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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (IRS Employer
incorporation or organization) 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
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__
As of May 01, 2003, there were 45,234,908 shares of common stock, par
value $.02 per share, outstanding.
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands except for share and per share December 31, March 31, 2003
data) 2002 (Unaudited)
Assets
Current:
Cash and cash equivalents $ 29,261 $ 4,662
Short term investments 213,360 185,158
Accounts receivable, net 13,870 12,820
Expendable parts and fuel inventory, net 14,317 15,859
Prepaid expenses and other current assets 38,610 103,776
Deferred tax asset 16,114 16,443
Total current assets 325,532 338,718
Property and equipment at cost, net of
accumulated depreciation and amortization 195,413 195,884
Intangible assets, net of accumulated
amortization 1,873 1,828
Debt issuance costs, net of accumulated
amortization 3,117 3,051
Aircraft deposits 44,810 44,210
Other assets 4,393 4,974
Total assets $ 575,138 $ 588,665
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 22,475 $ 25,874
Current portion of long-term debt 4,900 4,926
Current portion of capital lease
obligations 1,449 1,474
Accrued liabilities 84,377 86,297
Accrued aircraft early retirement
charge 14,700 14,700
Total current liabilities 127,901 133,271
Long-term debt, less current portion 53,540 53,092
Capital lease obligations, less current portion 751 373
Deferred tax liability 22,384 24,682
Deferred credits, net 61,903 66,206
Accrued aircraft early retirement charge,
less current portion 31,768 31,768
Other long-term liabilities 1,523 1,712
Total liabilities 299,770 311,104
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 130,000,000; shares
issued 50,255,184 and 50,305,878
respectively; shares outstanding
45,195,115 and 45,234,908 respectively 1,005 1,006
Additional paid-in capital 151,103 151,422
Less: Common stock in treasury, at cost,
5,060,069 and 5,070,970 shares respectively (35,586) (35,717)
Retained earnings 158,846 160,842
Accumulated other comprehensive income - 8
Total stockholders' equity 275,368 277,561
Total liabilities and
stockholders' equity $ 575,138 $ 588,665
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
(In thousands, except for per share data) 2002 2003
Operating revenues:
Passenger $ 170,691 $ 198,603
Other 2,275 5,606
Total operating revenues 172,966 204,209
Operating expenses:
Salaries and related costs 45,752 55,521
Aircraft fuel 23,835 39,851
Aircraft maintenance and materials 13,871 22,261
Aircraft rentals 26,672 31,739
Traffic commissions and related fees 5,061 6,435
Facility rents and landing fees 10,625 12,027
Depreciation and amortization 4,599 6,110
Other 18,853 26,414
Total operating expenses 149,268 200,358
Operating income 23,698 3,851
Other income (expense):
Interest income 1,554 953
Interest expense (1,131) (1,368)
Other, net (55) (53)
Total other income (expense) 368 (468)
Income before income tax provision 24,066 3,383
Income tax provision 9,747 1,387
Net income $ 14,319 $ 1,996
Income per share:
Basic:
Net income $0.32 $0.04
Diluted:
Net income $0.31 $0.04
Weighted average shares outstanding:
-Basic 44,677 45,225
-Diluted 46,367 45,328
See accompanying notes to the condensed consolidated financial statements.
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
(In thousands) 2002 2003
Cash flows from operating activities:
Net income $ 14,319 $ 1,996
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 4,790 6,053
Loss on disposal of assets 44 353
Amortization of deferred credits (1,145) (1,421)
Capitalized interest (net) (500) (283)
Other 1,367 304
Changes in operating assets and liabilities:
Accounts receivable 3,943 2,176
Expendable parts and fuel inventory (939) (1,697)
Prepaid expenses and other current assets (42,268) (65,205)
Accounts payable 258 7,430
Accrued liabilities 14,428 4,078
Net cash used in operating activities (5,703) (46,216)
Cash flows from investing activities:
Purchases of property and equipment (8,870) (6,568)
Proceeds from sales of assets 28 -
Purchases of short term investments (197,055) (102,275)
Sales of short term investments 40,320 130,485
Refunds of aircraft deposits 1,400 2,400
Payments of aircraft deposits and other (3,470) (1,801)
Net cash (used in) provided by investing
activities (167,647) 22,241
Cash flows from financing activities:
Payments of long-term debt (398) (422)
Payments of capital lease obligations (333) (353)
Deferred financing costs and other (10) (15)
Purchase of treasury stock - (131)
Proceeds from exercise of stock options 5,784 297
Net cash provided by (used in) financing
activities 5,043 (624)
Net decrease in cash and cash equivalents (168,307) (24,599)
Cash and cash equivalents, beginning of period 173,669 29,261
Cash and cash equivalents, end of period $ 5,362 $ 4,662
See accompanying notes to the condensed consolidated financial statements.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Atlantic Coast Airlines Holdings, Inc. ("ACAI") and its wholly owned
subsidiaries, Atlantic Coast Airlines ("ACA") and Atlantic Coast Jet, LLC
("ACJet"), (collectively, the "Company"), pursuant to the rules and
regulations of the Securities and Exchange Commission. ACJet and its
predecessor have not had any operating activity since June 30, 2001. All
significant intercompany accounts and transactions have been eliminated
in consolidation. The information furnished in these unaudited condensed
consolidated financial statements reflects all adjustments, which are, in
the opinion of management, necessary for a fair presentation of such
consolidated financial statements. Results of operations for the three
month period presented are not necessarily indicative of the results to
be expected for the full year ending December 31, 2003. Certain amounts
as previously reported have been reclassified to conform to the current
period presentation. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements, and the notes thereto,
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
2. STOCKHOLDERS' EQUITY
The Company applies the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation", to account for its stock options. SFAS No. 123
allows companies to continue to apply the provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations and provide pro forma net income and pro forma earnings
per share disclosures for employee stock options granted as if the fair-
value-based method defined in SFAS No. 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosures of SFAS No. 123. The Company accounts for non-
employee stock option awards in accordance with SFAS No. 123.
