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THIS DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 10-K FILED ON
APRIL 1, 1997 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-21976
ATLANTIC COAST AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State of incorporation) (IRS Employer
Identification No.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock par value $ .02 Nasdaq National Market
(Title of Class) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No__
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
The aggregate market value of voting stock held by nonaffiliates
of the registrant as of March 11, 1997 was approximately
$112,810,113
As of March 11, 1997 there were 8,519,578 shares of Common
Stock of the registrant issued and 8,507,078 shares of Common
Stock were outstanding.
Documents Incorporated by Reference
Certain portions of the documents listed below have been
incorporated by reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
Proxy Statement for 1996 Annual
Meeting of Shareholders Part III, Items 10-13
PART I
Item 1. Business
General
This Annual Report on Form 10-K contains forward-
looking statements, particularly those statements identified by
such words as "believes", "plans" or "expects". Actual results
may differ based on a variety of factors including costs,
competitive reactions, and marketplace demand for services on the
Company's routes.
Atlantic Coast Airlines, Inc. ("ACAI"), is the holding
company of Atlantic Coast Airlines (the "Company"), one of the
largest regional airlines based on total revenues in the United
States, serving thirty-nine destinations in seventeen states as
of March 1, 1997, with approximately 421 scheduled departures
each weekday. The Company markets itself as "United Express" and
is the only code-sharing regional airline for United Airlines,
Inc. ("United") operating as United Express in the Eastern United
States. The Company operates primarily from United's East Coast
hub at Washington-Dulles International Airport ("Washington-
Dulles"), which serves the Washington, D.C., and Northern
Virginia markets. As of March 1, 1997, the Company operated a
fleet of fifty-six turboprop aircraft. In 1996, approximately
65% of the Company's traffic was point-to-point local travel or
on-line connections, 32% connected with United flights, and 3%
connected to flights of other carriers.
The Company's code-sharing relationship with United has
contributed significantly to the Company's growth. The Company
coordinates its schedules with United, particularly at Washington-
Dulles, where United operates a hub for both domestic flights and
service to Europe and Mexico, and participates with United in
cooperative advertising and marketing agreements. The Company has
a shared market identity with United, lists its flights under
United's "UA" flight designator code in airline computerized
reservation systems ("CRSs") and other published schedules, and
awards United's "Mileage Plus" frequent flyer miles to the
Company's passengers. The Company also participates in United's
"Apollo" reservation system and other major CRSs, uses the United
Express logo and has exterior aircraft paint schemes similar to
those of United.
The Company believes that its relationship with United
is strong, and that United has significant business incentives
for maintaining that relationship. At Washington-Dulles, United's
operations are predominately international and transcontinental
flights with a lesser number of short haul flights. The ability
of the Company to provide service to some of United's short-haul
markets in the Eastern United States enables United to continue
to market, through the Company, frequent air service from its
Washington-Dulles hub, thus adding incremental traffic to
United's international and domestic flights.
Markets
As of March 1, 1997, the Company operated 181 non-stop
flights from Washington-Dulles representing more flights from the
airport than any other airline. During 1996, the Company
accounted for more passenger boardings from Washington-Dulles
than any airline other than United. On a combined basis, the
Company and United generated approximately 56% of passenger
traffic at Washington-Dulles during 1996.
The Company's top four cities based on frequency of
operations are Washington-Dulles, Boston, New York-JFK and
Newark. During 1996, the Company added additional flights to
existing Washington-Dulles markets, added new routes from the
Washington-Dulles, Boston and Newark airports and ceased
operations in four markets. The Company increased operations in
existing Washington-Dulles markets by four daily departures and
added Detroit as a new market which will have an additional four
flights per day by year end. Further, the Company added new non-
Dulles flying from Boston, consisting of one new market with six
daily departures; and Newark, with two new markets and ten daily
departures. In 1996 the Company ceased operations in Wilkes-
Barre/Scranton and Reading, PA, as well as Long Island and
Elmira, NY, resulting in the elimination of thirteen daily
departures from Washington-Dulles.
The following table sets forth the destinations currently served
by the Company:
Albany, NY New Haven, CT
Allentown, PA New York, NY (Kennedy)
Baltimore, MD New York, NY (LaGuardia)
Binghamton, NY Newark, NJ
Boston, MA Newport News, VA
Buffalo, NY Norfolk, VA
Burlington, VT Philadelphia, PA
Charleston, SC Pittsburgh, PA
Charleston, WV Portland, ME
Charlottesville, VA Providence, RI
Cleveland, OH Raleigh/Durham, NC
Columbus, OH Richmond, VA
Dayton, OH Roanoke, VA
Detroit, MI Rochester, NY
Greensboro, NC State College, PA
Harrisburg, PA Stewart, NY
Hartford, CT Syracuse, NY
Knoxville, TN Westchester County, NY
Lynchburg, VA Washington-Dulles
Manchester, NH
Fleet Description
As of March 1, 1997, the Company operated a fleet of
fifty-six turboprop aircraft, consisting of twenty-nine British
Aerospace Jetstream-32s ("J-32s") and twenty-seven British
Aerospace Jetstream-41s ("J-41s"). The Company believes that its
fleet of J-32 and J-41 aircraft, having varying capacities and
ranges, allows it to match equipment to the market conditions on
its routes.
As of February 23, 1997, the Company entered into an
agreement in principle with Aero International (Regional)
("AI(R)"), acting as agent for British Aerospace (Operations)
Limited, to acquire twelve new J-41 aircraft. Delivery of the
aircraft began in March 1997 and will continue through mid-1999.
Five aircraft are scheduled for delivery in 1997.
On January 28, 1997, the Company announced an agreement
to acquire twelve Canadair Regional Jet Series 200 ER ("CRJ")
aircraft from Bombardier, Inc. with options to acquire an
additional thirty-six jets. Deliveries are scheduled to begin in
July with revenue passenger service expected to begin in the
fall. Four jets are scheduled for delivery in 1997 and eight in
1998. The CRJ is a fifty seat twin engine aircraft designed to
serve medium-range and secondary markets. The Company is seeking
to obtain approval from its marketing partner, United Airlines,
to incorporate the regional jets into its existing United Express
product. The Company believes that CRJs will allow it to
capitalize on its strong position at Washington-Dulles in
addition to pursuing other potential route opportunities in the
Eastern United States. See "Outlook" in Item 7, below.
The following table describes the Company's fleet of
aircraft, scheduled deliveries for 1997 and thereafter, and
future options as of March 1, 1997.
Average Future
Passenger Age in Number 1997 Deliveries/
Years of Deliveries
Capacity Aircraft Options
British 19 7.0 29 - -
Aerospace J-32
British 29 2.3 27 5 7
Aerospace J-41
Canadair 50 - - 4 8/36
Regional Jets
Aircraft lease expense during 1996 for the Company's
aircraft was approximately $29.1 million.
Restructuring
In the second quarter 1994 the Company commenced a plan
of restructuring to rationalize its fleet structure, eliminate
unprofitable routes and operations, and recapitalize its
finances. The key elements of the restructuring plan included the
return of the Company's Embraer Brasilia ("EMB-120") and
deHavilland Dash-8 ("Dash-8") aircraft to the lessors, the sale
of spare parts and tooling associated with those aircraft, and
the closure of the Company's flight operations in Florida.
Management believes that the plan of restructuring addressed the
Company's past financial difficulties and that the improved
financial performance for the years ending December 31, 1996 and
1995 is largely attributable to the benefits of the
restructuring, improved yield management, and a generally
improved economic environment for airlines. There are no
remaining reserves related to the restructuring.
United Express Agreements
The Company's code-sharing and related agreements with
United (the "United Express Agreements") define the Company's
relationship with United. The United Express Agreements authorize
the Company to use United's "UA" flight designator code to
identify its flights and fares in the major CRSs, including
United's "Apollo" reservation system, to use the United Express
logo and exterior aircraft paint schemes and uniforms similar to
those of United, and to otherwise advertise and market its
association with United.
Company passengers may participate in United's "Mileage
Plus" frequent flyer program and are eligible to receive a
certain minimum of United frequent flyer miles for each of the
Company's flights. Mileage Plus members are also eligible to
redeem their awards on the Company's route system. In 1996
approximately 5% of the Company's passengers received their
tickets as part of a Mileage Plus award. The Company limits the
number of "Mileage Plus" tickets that may be used on its flights
and believes that the displacement, if any, of revenue passengers
is minimal.
The United Express Agreements also provide for
coordinated schedules and through-fares. A through-fare is a fare
offered by a major air carrier to prospective passengers who, in
order to reach a particular destination, transfer between the
major carrier and its code-sharing partner. Generally, these
fares are less expensive than purchasing the combination of local
fares. United establishes all through-fares and allows the
Company a portion of these fares on a fixed rate or formula basis
subject to periodic adjustment. The United Express Agreements
also provide for interline baggage handling, and for reduced
airline fares for eligible United and Company personnel and
families. The United Express code-sharing agreement expires on
March 31, 1998. The Company intends to negotiate a new United
Express code-sharing agreement and expects United to continue the
code-sharing relationship.
Under the United Express Agreements, United provides a
number of additional services to the Company. These include
publication of the fares, rules and related information that are
part of the Company's contracts of carriage for passengers and
freight; publication of the Company's flight schedules and
related information; provision of ground support services at many
of the airports served by both United and the Company; provision
of ticket handling services at United's ticketing locations;
provision of airport signage at airports where both the Company
and United operate; provision of United ticket stock and related
documents; provision of expense vouchers, checks and cash
disbursements to Company passengers inconvenienced by flight
cancellations, diversions and delays; and cooperation in the
development and execution of advertising, promotion, and
marketing efforts featuring United Express and the relationship
between United and the Company. The Company pays United monthly
fees based on the total number of revenue passengers boarded by
the Company on its flights for the month. The fee escalates
annually over the term of the United Express Agreements.
The United Express Agreements require the Company to
obtain United's consent to operate service between city pairs as
"United Express". If the Company experiences net operating
expenses that exceed revenues for three consecutive months on any
required route, the Company may withdraw from that route if
United and the Company are unable to negotiate an alternative
mutually acceptable level of service for that route. The United
Express Agreements also require the Company to obtain United's
approval if it chooses to enter into code-sharing arrangements
with other carriers, but do not prohibit United from competing,
or from entering into agreements with other airlines who would
compete, on routes served by the Company.
The United Express Agreements may be canceled if the
Company fails to meet certain financial tests or performance
standards or fails to maintain certain minimum flight frequency
levels, events which the Company, based on experience to date,
believes to be unlikely.
The United Express Agreements restrict the ability of
the Company to merge with another company or dispose of assets or
aircraft without offering United a right of first refusal to
acquire the Company or such assets or aircraft. United also has a
right of first refusal with respect to issuance by the Company of
shares of its Common Stock if, as a result of the issuance,
certain of the Company's stockholders and their permitted
transferees do not own at least 50% of the Company's Common Stock
after such issuance. Because those Company stockholders and their
permitted transferees own substantially less than 50% today,
management believes that such a right is unlikely to be
exercised.
The United Express Agreements also require the Company
to obtain United's consent to operate aircraft with seating
capacity for more than thirty passengers under the "United
Express" name. The Company has sought United's consent and is
awaiting United's response, regarding operating the CRJs under
the code-sharing agreement. See "Outlook" in Item 7, below.
Fuel
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing
prices in quantities sufficient to meet its future requirements.
During 1996, the Company purchased approximately 80.2% of its
fuel through an affiliate of United taking advantage of the
affiliate's significant buying power and fuel purchasing
expertise. On March 17, 1997, the Company renewed its fuel
purchasing agreement with the United affiliate and obtained a
reduction in the base price of fuel at its Washington-Dulles hub.
The Company's fuel purchasing agreement does not provide
protection against fuel price increases and does not insure
availability of supply. Fuel costs constituted 9.4%, 8.5%, and
9.6% of revenues in 1996, 1995, and 1994 respectively.
Marketing
The Company's advertising and promotional programs
emphasize the Company's close affiliation with United, including
coordinated flight schedules and the ability of the Company's
passengers to participate in United's "Mileage Plus" frequent
flyer program. The Company's services are marketed primarily by
means of listings in CRSs and the Official Airlines Guide,
advertising and promotions, and through direct contact with
travel agencies and corporate travel departments. For the year
ended December 31, 1996, approximately 74% of the Company's
passengers obtained their tickets through travel agencies and
corporate travel departments. In marketing to travel agents, the
Company relies on personal contacts and direct mail campaigns,
provides familiarization flights, and hosts group presentations
and other functions to acquaint travel agents with the Company's
services. Many of these activities are conducted in cooperation
with United marketing representatives. In addition, the Company
and United jointly create radio and print advertising in markets
served by the Company.
In September 1995 the Company became a participant in
United's electronic ticketing program. This program allows
customers to travel on flights of United and the Company without
the need for a paper ticket. The primary benefit of this program
is improved customer service and reduced ticketing costs. For the
year ended December 31, 1996, 16.4% of the Company's passengers
utilized electronic tickets.
Competition
The Company competes primarily with regional and major
air carriers as well as with ground transportation. The Company's
competition from other air carriers varies from location to
location, type of aircraft (both turbo-prop and jet), and in
certain cities, comes from carriers which serve the same
destinations as the Company but through different hubs. The
Company believes that its ability to compete in its market areas
is strengthened by its code-sharing relationship with United,
which has a substantial presence at Washington-Dulles, thereby
enhancing the importance of the "UA" flight designator code on
the East Coast. The Company seeks to compete with other airlines
by offering frequent flights. In addition, the Company's
competitive position benefits from the large number of
participants in United's "Mileage Plus" frequent flyer program
who fly regularly to or from the markets served by the Company.
At its Washington-Dulles hub, the Company faces limited
direct nonstop competition from other carriers. In eleven of its
markets from Dulles, other airlines have competing turboprop
and/or jet service. There are no other airlines serving the
Company's remaining twenty-seven Dulles markets with nonstop
flights. However, flights to the Company's Washington-Dulles
destinations are also offered by other carriers from Washington
National and Baltimore-Washington International airports.
During 1996, the Company continued to see a trend
towards a lower percentage of its passengers connecting to United
Airlines flights through its Dulles hub. One potential cause for
this trend was additional competition for connecting passengers
from other hub networks in the region controlled by some of
United's principal competitors. In 1996, regional jet operations
were a much larger part of these competing hub networks. As a
result, the Company's turbo-prop to jet connections with its code-
share partner United is increasingly competing with these other
hub networks jet to jet connections. Some passengers may perceive
jet to jet connections more favorably due to a jet's elapsed
flight time and comfort relative to a turbo-prop aircraft. The
Company believes that the public's favorable perception of
regional jets supports its strategy for acquisition of these
aircraft to mitigate any loss of passengers to operators already
using regional jets.
