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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State of incorporation) (IRS Employer
Identification No.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock par value $ .02 NASDAQ National Market
(Title of Class) (Name of each exchange
on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ____
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 1, 2000 was approximately $290,200,000.
As of March 1, 2000 there were 21,149,056 shares of common stock of the
registrant issued and 18,625,890 shares of common stock were outstanding.
Documents Incorporated by Reference
Certain portions of the document listed below have been incorporated by
reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
Proxy Statement for 2000 Annual Meeting Part III, Items 10-13
of Shareholders
2
PART I
Item 1. Business
General
This Annual Report on Form 10-K contains forward looking statements.
Statements in the Summary of Company Business Strategy and Management's
Discussion and Analysis of Operations and Financial Condition sections of
this filing, together with other statements beginning with such words as
"believes", "intends", "plans", and "expects" include forward-looking
statements that are based on management's expectations given facts as
currently known by management. Actual results may differ materially.
Factors that could cause the Company's future results to differ
materially from the expectations described here include the response of
the Company's competitors to the Company's business strategy, market
acceptance of new regional jet service, the costs of implementing jet
service, the cost of fuel, the amount and timing of ACJet's start-up
costs, obtaining FAA regulatory approval for ACJet to conduct air
transportation on a timely basis, the ability of the Company to obtain
favorable financing terms for its aircraft, the ability of the aircraft
manufacturers to deliver aircraft on schedule, the ability to identify,
implement and profitably operate new business opportunities, the ability
to hire and retain employees, the weather, changes in and satisfaction of
regulatory requirements including requirements relating to fleet
expansion, and general economic and industry conditions.
Atlantic Coast Airlines Holdings, Inc. ("ACAI"), is the holding
company of Atlantic Coast Airlines ("ACA"), and Atlantic Coast Jet, Inc.
("ACJet") together, (the "Company"), a large regional airline, serving 51
destinations in 24 states in the Eastern and Midwestern United States as
of March 1, 2000 with 561 scheduled non-stop flights system-wide every
weekday. ACA markets itself as "United Express" and is the only code-
sharing regional airline for United Airlines, Inc. ("United") operating
as United Express in the Eastern United States. ACJet is currently in
the pre-operating stage, awaiting government certification as a scheduled
airline, and has negotiated a fee per departure agreement with Delta Air
Lines, Inc. ("Delta") to operate as a Delta Connection carrier in the
Northeast United States. As of March 1, 2000, the Company operated a
fleet of 84 aircraft (24 regional jets and 60 turboprop aircraft) having
an average age of approximately six years.
Summary of Company Business Strategy
The Company's long-term corporate objective is to achieve
sustained earnings growth by focusing its resources in the following
areas:
1. Continue to capitalize on and grow the Company's identity
with United: The Company intends to capitalize on and promote its code-
sharing relationship with United, which has already contributed
significantly to the growth of the Company's ACA subsidiary. ACA markets
itself as "United Express" under its United Express Agreements with
United. These agreements, as further described under "Marketing
Agreements", provide ACA with a shared market identity with United, allow
ACA to list its flights under United's two letter flight designator code
in airline Computer Reservation Systems ("CRSs") and other published
schedules and to award United's "Mileage Plus" frequent flyer miles to
its passengers. ACA coordinates its schedules with United, and
participates with United in cooperative advertising and marketing
agreements. In most cities served by both United and ACA other than
Washington-Dulles and Chicago-O'Hare, United provides all airport
facilities and related ground support services. ACA also participates in
United's "Apollo" reservation system and all major CRSs, uses the United
Express logo and has exterior aircraft paint schemes similar to those of
United.
3
2. Capitalize on the Company's new relationship with Delta:
The Company intends to begin capitalizing on its new fee per departure
agreement with Delta. ACJet will operate as "Delta Connection" under its
Delta Connection Agreement with Delta. The agreement, as further
described under "Marketing Agreements", will provide ACJet with a shared
market identity with Delta, and will allow ACJet to list its flights
under Delta's two letter flight designator in airline CRSs and other
published schedules and to award Delta's "SkyMiles" frequent flyer miles
to its passengers. Delta will also provide all airport facilities and
related ground support services in the cities where Delta and ACJet both
provide service. ACJet will participate in Delta's "Deltamatic"
reservation system and all major CRSs, and will use the Delta Connection
logo and have exterior aircraft paint schemes similar to those of Delta.
3. Continued expansion through regional jet aircraft: The
Company has expanded its United Express operation with regional jets, and
will exclusively operate its Delta Connection operation with regional
jets. During 1999, the Company placed into service ten additional 50-
seat Bombardier Regional Jets ("CRJs"), converted an additional 17
option orders to firm deliveries, and placed new firm orders for an
additional six CRJs and received 17 new aircraft options. This brings
the total number of delivered CRJs to 24, firm ordered undelivered CRJs
to 42, and CRJ options to 27. Also in 1999, the Company placed a firm
order with Fairchild Aerospace Corporation for 25 Fairchild Dornier 32
seat 328JET feeder regional jet ("328JET") aircraft, and a conditional
order for 15 328JET aircraft and 40 Fairchild Dornier 44 seat 428JET
feeder regional jet ("438JET") aircraft (328JET aircraft and 428JET
aircraft are collectively referred to as "FRJs".) In addition, the
Company has options to acquire an additional 85 FRJ aircraft.
The Company has utilized regional jets to complement its route
system by initiating service from Washington-Dulles to markets beyond the
economic operating range of turboprop aircraft and has selectively
deployed the CRJ to its existing turboprop routes in the short-haul, high-
density East Coast markets. This has provided additional connecting
passengers to the Company's turboprop flights and to United's jets flying
from Washington-Dulles. The Company has also utilized CRJs to begin a
second hub operation at United's Chicago-O'Hare hub.
4. Commitment to operational safety and efficiency: During
the last four years, the Company has worked with the Federal Aviation
Administration ("FAA") to develop a prototype Crew Resource Management
("CRM") training program for the airline industry called Advanced Crew
Resource Management ("ACRM"). The research team concluded that ACRM
procedures have a significant advantage over traditional CRM training
methods like those being used at most commercial airlines. The Company
and the research team developed specific ACRM procedures allowing the
crews to use ACRM skills on a daily basis.
The Company has equipped its turboprop aircraft with an
automated aircraft time reporting system which enables the Company to
communicate more efficiently with flight crews and further automate the
flight tracking process. The Company intends to install automatic
aircraft time reporting systems in all of its CRJs beginning in the
second quarter 2000. This system improves the timeliness and accuracy of
flight information communicated and displayed to the Company's
passengers.
4
The Company has initiated the utilization of global positioning
satellite technology ("GPS") and flight management systems ("FMS")
onboard its aircraft. With the entire fleet of regional jets and
turboprop aircraft equipped with FMS, and the entire turboprop fleet
equipped with GPS, the Company believes it has improved safety and
efficiency. The first 22 of 96 GPS routes between Dulles and other
markets were implemented in 1998 with the remaining routes implemented by
the end of the third quarter 1999. These routes, combined with the
continued success of FMS procedure development for Washington-Dulles,
have reduced the number of miles required to be flown by ACA aircraft
while reducing pilot and air traffic controller workload.
Markets
As of March 1, 2000, the Company scheduled 245 non-stop flights
from Washington-Dulles per weekday, which were more flights from that
airport than any other airline. During 1999, the Company accounted for
more passenger boardings from Washington-Dulles than any airline other
than United. On a combined basis, the Company and United generated
approximately 59% of passenger traffic at Washington-Dulles during 1999.
The Company's top five airports based on frequency of
operations are Washington-Dulles, Chicago O'Hare, New York-JFK, Newark,
and Raleigh-Durham. During 1999, the Company added new routes from
Washington-Dulles and Chicago-O'Hare. The Company increased operations
in existing Washington-Dulles markets by 35 daily departures and added
new service to three cities: Columbia, SC, Akron/Canton, OH, and Mobile,
AL. The Company also replaced or complemented turboprop service with CRJ
service in the following markets: Albany, NY, Burlington, VT,
Charleston, SC, Newark, NJ, New York-LaGuardia. In 1999 the Company also
continued to build its operations at Chicago-O'Hare. Additional Chicago-
O'Hare non-stop CRJ service was added to: Akron/Canton, OH, Charleston,
SC, Savannah, GA, and Mobile, AL. In 1999, the Company ceased operations,
and United added service, from Washington-Dulles to Atlanta, GA, Tampa,
FL, and Hartford, CT and the Company ceased operations from Washington-
Dulles to Manchester, NH, and Fort Lauderdale, FL. In 2000, new service
was added between Roanoke, VA and Chicago-O'Hare, and service was
discontinued between Washington-Dulles and Fort Myers, FL.
5
The following table sets forth the destinations served by ACA
as of March 1, 2000:
Washington-Dulles (To/From)
Akron/Canton, OH* Mobile, AL*
Albany, NY** Nashville, TN*
Allentown, PA New York, NY (Kennedy)
Baltimore, MD New York, NY (LaGuardia)*
Binghamton, NY Newark, NJ**
Buffalo, NY Newport News, VA
Burlington, VT* Norfolk, VA
Charleston, SC** Philadelphia, PA
Charleston, WV** Pittsburgh, PA
Charlottesville, VA Portland, ME*
Cleveland, OH Providence, RI
Columbia, SC * Raleigh-Durham, NC**
Columbus, OH** Richmond, VA
Dayton, OH Roanoke, VA
Detroit, MI Rochester, NY
Greensboro, NC Savannah, GA*
Greenville/Spartanburg, SC* State College, PA
Harrisburg, PA Stewart, NY
Indianapolis, IN* Syracuse, NY
Jacksonville, FL* Westchester County, NY
Knoxville, TN Wilkes-Barre/Scranton, PA
Lynchburg, VA Wilmington, NC
Chicago-O'Hare (To/From)
Akron/Canton, OH* Roanoke, VA*
Charleston, SC* Savannah, GA *
Charleston, WV* Sioux Falls, SD*
Fargo, ND* Springfield/Branson, MO*
Mobile, AL* Wilkes-Barre/Scranton, PA*
Peoria, IL*
* Denotes all CRJ service
** Denotes mixture of CRJ and turboprop service
ACJet's Delta Connection service is expected to serve markets
in the Northeastern United States with an all regional jet fleet. Routes
will be determined by Delta.
6
Marketing Agreements
United Express:
The Company's United Express Agreements ("UA Agreements")
define the Company's relationship with United. The UA Agreements
authorize the Company to use United's "UA" flight designator code to
identify ACA's flights and fares in the major CRSs, including United's
"Apollo" reservation system, to use the United Express logo and exterior
aircraft paint schemes and uniforms similar to those of United, and to
otherwise advertise and market ACA's association with United.
In December 1998, the Company and United agreed to a ten year
extension of the UA Agreements. Prior to March 31, 2004, United may
terminate the UA Agreements at any time if ACA fails to maintain certain
performance standards, and may terminate without cause after March 31,
2004 by providing one year's notice to the Company. If by January 2,
2001 United has not given the Company the ability to operate regional
jets of 44 seats or less seating capacity as United Express, in addition
to its allocation of 50 seat regional jets, the Company may terminate the
UA Agreements as of March 31, 2004. The Company would be required to
provide notice of termination prior to January 2, 2002, which notice
would be void if United ultimately grants such authority prior to January
2, 2002.
ACA passengers may participate in United's "Mileage Plus"
frequent flyer program and are eligible to receive United frequent flyer
miles for each of ACA's flights. Mileage Plus members are also eligible
to redeem their awards on ACA's route system. ACA limits the number of
"Mileage Plus" tickets that may be used on its flights and believes that
the displacement, if any, of revenue passengers is minimal.
The UA Agreements also provide for coordinated schedules and
through-fares. A through-fare is a fare offered by a major air carrier to
prospective passengers who, in order to reach a particular destination,
transfer between the major carrier and its code-sharing partner.
Generally, these fares are less expensive than purchasing the combination
of local fares. United establishes all through-fares and allows ACA a
portion of these fares on a fixed rate or formula basis subject to
periodic adjustment. The UA Agreements also provide for interline baggage
handling, and for reduced airline fares for eligible United and Company
personnel and their families.
Pursuant to the UA Agreements, United provides a number of
additional services to ACA. These include publication of the fares, rules
and related information that are part of ACA's contracts of carriage for
passengers and freight; publication of ACA's flight schedules and related
information; provision of toll-free reservations services; provision of
ground support services at most of the airports served by both United and
ACA; provision of ticket handling services at United's ticketing
locations; provision of airport signage at airports where both ACA and
United operate; provision of United ticket stock and related documents;
provision of expense vouchers, checks and cash disbursements to ACA
passengers inconvenienced by flight cancellations, diversions and delays;
and cooperation in the development and execution of advertising,
promotion, and marketing efforts featuring United Express and the
relationship between United and ACA.
Under the terms of the UA Agreements, the Company pays United,
for these services, monthly fees based on the total number of revenue
passengers boarded by ACA on its flights for the month. The fee per
passenger is subject to periodic increases during the duration of the ten
year extension period.
7
The UA Agreements require ACA to obtain United's consent to
operate service between city pairs as "United Express". If ACA
experiences net operating expenses that exceed revenues for three
consecutive months on any required route, ACA may withdraw from that
route if United and the Company are unable to negotiate an alternative
mutually acceptable level of service for that route. The UA Agreements
do not prohibit United from competing, or from entering into agreements
with other airlines who would compete, on routes served by the Company,
but state that United may terminate the UA Agreements if ACAI and ACA
enter into a similar arrangement with any other carrier without United's
approval. The Company believes that its agreement to operate ACJet as
part of the Delta Connection program does not provide United the right to
terminate the UA Agreements.
The UA Agreements limit the ability of ACAI and ACA to merge
with another company or dispose of certain assets or aircraft without
offering United a right of first refusal to acquire the Company or such
assets or aircraft, and provide United a right to terminate the UA
Agreements if they merge with or are controlled or acquired by another
carrier. United also has a right of first refusal with respect to
issuance by ACAI and ACA of shares of their common stock if, as a result
of the issuance, certain of their stockholders and their permitted
transferees do not own at least 50% of their common stock after such
issuance. Because the holdings of these stockholders and their permitted
transferees are currently substantially less than 50%, management
believes that such a right is unlikely to be exercised.
Delta Connection:
In September, 1999, the Company 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. The Company's
Delta Connection Agreement ("DL Agreement") defines the Company's
relationship with Delta. The DL Agreement authorizes the Company 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 is contractually obligated to operate the flight schedule, for
which Delta pays the Company an agreed amount regardless of passenger
revenue. The Company thereby assumes the risk of operating the flight
schedule and Delta assumes the risk of marketing and selling seats to the
traveling public.
By operating as part of the Delta Connection program, ACJet is able to
use Delta's "DL" flight designator to identify ACJet's flights and fares
in the major CRSs, including Delta's "Deltamatic" reservation system, and
to use the Delta Connection logo and exterior aircraft paint schemes and
uniforms similar to those of Delta. In addition, ACJet passengers may
participate in Delta's "SkyMiles" frequent flyer program and are eligible
to receive a certain number of Delta frequent flyer miles for each of
ACJet's flights. SkyMiles members are also eligible to redeem their
awards on ACJet's route system
Pursuant to the DL Agreement, Delta, at its expense, is to
provide a number of support services to ACJet. These include handling all
customer reservations, customer service, ground handling, station
operations, pricing, scheduling, revenue accounting, revenue management,
frequent flyer, advertising and other passenger, aircraft and traffic
servicing functions in connection with the ACJet operation.
8
Delta may terminate the DL Agreement at any time if ACJet fails
to maintain certain performance standards and, subject to certain rights
by the Company, may terminate without cause, effective no earlier than
two years after commencement of operations, by providing 180 days notice
to the Company.
The DL Agreement requires the Company to obtain Delta's
approval if it chooses to enter into a code-sharing arrangement with
another carrier, to list its flights under any other code, or to operate
flights for any other carrier, except with respect to such arrangements
with United or non-U.S. code-shares partners of United or in certain
other circumstances. The DL Agreement does not prohibit Delta from
competing, or from entering into agreements with other airlines who would
compete, on routes served by the Company. The DL Agreement also
restricts the ability of the Company to dispose of aircraft subject to
the agreement without offering Delta a right of first refusal to acquire
such aircraft, and provides that Delta may terminate the agreement if,
among other things, the Company merges with or sells its assets to
another entity, is acquired by another entity or if any person acquires
more than a specified percentage of its stock.
Agreements with Other Airlines:
ACA has code-sharing agreements with Lufthansa German Airlines
("Lufthansa") and with Air Canada, which permit these airlines to place
their respective airline codes on certain flights operated by ACA. As of
March 1, 2000, 16 of ACA's markets are also listed under the Lufthansa
code and 18 of its markets are also listed under the Air Canada code.
Lufthansa and Air Canada are members of the STAR Alliance, a global
airline alliance, comprised of United, Lufthansa, Air Canada, Ansett,
SAS, Thai, Varig, and ANA. The United Express-Lufthansa agreement and the
United Express-Air Canada agreement provide a wide range of benefits for
code-share passengers including the ability to check-in once at their
initial departure city and receive boarding passes and seat assignments
for the flights on both carriers while their luggage is automatically
checked through to their final destination. Members of the other
airlines' frequent flyer programs receive mileage credit for these
flights.
Fleet Description
Fleet Expansion: As of March 1, 2000, the Company operated a
fleet of 24 CRJs and 60 turboprop aircraft, consisting of 32 British
Aerospace Jetstream-41 ("J-41s") and 28 British Aerospace Jetstream-32
("J-32s").
As of March 1, 2000, the Company had a total of 42 CRJs on firm
order from Bombardier, Inc., in addition to the 24 already delivered, and
held options for 27 additional CRJs. During 1999, the Company converted
17 option aircraft to firm orders and placed new firm orders for six
additional CRJs and received 17 new aircraft options. The Company also
had 25 328JETs on firm order and a combination of 55 328JETs and 428JETs
on conditional order from Fairchild Aerospace Corporation, and held
options for an additional 85 aircraft. The future delivery schedule of
the remaining 42 firm ordered CRJ aircraft undelivered as of March 1,
2000 is as follows: fourteen aircraft are scheduled for delivery in
2000, eighteen in 2001, and ten in 2002. The 25 firm ordered FRJ
aircraft are scheduled to be delivered beginning in April 2000, with
fourteen being delivered by year end, and the remaining eleven being
delivered in 2001. The conditional portion of the FRJ order is
contingent on the Company receiving approval from United to operate the
FRJs as United Express. The Company has the option to waive the
condition and enter into commitments for firm delivery positions under
the Fairchild agreement.
