Back to GetFilings.com
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, 2002
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.)
45200 Business Court, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(703)650-6000
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $ .02
(Title of Class)
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 whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
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 June 30, 2002 was approximately $962 million.
As of March 3, 2003 there were 50,305,878 shares of common stock of
the registrant issued and 45,234,908 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.
Documents Incorporated by Reference Part of Form
10-K
Proxy Statement for 2003 Annual Meeting of Shareholders
Part III, Items 10-13
(to be filed subsequently)
Table of Contents
Forward Looking Statement Disclosure
PART I
Item 1. Business
General
Marketing Agreement
Charter Operations
Markets
Fleet Description
Employees
Industry Regulation and Airport Access
Risk Factors Relating to the Company
Risk Factors Relating to the Airline Industry
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
Results of Operations
Recent Developments and Outlook
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Recent Accounting Pronouncements
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 9. Changes In and Disagreements With Accountants On
Accounting and Financial Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Signatures
Certifications
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking
statements. Statements in the Business 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 on the date this Form 10-K
was first filed with the SEC. Actual results may differ materially.
Factors that could cause the Company's future results to differ
materially from the expectations described here include: United's
ability to successfully reorganize in bankruptcy; the ability to
replace United with other carriers in the event United liquidates or
for the Company to implement other contingency plans; the ability
and timing of agreeing upon 2003 rates with United; the Company's
ability to collect pre-petition obligations from United or to offset
pre-petition obligations due to United; United's decision to either
affirm all of the terms of the Company's existing UA Agreement or to
reject the agreement in its entirety; the timing of such decision;
efforts by United to negotiate changes as a condition to affirming
the Company's existing UA Agreement; unexpected costs arising from
the insolvency of United; the effects of the United bankruptcy and
of the economic conditions in the air travel industry on the
Company's ability to obtain aircraft financing; Delta's ability to
successfully avoid bankruptcy; the ability of United and Delta to
manage their operations and cash flow, continue to deploy the
Company's aircraft, and to utilize and pay for scheduled service at
rates established under existing contracts with the Company; changes
in levels of service agreed to by the Company with United and Delta;
extent to which the Company accepts regional jet deliveries under
its agreement with Bombardier, and ability to delay deliveries or to
settle arrangements with Bombardier regarding undelivered aircraft;
satisfactory resolution of union contracts with the Company's
aviation maintenance technicians/ground service equipment mechanics
and flight attendants; potential service disruptions due to labor
actions by employees of the Company, Delta Air Lines or United
Airlines; ability to successfully retire turboprop aircraft and to
remarket them at anticipated rates; availability and cost of product
support for the Company's 328JET aircraft; ability of the Company to
recover or realize its claims against Fairchild Dornier in its
insolvency proceedings or to offset certain of its obligations to
Fairchild against these claims, and unexpected costs arising from
the insolvency of Fairchild Dornier; the costs and other effects of
enhanced security measures and other possible government orders;
changes in and satisfaction of regulatory requirements including
requirements relating to maintenance and fleet expansion;
willingness of the U.S. government to continue to provide war risk
insurance at favorable rates, or increased cost and reduced
availability of insurance; the effects of high fuel prices on the
Company and on its major airline partners; adverse weather
conditions; additional acts of war or terrorism; any actions that
may be taken by the Company's suppliers and competitors, and the
effects on the economy in general and the air travel industry in
particular of U.S. involvement in a war or in military or warlike
operations. The statements in this Annual Report are made as of
March 29, 2003 and the Company undertakes no obligation to update
any of the forward-looking information included in this release,
whether as a result of new information, future events, changes in
expectations or otherwise.
PART I
Item 1. Business
General
Atlantic Coast Airlines Holdings, Inc. ("ACAI"), is a
holding company with its primary subsidiary being Atlantic Coast
Airlines ("ACA"), a regional airline serving 84 destinations in 30
states in the Eastern and Midwestern United States and Canada as of
March 1, 2003 with 850 scheduled non-stop flights system-wide every
weekday. ACA operates under its marketing agreements as both a
United Express carrier with United Airlines, Inc. ("United") and as
a Delta Connection carrier with Delta Air Lines, Inc. ("Delta").
ACA's United Express and Delta Connection operations are conducted
throughout the Eastern and Midwestern United States as well as
Canada. Unless the context indicates otherwise, the terms "the
Company", "we", "us", or "our" refer herein to Atlantic Coast
Airlines Holdings, Inc. As of March 15, 2003, the Company operated
a fleet of 142 aircraft (112 regional jets and 30 turboprop
aircraft) having an average age of approximately 3.6 years.
The Company is subject to a number of risks and
uncertainties as a result of conditions that are adversely affecting
the domestic air travel industry and causing a number of corporate
restructurings and bankruptcies. Among other factors affecting the
Company, one of its code share partners, United, is currently in
bankruptcy. Revenue from United represented approximately 82% of
the Company's total revenue for the year ended December 31, 2002.
These and other matters are discussed below under Item 7,
Management's Discussion and Analysis of Results of Operations and
Financial Condition. The discussion appearing in this Item 1,
"Business", addresses the Company's current operations.
Marketing Agreements
The Company derives substantially all of its revenues
through its marketing agreements with United and Delta, operating
under their United Express and Delta Connection brands,
respectively.
United Express
The Company's United Express Agreements ("UA Agreements")
define the Company's relationship with United. In November 2000,
the Company and United amended and restated the UA Agreements,
effectively changing from a revenue sharing arrangement to a fee-per-
departure arrangement. Under the UA Agreements in effect prior to
November 2000, the Company was responsible for scheduling, marketing
and pricing its flights, in coordination with United's operations,
and paid a portion of the revenue it received from passenger fares
to United. Under the fee-per-departure structure in effect as of
December 1, 2000, the Company operates a flight schedule designated
by United, for which United pays the Company an agreed amount per
departure regardless of the number of passengers carried, with the
Company being able to receive additional incentive payments based on
operational performance. The Company thereby assumes the risks
associated with operating the flight schedule and United assumes the
risk of scheduling, marketing, and selling seats to the traveling
public. The restated UA Agreements are for a term of ten years.
The restated UA Agreements, as amended, give ACA the authority to
operate up to 121 regional jets in the United Express operation if
delivered by April 30, 2004. By operating under the UA Agreements,
the Company is able to use United's "UA" flight designator code to
identify the Company's flights and fares in the major airline global
distribution systems, including United's "Apollo" reservation
system, and to use the United Express logo and exterior aircraft
paint schemes and uniforms similar to those of United.
Pursuant to the restated UA Agreements, United, at its own
expense, provides a number of additional services to ACA. These
include customer reservations, customer service, pricing,
scheduling, revenue accounting, revenue management, frequent flyer
administration, advertising, provision of ticket handling services
at United's ticketing locations, and provision of airport signage
and ground support services at most of the airports where both ACA
and United operate flights. Under the restated agreement, the
Company remains responsible for fees associated with the global
distribution systems. The UA Agreements do not prohibit United from
serving, or from entering into agreements with other airlines who
would serve, routes served by the Company, but state that United may
terminate the UA Agreements if ACAI or ACA enter into a similar
arrangement with any other carrier other than Delta or a replacement
for Delta without United's prior written approval. 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 the right to terminate the UA
Agreements if ACAI or ACA merge with or are controlled or acquired
by another carrier. The UA agreements provide United with the right
to assume ACA's ownership or leasehold interest in certain aircraft
in the event ACA breaches specified provisions of the UA agreements,
or fails to meet specified performance standards. The UA Agreements
call for the resetting of fee-per-departure rates annually based on
the Company and United's planned level of operations for the
upcoming year. The Company and United are in discussions regarding
the fee-per-departure rates to be utilized during 2003. Until new
rates are established for 2003, United is paying the Company based
on 2002 rates and the Company is recording 2003 revenue using the
rates established for 2002.
On December 9, 2002, UAL, Inc. and its subsidiaries,
including United, filed for protection under Chapter 11 of the
United States Bankruptcy Code. UAL is currently operating and
managing its business and affairs as a debtor in possession. As
part of its first day filings in the bankruptcy proceeding, United
requested and was granted a court order permitting, but not
requiring it to continue to honor the UA Agreements while United is
in bankruptcy. As such, the Company continues to operate as a United
Express carrier pursuant to its UA agreement. UAL, Inc. and its
subsidiaries have been granted the exclusive right until October 6,
2003, to file a plan of reorganization and the exclusive right until
December 5, 2003, to seek acceptances of any such plan. The Court
has set May 12, 2003 as the deadline for the filing of proofs of
claim, although this deadline does not apply to claims arising under
executory contracts and unexpired leases that have yet to be
rejected by UAL, Inc. and its subsidiaries. It is possible that
any or all of the foregoing deadlines may be extended. In
bankruptcy, United also has the right to assume or reject the
Company's UA Agreements, as described in Recent Development and
Outlook below. No deadline has been set for United to assume or
reject the Company's UA Agreements.
Delta Connection
In September 1999, the Company reached a ten-year
agreement with Delta to operate regional jet aircraft as part of the
Delta Connection program. The Company began Delta Connection revenue
service on August 1, 2000. The Company's Delta Connection Agreement
("DL Agreement") defines the Company's relationship with Delta. The
Company is compensated by Delta on a fee-per-block hour basis.
Under the fee-per-block hour arrangement, the Company is
contractually obligated to operate a flight schedule designated by
Delta, for which Delta pays the Company an agreed amount per block
hour flown regardless of the number of passengers carried, with
incentive payments based on operational performance. The Company
thereby assumes the risks associated with operating the flight
schedule and Delta assumes the risks of scheduling, marketing, and
selling seats to the traveling public. By operating as part of the
Delta Connection program, the Company is able to use Delta's "DL"
flight designator to identify ACA's flights and fares in global
distribution systems, 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.
Pursuant to the DL Agreement, Delta, at its expense,
provides a number of support services to ACA. These include
customer reservations, customer service, ground handling, station
operations, a maintenance hangar facility in Cincinnati, pricing,
scheduling, revenue accounting, revenue management, frequent flyer
administration, advertising and other passenger, aircraft and
traffic servicing functions in connection with the ACA operation.
Delta may terminate the DL Agreement at any time if the Company
fails to meet certain performance standards and, subject to certain
rights of the Company and by providing 180 days notice to the
Company, may terminate without cause. If Delta terminates the Delta
agreement without cause prior to March 2010, the Company has the
right to put all or some of the Delta Connection aircraft to Delta.
The DL Agreement requires the Company to obtain Delta's approval if
it chooses to enter into a code-sharing arrangement with another
carrier other than in connection with termination of the UA
Agreements, 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-share partners of United
or in certain other circumstances. The DL Agreement does not
prohibit Delta from serving, or from entering into agreements with
other airlines that would serve, routes flown 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
extend or 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.
In January 2003, the Company and Delta agreed to 2003
rates, consistent with the rate setting process contained in the DL
Agreement.
Agreements with Other Airlines
As of March 1, 2003 the Company has implemented code-
sharing arrangements with Lufthansa German Airlines ("Lufthansa"),
Air Canada, Scandinavian Airlines, British Midland/BMI, Austrian
Airlines and All Nippon Airways involving certain United Express
flights. Such international code-sharing arrangements permit these
foreign air carriers to place their respective airline codes on
certain flights operated by ACA, and provide a wide range of
benefits for passengers including schedule coordination, through
ticketing and frequent flyer participation. The revenue benefits
from these arrangements accrue to United, and any such arrangements
as may be made in the future with respect to the Company's Delta
Connection flights would accrue to Delta, due to the nature of the
Company's agreements with these two airlines. The Company's primary
role under these arrangements is to obtain regulatory approvals for
the relationships and to operate the flights.
Charter Operations
The Company established a charter operation in February
2002. The charter business, which operates 32-seat Fairchild
Dornier 328JETs, utilizes the Company's operations and maintenance
services. The Company is presently providing regular private
shuttle service pursuant to an agreement with a major corporation
and is performing ad hoc charter services secured through brokers
and other means. In March 2003, the Company decided to continue to
service its existing clients but to de-emphasize the solicitation of
new charter business due to uncertainties regarding the bankruptcy
of the 328JET manufacturer. The Company recently made some of these
charter assets available to support its code share operations.
Markets
The Company's United Express operation is centered around
Washington's Dulles and Chicago's O'Hare airports. Beginning in
2001 and continuing throughout 2002, the Company greatly increased
its Chicago operation such that as of March 2003, 65% of the
Company's United Express capacity (as measured in available seat
miles) is flown to/from Chicago's O'Hare airport. The growth in
Chicago results from the combination of adding complementary service
to United mainline service in 17 markets and replacing United
mainline service completely in 14 markets since June 2001.
The Delta Connection operation is focused at Boston's
Logan airport and Cincinnati's Northern Kentucky International
airport. At Delta's request, the Company moved its remaining 328JET
aircraft from New York's LaGuardia airport to Cincinnati's Northern
Kentucky International airport effective November 1, 2002. As of
March 2003, 32% of the Company's Delta Connection capacity (as
measured in available seat miles) was to/from Boston, 67% was
to/from Cincinnati, with the remaining capacity to/from New York
Kennedy.
The following tables set forth the destinations served by
the Company as of March 1, 2003:
United Express Service
Washington-Dulles (To/From)
(Regional Jet and Turboprop Service)
Albany, NY Manchester, NH
Allentown, PA Nashville, TN
Binghamton, NY New York, NY (Kennedy)
Buffalo, NY New York, NY (LaGuardia)
Burlington, VT Newark, NJ
Charleston, SC Norfolk, VA
Charleston, WV Philadelphia, PA
Charlottesville, VA Pittsburgh, PA
Cleveland, OH Portland, ME
Columbia, SC Providence, RI
Columbus, OH Raleigh-Durham, NC
Dayton, OH Richmond, VA
Detroit, MI Roanoke, VA
Greensboro, NC Rochester, NY
Greenville/Spartanburg, SC Savannah, GA
Harrisburg, PA State College, PA
Hartford/Springfield, CT Syracuse, NY
Indianapolis, IN Toronto, ON Canada
Jacksonville, FL White Plains, NY
Knoxville, TN
Chicago-O'Hare (To/From)
(Regional Jet Service)
Akron/Canton, OH Knoxville, TN
Albany, NY Lansing, MI
Allentown, PA Lexington, KY
Birmingham, AL Memphis, TN
Bloomington, IL Moline, IL
Buffalo, NY Nashville, TN
Burlington, VT Norfolk/Virginia Beach, VA
Cedar Rapids/Iowa City, IA Oklahoma City, OK
Charleston, SC Peoria, IL
Charleston, WV Portland, ME
Charlotte, NC Raleigh/Durham, NC
Cleveland, OH Richmond, VA
Colorado Springs, CO Roanoke, VA
Columbia, SC Rochester, NY
Dayton, OH Saginaw, MI
Des Moines, IA Savannah, GA
Detroit, MI Sioux Falls, SD
Fargo, ND South Bend, IN
Ft. Wayne, IN Springfield/Branson, MO
Grand Rapids, MI St. Louis, MO
Greenville/Spartanburg, SC Syracuse, NY
Greensboro/High Point, NC Tulsa, OK
Harrisburg, PA White Plains, NY
Indianapolis, IN Wichita, KS
Jacksonville, FL Wilkes-Barre/Scranton, PA
Delta Connection Service
New York Kennedy (To/From)
(Regional Jet Service)
Raleigh/Durham, NC Washington Reagan, VA
Boston Logan (To/From)
(Regional Jet Service)
Atlantic City, NJ New York, NY (Kennedy)
Bangor, ME Newark, NJ
Burlington, VT Philadelphia, PA
Columbia, SC Portland, ME
Halifax, NS Canada Raleigh-Durham, NC
Montreal, Quebec Canada
Cincinnati-Northern Kentucky (To/From)
(Regional Jet Service)
Albany, NY Greenville/Spartanburg, SC
Appleton, WI Indianapolis, IN
Asheville, NC Kalamazoo, MI
Cedar Rapids, IA Knoxville, TN
Charleston, WV Lansing, MI
Charlotte, NC Lexington, KY
Charlottesville, VA Louisville, KY
Chattanooga, TN Madison, WY
Chicago Midway, IL Memphis, TN
Cleveland, OH Milwaukee, WI
Columbia, SC Nashville, TN
Columbus, OH Philadelphia, PA
Dayton, OH Pittsburgh, PA
Evansville, IN Raleigh-Durham, NC
Flint, MI Roanoke, VA
Ft. Wayne, IN South Bend, IN
Grand Rapids, MI Toledo, OH
Greensboro/High Point, NC Tri-Cities, TN
Fleet Description
Fleet Expansion: As of March 15, 2003, the Company
operated a fleet of 79 Bombardier CRJ200s ("CRJs"), 33 Fairchild
Dornier 328 regional jets ("328JETs"), and 30 British Aerospace
Jetstream-41 ("J-41s") turboprop aircraft. Thirty-one 328JETs are
operated in the Delta Connection program, 79 CRJs and 30 J-41s are
operated in the United Express program, and two 328JETs are
currently flown in charter operations.
As of March 15, 2003, the Company had a total of 42 CRJs
on firm order from Bombardier, Inc., in addition to the 79 already
delivered, and held options for 80 additional CRJs. The 42 firm
ordered aircraft include 25 CRJs that were ordered in July 2002
after Fairchild Dornier GmbH ("Fairchild"), the manufacturer of the
32-seat 328JET, opened formal insolvency proceedings in Germany and
rejected the Company's purchase agreement covering 328JETs the
Company had on firm order and under option. The Company's agreement
with Bombardier provides for 30 CRJs to be delivered during the
remainder of 2003 and an additional 12 CRJs to be delivered by April
30, 2004. Due to a number of factors, including the United
bankruptcy, the effect on the operations of the airline industry of
the war with Iraq, and the state of the financing markets, the
Company and Bombardier have agreed to delay by two weeks the
scheduled delivery date of two aircraft originally scheduled for
March deliveries. The Company is considering the delay of future
deliveries and is engaged in discussions with Bombardier regarding
financing and the aircraft delivery schedule. See risk factors
relating to the Company below.
Employees
As of March 1, 2003, the Company had 4,311 full-time and
504 part-time employees, classified as follows:
Classification Full-Time Part-Time
Pilots 1,488 -
Flight attendants 621 -
Station personnel 1,047 468
Maintenance personnel 635 5
Management,
administrative and
clerical personnel 520 31
Total employees 4,311 504
The Company's pilots are represented by the Airline Pilots
Association ("ALPA"), flight attendants are represented by the
Association of Flight Attendants ("AFA"), and aviation maintenance
technicians and ground service equipment mechanics are represented
by the Aircraft Mechanics Fraternal Association ("AMFA").
In January 2001, the Company agreed to a new four-and-a-
half year collective bargaining agreement with its pilot union that
was subsequently ratified and became effective on February 9, 2001.
The collective bargaining agreement covers pilots flying for the
United Express, Delta Connection, and charter operations. The
agreement provided for overall pilot costs that were, at the time,
comparable to other similarly situated regional carriers with
recently negotiated contracts who were operating under similar
agreements with major airlines. However, due to changes in the
regional airline industry, the Company believes that its overall
pilot costs are presently at the high end of pilot costs relative to
other regional carriers operating today. The Company has approached
its pilot union with the intent to negotiate wage reductions and
work rule changes through voluntary concessions, with the goal of
bringing its pilot costs in line with other regional carriers that
compete with the Company for its existing and new business.
The Company's collective bargaining agreement with AMFA,
which was ratified in June 1998, became amendable in June 2002, and
its collective bargaining agreement with the AFA, which was ratified
in October 1998, became amendable in October 2002. The Company has
entered into negotiations with AMFA and AFA regarding new
agreements. The Company is continuing to negotiate with both
unions, and management does not anticipate that there will be a
material effect on the Company's operations for the foreseeable
future as a result of these discussions.
In the airline industry, labor relations are regulated by
the Railway Labor Act ("RLA"). Under the RLA, collective bargaining
agreements do not expire but, rather, become amendable. The wage
rates, benefits and work rules contained in a contract that has
become amendable remain in place and represent the status quo until
a successor agreement is in place. The parties may not resort to
self-help, such as strikes or lockouts, until the RLA processes for
collective bargaining have been exhausted. It is impossible to
predict how long the RLA processes will take, but if an early
agreement cannot be reached it is not unusual for these processes to
last 18 months or more.
Certain of the Company's unrepresented labor groups are
from time to time approached by unions seeking to represent them.
In 2002, the International Association of Machinists and Aerospace
Workers ("IAM") attempted to organize the Company's customer service
employees. The Company was informed by the National Mediation Board
("NMB") that the IAM did not receive a sufficient showing of
interest from customer service employees to merit holding an
election. Because of this, the NMB will not accept any application
seeking representation of the Company's customer service employees
prior to March 2004.
In February 2003, the Company was informed by the National
Mediation Board that the Transport Workers Union ("TWU") was seeking
election to represent the Company's dispatch employees. The
election will take place in early April.
The Company is in the process of implementing a hiring
freeze, wage reductions for salaried employees, and bonus plan
reductions for all employees as a part of its cost-cutting measures,
as more fully detailed in "Management's Discussion and Analysis of
Results of Operations and Financial Condition - Outlook and Business
Risks" below.
Pilot Training
The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA"), which allow the Company to
train CRJ, J-41 and 328JET pilots at PAIFA's facility near
Washington-Dulles. In 2001, PAIFA relocated its Washington-Dulles
operations to a new training facility near the Company's Washington-
Dulles headquarters. This facility currently houses three CRJ
simulators, a 328JET simulator, and a J-41 simulator. The Company
has agreements to purchase an annual minimum number of CRJ simulator
training hours at agreed rates through 2010. The Company's payment
obligations for CRJ simulator usage over the remaining years of the
agreements total approximately $10.1 million.
In 2001, PAIFA, CAE Schreiner and the Company executed a
simulator provision and service agreement providing for 328JET
training at the PAIFA facility. Under this agreement, the Company
has committed to purchase all of its 328JET simulator time from
PAIFA at agreed upon rates, with no minimum number of simulator
hours guaranteed.
Internet Website
The Company's internet website can be found at
www.atlanticcoast.com. The Company makes available free of charge
on or through its internet website under the heading "for
investors", access to its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after such material
is filed, or furnished, to the Securities and Exchange Commission.
Industry Regulation and Airport Access
Economic
The Department of Transportation ("DOT") 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 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 scheduled and charter air transportation of persons,
property and mail between all points in the United States, its
territories and possessions. In addition, ACA may conduct scheduled
and charter air transportation to points outside the United States,
subject to obtaining any necessary authority from any foreign
country to be so served. The 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. In addition to this authority, ACA is
authorized to engage in air transportation between the United States
and Canada.
The Company's ACJet subsidiary also holds a certificate of
public convenience and necessity, issued by the DOT, that authorizes
it to conduct scheduled and charter air transportation of persons,
property and mail between all points in the United States, its
territories and possessions. ACJet is now a dormant company. The
only assets of ACJet are its DOT and FAA air carrier operating
certificates. In the first quarter of 2003, the Company paid $1
million to Delta in order to remove all contractual restrictions to
the use, sale or transfer of ACJet and its certificates. These
certificates are subject to revocation for non-use. The Company has
requested and obtained a waiver from the DOT and FAA to permit it to
continue to possess these certificates for a limited period of time
even though they are not being utilized at this time. The Company
has advised the DOT of its plans to make future use of these
certificates and, based on its statement of intent, has asked the
DOT to extend the waiver until June 2004.
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
that may impose additional regulatory burdens and costs on the
Company. In addition, air carriers may volunteer to impose new or
additional requirements on themselves to address Congressional
concerns or concerns expressed by the public, such as passenger
rights initiatives. Imposition of new laws and regulations on air
carriers or agreement on voluntary initiatives could increase the
cost of operation and or limit carrier management discretion.
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, airport security,
the transportation of hazardous materials 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 and related authorities issued by the FAA authorizing it
to conduct operations with turboprop and turbojet equipment. The
Company's ACJet subsidiary possesses an operating certificate by the
FAA and related authorities authorizing it to conduct operations
with 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 and with varying degrees of
intensity, the FAA conducts inspections of air carriers. Such
inspections may be scheduled or unscheduled and may be triggered by
specific events involving either the specific carrier being
inspected or other air carriers. In addition, the FAA may require
airlines to demonstrate that they have the capacity to properly
manage growth 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. These relate to, among other
things, the inspection of aircraft and the mandatory removal and
replacement of parts or structures. In addition, the FAA from time
to time amends its regulations and such amended regulations may
impose additional regulatory burdens on the Company, such as the
required installation of new safety-related items. Depending upon
the scope of the FAA's orders and amended regulations, these
requirements may cause the Company to incur substantial,
unanticipated expenses that may not be reimbursable under the
Company's marketing agreements. The FAA enforces its maintenance
regulations by the imposition of civil penalties, which can be
substantial.