The Aviation Deregulation Act of 1978 (the "1978 Act")
eliminated many regulatory constraints on airline competition,
thereby freeing airlines to set prices and, with limited
exceptions, to establish domestic routes without the necessity of
seeking government approval. The airline industry is highly
competitive, and there are few barriers to entry in the Company's
markets. Furthermore, larger carriers with greater resources can
impact the Company's markets through fare adjustments as well as
flight schedule modifications.
Yield Management
The Company closely monitors its inventory and pricing
of available seats by use of a computerized yield management
system. In September 1995, the Company signed a contract for the
installation of a state-of-the-art revenue management system,
PROS IV, marketed by PROS Strategic Solutions. This system
enables the Company's revenue control analysts, on a flight by
flight basis, to establish the optimal allocation of seats by
fare class (the number of seats made available for sale at
various fares). The Company expects that PROS IV will become
fully operational during the second quarter of 1997.
Slots
Slots are reservations for takeoffs and landings at
specified times and are required by governmental authorities to
operate at certain airports. The Company utilizes takeoff and
landing slots at the LaGuardia, New York-JFK and White Plains,
New York airports. Airlines may acquire slots by governmental
grant, by lease or purchase from other airlines, or by loan when
another airline does not use a slot but desires to avoid
governmental reallocation of a slot for lack of use. All leased
and loaned slots are subject to renewal and termination
provisions.
As of March 1, 1997 the Company utilized ten slots at
LaGuardia, nine slots at New York-JFK, and eleven slots at White
Plains. Of the above slots, the Company controls four at
LaGuardia and eight at White Plains. The other slots utilized by
the Company are either loaned or leased from other carriers and
are subject to varying renewal dates. The Company believes that
as slots expire it will be able to either renew the lease or find
substitute slots at similar prices.
Employees
As of March 1, 1997, the Company had 1,236 full-time
and 134 part-time employees, classified as follows:
Classification Full- Part-
Time Time
Pilots 463
-
Flight attendants 138
-
Station personnel 270 122
Maintenance personnel 118 2
Administrative and 231 9
clerical personnel
Management 16 1
Total employees 1,236 134
Labor Groups
The Company's pilots are represented by the Airline
Pilots Association ("ALPA"), its flight attendants by the
Association of Flight Attendants ("AFA"), and its mechanics by
the Aircraft Mechanics Fraternal Association ("AMFA").
The ALPA collective bargaining agreement was amended on
February 26, 1997 and is effective for three years. The new
contract modifies work rules to allow more flexibility, includes
regional jet pay rates, and transfers pilots into the Company's
employee benefit plans. The Company believes that the incremental
cost as a result of the amendments to the contract will not have
any material effect over the life of the agreement.
On March 11, 1994, AMFA was certified by the National
Mediation Board (the "NMB") as the collective bargaining
representative elected by mechanics and related employees of the
Company. As of March 1, 1997, AMFA represented 120 of the
Company's employees. The Company and AMFA have been attempting to
negotiate an initial contract under federal mediation since
December 1994, but have so far failed to reach agreement. The NMB
has indicated that it is in favor of continuing the negotiations,
and the Company anticipates participating in further
negotiations.
If, at some point, the NMB should decide that the
parties are deadlocked, the NMB could declare an impasse along
with a thirty day cooling off period. At the conclusion of that
period if an agreement has not been reached, AMFA would have the
authority to use self help, up to and including the right to
strike. The Company and AMFA are also engaged in litigation,
which is more fully described in Item 3, "Legal Proceedings,"
below. If that litigation were resolved in AMFA's favor, AMFA
would be in a position to use self help, even if the NMB does not
declare an impasse.
The Company's contract with the AFA will become
amendable on April 30, 1997. The Company expects to continue
operating under the terms of the existing agreement until new
terms are negotiated.
The Company believes that the wage rates and benefits
for other employee groups are comparable to similar groups at
other regional airlines. The Company is unaware of any
significant organizing activities by labor unions among its other
non-union employees at this time.
Annual turnover of Company pilots was approximately 18%
during 1996, compared to 14% during 1995. In 1996, several of
the major airlines began hiring greater numbers of pilots to
satisfy added fleet capacity and to replace a larger percentage
of retiring pilots compared to previous years. It is expected
that hiring by all the major airlines will continue, resulting in
a similar turnover rate in 1997. There are no assurances that
the Company will be able to hire and train sufficient pilots to
meet its operational requirements in the future.
Pilot Training
The Company performs pilot training in state-of-the-
art, full motion simulators and conducts training in accordance
with Federal Aviation Administration ("FAA") Part 121
regulations. In 1994, the Company initiated an Advanced
Qualification Program ("AQP") to enhance pilot training in both
technical and Crew Resource Management ("CRM") skills. The FAA
has recognized the Company's leadership in CRM training by
selecting the Company to participate in a FAA sponsored training
grant. The principal objective of the grant is to develop a
prototype training program that provides carriers with a more
efficient approach for integrating CRM procedures into standard
operating procedures. For the past eighteen months, the FAA has
worked closely with the Company and the first phase of the
program, development of standardized requirements, is now
complete. The second phase of the project, operational
implementation, began in August 1996.
Aviation Safety
On December 20, 1995, the FAA issued regulation 14 CFR
part 119, requiring air carriers operating aircraft under 14 CFR
part 135, with a seating capacity of ten to thirty seats,
excluding crew members, to comply with and be certified under the
more stringent air carrier safety regulation 14 CFR part 121 by
March 20, 1997. The Company has had an internal audit program
for flight operations in place since October 1993 and has been
training all of its flight crews under CFR Part 121 since
February 1994. Additionally, the Company appointed a safety
officer during 1995. The Company continues to emphasize safety
in its daily operations and plans to implement several new
programs for flight crews in 1997. On March 10, 1997, the
Company received certification to operate under 14 CFR part 121.
The Company underwent an intensive, two-week FAA
National Aerospace Inspection Program ("NASIP") audit during
December 1995. The final audit report was issued on January 31,
1996 and consisted of recommendations and minor findings, none of
which resulted in civil penalties. The Company responded to the
findings and believes that it has met and continues to meet the
required standards for safety and operational performance.
Regulation
The airline industry is subject to extensive regulation
of its operations. The Department of Transportation ("DOT") is
authorized to establish consumer protection regulations; prohibit
certain pricing practices; mandate conditions of carriage; and
make ongoing determinations of a carrier's fitness, willingness
and ability to provide air transportation. The DOT also has the
power to bring proceedings for the enforcement of its regulations
under the federal transportation statute, which may result in
civil penalties, revocation of operating authority, and criminal
sanctions.
The Company holds a certificate of public convenience
and necessity issued by the DOT under the transportation statute
which authorizes it to conduct air transportation of persons,
property, and mail between all points in the United States, its
territories and possessions. Such a certificate requires the
holder to maintain DOT prescribed minimum levels of insurance and
to comply with all applicable statutes and regulations.
The DOT has implemented regulations designed to prevent
unfair, discriminatory, and deceptive practices in the operation
of computerized reservation systems. These regulations do not
prohibit or limit code-sharing or the practice of some
computerized reservation system vendors to give display
preference to on-line versus interline connecting flights. The
DOT has stated that it views the practice as being consistent
with the traveler's preference for on-line flights when
reasonably convenient. The DOT must re-enact these regulations
and/or revise them on or after December 31, 1997. There can be no
assurance that the DOT will not amend its regulations to limit
these practices in the future.
The DOT has proposed to adopt regulations to strengthen
the requirement that carriers advise booking passengers that all
or part of their air transportation may be provided by the code-
share partner of the carrier accepting the passenger reservation.
Because the Company relies on its code-share partner and travel
agents to accept reservations on its behalf, the DOT rule, when
made final, is not anticipated to have a significant impact on
the cost of the Company's compliance with federal regulations.
Pursuant to the federal transportation statute, no more
than 25% of the voting interest in an U.S. certificated air
carrier, such as the Company, may be owned or controlled by
persons who are not citizens of the United States. The December
1994 investment in the Company by a subsidiary of British
Aerospace, PLC, complies with the statute.
The Company is subject to the jurisdiction of the FAA
with respect to aircraft maintenance and operations, equipment,
ground facilities, flight dispatch, communications, training,
weather observation, flight personnel and other matters affecting
air safety. To ensure compliance with its regulations, the FAA
requires airlines to obtain an operating certificate and
operations specifications for the particular aircraft and types
of operations conducted by the carrier, all of which are subject
to suspension or revocation for cause. The FAA has the authority
to bring proceedings for the enforcement of its regulations which
may result in civil penalties or revocation of operating
authority.
The FAA has sought to impose civil penalties on the
Company for alleged violations of passenger screening procedures,
and in one instance for an alleged violation involving a non-
revenue maintenance ferry flight. The Company has either
contested the allegations or sought to enter into compromise
agreements with the FAA to conclude the matters. It is not
expected that the settlement of these matters will have a
material adverse effect on the Company.
The Company is subject to the jurisdiction of the
Federal Communications Commission regarding the use of radio
facilities. Local governments and authorities in certain markets
have adopted regulations governing various aspects of aircraft
operations, including noise abatement, curfews, and use of
airport facilities. The Company believes that it is in compliance
with all such regulations in all material respects.
From time to time the DOT and FAA propose to adopt
additional regulations on air carriers. Some of these proposals
are the result of legislation. For example, the DOT is
considering means by which air carriers can collect certain
passenger related information not currently required to be
collected (date of birth, social security number, emergency
contact and telephone number). Other requirements may be imposed
on air carriers as a result of the recent Vice Presidential
Commission on Air Safety. For example, the industry is
considering the operational consequences of implementing a more
positive passenger-bag match system. The Company expects that
certain proposals now under discussion will be implemented in
some manner. A number of these proposals, in various forms now
under discussion, could have a substantial financial impact on
the air carrier industry including the Company. At this time, the
Company cannot predict the extent to which these proposals may be
imposed or their financial impact.
The Company is obligated to collect a U.S.
transportation tax of 10% of passenger ticket revenue. This tax
is known as the aviation trust tax or the "ticket tax". Recently
the federal statute authorizing the ticket expired on two
separate occasions, during the periods January 1, 1996 through
August 26, 1996, and January 1, 1997 through March 6, 1997.
Accordingly, the Company discontinued the collection of the
ticket tax during this period consistent with industry practice.
The ticket tax was most recently reinstated effective March 7,
1997, with an expiration date of September 20, 1997. The Congress
has directed a study of FAA funding requirements and how it can
best be met. As a result, the excise tax may be modified or
replaced by a user fee. Such a change in the nature of this tax
could, if adopted, affect the Company's overall exposure to these
fees.
Management believes that the industry fare increases in
1996 resulted, in part, from the expiration of the transportation
tax. The amount of increases due to this factor cannot be
determined nor can the impact on revenue which resulted from the
reinstatement of the tax or could result from the adoption of a
user fee.
Seasonality
As is common in the industry, the Company experiences
lower demand for its product during the period of December
through February. Because the Company's services and marketing
efforts are focused on the business traveler, this seasonality of
demand is somewhat greater than for airlines which carry a larger
proportion of leisure travelers. In addition, the Company's
principal area of operations experiences more adverse weather
during this period, causing a greater percentage of the Company's
and other airlines' flights to be canceled. These seasonal
factors have combined in the past to reduce the Company's
capacity, traffic, profitability, and cash generation for this
three month period as compared to the rest of the year.
Charter and Freight Service
The Company uses available aircraft, primarily on
weekends when there are fewer scheduled flights, to carry charter
groups to destinations such as Atlantic City, New Jersey, and
other regional destinations. The Company also carries mail and
small packages on most of its flights. Total revenues from its
charter flights and freight deliveries for 1996 were
approximately 1% of the Company's total revenues.
Item 2. Properties
Leased Facilities
Airports
The Company leases gate and ramp facilities at all of
the airports it serves and leases ticket counter and office space
at those locations where ticketing is handled by Company
personnel. Payments to airport authorities for ground facilities
are generally based on a number of factors, including space
occupied as well as flight and passenger volume. The Company
believes that it can accomodate through various arrangements the
new flights it plans, and is exploring possible long-term
solutions for assuring access to adequate facilities at
Washington-Dulles. The Company leases all of its aircraft, which
are described in Fleet Description, under various operating lease
agreements.
Corporate Offices
On February 15, 1997, the Company established new
headquarters in Dulles, VA. The new facility provides over
45,000 square feet in one building for the executive,
administrative, training and system control departments. This
facility compares to the previous space consisting of
approximately 28,500 square feet divided between two buildings.
The Company believes that the new headquarters provides adequate
facilities to conduct its current and planned operations.
Maintenance Facilities
The FAA's safety regulations mandate periodic
inspection and maintenance of commercial aircraft. The Company
performs most maintenance, service and inspection of its aircraft
and engines at its maintenance facilities using its own
personnel.
The Company currently leases approximately 30,000
square feet of hangar, shop and office space in Lynchburg, VA to
maintain the fleet of J-32 and J-41 aircraft. The Company
believes the Lynchburg facility is adequate to perform the
maintenance functions for the existing fleet. The lease on the
hangar complex is now on a month-to-month basis due to an on-
going airport planning study by the Airport and the City of
Lynchburg. The Company believes that its tenancy at the Lynchburg
facility is not threatened by the short-term lease. The Company
also leases approximately 3,800 square feet in the Signature
Flight Support hangar at Washington-Dulles for aircraft
maintenance. The 1996 rental expense for all maintenance
facilities was approximately $0.2 million.
The Company has begun to address the need for expanding
its facilities due to the planned increase in fleet size. The
Company intends to build or lease a hangar facility of
approximately 85,000 square feet for planned occupancy during
1998 large enough to consolidate its future maintenance
operations. The final site has not been determined but the
Washington-Dulles location is the leading contender for the new
maintenance facility due to the presence of the Company's hub
operation. The Company has applied to Loudoun County, VA for a
tax exempt bond issuance facility in the amount of $11.0 million
to finance the proposed facility.
Item 3. Legal Proceedings
The Company is a party to routine litigation and FAA
proceedings incidental to its business, none of which is likely
to have a material effect on the Company's financial position.
The Company is a party to an action pending in the
United States District Court for the Southern District of Ohio,
Peter J. Ryerson, administrator of the estate of David Ryerson,
v. Atlantic Coast Airlines, Case No. C2-95-611. This action is
more fully described in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995. The Company
believes that all claims resulting from this litigation remain
fully covered under the Company's insurance policy. On March 10,
1997, the Court granted Plaintiff's motion to the effect that
liability would not be limited to those damages available under
the Warsaw Convention. As of March 21, 1997, the matter has not
been set for trial.
The Company is in litigation with AMFA over the issue
of whether AMFA has a right to strike prior to the exhaustion of
mediation pursuant to the Railway Labor Act. See "Labor Groups"
in Item 1, above. The legal issue arose over the Company's
imposition of certain unilateral work rule changes during the
period between union certification and an initial collective
bargaining agreement. AMFA objected to this action, but the U.S.