9
Fleet Composition: The following table describes the Company's
fleet of aircraft, scheduled deliveries and options as of March 1, 2000:
Future
Number of Passenger Average Scheduled
Aircraft Capacity Age in Deliveries
Years /
Options
Canadair Regional 24 50 1.5 42/27
Jets
Fairchild Dornier - 32 N/A 40/852
328JET note 1
Fairchild Dornier - 44 N/A 40/see
428JET note 2 & 3
British Aerospace 32 29 5.2 -
J-41
British Aerospace 28 19 10.1 -
J-32
84 5.8 122/112
1 Includes 15 conditional ordered aircraft subject to United
approval.
2 Option aircraft can be either 328JET or 428JET aircraft.
3 Includes 40 conditional ordered aircraft, subject to United
approval.
As previously announced, the Company is exploring alternatives
to accelerate the retirement of its fleet of 28 leased 19 seat J-32
aircraft. The Company tentatively plans to remove as many as six J-32s
from ACA's fleet during 2000 and the remainder in 2001. As of December
31, 1999, the Company had J-32 operating lease commitments with remaining
lease terms ranging from one to six years and related minimum lease
payments of approximately $43 million. The Company has not yet finalized
its analysis of a phase-out plan, including quantification of any one-
time fleet rationalization charge.
Fuel
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing prices
in quantities sufficient to meet its future requirements. During 1999,
the Company had hedged the fuel price for approximately 57% of its fuel
requirements by entering into contracts with independent counterparties
that reduced the Company's exposure to upward movements in the price per
gallon of jet fuel. Fuel price increases in the second half of 1999 and
to date in 2000 have had a material impact on cost of operations
throughout the airline industry. The Company's results will continue to
be affected by fuel price volatility. For 2000, the Company is currently
not exposed to fuel price fluctuations for approximately 16% of its
estimated fuel requirements, 8% through fuel hedging activity and 8% by
virtue of the fact that Delta bears the risk of price movements in jet
fuel for the Delta Connection flying to be performed by ACJet.
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Marketing
ACA's advertising and promotional programs emphasize the close
affiliation with United, including coordinated flight schedules and the
ability of ACA's passengers to participate in United's "Mileage Plus"
frequent flyer program. ACA's services are marketed primarily by means of
listings in CRSs and the Official Airlines Guide, advertising and
promotions, and through direct contact with travel agencies and corporate
travel departments. For the year ended December 31, 1999, approximately
79% of ACA's passenger revenue was derived from ticket sales generated
through travel agencies and corporate travel departments. In marketing to
travel agents, ACA relies on personal contacts and direct mail campaigns,
provides familiarization flights and hosts group presentations and other
functions to acquaint travel agents with ACA's services. Many of these
activities are conducted in cooperation with United marketing
representatives. In addition, ACA and United jointly run radio and print
advertising in markets served by the Company.
ACA also participates in United's electronic ticketing program.
This program allows customers to travel on flights of United and ACA
without the need for a paper ticket. The primary benefit of this program
is improved customer service and reduced ticketing costs. For the year
ended December 31, 1999, 55% of the Company's passengers utilized
electronic tickets as compared to 43.5% for the year ended December 31,
1998.
All advertising and promotion of ACJet's flights will be
Delta's responsibility and at Delta's expense. This includes CRS and
travel agency arrangements, and passenger participation in Delta's
SkyMiles frequent flyer program.
Competition
The airline industry is highly competitive, and there are few
barriers to entry in the Company's markets. Furthermore, larger carriers
with greater resources can impact the Company's markets through fare
discounting as well as flight schedule modifications.
The Company competes primarily with regional and major air
carriers as well as with ground transportation. The Company's competition
from other air carriers varies by location, type of aircraft (both
turboprop and jet), and in certain cities, comes from carriers which
serve the same destinations as the Company but through different hubs.
The Company believes that its ability to compete in its market areas is
strengthened by its code-sharing relationship with United, which has a
substantial presence at Washington-Dulles and Chicago-O'Hare. The Company
competes with other airlines by offering frequent flights. In addition,
the Company's competitive position benefits from the large number of
participants in United's Mileage Plus and Delta's SkyMiles frequent flyer
programs who fly regularly to or from the markets served or to be served
by the Company.
During the first half of 1999 US Airways began to expand its
operations at Washington-Dulles. New service included the operations of
mainline US Airways, MetroJet, Shuttle and US Airways Express. US Airways
operated in five of the Company's Washington-Dulles markets as of
December 31, 1998 and by September 30, 1999 increased their presence to
21 of the Company's markets. Although the US Airways service generally
has utilized fare levels similar to that implemented by the Company, two
of the implemented markets were served by MetroJet, which offered fares
lower than that typically offered by the Company.
In 1999, United also significantly increased the number of
flights it operated at Washington-Dulles, and 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
March 1, 2000, United operated 113 daily departures from Washington
Dulles, a 64% increase from December 31, 1998. During 1999, the Company
and United either increased frequencies or upgraded equipment, or both,
in markets affected by the US Airways expansion.
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In the first quarter of 2000, US Airways began reducing some of
its MetroJet, Shuttle and US Airways Express operations at Washington-
Dulles. Reductions were made in the operations of MetroJet, Shuttle and
US Airways Express. By March 2000 US Airways ceased MetroJet service in
the Birmingham, AL, Columbus, OH, Milwaukee, WI and St. Louis, MO to
Washington-Dulles markets, and has announced its intention to withdraw
MetroJet service between Raleigh-Durham and Washington-Dulles. MetroJet
competed directly with the Company in the Columbus, OH and Raleigh-Durham
to Washington-Dulles markets. Further, US Airways has announced its
intention to withdraw hourly Shuttle service in the Boston and LaGuardia
to Washington-Dulles markets and to replace both with less frequent
service using a combination of mainline and US Airways Express regional
jet service. The Company competes directly with US Airways in the
LaGuardia-Washington-Dulles market. By March 2000 US Airways Express had
ceased service in the Indianapolis to Washington-Dulles market - a market
the Company serves with regional jets.
Yield Management
The Company closely monitors ACA's inventory and pricing of
available seats by use of a computerized yield management system.
Effective with flights departing after January 31, 1999, the Company
upgraded its yield management system to United's enhanced revenue
management system, "Orion". This system represents the latest in revenue
management technology and is designed to manage entire passenger
itineraries rather than individual flight legs. The Company was also
able to expand the number of booking classes available on ACA flights.
These expanded booking classes allowed the Company to broaden the number
of fare categories offered to customers, while simplifying booking
procedures. The Company experienced problems with the cut-over to Orion
which negatively impacted revenue in the first and second quarters of
1999. These problems were resolved and the Company is fully utilizing
the capabilities of the Orion system. Orion replaced the PROS IV yield
management system that the Company had implemented in the second quarter
1997.
Slots
Slots are reservations for takeoffs and landings at specified
times and are required by governmental authorities to operate at certain
airports. The Company utilizes takeoff and landing slots at Chicago-
O'Hare and the LaGuardia, Kennedy and White Plains, New York airports.
The Company also uses slot exemptions at Chicago-O'Hare, which differ
from slots in that they allow service only to designated cities and are
not transferable to other airlines without the approval of the U.S.
Department of Transportation ("DOT"). Airlines may acquire slots by
governmental grant, by lease or purchase from other airlines, or by loan
when another airline does not use a slot but desires to avoid
governmental reallocation of a slot for lack of use. All leased and
loaned slots are subject to renewal and termination provisions.
Congress recently passed and the President is expected to sign
into law new federal slot rules for three of the airports served by the
Company, Chicago-O'Hare, LaGuardia and Kennedy. Slot restrictions at
these airports has limited the number of flights the Company and its
competitors may offer from these airports. Under these new rules, which
do not apply at White Plains, all slot regulation will end at Chicago-
O'Hare after July 1, 2002 and at LaGuardia and Kennedy after January 1,
2007. The rules also provide that, in addition to those slots currently
held by carriers, operators of regional jet aircraft may apply for, and
the Secretary of Transportation must grant, additional slots at Chicago,
LaGuardia, Kennedy in order to permit the carriers to offer new service,
increase existing service or upgrade to regional jet service in
qualifying smaller communities. There is no limit on the number of slots
a carrier may request. In addition, the new rules permit carriers
proposing to operate aircraft larger than regional jets not serving these
airports or serving with fewer than 20 slots to apply for a total of 20
slots including the carrier's prior slot holdings. The Company expects
to apply for additional slots as permitted by the new rules.
12
Employees
As of March 1, 2000, the Company had 2,188 full-time and 357
part-time employees, classified as follows:
Classification Full- Part-
Time Time
Pilots 821 -
Flight attendants 259 -
Station personnel 513 317
Maintenance personnel 247 5
Administrative and 338 35
clerical personnel
Management 10 -
Total employees 2,188 357
The Company's pilots are represented by the Airline Pilots
Association ("ALPA"), ACA's flight attendants are represented by the
Association of Flight Attendants ("AFA"), and ACA's mechanics are
represented by the Aircraft Mechanics Fraternal Association ("AMFA").
The ALPA collective bargaining agreement became amendable in
February 2000 and the Company and ALPA began meetings on a new contract
in February 2000. The ALPA agreement covers all pilots of the Company,
including ACJet pilots.
ACA's collective bargaining agreement with AFA was ratified in
October, 1998. The agreement is for a four year duration and becomes
amendable in October 2002. ACJet has reached an agreement with AFA that
its flight attendants will be represented by AFA, and has also agreed
with AFA on the terms of a five year agreement covering ACJet flight
attendants on terms substantially similar to the terms of the contract
between ACA and AFA.
ACA's collective bargaining agreement with AMFA was ratified in
June, 1998. The agreement is for a four year duration and becomes
amendable in June 2002.
The Company believes that certain of the company's
unrepresented labor groups are from time to time approached by unions
seeking to represent them. However, the Company has not received any
official notice of organizing activity and there have been no
representation applications filed with the National Mediation Board by
any of these groups. The Company believes that the wage rates and
benefits for non-union employee groups are comparable to similar groups
at other regional airlines. The Company also believes that the
incremental costs of union agreements presently under negotiation will
not have a material effect on the Company's financial position or results
of its operations for the year 2000.
13
Due to the ACJet start-up, the Company's employee staffing
needs and recruitment efforts have increased significantly. The Company
continues to commit additional resources to its employee recruiting and
retention efforts and is hiring personnel to accommodate its growth
plans. However, due to competitive local labor market in Northern
Virginia and normal attrition, there can be no assurance that the Company
will be able to continue to meet its hiring requirements.
Pilot Training
The Company performs pilot training in state-of-the-art, full
motion simulators and conducts training in accordance with FAA Part 121
regulations. The Company utilizes an Advanced Qualification Program to
enhance pilot performance in both technical and Crew Resource Management
skills.
The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA") for the Company to train CRJ, J-41
and J-32 pilots at PAIFA's facility near Washington-Dulles. In 1999
PAIFA acquired from a third party the existing training facility where
the Company has been conducting J-41 and J-32 training, and added a CRJ
simulator at the facility in December 1999. The Company has committed to
purchase an annual minimum number of CRJ and J-41 simulator training
hours at agreed rates, with commitments extending ten and three years,
respectively. The Company's payment obligations over the next ten years
total approximately $20.1 million. FRJ training is presently being
conducted in Dallas, Texas at a facility arranged in conjunction with the
acquisition of the aircraft. The Company is exploring alternatives to
have PAIFA install a 328JET simulator at its Washington-Dulles facility.
Regulation
Economic. With the passage of the Deregulation Act, much of
the regulation of domestic airline routes and rates was eliminated. DOT
still has extensive authority to issue certificates authorizing carriers
to engage in air transportation, establish consumer protection
regulations, prohibit certain unfair or anti-competitive pricing
practices, mandate conditions of carriage and make ongoing determinations
of a carrier's fitness, willingness and ability to provide air
transportation. The DOT can also bring proceedings for the enforcement
of its regulations under applicable federal statutes, which proceedings
may result in civil penalties, revocation of operating authority or
criminal sanctions.
The Company's ACA subsidiary holds a certificate of public
convenience and necessity, issued by the DOT, that authorizes it to
conduct air transportation of persons, property and mail between all
points in the United States, its territories and possessions. This
certificate requires that ACA maintain DOT-prescribed minimum levels of
insurance, comply with all applicable statutes and regulations and remain
continuously "fit" to engage in air transportation.
Based on conditions in the industry, or as a result of
Congressional directives or statutes, the DOT from time to time proposes
and adopts new regulations or amends existing regulations which new or
amended regulations may impose additional regulatory burdens and costs on
the Company.
14
ACJet has been issued a certificate of public convenience and
necessity by the DOT like that possessed by ACA. The effectiveness of
this certificate is conditioned upon the issuance by the FAA of an
operating certificate to ACJet, an application for which is pending. In
order to obtain FAA approval, ACJet must demonstrate that it has the
necessary organization and technical ability to safely provide air
transportation, and must satisfy certain environmental requirements.
ACJet has targeted the commencement of revenue service for the second
quarter of 2000. There can be no assurance that all required approvals
will be granted to ACJet by that time.
Safety. The FAA extensively regulates the safety-related
activities of air carriers. The Company is subject to the FAA's
jurisdiction with respect to aircraft maintenance and operations,
equipment, ground facilities, flight dispatch, communications, training,
weather observation, flight personnel and other matters affecting air
safety. To ensure compliance with its regulations, the FAA requires that
airlines under its jurisdiction obtain an operating certificate and
operations specifications for the particular aircraft and types of
operations conducted by such airlines. The Company's ACA subsidiary
possesses an operating certificate issued by the FAA and related
authorities authorizing it to conduct operations with turboprop and
turbojet equipment. The Company, like all carriers, requires specific FAA
authority to add aircraft to its fleet. ACA's authority to conduct
operations is subject to suspension, modification or revocation for
cause. The FAA has authority to bring proceedings to enforce its
regulations, which proceedings may result in civil or criminal penalties
or revocation of operating authority.
From time to the time, the FAA conducts inspections of air
carriers with varying degrees of intensity. Such inspections may be
scheduled or unscheduled and may be triggered by specific events. In
addition, the FAA may require airlines to demonstrate that they have the
capacity to properly manage and safely operate increasing numbers of
aircraft.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and
other mandatory orders relating to, among other things, inspection of
aircraft and the mandatory removal and replacement of parts that have
failed or may fail in the future. In addition, the FAA from time to time
amends its regulations. Such amended regulations may impose additional
regulatory burdens on the Company such as the installation of new safety-
related items. Depending upon the scope of the FAA's order and amended
regulations, these requirements may cause the Company to incur
substantial, unanticipated expenses. The FAA has issued a directive
which requires that CRJ flight data recorders be upgraded to record an
increased number of flight parameters. The Company anticipates that new
CRJs will comply with the directives beginning with deliveries occurring
during the second quarter 2000, and is preparing to retrofit previously
delivered CRJs.
The FAA requires air carriers to adopt and enforce procedures
designed to safeguard property, ensure airport security and screen
passengers to protect against terrorist acts. The FAA, from time to
time, imposes additional security requirements on air carriers and
airport authorities based on specific threats or world conditions or as
otherwise required. The Company incurs substantial expense in complying
with current security requirements and it cannot predict what additional
security requirements may be imposed in the future or the cost of
complying with such requirements.
15
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the transportation of
hazardous materials. The Company neither accepts nor ships hazardous
materials or other dangerous goods. Employees of the Company are trained
in hazardous materials and dangerous goods recognition through a FAA
approved training course. The FAA enforces its hazardous material
regulations by the imposition of civil penalties, which can be
substantial.
Other Regulation. In the maintenance of its aircraft fleet and
ground equipment, the Company handles and uses many materials that are
classified as hazardous. The Environmental Protection Agency and similar
local agencies have jurisdiction over the handling and processing of
these materials. The Company is also subject to the oversight of the
Occupational Safety and Health Administration concerning employee safety
and health matters. The Company is subject to the Federal Communications
Commission's jurisdiction regarding the use of radio frequencies.
The Airport Noise Control Act ("ANCA") requires that airlines
phase-out the operation of certain types of aircraft. None of the
Company's aircraft are subject to the phase-out provisions of ANCA.
While ANCA generally preempts airports from imposing unreasonable local
noise rules that restrict air carrier operations, airport operators may
implement reasonable and nondiscriminatory local noise abatement
procedures, which procedures could impact the ability of the Company to
serve certain airports, particularly in off-peak hours. Certain local
noise rules adopted prior to ANCA were grandfathered under the statute.
Federal Excise Taxes and Passenger Charges. Ticketing airlines
are obligated to collect a U.S. transportation excise tax on passenger
ticket sales, which as of January 1, 2000 is calculated at 7.5% of the
passenger ticket price plus $2.50 per flight segment. In addition,
airports may request approval to impose passenger facility charges on
passengers. The amount of these charges that airports are permitted to
charge each passenger per flight leg is expected to increase from $3.00
to $4.50. These taxes and charges are collected by the ticketing airline
and remitted to the airport.
Seasonality
As is common in the industry, the Company experiences lower
demand for its product during the period of December through February.
Because the Company's services and marketing efforts are focused on the
business traveler, this seasonality of demand is somewhat greater than
for airlines which carry a larger proportion of leisure travelers. In
addition, the Company's principal geographic area of operations
experiences more adverse weather during this period, causing a greater
percentage of the Company's and other airlines' flights to be canceled.
These seasonal factors have combined in the past to reduce the Company's
capacity, traffic, profitability, and cash generation for this three
month period as compared to the rest of the year.
16
Item 2. Properties
Leased Facilities
Airports
The Company leases gate and ramp facilities at all of the
airports ACA serves and leases ticket counter and office space at those
locations where ticketing is handled by Company personnel. Gate and ramp
facilities for ACJet will be provided by Delta. Payments to airport
authorities for ground facilities are generally based on a number of
factors, including space occupied as well as flight and passenger volume.