On November 19, 2001 the President signed into law the
Aviation and Transportation Security Act (the "Security Act"). The
Security Act requires heightened passenger, baggage and cargo
security measures to be adopted as well as enhanced airport security
procedures. The Security Act created the Transportation Security
Administration ("TSA") that has taken over the responsibility for
conducting the screening of passengers and their baggage at the
nation's airports as of February 17, 2002. The activities of the
TSA are funded in part by the application of a $2.50 per passenger
enplanement security fee (subject to a maximum of $5.00 per one way
trip) and payment by all passenger carriers of a sum not exceeding
each carrier's passenger and baggage screening cost incurred in
calendar year 2000. The TSA was charged to have equipment in
operation by the end of 2002 to be able to electronically screen all
checked passenger baggage with explosive detection systems. The TSA
is also required to deploy federal air marshals on an increased
number of passenger flights.
The Security Act imposes new and increased requirements
for air carrier employee background checks and additional security
training of flight and cabin crew personnel. These additional and
new requirements may increase the security related costs of the
Company. The Security Act also mandates and the FAA has adopted new
rules requiring the strengthening of cockpit doors, some of the
costs of which may be reimbursed by the FAA. The Company completed
Level One fortification of its cockpit doors on all of its aircraft
as of November 15, 2001, and began installing Level Two
fortifications in December 2002. As of December 31, 2002, the
Company has received $1.9 million in reimbursements from the FAA for
the mandated cockpit door modifications. There is no guarantee that
the Company will be reimbursed in full for the cost of these
modifications. The modifications are expected to be completed
during 2003. New passenger and baggage screening requirements have
caused disruptions in the flow of passengers through airports and in
some cases delayed airline operations. The Company may experience
security-related disruptions in the future, including reduced
passenger demand for air travel, but believes that its exposure to
such disruptions is no greater than that faced by other providers of
regional air carrier services.
Although the TSA has taken over the former
responsibilities of the air carriers for the screening of all
passengers and baggage, the TSA, as with the FAA before it, requires
air carriers to adopt and enforce procedures designed to safeguard
property, and to protect airport and aircraft against terrorist
acts. The TSA, from time to time, may impose additional security
requirements on air carriers and airport authorities based on
specific threats or world conditions or as otherwise required. The
TSA has issued a number of security directives and altered
procedures upon changes in the Office of Homeland Security
announcements of heightened threat levels, and the Company has
adjusted its security procedures on numerous occasions in response
to these directives. The Company incurred substantial expense in
complying with current security requirements and it cannot predict
what additional security requirements may be imposed in the future
or the cost of complying with such requirements.
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the
transportation of hazardous materials. The Company has policies
against accepting hazardous materials or other dangerous goods for
transportation. Employees of the Company are trained in the
recognition of hazardous materials and dangerous goods through an
FAA approved training course. The Company may ship aircraft and
other parts and equipment, some of which may be classified as
hazardous materials, using the services of third party carriers,
both ground and air. In acting in the capacity of a shipper of
hazardous materials, the Company must comply with applicable
regulations. 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.
Federal law establishes maximum aircraft noise and
emissions limits. At the present time, all of the aircraft operated
by the Company comply with all applicable federal noise and
emissions regulations. Federal law generally preempts airports from
imposing unreasonable local noise rules that restrict air carrier
operations. However, under certain circumstances 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.
Slots.
Slots are reservations for takeoffs and landings
at specified times and are required by governmental authorities to
operate at certain airports. The Company has rights to and utilizes
takeoff and landing slots at Chicago-O'Hare and New York-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. All
slot regulation was eliminated at Chicago-O'Hare after July 1, 2002
and, under rules presently in effect, is scheduled to end at New
York-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 New York-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.
Risk Factors Affecting the Company
The Company's business is subject to numerous risks and
uncertainties, as described below and in the section titled,
"Management's Discussion and Analysis of Operations and Financial
Condition - Outlook and Business Risks" and "- Liquidity and Capital
Resources."
Substantially all of the Company's revenue is derived
under contracts with its code share partners. - The majority of
the Company's flights are operated under the United Express or Delta
Connection brand. As such, the Company must rely on its code share
partners to provide numerous services such as reservations,
ticketing, route planning, and customer service and ground handling
at certain stations. The Company's revenue and operations are
reliant on the ability of these partners to manage their operations
and cash flow, and ability and willingness of these partners to
continue to deploy the Company's aircraft and to utilize and pay for
scheduled service at agreed upon rates.
The code share partner that accounted for approximately
82% of the Company's revenue in 2002 is in bankruptcy. - The
Company devotes a substantial portion of its business to its
operations with United, and obtains substantial services from United
in operating that business. The Company's future operations are
substantially dependent on United's successful emergence from
bankruptcy and on the affirmation or renegotiation of the Company's
UA Agreement by United on acceptable terms, or on the Company's
ability to successfully establish an alternative to the United
business and services. If United seeks to renegotiate the terms of
the UA Agreements, a renegotiated agreement is likely to be on terms
that are less favorable to the Company with regard to operating
margins and could possibly result in the deployment of fewer
aircraft than currently contracted and/or be less favorable to the
Company in other respects, which would adversely affect the
Company's earnings and/or growth prospects. There is no assurance
that United will successfully emerge from bankruptcy, and United has
said that its liquidation is a possibility. If United does not
succeed in reorganizing its operations and emerging from bankruptcy,
and instead files for a liquidation under Chapter 7 of the U.S.
Bankruptcy Code, the Company would be faced with the prospect of
having to quickly find another code share partner or to develop the
airline-related infrastructure necessary to operate as an
independent airline. The Company anticipates that there would be an
interruption in its services during a transition period, the length
of which would be dependent on several factors including how soon
United liquidates. The Company has commenced planning for these
contingencies and will continue to pursue actions management
believes appropriate in the event that United liquidates under
Chapter 7. There are no assurances that the Company will be able to
find another code share partner or be able to compete as an
independent airline, and any prolonged stoppage of flying would
materially adversely affect the Company's results of operations and
financial position. Any failure to timely or successfully implement
alternative contingency plans could have a material adverse effect
on the Company and its viability. The Company's agreement with
Bombardier provides for 30 CRJs to be delivered during the remainder
of 2003 and an additional 12 CRJs to be delivered by April 30, 2004.
All of these aircraft were ordered for use in the Company's United
Express operations. Due to the United bankruptcy and other factors,
including the adverse effects on the airline industry of the war
with Iraq and the state of the financing markets, the Company and
Bombardier have agreed to delay by two weeks the scheduled delivery
date of two aircraft originally scheduled for March deliveries. The
Company is considering the delay of future deliveries and is engaged
in discussions with Bombardier regarding financing and aircraft
delivery schedules. See the discussion below regarding risks from
the Company's dealings with Bombardier. United's bankruptcy filing
may affect the Company in other ways that it is not currently able
to anticipate or plan for.
The average utilization of aircraft in the United Express
operation has declined and the rates for 2003 have not been
adjusted. - The UA Agreements call for the resetting of fee-per-
departure rates annually based on the Company's and United's planned
level of operations for the upcoming year. The average utilization
of aircraft in the United Express operation has declined, and as a
result, the Company is seeking a rate adjustment for 2003 consistent
with its interpretation of the United Express Agreements that would,
among other things, offset this reduction in utilization. The
Company and United are in discussions regarding the fee-per-
departure rates to be utilized during 2003. Until new rates are
established for 2003, United is paying the Company based on 2002
rates and the Company is recording its revenue in 2003 using the
rates established for 2002. There can be no assurance that the
Company will be able to successfully reset fee-per-departure rates.
Failure to reset fee-per-departure rates with United for 2003 could
have a material adverse effect on the Company's operating margins in
2003.
The Company relies on third party financing to pay for the
jets that it has contractually committed to purchase. - The
Company has contractual commitments with Bombardier for the delivery
of 30 CRJs to be delivered during 2003 and an additional 12 CRJs to
be delivered by April 30, 2004. The Company has generally relied on
leveraged lease transactions involving investments by institutional
or industrial investors that provide debt and equity capital to
finance the purchase price of aircraft it has committed to purchase.
In a leveraged lease, there is an equity source for 20% to 30% of
the purchase price and a debt source for the remaining 70% to 80% of
the purchase price. With the uncertainty of United's future and the
continued deterioration in industry conditions, the Company has been
unable to secure equity funding on any terms for its remaining firm
ordered aircraft. The inability to finance aircraft that the
Company desires to purchase may affect the Company's growth
prospects. The Company has a contingent commitment from Economic
Development Corporation of Canada ("EDC") for debt financing of its
next four aircraft scheduled for delivery. As a result of the
bankruptcy of United, EDC's debt funding obligation is contingent
upon the Company obtaining a waiver from EDC. The Company may not
be able to obtain such waivers in the future and may not be able to
obtain debt financing from EDC or others once the current EDC
financing commitment is no longer available. The Company is
considering the delay of future aircraft deliveries and is engaged
in discussions with Bombardier regarding financing and aircraft
delivery schedules. If the Company is unable to obtain permanent
aircraft financing at the time that it accepts any aircraft for
delivery, it may be required to fund aircraft purchases from its own
cash or to rely on temporary financing from the aircraft
manufacturer. The Company does not have the financial resources to
pay the full purchase price for all of the aircraft that it
currently has on order. If the Company is unable to delay
deliveries or pay for aircraft on order, Bombardier may assert a
claim for damages.
The Company is under pressure to control and reduce its
costs. - The economic downturn reduced demand for air travel and
the success of low-cost carriers has resulted in increased emphasis
in the airline industry on controlling and reducing expenses. The
Company has embarked on a cost reduction program with the goal of
reducing annualized operating expenses by approximately 10%. As
part of this program, the Company has implemented a hiring freeze,
has begun furloughing excess pilots, has eliminated or reduced bonus
programs, and has implemented salary reductions ranging from 5% to
10% for all salaried employees paid more than $30,000 per year. The
effect of salary reductions and the elimination of and changes in
bonus plans for those salaried employees is anticipated to reduce
cash compensation by between 10% and 33% with the reductions
affecting the Company's senior management and officers the most.
The Company has approached ALPA with the intent to negotiate similar
levels of wage reductions and work rule changes through voluntary
concessions. In order for the Company to achieve all of its cost
reduction goals, it will require cooperation from its employees,
major vendors and code share partners. If the Company is unable to
control and reduce its costs, it may not be able to effectively
compete against other regional carriers to maintain or expand its
existing operations.
The Company has unexpected costs and possible exposure
arising from the bankruptcy of Fairchild Dornier GmbH. - 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. At the time of the opening of formal insolvency proceedings,
Fairchild had significant current and future obligations to the
Company in connection with the Company's order of 328JET aircraft.
Fairchild subsequently notified the Company that it was rejecting
the Company's purchase agreement contract covering the remaining 32
328JETs the Company had on firm order, and options to acquire 81
additional aircraft. The Company's costs to operate its current
fleet of 33 328Jets increased in 2002 and may continue to increase
in the future due to Fairchild's failure to provide warranty and
product support and the limited availability of spare parts. The
Company has filed a claim against Fairchild Dornier GmbH and its
subsidiaries for $385 million in damages as a result of Fairchild's
insolvency proceedings but does not expect funds to be available to
satisfy any of its claim. Dornier Aviation of North America
("DANA"), one of the U.S. subsidiaries of Fairchild Dornier GmbH,
has filed a lawsuit against the Company claiming amounts allegedly
due for certain spare parts, late charges and consignment inventory
carrying charges. The Company is claiming the right of offset for
any amounts owed. If the Company loses in its claim to offset, it
could be obligated to pay DANA for parts received. At the time of
its bankruptcy, Fairchild had significant obligations to the Company
in connection with the Company's order of 328 Jets, including
providing the Company financial support in its retirement of J-41
aircraft. As a result of Fairchild's bankruptcy and its failure to
satisfy its obligations to the Company, the Company may continue to
experience higher than expected or unexpected costs in its
operations or may encounter consequences or risks that the Company
is not able to anticipate or plan for.
The Company's current operations benefit from government
support for insurance costs. - Following the September 11 terrorist
attacks, the aviation insurance industry imposed a worldwide
surcharge on aviation insurance rates as well as a reduction in
coverage for certain war risks. In response to the reduction in
coverage, the Air Transportation Safety and System Stabilization Act
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. Prior to December 2002, the Company
purchased hull war risk coverage through the private insurance
market, and purchased liability war risk coverage through a
combination of U.S. government provided insurance and private
insurance. In December 2002, the U.S. government offered to provide
additional war risk coverage that included certain risks previously
covered by private insurance. The Company has purchased, at rates
that are significantly lower than those charged by private insurance
carriers, hull and liability war risk coverage from the U.S.
government through April 14, 2003. These savings are passed through
to the Company's code share partners pursuant to its current UA and
DL Agreements. The Company anticipates that it will renew the
government insurance for as long as the coverage is available, and
then obtain this coverage through the private insurance market.
Under the Company's UA and DL Agreements, the Company passes through
the cost of insurance to its partners. However, the inability to
obtain insurance at any cost or the availability of insurance only
at excessive rates, could affect the Company's ability to operate.
The Company's contracts with two of its unions currently
are amendable. - The Company's contract with Aircraft Mechanics
Fraternal Association ("AMFA"), which was ratified in June 1998,
became amendable in June 2002, and its contract with the Association
of Flight Attendants ("AFA"), which was ratified in October 1998,
became amendable in October 2002. The AMFA contract covers all
aviation maintenance technicians and ground service equipment
mechanics working for the Company and the AFA contract covers all
flight attendants working for the Company. The Company has entered
into initial discussions with AMFA and with AFA regarding new
agreements. Although there can be no assurances as to the outcome
of these negotiations, the Company anticipates ultimately being able
to reach agreement with both unions on mutually satisfactory
contracts with no material effect on its results of operations or
financial position. However, the failure to resolve these
negotiations on appropriate terms could affect the Company's ability
to compete effectively.
The U.S. airline industry is experiencing significant
restructurings and bankruptcies. - The current U.S. airline
industry environment is probably the worst in its history.
Beginning in early 2001, the industry has experienced depressed
demand and shifts in passenger demand, lower unit revenues,
increased insurance costs, increased fuel costs, increased
government regulations and taxes, and tightened credit markets,
evidenced by higher credit spreads and reduced capacity to borrow.
These factors are directly affecting the operations and financial
condition of participants in the industry including the Company, its
code share partners, and aircraft manufacturers. The Company's
contractual relationships with others may continue to be affected by
other companies' bankruptcies or by concerns regarding potential
bankruptcies. The bankruptcy or prospect of bankruptcy among other
companies with which the Company deals or which operate in the
Company's industry may result in unexpected expenses and create
other risks or uncertainties that the Company is not able to
anticipate or plan around.
The travel industry has been materially adversely affected
by the September 11, 2001 terrorist attacks and the conflict in the
Middle East. - The terrorist attacks of September 11, 2001
adversely affected the Company and the airline industry by
significantly increasing the costs of security screening and
insurance, while reducing overall demand for air transportation.
Instability in the Middle East and the start of the U.S.-led war
with Iraq has increased the risk that the industry will continue to
be adversely affected by reduced demand, increased security costs,
increased fuel costs, and other factors. While the Company's code
share agreements allow it to recover these additional expenses from
its partners, the effects of any new terrorist attacks and/or a long
term U.S.-led war in the Middle East could materially adversely
affect the Company and its code share partners in ways that the
Company is not able to anticipate or plan around.
Item 2. Properties
Fleet Composition: The following table describes the
Company's fleet of aircraft, scheduled firm deliveries and options
as of March 15, 2003:
Total Number Number Average
Number of of Age
of Aircraft Aircraft Passenger In Firm
Aircraft Leased Owned Capacity Years Orders Options
Bombardier CRJ200 79 75 4 50 2.4 42 80
Fairchild Dornier
328JET 33 32 1 32 2.0 - -
British Aerospace
J-41 30 25 5 29 8.2 - -
Total 142 132 10 3.6 42 80
The Company has a plan to early retire its thirty (30)
British Aerospace J-41 turboprop aircraft ("J-41s") in the fleet.
Under the plan, J-41s would be removed from service by the end of
April 2004. The J-41 retirement plan is based on and tied to the
continued delivery of firm ordered CRJs and actual retirement could
be delayed if CRJ deliveries are delayed.
Leased Facilities
Airports
The Company enters into agreements for the use of
passenger terminals at most of the airports ACA serves and leases
ticket counter and office space at those locations where ticketing
and the Company's aircraft are handled by Company personnel.
Payments to airport authorities for ground facilities are generally
based on a number of factors, including space occupied as well as
flight and passenger volume. The Company occupies a 69,000 square
foot passenger concourse at Washington-Dulles dedicated solely to
regional airline operations. The 36-gate concourse, designed to
support the Company's United Express operation, is owned by the
Metropolitan Washington Airports Authority and leased to the Company
under a lease with a termination date of September 30, 2014.
Corporate Offices
The Company's executive, administrative and system control
departments are located in a three-story office building
encompassing 77,000 square feet of space under an operating lease
ending December 2010. The Company's employee training and services
center is located in a nearby 79,000 square foot building under a
lease ending December 31, 2007. A lease for additional office space
in Chicago, Illinois was entered into in October 2002 which ends
December 2007. The facility encompasses approximately 9,300 square
feet and provides space to support the Company's Chicago O'Hare
operations. Together, these properties provide the necessary
administrative facilities for the Company's operations.
Maintenance Facilities
The FAA's safety regulations mandate periodic inspection
and maintenance of commercial aircraft. The Company performs most
line maintenance, service and inspection of its aircraft and engines
at its own maintenance facilities using its own personnel.
The Company performs maintenance functions at a 112,000
square foot aircraft maintenance facility at Washington-Dulles
airport, a 34,000 square foot hangar facility in Columbia, SC, and a
53,000 square foot hangar at Chicago O'Hare airport. The Washington-
Dulles aircraft maintenance facility is comprised of 60,000 square
feet of hangar space and 52,000 square feet of support and
administrative space. The lease term for the Washington-Dulles
aircraft maintenance facility expires December 24, 2024. The lease
term for the Columbia facility expires on June 1, 2005 or earlier on
90 days notice. The Chicago O'Hare facility is subleased from
United, with the Company obligated to pay United's cost related to
the operation of the building including ground rent. This sublease
expires on December 31, 2007 although United has the right to reject
this lease in bankruptcy. In addition to these maintenance
facilities, the Company performs maintenance functions utilizing
hangar space at Cincinnati's Northern Kentucky International Airport
provided by Delta at no cost to the Company.
Item 3. Legal Proceedings
The Company has two outstanding legal matters with respect
to the Fairchild insolvency. The Company's balance sheet as of
December 31, 2002 includes a receivable for $1.2 million with
respect to deposits placed with Fairchild for undelivered aircraft.
The Company holds a bond from an independent insurance company that
was delivered to secure this deposit, and has made a demand for
payment under this bond. Fairchild's insolvency trustee has made a
claim for the collateral posted with the insurance company, and the
insurance company has withheld payment of the bond. The matter is
presently with the U.S. Bankruptcy Court for the Western District of
Texas.
At the time of Fairchild's insolvency, the Company had
outstanding invoices due to Fairchild for various spare parts
purchases. The Company believes it has the right to offset these
and other amounts claimed by Fairchild against obligations due from
Fairchild that will not be fulfilled as a result of the insolvency.
Fairchild-related entities dispute this right of offset, and in
September 2002, Fairchild's wholly owned U.S. subsidiary, Dornier
Aviation of North America ("DANA"), filed a lawsuit against the
Company in the United States Bankruptcy Court for the Eastern
District of Virginia (Civil Action No. 02-08181-SSM) seeking to
recover payments for certain spare parts, late payment charges, and
consignment inventory carrying charges. DANA contends that although
its German parent company may not have fulfilled its contractual
obligations to the Company, DANA sold spare parts to the Company
independent of its parent company's activities and that there is no
right of offset. The Company acknowledges that approximately $8
million in outstanding invoices existed, while DANA claims that an
additional $3.6 million is due. The action is presently in the
discovery stage and it is anticipated that a trial will be held
during the summer of 2003.
The Company has been named a defendant in two lawsuits
arising from the terrorist activities of September 11, 2001. These
lawsuits, known as Powell v. American Airlines, Atlantic Coast
Airlines, et al. (United States District Court, Southern District of
New York, case No. 02 CV 10160), and Gallop v. American Airlines,
Atlantic Coast Airlines, et al. (United States District Court,
Southern District of New York, case no. 0 3CV 1016), were commenced
by or on behalf of individuals who were injured or killed on the
ground in the attack on the Pentagon through the hijacking of an
American Airlines aircraft originating at Dulles Airport. In each
case, the plaintiffs have named all airlines operating at Dulles
Airport, including the Company, under the theory that all of the
airlines are jointly responsible for the alleged security breaches
by the Dulles security contractor, Argenbright Security. The
Company has joined a motion filed on behalf of American and other
defendants seeking dismissal of all ground victim claims on the
basis that the airline defendants do not owe a duty as a matter of
law to individuals injured or killed on the ground. It is
anticipated that the judge will rule on this motion during the
second quarter 2003. If this ruling is not favorable, the Company
anticipates that it will raise other defenses including its
assertion that it is not responsible for the incidents. The Company
anticipates that other similar lawsuits could be filed on behalf of
other victims.
From time to time, claims are made against the Company
with respect to activities arising from its airline operations.
Typically these involve injuries or damages incurred by passengers
and are considered routine to the industry. On April 1, 2002, one
of the Company's insurers on its comprehensive aviation liability
policy, Legion Insurance Company, a subsidiary of Mutual Risk Management
Ltd. ("Legion"), was placed into rehabilitation by the Commonwealth
of Pennsylvania, its state of incorporation. During the time that
Legion is in rehabilitation, Pennsylvania has ordered that Legion
pay no claims, expenses or other items of debt without its approval.
Consequently, the Company now directly carries the corresponding
exposure related to Legion's contribution percentage for payouts of
claims and expenses that Legion represented on the Company's all-
risk hull and liability insurance for the 1999, 2000, 2001 and 2002
policy years. Those contribution percentages are 15% for claims
arising from incidents occurring in 1999, 19% for 2000, 15% for
2001, and 8.5% for first quarter of 2002. Legion ceased to be an
insurer for the Company as of April 1, 2002, and there is,
therefore, no exposure with respect to Legion for claims arising
after that date. The insurance held by Legion on the Company's
policy was fully covered by reinsurance, which means that other
carriers are contractually obligated to cover all claims that are
direct obligations of Legion. While there are contractual
provisions to the effect that reinsurance funds are to be directly
applied against the Company's liabilities, it is anticipated that
Legion's creditors will attempt to obtain court authority to apply
these funds against Legion's other obligations. It is anticipated
that Legion ultimately will not be able to cover its obligations to
the Company except to the extent of recovery through reinsurance.
If Legion's creditors are able to apply reinsurance proceeds against
Legion's general obligations, the Company will be underinsured for
these claims at the percentages set forth above. This
underinsurance would include the September 11 related lawsuits
described above and any other similar lawsuits that are brought
against the Company. The Company has accrued reserves of
approximately $250,000 for the likely exposure on claims known to
date. No reserves have been accrued for the September 11 related
claims.
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, 2002, to a vote of the security holders of the Company
through the solicitation of proxies or otherwise.
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:
2001 High Low
First quarter $23.50 $18.25
Second quarter $29.99 $20.75
Third quarter $29.16 $10.03
Fourth quarter $24.94 $13.61
2002 High Low
First quarter $29.21 $23.05
Second quarter $24.31 $19.57
Third quarter $19.61 $8.69
Fourth quarter $17.03 $8.30
2003 High Low
First quarter
(through March 3, 2003) $14.54 $6.14
As of March 3, 2003, the closing sales price of the Common
Stock on NASDAQ/NM was $6.49 per share and there were approximately
176 holders of record of Common Stock.
The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company intends to retain earnings to
finance the growth of its operations. The payment of 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
subsidiaries by certain of its financing agreements, the prohibition
of dividends imposed by the Company's line of credit, and other
factors deemed relevant by the Board of Directors. In addition,
ACAI is a holding company and its only significant asset is its
investment in its subsidiary, ACA.
The Company's Board of Directors has approved the
repurchase of up to $40.0 million of the Company's outstanding
common stock in open market or private transactions. As of December
31, 2002 the Company has repurchased 2,171,837 shares of its common
stock and has approximately $21.0 million remaining of the $40.0
million authorized for repurchase.