As a result of applying APB Opinion No. 25, and related interpretations,
no stock-based employee compensation cost is reflected in net income, as
all options granted to employees had an exercise price equal to or
greater than the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation (in
thousands, except per share amounts).
March 31,
2003 2002
Net income, as reported $ 1,996 $ 14,319
Less total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (990) (1,629)
Pro forma net income $ 1,006 $ 12,690
Earnings per share:
Basic - as reported $ .04 $ .32
Basic - pro forma $ .02 $ .28
Diluted - as reported $ .04 $ .31
Diluted - pro forma $ .02 $ .27
3. COMMITMENTS AND CONTINGENCIES
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, under the terms of the
line of credit, it was necessary for the Company to request a covenant
waiver. Following this request, 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 $13.8 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 March 31, 2003, 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
March 31, 2003 was $3.7 million after deducting $13.8 million which has
been pledged as collateral for letters of credit. The Company intends to
renew its current line of credit upon expiration. If it is unable to
renew, the Company believes it has adequate liquidity to pledge cash as
collateral for existing letters of credit.
As of March 31, 2003, the Company had firm orders for 42 Bombardier
CRJ200s ("CRJs") in addition to the 79 previously delivered, and options
for 80 additional CRJs. The 42 firm ordered aircraft include 25 CRJs
that were ordered in July 2002 after Fairchild Dornier GmbH ("Fairchild")
opened formal insolvency proceedings in Germany and rejected the
Company's purchase agreement covering 328JETs. 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 is considering the delay of future aircraft
deliveries and is engaged in discussions with Bombardier regarding
financing and aircraft delivery schedules. The Company and Bombardier
have entered into an interim extension agreement to delay the delivery of
aircraft originally scheduled for delivery in March and April 2003. The
interim agreement currently expires in mid-May although the Company may
seek further extensions. If an agreement cannot be reached with
Bombardier, any unilateral delay in deliveries by the Company may result
in Bombardier asserting a claim for damages.
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 not been able to access
traditional sources of 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 Export
Development 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. For the period between the
United bankruptcy filing and the date of this filing, the Company has
been successful in obtaining such waivers from EDC, although there can be
no assurances that it will be able to obtain a waiver in the future. The
Company may be forced to utilize its own funds to meet its aircraft
financing requirements or to seek alternative sources of funding a
portion of its aircraft deliveries.
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 any 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 Fairchild, including the production and support of 328JETs. In April
2003, Dornier Aviation of North America ("DANA"), which included certain
328 JET spare parts inventories and the production lines for certain
328JET parts was sold to M-7 Aerospace. The Company anticipates that
long-term product support would be improved should the remainder of the
Fairchild businesses be successfully transitioned to a new owner, but
does not have any knowledge as to whether a sale of the remaining
Fairchild businesses can in fact be completed or whether aircraft
production will be resumed. In addition, the Company does not anticipate
that such sales 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 the Company's right to
proceed against this collateral will apply upon termination of the
applicable leases unless other arrangements are made with the other
interested parties. The Company's balance sheet as of March 31, 2003
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 March 31,
2003 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's wholly owned U.S. subsidiary, Dornier
Aviation North America, Inc. ("DANA"), disputes this right and 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. This lawsuit is now set for trial
beginning July 28, 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.
On December 9, 2002, UAL, Inc. and its subsidiaries, including United,
filed for protection under Chapter 11 of the United States Bankruptcy
Code. UAL continues operating and managing its business and affairs as a
debtor in possession. In bankruptcy, United has the right to assume or
reject all executory agreements including the Company's United Express
Agreements ("UA Agreements"). No deadline has been set by United to
assume or reject the Company's UA Agreements. United has obtained
bankruptcy court approval to retain Bain & Company as strategic
consultant and negotiating agent for United in connection with the United
Express operations. The Company will not be in a position to comment on
the status of this process while it is on-going. If the Company and
United were to reach agreement on revising the UA Agreements, the
renegotiated terms are likely to be 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 process.
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 or that
the Company will be able to reach agreement with United on revised terms
of the UA Agreements even if United emerges from bankruptcy. In either
of those instances, 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 continues planning for these contingencies and will pursue
actions management believes appropriate in the event that United
liquidates under Chapter 7 or in the event that satisfactory arrangements
for future United Express service cannot be agreed with United. 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's 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 and continuing into 2003, the average utilization of aircraft in the
United Express operation declined, and as a result, the 2002 per
departure 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 UA 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 future periods will be materially affected.