In May 1999, the Company took occupancy of its newly constructed 69,000
square foot passenger concourse at Washington-Dulles dedicated solely to
regional airline operations. The 36-gate concourse, designed to support
the Company's expanding United Express operation, is owned by the
Metropolitan Washington Airports Authority and leased to the Company
under a 15 year lease.
Corporate Offices
The Company's leased headquarters in Dulles, VA provides over
45,000 square feet in one building for the executive, administrative,
training and system control departments. The Company is currently looking
for additional office space to accommodate its facilities needs as a
result of the ACJet expansion.
Maintenance Facilities
The FAA's safety regulations mandate periodic inspection and
maintenance of commercial aircraft. The Company performs most line
maintenance, service and inspection of its aircraft and engines at its
maintenance facilities using its own personnel.
The Company performs all maintenance functions at its 90,000
square foot aircraft maintenance facility at Washington-Dulles airport.
This facility is comprised of 60,000 square feet of hangar space and
30,000 square feet of support space and includes hangar, shop and office
space necessary to maintain the Company's growing fleet. The Company
plans to secure additional hangar facilities for the ACJet operation at
an as yet undetermined city to perform maintenance on the 328JET fleet.
Item 3. Legal Proceedings
The Company is a party to routine litigation and to FAA civil
action proceedings, all of which are viewed to be incidental to its
business, and none of which the Company believes are likely to have a
material effect on the Company's financial position or the results of its
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal quarter ended
December 31, 1999, to a vote of the security holders of the Company
through the solicitation of proxies or otherwise.
17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock, par value $.02 per share (the
"Common Stock"), is traded on the Nasdaq National Market ("Nasdaq/NM")
under the symbol "ACAI". Trading of the Common Stock commenced on July
21, 1993.
The following table sets forth the reported high and low
closing sale prices of the Common Stock on the Nasdaq/NM for the periods
indicated, as adjusted for a 2-for-1 stock split payable as a stock
dividend on May 15, 1998:
1998 High Low
First quarter $25.38 $15.56
Second quarter $33.00 $23.50
Third quarter $35.00 $17.00
Fourth quarter $30.50 $13.25
1999
First quarter $35.00 $24.25
Second quarter $31.00 $15.875
Third quarter $21.50 $17.50
Fourth quarter $23.75 $17.688
2000
First quarter $22.688 $16.625
(through 3/1/00)
As of March 1, 2000, the closing sales price of the Common
Stock on Nasdaq/NM was $18.25 per share and there were approximately 243
holders of record of Common Stock.
The Company has not paid any cash dividends on its Common Stock
and does not anticipate paying any Common Stock cash dividends in the
foreseeable future. The Company intends to retain earnings to finance the
growth of its operations. The payment of Common Stock cash dividends in
the future will depend upon such factors as earnings levels, capital
requirements, the Company's financial condition, the applicability of any
restrictions imposed upon the Company's subsidiary by certain of its
financing agreements, the dividend restrictions imposed by the Company's
$35 million line of credit, and other factors deemed relevant by the
Board of Directors. In addition, ACAI is a holding company and its only
significant asset is its investment in its subsidiaries, ACA and ACJet.
18
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1, 2004
(the "Notes"), pursuant to Rule 144A under the Securities Act of 1933,
and received net proceeds of approximately $55.6 million related to the
sale of the Notes. The Notes are convertible into shares of Common Stock,
par value $0.02 of the Company by the holders at any time after sixty
days following the latest date of original issuance thereof and prior to
maturity, unless previously redeemed or repurchased, at a conversion
price of $9 per share, subject to certain adjustments. As of March 1,
2000, approximately $19.8 million principal amount of Notes were
outstanding, which were convertible into approximately 2.2 million shares
of Common Stock. The Company may redeem the remaining notes beginning on
July 1, 2000 by calling the notes at 104% of face value declining one
percent per year until maturity on July 1, 2004, in which case the
holders will have an opportunity to convert the Notes at their face
amount prior to redemption.
On April 21, 1999, the Company's Board of Directors approved a
plan to purchase up to $20 million or five percent of the then current
outstanding shares in open market or private transactions over a twelve
month period. As of March 10, 2000, the Company has purchased 1,064,000
shares of its common stock at an average price of $17.28 per share. The
Company has approximately $1.6 million remaining of the original $20
million authorization.
Item 6. Selected Financial Data
The following selected financial data under the caption
"Consolidated Financial Data" and "Consolidated Balance Sheet Data"
relating to the years ended December 31, 1995, 1996, 1997, 1998 and 1999
have been derived from the Company's consolidated financial statements.
The following selected operating data under the caption "Selected
Operating Data" have been derived from Company records. The data should
be read in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K.
19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share amounts and operating data)
Consolidated Financial Data: Years ended December 31,
1995 1996 1997 1998 1999
Operating revenues:
Passenger revenues $153,918 $179,370 $202,540 $285,243 $342,079
Total operating 156,968 182,484 205,444 289,940 347,365
revenues
Operating expenses:
Salaries and related 40,702 44,438 49,661 68,135 84,554
costs
Aircraft fuel 13,303 17,124 17,766 23,978 34,072
Aircraft maintenance 15,252 16,841 16,860 22,730 24,357
and materials
Aircraft rentals 25,947 29,137 29,570 36,683 45,215
Traffic commissions 25,938 28,550 32,667 42,429 54,521
and related fees
Facility rent and 7,981 8,811 10,376 13,475 17,875
landing fees
Depreciation and 2,240 2,846 3,566 6,472 9,021
amortization
Other 13,281 14,900 16,035 23,347 28,458
Restructuring charges (521) (426) - - -
(reversals)
Total operating 144,123 162,221 176,501 237,249 298,073
expenses
Operating income 12,845 20,263 28,943 52,691 49,292
Interest expense (1,802) (1,013) (3,450) (4,207) (5,614)
Interest income 66 341 1,284 4,145 3,882
Debt conversion - - - (1,410) -
expense (1)
Other income 181 17 62
(expense), net 326 (85)
Total non operating (1,555) (655) (2,104) (1,146) (1,817)
expenses
Income before income tax
expense, extraordinary
item and cumulative 11,290 19,608 26,839 51,545 47,475
effect of accounting
change
Income tax provision (1,212) 450 12,339 21,133 18,319
(benefit)
Income before extraordinary
item and cumulative 12,502 19,158 14,500 30,412 29,156
effect of accounting change
Extraordinary item (2) 400 - - - -
Cumulative effect of - - - - (888)
accounting change (3)
Net income $12,902 $19,158 $14,500 $30,412 $28,268
20
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
(Dollars in thousands, except per share amounts and operating data)
Years ended December 31,
1995 1996 1997 1998 1999
Income per share:
Basic:
Income before $0.73 $1.13 $0.93 $1.68 $1.54
extraordinary item and
cumulative effect
of accounting change
Extraordinary item 0.03 - - - -
Cumulative effect of - - - - (0.05)
accounting change
Net income per share $0.76 $1.13 $0.93 $1.68 $1.49
Diluted:
Income before $0.65 $1.08 $0.80 $1.42 $1.36
extraordinary item and
cumulative effect
of accounting change
Extraordinary item 0.02 - - - -
Cumulative effect of - - - - (0.04)
accounting change
Net income (loss) per $0.67 $1.08 $0.80 $1.42 $1.32
share
Weighted average number
of shares used
in computation
(in thousands)
Basic 16,684 16,962 15,647 18,128 18,964
Diluted 19,742 17,840 19,512 22,186 22,015
Selected Operating Data:
Departures 131,470 137,924 146,069 170,116 186,571
Revenue passengers 1,423,463 1,462,241 1,666,975 2,534,077 3,234,713
carried
Revenue passenger 348,675 358,725 419,977 792,934 1,033,912
miles (000s) (4)
Available seat miles 731,109 771,068 861,222 1,410,763 1,778,984
(000s) (5)
Passenger load 47.7% 46.5% 48.8% 56.2% 58.1%
factor (6)
Breakeven passenger 43.9% 41.4% 41.8% 45.8% 49.7%
load factor (7)
Revenue per $0.215 $0.237 $0.239 $0.206 $0.195
available seat mile
Cost per available $0.198 $0.211 $0.205 $0.168 $0.168
seat mile (8)
Average yield per $0.441 $0.500 $0.482 $0.360 $0.331
revenue passenger mile
(9)
Average fare $108 $123 $122 $113 $106
Average passenger 245 245 252 313 320
trip length (miles)
Aircraft in service 54 57 65 74 84
(end of period)
Destinations served 41 39 43 53 51
(end of period)
Consolidated Balance
Sheet Data:
Working capital $4,552 $17,782 $45,028 $68,130 $60,440
Total assets 47,499 64,758 148,992 227,626 293,753
Long-term debt and
capital leases, 7,054 5,673 76,145 64,735 92,787
less current portion
Redeemable Series A,
Cumulative, 3,825 - - - -
Convertible,
Preferred Stock
Total stockholders' 14,561 34,637 34,805 110,377 125,524
equity
21
1. In connection with the induced conversion of a portion of the 7%
Convertible Subordinated Notes , the Company recorded a non-cash, non-
operating charge of approximately $1.4 million in 1998. No similar
charges were recognized for the period from 1995 to 1997, or in 1999.
2. In connection with the early extinguishment of certain senior notes,
in 1995 the Company recorded an extraordinary gain of $400,000 associated
with the extinguished debt. No similar extinguishments were recognized
in 1995 to 1998.
3. In 1999, the Company recorded a charge of $888,000 for the
cumulative effect, net of income taxes, of a change in accounting for
preoperating costs in connection with the implementation of Statement of
Position 98-5.
4. "Revenue passenger miles" or "RPMs" represent the number of miles
flown by revenue passengers.
5. "Available seat miles" or "ASMs" represent the number of seats
available for passengers multiplied by the number of scheduled miles the
seats are flown.
6. "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles
by available seat miles.
7. "Breakeven passenger load factor" represents the percentage of seats
needed to be filled by revenue passengers for the airline to break even
after operating expenses, less other revenues and excluding restructuring
and write-offs of intangible assets.
8. "Operating cost per available seat mile" represents total operating
expenses excluding restructuring and write-offs of intangible assets
divided by available seat miles.
9. "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.
22
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
Atlantic Coast Airlines Holdings, Inc. ("ACAI") operates
through its wholly-owned subsidiaries, Atlantic Coast Airlines ("ACA"),
and Atlantic Coast Jet, Inc. ("ACJet") (together with non-carrier
subsidiaries, the "Company"). ACJet has targeted the commencement of
revenue service for the second quarter of 2000, although there can be no
assurance that all required approvals will be obtained by that time. In
1999, the Company recorded net income of $28.3 million compared to $30.4
million for 1998, and $14.5 million for 1997. The 1999 net results
include the cumulative effect of an accounting change, net of income
taxes, of $888,000 related to the adoption of Statement of Position 98-5,
which resulted in the write-off of remaining unamortized regional jet
implementation preoperating costs. The 1998 net results reflect a one
time, non-cash, non-operating charge of $1.4 million related to the
induced conversion of a portion of the 7% Convertible Subordinated Notes.
The decreased profitability from 1998 to 1999 is primarily the result of
the decrease in the Company's operating margin as a result of higher fuel
expense, US Airways competition, significantly more severe weather during
1999 including two September hurricanes, and complications from the
implementation of the Orion yield management system in the first and
second quarters of 1999. For 1999, the Company's available seat miles
("ASM") increased 26% with the addition of ten Canadair Regional Jet
("CRJ") aircraft during the year. Continued passenger acceptance of the
CRJ and the related increase in connecting traffic to turboprop flights
resulted in a 28% increase in total passengers and an 30% increase in
revenue passenger miles ("RPM").
The Company's increased profitability from 1997 to 1998 was primarily the
result of the Company's growth and operating margin improvement. For
1998 with the addition of nine CRJs during the year, the Company's total
ASMs increased 64%, total passengers increased 52%, and total RPMs
increased 89%.
Results of Operations
The Company earned income of $29.2 million (excluding the
cumulative effect of an accounting change, net of income taxes, of
$888,000) or $1.36 per diluted share in 1999 compared to income of $31.8
million (excluding a non-cash, non-operating charge of $1.4 million) or
$1.49 per diluted share in 1998, and $14.5 million or $0.80 per diluted
share in 1997. During 1999, the Company generated operating income of
$49.3 million compared to $52.7 million for 1998, and $28.9 million for
1997. Operating margins for 1999, 1998 and 1997 were 14.2%, 18.2% and
14.1%, respectively.
The 6.5% decrease in operating income from 1998 to 1999
reflects a 5.4% decrease in unit revenue (total revenue per ASM) from
$0.206 to $0.195, while unit cost (cost per ASM) remained the same at
$0.168 for both years, partially offset by a 26.1% increase in ASM's.
The improvement in operating income from 1997 to 1998 reflects
a 63.8% increase in ASMs partially offset by a 13.8% decrease in unit
revenue (revenue per ASM) from $0.239 to $0.206 and a 18% decrease in
unit cost (cost per ASM) from $0.205 to $0.168.
23
Fiscal Year 1998 vs. 1999
Operating Revenues
The Company's operating revenues increased 19.8% to $347.4
million in 1999 compared to $289.9 million in 1998. The increase
resulted from a 26.1% increase in ASMs, and an increase in load factor of
1.9 points, partially offset by an 8.0% decrease in revenue per passenger
mile (yield). The increase in ASMs reflects the addition of ten CRJ
aircraft in 1999 and the full year effect of adding nine CRJ aircraft
during 1998. The reduction in yield was caused principally by additional
competition by US Airways at the Company's Dulles hub, complications from
the implementation of the Orion yield management system in the first and
second quarters of 1999, and a 2.1% increase in the average passenger
stage length from 313 miles in 1998 to 320 miles for 1999. Revenue
passengers increased 27.6% in 1999 compared to 1998, which combined with
the increase in the average passenger stage length resulted in an 30.4%
increase in RPMs. Operating revenues as a whole in 1999, were negatively
impacted by more severe weather during 1999 as compared to 1998 including
two hurricanes in September 1999 that impacted air transportation in the
Eastern United States.
Operating Expenses
The Company's operating expenses increased 25.6% to $298.1
million in 1999 compared to $237.2 million in 1998 due primarily to the
26.1% increase in ASMs, the 27.6% increase in passengers, and a 10.6%
increase in the average price per gallon of jet fuel.
A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 1998
and 1999 is as follows:
Year Ended December 31,
1998 1999
Percent Cost Percent Cost
of of
Operating Per Operating Per
ASM ASM
Revenues (cents) Revenues (cents)
Salaries and related 23.5% 4.8 24.3% 4.8
costs
Aircraft fuel 8.3% 1.7 9.8% 1.9
Aircraft maintenance 7.8% 1.6 7.0% 1.4
and materials
Aircraft rentals 12.7% 2.6 13.0% 2.5
Traffic commissions and 14.6% 3.0 15.7% 3.1
related fees
Facility rent and 4.6% 1.0 5.2% 1.0
landing fees
Depreciation and 2.2% .5 2.6% .5
amortization
Other 8.1% 1.6 8.2% 1.6
Total 81.8% 16.8 85.8% 16.8
Costs per ASM remained the same at 16.8 cents for 1999 when
compared to 1998. Total operating expenses in absolute dollars increased
25.6% in 1999 to $298.1 million versus $237.2 million in 1998. ASM's for
1999 increased 26.1% to 1.8 billion as compared to 1.4 billion in 1998.
Salaries and related costs per ASM remained the same at 4.8
cents in 1999 when compared to 1998. In absolute dollars, salaries and
related expenses increased 24.1% from $68.1 million in 1998 to $84.6
million in 1999. The increase primarily resulted from the net addition
of 331 full and part time employees during 1999 to support the additional
aircraft.
24
The cost per ASM of aircraft fuel increased to 1.9 cents in
1999 compared to 1.7 cents in 1998. The total price per gallon of fuel
increased 10.6% to 74.6 cents in 1999 compared to 67.4 cents in 1998. In
absolute dollars, aircraft fuel expense increased 42.1% from $24 million
in 1998 to $34.1 million in 1999 reflecting the higher cost per gallon
fuel price, a 9.5% increase in block hours and the higher fuel
consumption per hour of a CRJ aircraft versus a turboprop aircraft which
results in a 17.4% increase in the system average burn rate (gallons used
per block hour flown).
The cost per ASM of aircraft maintenance and materials
decreased to 1.4 cents in 1999 compared to 1.6 cents in 1998. The
decreased maintenance expense per ASM resulted primarily from the
addition of the CRJ aircraft. In addition to generating higher ASMs, the
CRJ aircraft are covered by manufacturer's warranty for up to three years
on certain components. During the third quarter, the Company reversed
approximately $1.5 million in life limited parts repair expense accruals
related to CRJ engines that was no longer required based on the
maintenance services and terms contained in a new engine maintenance
agreement. The Company has not incurred any heavy maintenance repair
costs related to the CRJ aircraft in 1998 or 1999. The CRJ cost savings
are partially offset by the increasing costs of the turboprop aircraft as
they age. In absolute dollars, aircraft maintenance and materials
expense increased 7.2% from $22.7 million in 1998 to $24.4 million in
1999.
The cost per ASM of aircraft rentals decreased slightly to 2.5
cents in 1999 compared to 2.6 cents in 1998. During 1999, the Company
took delivery of ten additional CRJ aircraft, eight of which were lease
financed. In absolute dollars, aircraft rental expense increased 23.3%
to $45.2 million as compared to $36.7 million in 1998 due to the
additional aircraft added to the fleet.
The cost per ASM of traffic commissions and related fees
increased to 3.1 cents in 1999 as compared to 3.0 cents in 1998. The
increase does not reflect the reduced (from 8% to 5%) agency commission
rate for domestic travel adopted in late 1999. Since substantially all
passenger revenues are derived from interline sales, the Company will not
begin to realize the savings from this reduction until February 2000.
Related fees include program fees paid to United and CRS segment booking
fees for reservations. In absolute dollars, traffic commissions and
related fees increased 28.5% to $54.5 million in 1999 from $42.4 million
in 1998.
The cost per ASM of facility rent and landing fees remained the
same at 1.0 cent for 1999 when compared to 1998. In absolute dollars,
facility rent and landing fees increased 32.7% to $17.9 million for 1999
from $13.5 million in 1998. The absolute increase is the result of the
Company's new regional terminal at Washington's Dulles airport, continued
expansion of the Company's business to new markets and increased landing
fees due to the heavier CRJ aircraft.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents for 1999 and 1998. In absolute dollars, depreciation
and amortization expense for 1999 increased 39.4% to $9.0 million from
$6.5 million in 1998. The absolute increase results from the purchase of
two CRJ aircraft and rotable spare parts in 1999 for approximately $59
million and the full year effect of purchasing two CRJ aircraft and
rotable spare parts in 1998.
