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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
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 2, 1998 was approximately $253,399,036.
As of March 2, 1998 there were 9,107,786 shares of Common Stock of the
registrant issued and 7,635,286 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 1998 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
"anticipates", "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 ("ACA"), together, (the "Company"), a large regional
airline, serving 44 destinations in 19 states in the Eastern United States as of
March 2, 1998 with nearly 500 scheduled non-stop flights system-wide every
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 caters primarily to
business travelers with its principle operations at Washington-Dulles
International Airport ("Washington-Dulles"), which serves the Northern Virginia
and Washington, D.C. markets. The Company coordinates its schedules with United,
particularly at Washington-Dulles, where United operates 63 daily departures to
31 cities in the U.S., Europe and Mexico. As of March 2, 1998, the Company
operated a fleet of 67 aircraft (six regional jets and 61 turboprop aircraft)
having an average age of approximately five years.
Summary of Company Strategy
The Company's long-term corporate objective is to achieve
sustained earnings growth by focusing its resources in the following areas:
1. Implementation of the Regional Jet Fleet and Expansion of
the Washington-Dulles Hub: In the fourth quarter of 1997, the Company placed
into service its first five 50-seat Canadair Regional Jets ("CRJs"). One CRJ was
delivered in January 1998 with eight additional CRJs scheduled for delivery in
the remainder of the year and nine in 1999. The Company has options to acquire
25 additional CRJs.
The Company anticipates that it will utilize CRJs as part of
its strategy to grow at Washington-Dulles airport by reclaiming passenger
traffic lost when United downsized its Washington-Dulles schedule in the early
1990's and by increasing market share, principally in markets beyond the
economic operating range of its turboprop aircraft. The Company believes that
utilizing CRJs in this manner will provide additional connecting passengers to
both its turboprop fleet and United's jets flying from Washington-Dulles. The
Company also believes that the CRJs could also be deployed as a complement to
its existing turboprop service in the short-haul, high-density markets and could
provide additional capacity during peak business travel times.
In December 1997, the Company petitioned the U.S. Department
of Transportation ("DOT") for 42 arrival/departure slots at Chicago's O'Hare
Airport to serve seven cities currently without nonstop service to Chicago. If
granted, the Company would utilize as many as six CRJs operating as United
Express pursuant to agreements with United Airlines (see discussion on slots
below).
2. Capitalize on and Promote the Company's Identity with
United Airlines: The Company intends to capitalize on and promote its
code-sharing relationship with United, which has contributed significantly to
the Company's growth. The Company has a shared market identity with United,
lists its flights under United's two letter flight designator code in airline
Computer Reservation Systems ("CRSs") and other published schedules and awards
United's "Mileage Plus" frequent flyer miles to its passengers. The Company
coordinates its schedules with United, particularly at Washington-Dulles, and
participates with United in cooperative advertising and marketing agreements. In
most cities served by the Company, United provides all airport facilities and
related ground support services. The Company also participates in United's
"Apollo" reservation system and all major CRSs, uses the United Express logo and
has exterior aircraft paint schemes similar to those of United.
The Company markets itself as "United Express" under its
United Express Agreements ("Agreements") with United Airlines. These Agreements,
originally scheduled to expire on March 31, 1998, have been extended for one
year.
3. Continue to Emphasize Operational Safety and Efficiency:
For over three years, the Company has worked with the Federal Aviation
Administration ("FAA") to develop enhanced pilot training and cockpit
decision-making procedures under two programs: the Advanced Qualification
Program ("AQP") and the Advanced Crew Resource Management Program ("ACRM"). AQP
and ACRM focus training curriculums on individual technical skills and crew
interaction scenarios. The FAA selected the Company to participate in a grant to
study how ACRM can be integrated with standard operational procedures such as
crew briefings and checklists. The Company anticipates that it will continue to
enhance and improve these programs in cooperation with the FAA.
