SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
45200 Business Court, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 650-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
As of August 1, 2002, there were 45,194,115 shares of common stock, par
value $.02 per share, outstanding.
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
December 31, June 30, 2002
(In thousands except for share 2001 (Unaudited)
and per share data)
Assets
Current:
Cash and cash equivalents $ 173,669 $ 19,325
Short term investments 7,300 180,190
Accounts receivable, net 8,933 15,524
Expendable parts and fuel inventory,net 10,565 11,101
Prepaid expenses and other current assets 19,365 44,292
Deferred tax asset 6,806 9,199
Total current assets 226,638 279,631
Property and equipment at cost, net of
accumulated depreciation and amortization 171,528 191,358
Intangible assets, net of accumulated
amortization 1,941 1,909
Debt issuance costs, net of accumulated
amortization 3,415 3,272
Aircraft deposits 44,810 36,910
Other assets 4,093 4,944
Total assets $ 452,425 $ 518,024
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 21,750 $ 21,661
Current portion of long-term debt 4,639 4,900
Current portion of capital lease
obligations 1,359 1,403
Accrued liabilities 55,570 78,166
Accrued aircraft early retirement charge 4,661 5,130
Total current liabilities 87,979 111,260
Long-term debt, less current portion 58,441 56,590
Capital lease obligations, less current portion 2,202 1,490
Deferred tax liability 17,448 21,873
Deferred credits, net 45,063 50,632
Accrued aircraft early retirement charge,
less current portion 19,226 13,983
Other long-term liabilities 766 1,145
Total liabilities 231,125 256,973
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 130,000,000; shares
issued 49,229,202 and 50,254,184
respectively; shares outstanding
44,182,870 and 45,194,115 respectively 985 1,005
Additional paid-in capital 136,058 144,316
Less: Common stock in treasury, at cost,
5,046,332 and 5,060,069 shares respectively (35,303) (35,586)
Retained earnings 119,560 151,316
Total stockholders' equity 221,300 261,051
Total liabilities and
stockholders' equity $ 452,425 $ 518,024
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended June 30,
(In thousands, except for per share data) 2001 2002
Operating revenues:
Passenger $ 145,172 $ 185,611
Other 1,049 2,582
Total operating revenues 146,221 188,193
Operating expenses:
Salaries and related costs 39,803 49,112
Aircraft fuel 22,166 27,818
Aircraft maintenance and materials 12,217 20,089
Aircraft rentals 21,739 27,391
Traffic commissions and related fees 4,025 5,209
Facility rents and landing fees 7,446 10,874
Depreciation and amortization 3,774 4,934
Other 14,182 18,896
Aircraft early retirement charge - (4,763)
Total operating expenses 125,352 159,560
Operating income 20,869 28,633
Other income (expense):
Interest income 2,155 1,264
Interest expense (1,222) (1,091)
Government compensation - 944
Other, net (40) (445)
Total other income (expense) 893 672
Income before income tax provision 21,762 29,305
Income tax provision 8,814 11,869
Net income $ 12,948 $ 17,436
Income per share:
Basic:
Net income $ 0.30 $ 0.39
Diluted:
Net income $ 0.29 $ 0.38
Weighted average shares outstanding:
-Basic 43,168 45,115
-Diluted 45,029 46,305
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Six months ended June 30,
(In thousands, except for per share data) 2001 2002
Operating revenues:
Passenger $ 276,868 $ 356,302
Other 2,806 4,857
Total operating revenues 279,674 361,159
Operating expenses:
Salaries and related costs 76,794 94,864
Aircraft fuel 42,623 51,652
Aircraft maintenance and materials 23,374 33,961
Aircraft rentals 41,944 54,063
Traffic commissions and related fees 7,898 10,269
Facility rents and landing fees 14,870 21,499
Depreciation and amortization 7,174 9,533
Other 28,650 37,749
Aircraft early retirement charge - (4,763)
Total operating expenses 243,327 308,827
Operating income 36,347 52,332
Other income (expense):
Interest income 4,025 2,818
Interest expense (2,487) (2,223)
Government compensation - 944
Other, net (82) (500)
Total other income (expense) 1,456 1,039
Income before income tax provision 37,803 53,371
Income tax provision 15,230 21,615
Net income $ 22,573 $ 31,756
Income per share:
Basic:
Net income $ 0.53 $ 0.71
Diluted:
Net income $ 0.50 $ 0.69
Weighted average shares outstanding:
-Basic 42,961 44,897
-Diluted 44,831 46,341
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30, 2001 2002
(In thousands)
Cash flows from operating activities:
Net income $ 22,573 $ 31,756
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 7,085 9,916
Loss on disposal of assets 40 276
Amortization of deferred credits (1,714) (2,331)
Capitalized interest (net) (739) 104
Other 554 1,812
Changes in operating assets
and liabilities:
Accounts receivable 15,622 (2,477)
Expendable parts and fuel inventory (3,528) (797)
Prepaid expenses and other current assets(4,625) (25,006)
Accounts payable 436 3,194
Accrued liabilities (13,538) 20,931
Net cash provided by operating activities 22,166 37,378
Cash flows from investing activities:
Purchases of property and equipment (16,206) (20,281)
Proceeds from sales of assets - 28
Purchases of short term investments (53,815) (328,610)
Sales of short term investments 30,600 155,720
Refunds of aircraft deposits 9,400 2,600
Payments of aircraft deposits and other (4,500) (5,070)
Net cash used in investing activities (34,521) (195,613)
Cash flows from financing activities:
Payments of long-term debt (1,624) (1,589)
Payments of capital lease obligations (731) (668)
Deferred financing costs and other (633) (610)
Purchase of treasury stock - (283)
Proceeds from exercise of stock options 6,736 7,041
Net cash provided by financing activities 3,748 3,891
Net decrease in cash and cash equivalents (8,607) (154,344)
Cash and cash equivalents, beginning of period 86,117 173,669
Cash and cash equivalents, end of period $ 77,510 $ 19,325
See accompanying notes to the condensed consolidated financial statements.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
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"), (collectively, the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. On
July 1, 2001, ACAI combined the operations of its ACJet subsidiary into
the operations of ACA and on July 9, 2002 converted Atlantic Coast Jet,
Inc. into a limited liability corporation named Atlantic Coast Jet, LLC.