25
The cost per ASM of other operating expenses remained the same
at 1.6 cents for 1999 and 1998. In absolute dollars, other operating
expenses increased 21.9% to $28.5 million for 1999 from $23.3 million in
1998. This absolute increase is caused primarily by continuing increases
in crew accommodations, training, and other costs related to the general
expansion of the Company's business. During the fourth quarter 1998, the
Company began to pay for new hire training. The Company expects pilot
training costs to continue to increase as the remaining firm ordered CRJ
and Fairchild Dornier 328JET/428JET Feeder Regional Jets ("FRJs")
aircraft are received.
As a result of the foregoing expense items, total operating
expenses were $298.1 million for 1999, an increase of 25.6% compared to
$237.2 million in 1998. Total ASMs increased 26.1% year over year
causing the cost per ASM to remain at 16.8 cents for 1999 when compared
to 1998.
Interest expense increased from $4.2 million in 1998 to $5.6
million in 1999. The increase is the result of the issuance of new debt
to acquire two new CRJ aircraft in 1999, and the full year effect of the
debt outstanding for the purchase of two CRJs and one J-41 in 1998.
Interest income decreased from $4.1 million in 1998 to $3.9
million in 1999. This is primarily the result of the Company's lower
cash balances during 1999 as compared to 1998.
From March 20 through April 8, 1998, the Company temporarily
reduced the conversion price on its 7.0% Convertible Subordinated Notes
due July 1, 2004 (the "Notes") from $9 to $8.86 for holders of the Notes.
During this temporary period, $31.7 million of the Notes converted into
approximately 3.6 million shares of common stock. As a result of this
temporary price reduction, the Company recorded a $1.4 million charge to
other expense during 1998 representing the fair value of the additional
shares distributed upon conversion.
The Company recorded a provision for income taxes of $18.3
million for 1999, compared to a provision for income taxes of $21.1
million in 1998. The 1999 effective tax rate is approximately 38.6% as
compared to the 1998 effective tax rate of approximately 41%. The
reduction in the 1999 effective rate is the result of the application of
one time state tax credits applied in 1999. The effective tax rates
reflect non-deductible permanent differences between taxable and book
income.
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 were effective for 1999. The
Company had previously deferred certain start-up costs related to the
introduction of the CRJs and was amortizing such costs to expense ratably
over four years. Effective January 1, 1999, the Company recorded a charge
for the remaining unamortized balance of approximately $888,000, net of
$598,000 of income taxes, associated with previously deferred
preoperating costs.
Fiscal Year 1997 vs. 1998
Operating Revenues
The Company's operating revenues increased 41.1% to $289.9
million in 1998 compared to $205.4 million in 1997. The increase
resulted from a 63.8% increase in ASMs, and an increase in load factor of
7.4 points, partially offset by a 25.3% decrease in revenue per revenue
passenger mile (yield). The reduction in yield is caused principally by
a 24.2% increase in the average passenger stage length from 252 miles in
1997 to 313 miles for 1998. Revenue passengers increased 52% in 1998
compared to 1997, which combined with the increase in the average
passenger stage length resulted in an 88.8% increase in RPMs.
26
Operating Expenses
The Company's operating expenses increased 34.4% to $237.2
million in 1998 compared to $176.5 million in 1997 due primarily to the
63.8% increase in ASMs and the 52% increase in passengers. The increase
in ASMs reflects the addition of nine CRJ aircraft in 1998 and the full
year effect of adding five CRJs and five British Aerospace Jetstream-41
("J-41") aircraft during 1997.
A summary of operating expenses as a percentage of operating
revenue and operating cost per ASM for the years ended December 31, 1997
and 1998 is as follows:
Year Ended December 31,
1997 1998
Percent Cost Percent Cost
of of
Operating per Operating per
ASM ASM
Revenues (cents)Revenues (cents)
Salaries and related 24.2% 5.8 23.5% 4.8
costs
Aircraft fuel 8.6% 2.1 8.3% 1.7
Aircraft maintenance 8.2% 2.0 7.8% 1.6
and materials
Aircraft rentals 14.4% 3.4 12.7% 2.6
Traffic commissions and 15.9% 3.8 14.6% 3.0
related fees
Facility rent and 5.1% 1.1 4.6% 1.0
landing fees
Depreciation and 1.7% .4 2.2% .5
amortization
Other 7.8% 1.9 8.1% 1.6
Total 85.9% 20.5 81.8% 16.8
Costs per ASM decreased 18% to 16.8 cents in 1998 compared to
20.5 cents in 1997 primarily due to a 63.8% increase in ASMs in 1998
compared to 1997, offset by a 52% increase in passengers carried. The
increase in ASMs reflects the addition of nine CRJ aircraft during 1998
and the full year effect of adding five CRJs and five J-41 aircraft
during 1997.
Salaries and related costs per ASM decreased 17.2% to 4.8 cents
in 1998 compared to 5.8 cents in 1997. In absolute dollars, salaries and
related expenses increased 37.2% from $49.7 million in 1997 to $68.1
million in 1998. The increase primarily resulted from the net addition
of 609 full and part time employees during 1998 to support the additional
aircraft.
The cost per ASM of aircraft fuel decreased to 1.7 cents in
1998 compared to 2.1 cents in 1997. The total price per gallon of fuel
decreased 15% to 67.4 cents in 1998 compared to 79.3 cents in 1997. In
absolute dollars, aircraft fuel expense increased 35% from $17.8 million
in 1997 to $24 million in 1998 reflecting a 23% increase in block hours
and the higher fuel consumption per hour of a CRJ aircraft versus a
turboprop aircraft.
The cost per ASM of aircraft maintenance and materials
decreased to 1.6 cents in 1998 compared to 2.0 cents in 1997. The
decreased maintenance expense per ASM resulted primarily from the
addition of the CRJ aircraft. In addition to generating higher ASMs, the
CRJ aircraft are covered by manufacturer's warranty for up to three years
on certain components. The Company did not record any heavy maintenance
repair costs related to the CRJ aircraft. The CRJ cost savings are
partially offset by the increasing costs of the turboprop aircraft as
they age. In absolute dollars, aircraft maintenance and materials
expense increased 34.8% from $16.9 million in 1997 to $22.7 million in
1998.
27
The cost per ASM of aircraft rentals decreased to 2.6 cents in
1998 compared to 3.4 cents in 1997. The decreased unit costs reflect the
full year effect of refinancing to lower rental rates, eleven used J-41
aircraft, and the purchase of three used J-41s all during the second half
of 1997 and the refinancing of three J-41s, combined with the purchases
of two CRJs and one J41 aircraft during 1998. In absolute dollars,
aircraft rental expense increased 24.1% to $36.7 million as compared to
$29.6 million in 1997 due to the additional aircraft added to the fleet.
The cost per ASM of traffic commissions and related fees
decreased to 3.0 cents in 1998 as compared to 3.8 cents in 1997. The
decrease reflects the reduced (from 10% to 8%) agency commission rate for
domestic travel adopted in late 1997. Since substantially all passenger
revenues are derived from interline sales, the Company did not begin to
realize the savings from this reduction until February 1998. Related
fees include program fees paid to United and CRS segment booking fees for
reservations. In absolute dollars, traffic commissions and related fees
increased 29.9% to $42.4 million in 1998 from $32.7 million in 1997.
The cost per ASM of facility rent and landing fees decreased to
1.0 cent in 1998 compared to 1.1 cents in 1997. In absolute dollars,
facility rent and landing fees increased 29.9% to $13.5 million for 1998
from $10.4 million in 1997. The absolute increase is the result of
expansion of the Company's business to new markets and increased landing
fees due to the heavier CRJ aircraft.
The cost per ASM of depreciation and amortization increased to
0.5 cents in 1998 compared to 0.4 cents in 1997. In absolute dollars,
depreciation and amortization expense for 1998 increased 81.5% to $6.5
million from $3.6 million in 1997. The absolute increase results from
the purchase of two CRJ aircraft, a J-41 aircraft and CRJ rotable spare
parts in 1998 for approximately $51 million and the full year effect of
purchasing four J-41 aircraft and rotable spare parts in late 1997.
The cost per ASM of other operating expenses decreased to 1.6
cents in 1998 compared to 1.9 cents in 1997. In absolute dollars, other
operating expenses increased 45.6% to $23.3 million for 1998 from $16.0
million in 1997. This absolute increase is caused primarily by increases
in crew accommodations and training costs related to the general
expansion of the Company's business and increased distressed passenger
expenses. During the fourth quarter 1998, the Company began to pay for
new hire training. Due to the scheduled addition of six additional CRJs
in the first five months of 1999, the Company incurred new hire pilot
training costs of approximately $678,000 in the fourth quarter 1998.
As a result of the foregoing expense items, total operating
expenses were $237.2 million for 1998, an increase of 34.4% compared to
$176.5 million in 1997. Total ASMs increased 63.8% year over year
causing the cost per ASM to decrease from 20.5 cents in 1997 to 16.8
cents in 1998.
Interest expense increased from $3.4 million in 1997 to $4.2
million in 1998. During the first part of 1998, the Company accepted for
conversion into common stock approximately $38 million of the Notes. The
reduced interest costs resulting from the debt conversion partially
offset the full year effect of the debt outstanding for the purchase of
four J-41s in 1997, and the issuance of new debt to acquire two CRJs and
one J-41 in 1998.
28
Interest income increased from $1.3 million in 1997 to $4.1
million in 1998. This is primarily the result of the Company's
significantly higher cash balances during 1998 as compared to 1997 and
the capitalization of interest on the Company's outstanding aircraft
deposits with the manufacturers.
From March 20 through April 8, 1998, the Company temporarily
reduced the conversion price from $9 to $8.86 for holders of the Notes.
During this temporary period, $31.7 million of the Notes converted into
approximately 3.6 million shares of common stock. As a result of this
temporary price reduction, the Company recorded a $1.4 million charge to
other expense during 1998 representing the fair value of the additional
shares distributed upon conversion.
The Company recorded a provision for income taxes of $21.1
million for 1998, compared to a provision for income taxes of $12.3
million in 1997. The 1998 effective tax rate of approximately 41% and
the 1997 effective tax rate of approximately 46% are higher than the
statutory federal and state rates. The higher effective tax rates
reflect non-deductible permanent differences between taxable and book
income. Net operating loss carryforwards were fully utilized in 1996.
Outlook
This Outlook section and the Liquidity and Capital Resources
section below contain forward-looking statements. The Company's actual
results may differ significantly from the results discussed in forward-
looking statements. Factors that could cause the Company's future results
to differ materially from the expectations described here include the
response of the Company's competitors to the Company's business strategy,
market acceptance of new regional jet service , the costs of implementing
jet service, the cost of fuel, the amount and timing of ACJet's start-up
costs, obtaining FAA regulatory approval for ACJet to conduct air
transportation on a timely basis, the ability of the Company to obtain
favorable financing terms for its aircraft, the ability of the aircraft
manufactures to deliver aircraft on schedule, the ability to identify,
implement and profitably operate new business opportunities, the ability
to hire and retain employees, the weather, changes in and satisfaction of
regulatory requirements including requirements relating to fleet
expansion, and general economic and industry conditions.
The Company believes that a key element of the Company's
success is its experienced management team. On January 1, 2000,
President and Chief Executive Officer Kerry Skeen became Chairman of the
Board of Directors while retaining his role as CEO. C. Edward Acker
retired as Chairman but remains a member of the Board. Thomas Moore
became President on January 1, 2000 in addition to his duties as Chief
Operating Officer.
The Company believes that the future of the regional airline
industry lies in utilizing regional and feeder jets to complement and
feed the major carriers. To this end, in addition to the 24 CRJs in
service as of March 1, 2000, the Company has firm, conditional and option
orders for 69 CRJs and 165 FRJs and long-term marketing agreements with
United Airlines, Inc. and Delta Air Lines, Inc. to fly the jet aircraft
as United Express and Delta Connection, respectively. The addition of
these jets will allow the Company to grow capacity as measured in ASM's,
based on planned aircraft delivery dates, by approximately 34% in 2000
and 41% in 2001. The Company also believes that multiple marketing
agreements will enable the Company to reduce reliance on any one major
airline, and will enhance and stabilize operating results through a
combination of pro-rate and fee-per-departure revenue opportunities.
29
ACJet has targeted the commencement of revenue service with
FRJs during the second quarter of 2000 and with CRJs during the fourth
quarter of 2000. ACJet is presently engaged in pre-operating activities
including regulatory compliance, employee recruitment, training,
establishment of operating infrastructure, establishment of third party
contractual arrangements, and aircraft proving runs. In the first
quarter of 2000 ACJet was issued a certificate of public convenience and
necessity by the DOT. The effectiveness of the DOT certificate is
conditioned upon the issuance by the FAA of an operating certificate to
ACJet, an application for which is pending. In order to obtain FAA
approval, ACJet must demonstrate that it has the necessary organization
and technical ability to safely provide air transportation, and must
satisfy certain environmental requirements. ACJet will also need to
satisfy regulatory requirements with respect to CRJs prior to adding this
aircraft type to its fleet later in the year. There can be no assurance
that all required approvals will be granted to ACJet on a timely basis.
ACJet has accepted delivery of an interim 328JET aircraft, which is being
utilized for proving runs and training. The first two permanent 328JET
aircraft are scheduled for delivery in late April 2000. ACJet
anticipates incurring approximately $3.6 million in start-up expenses
from inception through commencement of revenue service, which will be
expensed as incurred.
A number of business and regulatory developments are affecting
the markets in which the Company competes. During the first half of 1999
US Airways began to expand its operations at Washington-Dulles. New
service included the operations of mainline US Airways, MetroJet, Shuttle
and US Airways Express. US Airways operated in five of the Company's
Washington-Dulles markets as of December 31, 1998 and by September 30,
1999 increased their presence to 21 of the Company's markets. Although
the US Airways service generally has utilized fare levels similar to that
implemented by the Company, two of the implemented markets were served by
MetroJet, which offered fares lower than that typically offered by the
Company.
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 March 1, 2000, United operated 113 daily departures from
Washington Dulles, a 64% increase from December 31, 1998. During 1999,
the Company and United either increased frequencies or upgraded
equipment, or both, in markets affected by the US Airways expansion.
In the first quarter of 2000, US Airways began reducing some of
its MetroJet, Shuttle and US Airways Express operations at Washington-
Dulles. Reductions were made in the operations of MetroJet, Shuttle and
US Airways Express. By March 2000 US Airways ceased MetroJet service in
the Birmingham, AL, Columbus, OH, Milwaukee, WI and St. Louis, MO to
Washington-Dulles markets, and has announced its intention to withdraw
MetroJet service between Raleigh-Durham and Washington-Dulles. MetroJet
competed directly with the Company in the Columbus, OH and Raleigh-Durham
to Washington-Dulles markets. Further, US Airways has announced its
intention to withdraw hourly Shuttle service in the Boston and LaGuardia
to Washington-Dulles markets and to replace both with less frequent
service using a combination of mainline and US Airways Express regional
jet service. The Company competes directly with US Airways in the
LaGuardia-Washington-Dulles market. By March 2000 US Airways Express had
ceased service in the Indianapolis to Washington-Dulles market - a market
the Company serves with regional jets.
30
While increased competition in the Company's markets has had a
negative effect on yields, the Company continues to take measures to
reduce the overall effect on the Company's results of operations. The
Company continually monitors and responds to the effects competition has
on its routes, fares and frequencies, and believes it can continue to
compete effectively.
Congress recently passed and the President is expected to sign
into law legislation that will allow airlines to provide additional
service with regional jet aircraft at certain slot restricted airports
including Chicago-O'Hare and New York-LaGuardia. Whereas previously slot
restrictions limited the amount of service that could be provided from
these airports, the new legislation, if and when enacted, will allow
substantial additional service to certain qualifying cities. The Company
is one of several regional carriers that will be in a position to provide
additional service at these cities with regional jet aircraft. This
legislation adds significantly to the number of potential regional jet
opportunities available to both the United Express and Delta Connection
operations and to the Company's competitors. It will also provide
increased competitive situations at these airports, the effect of which
cannot be determined at this time. During 2000 the Company will continue
to assess and respond to competitive opportunities as they may develop as
a result of this legislation.
Fuel price increases in the second half of 1999 and to date in
2000 have had a material impact on cost of operations throughout the
airline industry. The Company's results will continue to be affected by
fuel price volatility. During 1999, the effect of fuel price increases
on the Company's results was mitigated by the Company's having hedged
approximately 57% of its fuel requirements for the year. These hedges
generally settled at favorable prices relative to the market price at the
time of settlement, which resulted in a reduced fuel expense relative to
market rates. For 2000, the Company entered into hedges in late 1999,
settling in the second and third quarter of 2000, for an estimated 8% of
its estimated total 2000 fuel requirements. The Company is also not
exposed to fuel price volatility for an additional 8% of its estimated
2000 fuel requirements because the cost of this fuel, to be utilized in
the ACJet operations, will be passed through to Delta under the fee-per-
departure structure.
The Company's CRJ fleet is comprised of new aircraft, with an
average age of one and one-half years. Since maintenance expense on new
aircraft is lower in the early years of operation due to manufacturers'
warranties and the generally lower failure rates of major components, the
Company's maintenance expense for CRJ aircraft will increase in future
periods.
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 43 CRJs already delivered or on order for the United
Express operation. Under the terms of the agreement, the Company pays a
set dollar amount per engine hour flown on a monthly basis to GE and GE
assumes the responsibility to repair the engines when required at no
additional expense to the Company, subject to certain exclusions. The
Company expenses the amount due based on the monthly rates stipulated in
the agreement, as engine hours are flown. The Company's future
maintenance expense on CRJ 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.
Based on the contractual rates, unit maintenance costs recognized on
these CRJ engines during 2000 will be greater than those recorded
historically. The Company has signed a similar agreement covering up to
55 FRJs with the FRJ engine manufacturer, and also anticipates signing a
similar agreement for the remaining CRJ on firm order and FRJ aircraft on
conditional order.