District Court for the Southern District of New York, on December
14, 1995, ruled in favor of the Company, declining to render
AMFA's requested declaratory judgment and expressly stating that
AMFA was prohibited from striking at that time. In Aircraft
Mechanics Fraternal Association v. Atlantic Coast Airlines, 5
F.3d 90, the U.S. Court of Appeals for the Second Circuit
affirmed the District Court's ruling. AMFA subsequently
petitioned again to the U.S. Court of Appeals for the Second
Circuit to consider the issue, not previously addressed by the
Court, that the company's actions, while legal, should allow AMFA
to engage in self-help, including the right to strike. The
Second Circuit heard oral arguments on this matter in January
1997 and the parties are awaiting its decision.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal quarter ended
December 31, 1996, to a vote of the security holders of the
Company through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock, par value $.02 per share
(the "Common Stock"), is traded on the Nasdaq National Market
("Nasdaq/NM") under the symbol "ACAI". Trading of the Common
Stock commenced on July 21, 1993.
The following table sets forth the reported high and
low closing sale prices of the Common Stock on the Nasdaq/NM for
the periods indicated.
1995 High Low
First quarter 3.125 1.750
Second quarter 9.000 2.500
Third quarter 10.375 7.125
Fourth quarter 11.500 6.625
1996
First quarter 16.250 7.375
Second quarter 17.125 12.625
Third quarter 15.875 11.000
Fourth quarter 13.125 9.250
1997
First quarter 17.000 16.500
(through March 11, 1997)
As of March 11, 1997, the closing sales price of the
Common Stock on Nasdaq/NM was $17.000 per share and there were
approximately 123 holders of record of Common Stock.
The Company has not paid any cash dividends on its
Common Stock and does not anticipate paying any Common Stock cash
dividends in the foreseeable future. The Company intends to
retain earnings to finance the growth of its operations. The
payment of Common Stock cash dividends in the future will depend
upon such factors as earnings levels, capital requirements, the
Company's financial condition, the applicability of any
restrictions imposed upon the Company's subsidiary by certain of
its financing agreements, and other factors deemed relevant by
the Board of Directors. In addition, Atlantic Coast Airlines,
Inc. is a holding company and its only significant asset is its
investment in its subsidiary, Atlantic Coast Airlines.
In January 1996, the Company's Board of Directors
declared dividends of approximately $0.3 million on its
Redeemable Series A Cumulative Convertible Preferred Stock
representing the cumulative dividend for the full year 1995. The
Company paid these dividends in February 1996. On March 29, 1996,
the Company redeemed all of the preferred stock for $3.8 million.
The preferred stock was issued to JSX Capital Corporation
("JSX"), a subsidiary of British Aerospace, Inc. in December 1994
as part of a $20.0 million financing agreement consisting of an
equity investment and available borrowings. The preferred stock
was convertible into common stock at the option of JSX at any
time on or after September 15, 1997.
Item 6. Selected Financial Data
The following selected financial data relating to the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been
derived from the Company's consolidated financial statements which
have been audited by BDO Seidman, LLP, Independent Certified
Public Accountants, whose report with respect thereto appears
elsewhere in this Annual Report on Form 10-K. The following data
should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and the
Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and related operating data)
Year ended December 31,
1996 1995 1994 1993 1992
Operating revenues:
Passenger revenues $179,370 $153,918 $156,047 $145,786 $84,393
Total operating 182,484 156,968 158,919 149,103 85,871
revenues
Operating expenses:
Salaries and related 44,438 40,702 41,590 35,162 20,493
costs
Aircraft fuel 17,124 13,303 15,189 15,397 9,514
Aircraft maintenance 16,841 15,252 22,345 19,714 10,657
and materials
Aircraft rentals and 33,325 29,454 40,135 34,872 19,761
landing fees
Traffic commissions 28,550 25,938 25,913 22,914 12,796
and related fees
Depreciation and 2,846 2,240 2,329 1,654 2,283
amortization
Other 19,523 17,755 20,597 16,823 9,365
Write-off of - - 6,000 - 2,917
intangible assets
Restructuring (426) (521) 8,099 - -
(reversals) charges
Total operating 162,221 144,123 182,197 146,536 87,786
expenses
Operating income (loss) 20,263 12,845 (23,278) 2,567 (1,915)
Interest expense-net
and amortization of debt (1,013) (1,802) (2,153) (2,298) (2,602)
discount and finance
costs
Interest income 341 66 - 60 98
Other (expenses) (17) 181 295 (225) -
income
(655) (1,555) (1,858) (2,463) (2,504)
Income (loss) before 19,608 11,290 (25,136) 104 (4,419)
income tax expense
Income tax provision (1,212) - 67 20
(benefit) 450
Income (loss) before 19,158 12,502 (25,136) 37 (4,439)
extraordinary item
Extraordinary item (1) - 400 - (1,780) -
Net Income (loss) $19,158 $12,902 $(25,136) $(1,743) $(4,439)
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and related operating data)
Year ended December 31,
1996 1995 1994 1993 1992
Income (loss) per share:
Primary:
Earnings (loss) $2.14 $1.39 $(3.67) $ 0.01 $(1.18)
before extraordinary
item
Extraordinary item - 0.05 - (0.29) -
Net earnings (loss) $2.14 $1.44 $(3.67) $ (0.28) $(1.18)
per share
Fully diluted:
Earnings (loss) $2.14 $1.33 $(3.67) $ 0.01 $(1.18)
before extraordinary
item
Extraordinary item - 0.04 - (0.29) -
Net earnings (loss) $2.14 $ 1.37 $(3.67) $ (0.28) $(1.18)
per share
Average number of common
shares outstanding
(in thousands) 8,963 8,736 6,858 6,083 3,750
Primary 8,963 9,390 6,858 6,083 3,750
Fully diluted
Selected Operating Data:
Departures 137,924 131,470 134,804 97,291 56,213
Revenue passengers 1,462,241 1,423,463 1,545,520 1,445,878 781,421
carried
Revenue passenger 358,725 348,675 393,013 381,489 219,602
miles (000s) (2)
Available seat miles 771,068 731,109 885,744 853,668 468,697
(000s) (3)
Passenger load 46.5% 47.7% 44.3% 44.7% 46.9%
factor (4)
Breakeven passenger 41.4% 43.9% 47.0% 43.9% 45.0%
load factor (5)
Revenue per $0.237 $0.215 $0.179 $0.175 $0.183
available seat mile
Cost per available $0.211 $0.198 $0.189 $0.171 $0.177
seat mile (6)
Average yield per $0.500 $0.441 $0.397 $0.382 $0.384
revenue passenger mile
(7)
Average fare $123 $108 $101 $101 $108
Average passenger 245 245 254 264 281
trip length (miles)
Aircraft in service 57 54 56 62 37
(end of period)
Destinations served 39 41 42 54 36
(end of period)
Consolidated Balance
Sheet Data:
Working capital $17,782 $4,552 $(4,488) $(3,935) $(1,658)
(deficiency)
Total assets 64,758 47,499 40,095 52,448 26,628
Long-term debt and 5,673 7,054 6,675 5,941 11,647
capital leases, less
current portion
Redeemable common - - - - 2,475
stock warrants
Redeemable Series A,
Cumulative, - 3,825 3,825 - -
Convertible, Preferred stock
Total stockholders' 34,637 14,561 1,922 19,595 (2,231)
equity (deficit)
(1) In connection with the early extinguishment of certain senior notes, in
1993 the Company recorded an extraordinary charge of $1,779,583 resulting
from the write-off of the unamortized portion of debt discount and the
deferred finance costs associated with the extinguished debt; and in 1995 an
extraordinary gain of $400,000 related to the early extinguishment of debt.
No similar extinguishments were recognized in 1996.
(2) "Revenue passenger miles" or "RPMs" represent the number of miles flown by
revenue passengers.
(3) "Available seat miles" or "ASMs" represent the number of seats available
for passengers multiplied by the number of scheduled miles the seats are
flown.
(4) "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles by
available seat miles.
(5) "Breakeven passenger load factor" represents the percentage of seats
filled by revenue passengers for the airline to break even after operating
expenses, less other revenues and excluding restructuring and write-offs of
intangible assets. Had restructuring and write-offs of intangible assets
been included for the years ended December 31, 1996, 1995, 1994, 1993 and
1992, this percentage would have been 41.3%, 43.8%, 51.0%, 43.9% and 48.0%,
respectively.
(6) "Operating cost per available seat mile" represents total operating
expenses excluding restructuring and write-offs of intangible assets divided
by available seat miles. Had restructuring and write-offs of intangible
assets been included for the years ended December 31, 1996, 1995, 1994, 1993
and 1992, cost per available seat mile would have been $0.210, $0.197,
$0.206, $0.172 and $0.187, respectively.
(7) "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
In 1996 the Company posted a record profit of $19.2
million compared to a profit of $12.9 million for 1995, and a
loss of $25.1 million in 1994. The improvement over 1995 and
1994 reflects increases in the Company's yields as well as a
reduction in the break-even passenger load factor.
Management believes that these improvements are due to, among
other factors, the results of a major restructuring in 1994.
In the second quarter 1994 the Company commenced a
plan of restructuring to rationalize its fleet structure,
eliminate unprofitable routes and operations, and
recapitalize its finances. The key elements of the
restructuring plan included the return of the Company's EMB-
120 and Dash-8 aircraft to the lessors, the sale of spare
parts and tooling associated with those aircraft, and the
closure of the Company's flight operations in Florida.
As a result of these actions, coupled with
improvements in yield management, marketing, and a generally
improved economic environment for airlines, the Company
returned to profitability in the second quarter 1995,
achieving record profitability for 1995 and 1996.
Results of Operations
The Company earned net income of $19.2 million or
$2.14 per fully diluted share in 1996 compared to net income
of $12.9 million or $1.37 per fully diluted share in 1995,
and a net loss of $25.1 million or $(3.67) per fully diluted
share in 1994. During 1996, the Company generated operating
income of $20.3 million compared to $12.8 million for 1995,
and an operating loss of $23.3 million for 1994.
The improvement in operating results from 1995 to
1996 reflects a 10.2% increase in unit revenue (revenue per
available seat mile) from $0.215 to $0.237 partially offset
by a 6.6% increase in unit cost (cost per available seat
mile), coupled with a 5.5% increase in available seat miles
("ASMs"). These results were achieved despite a challenging
operating environment brought about by a 20.5% increase in
the total cost per gallon of fuel in 1996.
The Company's 1995 operating results reflect the
significant improvement over 1994 brought about by the
Company's restructuring plan. Unit revenue increased 20.1% to
21.5 cents compared to 17.9 cents in 1994. Partially
offsetting this was a 4.8% increase in unit costs as the
process of removing larger capacity EMB-120 and Dash-8
aircraft and spare parts from the fleet continued through the
second quarter 1995.
The Company's 1994 operating results reflect the
operation of larger capacity EMB-120 and Dash-8 aircraft in
addition to J-32s and J-41s; a separate Florida operation
which was closed in the third quarter 1994; the recording of
$8.1 million in restructuring charges and the write-off of
$6.0 million in aircraft purchase options.
Fiscal Year 1996 vs. 1995
Operating Revenues
The Company's operating revenues increased 16.3% to
$182.5 million in 1996 compared to $157.0 million in 1995.
The increase resulted from a 13.4% increase in yield per
revenue passenger mile ("RPM") to $.500 in 1996 compared from
$.441 in 1995, and a 2.9% increase in RPMs. The increased
traffic as measured in RPM's reflects a 5.5% increase in ASMs
partially offset by a decrease in passenger load factor of
1.2 percentage points. Total passengers increased 2.7% year
over year and length of haul remained unchanged.
Management believes that industry fare increases in
1996 resulted in part from the expiration of the aviation
trust fund tax, also known as the "ticket tax", on December
31, 1995. The amount of the increases due to this factor
cannot be determined, nor can the impact on revenue which
resulted from the reinstatement of the tax on August 27,
1996. The ticket tax subsequently expired on December 31,
1996, and was reinstated for the period March 7, 1997,
through September 30, 1997.
Operating Expenses
The Company's operating expense increased 12.6% in
1996 over 1995 reflecting increased ASMs and unit costs.
1996 unit costs increased 6.6% to 21.1 cents compared to 19.8
cents in 1995 reflecting increases in passenger and revenue
related costs (traffic commissions and booking fees)
associated with a 13.4% increase in yield, increased profit
sharing costs related to the higher net income in 1996, and a
28.7% increase in the total cost of fuel.
A summary of operating expenses as a percent of
operating revenues and operating cost per ASM for the years
ended December 31, 1996 and 1995 is as follows:
1996 1995
Percent Cost Percent Cost
of per of
Operating Operating per ASM
ASM
Revenues (cents) Revenues (cents)
Salaries and related 24.4% 5.8 25.9% 5.7
costs
Aircraft fuel 9.4% 2.2 8.5% 1.8
Aircraft maintenance 9.2% 2.2 9.7% 2.1
and materials
Aircraft rentals and 18.3% 4.3 18.8% 4.0
landing fees
Traffic commissions and 15.6% 3.7 16.5% 3.5
related fees
Depreciation and 1.6% .4 1.4% .3
amortization
Other 10.7% 2.5 11.3% 2.4
Restructuring reversals (.2%) (.1) (.3%) (.1)
Total 89.0% 21.0 91.8% 19.7
Salaries and related expenses were $44.4 million in
1996, an increase of 9.2% as compared to $40.7 million for
1995. Total employees increased approximately 8.0% to 1,370
in 1996. In addition, a contractual rate increase of 4.5% for
flight attendants became effective in May 1996. Total block
hours increased 5.7% or 9,350 hours compared to 1995
resulting in a corresponding increase in flight payroll.
Profit sharing expense increased 80.4% or $1.6 million
reflecting the Company's higher level of profitability in
1996.
Aircraft fuel expense was $17.1 million in 1996, an
increase of 28.7% compared to $13.3 million in 1995. The
increase in 1996 fuel expense resulted primarily from a 20.5%
increase in the total cost per gallon due to increases in
aircraft fuel prices, the 4.3 cents per gallon fuel tax
imposed by the federal government in October 1995, and a 5.7%
increase in block hours. The average cost per gallon,
including into-plane fees, was 82.8 cents in 1996 and 68.7
cents in 1995. The price of fuel in the first quarter 1997
has moderated somewhat, however, there can be no assurance
that the trend of lower fuel prices will continue.
Aircraft maintenance and materials expense was
$16.8 million in 1996, an increase of 10.4% compared to $15.3
million in 1995. The increase in 1996 resulted primarily from
a 5.7% increase in block hours as well as an increase in the
average age of the fleet, expiration of warranty coverage on
certain aircraft and rate increases in contract maintenance
for engines.
The Company's maintenance accounting policy is a
combination of expensing events as incurred and accruals for
maintenance events. The Company accrues for current and
future maintenance events on an ongoing basis which it feels
will be sufficient to cover maintenance costs for aircraft.