The Company is also in the process of installing in its
aircraft an enhanced navigational aid which utilizes global positioning
satellite ("GPS") technology. Once implemented, the Company anticipates that GPS
will reduce both aircraft block hours and pilot workloads. On July 18, 1997, the
FAA approved the Company's use of GPS on certain routes. Full implementation of
GPS is contingent on FAA approval for use in all of the Company's operational
areas.
During 1997, the Company equipped most of its aircraft with an
automated aircraft time reporting system, which enables the Company to more
efficiently communicate with flight crews and further automate the flight
tracking process. In addition, this system improves the timeliness and accuracy
of flight information communicated and displayed to the Company's passengers.
During 1997, the Company performed most aircraft overnight and
heavy-maintenance checks in Lynchburg, Virginia, approximately 160 miles from
Washington-Dulles. In February 1998, the Company occupied its new maintenance
hangar at Washington-Dulles. Moving its maintenance operation to the larger
facility at Washington-Dulles accommodates the Company's expanding fleet and has
enabled the Company to eliminate aircraft ferrying costs. In addition, because
the new facility increases the proximity of maintenance technicians and spare
parts, the Company believes it will improve completion factor by reducing flight
cancellations (see discussion on leased facilities below).
Markets
As of March 2, 1998, the Company scheduled 218 non-stop
flights from Washington-Dulles representing more flights from that airport than
any other airline. During 1997, 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 55% of passenger
traffic at Washington-Dulles during 1997.
The Company's top four cities based on frequency of operations
are Washington-Dulles, Boston, New York-JFK and Newark. During 1997, the Company
added additional flights to existing Washington-Dulles markets, added new routes
from the Washington-Dulles, Boston and New York-JFK airports and ceased
operations in one market. The Company increased operations in existing
Washington-Dulles markets by 23 daily departures and added new service to three
cities: Fort Myers, FL; Jacksonville, FL; and Nashville, TN. Further, the
Company added new non-Dulles flights from Boston, consisting of one new market
with five daily departures; and New York-JFK with two new markets and eight
daily departures. In 1997, the Company ceased operations to New Haven, CT,
resulting in the elimination of four daily departures from Washington-Dulles. In
1997, the Company also provided seasonal service to Martha's Vineyard and
Nantucket, MA from Washington-Dulles.
The following table sets forth the destinations currently
served (or scheduled for service on the date indicated) by the Company, as of
March 2, 1998:
Albany, NY Manchester, NH
Allentown, PA Nashville, TN
Atlanta, GA 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
Fort Myers, FL Savannah, GA (4/1/98)
Greensboro, NC State College, PA
Harrisburg, PA Stewart, NY
Hartford, CT Syracuse, NY
Indianapolis, IN (3/16/98) Tampa, FL
Jacksonville, FL Westchester County, NY
Knoxville, TN Washington-Dulles, VA
Lynchburg, VA Wilmington, NC
Worcester, MA (4/16/98)
Fleet Description
Fleet Expansion: As of March 2, 1998, the Company operated a
fleet of six CRJs and 61 turboprop aircraft, consisting of 29 British Aerospace
Jetstream-32 ("J-32s") and 32 British Aerospace Jetstream-41 ("J-41").
As of March 4, 1998, the Company had a total of 17 CRJs on
order from Bombardier, Inc., in addition to the six delivered, and held options
for 25 additional CRJs. The initial order for 12 CRJs and 36 options was placed
on January 28, 1997. Options were exercised on November 20, 1997 for an
additional six firm and six conditional CRJ deliveries. On March 4, 1998, five
of the six conditional orders were converted to firm orders and the remaining
one was restored to option status. The first six CRJs were delivered in the
third and fourth quarters of 1997, and January 1998. Eight additional deliveries
are scheduled in 1998 and nine deliveries are scheduled in 1999.
The Company accepted delivery of four new J-41s during the
first half of 1997, and had additional J-41s on order pursuant to a purchase
agreement with British Aerospace, dated February 23, 1997, the ("BA J-41
Agreement"). On May 29, 1997, British Aerospace announced that it would no
longer manufacture the J-41 as part of its regular product line. On July 2,
1997, the Company and British Aerospace amended the BA J-41 Agreement to cancel
any further deliveries pursuant to this agreement. On December 4, 1997, the
Company entered into a short term lease agreement and took delivery of a new
J-41.