31
In 1999, the Company commenced a replacement project of its
computer software systems. The Company has engaged IBM to define
functional requirements, evaluate vendor packages, and select and
implement software solutions. New systems will include general ledger,
payroll, accounts payable, accounts receivable, human resources
administration, and maintenance. Implementation is scheduled to be
completed during 2000. The Company anticipates spending approximately
$7.0 million on this project, the majority of which will be capitalized
and amortized over five years. In 1999, the Company expensed
approximately $400,000 related to replacement software selection and
capitalized $2.3 million in acquisition and implementation costs.
Liquidity and Capital Resources
As of December 31, 1999, the Company had cash and cash
equivalents of $57.4 million and working capital of $60.4 million
compared to $64.4 million and $68.1 million, respectively, as of December
31, 1998. During the year ended December 31, 1999, cash and cash
equivalents decreased $7 million, reflecting net cash provided by
operating activities of $49.9 million, net cash used in investing
activities of $72.3 million (related to aircraft purchase deposits,
purchases of aircraft and equipment and decreases in short term
investments) and net cash provided by financing activities of $15.4
million. Net cash provided by financing activities increased due to the
issuance of $37.2 million of long term debt principally to acquire two
CRJ aircraft, partially offset by the Company's common stock repurchase
program.
As of December 31, 1998, the Company had cash and cash
equivalents of $64.4 million and working capital of $68.1 million
compared to $39.2 million and $45.0 million, respectively, as of December
31, 1997. During the year ended December 31, 1998, cash and cash
equivalents increased $25.2 million, reflecting net cash provided by
operating activities of $39.7 million, net cash used in investing
activities of $39.7 million (related to purchases of aircraft and
equipment and decreases in short term investments) and net cash provided
by financing activities of $25.3 million. Net cash provided by financing
activities increased principally due to the issuance of long term debt to
acquire two CRJ and one J41 aircraft.
Other Financing
In February 1999, the Company entered into an asset-based
lending agreement with two financial institutions that provided 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 and will expire on
September 30, 2000, or upon termination of the United Express marketing
agreement, whichever is sooner. The interest rate on this line is LIBOR
plus .75% to 1.75% depending on the Company's fixed charges coverage
ratio. There were no borrowings on the $35 million line during 1999, or
any under the previous line during 1998. The Company pledged $2.9 million
of this line of credit as collateral to secure letters of credit issued
on behalf of the Company by a financial institution. The Company
anticipates that it will be able to renew this line of credit prior to
its expiration on terms at least as favorable as the current facility.
During 1999, the Company borrowed $7.8 million on the bridge
loan and provided funding to the Metropolitan Washington Airports
Authority ("MWAA") for the construction of the regional terminal of $12.5
million. In May 1999, MWAA paid the Company $7.8 million, and the Company
repaid its borrowings on the bridge loan. As of December 31, 1999 there
are no outstanding borrowings on the bridge loan. A note receivable from
MWAA of $4.7 million is recorded at December 31, 1999. No additional
amounts were drawn on the bridge loan for this additional $4.7 million
funding. However, the Company may do so in the future as desired.
32
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7% Convertible Subordinated Notes due July 1, 2004
("the Notes"). The Notes are convertible into shares of Common Stock
unless previously redeemed or repurchased, at a conversion price of $9
per share, (after giving effect to the stock split on May 15, 1998)
subject to certain adjustments. In January 1998, approximately $5.9
million of the Notes were converted, pursuant to their original terms,
into 660,826 shares of Common Stock. From March 20, 1998 to April 8,
1998, the Company temporarily reduced the conversion price from $9 to
$8.86 for holders of the Notes. During this period, $31.7 million of the
Notes converted into approximately 3.6 million shares of Common Stock.
As a result of this temporary price reduction, the Company recorded a non-
cash, non-operating charge to earnings during the second quarter of 1998
of $1.4 million representing the fair value of the additional shares
distributed upon conversion. Interest on the Notes is payable on April 1
and October 1 of each year. The Company may redeem the remaining notes
beginning on July 1, 2000 by calling the notes at 104% of face value
declining one percent per year until maturity on July 1, 2004, in which
case the holders will have an opportunity to convert the Notes at their
face amount prior to redemption.
In September 1997, approximately $112 million of pass through
certificates were issued in a private placement by separate pass through
trusts, which purchased with the proceeds, equipment notes (the
"Equipment Notes") issued in connection with (i) leveraged lease
transactions relating to four J-41s and six CRJs, all of which were
leased to the Company (the "Leased Aircraft"), and (ii) the financing of
four J-41s owned by the Company (the "Owned Aircraft"). The Equipment
Notes issued with respect to the Owned Aircraft are direct obligations of
ACA, guaranteed by ACAI and are included as debt obligations in the
accompanying consolidated financial statements. The Equipment Notes
issued with respect to the Leased Aircraft are not obligations of ACA or
guaranteed by ACAI.
Other Commitments
On April 21, 1999, the Company's Board of Directors approved a
plan to purchase up to $20 million or five percent of the then current
outstanding shares in open market or private transactions over a twelve
month period. As of March 10, 2000, the Company has purchased 1,064,000
shares of its common stock at an average price of $17.28 per share. The
Company has approximately $1.6 million dollars remaining on the original
$20 million authorization.
In August 1999, the Company entered into a series of put and
call contracts having an aggregate notional amount of $23 million. The
contracts mature between March and May 2000. The contracts were entered
into as an interest rate hedge designed to limit the Company's exposure
to interest rate changes on the anticipated issuance of permanent
financing relating to the delivery of three aircraft in 2000. As such,
effective gains or losses realized when permanent financing is obtained
will be amortized over the life of the related aircraft lease or will be
depreciated as part of the aircraft acquisition cost for owned aircraft.
The Company would have received from the counterparty approximately
$247,000 had these contracts settled on December 31, 1999.
33
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 14% of its anticipated jet fuel requirements for the second
quarter 2000; 27% for the third quarter 2000; and 18%, for the fourth
quarter of 2000. Had the commodity swap transactions settled on December
31, 1999, the Company would have recognized a reduction of approximately
$597,000 in fuel expense.
Aircraft
The Company has significant lease obligations for aircraft that
are classified as operating leases and therefore are not reflected as
liabilities on the Company's balance sheet. The remaining terms of such
leases range from one to sixteen and a half years. The Company's total
rent expense in 1999 under all non-cancelable aircraft operating leases
with remaining terms of more than one year was approximately $45.2
million. As of December 31, 1999, the Company's minimum annual rental
payments for 2000 under all non-cancelable aircraft operating leases with
remaining terms of more than one year were approximately $54.1 million.
As of March 1, 2000, the Company had a total of 42 CRJs on
order from Bombardier, Inc., and held options for 27 additional CRJs.
During 1999, the Company converted 17 option aircraft to firm orders and
placed new orders for six additional CRJs and received 17 new aircraft
options. The Company also placed a firm order with Fairchild Aerospace
Corporation for 25 Fairchild Dornier 32 seat 328JET feeder regional jet
("328JET") aircraft, a conditional order for a 15 328JETs and 40
Fairchild Dornier 44 seat 428JET feeder regional jet ("438JET") aircraft
(328JET aircraft and 428JET aircraft are collectively referred to as
"FRJs"), and received options for 85 additional FRJs. Of the 67 firm
aircraft deliveries, 28 are scheduled for 2000, 29 are scheduled for
2001, and ten are scheduled for 2002. The Company is obligated to
purchase and finance (including leveraged leases) the 67 firm ordered
aircraft at an approximate capital cost of $1.1 billion. The Company
anticipates leasing all 28 of its year 2000 aircraft deliveries on terms
similar to previously delivered CRJ aircraft. On March 15, 2000 and
March 22, 2000, the Company acquired through leveraged lease
transactions, its 25th and 26th CRJ aircraft. The lease terms are for
approximately 16.8 years.
As previously announced, the Company is exploring alternatives
to accelerate the retirement of its fleet of 28 leased 19 seat J-32
aircraft. The Company tentatively plans to remove as many as six J-32s
from ACA's fleet during 2000 and the remainder in 2001. As of December
31, 1999, the Company had J-32 operating lease commitments with remaining
lease terms ranging from one to six years and related minimum lease
payments of approximately $43 million. The Company has not yet finalized
its analysis of a phase-out plan, including quantification of any one-
time fleet rationalization charge.
34
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and
other mandatory orders relating to, among other things, inspection of
aircraft and the mandatory removal and replacement of parts that have
failed or may fail in the future. In addition, the FAA from time to time
amends its regulations. Such amended regulations may impose additional
regulatory burdens on the Company such as the installation of new safety-
related items. Depending upon the scope of the FAA's order and amended
regulations, these requirements may cause the Company to incur
substantial, unanticipated expenses. The FAA has issued a directive
which requires that CRJ flight data recorders be upgraded to record an
increased number of flight parameters. The Company anticipates that new
CRJs will comply with the directives beginning with deliveries occurring
during the second quarter 2000, and is preparing to retrofit previously
delivered CRJs. The Company estimates that the cost of this retrofit
will be approximately $3.5 million and has included this amount in its
capital spending plan for 2000.
Capital Equipment and Debt Service
In 2000 the Company anticipates capital spending of
approximately $21.5 million consisting of $15.1 million in rotable spare
parts, spare engines and equipment, and $6.4 million for other capital
assets, and expects to finance these capital expenditures out of working
capital.
Debt service for 2000 is estimated to be approximately $6.1
million reflecting borrowings related to the purchase of four CRJ
aircraft acquired in 1998 and 1999, five J-41s acquired in 1997 and 1998
and interest due on the remaining 7% Convertible Subordinated Notes. The
foregoing amount does not include additional debt that may be required
for the financing of the CRJs, FRJs, spare parts and spare engines.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the $35 million credit
facility as presently existing or as anticipated to be renewed, and other
available equipment financing will be sufficient to meet its working
capital needs, expected operating lease commitments, capital
expenditures, and debt service requirements for the next twelve months.
Inflation
Inflation has not had a material effect on the Company's
operations.
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.
35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results from changes in jet
fuel pricing and in interest rates.
For 2000, the Company has hedged a portion of its exposure to
jet fuel price fluctuations by entering into commodity swap contracts for
approximately 8% of its estimated 2000 fuel requirements for the United
Express program. The swap contracts are designed to provide protection
against sharp increases in the price of jet fuel. In addition, Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta connection program. Taking this
into account, based on the Company's projected fuel consumption for
the year 2000, a one-cent increase in the average annual price per gallon
of jet fuel would increase the Company's annual aircraft fuel expense by
approximately $530,000.
The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. The Company has entered into put and call contracts designed to
limit the Company's exposure to interest rate changes until permanent
financing is secured upon delivery of the Bombardier regional jet
aircraft. At December 31, 1999 the Company had three swap contracts
outstanding related to the delivery of the next three CRJs. A one
percentage point decrease in interest rates from the Company's call
contracts would increase the Company's annual aircraft lease or ownership
costs associated with these contracts by $199,600.
As of March 1, 2000, the Company has firm commitments to
purchase 67 additional jet aircraft. The Company expects to finance
these commitments using a combination of debt and leveraged leases.
Changes in interest rates will impact the actual cost to the Company for
these transactions in the future.
The Company does not have significant exposure to changing
interest rates on its long-term debt as the interest rates on such debt
are fixed. Likewise, the Company does not hold long-term interest
sensitive assets and therefore is not exposed to interest rate
fluctuations for its assets. The Company does not purchase or hold any
derivative financial instruments for trading purposes.
36
Item 8. Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report for the years ended December 37
31, 1997, 1998 and 1999
Consolidated Balance Sheets as of December 31, 1998 and 38
1999
Consolidated Statements of Operations for the years ended 39
December 31, 1997, 1998 and 1999
Consolidated Statements of Stockholders' Equity for the 40
years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended 41
December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements 42
37
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Coast Airlines Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Atlantic
Coast Airlines Holdings, Inc. and subsidiaries as of December 31, 1998
and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Atlantic Coast Airlines Holdings, Inc. and subsidiaries as of December
31, 1998 and 1999, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
1999 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
effective January 1, 1999, the Company changed its method of accounting
for preoperating costs.
KPMG LLP
McLean, VA
January 26, 2000
38
Atlantic Coast Airlines Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except for share data and par values)
December 31, 1998 1999
Assets
Current:
Cash and cash equivalents $64,412 $57,447
Short term investments 63 --
Accounts receivable, net 30,210 31,023
Expendable parts and fuel inventory, net 3,377 4,114
Prepaid expenses and other current 3,910 6,347
assets
Notes receivable -- 6,239
Deferred tax asset 2,534 2,850
Total current assets 104,506 108,020
Property and equipment at cost, net of
accumulated depreciation and amortization 89,966 133,160
Preoperating costs, net of accumulated 1,486 --
amortization
Intangible assets, net of accumulated 2,382 2,232
amortization
Debt issuance costs, net of accumulated 3,420 3,309
amortization
Aircraft deposits 19,420 38,690
Other assets 6,446 8,342
Total assets $ 227,626 $ 293,753
Liabilities and Stockholders' Equity
Current:
Current portion of long-term debt $3,450 $4,758
Current portion of capital lease 1,334 1,627
obligations
Accounts payable 5,262 5,343
Accrued liabilities 26,330 35,852
Total current liabilities 36,376 47,580
Long-term debt, less current portion 63,289 87,244
Capital lease obligations, less current 1,446 5,543
portion
Deferred tax liability, net 6,238 12,459
Deferred credits, net 9,900 15,403
Total liabilities 117,249 168,229
Stockholders' equity:
Preferred Stock: $.02 par value per share;
shares authorized - - -
5,000,000; no shares issued or outstanding
in 1998 or 1999
Common stock: $.02 par value per share;
shares authorized 65,000,000 in 1998 and in
1999; shares issued 20,821,001 in 1998 and 416 421
21,083,927 in 1999; shares outstanding
19,348,501 in 1998 and 18,628,261 in 1999
Class A common stock: nonvoting; par value;
$.02 stated value per share; shares - -
authorized 6,000,000; no shares issued or
outstanding
Additional paid-in capital 85,215 89,126
Less: Common stock in treasury, at cost,
1,472,500 shares in 1998 and 2,455,666
shares in 1999 (17,069) (34,106)
Retained earnings 41,815 70,083
Total Stockholders' Equity 110,377 125,524
Total Liabilities and Stockholders'
Equity $ 227,626 $ 293,753
Commitments and Contingencies
See accompanying notes to consolidated financial statements.
39
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except for per share data)
Years ended December 31,
1997 1998 1999
Operating revenues:
Passenger $202,540 $285,243 $342,079
Other 2,904 4,697 5,286
Total operating revenues 205,444 289,940 347,365
Operating expenses:
Salaries and related costs 49,661 68,135 84,554
Aircraft fuel 17,766 23,978 34,072
Aircraft maintenance and materials 16,860 22,730 24,357
Aircraft rentals 29,570 36,683 45,215
Traffic commissions and related fees 32,667 42,429 54,521
Facility rents and landing fees 10,376 13,475 17,875
Depreciation and amortization 3,566 6,472 9,021
Other 16,035 23,347 28,458
Total operating expenses 176,501 237,249 298,073
Operating income 28,943 52,691 49,292
Other income (expense):
Interest expense (3,450) (4,207) (5,614)
Interest income 1,284 4,145 3,882
Debt conversion expense - (1,410) --
Other income (expense), net 62 326 (85)
Total other expense, net (2,104) (1,146) (1,817)
Income before income tax provision and
cumulative effect of acct change 26,839 51,545 47,475
Income tax provision 12,339 21,133 18,319
Income before cumulative effect of 14,500 30,412 29,156
accounting change
Cumulative effect of accounting change,
net of income tax -- -- (888)
benefit of $598
Net income $14,500 $30,412 $28,268
Income per share:
Basic:
Income before cumulative effect of $0.93 $1.68 $1.54
accounting change
Cumulative effect of accounting change -- -- (.05)
Income per share $0.93 $1.68 $1.49
Diluted:
Income before cumulative effect of $0.80 $1.42 $1.36
accounting change
Cumulative effect of accounting change -- -- (.04)
Income per share $0.80 $1.42 $1.32
Weighted average shares used in
computation: 15,647 18,128 18,964
Basic 19,512 22,186 22,015
Diluted
See accompanying notes to consolidated financial statements.
40
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, exceptfor share data)
Common Stock Additional Treasury Stock Retained
-------------- Paid-In -------------- Earnings
Capital (Deficit)
Shares Amount Shares Amount l
Balance December 8,498,910 $170 $37,689 12,500 $(125) $(3,097)
31, 1996
Exercise of common 240,597 5 1,250 - - -
stock options
Tax benefit of stock - - 1,357 - - -
option exercise
Purchase of treasury - - - 1,460,000 (16,944) -
stock
Net income - - - - - 14,500
Balance December 8,739,507 175 40,296 1,472,500 (17,069) 11,403 $
31,1997
Exercise of common 286,011 6 2,473 - - -
stock options
Tax benefit of stock - - 4,239 - - -
option exercise
Amortization of
deferred - - 574 - - -
compensation
Stock split 9,673,901 193 (193) - - -
Conversion of debt 2,121,582 42 37,826 - - -
Net income - - - - - 30,412
Balance December 20,821,001 416 85,215 1,472,500 (17,069) 41,815
31, 1998
Exercise of common 262,926 5 1,579 - - -
stock options
Tax benefit of stock - - 1,835 - - -
option exercise
Purchase of treasury - - - 996,500 (17,192) -
stock
ESOP share - - 60 (13,334) 155 -
contributions
Amortization of
deferred - - 437 - - -
compensation
Net income - - - - - 28,268
Balance December $21,083,927 $421 $89,126 $2,455,666 $(34,106) $70,083
31, 1999
See accompanying notes to consolidated financial statements
41
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
1997 1998 1999
Cash flows from operating activities:
Net income $ 14,500 $ 30,412 $ 28,268
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 3,111 5,829 9,109
Write-off of preoperating costs - - 1,486
Amortization of intangibles and 455 690 176
preoperating costs
Provision for uncollectible 168 124 564
accounts receivable
Provision for inventory 63 86 110
obsolescence
Amortization of deferred credits (243) (801) (1,114)
Amortization of debt issuance 181 465 354
costs
Capitalized interest, net - (1,640) (1,683)
Deferred tax provision 2,452 4,392 5,905
Net loss on disposal of fixed 450 247 380
assets
Amortization of debt discount and 76 70 73
finance costs
Debt conversion expense - 1,410 -
Contribution of stock to the ESOP - - 214
Gain on ineffective hedge - - (211)
position
Gain on early termination of - - (291)
capital lease
Amortization of deferred - 574 437
compensation
Changes in operating assets and
liabilities:
Accounts receivable (5,829) (6,077) (3,572)
Expendable parts and (781) (990) (847)
fuel inventory
Prepaid expenses and 403 (2,512) (2,660)
other current assets
Preoperating costs (2,057) - -
Accounts payable 998 423 2,139
Accrued liabilities 7,313 7,028 11,013
Net cash provided by 21,260 39,730 49,850
operating activities
Cash flows from investing activities:
Purchase of property and equipment (26,005) (51,020) (59,669)
Proceeds from sales of fixed assets - 1.318 6,608
Maturities of short term
investments (10,737) 10,677 66
Refund of deposits - 120 3
Payments for aircraft and other (18,447) (832) (19,270)
deposits
Net cash used in (55,189) (39,737) (72,262)
investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term 75,220 29,650 37,203
debt
Payments of long-term debt (3,241) (2,248) (4,189)
Payments of capital lease (2,258) (2,656) (1,839)
obligations
Proceeds from receipt of deferred 809 96 37
credits and other
Deferred financing costs (3,215) (2,069) (157)
Proceeds from exercise of stock 1,255 2,479 1,584
options
Purchase of treasury stock (16,944) - (17,192)
Net cash provided by 51,626 25,252 15,447
financing activities
Net increase (decrease) in cash and 17,697 25,245 (6,965)
cash equivalents
Cash and cash equivalents, beginning 21,470 39,167 64,412
of year
Cash and cash equivalents, end of year $ 39,167 $ 64,412 $ 57,447
See accompanying notes to consolidated financial statements.