Neither Atlantic Coast Jet, LLC., nor its predecessor, ACJet, have had
any activity since June 30, 2001. All significant intercompany accounts
and transactions have been eliminated in consolidation. The information
furnished in these unaudited condensed consolidated financial statements
reflects all adjustments, which are, in the opinion of management,
necessary for a fair presentation of such consolidated financial
statements. Results of operations for the six month period presented are
not necessarily indicative of the results to be expected for the full
year ending December 31, 2002. Certain amounts as previously reported
have been reclassified to conform to the current period presentation.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements, and the notes thereto, included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
2. OTHER COMMITMENTS
On September 28, 2001, the Company entered into an asset-based lending
agreement with a financial institution that provided the Company with a
line of credit for up to $25.0 million. The line of credit, which will
expire on October 15, 2003, carries an interest rate of LIBOR plus .875%
to 1.375% depending on the Company's fixed charges coverage ratio. The
Company has pledged $15.4 million of this line of credit as collateral
for letters of credit issued on behalf of the Company by a financial
institution. The available borrowing under the line of credit is limited
to the value of the bond letter of credit on the Company's Dulles,
Virginia hangar facility plus the value of 60% of the book value of
certain rotable spare parts. As of June 30, 2002 the amount of available
credit under the line was $25.0 million including the pledged amount of
$15.4 million. As of June 30, 2002 there were no outstanding borrowings
on the $25.0 million line of credit.
In July 2002, Fairchild Dornier GmbH ("Fairchild"), the manufacturer of
the 32-seat Fairchild Dornier 328JET ("328JET"), opened formal insolvency
proceedings in Germany. Fairchild had been operating under the guidance
of a court appointed interim trustee since April 2002. Fairchild has
notified the Company that it has rejected the Company's purchase
agreement contract covering the remaining 30 328JETs the Company had on
firm order for its United Express operation, the two 328JETs on firm
order for the Private Shuttle operation, and options to acquire 81
additional aircraft. The Company has negotiated for the purchase of 25
additional 50-seat Bombardier Canadair Regional Jets ("CRJs") to replace
the two delivered and 30 undelivered 32-seat 328JETs for its United
Express operation. The two previously delivered 328JETs will be
redeployed in the Company's Private Shuttle operation. The Company now
has firm orders for 56 additional CRJs as of August 1, 2002, and
continues to hold options for an additional 80 CRJs.
At the time of the opening of formal insolvency proceedings, Fairchild
had significant current and future obligations to the Company in
connection with the order of 328JET aircraft. These include obligations:
to deliver 30 328JETs the Company had on firm order for its United
Express operation, two 328JETs on firm order for the Private Shuttle
operation, and 81 additional option 328JETs with certain financing
support; to pay the Company the difference between the sublease payments,
if any, received from remarketing 26 British Aerospace J-41 Turboprop ("J-
41") aircraft leased by the Company and the lease payment obligations of
the Company on those aircraft; to purchase five J-41 aircraft owned by
the Company at their net book value at the time of retirement; to assume
certain crew training costs; and to provide spares, warranty,
engineering, and related support. The Company believes it has a security
interest in Fairchild's equity interest in 32 delivered 328JETs. Its
right to proceed against this collateral will apply upon termination of
the applicable lease unless other arrangements are made with the other
interested parties. Included in the Company's balance sheet as of June
30, 2002 is approximately $1.3 million due from Fairchild, resulting from
payments made or owed by the Company to third parties for certain
training and other matters that were to be paid by Fairchild. The
Company believes it has the right to offset this and other obligations
from Fairchild against amounts the Company owes Fairchild, to the extent
permitted by law. The Company will file its claim in the insolvency
proceeding in August 2002. The Company may be required to take a charge
for all or a portion of these third party expenses to the extent that it
does not prevail in its offset claim. The Company believes its cost to
operate the current fleet of 33 328JETs will increase in the near and
future terms due to costs incurred for maintenance repairs that otherwise
would have been covered by manufacturer's warranty and the costs and
availability of spare parts until replacement suppliers can be found.
Additionally, as a result of Fairchild's rejection of the purchase
contract, the Company will not receive cash payments for the difference
in the sublease payments, if any, received from the remarketing of the 26
J-41 aircraft leased by the Company on those aircraft and the amount due
under the Company's aircraft leases.
Production of the CRJ aircraft by Bombardier, Inc. was halted for
approximately a three week period during the second quarter of 2002 as a
result of a strike against Bombardier by one of its unions. Production
resumed May 6, 2002, following a vote by the workers to accept a new
contract offer and to end the strike. The Company's CRJ deliveries were
delayed as a result of the work stoppage, and deliveries resumed May 29,
2002. Since resumption of deliveries, Bombardier has generally been one
month behind the original delivery schedule for deliveries scheduled for
the second half of 2002. Bombardier has not yet advised whether and to
what extent this delay may continue during 2003. As of August 1, 2002,
the Company is scheduled to take delivery of 9 CRJs for the remainder of
2002, 35 CRJs in 2003 and 12 CRJs in 2004.
3. ADOPTION OF FASB STATEMENTS 141, 142 and 144
On July 5, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 141, "Business
Combinations", and Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 addresses the
accounting for acquisitions of businesses and is effective for
acquisitions occurring on or after July 1, 2001. Statement No. 142
includes requirements to test goodwill and indefinite life intangible
assets for impairment rather than amortize them. Statement No. 142 is
effective for fiscal years beginning after December 15, 2001. The
Company adopted Statement No. 142 beginning January 1, 2002. The effect
of adopting these statements has not had a material impact on the
Company's financial position or results of operations for the first six
months of 2002. In the six months ended June 30, 2001, the Company
amortized approximately $88,000 in goodwill and certain other intangible
assets. The Company's goodwill and indefinite life intangible balance as
of January 1, 2002 was $1.7 million, which is no longer subject to
amortization.
On October 3, 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets". Statement No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". Statement No. 144 includes requirements related to
the classification of assets as held for sale, including the
establishment of six criteria that must be satisfied prior to this
classification. Statement No. 144 also includes guidance related to the
recognition and calculation of impairment losses for long-lived assets.
Statement No. 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted Statement No. 144 on January 1, 2002. The
effect of adopting this statement has not had a material impact on the
Company's financial position or results of operations for the first six
months of 2002. As a result of the Company's plans to retire early its
remaining five owned J-41 turboprop aircraft, the Company expects to
recognize $2.9 million in additional depreciation charges related to such
aircraft over their remaining estimated service lives. Such additional
depreciation charges will be necessary to reduce the carrying value of
the five owned J-41 turboprop aircraft to their estimated fair value at
their planned retirement dates.
4. INCOME TAXES
The Company's effective tax rate for federal and state income taxes was
40.5% for the three and six months ended June 30, 2002, as compared to
40.5% and 40.3% for the three and six months ended June 30, 2001,
respectively.