Fleet Composition: The following table describes the
Company's fleet of aircraft, scheduled deliveries and options as of March 4,
1998:
Future Scheduled
Number of Aircraft Passenger Capacity Average Age in Deliveries/
Years Options
British Aerospace J-32 29 19 8.2 -
British Aerospace J-41 32 29 3.2 -
Canadair Regional Jets 6 50 .4 17/25
-- -- -----
67 5.1 17/25
== =====
Regional Jet Implementation
During the third quarter of 1997 the Company successfully
completed line certification of the Regional Jet. Accordingly, the Company
received authorization to conduct operations under the provisions of the FAA
Part 121 regulations. The Company is operating the CRJs under the same FAA
regulatory requirements mandated by the FAA for all other CRJ, and larger jet,
carriers. The Company believes that the market will support existing
high-density routes and new routes and schedules that the Company's expanded
fleet will facilitate. In addition, the Company expects that its customers will
find the new CRJs acceptable for relatively longer flights, thereby enhancing
the Company's ability to compete in a broader geographic market.
The United Express Agreements required the Company to obtain
United's consent to operate the 50-seat CRJs under the "United Express" name
which consent was obtained on November 22, 1997. All CRJ routes operated as
United Express must receive prior approval from United. While the Company's
request for that consent was pending, United agreed in August 1997 to reimburse
the Company for its estimated aircraft lease and associated flight crew expenses
for its CRJs that were delivered but not in operation during the period from
September 11, 1997 through December 31, 1997. On November 22, 1997, the Company
began scheduled CRJ passenger service to four cities. From November 22 to
December 7, 1997, in order to expedite the introduction of United Express CRJ
service, United agreed to reimburse the Company for the block hour costs
associated with providing CRJ service to three of these cities. United received
the revenue from these flights. The United subsidy associated with aircraft
lease and flight crew expenses also ceased after December 7, 1997.
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 number 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 1997, approximately 60% of the Company's passengers participated in United's
"Mileage Plus" frequent flyer program. 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, 1999.
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 toll-free reservations services;
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. In return for these services, 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 periodically 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 certain 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.
Lufthansa Agreement
In October 1997, the Company entered into a code-sharing
agreement with Lufthansa German Airlines, which permits Lufthansa to place its
airline code on flights operated by the Company. In addition, the United
Express-Lufthansa agreement provides a wide range of benefits for code-share
passengers including the ability to check in once at their initial departure
city and receive boarding passes and seat assignments for the flights on both
carriers while their luggage is automatically checked through to their final
destination. Members of the Lufthansa Miles & More frequent flyer program
receive mileage credit for these flights. In January 1998, the Company added the
Lufthansa code to flights operated in ten city pair markets.
The following markets served by the Company now carry both the
United Airlines (UA) and Lufthansa (LH) designator codes on selected flights:
Washington-Dulles to Greensboro, NC; Charlottesville, VA; Cleveland, OH;
Norfolk, VA; Richmond, VA; Roanoke, VA; Syracuse, NY; Newport News, VA;
Pittsburgh, PA; and Raleigh-Durham, NC.
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 1997, the Company
purchased approximately 78% of its fuel from United Aviation Fuels Corporation
("UAFC"), 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. In January and
March 1998, the Company entered into fixed price fuel purchase agreements with
UAFC for the delivery of 33,000 barrels per month at Washington-Dulles. The
purchase contracts, representing approximately 46% of the Company's anticipated
1998 fuel requirements, expire December 31, 1998.
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, 1997,
approximately 82% of the Company's passenger revenue was derived from ticket
sales generated 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 February 1998, the Company announced that it would offer
double Mileage Plus miles to passengers on several United Express regional jet
markets from February 1 to April 15, 1998. Those flights include service between
Washington-Dulles International Airport and Fort Myers, Jacksonville and Tampa,
FL; as well as Atlanta, GA; Nashville, TN; and Raleigh-Durham, NC.