42
Atlantic Coast Airlines Holdings, Inc.
Notes to Consolidated Financial Statements
1. Summary of
Accounting (a)Basis of Presentation
Policies
The accompanying consolidated financial
statements include the accounts of Atlantic Coast
Airlines Holdings, Inc. ("ACAI") and its wholly-
owned subsidiaries, Atlantic Coast Airlines
("ACA") and Atlantic Coast Jet, Inc. ("ACJet"),
(together, the "Company"). All significant
intercompany accounts and transactions have been
eliminated in consolidation. The Company's
flights are currently operated under a code
sharing agreement with United Airlines, Inc.
("United") and are identified as United Express
flights in computer reservation systems. As of
December 31, 1999, the Company's ACA subsidiary
provided scheduled air transportation service as
United Express for passengers to destinations in
states in the Eastern and Midwestern United
States. During 1999, the Company's ACJet
subsidiary entered into a code sharing agreement
with Delta Air Lines to become part of the Delta
Connection network. ACJet is currently in the
pre-operating stage with scheduled service
anticipated to begin during the second quarter of
2000.
(b)Cash, Cash Equivalents and Short-Term Investments
The Company considers investments with an
original maturity of three months or less when
purchased to be cash equivalents. Investments
with an original maturity greater than three
months and less than one year are considered
short-term investments. All short-term
investments are considered to be available for
sale. Due to the short maturities associated
with the Company's investments, the amortized
cost approximates fair market value.
Accordingly, no adjustment has been made to
record unrealized holding gains and losses.
(c)Airline Revenues
Passenger fares and cargo revenues are recorded
as operating revenues at the time transportation
is provided. Substantially all of the Company's
passenger tickets are sold by other air
carriers. The value of unused passenger tickets
sold by the Company, which is minimal, is
included in current liabilities. ACA
participates in United's Mileage Plus frequent
flyer program, and ACJet will participate in the
Delta SkyMiles frequent flyer program. The
Company does not accrue for incremental costs
for mileage accumulation relating to these
programs because the Company believes such costs
are not significant. Incremental costs for
awards redeemed on the Company's flights are
expensed as incurred.
43
(d)Accounts and Notes Receivable
Accounts receivable are stated net of allowances
for uncollectible accounts of approximately
$364,000 and $772,500 at December 31, 1998 and
1999, respectively. Amounts charged to costs and
expenses for uncollectible accounts in 1997, 1998
and 1999 were $168,000, $124,000 and $564,500,
respectively. Write-off of accounts receivable
were $186,000, $29,000 and $156,000 in 1997, 1998
and 1999, respectively. Accounts receivable for
the years ended December 31, 1998 and 1999
included approximately $3.6 million and $2.9
million, respectfully, related to manufacturers
credits to be applied towards future spare parts
purchases and training expenses.
The note receivable balance at December 31, 1999
includes a promissory note from an executive
officer of the Company dated as of May 24, 1999
with a balance, including accrued interest, of
$1.5 million. The note was paid in full during
the first quarter of 2000.
(e)Concentrations of Credit Risk
The Company provides commercial air
transportation in the Eastern and Midwestern
United States. Substantially all of the Company's
passenger tickets are sold by other air carriers.
The Company has a significant concentration of
its accounts receivable with other air carriers
with no collateral. At December 31, 1998 and
1999, accounts receivable from air carriers
totaled approximately $24.4 million and $27.6
million, respectively. Such accounts receivable
serve as collateral to a financial institution in
connection with the Company's line of credit
arrangement. (See note 4). Of the total amount,
approximately $20.8 million and $23.2 million
at December 31, 1998 and 1999, respectively,
were due from United. Historically, accounts
receivable losses have not been significant.
44 (f)Risks and Uncertainties
The airline industry is highly competitive and
volatile. The Company competes primarily with
other air carriers and, particularly with
respect to its shorter flights, with ground
transportation. Airlines primarily compete on
the basis of pricing, scheduling, frequency, and
type of equipment. The Company's operations are
primarily dependent upon business-related travel
and are not subject to wide seasonal
fluctuation. However, some seasonal decline does
occur during portions of the winter months due
to lesser demand. The ability of the Company to
compete with ground transportation and other air
carriers depends upon public acceptance of its
aircraft and the provision of convenient,
frequent and reliable service to its markets at
reasonable rates.
The Company's ACA subsidiary operates under code-
sharing and other marketing agreements with
United, which expire on March 31, 2009, unless
earlier terminated by United (the "UA
Agreements"). Prior to March 31, 2004, United
may terminate the UA Agreements at any time if
ACA fails to maintain certain performance
standards, and may terminate without cause after
March 31, 2004 by providing one year's notice to
the Company. If by January 2, 2001 United has
not given the Company the ability to operate
regional jets of 44 seats or less seating
capacity as United Express, in addition to its
allocation of 50 seat regional jets, the Company
may terminate the UA Agreements as of March 31,
2004. The Company would be required to provide
notice of termination prior to January 2, 2002,
which notice would be void if United ultimately
grants such authority prior to January 2, 2002.
Under the terms of the UA Agreements, ACA pays
United monthly fees based on the total number of
revenue passengers boarded by the Company on its
flights for the month. The fee per passenger is
subject to periodic increases during the
duration of the ten year extension period. The
agreement allows ACA to operate under United's
colors, utilize the "United Express" name and
identify its flights using United's designator
code. The Company believes that its relationship
with United substantially enhances its ability
to compete for passengers. The loss of the
Company's affiliation with United could have a
material adverse effect on the Company's
business.
The UA Agreements require ACA to obtain United's
consent to operate service between city pairs as
"United Express". If ACA experiences net
operating expenses that exceed revenues for
three consecutive months on any required route,
ACA may withdraw from that route if United and
the Company are unable to negotiate an
alternative mutually acceptable level of service
for that route. The UA Agreements do not
prohibit United from competing, or from entering
into agreements with other airlines who would
compete, on routes served by the Company, but
state that United may terminate the UA
Agreements if ACAI and ACA enter into a similar
arrangement with any other carrier without
United's approval. The Company believes that
its agreement to operate ACJet as part of the
Delta Connection program does not provide United
the right to terminate the UA Agreements.
45
The UA Agreements limit the ability of the ACAI
and ACA to merge with another company or dispose
of certain assets or aircraft without offering
United a right of first refusal to acquire the
Company or such assets or aircraft, and provide
United a right to terminate the UA Agreements if
they merge with or are controlled or acquired by
another carrier. United also has a right of
first refusal with respect to issuance by ACAI
and ACA of shares of their common stock if, as a
result of the issuance, certain of their
stockholders and their permitted transferees do
not own at least 50% of their common stock after
such issuance. Because the holdings of these
stockholders and their permitted transferees are
currently substantially less than 50%,
management believes that such a right is
unlikely to be exercised.
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 is
contractually obligated to operate the flight
schedule, and Delta pays the Company an agreed
amount per hour flown. Delta may terminate the
agreement at any time if the Company fails to
maintain certain performance standards, and,
subject to certain rights by the Company, may
terminate without cause, effective no earlier
than two years after commencement of operations,
by providing 180 days notice to the Company.
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 during the second quarter of 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.
The Delta Connection Agreement requires the
Company to obtain Delta's approval if it chooses
to enter into a code-sharing arrangement with
another carrier, lists its flights under any
other code, or operate flights for any other
carrier, except with respect to such
arrangements with United or non-U.S. code-shares
partners of United or in certain other
circumstances. The Delta Connection Agreement
does not prohibit Delta from competing, or from
entering into agreements with other airlines who
would compete, on routes served by the Company.
The Delta Connection Agreement also restricts
the ability of the Company to dispose of
aircraft subject to the agreement without
offering Delta a right of first refusal to
acquire such aircraft, and provides that Delta
may terminate the agreement if, among other
things, the Company merges with or sells its
assets to another entity, is acquired by another
entity or if any person acquires more than a
specified percentage of its stock.
46
The Company's pilots are represented by the
Airline Pilots Association ("ALPA"), ACA's
flight attendants are represented by the
Association of Flight Attendants ("AFA"), and
ACA's mechanics are represented by the Aircraft
Mechanics Fraternal Association ("AMFA").
The ALPA collective bargaining agreement became
amendable in February 2000 and the Company and
ALPA began meetings on a new contract in
February 2000. The ALPA agreement covers all
pilots of the Company, including ACJet pilots.
As of December 31, 1999, approximately 31% of
the Company's workforce were pilots.
ACA's collective bargaining agreement with AFA
was ratified in October, 1998. The agreement is
for a four year duration and becomes amendable
in October 2002. ACJet has reached an agreement
with AFA that its flight attendants will be
represented by AFA, and has also agreed with AFA
on the terms of a five year agreement covering
ACJet flight attendants on terms substantially
similar to the terms of the contract between ACA
and AFA.
ACA's collective bargaining agreement with AMFA
was ratified in June, 1998. The agreement is
for a four year duration and becomes amendable
in June 2002.
The Company believes that certain of the
Company's unrepresented labor groups are from
time to time approached by unions seeking to
represent them. However, the Company has not
received any official notice of organizing
activity and there have been no representation
applications filed with the National Mediation
Board by any of these groups. The Company
believes that the wage rates and benefits for
non-union employee groups are comparable to
similar groups at other regional airlines. The
Company also believes that the incremental costs
of union agreements presently under negotiation
will not have a material effect on the Company's
financial position or results of its operations
for the year 2000.
47 (g)Use of Estimates
The preparation of financial statements in
accordance with generally accepted accounting
principles requires management to make certain
estimates and assumptions regarding valuation of
assets, recognition of liabilities for costs such
as aircraft maintenance, differences in timing of
air traffic billings from United and other
airlines, operating revenues and expenses during
the period and disclosure of contingent assets
and liabilities at the date of the consolidated
financial statements. Actual results could
differ from those estimated.
(h)Expendable Parts
Expendable parts and supplies are stated at the
lower of cost or market, less an allowance for
obsolescence of $318,000 and $428,000 as of
December 31, 1998 and 1999, respectively.
Expendable parts and supplies are charged to
expense as they are used. Amounts charged to
costs and expenses for obsolescence in 1997, 1998
and 1999 were $63,000, $86,000 and $110,000,
respectively.
(i)Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using the straight-line
method over the estimated useful lives of the
related assets which range from five to sixteen
and one half years. Capital leases and leasehold
improvements are amortized over the remaining
life of the lease.
Amortization of capital leases and leasehold
improvements is included in depreciation expense.
The Company periodically evaluates whether events
and circumstances have occurred which may impair
the estimated useful life or the recoverability
of the remaining balance of its long-lived
assets. If such events or circumstances were to
indicate that the carrying amount of these assets
would not be recoverable, the Company would
estimate the future cash flows expected to result
from the use of the assets and their eventual
disposition. If the sum of the expected future
cash flows (undiscounted and without interest
charges) is less than the carrying amount of the
asset, an impairment loss would be recognized by
the Company.
The Company capitalizes interest related to the
aircraft purchase deposits it has placed with the
aircraft manufacturers. Amounts capitalized in
1998 and 1999 were $1.6 million and $1.8 million,
respectively.
48 (j)Preoperating Costs
Preoperating costs represent the cost of
integrating new types of aircraft. Prior to 1999,
such costs, which consist primarily of flight
crew training and aircraft ownership related
costs, were deferred and amortized over a period
of four years on a straight-line basis.
During 1997 the Company capitalized approximately
$2.1 million of these costs related to the
introduction of the regional jet ("CRJ") into the
Company's fleet. Accumulated amortization of
preoperating costs at December 31, 1998 was
$571,000. On January 1, 1999, the Company wrote-
off the remaining unamortized preoperating costs
balance of approximately $1.5 million, before
income tax benefit of $598,000, in accordance
with the implementation of Statement of Position
98-5 ("SOP 98-5"). Also, in accordance with SOP
98-5, $2.2 million of preoperating costs incurred
during 1999 for the start up of ACJet were
expensed as incurred.
(k)Intangible Assets
Goodwill of approximately $3.2 million,
representing the excess of cost above the fair
value of net assets acquired in the acquisition
of ACA, is being amortized by the straight-line
method over twenty years. The primary financial
indicator used by the Company to assess the
recoverability of its goodwill is undiscounted
future cash flows from operations. The amount of
impairment, if any, is measured based on
projected future cash flows using a discount rate
reflecting the Company's average cost of funds.
Costs incurred to acquire slots are being
amortized by the straight-line method over twenty
years. Accumulated amortization of intangible
assets at December 31, 1998 and 1999 was $1.3
million and $1.4 million, respectively.
(l)Maintenance
The Company's maintenance accounting policy is a
combination of expensing certain events as
incurred and accruing for certain maintenance
events at rates it estimates will be sufficient
to cover maintenance cost for the aircraft. For
the J32 and J41 aircraft, the Company accrues for
airframe component and engine repair costs on a
per flight hour basis. For the CRJ aircraft, the
Company accrued for the replacement of major
engine life limited parts on a per cycle basis
until July 1999. The Company accrues for
auxiliary power units ("APU") costs on a per APU
hour basis. All other maintenance costs are
expensed as incurred.
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 43 CRJs already
delivered or on order for the United Express
operation. Under the terms of the agreement, the
Company pays a set dollar amount per engine hour
flown on a monthly basis to GE and GE assumes the
responsibility to repair the engines when
required at no additional expense to the Company,
subject to certain exclusions. The Company
expenses the amount due based on the monthly
rates stipulated in the agreement, as engine
hours are flown. The Company's future maintenance
expense on CRJ 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. The Company has reached a similar
agreement covering up to 55 Fairchild Dornier
aircraft with the engine manufacturer.
49
During the third quarter, the Company reversed
approximately $1.5 million in life limited parts
repair expense accruals related to CRJ engines
that are no longer required based on the
maintenance services and terms contained in the
GE engine maintenance agreement.
(m)Deferred Credits
The Company accounts for incentives provided by
the aircraft manufacturers as deferred credits
for leased aircraft. These credits are amortized
on a straight-line basis as a reduction to lease
expense over the respective lease term. The
incentives are credits that may be used to
purchase spare parts, pay for training expenses,
satisfy aircraft return conditions or be applied
against future rental payments.
(n)Income Taxes
The Company accounts for income taxes using the
asset and liability method. Under the asset and
liability method, deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between
the financial statement carrying amounts for
existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
expected to apply to taxable income in future
years in which those temporary differences are
expected to be recovered or settled.
50 (o)Stock-Based Compensation
The Company accounts for its stock-based
compensation plans using the intrinsic value
method prescribed under Accounting Principles
Board (APB) No. 25. Under these principles, the
Company records compensation expense for stock
options and awards only if the exercise price is
less than the fair market value of the stock on
the measurement date.
(p)Income Per Share
Basic income per share is computed by dividing
net income by the weighted average number of
common shares outstanding. Diluted income per
share is computed by dividing net income by the
weighted average number of common shares
outstanding and common stock equivalents, which
consist of shares subject to stock options
computed using the treasury stock method. In
addition, dilutive convertible securities are
included in the denominator while interest on
convertible debt, net of tax, is added back to
the numerator.
A reconciliation of the numerator and denominator
used in computing income per share is as follows
(in thousands, except per share amounts):
1997 1998 1999
Basic Dilut Basic Dilut Basic Dilut
ed ed ed
Share calculation:
Average number of common
shares outstanding 15,647 15,647 18,128 18,128 18,964 18,964
Incremental shares due
to assumed exercise of - 701 - 876 - 849
options
Incremental shares due to
assumed conversion of - 3,164 - 3,182 - 2,202
convertible debt
Weighted average common
shares outstanding 15,647 19,512 18,128 22,186 18,964 22,015
outstanding
Adjustments to net
income:
Income before cumulative
effect of accounting $14,500 $14,500 $30,412 $30,412 $29,156 $29,156
change
Interest expense on
convertible debt, - 1,187 - 1,202 - 831
net of tax
Income before
cumulative effect
of accounting $14,500 $15,687 $30,412 $31,614 $29,156 $29,987
change available to
common shareholders
Income per share
before cumulative
effect of accounting $ 0.93 $ 0.80 $ 1.68 $ 1.42 $ 1.54 $ 1.36
change
51
(q)Reclassifications
Certain prior year amounts as previously
reported have been reclassified to conform to
the current year presentation.