4. ADOPTION OF FASB STATEMENTS 144, 146 ,148 AND INTERPRETATIONS 45 AND
46
On October 3, 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, "Accounting for the Impairment or Disposal of Long-
Lived Assets". Statement No. 144 supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". Statement No. 144 includes requirements related to
the classification of assets as held for sale, including the
establishment of six criteria that must be satisfied prior to this
classification. Statement No. 144 also includes guidance related to the
recognition and calculation of impairment losses for long-lived assets.
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 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.
In the first quarter of 2003, the Company recognized $0.5 million in
additional depreciation expense. No additional depreciation expense
related to J-41 aircraft was recorded in the first quarter of 2002.
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. Previously existing accounting rules permitted
the accrual of such costs for firmly committed plans which were expected
to 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 previous accounting
treatment of taking a charge for these aircraft in the period in which
the retirement plan is initiated. See Note 8 of Notes to Condensed
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
31, 2003, the Company has not provided any guarantees that would require
recognition or disclosure as liabilities under this interpretation.
In December 2002, the Financial Accounting Standards Board 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
Employees".
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. The Company does not anticipate this
interpretation will have a significant impact on our financial position
or operating results.
5. INCOME TAXES
The Company's effective tax rate for federal and state income taxes was
41.0% and 40.5% for the three months ended March 31, 2003 and 2002,
respectively.
6. INCOME PER SHARE
Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted income per share is
computed by dividing net income by the weighted average number of common
shares outstanding and common stock equivalents, which consist of shares
subject to stock options computed using the treasury stock method. A
reconciliation of the numerator and denominator used in computing basic
and diluted income per share is as follows:
Three months ended March 31,
(in thousands except for per share data) 2002 2003
Income (basic and diluted) $ 14,319 $ 1,996
Weighted average shares outstanding (basic) 44,677 45,225
Incremental shares related to stock options 1,690 103
Weighted average shares outstanding (diluted) 46,367 45,328
7. SUPPLEMENTAL CASH FLOW INFORMATION
Quarter Ended March 31,
(in thousands)
Cash paid during the period for: 2002 2003
- Interest $895 $800
- Income taxes 471 279
8. AIRCRAFT EARLY RETIREMENT CHARGE
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. Since then, the Company had entered into discussions regarding
the potential deferral of CRJ deliveries. Should these discussions
ultimately result in the delay of some of the remaining CRJs on firm
order, those delays could negatively impact the Company's ability to
complete its early aircraft retirement plan for the J-41 turboprop fleet.
The timing of turboprop retirements is subject to discussions with
United regarding the UA Agreements. If the Company is forced to modify
the early aircraft retirement plan, it may have to reverse some or all of
the amounts previously expensed as early aircraft retirement charges. 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 planned retirement of 18 J-41 turboprop
aircraft. The total 2002 aircraft early retirement charges consist of a
charge of $21.5 million ($12.9 million after tax) taken 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) relating to 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 sales 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.
As of March 31, 2003, 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.
9. AVIATION AND TRANSPORTATION SECURITY ACT AND EMERGENCY WARTIME
SUPPLEMENTAL APPROPRIATIONS ACT
On November 19, 2001 the President signed into law the Aviation and
Transportation Security Act (the "Security Act"). The Security Act
requires that 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 responsibility 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 Security Act imposes new and
increased requirements for air carrier employee background checks and
additional security training of flight and cabin crew personnel and
requires the TSA to deploy Federal air marshals. 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 completed Level Two
fortifications in April 2003. As of March 31, 2003, the Company had
received $1.9 million in reimbursements from the FAA for these mandated
modifications.
On April 16, 2003, Congress passed the Emergency Wartime Supplemental
Appropriations Act ("the Act"). The Act makes available approximately
$2.3 billion to United States flag air carriers, which includes the
Company, a portion of which is based on each carrier's proportional share
of the amounts remitted in passenger and carrier security fees by
eligible air carriers to the TSA under the Air Transportation Safety and
System Stabilization Act ("the Stabilization Act"). The Company has paid
TSA security fees of approximately $1.3 million under the Stabilization
Act for which it is entitled to reimbursement, in whole or in part. The
precise amount the Company could receive under the Act will be determined
once the total TSA security fees paid by all eligible air carriers is
known. As such, the Company is unable to determine the amount it will
receive under this portion of the Stabilization Act at this time. The
Act requires TSA to make this payment to each eligible carrier on or
before May 16, 2003. The Act also provides for an additional $100 million
in funds to reimburse air carriers for the direct cost of modifying
cockpit doors as required by FAA regulation. At this time, the Company
is unable to estimate how much it may be entitled to under this section
of the Act. In addition to refunding previously remitted security fees,
the Act provides that carriers shall not collect and pay to TSA any
passenger or carrier security fees imposed by the Stabilization Act for
the period June 1, 2003 through September 30. 2003. The Act also
extended by 24 months the Government's war risk insurance program which
otherwise would have expired on December 31, 2002. The FAA provides war
risk insurance to carriers pursuant to the Act through short-term
policies, which it extends from time to time. Presently, the Company's
war risk insurance under the Act expires on June 13, 2003. The Company
anticipates renewing the insurance through the FAA as long as it is
available.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
First Quarter Operating Statistics
Increase
Three months ended March 31, 2002 2003 (Decrease)
Revenue passengers carried 1,450,201 1,922,609 32.6%
Revenue passenger miles ("RPMs")(000's) 601,637 746,084 24.0%
Available seat miles ("ASMs") (000's) 1,057,332 1,100,543 4.1%
Passenger load factor 56.9% 67.8% 10.9 pts
Revenue per ASM (cents) 16.1 18.0 11.8%
Cost per ASM (cents) 14.1 18.2 29.1%
Average passenger segment (miles) 415 388 (6.5)%
Revenue departures (completed) 66,403 72,019 8.5%
Revenue block hours 98,708 105,618 7.0%
Aircraft utilization (block hours) 9.7 8.9 (8.2)%
Average cost per gallon of fuel (cents) 83.9 128.6 53.3%
Aircraft in service (end of period) 124 142 14.5%
Revenue per departure $2,571 $2,758 7.3%
Comparison of three months ended March 31, 2003, to three months ended
March 31, 2002.
Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains
forward-looking statements and information that is based on
management's current expectations as of the date of this document.
When used herein, the words "anticipate", "believe", "estimate" and
"expect" and similar expressions, as they relate to the Company or its
management, are intended to identify such forward-looking statements.
Such forward-looking statements are subject to risks, uncertainties,
assumptions and other factors that may cause the actual results of the
Company to be materially different from those reflected in such
forward-looking statements. Factors that could cause the Company's
future results to differ materially from the expectations described
here include, among others: the extent to which the Company accepts
regional jet deliveries under its agreement with Bombardier, and its
ability to delay deliveries or to settle arrangements with Bombardier
regarding undelivered aircraft without Bombardier asserting a claim
for damages; United's decision to elect either to affirm all of the
terms of the Company's United Express Agreement or to reject the
agreement in its entirety, the timing of such decision, any efforts by
United to negotiate changes prior to making a decision on whether to
affirm or reject the contract, the ability and timing of agreeing upon
departure rates with United; the Company's ability to collect pre-
petition obligations from United or to offset pre-petition obligations
due to United; the Company's ability to collect post-petition amounts
it believes are due from United for rate adjustments; United's ability
to successfully reorganize and emerge from bankruptcy; the continued
financial health of Delta Air Lines, Inc.; changes in levels of
service agreed to by the Company with its code-share partners due to
market conditions; the willingness of finance parties to continue to
finance aircraft in light of the United situation and of market
conditions generally; the ability of these partners to manage their
operations and cash flow, and the 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; availability and
cost of product support for the Company's 328JET aircraft; whether
the Company is able to recover or realize on its claims and preserve
its right of offset against Fairchild Dornier in its insolvency
proceedings and in the pending litigation with a Fairchild affiliate,
and unexpected costs arising from the insolvency of Fairchild Dornier;
general economic and industry conditions; additional acts of war; and
risks and uncertainties arising from the events of September 11; the
impact of the outbreak of Severe Acute Respiratory Syndrome on travel
and from the slow economy which may impact the Company, its code-share
partners, and aircraft manufacturers in ways that the Company is not
currently able to predict. These and other factors are more fully
disclosed under "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in ACAI's
Annual Report on Form 10-K for the year ended December 31, 2002. The
Company does not intend to update these forward-looking statements
prior to its next required filing with the Securities and Exchange
Commission.
General
Net income in the first quarter was $2.0 million, or $.04 per
share on a diluted basis compared to $14.3 million or $.31 per share on a
diluted basis for the same period last year. The principal reasons for
the decrease in net income were that fee-per-departure rates paid by
United Airlines have not been set for 2003, with the result that ACA
continues to accrue and receive payment for revenue from United at 2002
rates that do not reflect changes in costs and in aircraft utilization;
higher than normal expenses and lower revenue due to severe weather
conditions at the Company's Washington Dulles hub and many of the cities
served in the Northeastern and Midwestern United States which resulted in
flight cancellations and damaged aircraft; payment of $1.0 million to
Delta to remove contractual restrictions on the use of the Company's
ACJet subsidiary and its operating certificate; $0.9 million accrued for
additional maintenance and potential interest costs associated with a
rate dispute with a vendor.
Operating Revenues
Passenger revenues increased 16.4% to $198.6 million for the
three months ended March 31, 2003 from $170.7 million for the three
months ended March 31, 2002. The increase was primarily due to an 8.5%
increase in revenue departures and a 7.3% increase in revenue per
departure to $2,758 in the first quarter of 2003 from $2,571 in the first
quarter of 2002. The increase in revenue per departure is primarily a
result of increased fuel costs for which the Company receives
reimbursement under its agreements with United and Delta and increases in
2003 rates with Delta which were finalized during the first quarter of
2003.
The Company's agreement with United calls 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 Company and
United are in discussions regarding the fee-per-departure rates to be
utilized during 2003. During 2002 and continuing into 2003, the average
utilization of aircraft in the United Express operation declined, and as
a result, the 2002 per departure 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 UA
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.
Other revenue increased 146.4% to $5.6 million compared to $2.3
million for the same period last year. This increase is primarily the
result of increased charter revenue from the Company's Private Shuttle
operation in the first quarter of 2003. 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 caused by
the bankruptcy of the 328JET manufacturer. The Company recently made
some of these charter assets available to support its code share
operations.