5. 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. A
reconciliation of the numerator and denominator used in computing basic
and diluted income per share is as follows:
Three months ended June 30,
(in thousands except for per share data) 2001 2002
Income (basic and diluted) $ 12,948 $ 17,436
Weighted average shares outstanding (basic) 43,168 45,115
Incremental shares related to stock options 1,861 1,190
Weighted average shares outstanding (diluted) 45,029 46,305
Six months ended June 30,
(in thousands except for per share data) 2001 2002
Income (basic and diluted) $ 22,573 $ 31,756
Weighted average shares outstanding (basic) 42,961 44,897
Incremental shares related to stock options 1,870 1,444
Weighted average shares outstanding (diluted) 44,831 46,341
6. SUPPLEMENTAL CASH FLOW INFORMATION
Six months ended June 30,
(in thousands) 2001 2002
Cash paid during the period for:
Interest $ 2,452 $ 2,078
Income taxes 1,711 13,397
7. AIRCRAFT EARLY RETIREMENT CHARGE
The Company revised the retirement schedule for its leased British
Aerospace Jetstream-41 turboprop aircraft ("J-41s") due to delays in
regional jet deliveries resulting from the failure of German aircraft
manufacturer Fairchild Dornier GmbH ("Fairchild") to deliver 328JET
aircraft following its filing for insolvency in April 2002. To reflect
the revised retirement dates of nine leased J-41s, in the second quarter
of 2002, the Company recorded a $4.8 million ($2.8 million after tax)
credit to income to reverse a portion of its prior aircraft early
retirement charge of $23.0 million ($13.8 million after tax) recorded in
the fourth quarter of 2001. The Company presently anticipates recording
additional charges totaling $33 million during the third and fourth
quarters of 2002, relating to J-41 aircraft which are expected to be
retired in 2003. In addition, the Company estimates that approximately
$16 million will be expensed during 2004 as the remaining five leased
aircraft are removed from service. (See Recent Accounting
Pronouncements.) The estimated total cost of retiring the leased J-41
aircraft is expected to be approximately $67 million ($40 million after
tax).
8. AIR TRANSPORTATION SAFETY AND SYSTEM STABILIZATION ACT
On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act ("the Stabilization
Act"). The Stabilization Act provides cash grants to commercial air
carriers as compensation for: (1) direct losses incurred beginning with
the terrorist attacks on September 11, 2001 as a result of any FAA
mandated ground stop order issued by the Secretary of Transportation (and
for any subsequent order which continues or renews such a stoppage), and
(2) incremental losses incurred during the period beginning September 11,
2001 and ending December 31, 2001 as a direct result of such attacks.
The Company is entitled to receive cash grants under these provisions.
The Company has complied with the requirements of the Stabilization Act
and submitted its final claim. The Company and the Airline Stabilization
Review Team have reached agreement on $10.7 million as the total amount
the Company shall receive as direct compensation under the Stabilization
Act. This resulted in the Company recording $0.9 million in additional
government compensation during the second quarter 2002. To date, the
Company has received payment of 95% of the agreed amount and expects
payment of the final 5% when the government disburses the final
settlement to all air carriers. All amounts received as government
compensation are subject to additional audit by the federal government
for the next five years.
In addition to the compensation described above, the Stabilization Act,
among other things, provides U.S. air carriers with the option to
purchase certain war risk liability insurance from the United States
government on an interim basis at rates that are more favorable than
those available from the private market and authorizes the federal
government to reimburse air carriers for the increased cost of war risk
insurance premiums for a limited but undetermined period of time as a
result of the terrorist attacks of September 11, 2001. Since September
11, the Company has purchased hull war risk coverage through the private
insurance market through September 24, 2002, and has purchased liability
war risk coverage from the United States government through August 17,
2002, and anticipates renewing the government insurance for as long as
the coverage is available. On June 18, 2002, the government issued the
Company a new policy with a premium calculation that significantly
reduces the cost of this type of war insurance for regional airlines.
The airline and insurance industries, together with the United States and
other governments, are continuing to evaluate both the cost and options
for providing coverage of aviation insurance. On May 21, 2002 an
industry-led group applied with the State of Vermont to create a mutual
insurance company, to be called Equitime, to cover war risk and terrorism
risk, which would initially seek support through government guarantees.
Equitime's organizers are awaiting governmental approval for the program,
but have encountered resistance from the traditional insurance market.
The Company anticipates that it will follow industry practices with
respect to sources of insurance.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
The following Management's Discussion and Analysis contains
forward-looking statements and information that are based on management's
current expectations as of the date of this document. When used herein,
the words "anticipate", "believe", "estimate", "expect" and similar
expressions, as they relate to the Company's management, are intended to
identify such forward-looking statements. Such forward-looking
statements are subject to risks, uncertainties, assumptions and other
factors that may cause the actual results of the Company to be materially
different from those reflected in such forward-looking statements. Such
factors include, among others: the costs and other effects of enhanced
security measures and other possible government orders; changes in and
satisfaction of regulatory requirements; changes in levels of service
agreed to by the Company with its code share partners due to market
conditions; the ability of these partners to manage their operations and
cash flow, and willingness of these partners to continue to deploy the
Company's aircraft and to utilize and pay for scheduled service at agreed
rates; the ability of United Airlines to secure and implement its
business strategies including negotiating favorable terms with its unions
and securing government loans; the ability of these partners to force
changes in rates; unexpected costs or delays in the implementation of new
service; satisfactory resolution of union contracts now amendable or
becoming amendable during 2002 with the Company's maintenance technicians
and ground service equipment mechanics and the Company's flight
attendants; availability and cost of funds for financing new aircraft;
the ability of the Company to obtain adequate product support for the
Company's 328JET aircraft; ability to recover claims against Fairchild
Dornier in its insolvency proceedings; delays in delivery of CRJ aircraft
from Bombardier, Inc.; ability to execute the early retirement schedule
for the Company's turboprop aircraft; general economic and industry
conditions; additional acts of war; and risks and uncertainties arising
from the events of September 11 and from the slow economy which may
impact the Company, its code share partners, and aircraft manufacturers
in ways that the Company is not currently able to predict. These and
other factors are more fully disclosed under the Company's "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
in ACAI's Annual Report on Form 10-K for the year ended December 31, 2001
and in its Quarterly Report on Form 10-Q for the quarter ended March 31,
2002, and this Form 10-Q should be read in conjunction with those
previous filings.