Maintenance accruals are estimated on a cost per flight hour
basis for all aircraft including those under warranty.
Aircraft rental and landing fees were $33.3 million
in 1996, an increase of 13.1% compared to $29.5 million in
1995. The increased expense reflects two additional J-41
aircraft delivered in 1996 and the full year effect of
aircraft delivered in 1995.
Traffic commissions and related fees were $28.6
million in 1996, an increase of 10.1% compared to $25.9
million in 1995. The increased commission in 1996 reflects
the increased passenger revenue in 1996. Commission rates
fluctuate based on the mix of commissionable and non-
commissionable tickets, and have changed due to a cap on the
total amount of commission which can be claimed by travel
agents. Commission as a percentage of total passenger revenue
averaged 7.4% in 1996 and 8.0% in 1995. Related fees include
program fees to United and segment booking fees for
reservations.
Depreciation and amortization expense was $2.8
million in 1996, an increase of 27.1% compared to $2.2
million in 1995. The increase in 1996 results primarily from
the acquisition of additional rotable spare parts associated
with additional J-41 aircraft, improvements to aircraft,
leasehold improvements, and purchases of computer equipment.
There were no significant changes in amortization in either
1996 or 1995.
Other operating expenses were $19.5 million in
1996, an increase of 10.0% compared to $17.8 million in 1995.
The increase in other operating expenses during 1996 is
primarily attributed to increased glycol costs related to
severe winter weather during the first quarter of 1996,
increased legal fees related to union negotiations, and
increased pilot training costs.
The Company reversed excess restructuring reserves
of $0.4 million in 1996 and $0.5 million in 1995. The Company
established the reserves with a charge of $8.1 million in
1994. The reversals reflected remaining unused reserves for
pilot requalification, return conditions, spare parts
reconciliation, and miscellaneous professional fees. There
are no remaining reserves related to the restructuring.
Interest expense net of interest income was $0.6
million in 1996 and $1.7 million in 1995. The decreased
expense reflects reduced borrowings under the Company's
accounts receivable financing facility and the early
retirement of a $4.0 million convertible term note to JSX in
December 1995.
The Company recorded a provision for income taxes
of approximately $0.5 million for 1996 as compared to a
benefit of approximately $1.2 million in 1995. The benefit
recorded in 1995 reflects the adjustment for the deferred tax
asset of $1.5 million in the fourth quarter of 1995, net of
valuation allowance. The effective tax rate in 1996 of
approximately 2.3% is significantly less than the statutory
federal and state rates due principally to the full
utilization of the operating loss carryforwards and
elimination of the valuation allowance.
The Company has recorded a net deferred tax asset
of $3.1 million at December 31, 1996. The Company believes
that realization of the net deferred tax asset is more likely
than not because of profitable operations over the past two
years due largely to the success of the restructuring of its
aircraft fleet initiated in 1994; continued profitability in
the Company's operations; and the utilization of the existing
net operating losses.
The Company expects the effective tax rate in 1997
to approximate statutory federal and state rates. There are
no operating loss carryforwards available for 1997.
Fiscal Year 1995 vs. 1994
Operating Revenues
The Company's operating revenues decreased 1.2% to
$157.0 million in 1995 compared to $158.9 million in 1994.
The decrease resulted from an 11.3% decrease in RPMs
resulting from 7.9% fewer passengers carried. Yield per RPM
increased 11.1% to $.441 in 1995 versus $.397 in 1994,
partially offset by a 11.3% reduction in RPMs. Load factor
increased in 1995 by 3.4 load factor points caused by ASMs
decreasing by 17.5% more than offsetting the decrease in
RPMs.
Operating Expenses
1995 unit costs increased 4.8% to 19.8 cents versus
18.9 cents in 1994 as a result of a 17.5% decrease in ASMs
brought about by the 1994 restructuring plan which simplified
fleet types through the elimination of larger capacity
aircraft. The increased unit costs also resulted from
passenger and revenue related costs associated with the
higher yield and load factor, and the costs of profit sharing
in 1995.
A summary of operating expenses as a percent of
operating revenues, and operating cost per ASM for the years
ended December 31, 1995, and 1994 is as follows:
1995 1994
Percent Cost Percent Cost
of per of
Operating ASM Operating per ASM
Revenues (cents) Revenues (cents)
Salaries and related 25.9% 5.7 26.2% 4.7
costs
Aircraft fuel 8.5% 1.8 9.6% 1.7
Aircraft maintenance 9.7% 2.1 14.1% 2.5
and materials
Aircraft rentals and 18.8% 4.0 25.3% 4.5
landing fees
Traffic commissions and 16.5% 3.5 16.3% 2.9
related fees
Depreciation and 1.4% .3 1.5% .3
amortization
Other 11.3% 2.4 13.0% 2.3
Write-off of intangible (.3%) (.1) 8.9% 1.6
asset and Restructuring
charges (reversals)
Total 91.8% 19.7 114.9% 20.5
Salaries and related expenses were $40.7 million
for 1995, a decrease of 2.1% compared to $41.6 million for
1994. In 1995 salaries and related expenses were $0.9
million less than 1994 reflecting the reduction in flight
crews and ground personnel resulting from the Company's
restructuring in 1994. Offsetting this savings was profit
sharing expense of $2.0 million based on the Company's 1995
profit. There was no profit sharing in 1994.
Aircraft fuel expense was $13.3 million in 1995, a
decrease of 12.4% for 1995 compared to $15.2 million in 1994.
The average cost per gallon including into-plane fees, was
68.7 cents in 1995 and 67.0 cents in 1994. Fuel expense in
1995 decreased 12.4% from 1994 reflecting the reduced level
of operations in 1995 and the utilization of more fuel
efficient J-41's instead of EMB-120 and Dash-8 aircraft.
Aircraft maintenance and materials expense was
$15.3 million in 1995, a decrease of 31.7% compared to $22.3
million in 1994. The reduction of maintenance expense in 1995
of $7.0 million reflects the fleet simplification associated
with the Company's restructuring in 1994.
Aircraft rental and landing fees were $29.5 million
in 1995, a decrease of 26.6% compared to $40.1 million in
1994. The reduced 1995 expense resulted from the elimination
of the larger EMB-120 and Dash-8 aircraft. The reduction was
partially offset by increased rental expense related to the
1995 deliveries of nine J-41 aircraft.
Traffic commissions and related fees were $25.9
million in 1995. Traffic commissions and related fees in 1995
were relatively unchanged from 1994 primarily reflecting the
same level of revenue compared to 1994. Commission rates
fluctuate based on the mix of commissionable and non-
commissionable tickets, and have changed due to a cap on the
total amount of commission which can be claimed by travel
agents. Commission as a percentage of total passenger revenue
averaged 8.0% in 1995, and 7.9% in 1994. Related fees include
program fees to United and segment booking fees for
reservations.
Depreciation and amortization expense was $2.2
million in 1995, a decrease of 3.8% compared to $2.3 million
in 1994. The 1995 decrease reflects the elimination of spare
parts inventory related to the fleet simplification offset by
increases in spare parts for the delivery of new J-41
aircraft. There were no significant changes in amortization
in 1995.
Other operating expenses were $17.8 million in
1995, a decrease of 13.8% compared to $20.6 million in 1994.
The decrease in other operating expenses during 1995 is
primarily attributed to a reduction in facility rental
expense related to the Company's restructuring in 1994,
reduced glycol expense due to more normal winter weather, and
reduced hull insurance expense due to the fleet
simplification.
Amortization and write-off of intangible assets
were negligible in 1995. In 1994 the Company wrote off $6.0
million related to EMB-120 aircraft purchase options as part
of the restructuring plan.
Restructuring expense and reversals were a $0.5
million credit in 1995 and an expense of $8.1 million in
1994. The credit in 1995 reflected elimination of remaining
unused restructuring reserves for pilot requalification,
return conditions, spare parts reconciliation, and
miscellaneous professional fees. The restructuring charge of
$8.1 million in 1994 consisted primarily of reserves for EMB-
120 and Dash-8 return conditions, maintenance base closings,
and the elimination of the Florida operation.
Interest expense net of interest income was $1.7
million in 1995 and $2.2 million in 1994. Interest expense
was lower in 1995 compared to 1994 reflecting reduced
borrowings on the receivables facility as well as reduced
borrowings from JSX.
In the first quarter of 1995 the Company borrowed
$4.0 million under a convertible term loan agreement. On
December 29, 1995, the Company prepaid the note at a discount
which resulted in an extraordinary gain of $0.4 million.
The Company recorded a deferred tax asset, net of
valuation allowance, and a corresponding income tax benefit
of $1.5 million in the fourth quarter of 1995. Realization
of the deferred tax asset was dependent upon the Company
generating pretax income of at least $4.0 million in 1996.
Based on the operating results in 1994, management believed
that it was more likely than not that the Company would
achieve at least this pretax income level in 1996. The actual
pretax income for 1996 was $19.6 million.
The Company recorded a provision for income taxes,
before the income tax benefit of $1.5 million, of
approximately $0.3 million for 1995. The provision is
insignificant in relation to pretax income of approximately
$11.3 million due to utilization of net operating losses. The
net operating loss carryforward for 1995 was $14.7 million.
Outlook
This Outlook section and the Liquidity and Capital
Resources section below contain forward-looking statements.
The Company's actual results may differ significantly from
the results discussed in forward-looking statements. Factors
that could cause the Company's future results to differ
materially from the expectations described here include the
extent to which the Company's operation of CRJs is
coordinated with the Company's code-sharing relationship, the
response of the Company's competitors to the Company's
business strategy, market acceptance of the new service
(including jet service), routes and schedules offered by the
Company, the cost of fuel, the weather, and satisfaction of
regulatory requirements.
A central element of the Company's business
strategy is expansion of its aircraft fleet. The Company has
commitments to acquire twelve 29-seat J-41 aircraft during
the period March 1997 through mid-1999, and twelve 50-seat
CRJs from July 1997 through 1998. The introduction of these
aircraft, particularly the CRJs, will expand the Company's
business into new markets. In general, introduction of new
markets into the Company's route system results, at least in
the short-term, in operating expenses that may not be matched
by increases in operating revenues.
In order to operate the CRJs under the "United
Express" name, the Company must obtain United's consent under
the United Express Agreements. The Company has sought
United's consent, and is awaiting United's response regarding
incorporating the CRJs into its existing United Express
product. While the Company currently operates only under the
"United Express" name, the Company believes that it will be
able to operate CRJs successfully regardless of whether such
operation is under the United Express Agreements.
Nonetheless, the Company believes that its results of
operations could be adversely affected unless the CRJs are
operated under the United Express Agreements.
The Company must complete several training,
operational, and administrative requirements before
commencing CRJ service. The Company expects that it will be
able to satisfy such requirements during 1997. The Company
has not previously operated jet aircraft but will operate
these aircraft under the same FAA regulatory requirements as
it does with it's current fleet of aircraft. The Company
believes that the market will support the new routes and
schedules which the Company's expanded fleet will enable it
to implement. In addition, the Company expects that its
customers will find the new CRJs acceptable for relatively
longer flights, enhancing the Company's ability to compete in
a broader geographic market.
The Company will incur significant expenses in its
fleet expansion program. Under the Company's contracts to
acquire CRJs, the Company is required to make deposits with
the manufacturer totaling $15.0 million on or before April 1,
1997. The Company deposited $4.0 million on January 9, 1997,
and will execute a short term promissory note with the
manufacturer for the remaining $11.0 million at 8% annual
interest. The April 1, 1997 note will be payable in full
including accumulated interest, upon delivery of the first
aircraft in July 1997.
In addition, the CRJs and the additional J-41s will
significantly increase the Company's lease obligations. The
Company is exploring various third party lease financing
arrangements for the aircraft. However, the Company has
backup lease financing arrangements or sufficient financing
support with the manufacturer of both the CRJs and J-41s such
that the Company believes it will be able to acquire the
aircraft at competitive rates.
In 1997 the Company anticipates capital spending
of approximately $16.3 million, consisting of $9.8 million in
spare parts related to the acquisition of the CRJs, $3.0
million in additional rotable spare parts and engines for the
J-41s, $2.5 million for a state- of-the-art Aircraft
Communications and Satellite Navigation System ("ACASNS"),
and $1.0 million for other capital assets. The Company
anticipates that it will be able to arrange financing for the
spares through a combination of manufacturer and third party
financing arrangements on favorable terms although there is
no certainty that such financing will be available or in
place before the commencement of deliveries.
Liquidity and Capital Resources
The Company's balance sheet improved significantly
during 1996. Cash and cash equivalents as of December 31,
1996 were $21.5 million or an increase of $13.1 million over
1995. Working capital increased to $17.8 million as compared
to $4.6 million at December 31, 1995.
During 1996, cash provided by operating activities
was $20.7 million compared to $15.7 million in 1995. The
31.9% increase in annual cash flow from operating activities
primarily reflects the improvement in the Company's net
income for 1996 compared to 1995.
Accounts receivable increased by $1.4 million to
$16.0 million at December 31, 1996, an increase of 9.3%
compared to $14.6 million for 1995. The year over year
increase is attributed to increased passenger ticket
receivables resulting from higher passenger revenue in
December 1996 versus December 1995. Prepaid expenses and
other current assets increased by $0.8 million to $2.6
million at December 31, 1996, an increase of 45.3% compared
to $1.8 million for 1995. The increase results from increased
prepaid insurance, fuel, and deposits related to aircraft
financing. Current liabilities increased by $1.9 million to
$24.0 million at December 31, 1996, an increase of 8.6%
compared to $22.1 million at December 31, 1995. The increase
results from a larger current portion of long-term debt and
capital lease obligations as well as increased reserves for
maintenance events.
Cash used in investing activities was $2.2 million
for 1996 compared to $2.0 million for 1995. The use of cash
in 1996 related to the acquisition of rotable spare parts and
a spare engine to support the additional deliveries of J-41
aircraft. Cash used in investing activities in 1995 consisted
of the purchase of equipment for leasehold improvements to
aircraft pertaining to Traffic Collision Avoidance Systems,
and the acquisition of spare parts and a spare engine related
to the deliveries of J-41 aircraft.
Cash used in financing activities in 1996 was $5.4
million or a decrease of 28.9% compared to $7.6 million in
1995. During 1996 the Company made payments of $1.9 million
on long term debt and capital lease obligations, redeemed the
Series A Cumulative Convertible Preferred Stock for $4.2
million, including the 1995 accumulated dividend of $0.3
million, and received $0.7 million in proceeds from stock
options. In 1995 the Company received proceeds from long term
debt of $4.2 million primarily related to borrowings on a
convertible term loan in the first quarter of 1995. The
Company made payments on long term debt and capital lease
obligations of $5.5 million including the early retirement in
December 1995 of the convertible term loan. The Company also
paid $6.4 million in 1995 to close out the outstanding
balance at December 31, 1994, of an asset-based lending
agreement with a financial institution.