Operating Expenses
A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the three months ended March 31, 2002, and
2003 is as follows:
Three Months ended March 31,
2002 2003
Percent of Cost Percent of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 26.5% 4.3 27.2% 5.0
Aircraft fuel 13.8% 2.3 19.5% 3.6
Aircraft maintenance and materials 8.0% 1.3 10.9% 2.0
Aircraft rentals 15.4% 2.5 15.5% 2.9
Traffic commissions and related fees 2.9% 0.5 3.2% 0.6
Facility rents and landing fees 6.1% 1.0 5.9% 1.1
Depreciation and amortization 2.7% 0.4 3.0% 0.6
Other 10.9% 1.8 12.9% 2.4
Total 86.3% 14.1 98.1% 18.2
Total operating expenses increased 34.2% to $200.4 million for
the quarter ended March 31, 2003 compared to $149.3 million for the
quarter ended March 31, 2002. The 8.5% increase in revenue departures
resulted in ASMs increasing 4.1% to 1.10 billion in the first quarter
2003 from 1.06 billion in the same period last year. As a result, cost
per ASM increased 29.1% on a year-over-year basis to 18.2 cents during
the first quarter of 2003. Costs per ASM changes that are not primarily
attributable to the changes in capacity are as follows:
The cost per ASM of salaries and related expenses increased
16.3% to 5.0 cents in the first quarter of 2003 compared to 4.3 cents in
the first quarter of 2002 primarily as a result of lower aircraft
utilization under the Company's agreements with United.
The cost per ASM of aircraft fuel increased to 3.6 cents in the
first quarter of 2003 compared to 2.3 cents in the first quarter of 2002.
The increase is due primarily as a result of the 53.3% increase in the
average cost per gallon of fuel to $1.29 in the first quarter of 2003
from $0.84 in the first quarter of 2002.
The cost per ASM of maintenance increased 53.8% due primarily
to increased maintenance costs on the Company's fleet of 328JETs arising
from the Fairchild-Dornier insolvency, $0.9 million accrued for
additional maintenance and potential interest costs associated with a
rate dispute with a vendor and the continuing expiration of the
manufacturer's warranty on the Company's CRJ fleet.
The cost per ASM of aircraft rentals increased 16.0% to 2.9 cents
in the first quarter of 2003 from 2.5 cents in the first quarter of 2002
primarily due to decreases in the Company's aircraft utilization as
evidenced by the 14.5% increase in the number of aircraft to 142 in the
first quarter of 2003 from 124 in the first quarter of 2002 as compared
to the 4.1% growth in ASMs for the same periods.
Cost per ASM of facility rents and landing fees increased
slightly to 1.1 cents in the first quarter of 2003 from 1.0 cents for the
first quarter of 2002. In absolute dollars, facility rents and landing
fees increased 13.2% to $12.0 million in the first quarter of 2003 from
$10.6 million in the first quarter of 2002. This increase is a result of
an 8.5% increase in number of departures, higher landing fees imposed by
airports to recover costs due to the events of September 11 and non-
signatory landing fees rates imposed by some airports as a result of
United filing for Chapter 11 bankruptcy protection.
Cost per ASM of depreciation and amortization increased 50.0%
to 0.6 cents in the first quarter of 2003 from 0.4 cents for the first
quarter of 2002. In absolute dollars, depreciation and amortization
increased 32.9% to $6.1 million in the first quarter of 2003 from $4.6
million in the first quarter of 2002. The increase is primarily as a
result of accelerated depreciation associated with the anticipated early
retirement of J-41 aircraft owned by the Company, depreciation expense
related to increased levels of rotable equipment required for regional
jets, and increased depreciation related to the replacement of the
Company's computer software systems.
The cost per ASM of other operating expenses increased to 2.4
cents in the first quarter of 2003 from 1.8 cents in the first quarter of
2002. In absolute dollars, other operating expenses increased 40.1% to
$26.4 million in the first quarter of 2003 from $18.9 million in the
first quarter of 2002. The increased costs were primarily the result of
an increase in the number of departures, unfavorable weather conditions,
a $1.0 million payment to Delta to remove contractual restrictions on the
use of the Company's ACJet subsidiary and its operating certificate,
increases in property taxes, and increased legal costs related to the
Fairchild bankruptcy and United filing for Chapter 11 bankruptcy
protection.
The Company's effective tax rate for federal and state income
taxes was 41.0% in the first quarter of 2003. This compares with an
effective tax rate for federal and state income taxes of 40.5% for the
first quarter of 2002.
Recent Developments and Outlook
This outlook section contains forward-looking statements, which
are subject to the risks and uncertainties set forth in the MD&A section
under Forward Looking Statements. This MD&A should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
The U.S. airline industry continues to experience depressed
demand and reductions in passenger yields, increased insurance costs,
changing and increased government regulations and tightened credit
markets as 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.
As a result of the war with Iraq and the continued
deterioration of airline industry economics, the Company has 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 30% for salaried employees with the largest reductions
affecting the Company's officers. The Company has also approached ALPA
to negotiate pay reductions and work rule changes to assure that the
Company's costs are at market rates. The Company's cost reduction goals
will require the cooperation of its employees, the unions representing
its employees, major vendors and code share partners.