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, 1997, 25.6% of the Company's
passengers utilized electronic tickets up from 18.4% for the year ended December
31, 1996.
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 Ronald Reagan Washington
National and Baltimore-Washington International airports.
During 1997, the Company continued to see a trend toward 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 1997, 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 are
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 shorter 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 March 1997,
the Company implemented 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) to maximize system revenue.
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 2, 1998 the Company utilized 18 slots at
LaGuardia, 15 slots at New York-JFK, and six slots at White Plains. Of the above
slots, the Company controls five at LaGuardia and three at White Plains. The
LaGuardia slots are issued under FAA regulations which provide that although a
carrier may be a holder of a slot, it has no property interest in such slot.
These slots can be withdrawn without compensation under certain circumstances.
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.
In December 1997, the Company applied to the U.S. Department
of Transportation ("DOT") for 42 slots to operate three daily round-trip flights
with 50-passenger regional jet aircraft between Chicago's O'Hare International
Airport and each of the following cities: Charleston, WV; Duluth, MN;
Fayetteville, AK; Montgomery, AL; Shreveport, LA; Springfield/Branson, MO; and
Wilkes-Barre/Scranton, PA. These flights would connect to ACA's code-share
partner, United, and other United Express operators at United's Chicago hub. An
affiliate of American Airlines, Inc., operating as American Eagle, has also
requested the DOT grant it slots to serve Chicago O'Hare from the same cities.
The DOT is expected to issue an order granting or denying the carrier requests
for slots to serve these city pair markets. There can be no assurance whether
any or all slots will be granted to the Company by the DOT.
Employees
As of March 2, 1998, the Company had 1,454 full-time and
151 part-time employees, classified as follows:
Classification Full-Time Part-Time
Pilots 566 -
Flight attendants 191 -
Station personnel 277 139
Maintenance personnel 120 1
Administrative and clerical personnel 286 11
Management 14 -
--------------- ---------------
Total employees 1,454 151
=============== ===============
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 on the Company's financial position or results of its
operations 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 2, 1998, AMFA
represented 110 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 were also engaged in litigation which
arose over certain work rule issues. In September 1997, the U.S. Court of
Appeals for the Second Circuit ruled in favor of the Company on all matters
pending before it, thereby resolving the pending litigation.
The Company's contract with the AFA became amendable on April
30, 1997. In March 1998, a tentative agreement between the Company and AFA was
rejected by a vote of the members. The Company expects to resume negotiations
during the second calendar quarter of 1998 and will continue to operate under
the terms of the existing agreement until negotiations are completed.
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.
As the Company continues to pursue its growth strategy, its
employee staffing needs and recruitment efforts are expected to increase
commensurately. Due to competitive local labor markets and normal attrition to
the major airlines, there can be no assurance that the Company will be able to
satisfy its hiring requirements. The Company has committed additional resources
to its employee retention efforts. Annual turnover of Company pilots was
approximately 11% during 1997, compared to 18% during 1996.
Pilot Training
The Company performs pilot training in state-of-the-art, full
motion simulators and conducts training in accordance with FAA Part 121
regulations. In 1993, 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 two and one half years, the
Company has worked closely with the FAA and George Mason University in the
development of proceduralized CRM. The second and final phase of the project,
operational implementation, began in August 1996 and is expected to be completed
in 1998.
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.
From time to the time, the FAA conducts inspections of air
carriers with varying degrees of intensity. The Company underwent an intensive,
two-week FAA Regional Aerospace Inspection Program ("RASIP") audit during the
fourth quarter of 1997. The final audit report 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. The Company's airline
operations will continue to be audited by the FAA for compliance with applicable
safety regulations.
Regulation
Economic. With the passage of the Deregulation Act, much of
the regulation of domestic airline routes and rates was eliminated. The DOT
still has extensive authority to issue certificates authorizing carriers to
engage in air transportation, establish consumer protection regulations,
prohibit certain unfair or anti-competitive pricing practices, mandate
conditions of carriage and make ongoing determinations of a carrier's fitness,
willingness and ability to provide air transportation. The DOT can also bring
proceedings for the enforcement of its regulations under applicable federal
statutes, which proceedings may result in civil penalties, revocation of
operating authority or criminal sanctions.