(r)Interest rate hedges
The Company has periodically used swaps to hedge
the effects of fluctuations in interest rates
associated with aircraft financings. These
transactions meet the requirements for current
hedge accounting. The effective portions of
hedging gains and losses resulting from the
interest rate swap contracts are deferred until
the contracts are settled and then amortized
over the aircraft lease term or capitalized as
part of acquisition cost, if purchased, and
depreciated over the life of the aircraft. The
ineffective portions of hedging gains and losses
are recorded as incurred.
(s)Segment Information
In 1998, the Company adopted the provisions of
Financial Accounting Standards Board Statement
No. 131, "Disclosure about Segments of an
Enterprise and Related Information (SFAS 131).
SFAS 131 establishes standards for reporting
information about operating segments and related
disclosures about products and services.
Operating segments are defined as components of
an enterprise about which separate financial
information is available that is regularly
evaluated by chief operating decision makers in
deciding how to allocate resources or in
assessing performance.
The Company's chief decision makers assess
operating and financial performance based on the
consolidated results of the Company and
accordingly, no further disclosure of segment
information is considered necessary.
Substantially all of the Company's revenues and
operating activity relate to passenger airline
transportation service. The Company does not
have any international service.
52
2. Property Property and equipment consist of
and the following:
Equipment
(in thousands)
December 31,
1998 1999
Owned aircraft and improvements $ 58,912 $ 92,868
Improvements to leased aircraft 4,949 5,005
Flight equipment, primarily 29,060 41,285
rotable spare parts
Maintenance and ground equipment 5,850 7,426
Computer hardware and software 2,408 4,804
Furniture and fixtures 753 957
Leasehold improvements 2,144 3,191
Subtotal 104,076 155,536
Less: Accumulated depreciation 14,110 22,376
and amortization
$ 89,966 $ 133,160
In 1999, the Company commenced a replacement
project of its computer software systems. The
Company anticipates spending approximately
$7 million on this project, the majority of which
will be capitalized and amortized over five years.
In 1999, the Company expensed approximately
$400,000 related to replacement software selection
and capitalized $2.3 million in acquisition and
implementation costs.
3. Accrued Accrued liabilities consist of the
Liabilities following:
(in thousands)
December 31,
1998 1999
Payroll and employee benefits $ 9,597 $ 10,482
Air traffic liability 516 723
Interest 1,061 1,442
Aircraft rents 2,118 1,526
Passenger related expenses 3,233 7,980
Maintenance costs 3,866 3,016
Fuel 2,260 3,964
Other 3,679 6,719
$ 26,330 $ 35,852
4. Debt 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 and will expire on September 30, 2000, or
upon termination of the United Express marketing
agreement, whichever is sooner. The interest rate
on this line is LIBOR plus .75% to 1.75% depending
on the Company's fixed charges coverage ratio.
53
During 1999, the Company borrowed $7.8 million on
the bridge loan and provided funding to the
Metropolitan Washington Airports Authority ("MWAA")
for the construction of the regional terminal of
$12.5 million. In May 1999, MWAA paid the Company
$7.8 million, and the Company repaid its borrowings
on the bridge loan. As of December 31, 1999 there
are no outstanding borrowings on the bridge loan. A
note receivable from MWAA of $4.7 million is
recorded at December 31, 1999. No additional
amounts were drawn on the bridge loan for this
additional $4.7 million funding. However, the
Company may do so in the future as desired.
The Company has pledged approximately $2.9 million
of the $35 million line as collateral for letters
of credit issued on behalf of the Company. At
December 31, 1999, the Company's remaining
available borrowing limit was approximately $19.8
million. There was no balance outstanding under the
line of credit at December 31, 1998 or December 31,
1999.
In July 1997, the Company issued $57.5 million
aggregate principal amount of 7% Convertible
Subordinated Notes due July 1, 2004 ("the Notes").
The Notes are convertible into 6.4 million shares
of Common Stock, $9 per share, (after giving effect
to the stock split on May 15, 1998) subject to
certain adjustments. Interest on the Notes is
payable on April 1 and October 1 of each year. The
Notes are redeemable by the Company, in whole or in
part, at any time on or after July 1, 2000, on at
least 15 days notice, at the redemption prices set
forth in the Indenture dated July 2, 1997, in each
case, together with accrued interest. The Notes
are unsecured and subordinated in right of payment
in full to all existing and future Senior
Indebtedness as defined in the Indenture. The
holders of the Notes have certain registration
rights with respect to the Notes and the underlying
Common Stock.
In January 1998, approximately $5.9 million of the
Notes were converted, pursuant to their original
terms, into 660,826 shares of Common Stock. From
March 20, 1998 to April 8, 1998, the Company
temporarily reduced the conversion price from $9 to
$8.86 for holders of the Notes. During this
period, $31.7 million of the Notes converted into
approximately 3.6 million shares of Common Stock.
As a result of this temporary price reduction, the
Company recorded a non-cash, non-operating charge
to earnings during the second quarter of 1998 of
$1.4 million representing the fair value of the
additional shares distributed upon conversion.
54
Long-term debt consists of the
following:
(in thousands) 1998 1999
December 31,
Convertible subordinated notes, principal
due July 1, 2004, interest payable in
semi-annual installments on the $19,820 $19,820
outstanding principal with interest at
7%, unsecured.
Equipment Notes associated with Pass
Through Trust Certificates, due
January 1, 2008 and January 1,
2010, principal payable annually through
January 1, 2006 and semi-annually 15,388 14,346
thereafter through maturity, interest
payable semi-annually at 7.49%
throughout term of notes, collateralized
by four J-41 aircraft.
Notes payable to supplier, due December
1999, principal and interest payable in
monthly installments of $14,027, with 161 -
interest at 8%, collateralized by flight
equipment, spare engines and parts, and
ground equipment.
Notes payable to supplier, due between May
15, 2000 and January 15, 2001, principal 1,839 621
payable monthly with interest of 6.74%
and 7.86%, unsecured.
Notes payable to institutional lenders, due
between October 23, 2010 and May 15,
2015, principal payable semiannually 25,556 53,629
with interest ranging from 5.65% to
7.63% through maturity, collateralized
by four CRJ aircraft.
Note payable to institutional lender, due
October 2, 2006, principal payable 3,975 3,586
semiannually with interest at 6.56%,
collateralized by one J41 aircraft.
Total 66,739 92,002
Less: Current Portion 3,450 4,758
$63,289 $87,244
As of December 31, 1999, maturities of long-term
debt are as follows:
(in thousands)
2000 $ 4,758
2001 4,344
2002 4,639
2003 4,900
2004 24,973
Thereafter 48,388
Total $92,002
The Company has various financial covenant
requirements associated with its debt and United
marketing agreements. These covenants require
meeting certain financial ratio tests, including
tangible net worth, net earnings, current ratio and
debt service levels.
55
5. Obligations The Company leases certain equipment for
Under noncancellable terms of more than one year. The net
Capital book value of the equipment under capital leases at
Leases December 31, 1998 and 1999, is $3.0 million and $7.2
million, respectively. The leases were capitalized
at the present value of the lease payments. The
weighted average interest rate for these leases is
approximately 8 %.
At December 31, 1999, the future minimum payments, by
year and in the aggregate, together with the present
value of the net minimum lease payments, are as
follows:
(in thousands)
Year Ending December 31,
2000 $ 2,240
2001 2,014
2002 1,919
2003 1,723
2004 772
Future minimum lease payments 8,668
Amount representing interest 1,498
Present value of minimum lease 7,170
payments
Less: Current maturities 1,627
$ 5,543
6. Operating Future minimum lease payments under noncancellable
Leases operating leases at December 31, 1999 are as follows:
(in thousands)
Year ending December 31, Aircraft Other Total
2000 $54,109 $ 3,856 $ 57,965
2001 52,160 3,430 55,590
2002 51,249 3,233 54,482
2003 49,576 2,935 52,511
2004 49,248 2,872 52,120
Thereafter 335,311 34,091 369,402
Total minimum
lease payments $591,653 $50,417 $642,070
Certain of the Company's leases require aircraft to
be in a specified maintenance condition at lease
termination or upon return of the aircraft.
The Company's lease agreements generally provide that
the Company pay taxes, maintenance, insurance and
other operating expenses applicable to leased assets.
Operating lease expense related to aircraft was $29.6
million; $36.7 million; and $45.2 million for the
years ended December 31, 1997, 1998 and 1999,
respectively.
56
7. Stockholders' Stock Split
Equity
On April 14, 1998, the Company declared a 2-for-1
stock split payable as a stock dividend on May 15,
1998. The stock dividend was contingent on
shareholder approval to increase the number of
authorized Common Shares from 15,000,000 to
65,000,000 shares. Shareholder approval was obtained
on May 5, 1998. The effect of this stock split is
reflected in the calculation of income per share and
in the stock option table presented below as of and
for the years ended December 31, 1997, 1998 and 1999,
respectively.
Stock Option Plans
The Company has two nonqualified stock option plans
which provide for the issuance of options to purchase
common stock of the Company to certain employees and
directors of the Company. Under the plans, options
are granted by the compensation committee of the
board of directors and vest over a period ranging
from less than one year to five years.
In 1998, the Company's shareholders approved the
addition of one million shares to the Company's stock
based compensation plans.
A summary of the status of the Company's stock
options awarded as of December 31, 1997, 1998 and
1999 and changes during the periods ending on those
dates is presented below:
1997 1998 1999
Weight Weight Weight
average average average
Shares exercise Shares exercise Shares exercise
price price price
Options outstanding at
beginning of year 1,916,784 $3.16 2,056,922 $5.14 1,759,899 $ 7.95
Granted 684,000 $8.91 539,000 $19.42 735,000 $22.88
Exercised 481,194 $2.60 572,023 $4.33 241,389 $ 6.69
Canceled 62,668 $5.45 264,000 $17.25 93,767 $20.60
Options outstanding 2,056,922 $5.14 1,759,899 $7.95 2,159,743 $12.63
at end of year
Options exercisable 916,568 $2.27 872,878 $3.88 1,160,206 $ 6.05
at year-end
Options available 1,028,182 653,182 27,334
for granting at
at year-end
Weighted-average fair
value of options $6.49 $11.88 $14.57
granted during the
year
57
The Company awarded a total of 100,000 shares of
restricted stock to certain employees during 1998.
These shares vest over three years. The Company
recognized $281,000 and $343,000 in compensation
expense for 1998 and 1999 respectively, associated
with these restricted stock awards and $293,000 and
$94,000 for 1998 and 1999 respectively, associated
with stock option awards. No such expense was
recognized in the year ended 1997.
The following table summarizes information about
stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable
Weighted-
Number average Weighted- Number Weighted-
outstand remainin average exercisa average
Range of exercise ing at g exercise ble exercise
price 12/31/99 contract price 12/31/99 price
ual life
(years)
$0.00 - $3.23 484,300 2.9 $ 1. 14 484,300 $ 1.14
$3.23 - $6.45 229,764 6.4 $ 5.22 229,764 $ 5.22
$6.45 - $9.68 311,905 7.2 $ 7.57 187,571 $ 7.62
$9.68 - $12.90 197,607 7.8 $11. 10 116,938 $11.12
$12.90 - $16.13 85,000 8.7 $14.43 83,333 $14.41
$16.13 - $19.35 54,667 8.1 $17.25 25,200 $17.25
$19.35 - $22.58 265,000 9.6 $20.07 - -
$22.58 - $25.80 448,500 9.1 $24.45 17,500 $24.35
$25.80 - $32.25 83,000 8.4 $30.19 15,600 $30.21
2,159,743 7.0 $12.63 1,160,206 $ 6.05
The Company uses the Black-Scholes option model to
estimate the fair value of options. A risk-free
interest rate of 5.8%, 4.73% and 6.61% for 1997, 1998
and 1999, respectively, a volatility rate of 50%, 55%
and 65% for 1997, 1998 and 1999, respectively, with
an expected life of 7.5 years for 1997, 6.5 years for
1998, and 6.7 years for 1999 was assumed in
estimating the fair value. No dividend rate was
assumed for any of the years.
The following summarizes the pro forma effects
assuming compensation for such awards had been
recorded based upon the estimated fair value. The
proforma information disclosed below does not include
the impact of awards made prior to January 1, 1995
(in thousands, except per share data):
58
1997 1998 1999
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net Income $ 14,500 $ 13,436 $ 30,412 $ 27,201 $ 28,268 $ 23,931
Basic earnings
per share $ 0.93 $ 0.86 $ 1.68 $ 1.50 $ 1.49 $ 1.26
Diluted earnings
per share $ 0.80 $ 0.75 $ 1.42 $ 1.28 $ 1.32 $ 1.12
Preferred Stock
The Board of Directors of the Company is authorized to
provide for the issuance by the Company of preferred
stock in one or more series and to fix the rights,
preferences, privileges, qualifications, limitations
and restrictions thereof, including, without
limitation, dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption
or repurchase, redemption or repurchase prices,
limitations or restrictions thereon, liquidation
preferences and the number of shares constituting any
series or the designation of such series, without any
further vote or action by the stockholders.
8. Employee Employee Stock Ownership Plan
Benefit
Plans The Company established an Employee Stock Ownership
Plan (the "ESOP") covering substantially all
employees. For each of the years 1992 through 1995,
the Company made contributions to the ESOP which were
used in part to make loan and interest payments.
Shares of common stock acquired by the ESOP were
allocated to each employee based on the employee's
annual compensation.
Effective June 1, 1998, the Board of Directors of the
Company voted to terminate the Plan. On March 15,
1999, the Internal Revenue Service issued a
determination letter notifying the Company that the
termination of the Plan does not adversely affect the
Plan's qualification for federal tax purposes. Upon
termination of the Plan, a participant becomes 100%
vested in his or her account. In preparing for the
final distribution of ESOP shares to participants, it
was determined that a misallocation of shares had
occurred in years 1993 through 1997 resulting in
certain 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. The number of shares
remaining in the Plan as of December 31, 1999 is
32,650.
59
401K Plan
Effective January 1, 1992, the Company adopted a
401(k) Plan (the "Plan"). The Plan covers
substantially all full-time employees who meet the
Plan's eligibility requirements. Employees may elect a
salary reduction contribution of up to 15% of their
annual compensation not to exceed the maximum amount
allowed by the Internal Revenue Service.
Effective October 1, 1994, the Plan was amended to
require the Company to make contributions to the Plan
for eligible pilots in exchange for certain
concessions. These contributions are in excess of any
discretionary contributions made for the pilots under
the original terms of the plan. These contributions
are 100% vested and equal to 3% of the first $15,000
of each eligible pilot's compensation plus 2% of
compensation in excess of $15,000. The plan limits the
Company's contributions for the pilots to 15% of the
Company's adjusted net income before extraordinary
items for such plan year. The Company's obligations to
make contributions with respect to all plan years in
the aggregate is limited to $2.5 million.
Contribution expense was approximately $445,000,
$552,000, and $640,000 for 1997, 1998 and 1999,
respectively.
Effective June 1, 1995, April 1, 1997, and October 1,
1998, the Plan was amended to allow the Company to
make a discretionary matching contribution for non-
union employees, pilots and mechanics, respectively,
equal to 25% of salary contributions up to 4% of total
compensation. The Company's matching contribution, if
any, vests ratably over five years. Contribution
expense was approximately $133,000, $235,000 and
$303,000 for 1997, 1998 and 1999, respectively.
Profit Sharing Programs
The Company has profit sharing programs which result
in periodic payments to all eligible employees. Profit
sharing compensation, which is based on attainment of
certain performance and financial goals, was
approximately $3.6 million, $3.9 million, and $4.5
million in 1997, 1998 and 1999, respectively.
60
9. Income The provision (benefit) for income taxes includes the
Taxes following components:
(in thousands)
Year Ended December 31,
1997 1998 1999
Federal:
Current $ 7,342 $ 13,580 $ 10,420
Deferred 1,907 3,591 5,602
Total federal provision 9,249 17,171 16,022
State:
Current 2,545 3,161 1,993
Deferred 545 801 304
Total state provision 3,090 3,962 2,297
Total provision on
income before
accounting change 12,339 21,133 18,319
Income tax benefit
due to change in
accounting method - - (598)
Total provision $ 12,339 $ 21,133 $ 17,721
A reconciliation of income tax expense at the
applicable federal statutory income tax rate of 35%
to the tax provision recorded is as follows:
(in thousands)
Year ended December 31,
1997 1998 1999
Income tax expense
at statutory rate $ 9,394 $18,041 $16,616
Increase (decrease)
in tax expense due to:
Permanent differences 937 517 89
and other
State income taxes,
net of federal 2,008 2,575 1,614
benefit
Income tax expense $12,339 $21,133 $18,319
Deferred income taxes result from temporary
differences which are the result of provisions of the
tax laws that either require or permit certain items
of income or expense to be reported for tax purposes
in different periods than for financial reporting
purposes.
The following is a summary of the Company's deferred
income taxes as of December 31, 1998, and 1999:
61
(in thousands)
December 31,
1998 1999
Deferred tax assets:
Engine maintenance $ 1,268 $ 751
accrual
Intangible assets 934 900
Air traffic liability 503 564
Allowance for bad debts 146 369
Deferred aircraft rent 530 323
Deferred credits 2,335 3,166
Accrued vacation 534 716
Other 582 1,278
Total deferred tax assets 6,832 8,067
Deferred tax liabilities:
Depreciation and (9,756) (17,595)
amortization
Preoperating costs (596) -
Other (184) (81)
Total deferred tax (10,536) (17,676)
liabilities
Net deferred income tax
assets (liabilities) $ (3,704) $ (9,609)
No valuation allowance was established in either
1998 or 1999 as the Company believes it is more
likely than not that the deferred tax assets can be
realized.
The Tax Reform Act of 1986 enacted an alternative
minimum tax ("AMT") system, generally effective for
taxable years beginning after December 31, 1986.
The Company is not subject to alternative minimum
tax for the years ended December 31, 1998 and 1999.
An AMT tax credit carryover of approximately
$564,000 was fully utilized in 1997.
10. Aircraft
Commitments
and
The Company has firm orders for 42 CRJs in addition
Contingencie to the 24 previously delivered as of December 31,
s 1999, and options for an additional 27 CRJs. The
delivery schedule for the 42 firm orders is as
follows: 14 in 2000, 18 in 2001, and ten in 2002.
Twenty-two of the 42 firm ordered CRJs are for the
United Express operation, and 20 are for the Delta
Connection operation. The Company is obligated to
purchase and finance (including leveraged leases)
the 42 firm ordered aircraft at an approximate
capital cost of $775 million.