On April 16, 2003, Congress passed the Emergency Wartime
Supplemental Appropriations Act ("the Act"). The Act makes available
approximately $2.3 billion to United States flag air carriers, which
includes the Company, a portion of which is based on each carrier's
proportional share of the amounts remitted in passenger and carrier
security fees by eligible air carriers to the TSA under the Air
Transportation Safety and System Stabilization Act ("the Stabilization
Act"). The Company has paid TSA security fees of approximately $1.3
million under the Stabilization Act for which it is entitled to
reimbursement, in whole or in part. The precise amount the Company could
receive under the Act will be determined once the total TSA security fees
paid by all eligible air carriers is known. As such, the Company is
unable to determine the amount it will receive under this portion of the
Stabilization Act at this time. The Act requires TSA to make this
payment to each eligible carrier on or before May 16, 2003. The Act also
provides for an additional $100 million in funds to reimburse air
carriers for the direct cost of modifying cockpit doors as required by
FAA regulation. At this time, the Company is unable to estimate how much
it may be entitled to under this section of the Act. In addition to
refunding previously remitted security fees, the Act provides that
carriers shall not collect and pay to TSA any passenger or carrier
security fees imposed by the Stabilization Act for the period June 1,
2003 through September 30. 2003. The Act also extended by 24 months the
Government's war risk insurance program which otherwise would have
expired on December 31, 2002. The FAA provides war risk insurance to
carriers pursuant to the Act through short-term policies, which it
extends from time to time. Presently, the Company's war risk insurance
under the Act expires on June 13, 2003. The Company anticipates renewing
the insurance through the FAA as long as it is available.
On December 9, 2002, UAL, Inc. and its subsidiaries, including
United, filed for protection under Chapter 11 of the United States
Bankruptcy Code. UAL continues operating and managing its business and
affairs as a debtor in possession. In bankruptcy, United has the right
to assume or reject all executory agreements including the Company's
United Express Agreements ("UA Agreements"). No deadline has been set by
United to assume or reject the Company's UA Agreements. United has
obtained bankruptcy court approval to retain Bain & Company as strategic
consultant and negotiating agent for United in connection with the United
Express operations. The Company will not be in a position to comment on
the status of this process while it is on-going. If the Company and
United were to reach agreement on revising the UA Agreements, the
renegotiated terms are likely to be 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 process.
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 or that
the Company will be able to reach agreement with United on revised terms
of the UA Agreements even if United emerges from bankruptcy. In either
of those instances, 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 continues planning for these contingencies and will pursue
actions management believes appropriate in the event that United
liquidates under Chapter 7 or in the event that satisfactory arrangements
for future United Express service cannot be agreed with United. 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's 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 and continuing into 2003, the average utilization of
aircraft in the United Express operation declined, and as a result, the
2002 per departure 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 UA 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 future periods will be materially affected.
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 not been able to access
traditional sources of 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 Export
Development 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. For the period between the
United bankruptcy filing and the date of this filing, the Company has
been successful in obtaining such waivers from EDC, although there can be
no assurances that it will be able to obtain a waiver in the future. The
Company may be forced to utilize its own funds to meet its aircraft
financing requirements 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 is considering the delay of future aircraft
deliveries and is engaged in discussions with Bombardier regarding
financing and aircraft delivery schedules. The Company and Bombardier
have entered into an interim extension agreement to delay the delivery of
aircraft originally scheduled for delivery in March and April 2003. The
interim agreement currently expires in mid-May although the Company may
seek further extensions. If an agreement cannot be reached with
Bombardier, any unilateral delay in deliveries by the Company may result
in Bombardier asserting a claim for damages. In connection with 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, and the Company has stopped making progress payments
to Bombardier for future aircraft. In addition, as of March 31, 2003,
the Company had $38.0 million on deposit with Bombardier for future
aircraft orders.
In July 2002, Fairchild Dornier Gbmh ("Fairchild"), the manufacturer of
the 32-seat 328JET, opened formal insolvency proceedings in Germany.
The Fairchild insolvency trustee indicated that it is unlikely that any
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 Fairchild, including the production and support of
328JETs. In April 2003, Dornier Aviation of North America ("DANA"),
which included certain 328 JET spare parts inventories and the production
lines for certain 328JET parts was sold to M-7 Aerospace. The Company
anticipates that long-term product support would be improved should the
remainder of the Fairchild businesses be successfully transitioned to a
new owner, but does not have any knowledge as to whether a sale of the
remaining Fairchild businesses can in fact be completed or whether
aircraft production will be resumed. In addition, the Company does not
anticipate that such sales will have an effect on its prior contractual
commitments or on its bankruptcy claim.
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's wholly owned U.S. subsidiary,
Dornier Aviation North America, Inc. ("DANA"), disputes this right and
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. This lawsuit is now set
for trial beginning July 28, 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 2003, 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 due to and the limited
availability and higher cost of spare parts. Additionally, as a result
of Fairchild's rejection of the purchase contract, the Company does not
expect Fairchild to satisfy provisions in the purchase agreement under
which among other things, Fairchild was obligated 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.
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. 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.
The Company also anticipates that the timing of turboprop retirements
will be a part of its discussions with United regarding the UA
Agreements. If the Company is forced to modify the early aircraft
retirement plan, it may have to reverse some or all of the amounts
previously expensed as early aircraft retirement charges.
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 has been a dormant company since June 2001. The
only assets of ACJet are its DOT and FAA air carrier operating
certificates. In the first quarter of 2003, the Company paid $1.0
million to Delta in order to remove all contractual restrictions to the
Company's use, sale or transfer of ACJet and its certificates. These
certificates are subject to revocation for non-use. The Company has
requested and recently obtained a waiver from the DOT, to which the FAA
has concurred, to permit it to continue to possess these certificates in
dormancy for a limited period of additional time. Under the terms of the
waiver, provided the Company advises the Department of its intent to
resume operations and submit updated "fitness" information on or before
December 31, 2003, the Company has until June 30, 2004 to resume
operations of Atlantic Coast Jet without subjecting its certificates to
revocation for nonuse.