The Company holds a certificate of public convenience and
necessity, issued by the DOT, that authorizes it to conduct air transportation
of persons, property and mail between all points in the United States, its
territories and possessions. This certificate requires that the Company maintain
DOT-prescribed minimum levels of insurance, comply with all applicable statutes
and regulations and remain continuously "fit" to engage in air transportation.
Based on conditions in the industry, or as a result of
Congressional directives or statutes, the DOT from time to time proposes and
adopts new regulations or amends existing regulations. For example, the DOT has
implemented extensive regulations to prevent unfair, discriminatory and
deceptive practices by CRSs. Currently, these rules are being re-examined by the
DOT in light of changing market conditions since they were last recodified in
1992. The DOT must either re-enact these regulations or revise them on or before
March 31, 1999.
The DOT has also enacted rules establishing guidelines for
setting reasonable airport charges and procedural rules for challenging such
charges. The DOT has recently adopted a compliance policy regarding the
increasing use of ticketless travel and the consumer-related notices that must
be supplied to passengers before travel. The DOT has also proposed rules to
implement a statutory directive and a Presidential Commission recommendation to
improve notice to families of passengers involved in aviation accidents. The DOT
is considering the means by which it will require domestic and international
carriers to collect additional passenger-related information, including
emergency contact names and telephone numbers and other identifying information.
The DOT has estimated that the cost to the industry of obtaining this
information from each passenger could be significant.
Safety. The FAA regulates the safety-related activities of air
carriers. The Company is subject to the FAA's jurisdiction with respect to
aircraft maintenance and operations, equipment, ground facilities, flight
dispatch, communications, training, weather observation, flight personnel and
other matters affecting air safety. To ensure compliance with its regulations,
the FAA requires that airlines under its jurisdiction obtain an operating
certificate and operations specifications for the particular aircraft and types
of operations conducted by such airlines. The Company possesses an Air Carrier
Certificate issued by the FAA and related authorities authorizing it to conduct
operations with turboprop and turbojet equipment. In addition, the FAA has
approved the Company's commencement of CRJ service. The Company's authority to
conduct operations is subject to suspension, modification or revocation for
cause. The FAA has authority to bring proceedings to enforce its regulations,
which proceedings may result in civil or criminal penalties or revocation of
operating authority.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft and the
mandatory removal and replacement of parts that have failed or may fail in the
future. In addition, the FAA from time to time amends its regulations which such
amended regulations may impose additional regulatory burdens on the Company such
as the installation of new safety-related items (collision and windshear
avoidance systems and enhanced flight data recorders). Depending upon the scope
of the FAA's order and amended regulations, these requirements may cause the
Company to incur substantial, unanticipated expenses.
The FAA requires air carriers to adopt and enforce procedures
designed to safeguard property, ensure airport security and screen passengers to
protect against terrorist acts. The FAA, from time to time, imposes additional
security requirements on air carriers and airport authorities based on specific
threats or world conditions or as otherwise required. The FAA and the industry
are cooperating to test a system by which passengers and their baggage would be
more closely monitored to ensure that no bag is checked without a passenger
boarding the aircraft. The Company incurs substantial expense in complying with
current security requirements and it cannot predict what additional security
requirements may be imposed in the future or the cost of complying with such
requirements.
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the transportation of
hazardous materials. The Company both accepts and ships approved hazardous
materials for transportation and must train its employees to identify and
properly handle such materials. The FAA enforces its hazardous material
regulations by the imposition of civil penalties, which can be substantial.
Other Regulation. In the maintenance of its aircraft fleet and
ground equipment, the Company handles and uses many materials that are
classified as hazardous. The Environmental Protection Agency and similar local
agencies have jurisdiction over the handling and processing of these materials.
The Company is also subject to the oversight of the Occupational Safety and
Health Administration concerning employee safety and health matters. The Company
is subject to the Federal Communications Commission's jurisdiction regarding the
use of radio facilities.