Second Quarter Operating Statistics
(excluding aircraft early retirement charge)
Increase
Three months ended June 30, 2001 2002 (Decrease)
Revenue passengers carried 1,284,733 1,784,925 38.9%
Revenue passenger miles ("RPMs") (OOO's) 476,849 719,754 50.9%
Available seat miles ("ASMs") (000's) 761,204 1,065,335 40.0%
Passenger load factor 62.6% 67.6% 5.0 pts
Revenue per ASM (cents) 19.1 17.4 (8.9)%
Cost per ASM (cents)(1) 16.5 15.4 6.7%
Average passenger segment (miles) 371 403 8.6%
Revenue departures (completed) 58,047 69,153 19.1%
Revenue block hours 79,861 101,169 26.7%
Aircraft utilization (block hours) 8.0 9.0 12.5%
Average cost per gallon of fuel (cents) 105.5 94.6 (10.3%)
Aircraft in service (end of period) 113 128 13.3%
Revenue per departure $2,501 $2,684 7.3%
(1)"Cost per ASM (cents)" excludes the aircraft early retirement charge.
Cmparison of three months ended June 30, 2002, to three months ended
June 30, 2001.
Results of Operations
General
Net income in the second quarter was $17.4 million or $.38 per
share on a diluted basis, compared to $12.9 million or $.29 per share on
a diluted basis for the same period last year. Excluding special items
described more fully below, net income for the second quarter was $14.3
million or $.31 per share. The primary reason for the increase in net
income was the 19.1% increase in revenue departures. Total operating
revenues increased 28.7% to $188.2 million for the three months ended
June 30, 2002 from $146.2 million for the three months ended June 30,
2001, while total operating expenses, excluding the reversal of the
aircraft early retirement charge, increased 31.1% to $164.3 million.
Operating Revenues
Passenger revenues increased 27.9% to $185.6 million for the
three months ended June 30, 2002 from $145.2 million for the three months
ended June 30, 2001. The increase was the result of a 19.1% increase in
revenue departures and a 7.3% increase in revenue per departure to $2,684
in the second quarter of 2002 from $2,501 in the second quarter of 2001.
During the second quarter of 2002, the Company reached agreement with
Delta Air Lines on final fee per block hour rates for 2002. The
Company's second quarter 2002 passenger revenue includes $3.4 million
(pre-tax) of additional revenue resulting from changes in estimates used
during the first quarter of 2002.
The increase in capacity as measured in ASMs is the result of
service expansion utilizing 18 additional 50-seat Canadair Regional Jet
("CRJs"), and the addition of 11 32-seat Fairchild Dornier 328JET
("328JET") aircraft, partially offset by the removal from service of 11
British Aerospace J-32 Turboprop ("J-32") aircraft and two British
Aerospace J-41 Turboprop ("J-41") aircraft, along with a 12.5% increase
in the average aircraft stage length and a 12.5% increase in aircraft
utilization, resulting in the 40.0% increase in available seat miles
("ASMs") to 1.1 billion in the second quarter of 2002 from 761 million in
the second quarter of 2001. The Company was operating 64 CRJs, 33
328JETs and 30 J-41s as of June 30, 2002 as compared to 46 CRJs, 22
328JETs, 32 J-41s and 11 J-32s as of June 30, 2001.
Operating Expenses
A summary of operating expenses, excluding the reversal of the
aircraft early retirement charge, as a percentage of operating revenues
and cost per ASM for the three months ended June 30, 2001, and 2002 is as
follows:
Three Months ended June 30,
2001 2002
Percent Percent
of Cost of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 27.2% 5.2 26.1% 4.6
Aircraft fuel 15.2% 2.9 14.8% 2.6
Aircraft maintenance and materials 8.3% 1.6 10.7% 1.9
Aircraft rentals 14.9% 2.9 14.5% 2.6
Traffic commissions and related fees 2.7% 0.5 2.8% 0.4
Facility rents and landing fees 5.1% 1.0 5.8% 1.0
Depreciation and amortization 2.6% 0.5 2.6% 0.5
Other 9.7% 1.9 10.0% 1.8
Total 85.7% 16.5 87.3% 15.4
Total operating expenses, excluding the reversal of the
aircraft early retirement charge, increased 31.1% to $164.3 million for
the quarter ended June 30, 2002 compared to $125.3 million for the
quarter ended June 30, 2001 primarily due to the 19.1% increase in
revenue departures. As explained above, ASMs increased 40.0% to 1.1
billion in the second quarter of 2002 from 761 million in the second
quarter of 2001. As a result, cost per ASM (excluding the reversal of
the aircraft early retirement charge) decreased 6.7% on a year-over-year
basis to 15.4 cents during the second quarter of 2002. Costs per ASM
changes that are not primarily attributable to the changes in capacity
are as follows:
The cost per ASM of aircraft fuel decreased to 2.6 cents in the
second quarter of 2002 compared to 2.9 cents in the second quarter of
2001. The higher fuel consumption per hour of regional jet aircraft
versus turboprop aircraft resulted in a 10.5% increase in the system
average burn rate (gallons used per block hour flown) which was more than
offset by the effects of a 10.3% decrease in the average cost per gallon
of fuel from $1.06 in the second quarter of 2001 to $.95 in the second
quarter of 2002 and the larger seat capacity of regional jet aircraft.
The cost per ASM of maintenance includes a $4.8 million charge
recorded in the second quarter of 2002 which may be claimed to be due by
a vendor under a power-by-the-hour agreement for certain engine repair
work. (See "Outlook", below.)
Although the cost per ASM of facility rents and landing fees
remained 1.0 cent for the second quarter of 2002, in absolute dollars,
facility rents and landing fees increased 46.0% from $7.4 million in the
second quarter of 2001 to $10.9 million in the second quarter of 2002.
This increase is a result of a 19.1% increase in number of revenue
departures, the heavier landing weight of the regional jets, and higher
rents and landing fees imposed by airports to recover costs in the
aftermath of the events of September 11.
The cost per ASM of other operating expenses decreased to 1.8
cents in the second quarter of 2002 from 1.9 cents in the second quarter
of 2001. In absolute dollars, other operating expenses increased 33.2%
from $14.2 million in the second quarter of 2001 to $18.9 million in the
second quarter of 2002. The increased costs result primarily from
additional property taxes, aircraft insurance associated with the events
of September 11, and increases in the costs associated with ground
handling.
During the second quarter the Company revised the early
retirement dates for the J-41 fleet as a result of Fairchild's insolvency
proceedings and Bombardier's delivery schedule of aircraft under the
agreement the Company executed with Bombardier to purchase CRJs in
replacement of the undelivered 328JETs. The requirement to operate the J-
41s in service longer resulted in a $4.8 million reduction of the early
retirement charge previously recorded in the fourth quarter of 2001 for
the first nine J-41s scheduled to be retired. See note 7 of Notes to
Condensed Consolidated Financial Statements.