Item 6. Selected Financial Data
The following selected financial data under the captions
"Consolidated Financial Data" and "Consolidated Balance Sheet Data"
relating to the years ended December 31, 1998, 1999, 2000, 2001 and
2002 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.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share amounts and
operating data)
Consolidated Financial Data: Years ended December 31,
1998 1999 2000 2001 2002
Operating revenues:
Passenger $285,243 $342,079 $442,695 $577,604 $749,103
Other 4,697 5,286 9,831 5,812 11,421
Total operating revenues 289,940 347,365 452,526 583,416 760,524
Operating expenses:
Salaries and related costs 68,135 84,554 107,831 164,446 203,341
Aircraft fuel 23,978 34,072 64,433 88,308 115,801
Aircraft maintenance and
Materials 22,730 24,357 36,750 48,478 72,233
Aircraft rentals 36,683 45,215 59,792 90,323 112,068
Traffic commissions and
related fees 42,429 54,521 56,623 15,589 19,994
Facility rents and landing
fees 13,475 17,875 20,284 32,025 43,805
Depreciation and
amortization 6,472 9,021 11,193 15,353 21,155
Other 23,347 28,458 42,537 61,674 85,163
Aircraft early retirement
charges (1) - - 28,996 23,026 24,331
Total operating expenses 237,249 298,073 428,439 539,222 697,891
Operating income 52,691 49,292 24,087 44,194 62,633
Other (expense) income :
Interest expense (4,207) (5,614) (6,030) (4,832) (4,332)
Interest income 4,145 3,882 5,033 7,500 4,628
Debt conversion expense (2) (1,410) - - - -
Government compensation (3) - - - 9,710 944
Other income (expense), net 326 (85) (278) 263 552
Total other (expense) income,net(1,146) (1,817) (1,275) 12,641 1,792
Income before income tax expense
and cumulative effect of
accounting change 51,545 47,475 22,812 56,835 64,425
Income tax provision 21,133 18,319 7,657 22,513 25,139
Income before cumulative
effect of accounting change 30,412 29,156 15,155 34,322 39,286 6 5
Cumulative effect of
accounting change, net (4) - (888) - - -
Net income $30,412 $28,268 $15,155 $34,322 $39,286
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (continued)
(Dollars in thousands, except per share amounts and operating data)
Years ended December 31,
1998 1999 2000 2001 2002
Income per share:
Basic:
Income before
cumulative effect of
accounting change $.84 $.77 $.38 $.79 $.87
Cumulative effect of
accounting change - (0.02) - - -
Net income per share (5) $.84 $.75 $.38 $.79 $.87
Diluted:
Income before
cumulative effect of
accounting change $.71 $.68 $.36 $.76 $.85
Cumulative effect of
accounting change - (0.02) - - -
Net income per share (5) $.71 $.66 $.36 $.76 $.85
Weighted average number
of shares used in
computation (in
thousands) (5)
Basic 36,256 37,928 40,150 43,434 45,047
Diluted 44,372 44,030 43,638 45,210 46,019
Selected Operating Data:
Revenue departures
(completed) 170,116 186,571 199,050 235,794 283,118
Revenue passengers
carried 2,534,077 3,234,713 3,778,811 4,937,208 7,160,480
Revenue passenger
miles (000s) (6) 792,934 1,033,912 1,271,273 1,895,152 2,833,155
Available seat miles
(000s) (7) 1,410,763 1,778,984 2,203,839 3,292,798 4,345,860
Passenger load
factor (8) 56.2% 58.1% 57.7% 57.6% 65.2%
Revenue per
available seat mile $0.206 $0.195 $0.205 $0.177 $0.175
Cost per available
seat mile (9) $0.168 $0.168 $0.181 $0.157 $0.155
Average yield per
revenue passenger
mile (10) $0.360 $0.331 $0.348 $0.305 $0.264
Average passenger
trip length (miles) 313 320 336 384 396
Revenue per
departure (11) $1,694 $1,851 $2,231 $2,452 $2,646
Aircraft utilization
(block hours) 8.9 8.6 7.8 8.1 8.8
Average cost per
gallon of fuel (cents) 67.4 74.6 111.1 98.4 97.0
Aircraft in service
(end of period) 74 84 105 117 137
Destinations served
(end of period) 53 51 53 64 84
Consolidated Balance
Sheet Data:
Working capital $68,130 $60,440 $72,018 $138,659 $197,631
Total assets $227,626 $293,753 $382,700 $452,425 $575,138
Long-term debt and
capital leases,
less current
portion $64,735 $92,787 $67,089 $60,643 $54,291
Total stockholders'
equity $110,377 $125,524 $168,173 $221,300 $275,368
1. In 2002, the Company recorded an operating charge of $24,539,000
($14,822,000 net of income tax benefits) for the non-discounted value of
future lease and other costs associated with the early retirement of
18 J-41 turboprop aircraft. In the second quarter of 2002 the Company
revised the retirement schedule for its leased J-41s. Included in the
operating charge for 2002 was a credit of $4,763,000 ($2,877,000 net of
income tax benefits) to reverse a portion of the operating charge booked
in 2001. In addition, in 2002 the company reversed the remaining portion
of the original 2000 operating charge of $208,000. In 2001, the Company
recorded an operating charge of $23,537,000 ($14,005,000 net of income tax
benefits) for the non-discounted value of future lease and other costs
associated with the early retirement of nine J-41 turboprop aircraft.
In 2000, the Company recorded an operating charge of $28,996,000
($17,398,000 net of income tax benefits) for the present value of
future lease and other costs associated with the early retirement of
28 J-32 turboprop aircraft. Upon completion of the J-32 retirement plan
in 2001, the Company reversed $500,000 of the original 2000 operating
charge in 2001.
2. 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.
3. In 2002 and 2001, the Company recognized $0.9 million and $9.7 million
respectively as non-operating income for funds received under the Air
Transportation Safety and System Stabilization Act, signed into law by
President Bush on September 22, 2001. In 2001, the Company recognized $9.7
million as non-operating income under the Air Transportation Safety and
System Stabilization Act.
4. In 1999, the Company recorded a charge of $888,000 for the cumulative
effect, net of income taxes, of a change in accounting for pre-operating costs
in connection with the implementation of Statement of Position 98-5.
5. All per share calculations have been restated to reflect 2-for-1 Common
Stock splits effected as dividends distributed on May 15, 1998 and February
23, 2001.
6. "Revenue passenger miles" or "RPMs" represent the number of miles flown by
revenue passengers.
7. "Available seat miles" or "ASMs" represent the number of seats available
for passengers multiplied by the number of scheduled miles the seats are
flown.
8. "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles by
available seat miles.
9. "Operating cost per available seat mile" or "CASM" represents total
operating expenses, excluding aircraft early retirement charges, divided by
available seat miles.
10. "Average yield per revenue passenger mile" represents the average passenger
revenue received for each mile a revenue passenger is carried.
11. "Revenue per departure" represents the revenue received for each departure
and is calculated by dividing gross passenger revenue by revenue departures.
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 subsidiary, Atlantic Coast Airlines
("ACA"). In 2002, the Company recorded net income of $39.3 million
compared to $34.3 million for 2001, and $15.2 million for 2000. For
2002, the Company's available seat miles ("ASM") increased 32% with
the addition of 17 Canadair Regional Jet ("CRJ") aircraft and 4
Fairchild Dornier 328JET ("328JET") aircraft, net of the reduction
of one J-41 turboprop aircraft during the year. The number of total
passengers increased 45.0%, and revenue passenger miles ("RPM")
increased 49.5%. For 2001, the Company's ASM increased 49.4% with
the addition of 19 CRJ aircraft and 15 328JET aircraft, net of the
reduction of 21 J32 turboprop aircraft during the year. The number
of passengers increased 30.7% and RPM increased 49.1%.
Fiscal Year 2001 vs. 2002
Results of Operations
For 2002, the Company's net income was $39.3 million or
$.85 per diluted share, compared to $34.3 million or $.76 per
diluted share for 2001. The Company generated operating income of
$62.6 million for 2002, compared to $44.2 million for 2001. These
results reflect the Company's increased capacity as it expanded the
number of aircraft operated under its agreements with United and
Delta as well as the additional items and factors discussed below.
The Company's net income for 2002 includes $0.9 million
(pre-tax) in government compensation received pursuant to the Air
Transportation Safety and System Stabilization Act ("Stabilization
Act") and net income for 2001 includes $9.7 million (pre-tax) for
government compensation received under the Stabilization Act. The
Company's net income and operating income for 2002 also reflect the
effects of $24.3 (pre-tax) million for J-41 turboprop early
retirement charges, $2.6 million (pre-tax) in bad debt expense
attributed to the potential write-off of net amounts due from United
Airlines as a result of its bankruptcy filing and $1.8 million (pre-
tax) in credits from the reversal of accruals from prior periods for
estimated expenses under the Company's code share agreements. Net
income and operating income for 2001 also reflects a $23.0 million
(pre-tax) operating charge related to the early retirement of J-41
turboprop aircraft.
Operating Revenues
The Company's operating revenues increased 30.4% to $760.5
million in 2002 compared to $583.4 million in 2001. The increase
resulted primarily from a 20.1% increase in revenue departures to
283,118 for 2002 as well as an 8.0% increase in revenue per
departure to $2,646. Revenue in 2002 was recognized primarily under
fee-for-service agreements. Revenue for 2001 also included an
additional $3.8 million attributable to routine subsequent period
sampling adjustments to prior billed tickets under the Company's
former proration-of-fare arrangement with United that ended on
November 30, 2000. The increase in departures reflects the addition
of 17 CRJ aircraft and 4 328JET aircraft in 2002, and the annualized
effect in 2002 of adding 19 CRJ aircraft and 15 328JET aircraft
during 2001. Revenue passengers increased 45.0% in 2002 compared to
2001, resulting in an average load factor for the year of 65.2%.
Operating Expenses
A summary of operating expenses as a percentage of
operating revenue and operating cost per ASM for the years ended
December 31, 2001 and 2002 is as follows:
Year Ended December 31,
2001 2002
Percent Percent Cost
of Cost of Per
Operating Per ASM Operating ASM
Revenue (cents) Revenues (cents)
Salaries and related costs 28.2% 5.0 26.8% 4.7
Aircraft fuel 15.1% 2.7 15.2% 2.7
Aircraft maintenance and
materials 8.3% 1.5 9.5% 1.7
Aircraft rentals 15.5% 2.7 14.7% 2.6
Traffic commissions and
related fees 2.7% .5 2.6% .4
Facility rents and
landing fees 5.5% 1.0 5.8% 1.0
Depreciation and amortization 2.6% .4 2.8% .5
Other 10.6% 1.9 11.2% 2.0
Aircraft early
retirement charge 3.9% .7 3.2% .5
Total 92.4% 16.4 91.8% 16.1
The Company's operating expenses increased primarily as a
result of increased capacity, as available seat miles (ASMs)
increased 32% to 4.3 billion in 2002 as compared to 3.3 billion in
2001. Operating expenses included $24.3 million and $23.0 million
aircraft early retirement charges in 2002 and 2001 respectively.
Operating expenses for 2002 also included $2.6 million pre-tax in
bad debt expense attributed to the potential write-off of net
amounts due from United Airlines as a result of its bankruptcy
filing in 2002, and $1.8 million pre-tax credits from the reversal
in 2002 of accruals from prior periods for estimated expenses under
the Company's code share agreements, the net effect of which
increased "Other" operating expense by 0.1 cents. Before accounting
for these items, the Company's operating expenses increased 30.3% to
$672.8 million or cost per available seat mile ("CASM") of 15.5
cents in 2002 compared to $516.2 million or CASM of 15.7 cents in
2001. As a result, CASM (excluding the items described above)
decreased 1.3%. CASM changes that are not primarily attributable to
the changes in capacity and the items described above are as
follows:
Salaries and related costs per ASM decreased 6% to 4.7
cents in 2002 as compared to 5.0 cents in 2001. The Company
suspended its cash employee bonus plans during the first quarter of
2002 due to the events of September 11, 2001. The Company
reinstated its cash bonus plans effective April 1, 2002.
The cost per ASM for maintenance increased 13.3% due
primarily to increased maintenance costs on the Company's fleet of
328JETs due to the bankruptcy filing of the manufacturer, the
continuing expiration of manufacturer's warranty on the CRJ fleet,
and increased cost accruals for amounts which are being claimed by
GE under a power-by-the-hour agreement for certain engine repair
work.
The cost per ASM for other operating expenses remained at
1.9 cents for 2002 and 2001. In absolute dollars, other operating
expenses, excluding the $2.6 million bad debt expense for United and
the $1.8 million in credits from accrual reversals, increased 35.3%
from $61.7 million in 2001 to $84.4 million in 2002. The increased
dollar costs result primarily from additional property taxes, higher
insurance costs associated with the terrorist acts, increased legal
costs related to the Fairchild Dornier and United Airlines
bankruptcies, and increased training costs.
Other Income (Expense)
Interest expense decreased from $4.8 million in 2001 to
$4.3 million in 2002. The decrease is the result of reductions of
overall debt levels as the Company pays down existing debt on owned
aircraft.
Interest income decreased 38.3% to $4.6 million in 2002
from $7.5 million in 2001. This decrease is primarily the result of
market rates earned on investments made in accordance with the
Company's investment policies and the decision to invest in lower
interest rate tax free securities, partially offset by the Company's
higher cash balances during 2002 as compared to 2001.
On September 22, 2001, President Bush signed into law 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
was entitled to receive cash grants under these provisions. The
Company received and recorded $0.9 million and $9.7 million in
government compensation in 2002 and 2001 respectively, under the
provisions of the Stabilization Act. The Company has recognized the
cash grants under these provisions as non-operating income under
"government compensation" in 2002 and 2001. All amounts received as
government compensation are subject to audit and adjustment by the
federal government for a period of up to five years.
The Company recorded a provision for income taxes of $25.1
million for 2002, compared to a provision for income taxes of $22.5
million in 2001. The Company's effective tax rate was 39.0% in 2002
and 39.6% in 2001. These rates reflect various state income tax
credits and continuing changes in apportionment of taxable income to
states in which the Company operates. The effective tax rates also
reflect non-deductible permanent differences between taxable and
book income.
Fiscal Year 2000 vs. 2001
Results of Operations
For 2001, the Company's net income was $34.3 million or
$.76 per diluted share, compared to $15.2 million or $.36 per
diluted share for 2000. The Company generated operating income of
$44.2 million for 2001, compared to $24.1 million for 2000. These
results reflect the Company's increased capacity as it expanded the
number of aircraft operated under its agreements with United and
Delta as well as the additional items and factors discussed below.
The Company's net income for 2001 includes $9.7 million
(pre-tax) for government compensation received for 2001. The
Company's net income and operating income for 2001 also reflect the
effects of a $23.0 million (pre-tax) operating charge related to the
early retirement of J-41 turboprop aircraft, while net income and
operating income for 2000 reflect a $29.0 million (pre-tax)
operating charge related to the early retirement of J-32 turboprop
aircraft.
Operating Revenues
The Company's operating revenues increased 28.9% to $583.4
million in 2001 compared to $452.5 million in 2000. The increase
resulted primarily from a 49.4% increase in ASMs to 3.3 billion as
well as a 9.9% increase in revenue per departure to $2,452. Revenue
in 2001 was recognized primarily under fee-for-service agreements as
compared to a combination of a proration-of-fare agreement and a fee-
for-service agreement in 2000. Revenue for 2001 also included an
additional $3.8 million attributable to routine subsequent period
sampling adjustments to prior billed tickets under the Company's
former proration-of-fare arrangement. The increase in ASMs reflects
the addition of 19 CRJ aircraft and 15 328JET aircraft in 2001, and
the full year effect in 2001 of adding 14 CRJ aircraft and 14 328JET
aircraft during 2000, offset by the removal of 21 J-32 aircraft
during 2001. Revenue passengers increased 30.7% in 2001 compared to
2000, which combined with the increase in the average passenger
stage length resulted in a 49.1% increase in RPMs.
The 40.8% decrease in other revenues year over year
reflects a $1.8 million decrease in revenue from package and mail
delivery and a $1.4 million decrease in United employee ticket
revenue. The decrease reflects the fact that these revenues are no
longer earned by the Company as a result of the restatement of the
UA Agreement, which went into effect on December 1, 2000.
Operating Expenses
A summary of operating expenses as a percentage of
operating revenue and operating cost per ASM for the years ended
December 31, 2000 and 2001 is as follows:
Year Ended December 31,
2000 2001
Percent Percent
of Cost of Cost
Operating per Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 23.8% 4.9 28.2% 5.0
Aircraft fuel 14.2% 2.9 15.1% 2.7
Aircraft maintenance and
materials 8.1% 1.7 8.3% 1.5
Aircraft rentals 13.2% 2.7 15.5% 2.7
Traffic commissions and
related fees 12.5% 2.6 2.7% .5
Facility rents and
landing fees 4.5% .9 5.5% 1.0
Depreciation and amortization 2.5% .5 2.6% .4
Other 9.5% 1.9 10.6% 1.9
Aircraft early retirement
charge 6.4% 1.3 3.9% .7
Total 94.7% 19.4 92.4% 16.4
The Company's operating expenses increased primarily as a
result of increased capacity, as ASMs increased 49.4% to 3.3 billion
in 2001 as compared to 2.2 billion in 2000. Operating expenses also
included $23 million and $29 million aircraft early retirement
charge in 2001 and 2000, respectively. Before accounting for these
items, the Company's operating expenses increased 29.2% to $516.2
million in 2001 compared to $399.4 million in 2000. This increase
was due primarily to: a 52.5% increase in total salary costs, a
51.1% increase in aircraft rentals and a 57.9% increase in facility
rents. These increases reflect the addition of 34 regional jet
aircraft in 2001, and the retirement of 21 J-32s during 2001. Cost
per ASM changes that are not primarily attributable to the changes
in capacity are as follows:
Salaries and related costs for 2001 include a $2.9 million
accrual reflecting estimated costs for additional company
contributions which may be made to the Company's 401(k) plan to
address operational defects found in the plan.
The cost per ASM of aircraft fuel decreased to 2.7 cents
in 2001 compared to 2.9 cents in 2000. The total average price per
gallon of fuel decreased 11.7% to 98 cents in 2001 compared to $1.11
in 2000. In absolute dollars, aircraft fuel expense increased 37.1%
from $64.4 million in 2000 to $88.3 million in 2001, reflecting a
27.3% increase in block hours and the higher fuel consumption per
hour of regional jet aircraft versus turboprop aircraft which
resulted in a 21.6% increase in the system average burn rate
(gallons used per block hour flown).
The cost per ASM of traffic commissions and related fees
decreased to 0.5 cents in 2001 as compared to 2.6 cents in 2000. In
absolute dollars, traffic commissions and related fees decreased
72.5% to $15.6 million in 2001 from $56.6 million in 2000. The
decrease reflects the fact that many of these fees are no longer
borne by the Company as a result of the restatement of the UA
Agreement, which went into effect on December 1, 2000. Under the
restated agreement, the Company is now only responsible for fees
associated with the major airline Computer Reservation Systems.
Other Income (Expense)
Interest expense decreased from $6 million in 2000 to $4.8
million in 2001. The decrease is the result of the full year effect
of the impact of the conversion of the Company's 7% notes into
equity during the first half of 2000.
Interest income increased from $5 million in 2000 to $7.5
million in 2001. This is primarily the result of the Company's
significantly higher cash balances during 2001 as compared to 2000
offset partially by lower rate of return on short-term investments
in 2001.
On September 22, 2001, President Bush signed into law the
Stabilization Act. The Stabilization Act provided 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
was entitled to receive cash grants under these provisions. The
exact amount of the Company's compensation was based on the lesser
of actual losses incurred or a statutory limit based on the total
amount allocable to all airlines. The Company received $9.7 million
in government compensation, in 2001 which was the government's
estimate of approximately 85% of the Company's allocation based on
preliminary data. The Company recognized this amount as non-
operating income under "government compensation" during the third
and fourth quarters 2001. All amounts received as government
compensation are subject to audit and adjustment by the federal
government.
The Company recorded a provision for income taxes of $22.5
million for 2001, compared to a provision for income taxes of $7.7
million in 2000. The 2001 effective tax rate was approximately
39.6% as compared to the 2000 effective tax rate of approximately
33.6%. This increase is primarily due to a favorable state income
tax ruling in 2000 resulting in the application of one time state
tax credits, and the realization of certain tax benefits that were
previously reserved, which together reduced income tax expense by
approximately $1.4 million for 2000. The effective tax rates
reflect non-deductible permanent differences between taxable and
book income.
Recent Developments and Outlook
This Recent Developments and Outlook section and the
Liquidity and Capital Resources section below contain forward-
looking statements. Actual results may differ materially. Factors
that could cause the Company's future results to differ materially
from the expectations described here include: United's ability to
successfully reorganize in bankruptcy; the ability to replace United
with other carriers in the event United liquidates or for the
Company to implement other contingency plans; the ability and timing
of agreeing upon 2003 rates with United; the Company's ability to
collect pre-petition obligations from United or to offset pre-
petition obligations due to United; United's decision to either
affirm all of the terms of the Company's existing UA Agreement or to
reject the agreement in its entirety; the timing of such decision;
efforts by United to negotiate changes as a condition to affirming
the Company's existing UA Agreement; unexpected costs arising from
the insolvency of United; the effects of the United bankruptcy and
of the economic conditions in the air travel industry on the
Company's ability to obtain aircraft financing; Delta's ability to
successfully avoid bankruptcy; the ability of United and Delta to
manage their operations and cash flow, continue to deploy the
Company's aircraft, and to utilize and pay for scheduled service at
rates established under existing contracts with the Company; changes
in levels of service agreed to by the Company with United and Delta;
extent to which the Company accepts regional jet deliveries under
its agreement with Bombardier, and ability to delay deliveries or to
settle arrangements with Bombardier regarding undelivered aircraft;
satisfactory resolution of union contracts with the Company's
aviation maintenance technicians/ground service equipment mechanics
and flight attendants; potential service disruptions due to labor
actions by employees of the Company, Delta Air Lines or United
Airlines; ability to successfully retire turboprop aircraft and to
remarket them at anticipated rates; availability and cost of product
support for the Company's 328JET aircraft; ability of the Company to
recover or realize its claims against Fairchild Dornier in its
insolvency proceedings or to offset certain of its obligations to
Fairchild against these claims, and unexpected costs arising from
the insolvency of Fairchild Dornier; the costs and other effects of
enhanced security measures and other possible government orders;
changes in and satisfaction of regulatory requirements including
requirements relating to maintenance and fleet expansion;
willingness of the U.S. government to continue to provide war risk
insurance at favorable rates, or increased cost and reduced
availability of insurance; the effects of high fuel prices on the
Company and on its major airline partners; adverse weather
conditions; additional acts of war or terrorism; any actions that
may be taken by the Company's suppliers and competitors, and the
effects on the economy in general and the air travel industry in
particular of U.S. involvement in a war or in military or warlike
operations. The statements in this Annual Report are made as of
March 29, 2003 and the Company undertakes no obligation to update
any of the forward-looking information included in this release,
whether as a result of new information, future events, changes in
expectations or otherwise. Certain of these risk factors are
discussed more fully above under "Business Risk Factors Affecting
the Company.
The U.S. airline industry continues to experience
depressed demand and shifts in passenger demand, increased insurance
costs, changing and increased government regulations and tightened
credit markets, evidenced by higher credit spreads and reduced
capacity. These factors are directly affecting the operations and
financial condition of participants in the industry including the
Company, its code share partners, and aircraft manufacturers.
Although recent steps taken by the major U.S. carriers to return to
profitability have tended to increase the importance of regional
jets to the industry, future implementation of regional jet programs
will depend on market conditions and relative cost structures.
Aggressive cost-cutting by major airlines, including United's
actions in bankruptcy, have reduced the gap between trip costs for
the major airlines' smallest jets relative to regional jets, thus
putting increased pressure on regional jet operators to also
decrease their costs. Moreover, the ongoing losses incurred by the
industry continue to raise substantial risks and uncertainties. As
discussed below, these risks may impact the Company, its code share
partners, and aircraft manufacturers in ways that the Company is not
currently able to predict.
In anticipation of the start of the war with Iraq and the
continued deterioration of the economics in the airline industry,
the Company embarked on a cost reduction program with the goal of
reducing annualized unit operating expenses by approximately 10%.
As part of this program, the Company implemented a hiring freeze,
began furloughing excess pilots, eliminated or reduced bonus
programs, and implemented salary reductions ranging from 5% to 10%
for all salaried employees. The elimination of and changes in bonus
plans and salaries for those management employees paid more than
$30,000 per year is anticipated to reduce cash compensation by
between 10% and 33% for salaried employees with the largest
reductions affecting the Company's officers. The Company has also
approached ALPA with the intent to negotiate similar pay reductions
and work rule changes where appropriate to assure that the Company's
costs are at market rates. In order for the Company to achieve all
of its cost reduction goals, it will require cooperation from its
employees, the unions representing its employees, major vendors and
code share partners.
The Company derives substantially all of its revenue under
long-term code share agreements with United and Delta. In addition
to the 79 CRJs, 33 328JETs, and 30 J-41s in service as of March 15,
2003, the Company has firm orders for an additional 42 CRJs from
Bombardier Inc., with option orders for 80 CRJs. All of the firm
ordered aircraft were ordered for use in the Company's United
Express operations. Under these agreements, the Company is
dependent on United and Delta for substantially all of its revenue
and for providing support services necessary to operate its
aircraft, and is dependent on Bombardier for providing aircraft and
other support. Business or operational difficulties, liquidity
problems or bankruptcy of any of these entities could materially
impact the Company's operations and financial condition. See the
discussion below in this "Recent Developments and Outlook" section
with respect to the Company's present considerations regarding
future deliveries.