The Airport Noise Control Act ("ANCA") requires that airlines
phase-out the operation of certain types of aircraft. None of the Company's
aircraft are subject to the phase-out provisions of ANCA. While ANCA generally
preempts airports from imposing unreasonable local noise rules that restrict air
carrier operations, airport operators may implement reasonable and
nondiscriminatory local noise abatement procedures, which procedures could
impact the ability of the Company to serve certain airports, particularly in
off-peak hours. Certain local noise rules adopted prior to ANCA were
grandfathered under the statute.
Federal Excise Taxes. Ticketing airlines are obligated to
collect a U.S. transportation excise tax on passenger ticket sales. This tax,
known as the aviation trust tax or the "ticket tax" is used to defray the cost
of FAA operations and other aviation programs. Recently, the federal statute
authorizing the ticket tax expired on two separate occasions - from January 1,
1996 through August 26, 1996, and from January 1, 1997 through March 6, 1997.
Ticketing airlines did not collect the ticket tax during these periods. The
ticket tax was most recently reinstated effective March 7, 1997, with an
expiration date of September 30, 1997. Beginning on October 1, 1997, a revised
formula for determining the ticket tax took effect. Under this revised formula,
the ticket tax is now comprised of a percentage of the passenger ticket price
plus a flat fee for each segment flown, and will be adjusted annually. For the
period from October 1, 1997 through September 30, 1998, the ticket tax will
equal nine percent of passenger ticket price plus $1 per segment.
Seasonality
As is common in the industry, the Company experiences lower
demand for its product during the period of December through February. Because
the Company's services and marketing efforts are focused on the business
traveler, this seasonality of demand is somewhat greater than for airlines which
carry a larger proportion of leisure travelers. In addition, the Company's
principal geographic area of operations experiences more adverse weather during
this period, causing a great77er 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.
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 accommodate through various arrangements the new flights it plans, and is
exploring possible long-term solutions for assuring access to adequate
facilities at Washington-Dulles.
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.
In February 1998, the Company occupied its new 90,000 square
foot aircraft maintenance facility comprised of 60,000 square feet of hangar
space and 30,000 square feet of support space at Washington-Dulles. The Company
has consolidated all maintenance functions to this facility which includes
hangar, shop and office space necessary to maintain the Company's growing fleet.
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 or the results of its
operations.
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. 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. The Company is currently unable
to estimate the monetary award, if any, resulting from this litigation, but
believes it remains fully covered under the Company's insurance policy.
The Company is also a party to an action pending in the United States Court
of Appeals for the Fourth Circuit known as Afzal v. Atlantic Coast Airlines,
Inc. (No. 98-1011). This action is an appeal of the December 1997 decision
granted in favor of the Company in a case claiming wrongful termination of
employment brought in the United States District Court for the Eastern District
of Virginia known as Afzal v. Atlantic Coast Airlines, Inc. (Civil Action No.
96-1537-A). The Company does not expect the outcome of this case to have any
material adverse effect on its financial condition or results of its operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal quarter ended December 31, 1997,
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:
1996 High Low
---- ---- ---
First quarter $16.250 $7.375
Second quarter 17.125 12.625
Third quarter 15.875 11.000
Fourth quarter 13.125 9.25
1997
First quarter $17.000 $11.800
Second quarter 17.250 12.250
Third quarter 22.000 15.500
Fourth quarter 31.875 18.500
1998
First quarter $45.000 $29.750
(through March 2, 1997)
As of March 2, 1998, the closing sales price of the Common
Stock on Nasdaq/NM was $44.00 per share and there were approximately 109 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 million financing agreement
consisting of an equity investment and available borrowings.
On July 2, 1997, the Company issued $50 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1, 2004 (the
"Notes"), pursuant to Rule 144A under the Securities Act of 1933, and received
net proceeds of approximately $48.3 million related to the sale of the Notes. On
July 18, 1997, the Company received additional net proceeds of $7.3 million for
the exercise of the over-allotment option. The notes are convertible into shares
of Common Stock, par value $0.02 of the Company (the "Common Stock") by the
holders at any time after sixty days following the latest date of original
issuance thereof and prior to maturity, unless previously redeemed or
repurchased, at a conversion price of $18 per share, subject to certain
adjustments. The Company may not call the notes for redemption prior to July 1,
2000.