Other Income (expense)
In the second quarter of 2002, the Company recorded the
following items in other income: $0.9 million in government compensation
under the Air Transportation Safety and System Stabilization Act; $1.1
million to write-off capitalized interest costs related to 328JET
aircraft that were to be delivered; and $0.6 million to write-off a
deferred credit from a settlement payment made by Fairchild Dornier
related to a J-41 turboprop retirement.
The Company's effective tax rate for federal and state income
taxes remained the same at 40.5% for second quarter of 2002 and 2001.
Six Months Operating Statistics
(excluding aircraft early retirement charge)
Increase
Six months ended June 30, 2001 2002 (Decrease)
Revenue passengers carried 2,222,431 3,235,126 45.6%
Revenue passenger miles ("RPMs") (000's) 816,481 1,321,391 61.8%
Available seat miles ("ASMs") (000's) 1,450,744 2,122,667 46.3%
Passenger load factor 56.3% 62.3% 6.0 pts
Revenue per ASM (cents) 19.1 16.8 (12.0)%
Cost per ASM (cents)(1) 16.8 14.8 11.9%
Average passenger segment (miles) 367 408 11.2%
Revenue departures (completed) 111,192 135,556 21.9%
Revenue block hours 153,677 199,877 30.1%
Aircraft utilization (block hours) 7.8 9.0 15.4%
Average cost per gallon of fuel (cents) 106.9 89.3 16.5%
Aircraft in service (end of period) 113 128 13.3%
Revenue per departure $2,494 $2,628 5.4%
(1)"Cost per ASM (cents)" excludes the aircraft early retirement charge.
Comparison of six months ended June 30, 2002, to six months ended June
30, 2001.
Results of Operations
General
Net income for the first half of 2002 was $31.8 million, or
$.69 per share on a diluted basis compared to $22.6 million or $.50 per
share on a diluted basis for the same period last year. Excluding special
items, net income for the first half of 2002 was $28.7 million or $.62
per share. The principal reason for the increase in net income was the
21.9% increase in revenue departures. Total operating revenues increased
29.1% to $361.2 million for the six months ended June 30, 2002 from
$279.7 million for the six months ended June 30, 2001.
Operating Revenues
Passenger revenues increased 28.7% to $356.3 million for the
six months ended June 30, 2002 from $276.9 million for the six months
ended June 30, 2001. The increase was primarily due to a 21.9% increase
in revenue departures, and a 5.4% increase in revenue per departure to
$2,628 in the second quarter of 2002 from $2,494 in the second quarter of
2001.
The increase in capacity as measured in ASMs is the result of
service expansion utilizing 18 additional 50-seat Canadair Regional Jet
("CRJs"), and the addition of 11 32-seat Fairchild Dornier 328JET
("328JET") aircraft, partially offset by the removal from service of 11
British Aerospace J-32 Turboprop ("J-32") aircraft and two British
Aerospace J-41 Turboprop ("J-41") aircraft along with the impact of a
14.6% increase in the average aircraft stage length and a 15.4% increase
in aircraft utilization which resulted in the 46.3% increase in available
seat miles ("ASMs") to 2.1 billion in the first six months of 2002 from
1.5 billion in the first six months of 2001.
Operating Expenses
A summary of operating expenses, excluding the reversal of the
aircraft early retirement charge, as a percentage of operating revenues
and cost per ASM for the six months ended June 30, 2001 and 2002 is as
follows:
Six Months ended June 30,
2001 2002
Percent Percent
of Cost of Cost
Operating Per ASM Operating Per ASM
Revenue (cents) Revenue (cents)
Salaries and related costs 27.5% 5.3 26.3% 4.5
Aircraft fuel 15.2% 2.9 14.3% 2.4
Aircraft maintenance and materials 8.4% 1.6 9.4% 1.6
Aircraft rentals 15.0% 2.9 15.0% 2.5
Traffic commissions and related 2.8% 0.6 2.8% 0.5
Facility rents and landing fees 5.3% 1.0 6.0% 1.0
Depreciation and amortization 2.6% 0.5 2.6% 0.5
Other 10.2% 2.0 10.4% 1.8
Total 87.0% 16.8 86.8% 14.8
Total operating expenses, excluding the reversal of the
aircraft early retirement charge, increased 28.9% to $313.6 million for
the six months ended June 30, 2002 compared to $243.3 million for the six
months ended June 30, 2001 primarily due to the 21.9% increase in revenue
departures. As explained above, ASMs increased 46.3% to 2.1 billion in
the six months ending June 30, 2002 from 1.5 billion in the six months
ending June 30, 2001. As a result, cost per ASM (excluding the reversal
of the aircraft early retirement charge) decreased 11.9% on a year-over-
year basis to 14.8 cents during the six months ended June 30, 2002. Cost
per ASM changes that are not primarily attributable to the changes in
capacity are as follows:
Salaries and related costs per ASM decreased 15.1% to 4.5 cents
in the first half of 2002 compared to 5.3 cents for the first half of
2001. The Company suspended its employee bonus plans during the first
quarter of 2002 due to the events of September 11. The Company
reinstated its bonus plans effective April 1, 2002. For the three months
ended March 31, 2001, the Company incurred $2.2 million in expenses
related to its bonus plans.
The cost per ASM of aircraft fuel decreased to 2.4 cents in the
first half of 2002 compared to 2.9 cents in the first half of 2001. The
higher fuel consumption per hour of regional jet aircraft versus
turboprop aircraft resulted in a 11.5% increase in the system average
burn rate (gallons used per block hour flown) which was more than offset
by the effects of a 16.8% decrease in the average cost per gallon of fuel
from $1.07 in the first half of 2001 to $.89 in the first half of 2002
and the larger seat capacity of regional jet aircraft.
Although the cost per ASM of facility rents and landing fees
remained 1.0 cent for the second half of 2002, in absolute dollars,
facility rents and landing fees increased 44.6% from $14.9 million in the
first half of 2001 to $21.5 million in the first half of 2002. This
increase is a result of a 21.9% increase in number of revenue departures,
the heavier landing weight of the regional jets, and higher rents and
landing fees imposed by airports to recover costs in the aftermath of the
events of September 11.
The cost per ASM of other operating expenses decreased to 1.8
cents in the first half of 2002 from 2.0 cents in the first half of 2001.
In absolute dollars, other operating expenses increased 31.8% from $28.7
million in the first half of 2001 to $37.7 million in the first half of
2002. The increased costs result primarily from additional property
taxes, aircraft insurance and security costs associated with the events
of September 11, and increases in the costs associated with ground
handling.