A CRJ was damaged in October 2002 and was out of service during
the first quarter of 2003 as a result of being struck by a shuttle bus
not operated by the Company. The Company expects this aircraft to return
to service in May 2003. In addition, a CRJ was damaged in February 2003
and was out of service during the first quarter of 2003 as a result of
snow accumulation on an improperly cleared runway. This aircraft was
returned to revenue service on May 1, 2003. Lightning strikes also
damaged certain aircraft in the first quarter, rendering them out of
service for various periods. All of the lightening-damaged aircraft had
returned to revenue service as of May 1, 2003. The Company expects the
majority of repair costs, but not lost revenue, on these damaged aircraft
will be covered by insurance proceeds.
Liquidity and Capital Resources
As of March 31, 2003, the Company had cash, cash equivalents
and short-term investments of $189.8 million and working capital of
$205.4 million compared to $242.6 million and $197.6 million respectively
as of December 31, 2002. During the first three months of 2003, cash and
cash equivalents decreased by $24.6 million, reflecting net cash used in
operating activities of $46.2 million, net cash provided by investing
activities of $22.2 million and net cash used in financing activities of
$0.6 million. The net cash used in operating activities is primarily the
result of a $65.2 million increase in prepaid expenses resulting from the
Company's scheduled, semi-annual aircraft lease payments; partially
offset by net income for the period of $2.0 million, non-cash
depreciation and amortization expenses of $6.1 million, and an increase
of $11.5 million in accrued liabilities and accounts payable, primarily
due to changes in corporate income tax and deferred tax liabilities. The
net cash provided by investing activities consisted primarily of sales of
short-term investments.
Other Financing
As more fully described in the Company's 2002 Annual Report on
Form 10-K, 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, under the terms of
the line of credit, it was necessary for the Company to request a
covenant waiver. Following this request, 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 $13.8
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 March 31,
2003, 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 March 31, 2003 was $3.7 million after deducting $13.8
million which has been pledged as collateral for letters of credit. As
of March 31, 2003 there were no outstanding borrowings on the $17.5
million line of credit.
Other Commitments
The Company's Board of Directors has approved the purchase of
up to $40.0 million of the Company's outstanding common stock in open
market or private transactions. As of May 1, 2003, the Company has
purchased 2,171,837 shares of its common stock. The Company has
approximately $21.0 million remaining of the $40.0 million originally
authorized.
The Company's collective bargaining agreement with Aircraft
Mechanics Fraternal Association ("AMFA"), which was ratified in June
1998, became amendable in June 2002, and its collective bargaining
agreement with the Association of Flight Attendants ("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 February 2003, the Company was informed by the National
Mediation Board ("NMB") that an election would be held to consider
whether the Transport Workers Union ("TWU") would represent the Company's
dispatch employees. In May 2003, the Company was informed by the NMB
that its dispatchers had rejected representation by the TWU. Once the
NMB dismissal of the TWU Petition is final, there is a one year bar
preventing any union from filing for another election among the
dispatchers.
The Company is a party to a sixteen year maintenance agreement
with Air Canada covering maintenance, repair and overhaul services for
airframe components on its CRJ aircraft, and to a five-year agreement
with Air Canada covering the scheduled airframe C-check overhaul of its
CRJ aircraft. On April 1, 2003, Air Canada announced that it had filed
for protection under Canada's Companies' Creditors Arrangement Act (CCAA)
in order to facilitate its operational, commercial, financial and
corporate restructuring. Air Canada is continuing to provide services to
the Company under these agreements.
Aircraft
As of May 1, 2003, the Company had a total of 42 CRJs on firm
order from Bombardier, Inc. ("Bombardier"), 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 entered into an interim
extension agreement to delay the delivery of four aircraft originally
scheduled for delivery in March and April 2003. The interim agreement
currently expires in mid-May, and the Company is continuing discussions
with Bombardier regarding financing and aircraft delivery schedules. The
Company may seek further extensions of the interim agreement and is
considering the delay of future deliveries. See the Recent Developments
and Outlook section above with respect to the Company's present
considerations regarding future deliveries.
Capital Equipment and Debt Service
Capital expenditures for the first three months of 2003 were
$6.6 million, compared to $8.9 million for the same period in 2002.
Capital expenditures for 2003 consisted primarily of the purchase of $1.9
million in rotable spare parts for the regional jet aircraft, $1.0
million in computers, $1.4 million for ground service equipment and $0.9
million for improvements to facilities. Other capital expenditures
included improvements to aircraft and purchases of office furniture and
fixtures.
For the remainder of 2003, excluding aircraft, the Company
anticipates spending approximately $14.8 million for rotable spare parts
related to the regional jets, ground service equipment, facilities,
computers and software. Depending on the outcome of discussions with
Bombardier and conditions in the aircraft financing market, the Company
may need to utilize a portion of its funds to acquire aircraft.
Debt service including capital leases for the three months
ended March 31, 2003 was $775,000 compared to $731,000 in the same period
of 2002.
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.
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 and discussed its
critical accounting policies in its Annual Report on Form 10-K. The
Company does not believe that there have been material changes to the
Company's critical accounting policies or the methodologies or
assumptions applied under them since the date of that Form 10-K.