The Company also has a firm order for 25 328JET
feeder jet aircraft and a conditional order for 15
328JET and 40 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 46 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.
As previously announced, the Company is exploring
alternatives to accelerate the retirement of its
fleet of 28 leased 19 seat J-32 aircraft. The
Company tentatively plans to remove as many as six
J-32s from ACA's fleet during 2000 and the remainder
in 2001. As of December 31, 1999, the Company had
J-32 operating lease commitments with remaining
lease terms ranging from one to six years and
related minimum lease payments of approximately $43
million. The Company has not yet finalized its
analysis of a phase-out plan, including
quantification of any one-time fleet rationalization
charge.
62
Training
The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA") for the
Company to train CRJ, J-41 and J-32 pilots at
PAIFA's facility near Washington-Dulles. In 1999
PAIFA acquired the existing training facility where
the Company has been conducting J-41 and J-32
training, and added a CRJ simulator at the facility
in December 1999. The Company has committed to
purchase an annual minimum number of CRJ and J-41
simulator training hours at agreed rates, with
commitments extending ten and three years,
respectively.
At December 31, 1999, the Company's minimum payment
obligations under the PAIFA agreements are as
follows:
(in thousands)
Year ended December 31,
2000 $4,028
2001 3,611
2002 3,631
2003 1,371
2004 1,391
Thereafter 6,066
$ 20,098
Derivative Financial Instruments
The Company has periodically entered into a series
of put and call contracts as an interest rate hedge
designed to limit its exposure to interest rate
changes on the anticipated issuance of permanent
financing relating to the delivery of the CRJ
aircraft. During 1998 and 1999, the Company settled
eight and seven hedge transactions, respectively,
paying the counterparty $3.0 million in 1998 and
receiving $119,000 in 1999. In 1999, the Company
recognized a gain of $211,000 on the settlement of
one contract representing the ineffective portion of
a hedge. At December 31, 1999 the Company
had three interest rate swap contracts
open with an aggregate notional amount of $23
million to hedge its exposure by approximately 44%,
to interest rate changes until permanent financing
for three CRJ aircraft scheduled for delivery in
March, April and May 2000, is secured. The Company
would have received from the counterparty
approximately $247,000 had the three swap contracts
settled on December 31, 1999.
63
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 14% of its anticipated jet fuel
requirements for the second quarter 2000; 27% for
the third quarter 2000; and 18%, for the fourth
quarter of 2000. Had the commodity swap
transactions settled on December 31, 1999, the
Company would have recognized a reduction of
approximately $597,000 in fuel expense.
11. Litigation The Company is a party to routine litigation and to
FAA civil action proceedings, all of which are
incidental to its business, and none of which the
Company believes are likely to have a material
effect on the Company's financial position or the
results of its operations.
12. Financial Statement of Financial Accounting Standards No.
107, "Disclosure of Fair Value of Financial
Instruments Instruments" requires the disclosure of the fair
value of financial instruments. Some of the
information used to determine fair value is
subjective and judgmental in nature; therefore,
fair value estimates, especially for less
marketable securities, may vary. The amounts
actually realized or paid upon settlement or
maturity could be significantly different.
Unless quoted market price indicates otherwise, the
fair values of cash and cash equivalents, short
term investments, accounts receivable and accounts
payable generally approximate market because of the
short maturity of these instruments. The Company
has estimated the fair value of long term debt
based on quoted market prices, when available, or
by discounted expected future cash flows using
current rates offered to the Company for debt with
similar maturities.
64
The estimated fair values of the Company's
financial instruments, none of which are held for
trading purposes, are summarized as follows
(brackets denote liability):
(in December 31, 1998 December 31, 1999
thousands)
Estimated CarryingEstimated
Carrying Fair Amount Fair
Value Value
Amount
Cash and cash
equivalents $64,412 $ 64,412 $ 57,447 $ 57,447
Short-term
investments 63 63 - -
Accounts 30,210 30,210 32,518 32,518
receivable
Accounts (5,262) (5,262) (5,343) (5,343)
payable
Long-term debt (66,739) (101,975) (92,002) (124,484)
See note 10 for information regarding the fair value of
derivative financial instruments.
13. Supplemental disclosures of cash flow
Supplemental information:
Cash Flow Year ended
Information December 31,
(in thousands)
1997 1998 1999
Cash paid during the
period for:
- Interest $1,778 $3,665 $4,532
- Income taxes 5,767 15,426 8,193
15,426
The following non cash investing and financial
activities took place in 1997, 1998 and 1999:
In 1997, the Company acquired $2.9 million in
rotable parts, spare engines, market planning
software and other fixed assets and expendable
parts under capital lease obligations and through
the use of manufacturers credits.
In November 1997, the Company received $4.3 million
in additional manufacturers credits pursuant to the
terms of aircraft agreements of which $261,000 was
received in cash by the end of 1997.
In September and December 1998, the Company
received $352,000 of manufacturers credits which
were applied against the purchase price of two CRJs
65 purchased in 1998 from the manufacturer. The
credits will be utilized primarily through the
purchase of rotable parts and other fixed assets,
expendable parts, and pilot training.
In 1998, the Company acquired $3.0 million
consisting primarily of rotable parts and other
fixed assets and expendable parts under capital
lease obligations and through the use of
manufacturer credits. As of December 31, 1998,
there was a remaining balance of approximately
$607,000 in earned, but unused manufacturer credits
which is reflected in accounts receivable.
In 1998, the note holders elected to convert $37.8
million of the Company's Notes to common stock
resulting in a recognition of $1.4 million of debt
conversion expense.
In April 1998, the Company declared a 2-for-1 stock
split payable as a stock dividend. Pursuant to
this dividend, $193,000 was transferred from
additional paid-in capital to common stock to
properly maintain the par value per share.
On September 29, and November 19, 1998 the Company
issued long-term promissory notes for $12.7 million
and $12.9 million respectively, for the acquisition
of two new CRJ aircraft. The promissory notes
mature on March 29, 2015 and May 19, 2015
respectively, and are collateralized by the CRJ
aircraft delivered with principal and interest, at
rates of 5.65% and 5.88%, payable on a semiannual
basis through maturity.
In 1998, the Company capitalized $1.6 million in
interest related to a $15 million deposit with a
manufacturer.
During 1999, the Company received $755,000 of
manufacturers credits which were applied against
the purchase price of the two CRJs purchased in
1999 from the manufacturer. The credits will be
utilized primarily through the purchase of rotable
parts and other fixed assets, expendable parts, and
pilot training.
On April 23, and October 5, 1999 the Company
issued long-term promissory notes for $14.7 million
and $14.8 million respectively, for the acquisition
of two new CRJ aircraft. The promissory notes
mature on October 23, 2010 and October 5, 2011
respectively, and are collateralized by the CRJ
aircraft delivered with principal and interest, at
rates of 6.62% and 7.63%, payable on a semiannual
basis through maturity.
In 1999, the Company capitalized $1.8 million in
interest related to $38.7 million on deposit with
aircraft manufacturers.
66
14. Recent In June 1998, the FASB issued Statement No. 133,
Accounting "Accounting for Derivative Instruments and Hedging
Pronouncements 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.
67
15. Selected (in thousands, except per share amounts)
Quarterly
Financial
Data
(Unaudited)
Quarter Ended
March 31, June 30, September December 31,
1999 1999 30, 1999
1999
Operating revenues $73,004 $92,397 $91,022 $90,943
Operating income 5,677 18,501 14,531 10,583
Net income 2,875 1 11,068 8,351 5,974
Net income per share
Basic $ 0.15 $ 0.58 $ 0.45 $ 0.32
Diluted $ 0.14 $ 0.51 $ 0.40 $ 0.29
Weighted average
shares outstanding
Basic 19,445 19,177 18,655 18,593
Diluted 22,613 22,224 21,632 21,577
Quarter Ended
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
Operating revenue $58,055 $75,759 $78,100 $78,026
Operating income 5,875 17,358 17,055 12,403
income
Net income 2,983 9,092 10,613 7,725
Net income per share
Basic $ 0.20 $ 0.48 $ 0.55 $ 0.40
Diluted $ 0.16 $ 0.42 2 $ 0.49 $ 0.36
Weighted average
shares outstanding
Basic 15,162 18,805 19,198 19,288
Diluted 22,034 22,246 22,244 22,289
1 Includes the $888,000, net of income taxes, charge for the
cumulative effect of an accounting change. Without this charge,
basic and diluted income per share would have been $0.19 and
$0.18, respectively.
2 Excluding a non-cash, non-operating charge to earnings during
the second quarter of 1998 of $1.4 million representing the fair
value of the additional shares distributed upon conversion
68
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None to report.
PART III
The information required by this Part III (Items 10, 11, 12 and
13) is hereby incorporated by reference from the Company's definitive
proxy statement which is expected to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934 not later than 120 days after the
end of the fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements listed in the index
in Part II, Item 8, are filed as part of this report.
2. Consolidated Financial Statement Schedules
Reference is hereby made to the Consolidated Financial
Statements and the Notes thereto included in this filing
in Part II, Item 8.
3. Exhibits
Exhibit
Number Description of Exhibit
3.1 (note 6) Restated Certificate of Incorporation of the Company.
3.2 (note 6) Restated By-laws of the Company.
4.1 (note 4) Specimen Common Stock Certificate.
4.2 (note 11) Stockholders' Agreement, effective as of October 15,
1991, among the Company, the stockholders and the holder
of warrants of the Company named on the signature pages
thereto and a trust established pursuant to the Atlantic
Coast Airlines, Inc. Employee Stock Ownership Plan,
together with Amendment and Second Amendment thereto
dated as of February 24, 1992 and May 1, 1992
respectively.
4.3 (note 11) Registration Rights Agreement, dated as of September 30,
1991, among the Company and the stockholders named on
the signature pages thereto (the "Stockholders
Registration Rights Agreement").
4.4 (note 11) Form of amendment to the Stockholders Registration
Rights Agreement.
69
4.17 (note 8) Indenture, dated as of July 2, 1997, between the Company
and First Union National Bank of Virginia.
4.18 (note 9) Registration Rights Agreement, dated as of July 2, 1997,
by and among the Company, Alex. Brown & Sons
Incorporated and the Robinson-Humphrey Company, Inc.
4.19 (note 5) Rights Agreement between Atlantic Coast Airlines
Holdings, Inc. and Continental Stock Transfer & Trust
Company dated as of January 27, 1999.
10.1 (note 11) Atlantic Coast Airlines, Inc. 1992 Stock Option Plan.
10.2 (note 9) Restated Atlantic Coast Airlines, Inc. Employee Stock
Ownership Plan, effective October 11, 1991, as amended
through December 31, 1996.
10.4 (note 9) Restated Atlantic Coast Airlines 401(k) Plan, as amended
through February 3, 1997.
10.4(a) (note 7) Amendment to the Atlantic Coast Airlines 401(k) Plan
effective May 1, 1997
10.6 (notes 11 & 12) United
Express Agreement, dated October 1, 1991, among United
Airlines, Inc., Atlantic Coast Airlines and the Company,
together with Amendment No. 1, dated as of April 1,
1993.
10.6(a) (note 7) Third Amendment to United Express Agreement, dated March
3, 1998, among United Airlines, Inc., Atlantic Coast
Airlines and the Company.
10.6(b) (notes 4 & 12) Fourth
Amendment to the United Express Agreement, dated
December 11, 1998, among United Airlines, Inc., Atlantic
Coast Airlines and the Company.
10.7 (notes 11 & 12) Agreement
to Lease British Aerospace Jetstream-41 Aircraft, dated
December 23, 1992, between British Aerospace, Inc. and
Atlantic Coast Airlines.
10.8 (notes 2 & 13) 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(a) (notes 1 & 14) Amended
and Restated Severance Agreement, dated as of December
28, 1999, between the Company and Kerry B. Skeen.
10.12(b) (notes 1 & 14) Amended
and Restated Severance Agreement, dated as of December
28, 1999, between the Company and Thomas J. Moore.
10.12(c) (notes 1 & 14) Form of Severance Agreement substantially similar
to agreements with Richard J. Surratt and with Michael
S. Davis, both restated as of December 28, 1999.
10.12(d) (notes 3 & 14) Executive Officer Note.
10.13(a) (note 9) Form of
Indemnity Agreement. The Company has entered into
substantially identical agreements with the individual
members of its Board of Directors.
10.21 (note 10) Acquisition Agreement, dated as of December 30, 1994, by
and among Jetstream Aircraft, Inc., JSX Capital
Corporation, and Atlantic Coast Airlines.
10.21(a) (note 9) Amendment
Number One to Acquisition Agreement, dated as of June
17, 1996, by and among Jetstream Aircraft, Inc., JSX
Capital Corporation, and Atlantic Coast Airlines.
10.23 (note 4) Amended and Restated Loan and Security Agreement dated
February 8, 1999 between Atlantic Coast Airlines and
Fleet Capital Corporation.
10.24 (note 4) Stock Incentive Plan of 1995, as amended as of May 5,
1998.
10.25(a) (note 4) Form of
Incentive Stock Option Agreement. The Company enters
into this agreement with employees who have been granted
incentive stock options pursuant to the Stock Incentive
Plans.
70
10.25(b) (notes 4 & 14) Form of
Incentive Stock Option Agreement. The Company enters
into this agreement with corporate officers who have
been granted incentive stock options pursuant to the
Stock Incentive Plans.
10.25(c) (notes 4 & 14) Form of
Non-Qualified Stock Option Agreement. The Company enters
into this agreement with employees who have been granted
non-qualified stock options pursuant to the Stock
Incentive Plans.
10.25(d) (notes 4 & 14) Form of
Non-Qualified Stock Option Agreement. The Company enters
into this agreement with corporate officers who have
been granted non-qualified stock options pursuant to the
Stock Incentive Plans.
10.25(e) (notes 4 & 14) Form of
Restricted Stock Agreement. The Company entered into
this agreement with corporate officers who were granted
restricted stock pursuant to the Stock Incentive Plans.
10.27 (notes 1 & 14) Form of
Split Dollar Agreement and Agreement of Assignment of
Life Insurance Death Benefit as Collateral. The Company
has entered into substantially identical agreements with
Kerry B. Skeen, Thomas J. Moore, Michael S. Davis and
Richard J. Surratt.
10.31 (note 14) Summary
of Senior Management Incentive Plan. The Company has
adopted a plan as described in this exhibit for 2000 and
for the three previous years.
10.32 (note 14) Summary
of Management Incentive Plan and Share the Success
Program. The Company has adopted plans as described in
this exhibit for 2000 and for the three previous years.
10.40A (notes 4 & 12) Purchase
Agreement between Bombardier Inc. and Atlantic Coast
Airlines Relating to the Purchase of Canadair Regional
Jet Aircraft dated January 8, 1997, as amended through
December 31, 1998.
10.40A(1) (notes 2 & 13) 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 (notes 2 & 13) 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 (note 3) Aircraft Purchase Agreement between Dornier Luftfahrt
GmbH and Atlantic Coast Airlines dated effective March
31, 1999.
10.45(1) (note 2)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.
10.50(a) (note 7)Form of Purchase Agreement, dated September 19, 1997,
among the Company, Atlantic Coast Airlines, Morgan
Stanley & Co. Incorporated and First National Bank of
Maryland, as Trustee.
10.50(b) (note 7)Form of Pass Through Trust Agreement, dated as of
September 25, 1997, among the Company, Atlantic Coast
Airlines, and First National Bank of Maryland, as
Trustee.
10.50(c) (note 7)Form of Pass Through Trust Certificate.
71
10.50(d) (note 7)Form of Participation Agreement, dated as of September
30, 1997, Atlantic Coast Airlines, as Lessee and Initial
Owner Participant, State Street Bank and Trust Company
of Connecticut, National Association, as Owner Trustee,
the First National Bank of Maryland, as Indenture
Trustee, Pass-Through Trustee, and Subordination Agent,
including, as exhibits thereto, Form of Lease Agreement,
Form of Trust Indenture and Security Agreement, and Form
of Trust Agreement.
10.50(e) (note 7)Guarantee, dated as of September 30, 1997, from the
Company.
10.80 (note 7) Ground Lease Agreement Between The Metropolitan
Washington Airports Authority And Atlantic Coast
Airlines dated as of June 23, 1997.
10.85 (note 4) Lease Agreement Between The Metropolitan Washington
Airports Authority and Atlantic Coast Airlines, with
amendments as of January 1, 1999.
10.90 (notes 7 & 12) Schedules
and Exhibits to ISDA Master Agreement between the
Company and Bombardier Inc. dated as of July 11, 1997
(the Company entered into substantially similar
arrangements for interest rate hedges that are presently
outstanding).
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule.
Notes
(1) To be filed by amendment as an Exhibit to this Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
(2) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended September 30, 1999.
(3) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1999.
(4) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(5) Filed as Exhibit 99.1 to Form 8-A (File No. 000-21976),
incorporated herein by reference.
(6) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1998.
(7) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, incorporated herein by
reference.
(8) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1997, incorporated herein by
reference.
(9) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, incorporated herein by
reference.
(10) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, incorporated herein by
reference.
(11) Filed as an Exhibit to Form S-1, Registration No. 33-62206,
effective July 20, 1993, incorporated herein by reference.
(12) Portions of this document have been omitted pursuant to a request
for confidential treatment that has been granted.
(13) Portions of this document have been omitted pursuant to a request
for confidential treatment that is pending.
(14) This documents is a management contract or compensatory plan or
arrangement..
(b) Reports on Form 8-K.
None.
72
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 27, 2000.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
By /S/
:
/ Kerry B. Skeen
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 2000.
Name Title
/S/ Chairman of the Board of
Directors
Kerry B. Skeen and Chief Executive Officer
(principal executive officer)
/S/ Director, President and
Thomas J. Moore Chief Operating Officer
/S/ Senior Vice President, Treasurer
and
Richard J. Surratt Chief Financial Officer
(principal financial officer)
/S/ Vice President, Financial
Planning and Controller
David W. Asai (principal accounting officer)
/S/
C. Edward Acker Robert E. Buchanan
Director Director
/S/ /S/
Susan MacGregor Coughlin James J. Kerley
Director Director
/S/ /S/
Daniel L. McGinnis James C. Miller III
Director Director
/S/ /S/
Judy Shelton John M. Sullivan
Director Director