Other Income (expense)
In the first half of 2002, the Company recorded the following
items in other income: $0.9 million in government compensation under the
Air Transportation Safety and System Stabilization Act; $1.1 million to
write-off capitalized interest costs related to 328JET aircraft that were
to be delivered; and $0.6 million to write-off a deferred credit from a
settlement payment made by Fairchild Dornier related to a turboprop
retirement.
The Company's effective tax rate for federal and state income
taxes was 40.5% for the six months ended June 30, 2002, and 40.3% for the
six months ended June 30, 2001.
Outlook and Business Risks
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth above under Forward-
Looking Statements.
The events of September 11, together with the slowing economy
that started in 2001, had a significant effect on the U.S. airline
industry that continues into 2002. These events continue to cause
changes in government regulation, declines and shifts in passenger
demand, increased insurance costs and tightened credit markets which
affect the operations and financial condition of participants in the
industry including the Company, its code share partners, and aircraft
manufacturers. Although these events have generally increased the
importance of regional jets to the industry, these circumstances continue
to raise substantial risks and uncertainties, including those discussed
below, which may impact the Company, its code share partners, and
aircraft manufacturers, in ways that the Company is not currently able to
predict.
In July 2002, Fairchild Dornier GmbH ("Fairchild"), the
manufacturer of the 32-seat 328JET, opened formal insolvency proceedings
in Germany. Fairchild had been operating under the guidance of a court
appointed interim trustee since April 2002. Fairchild has notified the
Company that it has rejected the Company's purchase agreement contract
covering the remaining 30 328JETs the Company had on firm order for its
United Express operation, the two 328JETs on firm order for the Company's
Private Shuttle operation, and options to acquire 81 additional aircraft.
The Company has entered into agreements with Bombardier for the purchase
of 25 additional 50-seat CRJs to replace the two delivered and 30
undelivered 32-seat 328JETs for its United Express operation. The Company
now has firm orders for 56 additional CRJs as of August 1, 2002, and
continues to hold options for an additional 80 CRJs. Since resumption of
deliveries, Bombardier has generally been one month behind the original
delivery schedule for deliveries scheduled for the second half of 2002.
Bombardier has not yet advised whether and to what extent this delay may
continue during 2003. As of August 1, 2002, the Company is scheduled to
take delivery of 9 CRJs for the remainder of 2002, 35 CRJs in 2003 and 12
CRJs in 2004.
On June 4, 2002, the Company and United agreed to an amendment
to the Company's United Express Agreement authorizing the Company to
operate an additional 25 CRJs in lieu of 32 328JETs that were to have
been delivered by Fairchild, with the additional aircraft to be placed in
service no later than April 30, 2004. The Company also re-confirmed its
commitment to remove its remaining turboprop aircraft from service no
later than April 30, 2004 without the benefit of manufacturer support.
As a result, the Company will be required to pay over the remaining lease
term, any shortfall between its lease obligations for those aircraft
subsequent to its retirement date, and the amounts received in the
sublease or sale of the aircraft. Previously, the Company anticipated
that it would record this cost for accounting purposes but that the cash
cost would be paid by Fairchild Dornier. Finally, the Company agreed
with United that, not later than December 31, 2002, two 328JET aircraft
placed in United Express service during 2002 would be removed from United
Express operations. These aircraft will be utilized in the Company's
Private Shuttle operation.
The undelivered 328JET aircraft were to replace the Company's
fleet of 29-seat J-41 turboprop aircraft. The Company is still committed
to its plan to early retire the remaining 30 J-41s from its fleet,
however the retirement schedule for certain of these aircraft has been
revised and is now scheduled to be completed in April 2004. The Company
has long-term lease commitments for 25 of these aircraft, and estimates
that the early retirement will result in a $40 million after tax charge
to earnings. The Company has already expensed $11.2 million after tax of
this charge and anticipates expensing the remaining amounts in the third
and fourth quarters of 2002, and the first quarter of 2004. See note 3
and note 7 of Notes to Condensed Consolidated Financial Statements.
The Company plans to remarket actively the J-41s through
leasing, subleasing or outright sale of the aircraft. Outright sale of a
leased aircraft may require the Company to make payments to the lessor to
cover shortfalls between sale prices and lease stipulated loss values.
The current retirement schedule reflects when replacement CRJs are
expected to be available for delivery. The Company may elect to
accelerate the out of service dates of some or all of the J-41s if viable
remarketing opportunities present themselves.
The Company estimates that at the future scheduled removal date
from service, four of the five owned J-41s would each have a fair market
value that is less than their net book value, using previous useful
lives. See note 3 of Notes to Condensed Consolidated Financial
Statements.
At the time of the opening of formal insolvency proceedings,
Fairchild had significant current and future obligations to the Company
in connection with the order of 328JET aircraft. These include
obligations: to deliver 30 328JETs the Company had on firm order for its
United Express operation, two 328JETs on firm order for the Private
Shuttle operation, and 81 additional option 328JETs with certain
financing support; to pay the Company the difference between the sublease
payments, if any, received from remarketing 26 British Aerospace J-41
Turboprop ("J-41") aircraft leased by the Company and the lease payment
obligations of the Company on those aircraft; to purchase five J-41
aircraft owned by the Company at their net book value at the time of
retirement; to assume certain crew training costs; and to provide spares,
warranty, engineering, and related support. The Company believes it has
a security interest in Fairchild's equity interest in 32 delivered
328JETs. Its right to proceed against this collateral will apply upon
termination of the applicable lease unless other arrangements are made
with the other interested parties. Included in the Company's balance
sheet as of June 30, 2002 is approximately $1.3 million due from
Fairchild, resulting from payments made or owed by the Company to third
parties for certain training and other matters that were to be paid by
Fairchild. The Company believes it has the right to offset this and
other obligations from Fairchild against amounts the Company owes
Fairchild, to the extent permitted by law. The Company will file its
claim in the insolvency proceeding in August 2002. The Company may be
required to take a charge for all or a portion of these third party
expenses to the extent that it does not prevail in its offset claim. The
Company believes its cost to operate the current fleet of 33 328JETs will
increase in the near and future terms due to costs incurred for
maintenance repairs that otherwise would have been covered by
manufacturer's warranty and the costs and availability of spare parts
until replacement suppliers can be found. Additionally, as a result of
Fairchild's rejection of the purchase contract, the Company will not
receive cash payments for the difference in the sublease payments, if
any, received from the remarketing of the 26 J-41 aircraft leased by the
Company on those aircraft and the amount due under the Company's aircraft
leases.