Other Financing
The Company has an asset-based lending agreement
with a financial institution that provides the Company with a
line of credit of up to $20.0 million. Borrowings under the
line of credit can provide the Company a source of working
capital until proceeds from ticket coupons are received. The
line is collateralized by all of the Company's receivables
and general intangibles and as of December 31, 1996, there
was no outstanding balance.
In December 1994, the Company completed a plan of
recapitalization with an aircraft supplier that included an
$11.0 million equity investment consisting of common stock
and Series A Cumulative Convertible Preferred Stock, creation
of a term loan facility in the amount of $4.0 million and a
revolving line of credit of $5.0 million.
In the first quarter of 1995 the Company borrowed
$4.0 million on the term loan facility. On December 29,
1995, the Company fully prepaid the loan at a discount and
recorded an extraordinary gain of $0.4 million. On March 29,
1996, the Company redeemed the Series A Cumulative
Convertible Preferred Stock in the amount of $3.8 million.
Dividends for the first quarter of 1996 were not paid due to
the redemption before quarter end in accordance with the
terms of the preferred stock agreement. The Company never
borrowed against the revolving line of credit facility
created during the December 1994 recapitalization and on June
12, 1996 the Company canceled the facility.
Aircraft
The Company has significant lease obligations on
aircraft which are classified as operating leases and not
reflected as liabilities on the Company's balance sheets.
(See Note 8 to the Consolidated Financial Statements.) The
remaining terms of the leases range from less than one year
to fourteen years. The Company's minimum rental payments in
1997 under all non-cancelable aircraft operating leases with
remaining terms of more than one year were approximately
$28.9 million as of December 31, 1996. The foregoing amount
does not include five J-41 aircraft and four CRJ aircraft
scheduled for delivery in 1997 as the financing arrangements
have not been concluded at this time.
As of February 23, 1997 the Company entered into an
agreement with AI(R) to acquire twelve new J-41 aircraft.
The agreement will allow the Company to take advantage of
favorable third party financing while allowing the
refinancing of existing J-41s which are currently financed
through the manufacturer. The Company believes that it will
be able to obtain third party financing on favorable terms
although there is no certainty that such financing will be
available or in place before the commencement of deliveries.
The delivery schedule provides for the Company to take
delivery of these aircraft beginning in the first quarter of
1997 and continuing through mid-1999.
On January 8, 1997, the Company entered into an
agreement with Bombardier, Inc. to purchase twelve Canadair
Regional Jets with options for thirty-six additional
aircraft. The delivery schedule provides for the Company to
take delivery of four aircraft in 1997 commencing in July.
The remaining eight aircraft will be delivered during 1998.
Under the terms of the agreement, the Company is required to
make deposits with the manufacturer totaling $15.0 million on
or before April 1, 1997. The Company deposited $4.0 million
on January 9, 1997 and will execute a short term promissory
note with the manufacturer for the remaining $11.0 million at
8% annual interest. The April 1, 1997 note will be payable
in full including accumulated interest, upon delivery of the
first aircraft in July 1997.
On December 30, 1994, the Company agreed to acquire
from British Aerospace twenty additional J-41 aircraft. Nine
aircraft were delivered as of December 31, 1995 and two
aircraft were delivered in the first quarter of 1996. The
remaining nine aircraft were converted to options to acquire
aircraft which the Company chose not to exercise.
In 1996, the Company refinanced the operating
leases on two J-41 aircraft that it took delivery of in the
first quarter of 1996 and two J-41 aircraft it had been
operating. The refinancing resulted in more competitive
lease rates compared to prior leases. The Company will
actively continue to seek competitive leasing arrangements to
replace its existing aircraft leases.
Capital Equipment and Debt Service
In 1997 the Company anticipates capital spending of
approximately $16.3 million consisting primarily of $9.8
million in spare parts related to the acquisition of regional
jets, $3.0 million in additional rotable spare parts and
engines for the J-41s, $2.5 million for ACASNS, and $1.0
million for other capital assets. The Company anticipates
that it will be able to arrange financing for the spares
through a combination of manufacturer and third party
financing arrangements on favorable terms, although there is
no certainty that such financing will be available or in
place before the commencement of deliveries.
Debt service for 1997 is estimated to be
approximately $3.5 million reflecting increased borrowings
related to the purchase of spare engines, spare parts and
insurance premium financing. The foregoing amount does not
include additional debt that may be required for the
financing of the CRJ spare parts and engines.
The Company believes that, in the absence of
unusual circumstances, its cash flow from operations,
availability of manufacturer and third party financing, and a
$20.0 million accounts receivable credit facility will be
sufficient to meet its working capital needs, capital
expenditures, and debt service requirements for the next
twelve months.
Inflation
Inflation has not had a material effect on the
Company's operations.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities (SFAS 125)". SFAS
125 provides accounting and reporting standards for transfers
of financial assets using a financial-components approach
which focuses on control. Under this approach, following a
transfer of financial assets, a company recognizes the
financial assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered and derecognizes liabilities when extinguished.
SFAS 125 is applicable to the Company's borrowings under its
line of credit collateralized by accounts receivable. The
Company evaluated the financing transaction using the
criteria set forth in SFAS 125 and concluded that it did not
transfer control of its accounts receivable to the financial
institution. Consequently, the Company believes that
adoption of SFAS 125, as of January 1, 1997, will not have a
material impact on its fiscal 1997 financial or operating
results.
On March 3, 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No, 128, "Earnings per Share (SFAS 128)". SFAS 128
provides a different method of calculating earnings per share
than is currently used in accordance with APB Opinion 15.
SFAS 128 provides for the calculation of Basic and Diluted
earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to
common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to existing
fully diluted earnings per share. Using the principles set
forth in SFAS 128, Basic earnings (loss) per share would have
been $(3.67), $1.55, and $2.27 for 1994, 1995 and 1996,
respectively.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial
Statement Schedule included in Item 14.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
The information required by this Part III (Items
10, 11, 12 and 13) is hereby incorporated by reference from
the Company's definitive proxy statement which is expected to
be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 not later than 120 days after the end of
the fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) 1. Financial Statements
The Financial Statements listed in the
accompanying index to financial statements are
filed as part of this Annual Report on Form 10-
K.
2. Financial Statement Schedules
The Financial Statement Schedules listed in
the accompanying index to financial statements
are filed as part of this Annual Report on
Form 10-K.
3. Exhibits
Exhibit
Number Description of Exhibit
3.1*** Restated Certificate of Incorporation of the
Company.
3.1(a)** Certificate of Correction to the Restated
Certificate of Incorporation.
3.2** Restated By-laws of the Company.
4.1* Specimen Common Stock Certificate.
4.2* Stockholders' Agreement, effective as of October
15, 1991, among the Company, the stockholders and
the holder of warrants of the Company named on the
signature pages thereto and a trust established
pursuant to the Atlantic Coast Airlines, Inc.
Employee Stock Ownership Plan, together with
Amendment and Second Amendment thereto dated as of
February 24, 1992 and May 1, 1992 respectively.
4.3* Registration Rights Agreement, dated as of
September 30, 1991, among the Company and the
stockholders named on the signature pages thereto
(the "Stockholders Registration Rights Agreement").
4.4* Form of amendment to the Stockholders Registration
Rights Agreement.
4.16*** Registration Rights Agreement, dated as of December
30, 1994, by and between JSX Capital Corporation
and Atlantic Coast Airlines, Inc.
10.1* Atlantic Coast Airlines, Inc. 1992 Stock Option
Plan.
10.2** Restated Atlantic Coast Airlines, Inc. Employee
Stock Ownership Plan, effective October 11, 1991,
as amended through December 31, 1996.
10.4** Restated Atlantic Coast Airlines 401(k) Plan, as
amended through February 3, 1997.
10.6#* United Express Agreement, dated October 1, 1991,
among United Airlines, Inc., Atlantic Coast
Airlines and the Company, together with Amendment
No. 1, dated as of April 1, 1993.
10.7#* Agreement to Lease British Aerospace Jetstream-41
Aircraft, dated December 23, 1992, between British
Aerospace, Inc. and Atlantic Coast Airlines.
10.12(b)**** Amendment and Restated Severance Agreement,
dated as of October 18, 1995 between the Company
and Kerry B. Skeen.
10.12(c)** First Amendment To Severance Agreement For
Kerry B. Skeen effective as of October 16, 1996.
10.12(h)** Form of Severance Agreement. The Company has
entered into substantially identical agreements
with Thomas J. Moore and with Michael S. Davis,
both dated as of January 1, 1997.
10.12(i)** Severance Agreement dated as of January 28,
1997, between the Company and James B. Glennon.
10.12(j)**Promissory Note in the amount of $75,000 issued to Paul H. Tate
to the Company dated February 19, 1997 and payable
September 30, 1997.
10.13(a)** Form of Indemnity Agreement. The Company has
entered into substantially identical agreements
with the individual members of its Board of
Directors.
10.20*** Stock Purchase Agreement, dated the 30th day of
December 1994, by and among JSX Capital
Corporation, Atlantic Coast Airlines, and Atlantic
Coast Airlines, Inc.
10.21*** Acquisition Agreement, dated as of December 30,
1994, by and among Jetstream Aircraft, Inc., JSX
Capital Corporation, and Atlantic Coast Airlines.
10.21(a)** Amendment Number One to Acquisition Agreement,
dated as of June 17, 1996, by and among Jetstream
Aircraft, Inc., JSX Capital Corporation, and
Atlantic Coast Airlines.
10.23** Loan and Security Agreement, dated as of October
12, 1995, between Atlantic Coast Airlines and
Shawmut Capital Corporation.
10.24**** Stock Incentive Plan of 1995.
10.25**** Form of Incentive Stock Option Agreement. The
Company enters into this agreement with employees
who have been granted incentive stock options
pursuant to the Stock Incentive Plans.
10.26**** Form of Non-Qualified Stock Option Agreement. The
Company enters into this agreement with employees
who have been granted non-qualified stock options
pursuant to the Stock Incentive Plans.
10.27**** Split Dollar Agreement, dated as of December 29,
1995, between the Company and Kerry B. Skeen.
10.27(a)** Form of Split Dollar Agreement. The Company
has entered into substantially identical agreements
with Thomas J. Moore and with Michael S. Davis,
both dated as of July 1, 1996.
10.28**** Split Dollar Agreement, dated as of December 29,
1995, between the Company and James B. Glennon.
10.29**** Agreement of Assignment of Life Insurance Death
Benefit As Collateral, dated as of December 29,
1995, between the Company and Kerry B. Skeen.
10.29(a)** Form of Agreement of Assignment of Life
Insurance Death Benefit As Collateral. The Company
has entered into substantially identical agreements
with Thomas J. Moore and with Michael S. Davis,
both dated as of July 1, 1996.
10.30**** Agreement of Assignment of Life Insurance Death
Benefit As Collateral, dated as of December 29,
1995, between the Company and James B. Glennon.
10.31** Summary of Senior Management Bonus Program. The
Company has adopted a plan in substantially the
form as outlined in this Exhibit for 1997.
10.32**** Summary of "Share the Success" Profit Sharing Plan.
The Company has adopted a plan in substantially this
form for 1997 and 1996.
10.40#** Purchase Agreement between Bombardier Inc. and
Atlantic Coast Airlines Relating to the Purchase of
Canadair Regional Jet Aircraft dated January 8,
1997.
10.50#** Purchase Agreement for Twelve Jetstream 4100
Aircraft between Atlantic Coast Airlines and Aero
International (Regional) as agent for and on behalf
of British Aerospace (Operations) Limited dated
February 23, 1997.
10.60** Form of Lease Agreement between Atlantic Coast
Airlines and Finova Capital Corporation. The Company
has entered into four substantially identical
agreements during 1996 for four J-41 aircraft.
11.1** Computation of Per Share Earnings.
21.1* Subsidiaries of the Company.
23.1** Consent of BDO Seidman.
# Portions of this document have been omitted pursuant
to a request for confidential treatment.
* Filed as an Exhibit to Form S-1, Registration No. 33-
62206, effective July 20, 1993, incorporated herein
by reference.
** To be filed as an Amendment to this Annual Report on
Form 10-K for the fiscal year ended December 31,
1996.
*** Filed as an Exhibit to the Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, incorporated
herein by reference.
**** Filed as an Exhibit to the Annual report on Form 10-K
for the fiscal year ended December 31, 1995, incorporated
herein by reference.
(b) Reports on Form 8-K. The Company did not file any
current reports on Form 8-K during the fourth quarter
of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 25, 1997.
ATLANTIC COAST AIRLINES, INC.
By: /S/ C. Edward Acker
C. Edward Acker
Chairman of the Board
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated on March 25, 1997.
Name Title
/S/ C. Edward Acker
C. Edward Acker Chairman of the Board of
Directors
/S/ Kerry B. Skeen President
Kerry B. Skeen Chief Executive Officer
(principal executive officer)
/S/ Paul H. Tate Senior Vice President
Paul H. Tate Chief Financial Officer
(principal financial and
accounting officer)
/S/ John M. Sullivan
/S/ Gordon A. Cain
John M. Sullivan Gordon A. Cain
Director Director
/S/ Robert E. Buchanan /S/ James J. Kerley
Robert E. Buchanan James J. Kerley
Director Director
/S/ Joseph W. Elsbury /S/ James C. Miller
Joseph W. Elsbury James C. Miller
Director Director
ATLANTIC COAST AIRLINES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(Item 14(a))
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants F-1
Consolidated:
Balance Sheets as of December 31, 1996 and 1995 F-2
Statements of Operations for the years ended December 31, 1996,
1995 and 1994 F-3
Statements of Stockholders' Equity for the years ended December
31, 1996, 1995 and 1994 F-4
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 F-5
Notes to Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE:
Report of Independent Certified Public Accountants on Financial
Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-5
All other financial statement schedules are omitted as the
required information is presented in the financial statements
or the notes thereto or is not necessary.
(In thousands, except for share data and par values)
December 31, 1996 1995
Assets
Current:
Cash and cash equivalents $21,470 $ 8,396
Accounts receivable, net 15,961 14,607
Expendable parts and fuel inventory, net 1,759 1,850
Prepaid expenses and other current 2,554 1,758
assets
Total current assets 41,744 26,611
Property and equipment at cost, net of
accumulated depreciation and amortization 16,157 15,513
Preoperating costs, net of accumulated 225 462
amortization
Intangible assets, net of accumulated 2,882 2,864
amortization
Deferred tax asset 3,140 1,500
Other assets 610 549
Total assets $64,758 $ 47,499
Liabilities and Stockholders' Equity
Current:
Accounts payable $3,770 $ 3,532
Current portion of long-term debt 1,319 1,214
Current portion of capital lease 1,497 1,192
obligations
Accrued liabilities 17,376 16,121
Total current liabilities 23,962 22,059
Long-term debt, less current portion 2,407 3,260
Capital lease obligations, less current 3,266 3,794
portion
Deferred credits 486 -
Total liabilities 30,121 29,113
Commitments and contingencies
Redeemable Series A Cumulative Convertible
Preferred stock,
$.02 par value (liquidation preference of - 3,825
$3,825), authorized 8,000 shares, 3,825
shares issued and outstanding
Stockholders' equity:
Preferred Stock, $.02 par value per share;
shares authorized - -
4,992,000; no shares issued or
outstanding
Common stock: $.02 par value per share;
shares authorized 15,000,000; shares issued 170 167
8,498,910 in 1996 and 8,356,411 in 1995
Class A common stock: nonvoting; par value;
$.02 stated value per share; shares - -
authorized 6,000,000; no shares issued or
outstanding
Additional paid-in capital 37,689 36,774
Less: Common stock in treasury, at cost, (125) (125)
12,500 shares
Accumulated deficit (3,097) (22,255)
Total Stockholders' Equity 34,637 14,561
Total Liabilities and Stockholders' $64,758 $ 47,499
Equity
See accompanying notes to consolidated financial statements.