In response to industry conditions, both United and Delta
are changing how the Company's regional jet aircraft are utilized.
In the past, regional jets were primarily deployed to open new long,
thin routes and to replace some turboprop service in higher traffic
markets. The Company continues to work closely with its two major
partners, United Airlines and Delta Air Lines, to provide value and
cost efficiencies in the current difficult airline environment. For
United, the Company has added CRJs into Chicago's O'Hare airport
allowing United to offer all jet United Express service from Chicago
O'Hare as of August 2002. FAA slot restrictions at Chicago's O'Hare
airport were eliminated effective July 2002, which removed a barrier
to the Company's providing additional service there. At Delta's
request, the Company moved 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. The stage length for flights
out of Cincinnati are on average shorter than those previously flown
out of New York's LaGuardia airport. The Company anticipates that
its overall operating costs at Cincinnati will be lower than costs
incurred while operating at LaGuardia, however, its unit costs
overall will be higher as a result of shorter stage lengths coupled
with an increase in maintenance costs on the 328 due to the
insolvency filing by Fairchild. The Company reset its rate per
block hour with Delta in January 2003, in accordance with the terms
of its agreement, and these rates reflect the anticipated impact of
higher unit costs due to Cincinnati based flying.
On December 9, 2002, UAL, Inc. and its subsidiaries,including
United, filed for protection under Chapter 11 of the United States
Bankruptcy Code. UAL is currently operating and managing its
business and affairs as a debtor in possession. As part of its
first day filings in the bankruptcy proceeding, United requested and
was granted a court order permitting, but not requiring it to
continue to honor the UA Agreements while United is in bankruptcy.
As such, the Company continues to operate as a United Express
carrier pursuant to its UA agreement. UAL, Inc. and its
subsidiaries have been granted the exclusive right until October 6,
2003, to file a plan of reorganization and the exclusive right until
December 5, 2003, to seek acceptances of any such plan. The Court
has set May 12, 2003 as the deadline for the filing of proofs of
claim, although this deadline does not apply to claims arising under
executory contracts and unexpired leases that have yet to be
rejected by UAL, Inc. and its subsidiaries. It is possible that
any or all of the foregoing deadlines may be extended. In
bankruptcy, United also has the right to assume or reject the
Company's UA Agreements, as described in Recent Development and
Outlook below. No deadline has been set for United to assume or
reject the Company's UA Agreements. If United seeks to renegotiate
the terms of the UA Agreements, a renegotiated agreement is likely
to be on terms that are less favorable to the Company with regard to
operating margins and in other respects, which would adversely
affect the Company's earnings and/or growth prospects. The Company
cannot predict the outcome of United's decision. As of December 31,
2002, the Company believes that United owed ACA approximately $8.0
million as of the date of United's bankruptcy filing for unpaid pre-
petition obligations relating to United Express services prior to
the filing and that, if these pre-petition amounts are not
ultimately paid by United, ACA will have the right to offset amounts
ACA owes United for pre-petition services totaling approximately
$5.4 million. As of December 31, 2002, the Company has taken a pre-
tax charge of $2.6 million relating to this unpaid pre-petition
obligation. The Company continues to assess the effects of the
bankruptcy filing by United Airlines and its related companies.
The Company devotes a substantial portion of its business
to its operations with United, and obtains substantial services from
United in operating that business. The Company's future operations
are substantially dependent on United's successful emergence from
bankruptcy and on the affirmation or renegotiation of the Company's
UA Agreement by United on acceptable terms, or on the Company's
ability to successfully establish an alternative to the United
business and services. There is no assurance that United will
successfully emerge from bankruptcy, and United has said that
liquidation is a possibility. If United does not succeed in
reorganizing its operations and emerging from bankruptcy, and
instead files for a liquidation under Chapter 7 of the U.S.
Bankruptcy Code, the Company would be faced with the prospect of
having to quickly find another code share partner or to develop the
airline related infrastructure to fly as an independent airline.
The Company has commenced planning for these contingencies and will
continue to pursue actions management believes appropriate in the
event that United liquidates under Chapter 7. The Company
anticipates that there would be an interruption in its services
during a transition period, the length of which would be dependent
on several factors including how soon United liquidates. There are
no assurances that the Company will be able to find another code
share partner or be able to compete as an independent airline, and
any prolonged stoppage of flying would materially adversely affect
the Company's results of operations and financial position.
United's bankruptcy filing may affect the Company in other ways that
it is not currently able to anticipate or plan for.
The UA Agreements call for the resetting of fee-per-
departure rates annually based on the Company and United's planned
level of operations for the upcoming year. The Company and United
are in discussions regarding the fee-per-departure rates to be
utilized during 2003. During 2002, the average utilization of
aircraft in the United Express operation declined, and as a result,
the 2002 rates do not adequately reflect decreases in the Company's
aircraft utilization. In the first quarter of 2003, utilization of
the Company's aircraft has continued to decline relative to fourth
quarter 2002 levels. The Company is seeking a rate adjustment for
2003 consistent with its interpretation of the United Express
Agreements that would, among other things, offset this reduction in
utilization. Until new rates are established for 2003, United is
paying the Company based on 2002 rates and the Company is recording
its revenue in 2003 using the rates established for 2002. There can
be no assurance that the Company will be able to successfully reset
fee-per-departure rates. Unless the Company is successfully able to
reset its 2003 fee-per-departure rates with United or to
significantly reduce costs or increase utilization, its operating
margins for 2003 will be materially affected.
The Company's Delta Connection service commenced revenue
service with 328JETs during the third quarter of 2000 and added CRJs
during the fourth quarter of 2000. Approximately $7.8 million in
start-up expenses from inception through commencement of revenue
service were incurred, which were expensed as incurred. Delta is
reimbursing the Company for $5.2 million of these costs, and the
amounts are being recorded as revenue ratably through July 2003.
Through December 31, 2002, the Company has recorded $4.0 million of
this revenue. In January 2003, the Company and Delta agreed to 2003
rates, consistent with the rate setting process contained in the DL
Agreement.
The Company's agreement with Bombardier provides for 30
CRJs to be delivered during the remainder of 2003 and an additional
12 CRJs to be delivered by April 30, 2004. The Company has
generally financed its new aircraft deliveries through leverage
lease structures involving investments by institutional or
industrial investors who provide debt and equity capital to finance
the Company's aircraft. This type of financing has been more
difficult to obtain since September 11, both in terms of cost and
sources of funds. Although the Company has finalized funding
arrangements for all aircraft delivered through March 15, 2003, the
Company has not been able to locate equity funding, which provides
approximately 20% of the aircraft acquisition cost, for any further
deliveries and had obtained contingent debt commitments for only
four undelivered aircraft. The availability of funding,
particularly equity funding, remains uncertain. The Company has a
contingent commitment from Economic Development Corporation of
Canada ("EDC") for debt financing of four aircraft originally
scheduled for delivery in March and April 2003. As a result of the
bankruptcy of United, EDC's debt funding obligation is contingent
upon the Company obtaining a waiver from EDC. Since the United
bankruptcy filing through the date of this filing, the Company has
been successful in obtaining such waivers. The Company has been in
discussions with EDC to provide debt financing for additional
ordered aircraft. The Company may be forced to utilize its own
funds for equity investments or to seek alternative sources of
funding a portion of its aircraft deliveries. Due to a number of
factors, including the United bankruptcy, the effect on the
operations of the airline industry of the war with Iraq, and the
state of the financing markets, the Company and Bombardier have
agreed to delay by two weeks the delivery of two aircraft originally
scheduled for March deliveries. The Company is considering the
delay of future deliveries and is engaged in discussions with
Bombardier regarding financing and the aircraft delivery schedule.
As a result of these discussions, Bombardier is withholding
approximately $3.7 million in payments due to the Company for
amounts owed under the Company's aircraft purchase agreements. In
addition, as of February 2003, the Company had $37.3 million on
deposit with Bombardier for future aircraft orders.
In July 2002, 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 subsequently notified the
Company that it has rejected the Company's purchase agreement
covering the remaining 30 328JETs the Company had on firm order for
its United Express operation, two 328JETs on firm order for the
Company's Private Shuttle operation, and options to acquire 81
additional aircraft. At the time of the opening of formal
insolvency proceedings, Fairchild had significant current and future
obligations to the Company in connection with the Company's 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 J-41 Turboprop 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. In August 2002, the Company filed its claim in
the Fairchild insolvency proceeding. The Fairchild insolvency
trustee indicated that it is unlikely that funds will be available
for claims by unsecured creditors. During the first quarter 2003,
the trustee indicated that he is finalizing plans to sell portions
of the prior business including the production and support of
328JETs. The Company anticipates that long-term product support
would be improved should the businesses be successfully transitioned
to a new owner, but does not have any knowledge as to whether a sale
of these businesses can in fact be completed or whether production
can be resumed. In addition, the Company does not anticipate that
such a sale will have an effect on its prior contractual commitments
or on its bankruptcy claim.
The Company believes it has a security interest in
Fairchild's equity interest in 32 delivered 328JETs, under which 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. The Company's balance sheet as of
December 31, 2002 includes a receivable for $1.2 million with
respect to deposits placed with Fairchild for undelivered aircraft.
The Company holds a bond from an independent insurance company that
was delivered to secure this deposit, and has made a demand for
payment under this bond. Fairchild's insolvency trustee has made a
claim for the collateral posted with the insurance company, and the
insurance company has withheld payment of the bond. The matter is
presently with the U.S. bankruptcy court for the Western District of
Texas. The Company's balance sheet as of December 31, 2002 also
includes approximately $1.0 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. To the extent the Company does not prevail in its
claims, it may be required to take a charge for all or a portion of
the $1.0 million due from Fairchild for third party expenses, or the
$1.2 million in deposits secured by the bond. At the time of
Fairchild's insolvency, the Company had outstanding invoices due to
Fairchild for various spare parts purchases. The Company believes
it has the right to offset these and other amounts claimed by
Fairchild against obligations due from Fairchild, to the extent
permitted by law. Fairchild related entities dispute this right,
and Fairchild's wholly owned U.S. subsidiary, Dornier Aviation of
North America ("DANA"), has filed a lawsuit against the Company
claiming amounts allegedly due for certain spare parts, late payment
charges, and consignment inventory carrying charges. DANA contends
that although its German parent company may not have fulfilled its
contractual obligations to the Company, DANA sold spare parts to the
Company independent of its parent company's activities and that
there is no right of offset. The Company acknowledges that
approximately $8 million in outstanding invoices existed, while DANA
claims that an additional $3.6 million is due. The action is
presently in the discovery stage and it is anticipated that a trial
will be held during the summer of 2003.
The Company's costs to operate its current fleet of 33
328JETs increased in 2002, and may continue to increase in the
future due to costs incurred for maintenance repairs that otherwise
would have been covered by the manufacturer's warranty and the costs
and limited availability of spare parts. Additionally, as a result
of Fairchild's rejection of the purchase contract, the Company does
not expect Fairchild to satisfy its obligation to pay the difference
in the sublease payments, if any, received from remarketing the 26 J-
41 aircraft leased by the Company on those aircraft and the amount
due under the Company's aircraft leases.
On June 4, 2002, the Company and United agreed to an
amendment to the Company's UA 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 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 42 additional CRJs as of March 15, 2003, and continues to
hold options for an additional 80 CRJs. See below with respect to
the Company's present considerations regarding future deliveries.
Fairchild had the obligation to purchase five J-41
aircraft owned by the Company at their net book value at the time of
their retirement. As a result of Fairchild's rejection of the
purchase contract, the Company does not expect Fairchild to satisfy
this obligation. The Company is required to evaluate the book value
of its long-lived assets as compared to estimated fair market value.
The Company now estimates that the fair market value of four of the
five owned J-41 aircraft will be, in the aggregate, $2.9 million
below book value when the aircraft are retired from the fleet. As a
result, the Company is recognizing $2.9 million in additional
depreciation charges related to such aircraft over their remaining
estimated service lives. As of December 31, 2002, the Company had
recognized $1.0 million of this additional depreciation expense.
In June 2002 the Company reconfirmed its commitment to
United to remove its remaining J-41 turboprop aircraft from service
no later than April 30, 2004. The Company has long-term lease
commitments for 25 of these J-41 aircraft and owns 5 J-41 aircraft.
During 2002, the Company recorded aircraft early retirement
operating charges totaling $24.3 million ($14.6 million net of
income tax) for the non-discounted value of future lease payments
and other costs associated with the early retirement of 18 J-41
turboprop aircraft. The total 2002 aircraft early retirement
charges reflects a charge of $21.5 million ($12.9 million after tax)
in the fourth quarter of 2002 relating to J-41 aircraft which are
expected to be retired by the fourth quarter of 2003, a $7.6 million
charge ($4.5 million after tax) in the third quarter of 2002 related
to expected scheduled aircraft retirements by the third quarter of
2003, and a $4.8 million ($2.8 million after tax) credit to income
in the second quarter of 2002 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
estimates that it will expense approximately $26.5 million (pre-tax)
to retire the remaining 8 leased J-41s as they are retired during
2004. The Company plans to actively remarket the J-41s through
leasing, subleasing or outright sale of the aircraft. Any of these
arrangements involving leased aircraft may require the Company to
make payments to the lessor to cover shortfalls between sale prices
and lease stipulated loss values. Significant delays in the
delivery of the remaining CRJs on firm order could negatively impact
the Company's ability to complete its early aircraft retirement plan
for the J-41 turboprop fleet.
Liquidity and Capital Resources
As of December 31, 2002, the Company had cash, cash
equivalents, and short-term investments of $242.6 million and
working capital of $197.6 million compared to $181.0 million and
$138.7 million, respectively, as of December 31, 2001. During the
year ended December 31, 2002, cash and cash equivalents decreased
$144.4 million, reflecting net cash provided by operating activities
of $106.8 million, net cash used in investing activities of $252.1
million (primarily the results of the net increase in short term
investments of $206.1 million and purchases of property and
equipment of $35.7 million) and net cash provided by financing
activities of $0.8 million. Net cash provided by financing
activities was mainly related to proceeds from exercise of stock
options.
As of December 31, 2001, the Company had cash, cash
equivalents, and short-term investments of $181.0 million and
working capital of $138.7 million compared to $121.2 million and
$72.0 million, respectively, as of December 31, 2000. During the
year ended December 31, 2001, cash and cash equivalents increased
$87.6 million, reflecting net cash provided by operating activities
of $88.0 million, net cash used in investing activities of $5.7
million (primarily the results of increased purchases of property
and equipment of $34.9 million offset by the net reduction in short
term investments of $27.8 million) and net cash provided by
financing activities of $5.2 million. Net cash provided by
financing activities was mainly related to proceeds from exercise of
stock options.
Capital Commitments
The Company's business is very capital intensive,
requiring significant amounts of capital to fund the acquisition of
assets, particularly aircraft. The Company has historically funded
the acquisition of its aircraft by entering into off-balance sheet
financing arrangements known as leveraged leases, in which third
parties provide equity and debt financing to purchase the aircraft
and simultaneously enter into long-term agreements to lease the
aircraft to the Company. See the discussion above in the "Recent
Developments and Outlook" section with respect to the Company's
present considerations regarding future deliveries. Similarly, the
Company often enters into long-term lease commitments to ensure
access to terminal, cargo, maintenance and other similar
facilities. As can be seen in the table below setting forth
information as of December 31, 2002, these operating lease
commitments are significant.
2003 2004 2005 2006 2007 Thereafter Total
(In millions)
Long term debt $ 4.9 $ 5.2 $ 6.0 $ 5.9 $ 5.5 $ 30.9 $ 58.4
Capital lease
obligations 1.5 .8 - - - - 2.3
Guaranteed
simulator usage
commitments 1.4 1.4 1.2 1.2 1.2 3.7 10.1
Operating lease
commitments 153.5 148.7 147.1 145.4 138.2 1,099.9 1,832.8
Aircraft purchase
commitments 700.0 240.0 - - - - 940.0
Total contractual
capital
commitments $861.3 $396.1 $154.3 $152.5 $144.9 $1,134.5 $2,843.6
See Note 4 "Debt", Note 5 "Obligations Under Capital Leases", Note 6
"Operating Leases", and Note 10 "Commitments and Contingencies" in
the Notes to Consolidated Financial Statements for additional
discussion of these items. Between December 31, 2002 and March 15,
2003, the Company accepted deliveries of 5 CRJs, and paid certain
operating lease commitments. As a result, as of March 15, 2003, the
Company's operating lease commitments were $64.4 million for the
remainder of 2003, $156.6 million for 2004, $157.4 million for 2005,
$154.2 million for 2006, and $1.3 billion thereafter. The
Company's aircraft purchase commitments were $600 million for the
remainder of 2003 and $240 million for 2004.
The Company also has a variety of other long-term
contractual commitments that are of a nature that, under accounting
principles generally accepted in the United States, are not required
to be reflected on the Company's balance sheet, and that are not
generally viewed as "off-balance sheet financing arrangements," such
as commitments for major overhaul maintenance on the Company's
aircraft, and pilot training. See "Liquidity and Capital Resources
- - Other Commitments" below and "Business - Pilot Training" above,
and Note 1 "Summary of Accounting Policies - (l) Maintenance" and
Note 10 "Commitments and Contingencies - Training" in the Notes to
Consolidated Financial Statements for additional discussion of these
items.
The Company believes that its cash balances and cash flow
from operations together with operating lease financing and other
available equipment financing will be sufficient to enable the
Company to meet its working capital needs, expected operating lease
financing commitments, other capital expenditures, and debt service
requirements for the remainder of 2003. However, the Company's
industry environment is highly uncertain and volatile at this time.
Future events could affect the industry or the Company in ways that
are not presently anticipated that could adversely affect the
Company's liquidity.
Other Financing
On September 28, 2001, the Company entered into an asset-
based lending agreement with Wachovia Bank, N.A. that initially
provided the Company with a line of credit for up to $25.0 million.
As a result of the Chapter 11 bankruptcy filing by United Airlines,
it was necessary for the Company to request a covenant waiver. As a
result of these negotiations, the Company agreed to reduce the size
of the lending agreement to $17.5 million and revise certain
covenants. 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 $15.7 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 60% of the book
value of certain rotable spare parts. As of December 31, 2002 the
value of the collateral supporting the line was sufficient for the
amount of available credit under the line to be $17.5 million.
There have been no borrowings on the line of credit. The amount
available for borrowing at December 31, 2002 was $1.8 million after
deducting $15.7 million which has been pledged as collateral for
letters of credit. The Company intends to request that its current
line of credit be renewed upon expiration. If it is unable to
renew, the Company believes it has adequate liquidity to pledge cash
as collateral for letters of credit.
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 and in the table above. The Equipment Notes
issued with respect to the Leased Aircraft are not obligations of
ACA or guaranteed by ACAI.
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 three
quarters years. The Company's total rent expense in 2002 under all
non-cancelable aircraft operating leases was approximately $112.1
million. As of December 31, 2002, the Company's minimum annual
rental payments for 2003 under all non-cancelable aircraft operating
leases with remaining terms of more than one year were approximately
$144.7 million. In order to minimize the total aircraft rental
expense over the entire life of the related aircraft leveraged lease
transactions, the Company has uneven semiannual lease payment dates
of January 1 and July 1 for its CRJ and 328JET aircraft. As of
March 15, 2003, approximately 22.1% of the Company's annual lease
payments for its CRJ and 328JET aircraft are due in July 2003 and
69.4% are due in January 2004. The amounts due under and payment
schedules for any aircraft lease financing entered into after March
15, 2003 may cause these amounts to change. The Company made lease
payments for its CRJ and 328JET aircraft totaling $83.8 million in
January 2003.
As of March 15, 2003, the Company had a total of 42 CRJs
on firm order from Bombardier, Inc., in addition to the 79 already
delivered, and held options for 80 additional CRJs. The 42 firm
ordered aircraft include 25 CRJs that were ordered in July, 2002
after Fairchild Dornier GmbH ("Fairchild"), the manufacturer of the
32-seat 328JET, opened formal insolvency proceedings in Germany and
rejected the Company's purchase agreement covering 328JETs the
Company had on firm order and under option. The Company's agreement
with Bombardier provides for 30 CRJs to be delivered during the
remainder of 2003 and an additional 12 CRJs to be delivered by April
30, 2004. Due to a number of factors, including the United
bankruptcy, the effect on the operations of the airline industry of
the war with Iraq, and the state of the financing markets, the
Company and Bombardier have agreed to delay by two weeks the
scheduled delivery date of two aircraft originally scheduled for
March deliveries. The Company is considering the delay of future
deliveries and is engaged in discussions with Bombardier regarding
financing and the aircraft delivery schedule. See the Recent
Developments and Outlook section above with respect to the Company's
present considerations regarding future deliveries.
The Company relies on third party financing to pay for the
CRJ aircraft it has ordered. In order to realize the lowest lease
rates, the Company has utilized leveraged lease transactions. In a
leveraged lease, there is an equity source for 20% - 30% of the
purchase price and a debt source for the remaining 70% - 80%. With
the uncertainty of United's future and industry conditions, the
Company has been unable to secure equity funding for any of its
remaining firm ordered aircraft. The Company has been in
discussions with the Economic Development Corporation of Canada
("EDC") to provide the debt financing for the ordered aircraft. The
Company has a contingent commitment from EDC for debt financing of
four aircraft scheduled for delivery in April and May 2003. As a
result of the bankruptcy of United, the obligation of the EDC to
fund any of the four aircraft is contingent upon the Company
obtaining a waiver from the EDC. Since the United bankruptcy
filing, through the date of this filing, the Company has been
successful in obtaining such waivers.
A CRJ was damaged in October 2002 as a result of being
struck by a shuttle bus that was not operated by the Company. In
addition, a CRJ was damaged in February 2003 as a result of snow
accumulation on an improperly cleared runway. It is anticipated
that both aircraft will be out of operation through May of 2003, and
the Company expects the repair costs on both aircraft to be covered
by insurance proceeds. The Company does not currently anticipate
the loss of use of these aircraft to have a material effect on its
results of operations.
Capital Equipment and Debt Service
In 2003, the Company anticipates capital spending of
approximately $25 million consisting of approximately $6.8 million
for rotable spare parts and flight equipment, $7.5 million for
ground and maintenance equipment, $5.5 million for computer
equipment, and $5.2 million for other capital assets, and expects to
finance these capital expenditures out of working capital.
Principal payments on long term debt for 2003 are
estimated to be approximately $4.9 million reflecting borrowings
related to the purchase of four CRJs acquired in 1998 and 1999 and
five J-41s acquired in 1997 and 1998. The foregoing amount does not
include additional debt that may be required for the financing of
new CRJs, spare parts and spare engines.
Other Commitments
The Company's regional jet fleet is comprised of new
aircraft with an average age of less than two and a 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 regional jet aircraft will increase in
future periods.
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 amounts it paid GE under the agreement and
correspondingly reduced the amounts it expensed for engine
maintenance. The Company continues to negotiate with GE and other
vendors in order to reach an acceptable maintenance agreement.
Accordingly, the Company currently is not adding engines beyond the
66 covered aircraft and anticipates that the adjustments described
above will continue to be disputed. The Company recorded $4.8
million, $1.3 million, and $1.3 million to maintenance expense in
the second, third, and fourth quarters of 2002, which represented
the Company's estimate of amounts that GE may seek to collect 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 does not agree with the Company's
interpretation of the agreement. In February 2003 the Company
provided notice of its desire to settle this issue in arbitration.
GE subsequently presented an invoice for amounts it believes to be
due from the Company, which amounts are $1.0 million in excess of
the amounts accrued by the Company, and requested that the question
of the amounts due also be settled by arbitration. The parties are
presently negotiating whether an agreement can be reached outside of
arbitration, as provided in the agreement. If no agreement can be
reached and the arbitration is decided in the Company's favor, the
Company will remove the engines from the agreement and will
negotiate for new terms at market rates. A decision in GE's favor
will result in covered engines remaining in the agreement for the
balance of the term.
Effective September 2001, the Company entered a sixteen
year maintenance agreement with Air Canada covering maintenance,
repair and overhaul services for airframe components on its CRJ
aircraft. Under the terms of this agreement, the Company pays a
varying amount per flight hour each month, based on the age of the
aircraft. The Company expenses the amount paid to Air Canada based
on the rates stipulated in the agreement and the hours flown each
month. In February 2002, the Company entered into a five-year
agreement with Air Canada covering the scheduled airframe C-check
overhaul of its CRJ aircraft. The Company expenses this cost as the
overhaul is completed.
Effective January 2001, the Company entered into an
agreement with BAE Systems Holdings, Inc. covering repair and
overhaul of airframe rotable parts on the Company's J-41 aircraft
through the remaining service life of the J-41 fleet. Under the
terms of this agreement, the Company pays a fixed amount per flight
hour each month. The Company expenses the amount paid to BAE
Systems Holdings, Inc. based on the rates stipulated in the
agreement and the hours flown each month.