Under the Company's United Express agreement, United pays the
Company an agreed amount per departure, and under the Company's Delta
Connection agreement, Delta pays the Company an agreed amount per block
hour flown, both regardless of passenger revenue, and both with
additional incentive payments based on operational performance. Both
agreements provide that the rates will be adjusted annually to reflect
changes in costs. During any period when the Company and a code-share
partner have not agreed to rates for the year, the Company records
revenue applying conservative rate assumptions. In the first quarter of
2002, the Company and United established rates to be in effect for the
Company's United Express flights throughout 2002 and the Company used
those agreed upon rates to record revenue for 2002. During the second
quarter of 2002, the Company and Delta agreed to rates to be effective
for all of 2002. As a result of recording estimated revenues in the
first quarter 2002 prior to the establishment of final rates with Delta,
the Company recorded additional revenue of $3.4 million in the second
quarter as a result of changes to initial estimates.
The Company continues to work closely with its two major
partners, United Airlines and Delta Air Lines, to provide value in the
current difficult airline environment. At Delta's request, the Company
anticipates moving its 328JET flights operating from New York's LaGuardia
airport to Cincinnati, Ohio effective November 1, 2002. These network
changes will allow Delta to more closely match aircraft capacity with
route demand. For United, the Company continues to add CRJs into
Chicago's O'Hare airport allowing United to offer all jet service from
Chicago O'Hare as of August 2002. In addition, FAA slot restrictions at
Chicago's O'Hare airport were eliminated effective July 2002, which
eliminates a barrier to the Company's providing additional service there.
In 2000, the Company executed a seven-year engine services
agreement with GE Engine Services, Inc. ("GE") covering the scheduled and
unscheduled repair of ACA's CRJ jet engines, operated on the 43 CRJs
already delivered or on order at that time for the United Express
operation. This agreement was amended in July 2000 to cover 23
additional CRJ aircraft, bringing the total number of CRJ aircraft
covered under the agreement to 66. 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's future maintenance expense on CRJ engines
covered under the 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 expenses aircraft maintenance
based upon the amount paid to GE under the agreement, as engine hours are
flown. To date, the time between scheduled repair work has been longer
and therefore the costs of maintaining these engines has been lower than
anticipated at the time the original contract and rates were agreed. The
Company has been in negotiations with GE to reduce the base rate in the
agreement to reflect the actual operating performance of the engines, to
add the remaining ordered aircraft to the agreement, and to extend the
term. The Company has disputed the appropriateness of certain contract
rate adjustments and in the fourth quarter of 2001 sought other rate
concessions from GE in the context of negotiating with GE for an
adjustment in rates and for an extension of the contract to cover a
longer term and to cover the remaining CRJ aircraft on order. Consistent
with its understanding at the time, the Company reduced the amount it
paid GE under the agreement and correspondingly reduced the amounts it
expensed for engine maintenance. In July 2002, the Company received a
revised maintenance agreement proposal from GE which it did not find to
be acceptable. Accordingly, the Company does not presently anticipate
that it will add engines beyond the 66 covered aircraft or that it will
extend the term of the agreement with GE, and anticipates that the
adjustments described above will continue to be disputed. In connection
with this determination, the Company recorded an additional $4.8 million
to maintenance expense in the second quarter 2002, of which approximately
$3.5 million represents amounts that GE may now seek to collect for past
rate concessions under the agreement. In addition, the Company believes
that, if it so elects, it has the right to remove any or all engines from
this agreement at any time. GE recently has informed the Company that it
does not agree with the Company's interpretation of the agreement, and
the Company presently intends to file for arbitration under the terms of
the contract to resolve the question of whether the Company may remove
all engines from the contract.
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. Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program, and United
Airlines bears such risk for the Company's United Express program. As
such, the Company expects that its results of operations will no longer
be directly affected by fuel price volatility.
Liquidity and Capital Resources
As of June 30, 2002, the Company had cash, cash equivalents and
short-term investments of $199.5 million and working capital of $168.4
million compared to $181 million and $138.7 million respectively as of
December 31, 2001. During the first six months of 2002, cash and cash
equivalents decreased by $154.3 million, reflecting net cash provided by
operating activities of $37.4 million, net cash used in investing
activities of $195.6 million and net cash provided by financing
activities of $3.9 million. The net cash provided by operating
activities is primarily the result of net income for the period of $31.8
million, non-cash depreciation and amortization expenses of $9.9 million,
and a $21.0 million increase in accrued liabilities, offset by a $25.0
million increase in prepaid expenses. The increase in accrued
liabilities is the result of increases in various accruals, including a
$4.8 million expense recorded in the second quarter of 2002 to fully
accrue for disputed amounts which may be claimed to be due by a vendor
under a power-by-the-hour agreement for certain engine repair work, a
$4.2 million increase in accruals for fuel costs and a $7.1 million
increase in accrued payroll costs. The increase in prepaid expenses is
primarily the result of the Company making its semi-annual aircraft rent
payments in January 2002. The net cash used in investing activities
consisted primarily of purchases of property and equipment and net
purchases of short-term investments. Financing activities consisted
primarily of payments on long-term debt and capital lease obligations
offset by the proceeds from the exercise of stock options.
Other Financing
On September 28, 2001, the Company entered into an asset-based
lending agreement with a financial institution that provides the Company
with a line of credit for up to $25.0 million. The line of credit, which
will expire on October 15, 2003, carries an interest rate of LIBOR plus
..875% to 1.375% depending on the Company's fixed charges coverage ratio.
The Company has pledged $15.4 million of this line of credit as
collateral for letters of credit issued on behalf of the Company by a
financial institution. The available borrowing under the line of credit
is limited to the value of the bond letter of credit on the Company's
Dulles, Virginia hangar facility plus the value of 60% of the book value
of certain rotable spare parts. As of June 30, 2002 the amount of
available credit under the line was $25.0 million including the pledged
amount of $15.4 million. As of June 30, 2002 there were no outstanding
borrowings on the $25.0 million line of credit.
Other Commitments
The Company's Board of Directors has approved the repurchase of
up to $40 million of the Company's outstanding common stock in open
market or private transactions. As of August 1, 2002 the Company has
repurchased 2,171,837 shares of its common stock and has approximately
$21.0 million remaining of the $40 million authorized for repurchase.
The Company's contract with the Association of Flight
Attendants ("AFA"), which was ratified in October 1998, becomes amendable
in October 2002. The Company expects to begin discussions with the AFA
in the near term. The Company's contract with Aircraft Mechanics
Fraternal Association ("AMFA"), which was ratified in June 1998, became
amendable in June 2002. The Company has entered into initial discussions
with AMFA regarding a new agreement.