(In thousands, except for earnings per share data)
Year ended December 31,
1996 1995 1994
Operating revenues:
Passenger 179,370 153,918 156,047
Other 3,114 3,050 2,872
Total operating revenues 182,484 156,968 158,919
Operating expenses:
Salaries and related costs 44,438 40,702 41,590
Aircraft fuel 17,124 13,303 15,189
Aircraft maintenance and materials 16,841 15,252 22,345
Aircraft rentals and landing fees 33,325 29,454 40,135
Traffic commissions and related fees 28,550 25,938 25,913
Depreciation and amortization 2,846 2,240 2,329
Other 19,523 17,755 20,597
Write-off of intangible asset - - 6,000
Restructuring charges (reversals) (426) (521) 8,099
Total operating expenses 162,221 144,123 182,197
Operating income (loss) 20,263 12,845 (23,278)
Other income (expense):
Interest expense (1,013) (1,802) (2,153)
Interest income 341 66 -
Other income 17 181 295
Total other expense (655) (1,555) (1,858)
Income (loss) before
income tax provision (benefit) 19,608 11,290 (25,136)
and extraordinary item
Income tax provision (benefit) 450 (1,212) -
Income (loss) before 19,158 12,502 (25,136)
extraordinary item
Extraordinary Item - 400 -
Net income (loss) $19,158 $ 12,902 $(25,136)
Income (loss) per share:
Earnings (loss) per common and common
equivalent share:
Primary:
Earnings (loss) before extraordinary
item $2.14 $ 1.39 $(3.67)
Extraordinary item - 0.05 -
Net earnings (loss) $2.14 $ 1.44 $(3.67)
Fully diluted:
Earnings (loss) before extraordinary item $2.14 $1.33 $(3.67)
Extraordinary item - 0.04 -
Net earnings (loss) $2.14 1.37 $(3.67)
Weighted average common and common
equivalent shares: 8,963 8,736 6,858
Primary 8,963 9,390 6,858
Fully diluted
See accompanying notes to consolidated financial statements.
(thousands, except
for share data) Common Stock Additi Treasury Stock
------------- onal -------------- Receiva Accumulat
------------- paid--------------- ble ed
---------- in ------- from Deficit
Shares ESOP
capita Amount
Shares l
Amount
Balance, December 6,842, $ $ (12,50 $ $ $
31, 1993 390 137 29,769 0) (125) (500) (9,686)
Exercise of common 22,080 1 46 - - - -
stock options
Sale of common stock 1,460, 28 6,888 - - - -
000
Reduction of ESOP - - - - - 500 -
receivable
Net Loss - - - - - - (25,136)
Balance, December 8,324, 166 36,703 (12,50 (125) - (34,822)
31, 1994 470 0)
Exercise of common 31,941 1 71 - - - -
stock options
Preferred stock - - - - - - (335)
dividends declared
Net Income - - - - - - 12,902
Balance, December 8,356, 167 36,774 (12,50 (125) (22,255)
31, 1995 411 0) -
Exercise of common 142,49 3 351 - - - -
stock options 9
Tax benefit of stock - - 564 - - - -
option exercise
Net Income - - - - - - 19,158
Balance December 31, 8,498, $ $ (12,50 $ $ $
1996 910 170 37,689 0) (125) - (3,097)
See accompanying notes to consolidated financial statements.
(In thousands)
Year ended December 31, 1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ 19,158 $ 12,902 $(25,136)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Extraordinary gain - (400) -
Depreciation 2,434 1,815 1,704
Amortization of intangibles and 412 425 625
preoperating costs
Provision for uncollectible 387 229 225
accounts
Provision for inventory 50 120 -
obsolescence
Amortization of deferred credits (27) - (20)
Increase in deferred tax asset (1,640) (1,500) -
Net loss (gain) on disposal of 1 (7) 1,100
fixed assets
Amortization of debt discount and 46 7 -
finance costs
Write-off of intangible assets - - 6,000
(Gain) on disposal of slots - (177) -
Write-off of preoperating costs - - 1,041
Write-off of deferred - - (346)
credits
Changes in operating assets and
liabilities:
Accounts receivable (1,741) (1,169) (576)
Expendable parts and 41 686 (80)
fuel inventory
Prepaid expenses and (796) 2,814 (292)
other current assets
Preoperating costs - - (245)
Other assets - 62 -
Accounts payable 238 (1,393) (2,585)
Accrued liabilities 1,590 1,259 2,853
Increase in deferred 513 - -
credits
Net cash provided by 20,666 15,673 (15,732)
(used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment (2,128) (4,260) (1,493)
Proceeds from sales of fixed assets - 1,916 4,073
Proceeds from sale of intangible - 375 786
assets
Decrease (increase) in deposits (61) - 1,821
Net cash (used in) (2,189) (1,969) 5,187
provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term 486 4,210 -
debt
Payments of long-term debt (1,234) (4,769) (1,329)
Payments of capital lease (1,174) (689) (442)
obligations
Net (decrease) increase in lines of - (6,356) 10,709
credit
Increase in intangible assets (239) - -
Deferred financing costs - (66) -
Payment of convertible preferred (335) - -
stock dividend
Redeem convertible preferred stock (3,825) - -
Net proceeds from sale of common - - 788
and preferred stock
Proceeds from exercise of stock 918 72 -
options
Decrease in receivable from - - 500
Employee Stock Option Plan
Net cash (used in) (5,403) (7,598) 10,226
provided by financing activities
Net increase (decrease) in cash and 13,074 6,106 (319)
cash equivalents
Cash and cash equivalents, beginning 8,396 2,290 2,609
of year
Cash and cash equivalents, end of year $ 21,470 $ 8,396 $ 2,290
See accompanying notes to consolidated financial statements.
1. Summary of
Accounting (a)Basis of Presentation
Policies
The consolidated financial statements included
herein have been prepared by Atlantic Coast
Airlines, Inc. ("ACAI") and its wholly-owned
subsidiary, Atlantic Coast Airlines ("ACA"),
(together, the "Company"). All significant
intercompany accounts and transactions have been
eliminated in consolidation. The Company operates
predominantly in the air transportation industry
providing scheduled service for passengers to
thirty-nine destinations in seventeen eastern
states of the United States.
(b)Cash and Cash Equivalents
The Company considers investments with an
original maturity of three months or less when
purchased to be cash equivalents.
(c)Airline Revenues
Passenger fares and cargo revenues are recorded
as operating revenues at the time transportation
is provided. The value of unused passenger
tickets sold by the Company is included in
current liabilities. Accounts receivable are
stated net of allowances for uncollectible
accounts of approximately $550,000 and $287,000
at December 31, 1995 and 1996, respectively.
The Company participates in United Airlines,
Inc.'s ("United") Mileage Plus frequent flyer
program. The Company does not accrue for
incremental costs for mileage accumulation
relating to this program, since the impact is
immaterial.
(d)Concentrations of Credit Risk
The Company provides commercial air
transportation in the eastern United States.
Substantially all of the Company's passenger
tickets are sold by other air carriers. The
Company has a significant concentration of its
accounts receivable with other air carriers with
no collateral. At December 31, 1995 and 1996,
accounts receivable from air carriers totaled
approximately $13,036,000 and $14,306,000,
respectively. Such accounts receivable are
assigned to a financial institution in connection
with the Company's line of credit arrangement
(see Note 6). Of the total amount, approximately
$8,983,000 and $11,044,077, at December 31, 1995
and 1996, respectively, were due from United.
Accounts receivable losses have been
insignificant.
(e)Risks and Uncertainties
The airline industry is highly competitive and
volatile. The Company competes primarily with
other air carriers and, particularly with
respect to its shorter flights, with ground
transportation. Airlines primarily compete in
areas of pricing, scheduling and type of
equipment. The Company's operations are
primarily dependent upon business-related travel
and are not subject to wide seasonal
fluctuation. However, some seasonal decline does
occur during portions of the winter months due
to lesser demand. The ability of the Company to
compete with ground transportation and other air
carriers depends upon public acceptance of its
aircraft and the provision of convenient,
frequent and reliable service to its markets at
reasonable rates.
The Company entered into a code-sharing
agreement with United, which expires on March
31, 1998. The agreement allows the Company to
operate under United's colors, utilize the
"United Express" name and identify its flights
using United's designator code. The Company
believes that its relationship with United
substantially enhances its ability to compete
for passengers. The loss of the Company's
affiliation with United could have a material
adverse effect on the Company's business.
The Company's pilots are represented by the
Airline Pilots Association ("ALPA"), its flight
attendants by the Association of Flight
Attendants ("AFA"), and its mechanics by the
Aircraft Mechanics Fraternal Association
("AMFA").
The ALPA collective bargaining agreement was
amended on February 26, 1997. The agreement is
for three years and is amendable on February 28,
2000. The new contract modifies work rules to
allow more flexibility, introduces regional jet
pay rates, and transfers pilots into the
Company's employee benefit plans. The Company
believes that the incremental cost as a result
of the amendments to the contract will not have
any material effect over the life of the
agreement.
On March 11, 1994, AMFA was certified by the
National Mediation Board (the "NMB") as the
collective bargaining representative elected by
mechanics and related employees of the Company.
As of March 1, 1997, AMFA represented 120 of the
Company's employees. The Company and AMFA have
been attempting to negotiate an initial contract
under federal mediation since December 1994, but
have so far failed to reach agreement. The NMB
has indicated that it is in favor of continuing
the negotiations, and the Company anticipates
participating in further negotiations.
If, at some point, the NMB should decide that
the parties were deadlocked, then the NMB could
declare an impasse along with a thirty day
cooling off period. At the conclusion of that
period if an agreement had not been reached,
AMFA would have the authority to use self help,
up to and including the right to strike. The
Company and AMFA are also engaged in litigation,
which is more fully described in Item 3, "Legal
Proceedings," below. If that litigation were
resolved in AMFA's favor, AMFA would be in a
position to use self help, even if the NMB does
not declare an impasse.
The Company's contract with the AFA will become
amendable on April 30, 1997. The Company
expects to continue operating under the terms of
the agreement until new terms are negotiated.
The Company believes that the wage rates and
benefits for other employee groups are
comparable to similar groups at other regional
airlines. The Company is unaware of significant
organizing activities by labor unions among
other non-union employees at this time.
(f)Use of Estimates
The preparation of financial statements in
accordance with generally accepted accounting
principals requires management to make certain
estimates and assumptions regarding valuation of
assets, recognition of liabilities for costs such
as aircraft maintenance, differences in timing of
air traffic billings from United and other
airlines and disclosure of contingent assets and
liabilities at the date of the financial
statements. Actual results could differ from
those estimates.
(g)Expendable Parts
Expendable parts and supplies are stated at the
lower of average cost or market, less an
allowance for obsolescence. Expendable parts and
supplies are charged to expense as they are used.
(h)Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed on the straight-line
method over the estimated useful lives of the
related assets which range from five to fifteen
years. Amortization of capital leases is included
in depreciation expense.
(i)Preoperating Costs
Preoperating costs represent the cost of
integrating new types of aircraft. Such costs,
which consist primarily of flight crew training,
are deferred and amortized over a period of four
years on a straight-line basis.
(j)Intangible Assets
Goodwill, representing the excess of cost above
the fair value of net assets acquired in the
acquisition of ACA, is being amortized by the
straight-line method over twenty years. The
primary financial indicator used by the Company
to assess the recoverability of its goodwill is
undiscounted future cash flows from operations.
The amount of impairment, if any, is measured
based on projected future cash flows using a
discount rate reflecting the Company's average
cost of funds. Slots are being amortized by the
straight-line method over twenty years.
(k)Maintenance
The Company's maintenance accounting policy is a
combination of expensing events as incurred and
accruals for maintenance events. The Company
accrues for current and future maintenance events
on an ongoing basis which it feels will be
sufficient to cover maintenance costs for
aircraft. Maintenance accruals are estimated on
a cost per flight hour basis for all aircraft
including those under warranty.
(l)Income Taxes
The Company accounts for deferred income taxes
using the asset and liability method. Under the
asset and liability method, deferred tax assets
and liabilities are recognized for the future tax
consequences attributable to differences between
the financial statement carrying amounts for
existing assets and liabilities and respective
tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to
apply to taxable income in future years in which
those temporary differences are expected to be
recovered or settled.
(m)Stock options
The Company accounts for its fixed-price stock-
based compensation plans using the principles set
forth in APB Opinion 25. Under these principles,
the Company records no charge to expense at the
grant date because it grants stock options at an
exercise price equal to the current market price
and the measurement date is the grant date.
(n)Earnings per Share
Primary earnings per share is computed by
dividing income, after deducting preferred
dividend requirements, by the weighted average
number of common shares outstanding and common
stock equivalents. For both primary and fully
diluted earnings per share, common stock
equivalents consist of shares subject to stock
options computed using the treasury stock method.
For the calculation of fully diluted earnings per
share in 1995, the outstanding convertible
preferred stock is considered in the weighted
average number of common shares when its effect
is dilutive.
Common equivalent shares consisting of unissued
shares under options and redeemable convertible
preferred stock have been excluded from the
computation for 1994 because their effect is
antidilutive.
Primary earnings per share reflect the dilution
of outstanding stock options as if the options
were exercised at the beginning of the period or
the issuance date, whichever is later, and as if
the funds obtained thereby were used to purchase
common stock at the average market price during
the period. Fully diluted earnings per share
reflect the assumed exercise of outstanding
stock options as if the funds obtained thereby
were used to purchase common stock at the ending
market price in order to reflect the maximum
potential dilution. For the years ended December
31, 1995 and 1996, all of the Company's
securities were dilutive. Common and common
equivalent shares outstanding for fully diluted
earnings per share also include the weighted
average effect of the convertible preferred
stock. The effect on outstanding common shares
for the convertible debt was not considered due
to the repayment during 1995.