The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA"), which allow the Company to
train CRJ, J-41 and 328JET pilots at PAIFA's facility near
Washington-Dulles. In 2001, PAIFA relocated its Washington-Dulles
operations to a new training facility near the Company's Washington-
Dulles headquarters. This facility currently houses three CRJ
simulators, a 328JET simulator, and a J-41 simulator. The Company
has agreements to purchase an annual minimum number of CRJ simulator
training hours at agreed rates through 2010. The Company's payment
obligations for CRJ simulator usage over the remaining years of the
agreements total approximately $10.1 million.
In 2001, PAIFA, CAE Schreiner and the Company executed a
simulator provision and service agreement providing for 328JET
training at the PAIFA facility. Under this agreement, the Company
has committed to purchase all of its 328JET simulator time from
PAIFA at agreed upon rates, with no minimum number of simulator
hours guaranteed.
The Company has committed to provide its senior executive
officers a deferred compensation plan which utilizes split dollar
life insurance policies, and for a certain officer, a make-whole
provision for income taxes, post retirement salary based on ending
salary, and post retirement benefits based on benefits similar to
those currently provided to the executive while actively employed.
The Company has estimated the cost of the deferred compensation and
tax gross up feature, future salary and future benefits and is
accruing this cost over the remaining required service time of the
executive officers. In 2002, the Company expensed approximately
$1.8 million as the current year's cost of these benefits. The
Company expects to recognize similar costs annually over the
remaining required service life of the senior executives.
In 1999, the Company commenced a replacement project of
its computer software systems covering financials, human resources,
benefits, and maintenance. The majority of these costs are being
capitalized and amortized over seven years. In 1999, the Company
expensed approximately $400,000 related to replacement software
selection and capitalized $2.3 million in acquisition and
implementation costs. In 2000, 2001 and 2002, the Company
capitalized an additional $5.2 million, $2.8 million and $3.5
million of costs incurred, respectively, bringing the total
capitalized costs as of December 31, 2002 to $13.8 million.
The Company's Board of Directors has approved the
repurchase of up to $40.0 million of the Company's outstanding
common stock in open market or private transactions. As of March 1,
2003 the Company has repurchased 2,171,837 shares of its common
stock and has approximately $21.0 million remaining of the $40.0
million authorized for repurchase.
Inflation
Inflation has not had a material effect on the Company's
operations because the Company's fee-for-service rates are adjusted
annually under the terms of its agreements with United and Delta.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
Company management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities in the
consolidated financial statements and accompanying notes. The U.S.
Securities and Exchange Commission has defined a Company's most
critical accounting policies as the ones that are most important to
the portrayal of the Company's financial condition and results, and
which require the company to make its most difficult and subjective
judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based on this definition,
the Company has identified its critical accounting policies as
including those addressed below. The Company also has other key
accounting policies, which involve the use of estimates, judgments
and assumptions. See Note 1 "Summary of Accounting Policies " in
the Notes to Consolidated Financial Statements for additional
discussion of these items. Management believes that its estimates
and assumptions are reasonable, based upon information presently
available; however, actual results may differ from these estimates
under different assumptions or conditions.
Revenue Recognition: Under the proration-of-fare
arrangement in effect with United until November of 2000, the
Company recognized passenger revenue when a flight was completed.
This required various estimates about passenger fares and other
factors that were subject to subsequent adjustment and settlement
with United and other carriers. Following certain changes in
estimates, which resulted in adjustments in 2001 as described in
"Results of Operations", the Company does not expect any further
adjustments attributable to the former proration-of-fare
arrangement. Under the fee-per-departure and fee-per-block hour
contracts currently in place with United and Delta, respectively,
revenue is the product of the agreed upon rate and the number of
departures or the number of block hours flown. Rates are generally
agreed to on an annual basis and are subject to adjustments upon
certain specified events, such as changes in cities served or in
aircraft utilization levels. Until rates are agreed to each year
with United and Delta or are adjusted in response to specified
events, the Company may be required to estimate these rates and
record revenue based upon such estimates until final rates are
agreed to by either United or Delta. In addition, certain incentive
payments are recorded based upon the Company's assessment of its
satisfaction of operational performance criteria and are subject to
review by United or Delta.
Major maintenance costs: The Company has executed long-
term agreements with the engine manufacturers and other service
providers covering the repair and overhaul of its engines, airframe
and avionics components, and landing gear. These agreements
generally include escalating rates per flight hour over the term of
the agreement. The escalating rates are intended to reflect the
approximate actual maintenance cost increases as the aircraft age.
The Company expenses costs based upon the current rate per hour and
the number of aircraft and engines hours for the period. As a
result, maintenance costs for the Company's existing aircraft fleet
are expected to increase in future years.
Aircraft leases: The majority of the Company's aircraft
are leased from third parties. In order to determine the proper
classification of a lease as either an operating lease or a capital
lease, the Company must make certain estimates at the inception of
the lease relating to the economic useful life and the fair value of
an asset as well as select an appropriate discount rate to be used
in discounting future lease payments. These estimates are utilized
by management in making computations as required by existing
accounting standards that determine whether the lease is classified
as an operating lease or a capital lease. Substantially all of the
Company's aircraft leases have been classified as operating leases,
which results in rental payments being charged to expense over the
terms of the related leases. Additionally, operating leases are not
reflected in the balance sheet and accordingly, neither a lease
asset nor an obligation for future lease payments are reflected in
the Company's consolidated balance sheet.
Aircraft Early Retirement Costs: In determining the cost
of the early retirement of leased aircraft (and thus in determining
the amount of the aircraft early retirement charge), the Company
must estimate, among other things, retirement date, market lease
rates, future sub-lease income, the cost of maintenance return
provisions, future interest and inflation rates, and the duration
and cost of aircraft storage. The Company generally does not accrue
for the costs of retiring leased aircraft more than one year before
the planned date of removal from service, considering the potential
for changes in plans and associated costs. As the associated leases
may extend over several years, these costs estimates are subject to
change. Any significant delays in the delivery of the remaining
CRJs on firm order could cause the actual retirement dates to differ
materially from the planned retirement dates.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board
issued FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." This
interpretation requires an existing unconsolidated variable interest
entity to be consolidated by their primary beneficiary if the entity
does not effectively disperse risk among all parties involved or if
other parties do not have significant capital to finance activities
without subordinated financial support from the primary beneficiary.
The primary beneficiary is the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected
residual returns, or both as a result of holding variable interests,
which are the ownership, contractual, or other pecuniary interests
in an entity. We do not expect the statement to have a significant
impact on our financial position or operating results.
In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS No. 123 "Accounting for Stock-Based
Compensation." The new standard provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in the annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
This statement is effective for financial statements for fiscal
years ending after December 15, 2002. In compliance with SFAS No.
148, the Company has elected to continue to follow the intrinsic
value method in accounting for its stock-based employee compensation
arrangement as defined by Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employee, and has
made the applicable disclosures in Note 1 to the consolidated
financial statements.
In November 2002, the Financial Accounting Standards Board
issued FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation
No. 34. This interpretation outlines disclosure requirements in a
guarantor's financial statements relating to any obligations under
guarantees for which it may have potential risk or liability, as
well as clarifies a guarantor's requirement to recognize a liability
for the fair value, at the inception of the guarantee, of an
obligation under that guarantee. The initial recognition and
measurement provisions of this interpretation are effective for
guarantees issued or modified after December 31, 2002 and the
disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. As of
March 1, 2003, we have not provided any guarantees that would
require recognition or disclosure as liabilities under this
interpretation.
On July 30, 2002, the Financial Accounting Standards Board
issued FASB Statement No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", which is effective for exit or
disposal activities that are initiated after December 31, 2002.
Statement No. 146 requires that liabilities for the costs associated
with exit or disposal activities be recognized when the liabilities
are incurred, rather than when an entity commits to an exit plan.
The Company adopted Statement No. 146 on January 1, 2003. The new
rules will change the timing of liability and expense recognition
related to exit or disposal activities, but not the ultimate amount
of such expenses. Existing accounting rules permit the accrual of
such costs for firmly committed plans which will be executed within
twelve months. Accordingly, to the extent that the Company's plans
to early retire J-41 turboprop aircraft extend beyond the end of
2003, the adoption of Statement No. 146 will cause the Company to
record costs associated with such individual early retired aircraft
in the month they are retired, as opposed to the current accounting
treatment of taking a charge for these aircraft in the period in
which the retirement plan is initiated. See Note 11 of Notes to
Condensed Consolidated Financial Statements.
In April 2002, the Financial Accounting Standards Board
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections."
The provisions of this standard, which primarily relate to the
rescission of Statement 4, eliminate the requirement that gains and
losses from the extinguishment of debt be classified as
extraordinary items unless it can be considered unusual in nature
and infrequent in occurrence. These provisions are effective in
fiscal years beginning after May 15, 2002. We will implement the
provisions of SFAS No. 145 beginning in fiscal year 2003. We do not
expect the statement to have a significant impact on our financial
position or operating results.
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 will be effective for fiscal
years beginning after December 15, 2001. The Company adopted
Statement No. 142 in the first quarter of 2002. The
implementation of SFAS 141 and SFAS 142 has had minimal impact on
the Company's financial position or results of operations. The
Company anticipates that SFAS 142 will continue to have minimal
impact on the Company's financial position or results of operations.
On October 3, 2001, the Financial Accounting Standards
Board issued FASB Statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting 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. Under
Statement No. 144, the Company is required to evaluate the book
value of its long-lived assets as compared to estimated fair market
value. The Company estimates that the fair market value of four of
the five owned J-41 aircraft will be in the aggregate $2.9 million
below book value when the aircraft are retired from the fleet. As a
result, the Company is recognizing $2.9 million in additional
depreciation charges related to such aircraft over their remaining
estimated service lives. In 2002, the Company recognized $1.0
million in additional depreciation expense.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results 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. 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 2000 and 2001, the Company settled eight and one
hedge transactions, respectively, paying the counterparty $379,000
in 2000 and paying the counterparty $722,000 in 2001. At December
31, 2000 the Company had one interest rate hedge transaction open
with a notional value of $8.5 million. It settled on January 3,
2001 resulting in the payment to the counterparty referenced above.
The Company had no interest rate hedge transactions in 2002.
As of March 15, 2003, the Company had firm commitments to
purchase 42 additional jet aircraft. The Company relies on third
party financing to pay for the CRJ aircraft it has ordered. In
order to realize the lowest lease rates, the Company has utilized
leveraged lease transactions. In a leveraged lease, there is an
equity source for 20% - 30% of the purchase price and a debt source
for the remaining 70% - 80%. With the uncertainty of United's
future and industry conditions, the Company has been unable to
secure equity funding for any of its remaining firm ordered
aircraft. The Company has been in discussions with the Economic
Development Corporation of Canada ("EDC") to provide the debt
financing for the ordered aircraft. The Company has a contingent
commitment from EDC for debt financing of four aircraft scheduled
for delivery in April and May 2003. As a result of the bankruptcy
of United, the obligation of the EDC to fund any of the four
aircraft is contingent upon the Company obtaining a waiver from the
EDC. Since the United bankruptcy filing, the Company has been
successful in obtaining such waivers.
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. The fair value of this fixed rate debt is sensitive
to changes in interest rates. If market rates decline, the required
payments will exceed those based on current market rates. The
Company's interest rate on its $17.5 million line of credit is
dependent on LIBOR plus a percentage ranging from .875% to 1.375%
depending on the Company's fixed charges coverage ratio. 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.
Item 8. Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2000, 2001 and 2002
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 2001 and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002
Notes to Consolidated Financial Statements
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, 2001 and 2002, 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, 2002. 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 auditing standards
generally accepted in the United States of America. 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, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-
year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
McLean, VA
January 29, 2003, except as to Notes 1(f) and 13,
which are as of March 28, 2003
Atlantic Coast Airlines Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except for share data and par values)
December 31, 2001 2002
Assets
Current:
Cash and cash equivalents $ 173,669 $ 29,261
Short term investments 7,300 213,360
Accounts receivable, net 8,933 13,870
Expendable parts and fuel inventory,net 10,565 14,317
Prepaid expenses and other current assets 19,365 38,610
Deferred tax asset 6,806 16,114
Total current assets 226,638 325,532
Property and equipment at cost, net of
accumulated depreciation and amortization 171,528 195,413
Intangible assets, net of accumulated amortization 1,941 1,873
Debt issuance costs, net of accumulated amortization 3,415 3,117
Aircraft deposits 44,810 44,810
Other assets 4,093 4,393
Total assets $ 452,425 $ 575,138
Liabilities and Stockholders' Equity
Current:
Current portion of long-term debt $ 4,639 $ 4,900
Current portion of capital lease obligations 1,359 1,449
Accounts payable 21,750 22,475
Accrued liabilities 55,570 84,377
Accrued aircraft early retirement charge 4,661 14,700
Total current liabilities 87,979 127,901
Long-term debt, less current portion 58,441 53,540
Capital lease obligations, less current portion 2,202 751
Deferred tax liability 17,448 22,384
Deferred credits, net 45,063 61,903
Accrued aircraft early retirement charge,
less current portion 19,226 31,768
Other long-term liabilities 766 1,523
Total liabilities 231,125 299,770
Stockholders' equity:
Preferred Stock: $.02 par value per share;
shares authorized 5,000,000; no shares issued or
outstanding in 2001 or 2002 - -
Common stock: $.02 par value per share;
shares authorized 130,000,000; shares
issued 49,229,202 in 2001 and 50,255,184
in 2002; shares outstanding 44,182,870 in
2001 and 45,195,115 in 2002 985 1,005
Class A common stock: nonvoting; no par
value; $.02 stated value per share;
shares authorized 6,000,000; no shares
issued or outstanding - -
Additional paid-in capital 136,058 151,103
Less: Common stock in treasury, at cost,
5,046,332 shares in 2001 and 5,060,069 in
2002 (35,303) (35,586)
Retained earnings 119,560 158,846
Total stockholders' equity 221,300 275,368
Total liabilities and stockholders' equity $ 452,425 $ 575,138
Commitments and Contingencies
See accompanying notes to consolidated financial statements
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except for per share data)
Years ended December 31, 2000 2001 2002
Operating revenues:
Passenger $ 442,695 $ 577,604 $ 749,103
Other 9,831 5,812 11,421
Total operating revenues 452,526 583,416 760,524
Operating expenses:
Salaries and related costs 107,831 164,446 203,341
Aircraft fuel 64,433 88,308 115,801
Aircraft maintenance and materials 36,750 48,478 72,233
Aircraft rentals 59,792 90,323 112,068
Traffic commissions and related fees 56,623 15,589 19,994
Facility rents and landing fees 20,284 32,025 43,805
Depreciation and amortization 11,193 15,353 21,155
Other 42,537 61,674 85,163
Aircraft early retirement charge 28,996 23,026 24,331
Total operating expenses 428,439 539,222 697,891
Operating income 24,087 44,194 62,633
Other (expense) income:
Interest expense (6,030) (4,832) (4,332)
Interest income 5,033 7,500 4,628
Government compensation - 9,710 944
Other (expense) income, net (278) 263 552
Total other (expense) income, net (1,275) 12,641 1,792
Income before income tax provision 22,812 56,835 64,425
Income tax provision 7,657 22,513 25,139
Net income $ 15,155 $ 34,322 $ 39,286
Income per share:
Basic:
Net income $.38 $.79 $.87
Diluted:
Net income $.36 $.76 $.85
Weighted average shares used in
computation:
Basic 40,150 43,434 45,047
Diluted 43,638 45,210 46,019
See accompanying notes to consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except for share data)
Common Stock Additional Treasury Stock
------------ Paid-In -------------- Retained
Shares Amount Capital Shares Amount Earnings
Balance
December 31, 1999 42,167,854 $ 843 $ 88,704 4,911,332 $(34,106) $ 70,083
Exercise of common
stock options 1,132,432 23 3,919 - - -
Tax benefit of stock
option exercise - - 4,952 - - -
Purchase of treasury
stock - - - 135,000 (1,197) -
Conversion of debt 4,404,434 88 19,261 - - -
Amortization of
deferred compensation - - 448 - - -
Net income - - - - - 15,155
Balance
December 31, 2000 47,704,720 $ 954 $117,284 5,046,332 $(35,303) $ 85,238
Exercise of common
stock options 1,524,482 31 8,145 - - -
Tax benefit of stock
option exercise - - 9,010 - - -
Amortization of
deferred compensation - - 1,619 - - -
Net income - - - - - 34,322
Balance December 31
December 31, 2001 49,229,202 $ 985 $136,058 5,046,332 $(35,303) $119,560
Exercise of common
stock options 1,025,982 20 7,027 - - -
Tax benefit of stock
option exercise - - 6,634 - - -
Purchase of treasury
stock - - - 13,737 (283) -
Amortization of
deferred compensation - - 1,384 - - -
Net income - - - - - 39,286
Balance
December 31, 2002 50,255,184 $1,005 $151,103 5,060,069 $(35,586) $158,846
See accompanying notes to consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 2000 2001 2002
Cash flows from operating activities:
Net income $ 15,155 $ 34,322 $ 39,286
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 11,544 16,179 22,031
Amortization of intangibles and
pre-operating costs 183 193 17
Provision for uncollectible
accounts receivable 503 227 2,619
Provision for inventory obsolesence 237 578 596
Amortization of deferred credits (1,599) (3,662) (4,966)
Amortization of debt issuance costs 297 293 304
Capitalized interest, net (2,554) (1,835) (1,032)
Deferred tax (benefit) provision (4,648) 5,681 (4,372)
Net loss on disposal of fixed assits - 198 567
Amortization of debt discount and
finance costs 56 61 202
Gain on early termination of
capital lease (3) - -
Amortization of deferred compensation 469 1,619 1,384
Other - - -
Changes in operating assets and
liabilities:
Accounts receivable 6,564 25,148 2.455
Expendable parts and fuel inventory (2,310) (4,956) (4,348)
Prepaid expenses and
other current assets (1,866) (5,376) (19,403)
Accounts payable 22,300 9,275 12,016
Accrued liabilities 49,601 10,100 59,477
Net cash provided by operating activities 93,929 88,045 106,833
Cash flows from investing activities:
Purchases of property and equipment (19,146) (34,903) (35,655)
Proceeds from sales of fixed assets 585 - 28
Purchases of short term investments (74,705) (76,715) (651,365)
Maturities of short term investments 57,155 104,515 445,305
Refund of deposits 4,600 11,100 5,800
Payments for aircraft and other deposits (12,330) (9,701) (16,170)
Net cash used in investing activities (43,841) (5,704) (252,057)
Cash flows from financing activities:
Payments of long-term debt (4,758) (4,344) (4,640)
Payments of capital lease obligations (1,647) (1,959) (1,361)
Proceeds from receipt of deferred
credits and other 173 4,286 -
Deferred financing costs (381) (948) 53
Proceeds from exercise of stock options 3,942 8,176 7,047
Purchase of treasury stock (1,197) - (283)
Net cash (used in)
provided by financing activities (3,868) 5,211 816 Net cash (used in)
Net increase (decrease) in cash and
cash equivalents 46,220 87,522 (144,408)
Cash and cash equivalents, beginning
of year 39,897 86,117 173,669
Cash and cash equivalents, end of year $ 86,117 $173,669 $ 29,261
See accompanying notes to consolidated financial statements.
1.Summary of
Accounting
Policies
(a)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"), 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 Company's flights are
operated under code sharing agreements with
United Airlines, Inc. ("United") and Delta
Airlines ("Delta") and are identified as United
Express and Delta Connection flights in computer
reservation systems. As of December 31, 2002,
the Company provided scheduled air transportation
service as United Express for passengers to
destinations in the Eastern and Midwestern United
States. The Company provides scheduled air
transportation service as Delta Connection to
various destinations in the Eastern United States
and Canada. The Company also operates private
shuttle service and ad hoc charter service.
(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. In addition, the Company
holds investments in tax-free, variable-rate
Industrial Revenue Bonds ("IRB") and General
Obligation Bonds ("GOB") having initial
maturities up to 30 years. Pursuant to the
company's investment policy, these bonds must
have a long-term rating of at least AA by
Standard & Poor's or Aa by Moodys to be eligible
investments. The Company's investment policy
also has issuer and geographical concentration
limitations on these investments. These bonds
are often backed by letters of credit or
insurance and can be sold back to the remarketer
at par on a weekly or monthly basis.
As such, the Company considers securities of
this type to be 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 revenues are recorded as operating
revenues at the time transportation is provided.
Under the Company's fee-per-departure and fee-
per-block hour agreements, transportation is
considered provided when the flight has been
completed. Under the proration of fare
agreement in effect with United for periods
prior to and through November 2000,
transportation was considered provided when the
passenger flew. All of the passenger tickets
used by the Company's revenue passengers are
sold by other air carriers.
Under the proration-of-fare arrangement in
effect with United until November of 2000, the
Company recognized passenger revenue when a
flight was completed. This required various
estimates about passenger fares and other
factors that were subject to subsequent
adjustment and settlement with United and other
carriers. Under the fee-per-departure and fee-
per-block hour contracts currently in place with
United and Delta, respectively, revenue is the
product of the agreed upon rate and the number
of departures or the number of block hours
flown. Rates are generally agreed to on an
annual basis and are subject to adjustments upon
certain specified events, such as changes in
cities served or in aircraft utilization levels.
Until rates are agreed to each year with United
and Delta or are adjusted in response to
specified events, the Company may be required to
estimate these rates and record revenue based
upon such estimates until final rates are agreed
to by either United or Delta. In addition,
certain incentive payments are recorded based
upon the Company's assessment of its
satisfaction of operational performance criteria
and are subject to review by United or Delta.
ACA participates in United's Mileage Plus
frequent flyer program and in the Delta SkyMiles
frequent flyer program. The Company does not
accrue for incremental costs for mileage
accumulation or redemption relating to these
programs because the Company operates under
agreements with United and Delta, and the
Company's revenues under these agreements are
not affected by the number of miles earned by
its passengers or number of passengers on its
flights redeeming miles.
(d)Accounts and Notes Receivable
Accounts receivable are stated net of allowances
for uncollectible accounts of approximately
$595,000 and $3.1 million at December 31, 2001
and 2002, respectively. Amounts charged to
expenses for uncollectible accounts in 2000,
2001 and 2002 were $503,000, $227,000 and $2.6
million respectively. Write-off of accounts
receivable were $521,000, $386,000 and $150,000
in 2000, 2001 and 2002, respectively. Accounts
receivable as of December 31, 2001 and 2002
included ticket receivables of $1.3 million and
$607,000 respectively, and approximately $4.4
million and $4.3 million respectively, related to
manufacturers credits to be applied towards
future spare parts purchases and training
expenses. The increase in the allowances for
uncollectible accounts in 2002 is largely
attributed to the potential write-off of net
amounts due from United Airlines as a result of
its bankruptcy filing. Based on the Company's
most recent estimates, the Company believes that
United owed ACA approximately $8.0 million as of
the date of United's bankruptcy filing for unpaid
pre-petition obligations relating to United
Express services prior to the filing and that, if
these pre-petition obligations are not ultimately
paid by United, ACA will have the right to offset
amounts ACA owes United for pre-petition services
totaling approximately $5.4 million. The large
decrease in ticket receivables is due to the
change in the UA Agreement from a proration-of-
fare arrangement to a fee-per-departure
arrangement as described herein.
(e)Concentrations of Credit Risk
Substantially all of the Company's passenger
tickets are sold by other air carriers. Prior to
the change from a proration of fare agreement to
a fee-per-departure agreement, the Company had a
significant concentration of its accounts
receivable with other air carriers with no
collateral. At December 31, 2001 and 2002,
accounts receivable from air carriers totaled
approximately $929,000 and $449,000 respectively.
Of the total amount, approximately $240,000 and
$118,000 at December 31, 2001 and 2002,
respectively, were due from United. Under the
fee-per-departure agreements, the Company
receives payment in advance from both United and
Delta. Historically, accounts receivable losses
have not been significant.
(f)Risks and Uncertainties
The U.S. airline industry continues to
experience depressed demand and shifts in
passenger demand, increased insurance costs,
changing and increased government regulations
and tightened credit markets, evidenced by
higher credit spreads and reduced capacity.
These factors are directly affecting the
operations and financial condition of
participants in the industry including the
Company, its code share partners, and aircraft
manufacturers. Although recent steps taken by
the major U.S. carriers to return to
profitability have generally increased the
importance of regional jets to the industry,
future implementation will depend on market
conditions and relative cost structures.
Aggressive cost-cutting by major airlines,
including United's actions in bankruptcy, have
reduced the gap between trip costs for the major
airlines' smallest jets relative to regional
jets, thus putting increased pressure on
regional jet operators to also decrease their
costs. Moreover, the ongoing losses incurred by
the industry continue to raise substantial risks
and uncertainties. As discussed below, these
risks may impact the Company, its code share
partners, and aircraft manufacturers in ways
that the Company is not currently able to
predict.
