 1999, amending the Severance
Agreement, dated as of January 20, 1999, between the Company
and Thomas J. Moore.
30
10.12(c)(1) Amendment Number One to Severance
Agreement, dated as of August 17, 1999, amending the Restated
Severance Agreement, dated as of January 20, 1999, between the
Company and Kerry B. Skeen.
10.40A(1) Contract Change Orders No. 13, 14, and 15, dated
April 28, 1999, July 29, 1999, and September 24, 1999,
respectively, amending the Purchase Agreement between
Bombardier Inc. and Atlantic Coast Airlines relating to the
purchase of Canadair Regional Jet Aircraft dated January 8,
1997.
10.41 Purchase Agreement between Bombardier Inc. and
Atlantic Coast Airlines relating to the Purchase of Canadair
Regional Jet Aircraft dated July 29, 1999, as amended through
September 30, 1999.
10.45(1) First Amendment dated effective September 10,
1999, to the Aircraft Purchase Agreement between Dornier
Luftfahrt GmbH and Atlantic Coast Airlines dated effective
March 31, 1999.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None to report.
31
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
November 15, 1999 By: /S/ Paul H. Tate
Paul H. Tate
Senior Vice President and Chief
Financial Officer
November 15, 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.
2 Average cost per gallon of fuel is inclusive of all taxes, into plane
and flowage fees, and gains and losses from fuel hedge transactions.