(o)Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment
of Liabilities (SFAS 125)". SFAS 125 provides
accounting and reporting standards for transfers
of financial assets using a financial-components
approach which focuses on control. Under this
approach, after a transfer of financial assets,
a company recognizes the financial assets it
controls and the liabilities it has incurred,
derecognizes financial assets when control has
been surrendered and derecognizes liabilities
when extinguished. SFAS 125 is applicable to
the Company's borrowings under its line of
credit collateralized by accounts receivable.
The Company evaluated the financing transaction
using the criteria set forth in SFAS 125 and
concluded that it did not transfer control of
its accounts receivable to the financial
institution. Consequently, the Company believes
that adoption of SFAS 125, as of January 1,
1997, will not have a material impact on its
fiscal 1997 financial or operating results.
On March 3, 1997 the Financial Accounting
Standards Board issued Statement of Financial
Accounting Standards No, 128, "Earnings per
Share (SFAS 128)". SFAS 128 provides a
different method of calculating earnings per
share than is currently used in accordance with
APB Opinion 15. SFAS 128 provides for the
calculation of Basic and Diluted earnings per
share. Basic earnings per share includes no
dilution and is computed by dividing income
available to common shareholders by the
weighted average number of common shares
outstanding for the period. Diluted earnings
per share reflects the potential dilution of
securities that could share in the earnings of
an entity, similar to existing fully diluted
earnings per share. Using the principles set
forth in SFAS 128, Basic earnings (loss) per
share would have been $(3.67), $1.55, and $2.27
for 1994, 1995 and 1996, respectively.
(p)Reclassifications
Certain amounts as previously reported have been
reclassified to conform to the current year
presentation.
2. Prepaid Prepaid expenses and other current assets consist of
Expenses the following:
and Other
Current (in thousands)
Assets December 31, 1996 1995
Prepaid rent $ 62 $ -
Prepaid fuel 237 33
Prepaid insurance 1,448 1,137
Deposits, primarily for aircraft 726 496
Prepaid other 81 92
$ 2,554 $1,758
3. Property Property and equipment consist of
and the following:
Equipment
(in thousands)
December 31,
1996 1995
Improvements to aircraft 2,350 2,210
Flight equipment, primarily 14,014 11,978
rotable spare parts
Maintenance and ground equipment 3,380 3,267
Computer hardware and software 1,464 1,178
Furniture and fixtures 296 272
Leasehold improvements 619 465
22,123 19,370
Less: Accumulated depreciation 5,966 3,857
and amortization
$16,157 $15,513
4. Intangible Intangible assets consist of
Assets the following:
(in thousands)
December 31, 1996 1995
Goodwill $ 3,173 $ 3,172
Slots 350 350
Deferred financing costs 270 77
3,793 3,599
Less: Accumulated 911 735
amortization
$ 2,882 $ 2,864
On December 1, 1995, the Company transferred its
rights with respect to five of the Company's eighteen
landing slots at Westchester County Airport (White
Plains, NY) to United. In accordance with the
agreement, the Company received cash and certain slot
leases at LaGuardia airport from United. The Company
recognized a gain of approximately $177,000 from the
sale of the five slots, which is reflected as other
income in the accompanying statement of operations
for the year ended December 31, 1995.
5. Accrued Accrued liabilities consist of
the following:
Liabilities
(in thousands)
December 31,
1996 1995
Accrued payroll and employee $ 4,929 $ 4,554
benefits
Air traffic liability 2,703 2,690
Interest 13 99
Aircraft rents 564 583
Reservations and handling 2,454 2,155
Engine and airframe overhaul 3,311 2,242
costs
Fuel 1,196 831
Other 2,206 2,967
$ 17,376 $ 16,121
6. Debt On November 1, 1995, the Company entered into a line
of credit agreement with a financial institution
which, based on a specified percentage of outstanding
interline receivables (financing base), provides for
borrowings of up to $20 million. Interest is payable
monthly at a rate of prime (8.25% at December 31,
1996) plus 1.25%. Under the terms of the line of
credit agreement, at December 31, 1996, the Company's
borrowing limit was approximately $8.6 million. There
was no balance outstanding under the line of credit
at December 31, 1995, or December 31, 1996. The line
of credit is collateralized by interline receivables
and general intangibles, and will expire on November
1, 1998, or upon termination of the United Express
marketing agreement whichever is sooner.
Through October 31, 1995, the Company had a line of
credit arrangement with a financial institution
which, based on a specified percentage of outstanding
interline receivables (financing base), provided for
borrowings of up to $17 million. Interest was payable
monthly at a rate of prime (8.5% at December 31, 1994)
plus 2.0%. The weighted average interest rate for the
year ended December 31, 1994 was 9.13%. At December
31, 1994, the Company's available borrowing was
approximately $3,187,000 and the outstanding balance
was approximately $6,357,000. The line of credit was
collateralized by interline receivables, unprocessed
tickets, inventories and equipment.
Long-term debt consists of the following:
(in thousands)
December 31, 1996 1995
Note payable to institutional lender, due
October 1, 2000, principal and interest
payable in monthly installments of $776 $934
$20,369 with interest at 10%,
collateralized by engines
Note payable to airport authority, due
April 1, 2001, principal payable monthly
with interest at 6.5% through March 31, 760 907
1995 and prime plus 1.5% thereafter
through maturity, collateralized by
expendable parts inventory
Note payable to institutional lender, due
May 1, 1999, principal and interest
payable in monthly installments of 520 695
$20,734 with interest at 12%,
collateralized by aircraft engines
Note payable to institutional lender, due
October 1, 1998, principal payable
monthly with interest at 6.27%, 466 -
unsecured
Note payable to institutional lender, due
December 31, 1999, principal and
interest payable in monthly installments 448 574
of $14,026 with interest at 8%,
collateralized by spare parts
Note payable to other airline, due March
31, 1998, principal payable in quarterly
installments of $38,400 with interest at 192 346
9%, collateralized by ground support
equipment
Note payable to institutional lender, due
May 1, 1999, principal and interest
payable in monthly installments of 253 339
$10,112 with interest at 12%,
collateralized by spare parts
Note payable to institutional lender for
two de-icing trucks, due March 1, 1998,
principal and interest payable in 128 225
monthly installments of $9,469 with
interest at 9%, collateralized by the
trucks
Note payable to institutional lender, due
October 1, 2000, principal and interest
payable in monthly installments of 177 215
$4,731 with interest at 10%,
collateralized by spare parts
Note payable to institutional lender, due
March 12, 1996, principal and interest
payable in monthly installments of - 42
$14,115 with interest at 8.5%,
collateralized by spare parts
Other 6 198
Total 3,726 4,474
Less: Current Portion 1,319 1,214
$2,407 $3,260
On December 30, 1994, the Company entered into a $20
million financing agreement with JSX Capital
Corporation ("JSX"), an affiliate of British
Aerospace, Inc. ("BAI"). This arrangement included
the conversion of an outstanding loan on a revolving
credit facility of $10.0 million to equity, an
additional $1.0 million cash equity investment,
creation of a term loan facility in the amount of
$4.0 million, issuance of redeemable convertible
preferred stock of approximately $3.8 million, and a
new revolving line of credit facility of $5.0
million.
The $4.0 million convertible term loan was due
October 31, 1999, with interest at prime plus 2%,
payable monthly, except that through June 30, 1995,
interest was deferrable and could be added to the
principal balance, at the Company's option. The
principal repayment consisted of 12 equal payments of
principal (plus the pro rata portion of any unpaid
interest) payable on April 30, July 31, and October
31 of the years 1996 through 1999. Any principal or
interest unpaid as of October 31, 1999, could, at the
option of JSX, be converted into common stock at
$7.00 per share at any time thereafter until paid.
The term loan was collateralized by the Company's
fixed assets and accounts receivable. During 1995,
the Company prepaid the balance in full at a discount
which resulted in an extraordinary gain of $400,000.
A total of 3,825 shares of Series A Redeemable Convertible
Preferred Stock at $1,000 per share with liquidation
preference of full face amount plus accrued and
unpaid dividends was issued, resulting in total
proceeds of $3,825,000. The shares were to be
redeemed by the Company at the end of 7 years. The
shares may be redeemed earlier at the option of the
Company. The Company redeemed, at par, the Series
A Redeemable, Convertible, Preferred Stock on March 29,
1996.
The Company did not borrow against the $5.0 million
revolving credit facility during 1995 . On July 1,
1995, the maximum amount of the revolving credit
facility was reduced to $2.5 million as specified in
the original agreement. The Company never borrowed
against the revolving credit facility and the Company
terminated the facility in June 1996.
During 1994, the Company entered into a revolving
line of credit arrangement with JSX which allowed it
to borrow a maximum of $10,000,000. Interest was
payable monthly at rates ranging from prime plus 3%
to prime plus 5% depending on the level of
borrowings. This revolving line of credit
arrangement was repaid by the Company issuing common
and preferred stock in connection with the financing
arrangement entered into on December 30, 1994.
As of December 31, 1996, the portions of long-term
debt due in the five subsequent years are as follows:
(in thousands)
1997 $ 1,319
1998 1,161
1999 753
2000 427
2001 66
$ 3,726
At December 31, 1996, the Company met all covenants
associated with its debt and marketing agreements. In
October 1996, the Company entered into an agreement
to purchase the ACASNS Systems for $2.5 million to be
financed by the supplier subsequent to year-end. The
payments will be made in thirty-one installments on
each installation for all aircraft in the Company's
fleet.
7. Obligations The Company leases certain equipment for
Under noncancellable terms of more than one year. Interest
Capital rates for these leases range from 8.0% to 19.45%. The
Leases net book value of the equipment under capital leases
at December 31, 1995, and 1996 is $5,190,182, and
$5,187,298 respectively. The leases were capitalized
at the present value of the lease payments.
At December 31, 1996, the future minimum payments, by
year and in the aggregate, together with the present
value of the net minimum lease payments, are as
follows:
(in thousands)
Year Ending December 31,
1997 $ 1,762
1998 1,649
1999 1,541
2000 412
2001 94
Future minimum lease payments 5,458
Amount representing interest 695
Present value of minimum lease 4,763
payments
Less: Current maturities 1,497
$ 3,266
8. Operating The Company leases its principal administrative and
Leases flight facilities under operating leases expiring in
2004 with no options for renewal. Future minimum
lease payments will average approximately $400,000
per year for a total of $2,800,000 through the end of
the lease.
The Company's lease agreements generally provide that
the Company pay taxes, maintenance, insurance and
other operating expenses applicable to leased assets.
Operating lease expense was $40,312,627;
$30,498,699; and $33,789,204 for the years ended
December 31, 1994, 1995 and 1996, respectively.
Future minimum lease payments under noncancellable
aircraft operating leases at December 31, 1996 are as
follows:
(in thousands)
Year ending December 31,
1997 $ 28,924
1998 28,738
1999 28,738
2000 28,738
2001 28,738
2002 - 2006 122,814
2007 - 2011 60,452
Total minimum lease $ 327,142
payments
On February 23, 1997, the Company entered into an
agreement with AI(R) to acquire twelve new J-41
aircraft. Delivery of the twelve aircraft began in
March 1997 and will continue through mid 1999 with
five aircraft scheduled for delivery in 1997.
On January 28, 1997, the Company announced an
agreement with Bombardier, Inc. to purchase twelve
Canadair Regional Jets with options for thirty-six
additional aircraft. The delivery schedule provides
for the Company to take delivery of four aircraft in
1997 commencing in July. The remaining eight
aircraft will be delivered during 1998. Under the
terms of the agreement, the Company is required to
make deposits with the manufacturer totaling $15.0
million on or before April 1, 1997. The Company
deposited $4.0 million on January 9, 1997, and will
execute a short term promissory note with the
manufacturer for the remaining $11.0 million at 8%
annual interest. The note on April 1, 1997 will be
payable in full including accumulated interest, upon
delivery of the first aircraft in July 1997.
9. Stockholders' Stock Option Plans
Equity
The Company has two nonqualified stock option
plans which provide for the issuance of options to
purchase common stock of the Company to employees
and directors of the Company. Under the plans,
options are granted by the compensation committee
of the board of directors and become exercisable
over a three year period, commencing one year
after the date of the grant.
The Company has reserved 1,500,000 shares of
common stock for issuance upon the exercise of
options granted under the plan. The purchase price
of the stock is 100% of its fair market value at
the date of grant.
Stock option transactions were as follows:
Options outstanding, December 31,1993 709,105
Granted (at $2.875 to $8.25 per share) 69,000
Exercised (at $2.08 to $2.50 per share) (22,080)
Canceled (70,170)
Expired (at $2.08 to $2.50 per share) (28,333)
Options outstanding, December 31, 1994 657,522
Granted (at $2.50 to $8.875 per share) 184,667
Exercised (at $2.08 to $9.75) (31,941)
Canceled (77,336)
Options outstanding, December 31,1995 732,912
Granted (at $6.375 to $16.125 per share) 397,500
Exercised (at $9.375 to $17.125) (142,499)
Canceled (29,501)
Options outstanding, December 31,1996 958,412
Exercisable at December 31, 1996 479,779
Available for grant at December 31,1996 324,757
The exercise price of stock options at December
31, 1996, ranged from $2.08 to $16.125 per share
with a weighted average exercise price and
remaining contractual life of $10.25 and 7.5
years, respectively.
The estimated per share weighted average fair
value of stock options granted during 1995 and
1996 was $4.75 and $10.50, respectively, on the
date of grant. A risk-free interest rate of 5.80%
and 5.25% for 1995 and 1996, and a 135% and 240%
volatility rate for 1995 and 1996, respectively,
with an expected life of ten years for both 1995
and 1996, was assumed in estimating the fair
value.
The following summarizes the pro forma effects
assuming compensation for such awards had been
recorded based upon the estimated fair value (in
thousands, except per share data):
1996 1995
As Pro As Pro
Reported Forma Reported Forma
Net Income $19,158 $15,223 $12,902 $12,146
Primary
earnings
per share $2.14 $1.70 $1.44 $1.39
Fully diluted
earnings per $2.14 $1.70 $1.37 $1.29
share
Preferred Stock
The Board of Directors of the Company is authorized
to provide for the issuance by the Company of
preferred stock in one or more series and to fix
the rights, preferences, privileges,
qualifications, limitations and restrictions
thereof, including, without limitation, dividend
rights, dividend rates, conversion rights, voting
rights, terms of redemption or repurchase,
redemption or repurchase prices, limitations or
restrictions thereon, liquidation preferences and
the number of shares constituting any series or the
designation of such series, without any further
vote or action by the stockholders. The issuance of
any series of preferred stock may have an adverse
effect on the rights of holders of common stock,
and could decrease the amount of earnings and
assets available for distribution to holders of
common stock. In addition, any issuance of
preferred stock could have the effect of delaying,
deferring or preventing a change in control of the
Company.
At December 31, 1995, and 1996, the Company had
5,000,000 shares of $.02 par value preferred stock
authorized. 8,000 of those shares were designated
in 1994 as Series A Cumulative Convertible
Preferred Stock, of which 3,825 shares were issued
as of December 31, 1995. These shares were issued
in connection with a financing arrangement entered
into by the Company on December 30, 1994 (see Note
6).