United Express:
The Company's United Express Agreements ("UA
Agreements") define the Company's relationship
with United. In November 2000, the Company and
United amended and restated the UA Agreements,
effectively changing from a revenue sharing
arrangement to a fee-per-departure arrangement.
Under the UA Agreements in effect prior to
November 2000, the Company was responsible for
scheduling, marketing and pricing its flights,
in coordination with United's operations, and
paid a portion of the revenue it received from
passenger fares to United. Under the fee-per-
departure structure in effect as of December 1,
2000, the Company operates a flight schedule
designated by United, for which United pays the
Company an agreed amount per departure
regardless of the number of passengers carried,
with the Company being able to receive
additional incentive payments based on
operational performance. The Company thereby
assumes the risks associated with operating the
flight schedule and United assumes the risk of
scheduling, marketing, and selling seats to the
traveling public. The restated UA Agreements
are for a term of ten years. The restated UA
Agreements, as amended, give ACA the authority
to operate up to 121 regional jets in the United
Express operation if delivered by April 30,
2004. By operating under the UA Agreements, the
Company is able to use United's "UA" flight
designator code to identify the Company's
flights and fares in the major airline global
distribution systems, including United's
"Apollo" reservation system, and to use the
United Express logo and exterior aircraft paint
schemes and uniforms similar to those of United.
Pursuant to the restated UA Agreements, United,
at its own expense, provides a number of
additional services to ACA. These include
customer reservations, customer service,
pricing, scheduling, revenue accounting, revenue
management, frequent flyer administration,
advertising, provision of ticket handling
services at United's ticketing locations, and
provision of airport signage and ground support
services at most of the airports where both ACA
and United operate flights. Under the restated
agreement, the Company remains responsible for
fees associated with the global distribution
systems. The UA Agreements do not prohibit
United from serving, or from entering into
agreements with other airlines who would serve,
routes served by the Company, but state that
United may terminate the UA Agreements if ACAI
or ACA enter into a similar arrangement with any
other carrier other than Delta or a replacement
for Delta without United's prior written
approval. 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 the right to terminate the UA
Agreements if ACAI or ACA merge with or are
controlled or acquired by another carrier. The
UA agreements provide United with the right to
assume ACA's ownership or leasehold interest in
certain aircraft in the event ACA breaches
specified provisions of the UA agreements, or
fails to meet specified performance standards.
The UA Agreements call for the resetting of fee-
per-departure rates annually based on the
Company and United's planned level of operations
for the upcoming year. The Company and United
are in discussions regarding the fee-per-
departure rates to be utilized during 2003.
On December 9, 2002, UAL, Inc. and its
subsidiaries, including United, filed for
protection under Chapter 11 of the United States
Bankruptcy Code. UAL is currently operating and
managing its business and affairs as a debtor in
possession. As part of its first day filings
in the bankruptcy proceeding, United requested
and was granted a court order permitting, but
not requiring it to continue to honor the UA
Agreements while United is in bankruptcy. As
such, the Company continues to operate as a
United Express carrier pursuant to its UA
agreement. UAL, Inc. and its subsidiaries have
been granted the exclusive right until October
6, 2003, to file a plan of reorganization and
the exclusive right until December 5, 2003, to
seek acceptances of any such plan. The Court
has set May 12, 2003 as the deadline for the
filing of proofs of claim, although this
deadline does not apply to claims arising under
executory contracts and unexpired leases that
have yet to be rejected by UAL, Inc. and its
subsidiaries. It is possible that any or all
of the foregoing deadlines may be extended. In
bankruptcy, United also has the right to assume
or reject the Company's UA Agreements, as
described in Recent Development and Outlook
below. No deadline has been set for United to
assume or reject the Company's UA Agreements.
Delta Connection:
In September 1999, the Company reached a ten-
year agreement with Delta to operate regional
jet aircraft as part of the Delta Connection
program. The Company began Delta Connection
revenue service on August 1, 2000. The
Company's Delta Connection Agreement ("DL
Agreement") defines the Company's relationship
with Delta. The Company is compensated by Delta
on a fee-per-block hour basis. Under the fee-
per-block hour arrangement, the Company is
contractually obligated to operate a flight
schedule designated by Delta, for which Delta
pays the Company an agreed amount per block hour
flown regardless of the number of passengers
carried, with incentive payments based on
operational performance. The Company thereby
assumes the risks associated with operating the
flight schedule and Delta assumes the risks of
scheduling, marketing, and selling seats to the
traveling public. By operating as part of the
Delta Connection program, the Company is able to
use Delta's "DL" flight designator to identify
ACA's flights and fares in global distribution
systems, 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.
Pursuant to the DL Agreement, Delta, at its
expense, provides a number of support services
to ACA. These include customer reservations,
customer service, ground handling, station
operations, a maintenance hangar facility in
Cincinnati, pricing, scheduling, revenue
accounting, revenue management, frequent flyer
administration, advertising and other passenger,
aircraft and traffic servicing functions in
connection with the ACA operation. Delta may
terminate the DL Agreement at any time if the
Company fails to meet certain performance
standards and, subject to certain rights of the
Company and by providing 180 days notice to the
Company, may terminate without cause. If Delta
terminates the Delta agreement without cause
prior to March 2010, the Company has the right
to put all or some of the Delta Connection
aircraft to Delta. The DL Agreement requires
the Company to obtain Delta's approval if it
chooses to enter into a code-sharing arrangement
with another carrier other than in connection
with termination of the UA Agreements, 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-share partners of United or in certain
other circumstances. The DL Agreement does not
prohibit Delta from serving, or from entering
into agreements with other airlines that would
serve, routes flown 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 extend or 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.
In January 2003, the Company and Delta agreed to
2003 rates, consistent with the rate setting
process contained in the DL Agreement.
At December 31, 2002 74 Bombardier CRJ200s
("CRJs"), 2 Fairchild Dornier 328JETs
("328JET"), and 30 British Aerospace J-41's ("J-
41's") were operated under the United Express
program and 30 328JETs were operated under the
Delta Connection program. For the year ended
December 31, 2002, 82% of consolidated passenger
revenues were derived from the United Express
program and 18% of consolidated passenger
revenues were derived from the Delta Connection
program. Following the terrorist attacks on
September 11, 2001, the major U.S. airlines have
suffered substantial losses and continued losses
are expected until passenger traffic levels
substantially recover.
Fairchild Dornier Purchase Agreement:
In July 2002, 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 subsequently notified the Company that
it has rejected the Company's purchase agreement
covering the remaining 30 328JETs the Company
had on firm order for its United Express
operation, two 328JETs on firm order for the
Company's Private Shuttle operation, and options
to acquire 81 additional aircraft. At the time
of the opening of formal insolvency proceedings,
Fairchild had significant current and future
obligations to the Company in connection with
the Company's 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 J-41 Turboprop 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. In August 2002, the Company filed its
claim in the Fairchild insolvency proceeding.
The Fairchild insolvency trustee indicated that
it is unlikely that funds will be available for
claims by unsecured creditors. During the first
quarter 2003, the trustee indicated that he is
finalizing plans to sell portions of the prior
business including the production and support of
328JETs. The Company anticipates that long-term
product support would be improved should the
businesses be successfully transitioned to a new
owner, but does not have any knowledge as to
whether a sale of these businesses can in fact
be completed or whether production can be
resumed. In addition, the Company does not
anticipate that such a sale will have an effect
on its prior contractual commitments or on its
bankruptcy claim.
The Company believes it has a security interest
in Fairchild's equity interest in 32 delivered
328JETs, under which 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. The Company's balance sheet as of
December 31, 2002 includes a receivable for $1.2
million with respect to deposits placed with
Fairchild for undelivered aircraft. The Company
holds a bond from an independent insurance
company that was delivered to secure this
deposit, and has made a demand for payment under
this bond. Fairchild's insolvency trustee has
made a claim for the collateral posted with the
insurance company, and the insurance company has
withheld payment of the bond. The matter is
presently with the U.S. bankruptcy court for the
Western District of Texas. The Company's
balance sheet as of December 31, 2002 also
includes approximately $1.0 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. At the time of Fairchild's
insolvency, the Company had outstanding invoices
due to Fairchild for various spare parts
purchases. The Company believes it has the
right to offset these and other obligations
claimed by Fairchild against amounts the Company
owes Fairchild, to the extent permitted by law.
Fairchild disputes this right, and Fairchild's
wholly owned U.S. subsidiary, Dornier Aviation
of North America ("DANA"), has filed suit
against the Company claiming amounts allegedly
due for certain spare parts, late payment
charges, and consignment inventory carrying
charges. DANA contends that although its German
parent company may not have fulfilled its
contractual obligations to the Company, DANA
sold spare parts to the Company independent of
its parent company's activities and that there
is no right of offset. The Company acknowledges
that approximately $8 million in outstanding
invoices existed, while DANA claims that an
additional $3.6 million is due. The action is
presently in the discovery stage and it is
anticipated that a trial will be held during the
summer of 2003. To the extent the Company does
not prevail in its claims, it may be required to
take a charge for all or a portion of the $1.0
million due from Fairchild for third party
expenses, or the $1.2 million in deposits
secured by the bond.
The Company's costs to operate its current fleet
of 33 328JETs increased in 2002, and may
continue to increase in the near future, due to
costs incurred for maintenance repairs that
otherwise would have been covered by the
manufacturer's warranty and the costs and
limited availability of spare parts.
Additionally, as a result of Fairchild's
rejection of the purchase contract, the Company
does not expect Fairchild to satisfy its
obligation to pay the difference in the sublease
payments, if any, received from remarketing the
26 J-41 aircraft leased by the Company on those
aircraft and the amount due under the Company's
aircraft leases.
Collective Bargaining Agreements:
The Company's pilots are represented by the
Airline Pilots Association ("ALPA"), flight
attendants are represented by the Association of
Flight Attendants ("AFA"), and aviation
maintenance technicians and ground service
equipment mechanics are represented by the
Aircraft Mechanics Fraternal Association
("AMFA").
In January 2001, the Company agreed to a new
four-and-a-half year collective bargaining
agreement with its pilot union that was
subsequently ratified and became effective on
February 9, 2001. The collective bargaining
agreement covers pilots flying for the United
Express, Delta Connection, and charter
operations. The Company has approached its
pilot union with the intent to negotiate wage
reductions and work rule changes through
voluntary concessions, with the goal of bringing
its pilot costs in line with other regional
carriers that compete with the Company for its
existing and new business.
The Company's collective bargaining agreement
with AMFA, which was ratified in June 1998,
became amendable in June 2002, and its
collective bargaining agreement with the AFA,
which was ratified in October 1998, became
amendable in October 2002. The Company has
entered into negotiations with AMFA and AFA
regarding new agreements.
In the airline industry, labor relations are
regulated by the Railway Labor Act ("RLA").
Under the RLA, collective bargaining agreements
do not expire but, rather, become amendable.
The wage rates, benefits and work rules
contained in a contract that has become
amendable remain in place and represent the
status quo until a successor agreement is in
place. The parties may not resort to self-help,
such as strikes or lockouts, until the RLA
processes for collective bargaining have been
exhausted.
Certain of the Company's unrepresented labor
groups are from time to time approached by
unions seeking to represent them. In 2002, the
International Association of Machinists and
Aerospace Workers ("IAM") attempted to organize
the Company's customer service employees. The
Company was informed by the National Mediation
Board ("NMB") that the IAM did not receive a
sufficient showing of interest from customer
service employees to merit holding an election.
Because of this, the NMB will not accept any
application seeking representation of the
Company's customer service employees prior to
March 2004.
In February 2003, the Company was informed by
the National Mediation Board that the Transport
Workers Union ("TWU") was seeking election to
represent the Company's dispatch employees. The
election will take place in early April.
The Company is in the process of implementing a
hiring freeze, wage reductions for salaried
employees, and bonus plan reductions for all
employees as a part of its cost-cutting
measures, as more fully detailed in Note 13
Subsequent Events.
Aviation Insurance
Following the September 11 terrorist attacks,
the aviation insurance industry imposed a
worldwide surcharge on aviation insurance rates
as well as a reduction in coverage for certain
war risks. In response to the reduction in
coverage, the Air Transportation Safety and
System Stabilization Act 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. Prior to December 2002, the
Company purchased hull war risk coverage through
the private insurance market, and purchased
liability war risk coverage through a
combination of U.S. government provided
insurance and private insurance. In December
2002, the U.S. government offered to provide
additional war risk coverage that included
certain risks previously covered by private
insurance. The Company has purchased, at rates
that are significantly lower than those charged
by private insurance carriers, hull and
liability war risk coverage from the U.S.
government through April 14, 2003. These
savings are passed through to the Company's
major airline partners pursuant to its current
UA and DL Agreements. The Company anticipates
that it will renew the government insurance for
as long as the coverage is available, and then
obtain this coverage through the private
insurance market. Under the Company's UA and DL
Agreements, the Company passes through the cost
of insurance to its partners. However, the
absence of insurance, or availability at
excessive rates, could affect the Company's
ability to operate. The Company anticipates
that it will follow industry practices with
respect to sources of insurance.
(g)Use of Estimates
The preparation of financial statements in
accordance with accounting principles generally
accepted in the United States of America 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
weighted average cost, less an allowance for
obsolescence of $1.2 million and $1.1 million as
of December 31, 2001 and 2002, respectively.
Expendable parts and supplies are charged to
expense as they are used. Amounts charged to
costs and expenses for obsolescence in 2000, 2001
and 2002 were $237,000, $578,000 and $596,000,
respectively.
(i)Property and Equipment
Property and equipment, including rotable spare
parts, are stated at cost. Assets held under
capital leases are initially recorded at the
present value of the minimum future lease
payments. Depreciation is computed using the
straight-line method over the estimated useful
lives of the related assets that range from five
to sixteen and one half years. Capital leases
and leasehold improvements are amortized over the
shorter of the estimated life or the remaining
term 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 impact
the remaining estimated useful life or the
recoverability of the remaining carrying value of
its long-lived assets, including rotable spare
parts. If such events or circumstances were to
indicate that the carrying amount of these assets
would not be recoverable, the Company would
estimate the future cash flows expected to result
from the use of the assets and their eventual
disposition. If the sum of the expected future
cash flows (undiscounted and without interest
charges) is less than the carrying amount of the
asset, an impairment loss would be recognized by
the Company.
(j)Pre-operating Costs
The American Institute of Certified Public
Accountants issued Statement of Position 98-5
("SOP 98-5") on accounting for start-up costs,
including pre-operating costs related to the
introduction of new fleet types by airlines,
which the Company adopted effective January 1,
1999.
In accordance with SOP 98-5, approximately $5.6
million of pre-operating costs incurred during
2000 for the start up of ACJet were expensed as
incurred.
(k)Intangible Assets
Goodwill of approximately $3.2 million,
representing the excess of cost over the fair
value of net assets acquired in the acquisition
of ACA, was previously amortized by the straight-
line method over twenty years. Costs incurred to
acquire slots were being amortized by the
straight-line method over twenty years. The
primary financial indicator used by the Company
to assess the recoverability of its intangible
assets 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. Accumulated amortization
of intangible assets at December 31, 2001 and
2002 was $1.8 million.
In accordance with Statement of Financial
Accounting Standards No. 142, (see Note 17),
which the Company adopted as of January 1, 2002,
the Company no longer recognizes amortization of
its goodwill and slots for 2002 and future years
but, instead, evaluates these assets, at least
annually, for potential impairment based upon
fair value.
(l)Maintenance
The Company has executed long term agreements
with the engine manufacturers and other service
providers covering repair and overhaul of its
engines, airframe and avionics components, and
landing gear. These agreements call for an
escalating rate per hour flown over the life of
the agreement. The Company's maintenance
accounting policy is to expense amounts based on
the current rate as the aircraft are flown.
Prior to the execution of these long-term
maintenance agreements, the Company's maintenance
policy was a combination of expensing certain
events as incurred and accruing for certain
maintenance events at rates it estimated would be
sufficient to cover maintenance cost for the
aircraft.
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 amounts it paid GE under the agreement and
correspondingly reduced the amounts it expensed
for engine maintenance. The Company continues
to negotiate with GE and other vendors in order
to reach an acceptable maintenance agreement.
Accordingly, the Company currently is not adding
engines beyond the 66 covered aircraft and
anticipates that the adjustments described above
will continue to be disputed. The Company
recorded $4.8 million, $1.3 million, and $1.3
million to maintenance expense in the second,
third, and fourth quarters of 2002, which
represented the Company's estimate of amounts
that GE may seek to collect 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
does not agree with the Company's interpretation
of the agreement. In February 2003 the Company
provided notice of its desire to settle this
issue in arbitration. GE subsequently presented
an invoice for amounts it believes to be due
from the Company, which amounts are $1.0 million
in excess of the amounts accrued by the Company,
and requested that the question of the amounts
due also be settled by arbitration. The parties
are presently negotiating whether an agreement
can be reached outside of arbitration, as
provided in the agreement. If no agreement can
be reached and the arbitration is decided in the
Company's favor, the Company will remove the
engines from the agreement and will negotiate
for new terms at market rates. A decision in
GE's favor will result in covered engines
remaining in the agreement for the balance of
the term.
Effective September 2001, the Company entered a
sixteen year maintenance agreement with Air
Canada covering maintenance, repair and overhaul
services for airframe components on its CRJ
aircraft. Under the terms of this agreement,
the Company pays a varying amount per flight
hour each month, based on the age of the
aircraft. The Company expenses the amount paid
to Air Canada based on the rates stipulated in
the agreement and the hours flown each month.
In February 2002, the Company entered into a
five-year agreement with Air Canada covering the
scheduled airframe C-check overhaul of its CRJ
aircraft. The Company expenses this cost as the
overhaul is completed.
Effective January 2001, the Company entered into
an agreement with BAE Systems Holdings, Inc.
covering repair and overhaul of airframe rotable
parts on the Company's J-41 aircraft through the
remaining service life of the J-41 fleet. Under
the terms of this agreement, the Company pays a
fixed amount per flight hour each month. The
Company expenses the amount paid to BAE Systems
Holdings, Inc. based on the rates stipulated in
the agreement and the hours flown each month.
(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,
or be applied against future rental payments.
(n)Income Taxes
The Company accounts for income taxes using the
asset and liability method. Under the asset and
liability method, deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between
the financial statement carrying amounts for
existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
expected to apply to taxable income in future
years in which those temporary differences are
expected to be recovered or settled.
(o)Stock-Based Compensation
The Company accounts for its stock-based
compensation plans using the intrinsic value
method prescribed under Accounting Principles
Board (APB) No. 25. As such, 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.
For purposes of the pro forma disclosures of
compensation expense under Statement of Financial
Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", the Company uses the
Black-Scholes option model to estimate the fair
value of options. A risk-free interest rate of
6.0%, 4.5% and 3.1% for 2000, 2001 and 2002,
respectively, a volatility rate of 65.0%, 73.4%
and 70.6% for 2000, 2001 and 2002, respectively,
with an expected life of 4.0 years for 2000, 4.0
years for 2001 and 6.3 years for 2002 were
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
pro forma information disclosed below does not
include the impact of awards made prior to
January 1, 1995 (in thousands, except per share
data):
2000 2001 2002
Net income, as reported $15,155 $34,322 $39,286
Less: stock-based employee compensation
expense, net of related tax effects (3,146) (5,284 (6,520)
Pro forma net income $12,009 $29,038 $32,766
Earnings per share:
Basic - as reported $.38 $.79 $.87
Basic - pro forma $.30 $.67 $.73
Diluted - as reported $.36 $.76 $.85
Diluted - pro forma $.28 $.64 $.71
(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. On January 25, 2001, the Company
announced a 2-for-1 common stock split payable
as a stock dividend on February 23, 2001 to
shareholders of record on February 9, 2001. All
share and income per share information has been
adjusted for all years presented to reflect the
stock split.
A reconciliation of the numerator and denominator
used in computing income per share is as follows
(in thousands, except per share amounts):
2000 2001 2002
Basic Diluted Basic Diluted Basic Diluted
Share calculation:
Average number of common
shares outstanding 40,150 40,150 43,434 43,434 45,047 45,047
Incremental
shares due to assumed
exercise of options - 1,616 - 1,776 - 972
Incremental shares
due to assumed
conversion of
convertible debt - 1,872 - - - -
Weighted average common
shares Outstanding 40,150 43,638 43,434 45,210 45,047 46,019
Adjustments to net
income:
Net income $15,155 $15,155 $34,322 $34,322 $39,286 $39,286
Interest expense on
convertible debt,
net of tax - 416 - - - -
Net Income $15,155 $15,571 $34,322 $34,322 $39,286 $39,286
Net income per share $.38 $.36 $.79 $.76 $.87 $.85
(q) Reclassifications
Certain prior years' 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
The Company has adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and
Related Information." The statement requires
disclosures related to components of a company
for which separate financial information is
available that is evaluated regularly by a
company's chief operating decision maker in
deciding the allocation of resources and
assessing performance. The Company is engaged
in one line of business, the scheduled and
chartered transportation of passengers, which
constitutes nearly all of its operating revenues.
(t) Aircraft Deposits
As part of the Company's purchase agreements for
certain aircraft, the manufacturers require
deposits to be placed and/or progress payments to
be made in advance of the aircraft's delivery to
the Company. These aircraft deposits
are considered long term in nature due to the
fact that they are scheduled to be returned in
years extending beyond 2003.
2.Property Property and equipment consist of
and the following:
Equipment
(in thousands)
December 31, 2001 2002
Owned aircraft and improvements $ 92,562 $103,833
Improvements to leased aircraft 6,782 7,023
Flight equipment, primarily rotable spare parts 82,372 105,907
Maintenance and ground equipment 10,971 13,849
Computer hardware and software 14,314 19,730
Furniture and fixtures 2,120 2,998
Leasehold improvements 7,887 8,870
217,008 262,210
Less: Accumulated depreciation and amortizatio 45,480 66,797
$171,528 $195,413
In 1999, the Company commenced a replacement
project of its computer software systems. The
majority of these costs are being capitalized and
amortized over seven years. In 1999, the Company
expensed approximately $400,000 related to
replacement software selection and capitalized $2.3
million in acquisition and implementation costs.
In 2000, 2001 and 2002, the Company capitalized an
additional $5.2 million, $2.8 million and $3.5
million of costs incurred, respectively, bringing
the total capitalized costs to date to $13.8
million.
3. Accrued Accrued liabilities consist of the
Liabilities following:
(in thousands)
December 31, 2001 2002
Payroll and employee benefits $ 20,385 $ 29,973
Air traffic liability 2,534 2,398
Landing fees 2,313 2,994
Property taxes 1,205 2,907
Aircraft rents 6,765 3,712
Passenger related expenses 6,075 5,179
Maintenance costs 1,266 8,933
Fuel 4,595 11,455
Other 10,432 16,826
$ 55,570 $ 84,377
4. Debt On September 28, 2001, the Company entered into an
asset-based lending agreement with Wachovia Bank,
N.A. that initially provided the Company with a
line of credit for up to $25.0 million. As a
result of the Chapter 11 bankruptcy filing by
United Airlines, it was necessary for the Company
to request a covenant waiver. As a result of these
negotiations, the Company agreed to reduce the size
of the lending agreement to $17.5 million and
revise certain covenants. 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 $15.7 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 60% of the book value
of certain rotable spare parts. As of December 31,
2002 the value of the collateral supporting the
line was sufficient for the amount of available
credit under the line to be $17.5 million. There
have been no borrowings on the line of credit. The
amount available for borrowing at December 31, 2002
was $1.8 million after deducting $15.7 million
which has been pledged as collateral for letters of
credit. The Company intends to request that its
current line of credit be renewed upon expiration.
If it is unable to renew, the Company believes it
has adequate liquidity to pledge cash as collateral
for letters of credit.
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 were convertible into shares of Common
Stock unless previously redeemed or repurchased, at
a conversion price of $4.50 per share, subject to
certain adjustments. During 1998, approximately
$37.7 million of the notes were converted into
approximately 8.5 million shares of common stock.
Interest on the Notes was payable on April 1 and
October 1 of each year. On May 15, 2000, the
Company called the remaining $19.8 million
principal amount of Notes outstanding, for
redemption at 104% of face value effective July 3,
2000. The Noteholders elected to convert all of
the Notes into common stock and approximately 4.4
million shares were issued in exchange for the
Notes during the period May 25, 2000 to June 6,
2000, resulting in an addition to paid in capital
of approximately $19.8 million partially offset by
a reduction of approximately $471,000 for the
unamortized debt issuance costs relating to the
Notes in connection with their conversion.
In September 1997, approximately $112 million of
pass through certificates were issued in a private
placement by separate pass through trusts, which
purchased with the proceeds, equipment notes (the
"Equipment Notes") issued in connection with (i)
leveraged lease transactions relating to four J-41s
and six 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.