Aircraft
As of August 1, 2002, the Company was operating a fleet of 128
aircraft comprised of 65 50-seat Bombardier Canadair Regional Jets
("CRJs"), 33 32-seat Fairchild Dornier 328JETs ("328JETs") and 30 British
Aerospace J-41s ("J-41s"), and had firm orders for 56 Canadair Regional
Jets ("CRJs"), and options for 80 additional CRJs. The Company is
obligated to purchase and finance (including the possible use of
leveraged leases) the 56 firm ordered aircraft at an approximate capital
cost of $1.1 billion. The Company anticipates leasing all of its
remaining year 2002 CRJ aircraft deliveries on terms similar to
previously delivered CRJ aircraft.
Capital Equipment and Debt Service
Capital expenditures for the first six months of 2002 were
$20.3 million, compared to $16.2 million for the same period in 2001.
Capital expenditures for 2002 consisted primarily of the purchase of
$16.5 million in rotable spare parts for the regional jet aircraft,
$872,000 in computers and telecom equipment and $802,000 for improvements
to aircraft. Other capital expenditures included facility leasehold
improvements, ground equipment, and office equipment.
For the remainder of 2002, the Company anticipates spending
approximately $12.4 million for rotable spare parts related to the
regional jets, ground service equipment, facilities, computers and
software.
Debt service including capital leases for the six months ended
June 30, 2002 was $2.3 million compared to $2.4 million in the same
period of 2001.
The Company believes that, in the absence of further terrorist
attacks or other unusual circumstances, its cash and short term
investments together with cash flow from operations and other available
financing, will be sufficient to meet its working capital needs, capital
expenditures, and debt service requirements for the next twelve months.
Recent Accounting Pronouncements
On July 5, 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 141, "Business
Combinations", and Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 addresses the
accounting for acquisitions of businesses and is effective for
acquisitions occurring on or after July 1, 2001. Statement No. 142
includes requirements to test goodwill and indefinite life intangible
assets for impairment rather than amortize them. Statement No. 142 is
effective for fiscal years beginning after December 15, 2001. The
Company adopted Statement No. 142 beginning January 1, 2002. The effect
of adopting these statements has not had a material impact on the
Company's financial position or results of operations for the first six
months of 2002. In the six months ended June 30, 2001, the Company
amortized approximately $88,000 in goodwill and certain other intangible
assets. The Company's goodwill and indefinite life intangible balance as
of January 1, 2002 was $1.7 million, which is no longer subject to
amortization.
On October 3, 2001, the Financial Accounting Standards Board
issued FASB Statement No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". Statement No. 144 supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". Statement No. 144 includes requirements related to
the classification of assets as held for sale, including the
establishment of six criteria that must be satisfied prior to this
classification. Statement No. 144 also includes guidance related to the
recognition and calculation of impairment losses for long-lived assets.
Statement No. 144 is effective for fiscal years beginning after December
15, 2001. The Company adopted Statement No. 144 on January 1, 2002. The
effect of adopting this statement has not had a material impact on the
Company's financial position or results of operations for the first six
months of 2002. See note 7 of Notes to Condensed Consolidated Financial
Statements.
In July 2002, the Financial Accounting Standards Board issued
FASB Statement No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities", which addresses costs associated with an exit
activity or with disposal of long-lived assets. Under statement 146, a
Company will record a liability for a cost associated with an exit or
disposal activity when that liability is incurred, and can be measured at
fair value. Commitment to an exit plan or a plan of disposal no longer
meets the requirement for recognizing a liability and the related
expense. The new requirements are effective prospectively for exit or
disposal activities initiated after December 31, 2002. The Company
anticipates adopting FASB 146 on January 1, 2003. Adoption of this FASB
will affect the timing of recognition of expense for aircraft retired
subsequent to the date the FASB is adopted and not previously included in
a retirement plan, shifting the recognition of these costs to the period
incurred. The Company anticipates recording approximately $9.6 million
in expense during 2004 as the remaining five leased British Aerospace J-
41 turboprop aircraft are removed from service. These costs would have
been recognized as an aircraft early retirement charge in the first
quarter of 2003 prior to the adoption of FASB 146.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk arises from changes in
interest rates. The Company's exposure to market risk associated with
changes in interest rates relates to the Company's commitment to acquire
regional jets. From time to time 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
regional jet aircraft. As of June 30, 2002, the Company had no open
hedge transactions.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED JUNE 30, 2002
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation and FAA civil
action proceedings incidental to its business, none of which the Company
believes are likely to have a material effect on the Company's financial
position. The Company is also subject to DOT and U.S. Customs Service
administrative proceedings relating to its post-September 11 operations,
the maximum fines for which could be substantial. Based on preliminary
information and initial review by the Company, the Company believes that
these proceedings may result in fines or penalties but does not believe
the proceedings are likely to have a material effect on the Company's
operations or financial position.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders of the Company was held in
Herndon, Virginia on May 29, 2002. Of the 45,037,948 shares of common
stock outstanding and entitled to vote on the record date, 41,337,776
were present by proxy. Those shares were voted on the matters before the
meeting as follows:
1. Election of Directors For Withheld
Kerry B. Skeen 41,227,557 110,219
Thomas J. Moore 41,226,243 111,533
C. Edward Acker 40,761,548 576,228
Robert E. Buchanan 41,227,757 110,019
Susan MacGregor Coughlin 41,228,601 109,175
Daniel L. McGinnis 41,228,957 108,819
James C. Miller III 41,227,548 110,228
John M. Sullivan 41,227,712 111,064
2. To ratify appointment of KPMG LLP as the Company's independent
auditors for the current year.
For Against Abstain
39,943,145 1,393,226 1,405
ITEM 5. Other Information.
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3. Exhibits
Exhibit
Number Description of Exhibit
10.6(a) (notes 5 & 18) Amendment dated June 4, 2002 to United Express
Agreement, dated as of November 22, 2000, among
United Airlines, Inc., Atlantic Coast Airlines and
the Company. (Confidential treatment has been
requested for portions of this document).
(b) Reports on Form 8-K
Form 8-K filed on June 4, 2002 to announce that the
Company would be adding 25 Canadair Regional Jet aircraft
to its United Express fleet.
Form 8-K filed on June 10, 2002 to announce that an
officer of the Company would be making a presentation to
investors and analysts.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
August 13, 2002 By: /S/ Richard J. Surratt
Richard J. Surratt
Executive Vice President, Treasurer,
and Chief Financial Officer