Recent Accounting Pronouncements
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
31, 2003, the Company has not provided any guarantees that would require
recognition or disclosure as liabilities under this interpretation.
In December 2002, the Financial Accounting Standards Board
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
Employees".
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. The Company does not anticipate this
interpretation will have a significant impact on our financial position
or operating results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk arises from changes in
interest rates. The Company's exposure to market risk associated with
changes in interest rates relates to the Company's commitment to acquire
regional jets. From time to time the Company has entered into put and
call contracts designed to limit the Company's exposure to interest rate
changes until permanent financing is secured upon delivery of the
regional jet aircraft. As of March 31, 2003, the Company had no open
hedge transactions.
Item 4. 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 II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in legal proceedings related to the
insolvency of Fairchild Dornier Gbmh ("Fairchild"). The Company's
balance sheet as of March 31, 2003 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 North America, Inc. ("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 $8.0 million in
outstanding invoices existed at the time of the Fairchild insolvency
filings. DANA claims that an additional $3.6 million is due. The trial
in this matter has been scheduled to begin in July 2003.
The Company has been named a defendant in two lawsuits arising
from the terrorist activities of September 11, 2001. These actions 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. These lawsuits
are 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), which was filed December 20, 2002 and claims physical and
emotional injuries, lost income, and wrongful death, and as Gallop v.
American Airlines, Atlantic Coast Airlines, et al. (United States
District Court, Southern District of New York, case no. 0 3CV 1016),
which was filed February 13, 2003 and claims physical and emotional
injuries and lost income. Both actions seek compensatory and punitive
damages in an unspecified amount as deemed appropriate at trial. 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 the 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 FAA civil action
proceedings incidental to its business, none of which the Company
believes are likely to have a material effect on the Company's business,
financial condition, or operating results.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
10.8(a)
(notes 1 & 2) Amendment No. 1, dated June 29, 2000, Amendment No. 2, dated
February 6, 2001, Amendment No. 3, dated January 29,
2002, and Amendment No. 4, dated January 22, 2003, to
the Delta Connection Agreement, dated as of September
9, 1999 among Delta Air Lines, Inc., Atlantic Coast
Airlines Holdings, Inc. and Atlantic Coast Airlines.
10.25(a)
(notes 1 and 3) Form of Incentive Stock Option Agreement. The
Company enters into this agreement with employees who
have been granted incentive stock options pursuant to
the Company's Stock Incentive Plans. The exercise
price, vesting schedule, and certain other terms vary
among grants, as reflected in the form of agreement.
10.25(b)
(notes 1 & 3) 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 Company's Stock Incentive Plans. The
exercise price, vesting schedule, and certain other
terms vary among grants, as reflected in the form of
agreement.
10.25(c)
(notes 1 & 3) 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
Company's Stock Incentive Plans. The exercise price,
vesting schedule, and certain other terms vary among
grants, as reflected in the form of agreement.
10.25(d)
(notes 1 & 3) 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.
The exercise price, vesting schedule, and certain other
terms vary among grants, as reflected in the form of
agreement.
10.25(f)
(notes 1 & 3) Form of Director's Stock Option Agreement. The Company enters
into this agreement with directors who have been
granted stock options pursuant to the Company's Stock
Incentive Plans. The exercise price, vesting schedule,
and certain other terms vary among grants, as reflected
in the form of agreement.
99.1 Certification pursuant to 18 U.S.C. Section 1350.
(note 1)
Notes
(1) Filed as an Exhibit to this Annual Report on Form 10-Q for the three
month period ended March 31, 2003.
(2) Portions of this document have been omitted pursuant to a request
for confidential treatment that has been requested.
(3) This document is a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K
Form 8-K filed under Item 9 on January 27, 2003 to
announce that an officer of the Company would be making a
presentation to investors and analysts
Form 8-K filed under Item 9 on January 29, 2003 to
announce fourth quarter and year end 2002 financial and
operating results
Form 8-K filed under Item 9 on January 31, 2003 to
announce that an officer of the Company would be making a
presentation to investors and analysts
Form 8-K filed under Item 9 on February 10, 2003 to
announce that an officer of the Company would be making a
presentation to investors and analysts
Form 8-K filed under Item 9 on February 27, 2003 to
announce that an officer of the Company would be making a
presentation to investors and analysts
Form 8-K filed under Item 9_on April 15, 2003 to announce
information on first quarter 2003 earnings
Form 8-K filed under Item 9 on April 23, 2003 to announce
first quarter 2003 earnings
SIGNATURES
Pursuant to the requirements 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.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
May 12, 2003 By: /S/ Richard J. Surratt
Richard J. Surratt
Executive Vice President, Treasurer,
and Chief Financial Officer
CERTIFICATIONS
I, Kerry B. Skeen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic Coast
Airlines Holdings, Inc.:
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function):
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 quarterly report whether or not 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: May 12, 2003
/s/ Kerry B. Skeen
Kerry B. Skeen
Chairman and Chief Executive Officer
I, Richard J. Surratt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Atlantic Coast
Airlines Holdings, Inc.:
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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 function):
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 quarterly report whether or not 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: May 12, 2003
/s/ Richard J. Surratt
Richard J. Surratt
Executive Vice President, Treasurer, and Chief Financial Officer