Long-term debt consists of the
following:
(in thousands) 2001 2002
December 31,
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
thereafter through maturity, interest
payable semi-annually at 7.49%
throughout term of notes, collateralized
by four J-41 aircraft. $ 12,262 $ 11,147
Notes payable to institutional lenders, due
between October 23, 2010 and May 15,
2015, principal payable semiannually
with interest ranging from 5.65% to
7.63% through maturity, collateralized
by four CRJ aircraft. 48,096 45,047
Note payable to institutional lender, due
October 2, 2006, principal payable
semiannually with interest at 6.56%,
collateralized by one J-41 aircraft. 2,722 2,246
Total 63,080 58,440
Less: Current Portion 4,639 4,900
$ 58,441 $ 53,540
As of December 31, 2002, maturities of long-term
debt are as follows:
(in thousands)
2003 $ 4,900
2004 5,153
2005 6,019
2006 5,936
2007 5,542
Thereafter 30,890
$ 58,440
The Company has various financial covenant
requirements associated with its debt and the UA
Agreement. These covenants require the Company to
meet certain financial ratio tests, including
tangible net worth, net earnings, current ratio and
debt service levels.
5. Obligations The Company leases certain equipment for
Under noncancelable terms of more than one year. These
Capital lease agreements expire on various dates through
Leases 2004. The net book value of the equipment under
capital leases at December 31, 2001 and 2002 was
$3.6 million and $2.2 million, respectively. The
leases were capitalized at the present value of the
lease payments. The weighted average interest rate
for these leases is approximately 7.6 %.
At December 31, 2002, 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,
2003 $ 1,565
2004 771
Total future minimum lease payments 2,336
Amount representing interest 136
Present value of minimum lease payments 2,200
Less: Current maturities 1,449
$ 751
6. Operating Future minimum lease payments under noncancelable
Leases operating leases at December 31, 2002 are as follows:
(in thousands)
Year ending December 31, Aircraft Other Total
2003 $ 144,705 $ 8,864 $ 153,569
2004 139,970 8,691 148,661
2005 138,633 8,464 147,097
2006 136,985 8,389 145,374
2007 130,102 8,059 138,161
Thereafter 1,049,675 50,239 1,099,914
Total minimum
lease payments $1,740,070 $92,706 $1,832,776
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 pays taxes, maintenance, insurance and
other operating expenses applicable to leased assets.
Operating lease expense was $70.8 million, $107.4
million and $133.6 million for the years ended
December 31, 2000, 2001 and 2002, respectively.
7. Stockholders'Stock Splits
Equity
On January 25, 2001, the Company announced a 2-for-1
common stock split payable as a stock dividend on
February 23, 2001 to shareholders of record on
February 9, 2001. The effect of this stock split is
reflected in the accompanying financial statements,
calculation of income per share, and stock option
table presented below as of and for the years ended
December 31, 2000, 2001 and 2002.
Stock Option Plans
The Company's 1992 Stock Option Plan has 3.0 million
shares of which a majority had been granted by 1995.
The Company's 1995 Stock Incentive Plan has 5.0
million shares of which the majority had been granted
by year-end 1999. In 2000, the Company's
shareholders approved a new 2000 Stock Incentive Plan
for 4.0 million shares. These three shareholder
approved plans provide for the issuance of incentive
stock and non qualified stock options to purchase
common stock of the Company and restricted stock
awards to certain employees and directors of the
Company. In addition, during 2000 the Company's Board
of Directors approved stock option programs for an
additional 2.4 million shares. The Board approved
programs provide for the issuance of non-qualified
stock options to purchase common stock of the Company
and restricted stock awards to certain employees.
Executive officers and directors of the Company are
not eligible to participate in the Board authorized
stock option programs. Under the plans and programs,
options are granted by the Chief Executive Officer of
the Company with approval from the Compensation
Committee of the Board of Directors and vest over a
period ranging from three to five years.
A summary of the status of the Company's stock option
plan awards, including restricted stock awards as of
December 31, 2000, 2001, and 2002 and changes during
the periods ending on those dates is presented below:
2000 2001 2002
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Options outstanding at
beginning of year 4,445,642 $ 6.14 4,576,994 $ 8.57 5,194,638 $12.07
Granted 1,341,000 $12.51 2,202,826 $14.74 645,500 $12.19
Exercised 1,132,432 $ 3.46 1,524,482 $ 5.35 1,025,982 $ 6.87
Canceled 77,216 $10.84 60,700 $14.90 103,325 $16.34
Options outstanding at
end of year 4,576,994 $ 8.58 5,194,638 $12.07 4,710,831 $13.12
Options exercisable at
year-end 2,132,823 $ 5.02 1,408,608 $ 7.88 1,694,566 $12.49
Options available for
granting at year end 5,190,884 3,048,758 2,520,320
Weighted-average fair
value of options
granted during the
year $7.45 $8.77 $8.05
The Company awarded a total of 55,900 shares of
restricted stock to certain employees during 2001.
These shares vest over four years and have a
provision for accelerated vesting tied to a 25%
increase in any 2002 quarter's operating results over
the prior year's quarter. In the first quarter of
2002, the Company's operating results met the
threshold for accelerated vesting and as a result,
these restricted shares vested 100% in April 2002.
The Company recognized $218,000 and $1.1 million in
compensation expense in 2001 and 2002, respectively,
due to these restricted stock awards and as a result
of the accelerated vesting schedule. The Company
awarded a total of 67,000 shares of restricted stock
to certain employees during 2000. These shares vest
over three years and had a provision for accelerated
vesting if the Company's stock price appreciated by
25% during the first year of vesting. In February
2001, the Company's stock price met the threshold for
accelerated vesting and as a result, these restricted
shares vested 100% in April 2001. The Company
recognized $1.1 million and $78,000 in compensation
expense in 2001 and 2000, respectively, due to these
restricted stock awards and as a result of the
accelerated vesting schedule. In 1998, the Company
awarded a total of 200,000 shares of restricted stock
to certain employees. These shares vest over three
to five years. The Company recognized $301,000,
$241,000 and $235,000 in compensation expense for
2000, 2001 and 2002 respectively, associated with the
1998 restricted stock awards and $90,000, $57,000 and
$54,000 for 2000, 2001 and 2002 respectively,
associated with certain stock option awards.
The following table summarizes information about
stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable
Weighted-
Number average- Weighted- Weighted-
outstanding remaining average Number average
Range of exercise at contractual exercise exercisable exercise
price 12/31/02 life price 12/31/02 price
(years)
$0.00 - $2.79 30,494 5.4 $ .18 2,800 $ 1.97
$2.80 - $5.59 128,776 3.9 $ 3.72 128,776 $ 3.72
$5.60 - $8.39 57,536 4.4 $ 6.35 57,536 $ 6.35
$8.40 - $11.19 959,566 8.0 $ 9.44 299,466 $ 9.77
$11.20 - $13.99 2,867,898 8.0 $ 13.50 929,427 $ 13.26
$14.00 - $16.79 287,286 7.1 $ 15.83 153,086 $ 15.75
$16.80 - $19.59 13,000 8.0 $ 17.70 5,250 $ 17.48
$19.60 - $22.39 175,250 8.2 $ 20.77 94,000 $ 20.52
$22.40 - $25.19 101,500 8.9 $ 23.37 4,125 $ 23.49
$25.20 - $27.99 89,525 8.2 $ 26.88 20,100 $ 26.90
4,710,831 7.8 $ 13.12 1,694,566 $ 12.49
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 that 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 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 began distribution of the ESOP assets
per participant's direction. In 2000 and 2001,
additional ESOP shares were distributed, as
participants were located. 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, 2001
and 2002 were 14,537 and 11,789, respectively.
401K Plan
Effective January 1, 1992, the Company adopted a
401(k) Plan (the "Plan"). The Plan covers all
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 are
limited to $2.5 million. The employer's aggregate
contribution as of December 31, 1999 was $2,500,000.
The Plan allows the Company to make discretionary
matching contributions for non-union employees,
mechanics, and certain flight attendants, equal to
25% of salary contributions up to 4% of total
compensation. Effective with the ratification of the
pilot's new union agreement on February 9, 2001, the
Company's match for pilots is variable depending upon
the pilot's length of service and the Company's
operational performance. The Company's matching
percentage for a pilot can range from two to six
percent of eligible compensation. The Company's
matching contribution for all qualified employees, if
any, vests ratably over five years. Contribution
expense was approximately $374,000, $3.9 million and
$1.6 million for 2000, 2001 and 2002, respectively.
The Company's contribution expense in 2001 includes
estimated costs of $2.9 million for additional
contributions to correct operational defects found in
the Company's 401(k) plan in addition to $1 million
in discretionary matching contributions.
Profit Sharing Programs
The Company has profit sharing programs that result
in periodic payments to all eligible employees.
Profit sharing compensation, which is based on
attainment of certain performance and financial
goals, was approximately $4.5 million, $6.3 million,
and $10.3 million in 2000, 2001 and 2002,
respectively.
9. Income Taxes
The provision (benefit) for income taxes includes the following components:
(in thousands)
Year Ended December 31, 2000 2001 2002
Federal:
Current $ 11,295 $ 15,392 $ 25,124
Deferred (4,267) 4,437 (2,850)
Total federal provision 7,028 19,829 22,274
State:
Current 1,010 2,207 4,388
Deferred (381) 477 (1,523)
Total state provision 629 2,684 2,865
Total provision $ 7,657 $ 22,513 $ 25,139
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, 2000 2001 2002
Income tax expense
at statutory rate $ 7,984 $ 19,892 $ 22,549
Increase (decrease)in tax
expense due to:
Permanent differences and other (487) 877 711
State income taxes, net
of federal benefit 160 1,744 1,879
Income tax expense $ 7,657 $ 22,513 $ 25,139
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 Company's 2000 effective tax rate was
positively affected by the receipt of a favorable
ruling request which allowed the Company to obtain
additional tax credits to offset income tax as well
as the realization of certain tax benefits that were
previously reserved which together reduced income tax
expense by approximately $1.4 million.
The following is a summary of the Company's deferred
income taxes as of December 31, 2001 and 2002:
(in thousands)
December 31,
2001 2002
Deferred tax assets:
Engine maintenance accrual $ 411 $ 3,212
Intangible assets 569 333
Air traffic liability 942 432
Allowance for bad debts 238 1,248
Deferred aircraft rent 2,363 2,824
Deferred credits 2,241 2,431
Accrued compensation 1,557 1,964
Accrued aircraft early 9,555 18,587
retirement charge
Start up and organizational 1,702 1,227
costs
Other 3,735 5,787
Total deferred tax assets 23,313 38,045
Deferred tax liabilities:
Depreciation and amortization (32,717) (43,277)
Accrued expenses and other (1,238) (1,038)
Total deferred tax liabilities (33,955) (44,315)
Net deferred income tax
(liabilities) $ (10,642) $ (6,270)
No valuation allowance was established in either
2001 or 2002, as the Company believes it is more
likely than not that the deferred tax assets will be
realized.
10. Aircraft
Commitments
and As of December 31, 2002, the Company had a total of
Contingencies 47 Bombardier CRJ200s ("CRJs") on order from
Bombardier, Inc., and held options for 80
additional CRJs. Of the 47 firm aircraft
deliveries, 35 are scheduled for 2003 and an
additional 12 are scheduled for 2004. The Company
is obligated to purchase and finance (including
leveraged leases) the 47 firm ordered aircraft at
an approximate capital cost of $0.9 billion.
The Company has generally financed its new aircraft
deliveries through leverage lease structures
involving investments by institutional or
industrial investors who provide debt and equity
capital to finance the Company's aircraft. This
type of financing has been more difficult to obtain
since September 11, both in terms of cost and
sources of funds. The Company has not been able to
locate equity funding, which provides approximately
20% of the aircraft acquisition cost, for any
further deliveries and had obtained debt
commitments for only four undelivered aircraft.
The availability of funding, particularly equity
funding, which provides approximately 20% of the
aircraft acquisition cost, remains uncertain. The
Company may be forced to utilize its own funds for
equity investments or to seek alternative sources
of funding for a portion of its aircraft
deliveries. (See Note 13).
Deferred Compensation Arrangements
The Company has committed to provide its senior
executive officers a deferred compensation plan
which utilizes split dollar life insurance
policies, and for a certain officer, a make-whole
provision for taxes, post retirement salary based
on ending salary, and post retirement benefits
based on benefits similar to those currently
provided to the executive while actively employed.
The Company has estimated the cost of the deferred
compensation and tax gross up feature, future
salary and future benefits and is accruing this
cost over the remaining required service time of
the executive officer. In 2002, the Company
expensed approximately $1.8 million as the current
year's cost of these benefits. The company expects
to recognize similar costs annually over the
remaining service life of the senior executives.
Training
The Company has entered into agreements with Pan Am
International Flight Academy ("PAIFA"), which allow
the Company to train CRJ, J-41 and 328JET pilots at
PAIFA's facility near Washington-Dulles. In 2001,
PAIFA relocated its Washington-Dulles operations to
a new training facility near the Company's
Washington-Dulles headquarters. This facility
currently houses three CRJ simulators, a 328JET
simulator, and a J-41 simulator. The Company has
agreements to purchase an annual minimum number of
CRJ simulator training hours at agreed rates
through 2010. The Company's payment obligations
for CRJ simulator usage over the remaining years of
the agreements total approximately $10.1 million.
In 2001, PAIFA, CAE Schreiner and the Company
executed a simulator provision and service
agreement providing for 328JET training at the
PAIFA facility. Under this agreement, the Company
has committed to purchase all of its 328JET
simulator time from PAIFA at agreed upon rates,
with no minimum number of simulator hours
guaranteed.
At December 31, 2002, the Company's minimum payment
obligations under the PAIFA agreements for the CRJ
simulator is as follows:
(in thousands)
Year ended December 31,
2003 $ 1,371
2004 1,391
2005 1,178
2006 1,195
2007 1,213
Thereafter 3,748
$ 10,096
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 2000 and 2001, the Company
settled eight and one hedge transactions,
respectively, paying the counterparty $379,000 in
2000 and paying the counterparty $722,000 in 2001.
At December 31, 2000 the Company had one interest
rate hedge transaction open with a notional value
of $8.5 million. It settled on January 3, 2001
resulting in the payment to the counterparty
referenced above. The Company had no interest rate
hedge transactions in 2002.
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 provided 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. Effective December 1,
2000, under the United Air Lines agreements and
since inception of the Delta Air Lines agreements,
the Company no longer bears the risk associated
with fuel price volatility for its operations.
Accordingly, no fuel hedging transactions were
entered for 2001 and 2002, and there were no fuel
hedging transactions open as of December 31, 2001
and 2002.
11. Aircraft In June 2002 the Company reconfirmed its commitment
Early to United to remove its remaining J-41 turboprop
Retirement aircraft from service no later than April 30, 2004.
Charge The Company has long-term lease commitments for 25
of these J-41 aircraft and owns 5 J-41 aircraft.
During 2002, the Company recorded aircraft early
retirement operating charges totaling $24.3 million
($14.6 million net of income tax) for the non-
discounted value of future lease payments and other
costs associated with the early retirement of 18 J-
41 turboprop aircraft. The total 2002 aircraft
early retirement charges reflects a charge of $21.5
million ($12.9 million after tax) in the fourth
quarter of 2002 relating to J-41 aircraft which are
expected to be retired by the fourth quarter of
2003, a $7.6 million charge ($4.5 million after
tax) in the third quarter of 2002 related to
expected scheduled aircraft retirements by the
third quarter of 2003, and a $4.8 million ($2.8
million after tax) credit to income in the second
quarter of 2002 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 estimates that it
will expense approximately $26.5 million (pre-tax)
to retire the remaining 8 leased J-41s as they are
retired during 2004. The Company plans to actively
remarket the J-41s through leasing, subleasing or
outright sale of the aircraft. Any of these
arrangements involving leased aircraft may require
the Company to make payments to the lessor to cover
shortfalls between sale prices and lease stipulated
loss values. Significant delays in the delivery of
the remaining CRJs on firm order could negatively
impact the Company's ability to complete its early
aircraft retirement plan for the J-41 turboprop
fleet.
In the fourth quarter of 2001, the Company recorded
an aircraft early retirement charge of $23.5
million ($14.0 million after tax) for the early
retirement of nine leased Jetstream-41 turboprop
aircraft that were originally scheduled to be
removed from service prior to year-end 2002.
During 2000, the Company recorded aircraft early
retirement operating charges totaling $29.0 million
($17.4 million net of income tax) for the early
lease termination of its 28 19-seat British
Aerospace Jetstream 32 ("J-32's") turboprop
aircraft, which were removed from service prior to
December 31, 2001. The charge included the
estimated cost of contractual obligations to meet
aircraft return conditions, as well as a lease
termination fee, which fee was calculated including
such factors as the discounted present value cost
of future lease obligations from the planned out of
service date to the lease termination date, and
miscellaneous costs and benefits of early return to
the lessor.
As a result of completing the J-32 early retirement
during the fourth quarter of 2001, the Company
reversed portions of this aircraft early retirement
charge which were no longer required.
Approximately $500,000 of the original $29.0
million J-32 charge was reversed and recorded as a
reduction to the aircraft early retirement charge
in 2001, and approximately $200,000 of this charge
was reversed as a reduction to the aircraft early
retirement charge in 2002.
As of December 31, 2002, the Company had
liabilities of $46.5 million accrued for J-41
aircraft to be early retired. This amount reflects
aircraft early retirement charges booked, offset by
cash payments of $1.7 million for the retirement of
one J-41 in 2002.
12 Air On September 22, 2001, President Bush signed into
Transportation law the Air Transportation Safety and System
Safety and Stabilization Act ("the Stabilization Act"). The
System Stabilization Act provided cash grants to
Stabilization commercial air carriers as compensation for: (1)
Act/Aviation direct losses incurred beginning with the
and terrorist attacks on September 11, 2001 as a
Transportation result of any FAA mandated ground stop order
Security Act 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 was 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 was
eligible to receive as direct compensation under
the Stabilization Act. The Company has received
payment of this amount from the government. 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 period of thirty days as a result
of the terrorist attacks of September 11, 2001.
Prior to December 2002, the Company purchased hull
war risk coverage through the private insurance
market, and purchased liability war risk coverage
through a combination of U.S. government provided
insurance and private insurance. In December
2002, the U.S. government offered to provide
additional war risk coverage that included certain
risks previously covered by private insurance.
The Company anticipates that it will renew the
government insurance for as long as the coverage
is available.
On November 19, 2001 the President signed into law
the Aviation and Transportation Security Act (the
"Security Act"). The Security Act requires
heightened passenger, baggage and cargo security
measures be adopted as well as enhanced airport
security procedures. The Security Act created the
Transportation Security Administration ("TSA")
that has taken over from the air carriers the
reasonability for conducting the screening of
passengers and their baggage. The TSA assumed
both of the Company's passenger screening
contracts on February 17, 2002. Air carriers
continue to have responsibility for aircraft
security, employee background checks, the security
of air carrier airport facilities and other
security related functions.
The activities of the TSA are to be funded in part
by the application of a $2.50 per passenger
enplanement security fee (subject to a maximum of
$5.00 per one way trip) and payment by all
passenger carriers of a sum not exceeding each
carrier's passenger and baggage screening cost
incurred in calendar year 2000. The TSA is
required to deploy federal air marshals on an
increased number of passenger flights. The
Security Act imposes new and increased
requirements for air carrier employee background
checks and additional security training of flight
and cabin crew personnel. The Security Act also
mandated and the FAA has adopted new rules
requiring the strengthening of cockpit doors, some
of the costs of which are being reimbursed by the
FAA. The Company completed Level One
fortification if its cockpit doors on all of its
aircraft as of November 15, 2001, and began level
two fortifications in December 2002. As of
December 31, 2002, the Company has received $1.9
million in reimbursements from the FAA for the
mandated cockpit door modifications. There is no
guarantee that the Company will be reimbursed in
full for the cost of these modifications. The
modifications are expected to be completed during
2003. New passenger and baggage screening
requirements have caused disruptions in the flow
of passengers through airports and in some cases
delayed airline operations. The Company may
experience security-related disruptions in the
future, including reduced passenger demand for air
travel, but believes that its exposure to such
disruptions is not greater than that faced by
other providers of regional air carrier services.
13. Subsequent In anticipation of the start of a war with Iraq and
Events the continued deterioration of the economics in the
airline industry, the Company embarked on a cost
reduction program with the goal of reducing
annualized operating expenses by approximately 10%.
As part of this program, the Company has
implemented a hiring freeze, has begun furloughing
excess pilots, has eliminated or reduced bonus
programs, and has implemented salary reductions
ranging from 5% to 10% for all salaried employees.
The effect of the elimination of and changes in
bonus plans and salaries for those management
employees paid more than $30,000 per year is
anticipated to reduce cash compensation by between
10% and 33% for salaried employees with the largest
reductions affecting the Company's officers.
On December 9, 2002, UAL, Inc. and its
subsidiaries, including United, filed for
protection under Chapter 11 of the United States
Bankruptcy Code. UAL is currently operating as a
debtor in possession and managing its business and
affairs. As part of its first day filings in the
bankruptcy proceeding, United requested and was
granted a court order permitting, but not
requiring, it to continue to honor the UA
Agreements while United is in bankruptcy. UAL, Inc.
and its subsidiaries have been granted the
exclusive right until October 6, 2003, to file a
plan of reorganization and the exclusive right
until December 5, 2003, to seek acceptances of any
such plan. The Court has set May 12, 2003 as the
deadline for the filing of proofs of claim,
although this deadline does not apply to claims
arising under executory contracts and unexpired
leases that have yet to be rejected by UAL, Inc.
and its subsidiaries. It is possible that any or
all of the foregoing deadlines may be extended. In
bankruptcy United also has the right to assume or
reject the UA Agreements. No deadline has been set
for United to assume or reject the UA Agreements.
The Company devotes a substantial portion of its
business to its operations with United, and obtains
substantial services from United in operating that
business. The Company's future operations are
substantially dependent on United's successful
emergence from bankruptcy and on the affirmation or
renegotiation of the Company's UA Agreement by
United on acceptable terms, or on the Company's
ability to successfully establish an alternative to
the United business and services. If United seeks
to renegotiate the terms of the UA Agreements, a
renegotiated agreement is likely to be on terms
that are less favorable to the Company with regard
to operating margins and in other respects, which
would adversely affect the Company's earnings
and/or growth prospects. There is no assurance
that United will successfully emerge from
bankruptcy, and United has said that liquidation is
a possibility. If United does not succeed in
reorganizing its operations and emerging from
bankruptcy, and instead files for a liquidation
under Chapter 7 of the U.S. Bankruptcy Code, the
Company would be faced with the prospect of having
to quickly find another code share partner or to
develop the airline related infrastructure to fly
as an independent airline. The Company has
commenced planning for these contingencies and will
continue to pursue actions management believes
appropriate in the event that United liquidates
under Chapter 7. The Company anticipates that
there would be an interruption in its services
during a transition period, the length of which
would be dependent on several factors including how
soon United liquidates. There are no assurances
that the Company will be able to find another code
share partner or be able to compete as an
independent airline, and any prolonged stoppage of
flying would materially adversely affect the
Company's results of operations and financial
position. United's bankruptcy filing may affect
the Company in other ways that it is not currently
able to anticipate or plan for.
The UA Agreements call for the resetting of fee-per-
departure rates annually based on the Company and
United's planned level of operations for the
upcoming year. The Company and United are in
discussions regarding the fee-per-departure rates
to be utilized during 2003. During 2002, the
average utilization of aircraft in the United
Express operation declined, and as a result, the
2002 rates do not adequately reflect decreases in
the Company's aircraft utilization. The Company is
seeking a rate adjustment for 2003 consistent with
its interpretation of the United Express Agreements
that would, among other things, offset this
reduction in utilization. Until new rates are
established for 2003, United is paying the Company
based on 2002 rates and the Company is recording
its revenue in 2003 using the rates established for
2002. There can be no assurance that the Company
will be able to successfully reset fee-per-
departure rates.
The Company has contractual commitments with
Bombardier for the delivery of 30 CRJs to be
delivered during the remainder of 2003 and an
additional 12 CRJs to be delivered by April 30,
2004. The Company has generally relied on
leveraged lease transactions involving investments
by institutional or industrial investors that
provide debt and equity capital to finance the
purchase price of aircraft it has committed to
purchase. In a leveraged lease, there is an equity
source for 20% to 30% of the purchase price and a
debt source for the remaining 70% to 80% of the
purchase price. With the uncertainty of United's
future and the continued deterioration in industry
conditions, the Company has been unable to secure
equity funding on any terms for its remaining firm
ordered aircraft. The inability to finance
aircraft that the Company desires to purchase may
affect the Company's growth prospects. The Company
has a contingent commitment from Economic
Development Corporation of Canada ("EDC") for debt
financing of four aircraft originally scheduled for
delivery in March and April 2003. As a result of
the bankruptcy of United, EDC's debt funding
obligation is contingent upon the Company obtaining
a waiver from EDC. Since the United bankruptcy
filing through the date of this filing, the Company
has been successful in obtaining such waivers. The
Company has been in discussions with EDC to provide
debt financing for additional ordered aircraft.