In January 1996, the Company's Board of Directors
declared dividends of $334,688 on its Series A
Cumulative Convertible Preferred Stock. This
represents accrued dividends for the year ended
December 31, 1995, in accordance with the financing
arrangement entered into by the Company in December
1994 (see Note 6). The Company paid these
dividends in February 1996. As of December 31,
1995, this amount was reflected in accrued
liabilities in the accompanying financial
statements.
The Company redeemed $3.8 million in Series A
Cumulative Convertible Preferred Stock on March 29,
1996. The preferred stock was issued to JSX in
December 1994 as part of a $20 million financing
agreement consisting of an equity investment and
available borrowings. The preferred stock was
convertible into common stock at the option of JSX
at any time on or after September 15, 1997.
10. Employee Effective October 11, 1991, the Company established an
Benefit Employee Stock Ownership Plan (the "ESOP") covering
Plans substantially all employees. For each of the years
1992 through 1995, the Company made contributions to
the ESOP which were used in part to make loan and
interest payments. For the year ended December 31,
1995, the Company made contributions to the ESOP
amounting to $131,040. No contribution was made in
1996. Shares of common stock acquired by the ESOP are
to be allocated to each employee based on the
employee's annual compensation.
Effective January 1, 1992, the Company adopted a
401(k) Plan (the "Plan"). The Plan covers
substantially all full-time employees who meet the
Plan's eligibility requirements. Employees may elect a
salary reduction contribution up to 17% of their
annual compensation not to exceed the maximum amount
allowed by the Internal Revenue Service.
The Company may make a discretionary contribution to
the Plan each year; no such contribution was made by
the Company for the year ended December 31, 1994.
However, the Company did make contributions of $16,000
and $28,920 for the years ended December 31, 1995 and
1996, respectively.
Effective October 1, 1994, the Plan was amended to
require the Company to make contributions to the Plan
for eligible pilots in exchange for certain
concessions. These contributions are in excess of any
discretionary contributions made for the pilots under
the original terms of the plan. The contribution is
100% vested and equal to 3% of the first $15,000 of
compensation plus 2% of compensation in excess of
$15,000. The Company's contributions for the pilots
shall not exceed 15% of the Company's adjusted net
income before extraordinary items for such plan year.
The Company's obligations to make contributions with
respect to all plan years in the aggregate is limited
to $2.5 million. Contribution expense was
approximately $370,000 and $395,000 for 1996 and 1995
respectively. No contribution was made for 1994.
Effective June 1, 1995, the Plan was amended to allow
the Company to make a discretionary matching
contribution for non-union employees equal to 25% of
salary contributions up to 4% of total compensation.
Effective April 1, 1997, all eligible pilots will be
included under the original terms of the Plan.
In addition to the pilot 401(k), the Company has
profit sharing programs which result in periodic
payments to all eligible employees. Compensation,
which is based on attainment of certain performance
and financial goals, was approximately $2.6 million
and $1.2 million in 1996 and 1995, respectively.
11. Income The provision (benefit) for income taxes includes
Taxes the following components:
(in thousands)
Year Ending December 31, 1996 1995 1994
Federal and state:
Current 2,090 288 -
Deferred (1,640) (1,500) -
Total provision(benefit) $ 450 $(1,212) $ -
A reconciliation of income tax expense (benefit) for
taxes on income at the applicable federal and state
statutory income tax rates (35% federal statutory rate
and 5% state statutory rate for 1994, 1995 and 1996)
to the tax provision (benefit) recorded is as follows:
(in thousands)
Year ending December 31, 1996 1995 1994
Income tax expense
(benefit) $6,863 $4,092 $(8,798)
at statutory rate
Increase (decrease)
in tax
expense (benefit):
State income
taxes, net 980 585 (1,257)
of federal benefit
Change in valuation
reserve for (1,640) (1,500) -
deferred tax asset
Generation (utilization)
of net (5,811) (4,677) 10,055
operating loss
carryforward
Alternative
minimum tax expense - 210 -
("AMT")
Other 58 78 -
Income tax expense $ 450 $(1,212) $ -
(benefit)
Deferred income taxes result from temporary
differences which are the result of provisions of the
tax laws that either require or permit certain items
of income or expense to be reported for tax purposes
in different periods than for financial reporting.
The following is a summary of the Company's deferred
income taxes as of December 31, 1996, and 1995:
(in thousands)
December 31,
1996 1995
Deferred tax assets:
Engine overhaul $1,324 $897
reserve
Intangible assets 1,195 1,396
Net operating - 5,840
loss carryforward
Restructuring - 204
accrual
Revenue valuation 1,362 1,443
reserves
Reserve for bad 265 436
debts
Alternative
minimum tax 661 244
credit
carryforwards
Other 358 330
5,165 10,790
Valuation allowance - (7,667)
Net deferred tax 5,165 3,123
assets
Deferred tax
liabilities:
Depreciation (1,935) (1,438)
Preoperating costs (90) (185)
Total (2,025) (1,623)
deferred tax
liabilities
Net deferred income $3,140 $1,500
taxes
The valuation allowance established in 1995 was
eliminated in 1996 as the Company believes that the
future realization of the deferred tax asset is more
likely than not.
The Tax Reform Act of 1986 enacted an alternative
minimum tax system, generally effective for taxable
years beginning after December 31, 1986. The
Company is subject to alternative minimum tax of
approximately $1.1 million for the year ended
December 31, 1996. This amount of AMT tax in excess
of regular tax may be utilized as a credit carryover
against income tax payable in future periods. The
Company has alternative minimum tax credit
carryforwards available of approximately $661,000 at
December 31, 1996.
12. Aircraft
Commitments
As of February 23, 1997, the Company entered into an
agreement in principle with AI(R) to acquire twelve
new J-41 aircraft. Delivery of the twelve aircraft is
to began in March 1997 and will continue through mid
1999. In 1997 five aircraft are scheduled for
delivery.
On January 28, 1997, the Company announced its
decision to acquire twelve CRJs from Bombardier, Inc.
with the option to acquire an additional thirty-six
jets. Deliveries are scheduled to begin as early as
July 1997 with revenue passenger service expected to
begin in the Fall. Four jets are scheduled for
delivery in 1997 and eight in 1998. The CRJ is a
fifty seat passenger twin engine aircraft designed to
serve medium-range and small markets. The Company is
currently working with its marketing partner, United
Airlines, in an effort to incorporate the regional
jets into its existing United Express product.
The Company is exploring various third party lease
financing arrangements for the aircraft. However, the
Company has backup lease financing arrangements or
sufficient financing support with the manufacturer
such that the Company believes it will be able to
acquire the aircraft at competitive rates.
Brasilia Options
The Company acquired options to purchase ten Brasilia
aircraft at a total purchase price of approximately $68
million as part of the ACA acquisition in 1991. This
agreement was amended during 1992 and delivery dates
were extended through October 1995. The Company
assigned a value of $6 million to these options. These
options were charged to expense during 1994 in
connection with the Company's restructuring plan (see
Note 13).
Employment Agreements
In October 1995, the Company executed an amended
employment agreement with its President and Chief
Executive Officer . The agreement is effective through
October 1998 after which it will extend automatically
for successive twelve-month periods unless either party
terminates it upon 60 days notice. The Company will pay
the President and Chief Executive Officer a specific
annual salary subject to annual review and adjustment.
The officer is also eligible to participate in the
Company's incentive bonus and stock option plans.
Maintenance Facility
The Company has also begun to address the need for
expanding its facilities due to the planned increase in
fleet size. The Company intends to build or lease a
hangar facility of approximately 85,000 square feet for
planned occupancy during 1998 large enough to
consolidate its future maintenance operations. The
final site has not been determined but the Washington-
Dulles location is the leading contender for the new
maintenance facility due to the existence of the
Company's hub operation. The Company has applied to
Loudoun County, VA for a tax exempt bond issuance
facility in the amount of $11.0 million to finance the
proposed facility.
13. In 1994 the Company commenced a major restructuring
Restructuring plan. The basis of the plan was to simplify the
Charges fleet by eliminating the EMB-120 and Dash-8 aircraft
fleets in conjunction with the elimination of
unprofitable routes, the consolidation of
maintenance bases and other cost saving measures.
As of December 31, 1995, the Company's restructuring
plan regarding the elimination of the EMB-120
aircraft is complete. All aircraft were returned as
of December 31, 1994, and all spare parts were
delivered as of the end of the second quarter 1995.
In the second quarter 1994 the Company reserved
approximately $2.2 million including $0.4 million in
unamortized financing credits for EMB-120
restructuring, and $6.0 million related to EMB-120
purchase options.
For the full year 1995 the Company paid
approximately $1.9 million against remaining
reserves as of December 31, 1994, for a total of
$2.6 million since the reserves were established in
1994. These payments also included return condition
payments to British Aerospace for J-31 aircraft
received from WestAir. The Company received net
proceeds from WestAir during 1995 of $2.1 million
representing proceeds for spare parts and J-31
return condition payments, offset by EMB-120 return
condition payments due WestAir.
There are no remaining reserves related to restructuring.
As of December 31, 1995, the Company's restructuring
plan regarding the elimination of the Dash-8
aircraft was substantially complete. All aircraft
were returned as of the end of the first quarter
1995, and all spare parts were delivered as of the
end of the second quarter 1995. In the third and
fourth quarters of 1994 the Company reserved
approximately $5.4 million for Dash-8
restructuring.
For the full year 1995 the Company paid $4.0 million
net of reimbursements from United against remaining
reserves as of December 31, 1994, for a total of
$4.3 million since the reserves were established in
1994. The Company also reversed excess reserves of
$0.5 million related to pilot requalification and
engine overhaul reserves.
The Company received approximately $2.6 million from
United consisting of excess return condition
payments and reimbursements for Dash-8 maintenance
and spare parts repair costs previously paid for by
the Company.
The Company concluded the accounting for the EMB-
120 restructuring plan as of December 31, 1995 and
the Dash-8 restructuring plan as of June 30, 1996.
There are no remaining reserves related to restructuring.
14. Litigation The Company is a party to routine litigation
incidental to its business, none of which is likely
to have a material effect on the Company's financial
position. As of March 20, 1997, the Company had no
FAA proposed civil penalties pending.
The Company is a party to an action pending in the
United States District Court for the Southern
District of Ohio known as Peter J. Ryerson,
administrator of the estate of David Ryerson, v.
Atlantic Coast Airlines, Case No. C2-95-611. This
action is more fully described in the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. The Company believes that all
claims resulting from this litigation remain fully
covered under the Company's insurance policy. On
March 10, 1997, the Court granted Plaintiff's motion
to the effect that liability would not be limited to
those damages available under the Warsaw Convention.
As of March 21, 1997, the matter has not been set
for trial.
The Company is in litigation with AMFA over the
issue of whether AMFA has a right to strike prior to
the exhaustion of mediation pursuant to the Railway
Labor Act. The legal issue arose over the Company's
imposition of certain unilateral work rule changes
during the period between union certification and an
initial collective bargaining agreement. AMFA
objected to this action, but the U.S. District Court
for the Southern District of New York, on December
14, 1995, ruled in favor of the Company, declining
to render AMFA's requested declaratory judgment and
expressly stating that AMFA was prohibited from
striking at that time. In Aircraft Mechanics
Fraternal Association v. Atlantic Coast Airlines, 5
F.3d 90, the U.S. Court of Appeals for the Second
Circuit affirmed the District Court's ruling. AMFA
subsequently petitioned again to the U.S. Court of
Appeals for the Second Circuit to consider the
issue, not previously addressed by the Court, that
the company's actions, while legal, should allow
AMFA to engage in self-help, including the right to
strike. The Second Circuit heard oral arguments on
this matter in January 1997 and the parties are
awaiting its decision.
15. Related The Company paid approximately $42,500 and $25,000
Party for the years ended December 31, 1994 and 1995,
respectively, in consulting fees to The Acker Group,
Transactions a Company owned by one of the Company's
officers/stockholders. The agreement under which the
fees were paid ended as of February 1995.
16. Financial In December 1995, the Company adopted Statement of
Financial Accounting Standards No. 107, "Disclosure
Instruments of Fair Value of Financial Instruments" (SFAS 107).
SFAS 107 requires the disclosure of the fair value
of financial instruments; however, this information
does not represent the aggregate net fair value of
the Company. Some of the information used to
determine fair value is subjective and judgmental in
nature; therefore, fair value estimates, especially
for less marketable securities, may vary. The
amounts actually realized or paid upon settlement or
maturity could be significantly different.
Unless quoted market price indicates otherwise, the
fair values of cash and cash equivalents generally
approximate market because of the short maturity of
these instruments. The Company has estimated the
fair value of long-term debt based on quoted market
prices for similar loans. The estimated fair value
of the redeemable preferred stock was obtained by
consulting with the holder which is knowledgeable in
the valuation of such a financial instrument.
The estimated fair values of the Company's financial
instruments, none of which are held for trading
purposes, are summarized as follows (brackets denote
liability):
(in thousands)
December 31, December 31,
1996 1995
Estimated Estimated
Carrying Carrying
Fair Fair
Amount Value Amount Value
Cash and cash $21,470 $21,470 $8,396 $8,396
equivalents
Long-term debt
(excludes capital lease (3,726) (3,912) (4,474) (4,275)
obligations)
Redeemable preferred - - 3,825 4,160
stock
17. Supplemental
Cash Flow
Year ended 1996 1995 1994
Information December 31,
(in thousands)
Supplemental
disclosures of
cash flow
information:
Cash paid $ 883 $1,804 $1,967
during the 1,319 190 -
period:
-
Interest
-
Income taxes
The following noncash investing and financing
activities took place in 1994, 1995 and 1996:
In 1994 the Company acquired approximately $2,485,000
in rotable parts under capital lease obligations and
by the issuance of notes. These purchases were
financed by suppliers.
In 1995 the Company acquired approximately $2,250,388
in rotable parts under capital lease obligations and
by issuing notes. These purchases were financed by
suppliers.
In December 1995 the Company accrued dividends of
$334,688 on its Series A Cumulative Convertible
Preferred Stock (see Note 9).
In 1996, the Company acquired approximately $1,194,569
in rotable parts, ground equipment, telephone system
upgrades and Director's and Officer's Liability
Insurance under capital lease obligations and by
issuing notes. These purchases were financed by
suppliers and outside lenders.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Schedule II
ATLANTIC COAST AIRLINES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Charged
Balance to Balance
DESCRIPTION at Costs at End
Beginning and Deduction of Year
Expenses
of Year
Year ended December 31, 1996
Allowance for $550 $387 650 $287
uncollectible accounts
Year ended December 31, 1995
Allowance for $321 $229 - $550
uncollectible accounts
Year ended December 31, 1994
Allowance for $96 $225 - $321
uncollectible accounts