The Company may not be able to obtain such waivers
in the future and may not be able to obtain debt
financing from EDC or others once the current EDC
financing commitment is no longer available. The
Company is considering the delay of future aircraft
deliveries and is engaged in discussions with
Bombardier regarding financing and aircraft
delivery schedules. If the Company is unable to
obtain permanent aircraft financing at the time
that it accepts any aircraft for delivery, it may
be required to fund aircraft purchases from its own
cash or to rely on temporary financing from the
aircraft manufacturer. The Company does not have
the financial resources to pay the full purchase
price for all of the aircraft that it currently has
on order. If the Company is unable to delay
deliveries or pay for aircraft on order, Bombardier
may assert a claim for damages.
After evaluating the foregoing, the Company
believes that its cash balances and cash flow from
operations together with operating lease financing
and other available equipment financing will be
sufficient to enable the Company to meet its
liquidity requirements for the remainder of 2003.
However, the Company's industry environment is
highly uncertain and volatile at this time. Future
events could affect the industry or the Company in
ways that are not presently anticipated that could
adversely affect the Company's liquidity.
14.Litigation The Company has two outstanding legal matters with
respect to the Fairchild insolvency. The Company's
balance sheet as of December 31, 2002 includes a
receivable for $1.2 million with respect to
deposits placed with Fairchild for undelivered
aircraft. The Company holds a bond from an
independent insurance company that was delivered to
secure this deposit, and has made a demand for
payment under this bond. Fairchild's insolvency
trustee has made a claim for the collateral posted
with the insurance company, and the insurance
company has withheld payment of the bond. The
matter is presently with the U.S. bankruptcy court
for the Western District of Texas.
At the time of Fairchild's insolvency, the Company
had outstanding invoices due to Fairchild for
various spare parts purchases. The Company
believes it has the right to offset these and other
amounts due to Fairchild against obligations due
from Fairchild that will not be fulfilled as a
result of the insolvency. Fairchild-related
entities dispute this right of offset and in
September Fairchild's wholly owned U.S. subsidiary,
Dornier Aviation of North America ("DANA"), filed
suit against the Company in the United States
Bankruptcy Court for the Eastern District of
Virginia (Civil Action No. 02-08181-SSM) seeking to
recover from the Company payments for certain spare
parts, late payment charges, and consignment
inventory carrying charges. DANA contends that
although its German parent company may not have
fulfilled its contractual obligations to the
Company, that DANA sold spare parts to the Company
independent of its parent company's activities and
that there is no right of offset. The Company
acknowledges that approximately $8 million in
outstanding invoices existed, while DANA claims
that an additional $3.6 million is due. The action
is presently in the discovery stage and it is
anticipated that a trial will be held during the
summer of 2003.
The Company has been named a defendant in two
lawsuits arising from the terrorist activities of
September 11, 2001. These lawsuits, known as
Powell v. American Airlines, Atlantic Coast
Airlines, et al. (United States District Court,
Southern District of New York, case No. 02 CV
10160), and Gallop v. American Airlines, Atlantic
Coast Airlines, et al. (United States District
Court, Southern District of New York, case no. 0
3CV 1016), were commenced by or on behalf of
individuals who were injured or killed in the
attack on the Pentagon through the hijacking of an
American Airlines aircraft originating at Dulles
Airport. In each case, the plaintiffs have named
all airlines operating at Dulles Airport including
the Company, under the theory that all of the
airlines are jointly responsible for the alleged
security breaches by the Dulles security
contractor, Argenbright Security. The Company has
joined a motion filed on behalf of American
Airlines and other defendants seeking dismissal of
all ground victim claims on the basis that the
airline defendants do not owe a duty as a matter of
law to individuals injured or killed on the ground.
It is anticipated that the judge will rule on this
motion during the second quarter 2003. If this
ruling is not favorable, the Company anticipates
that it will raise other defenses including a claim
that it is not responsible for the incidents. The
Company anticipates that other similar lawsuits
could be filed on behalf of other victims.
From time to time claims are made against the
Company with respect to activities arising from its
airline operations. Typically these involve
injuries or damages incurred by passengers and are
considered routine to the industry. On April 1,
2002, one of the Company's insurers on its
comprehensive aviation liability policy was placed
into rehabilitation by the Commonwealth of
Pennsylvania, its state of incorporation. During
the time that Legion is in rehabilitation,
Pennsylvania has ordered that Legion pay no claims,
expenses or other items of debt without its
approval. Consequently, the Company now directly
carries the corresponding exposure related to
Legion's contribution percentage for payouts of
claims and expenses that Legion represented on the
Company's insurance for the 1999, 2000, 2001 & 2002
policy years. Those contribution percentages are
15% for claims arising from incidents occurring in
1999, 19% for 2000, 15% for 2001, and 8.5% for
first quarter of 2002. Legion ceased to be an
insurer for the Company as of April 1, 2002, and
there is therefore no exposure with respect to
Legion for claims arising after that date. The
insurance held by Legion on the Company's policy
was fully covered by reinsurance, which means that
other carriers are contractually obligated to cover
all claims that are direct obligations of Legion.
While there are contractual provisions to the
effect that reinsurance funds are to be directly
applied against the Company's liabilities, it is
anticipated that Legion's creditors will attempt to
obtain court authority to apply these funds against
Legion's other obligations. It is anticipated that
Legion will ultimately not be able to cover its
obligations to the Company except to the extent of
recovery through reinsurance. If Legion's
creditors are able to apply reinsurance against
Legion's general obligations, the Company will be
underinsured for these claims at the percentages
set forth above. This underinsurance would include
the September 11 related lawsuits described above
and any other similar lawsuits that are brought
against the Company. The Company has accrued
reserves of approximately $250,000 for the likely
exposure on claims known to date. No reserves have
been accrued for the September 11 related claims.
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.
15. Financial Statement of Financial Accounting Standards No.
Instruments 107, "Disclosure of Fair Value of Financial
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.
The estimated fair values of the Company's financial
instruments, none of which are held for trading
purposes, are summarized as follows
(brackets denote liability):
(in thousands) December 31, 2001 December 31, 2002
Carrying Carrying Carrying Estimated
Amount Amount Amount Fair Value
Cash and cash
equivalents $173,669 $173,669 $29,261 $29,261
Short-term
investments 7,300 7,300 213,360 213,360
Accounts receivable 8,933 8,933 20,505 20,505
Accounts payable (21,750) (21,750) (29,110) (29,110)
Long-term debt (63,080) (63,856) (58,440) (63,265)
See note 10 for information regarding the fair value of
derivative financial instruments.
16.Supplemental Supplemental disclosures of cash flow information:
Cash Flow
Information
Year ended December 31,
(in thousands)
2000 2001 2002
Cash paid during the
period for:
- Interest $ 6,410 $ 4,811 $ 4,382
- Income taxes 8,944 7,837 24,353
The following non cash investing and financial
activities took place in 2000, 2001 and 2002:
In 2000, the Company capitalized $2.7 million in
interest related to $46.4 million on deposit with
aircraft manufacturers.
In 2000, the remaining $19.8 million principal
amount of Notes outstanding were converted into
common stock of the Company resulting in a $19.3
million increase to paid in capital.
In 2001, the Company capitalized $2.6 million in
interest related to $44.8 million on deposit with
aircraft manufacturers.
In 2002, the Company capitalized $1.4 million (net
of a reversal $1.1 million of capitalized interest
in connection with the cancellation of future
deliveries of 328JETs due to the Fairchild Dornier
insolvency) in interest related to $44.8 million on
deposit with aircraft manufacturers.
17. Recent In January 2003, the Financial Accounting Standards
Accounting Board issued FASB Interpretation No. 46,
Pronouncements "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin No.
51, "Consolidated Financial Statements." This
interpretation requires an existing unconsolidated
variable interest entity to be consolidated by their
primary beneficiary if the entity does not
effectively disperse risk among all parties involved
or if other parties do not have significant capital
to finance activities without subordinated financial
support from the primary beneficiary. The primary
beneficiary is the party that absorbs a majority of
the entity's expected losses, receives a majority of
its expected residual returns, or both as a result
of holding variable interests, which are the
ownership, contractual, or other pecuniary interests
in an entity. We do not expect the statement to
have a significant impact on our financial position
or operating results.
In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended SFAS No.
123 "Accounting for Stock-Based Compensation." The
new standard provides alternative methods of
transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. Additionally, the statement amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in the annual and interim
financial statements about the method of accounting
for stock-based employee compensation and the effect
of the method used on reported results. This
statement is effective for financial statements for
fiscal years ending after December 15, 2002. In
compliance with SFAS No. 148, the Company has
elected to continue to follow the intrinsic value
method in accounting for its stock-based employee
compensation arrangement as defined by Accounting
Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employee, and has made the
applicable disclosures in Note 1 to the consolidated
financial statements.
In November 2002, the Financial Accounting Standards
Board issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB
Interpretation No. 34. This interpretation outlines
disclosure requirements in a guarantor's financial
statements relating to any obligations under
guarantees for which it may have potential risk or
liability, as well as clarifies a guarantor's
requirement to recognize a liability for the fair
value, at the inception of the guarantee, of an
obligation under that guarantee. The initial
recognition and measurement provisions of this
interpretation are effective for guarantees issued
or modified after December 31, 2002 and the
disclosure requirements are effective for financial
statements of interim or annual periods ending after
December 15, 2002. As of March 1, 2003, we have not
provided any guarantees that would require
recognition or disclosure as liabilities under this
interpretation.
On July 30, 2002, the Financial Accounting Standards
Board issued FASB Statement No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities",
which is effective for exit or disposal activities
that are initiated after December 31, 2002.
Statement No. 146 requires that liabilities for the
costs associated with exit or disposal activities be
recognized when the liabilities are incurred, rather
than when an entity commits to an exit plan. The
Company plans to adopt Statement No. 146 on January
1, 2003. The new rules will change the timing of
liability and expense recognition related to exit or
disposal activities, but not the ultimate amount of
such expenses. Existing accounting rules permit the
accrual of such costs for firmly committed plans
which will be executed within twelve months.
Accordingly, to the extent that the Company's plans
to early retire J-41 turboprop aircraft extend
beyond the end of 2003, the adoption of Statement
No. 146 will cause the Company to record costs
associated with such individual early retired
aircraft in the month they are retired, as opposed
to the current accounting treatment of taking a
charge for these aircraft in the period in which the
retirement plan is initiated. See Note 11 of Notes
to Condensed Consolidated Financial Statements.
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 will be
effective for fiscal years beginning after December
15, 2001. The Company adopted Statement No. 142 in
the first quarter of 2002. The implementation of
SFAS 141 and SFAS 142 has had minimal impact on the
Company's financial position or results of
operations. The Company anticipates that SFAS 142
will continue to have minimal impact on the
Company's financial position or results of
operations.
On October 3, 2001, the Financial Accounting
Standards Board issued FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-
Lived Assets", which addresses financial accounting
and reporting 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.
Under Statement No. 144, the Company is required to
evaluate the book value of its long-lived assets as
compared to estimated fair market value. The
Company estimates that the fair market value of four
of the five owned J-41 aircraft will be in the
aggregate $2.9 million below book value when the
aircraft are retired from the fleet. As a result,
the Company is recognizing $2.9 million in
additional depreciation charges related to such
aircraft over their remaining estimated service
lives. In 2002, the Company recognized $1.0 million
in additional depreciation expense.
18. Selected (in thousands, except per share amounts)
Quarterly
Financial
Data
(Unaudited)
Quarter Ended
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
Operating revenues $172,966 $188,193 $195,033 $204,332
Operating income
(Note 1) 23,698 28,633 13,051 (2,749)
Net income (loss)
(Note 1,3) 14,319 17,436 8,500 (969)
Net income (loss)
per share
Basic $ 0.32 $ 0.39 $ 0.19 $ (0.02)
Diluted $ 0.31 $ 0.38 $ 0.19 $ (0.02)
Weighted average
shares outstanding
Basic 44,677 45,115 45,194 45,195
Diluted 46,367 46,305 45,484 45,195
Quarter Ended
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
Operating revenues $133,454 $146,221 $147,651 $156,090
Operating income
(Note 2) 15,479 20,868 15,895 (8,049)
Net income (loss)
(Note 2,3) 9,625 12,948 12,751 (1,003)
Net income (loss)
per share
Basic $ 0.23 $ 0.30 $ 0.29 $ (0.02)
Diluted $ 0.22 $ 0.29 $ 0.28 $ (0.02)
Weighted average
shares outstanding
Basic 42,750 43,168 43,775 43,999
Diluted 44,638 45,029 45,426 43,999
1 In the second, third and fourth quarters of 2002, the Company
recorded aircraft early retirement charges. The amount of the
charges were $(4.8) million (pre-tax) credit in the second quarter
to reverse amounts recorded in the fourth quarter of 2001, $7.6
million (pre-tax) in the third quarter, and $21.5 million in the
fourth quarter.
2 In the fourth quarter of 2001, the Company recorded an aircraft
early retirement charge. The amount of the charge was $23.0
million (pre-tax).
3 Includes government compensation of $0.9 million in the second
quarter of 2002, $4.6 million in the third quarter of 2001 and
$5.1 million in the fourth quarter of 2001.
Note: The sum of the four quarters may not equal the totals for
the year due to rounding of quarterly results.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None to report.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item 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.
Item 11. Executive Compensation
The information required by this Item 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
Information as of December 31, 2002 regarding equity
compensation plans approved and not approved by shareholders is
summarized in the following table:
Number of
securities
remaining
available
Number of for future
securities Weighted- issuance
to be average under equity
issued upon exercise compensation
exercise of price of plans
outstanding outstanding (excluding
options, options, securities
warrants warrants reflected in
Plan category and rights and rights column (a))
(a) (b) (c)
Equity compensation plans approved
by shareholders 3,276,456 $12.29 1,665,318
Equity compensation plans not
approved by shareholders 1,434,375 $15.01 855,002
Total 4,710,831 $13.12 2,520,320
The Company has two equity compensation plans that were not
approved by shareholders, pursuant to which options, rights or warrants
may be granted: the Non-Executive Officer Stock Option Plan (the "Non-
Executive Officer Plan") and the Non-Officer Option Grant Program (the
"Non-Officer Option Program"). The Company's Board of Directors approved
these two plans in 2000.
Non-Executive Officer Stock Option Plan
The Non-Executive Officer Plan is substantially identical to
the Company's 2000 Stock Incentive Plan, which was approved by
shareholders. The Non-Executive Officer Plan allows the Company to grant
equity compensation under non-qualified stock options and restricted
stock awards. Eligible participants are employees, as defined under
Securities and Exchange Commission Form S-8, and prospective employees of
the Company or any of its affiliates who are not executives or directors
of the Company. A maximum of 2 million shares of common stock are
authorized for issuance under the Non-Executive Officer Stock Option
Plan. The exercise price of options granted under the plan can not be
less than 100% of the fair market value of a share of the Company's stock
on the option grant date. Awards are granted by the Chief Executive
Officer of the Company with approval from the Compensation Committee of
the Board of Directors. The terms of awards granted under the Non-
Executive Officer Plan, including vesting, forfeiture, post-termination
exerciseability and the effects (if any) of a change in control, are set
by the plan administrator subject to certain restrictions set forth in
the Non-Executive Officer Plan.
Non-Officer Option Grant Program
There are 400,000 shares reserved for issuance under the Non-
Officer Option Program. Options granted under the Non-Officer Option
Program are subject to the same terms as non-qualified stock options
granted under the Company's 1995 Stock Incentive Plan or the Company's
2000 Stock Incentive Plan (both of which were approved by shareholders),
as specified in the terms of any such grant. The exercise price of
options granted under the plan can not be less than 100% of the fair
market value of a share of the Company's stock on the option grant date.
Options are granted by the Chief Executive Officer of the Company with
approval from the Compensation Committee of the Board of Directors.
Stock options granted under the Non-Officer Option Program generally vest
over a period ranging from three to five years and expire 10 years after
the date of grant.
Other information required by this Item 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.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item 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.
Item 14. Controls and Procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's principal executive
officer and principal financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Management necessarily applied its
judgment in assessing the costs and benefits of such controls and
procedures which, by their nature, can provide only reasonable assurance
regarding management's control objectives. It should be noted that the
design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote. Based
upon the foregoing evaluation, the principal executive officer and
principal financial officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC
reports. In addition, the Company reviewed its internal controls, and
there have been no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent
to the date of their last evaluation.
PART IV
Item 15. 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 16) Restated By-laws of the Company.
4.1 (note 14) Specimen Common Stock Certificate.
4.19 (note 15) Rights Agreement between Atlantic Coast Airlines
Holdings, Inc. and Continental Stock Transfer & Trust
Company dated as of January 27, 1999.
10.1 (notes 20
and 22) Atlantic Coast Airlines, Inc. 1992 Stock Option Plan.
10.6 (notes 8
and 21) United Express Agreement, dated as of November 22, 2000,
as amended as of February 6, 2001, among United Airlines,
Inc., Atlantic Coast Airlines and the Company.
10.6(a) (notes 3
and 21) 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.
10.8 (notes 12
and 21) 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 5
and 22) Second Amended and Restated Severance Agreement, dated as
of July 25, 2001, between the Company and Kerry B. Skeen.
10.12(b)(notes 4
and 22) Amended and Restated Severance Agreement, dated as of
December 28, 2001, between the Company and Thomas J. Moore.
10.12(c)(notes 4
and 22) Form of Severance Agreement substantially similar to
agreements with Richard J. Surratt, Michael S. Davis, and
William R. Lange, all restated as of December 28, 2001.
10.12(d)(notes 4
and 22) Form of Letter Agreement substantially similar to agreements
entered into with Senior Executive Officers regarding
reduction in base salary.
10.12(e)(notes 2
and 22) Form of Letter Agreement substantially similar to agreements
entered into with Senior Executive Officers regarding
elimination of voluntary reductions in base salary.
10.13(a)(note 1) Form of Indemnity Agreement. The Company has entered
into substantially identical agreements with the
individual members of its Board of Directors.
10.23 (note 4) Loan and Security Agreement dated September 28, 2001
between Atlantic Coast Airlines and Wachovia Bank, N.A.
10.23(a)(note 1) Loan Modification Agreement dated December 23, 2002
between Atlantic Coast Airlines and Wachovia Bank, N.A.
10.24 (notes 14
and 22) Atlantic Coast Airlines, Inc. 1995 Stock Incentive Plan, as
amended as of May 5, 1998.
10.245 (notes 10
and 22) 2000 Stock Incentive Plan of Atlantic Coast Airlines Holding,
Inc.
10.246 (notes 1
and 22) Non-Executive Officer Stock Plan of Atlantic Coast Airlines
Holdings, Inc.
10.247 (notes 1
and 22) Non-Officer Option Grant Program of Atlantic Coast Airlines
Holdings, Inc.
10.25(a)(notes 14
and 22) Form of Incentive Stock Option Agreement. The
Company enters into this agreement with employees who
have been granted incentive stock options pursuant to
the Stock Incentive Plans.
10.25(b)(notes 14
and 22) Form of Incentive Stock Option Agreement. The Company enters
into substantially this agreement, adjusted to reflect
the terms of any employment agreements, with corporate
officers who have been granted incentive stock options
pursuant to the Stock Incentive Plans.
10.25(c)(notes 14
and 22) 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 14
and 22) Form of Non-Qualified Stock Option Agreement. The Company
enters into substantially this agreement, adjusted to
reflect the terms of any employment agreements, with
corporate officers who have been granted non-qualified
stock options pursuant to the Stock Incentive Plans.
10.25(e)(notes 14
and 22) 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 11
and 22) 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,
Richard J. Surratt, and William R. Lange.
10.31 (notes 1
and 22) Summary of Senior Management Incentive Plan. The Company has
adopted a plan as described in this exhibit for 2002 and
for the three previous years.
10.32 (notes 1
and 22) Summary of Management Incentive Plan and Share the Success
Program. The Company has adopted plans as described in
this exhibit for 2002 and for the three previous years.
10.40A (notes 14
and 21) 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
12 and 21) 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 12
and 21) 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.
10.41(a)(notes 3
and 21) Purchase Agreement between Bombardier Inc. and Atlantic Coast
Airlines relating to the Purchase of Canadair Regional
Jet Aircraft dated July 29, 1999, as amended.
10.41A(1)(notes 2
and 21) Contract Change Orders No. 1, 2, 3, 4, 5 and 6 dated
September 24, 1999, August 2, 2000, December 6, 2000,
November 7, 2001, December 20, 2001 and July 19, 2002,
respectively, amending the Purchase Agreement between
Bombardier Inc. and Atlantic Coast Airlines relating to the
purchase of Canadair Regional Jet Aircraft dated July 29, 1999.
10.45 (notes 7
and 21) Form of Aircraft Purchase Agreement between Fairchild Dornier
GmbH and Atlantic Coast Airlines dated effective
December 20, 2000 (supersedes Exhibits 10.45 and
10.45(1) filed as an Exhibit to the Annual Report on
Form 10-K for the year ended December 31, 2000.
10.50(a)(note 17)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 17)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 17)Form of Pass Through Trust Certificate.
10.50(d)(note 17)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 17)Guarantee, dated as of September 30, 1997, from the
Company.
10.80 (note 17) Ground Lease Agreement Between The Metropolitan
Washington Airports Authority And Atlantic Coast
Airlines dated as of June 23, 1997.
10.85 (note 14) Lease Agreement Between The Metropolitan Washington
Airports Authority and Atlantic Coast Airlines, with
amendments as of January 1, 1999.
21.1 (note 1) Subsidiaries of the Company.
23.1 (note 1) Consent of KPMG LLP.
99.1 (note 1) Certification pursuant to 8 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
Notes
(1) Filed as an Exhibit to this Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
(2) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended September 30, 2002.
(3) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended June 30, 2002.
(4) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
(5) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended September 30, 2001.
(6) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended June 30, 2001.
(7) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended March 31, 2001.
(8) Filed by Exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
(9) Filed as an Exhibit to the Current Report on Form 8-K filed on
March 2, 2001.
(10) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the
three-month period ended June 30, 2000.
(11) Filed as an Exhibit to the Amended Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1999.
(12) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended September 30, 1999.
(13) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1999.
(14) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(15) Filed as Exhibit 99.1 to Form 8-A (File No. 000-21976),
incorporated herein by reference.
(16) Filed as Exhibit to the Quarterly Report on Form 10-Q for the
three month period ended June 30, 1998.
(17) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, incorporated herein by
reference.
(18) Filed as an Amendment to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, incorporated herein by
reference.
(19) Filed as an Exhibit to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, incorporated herein by
reference.
(20) Filed as an Exhibit to Form S-1, Registration No. 33-62206,
effective July 20, 1993, incorporated herein by reference.
(21) Portions of this document have been omitted pursuant to a request
for confidential treatment that has been granted or has been
requested.
(22) This document is a management contract or compensatory plan or
arrangement.
Reports on Form 8-K:
Nov. 12, 2002 Regulation FD Disclosure of Solomon Smith Barney
Transportation Conference Presentation.
Dec. 11, 2002 Regulation FD Disclosure of news release concerning
bankruptcy filing by United Airlines, Inc.
Jan. 24, 2003 Regulation FD Disclosure of Raymond James & Associates
Airline Conference Presentation.
Jan. 29, 2003 Regulation FD Disclosure of news release concerning the
Company's fourth quarter and year end 2002 earnings.
Jan. 31, 2003 Regulation FD Disclosure of Goldman Sachs Transportation
Conference Presentation.
Feb. 10, 2003 Regulation FD Disclosure of Deutsche Banc Securities 2003
Global Transportation Conference Presentation.
Feb. 26, 2003 Regulation FD Disclosure of Raymond James & Associates
Institutional Investors Conference Presentation.
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 29, 2003.
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 29, 2003.
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/ Executive Vice President, Treasurer and
Richard J. Surratt Chief Financial Officer
(Principal financial officer)
/S/ Vice President, and Controller
David W. Asai (Principal accounting officer)
/S/ /S/
C. Edward Acker Robert E. Buchanan
Director Director
/S/ /S/
Susan MacGregor Coughlin Daniel L. McGinnis
Director Director
/S/ /S/
James C. Miller III John M. Sullivan
Director Director
/S/ /S/
William Anthony Rice Caroline M. Devine
Director Director
CERTIFICATIONS
I, Kerry B. Skeen, certify that:
1. I have reviewed this annual report on Form 10-K of Atlantic Coast
Airlines Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 29, 2003
___/s/ Kerry B. Skeen___
Kerry B. Skeen
Chairman and Chief Executive Officer
I, Richard J. Surratt, certify that:
1. I have reviewed this annual report on Form 10-K of Atlantic Coast
Airlines Holdings, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 29, 2003
_/s/ Richard J. Surratt__
Richard J. Surratt
Executive Vice President, Treasurer, and Chief Financial Officer