In January 1998, $5.9 million face amounts of Notes were
converted at the option of several holders into 330,413 shares of the Company's
Common Stock. On March 3, 1998, the Company notified holders of the Notes that
the Company was temporarily reducing the conversion price in order to induce the
holders to redeem their Notes for Common Stock. If all remaining holders of the
Notes converted to Common Stock pursuant to this inducement, approximately
46,000 shares of Common Stock will be issued representing the reduction
component of the conversion price. The holders have until April 8, 1998 to
accept the Company's inducement.
In July 1997, the Company repurchased 1.46 million shares of
the Company's Common Stock from British Aerospace for $16.9 million using a
portion of the proceeds received from the issuance of the Notes.
Item 6. Selected Financial Data
The following selected financial data under the caption
"Consolidated Financial Data" and "Consolidated Balance Sheet Data" relating to
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived
from the Company's consolidated financial statements. The following selected
operating data under the caption "Selected Operating Data" have been derived
from Company records. The data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Annual Report on Form 10-K.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and related operating data)
Consolidated Financial Data: Years ended December 31,
1993 1994 1995 1996 1997
---------------- ---------------- ---------------- -------------- ------------
Operating revenues:
Passenger revenues $145,786 $156,047 $153,918 $179,370 $202,540
Total operating revenues 149,103 158,919 156,968 182,484 205,444
Operating expenses:
Salaries and related costs 35,162 41,590 40,702 44,438 49,661
Aircraft fuel 15,397 15,189 13,303 17,124 17,766
Aircraft maintenance and materials 19,714 22,345 15,252 16,841 16,860
Aircraft rentals 31,087 35,565 25,947 29,137 29,570
Traffic commissions and related fees 22,914 25,913 25,938 28,550 32,667
Depreciation and amortization 1,654 2,329 2,240 2,846 3,566
Other 20,608 25,167 21,262 23,711 26,411
Write-off of intangible assets - 6,000 - - -
Restructuring charges (reversals) - 8,099 (521) (426) -
---------------- ---------------- ---------------- --------------
------------
Total operating expenses 146,536 182,197 144,123 162,221 176,501
---------------- ---------------- ---------------- -------------- ------------
Operating income (loss) 2,567 (23,278) 12,845 20,263 28,943
---------------- ---------------- ---------------- -------------- ------------
Interest expense (2,298) (2,153) (1,802) (1,013) (3,450)
Interest income 60 - 66 341 1,284
Other (expenses) income (225) 295 181 17 62
---------------- ---------------- ---------------- -------------- ----------
Total non operating expenses (2,463) (1,858) (1,555) (655) (2,104)
---------------- ---------------- ---------------- -------------- ------------
Income (loss) before income tax expense
and extraordinary item 104 (25,136) 11,290 19,608 26,839
Income tax provision (benefit) 67 - (1,212) 450 12,339
---------------- ---------------- ---------------- -------------- ------------
Income (loss) before extraordinary item 37 (25,136) 12,502 19,158 14,500
Extraordinary item (1) (1,780) - 400 - -
---------------- ---------------- ---------------- -------------- ------------
Net Income (loss) $(1,743) $(25,136) $12,902 $19,158 $14,500
================ ================ ================ ============== ============
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and related operating data)
Years ended December 31,
1993 1994 1995 1996 1997
-------------- -------------- -------------- ----------------- -------------
Income (loss) per share:
Basic:
Income (loss) before extraordinary item $0.01 $(3.67) $1.46 $2.25 $1.85
Extraordinary item (0.29) - 0.05 - -
============== =============== ============== ================= =============
Net income (loss) per share $(0.28) $(3.67) $1.51 $2.25 $1.85
============== =============== ============== ================= =============
Diluted:
Income (loss) before extraordinary item $0.01 $(3.67) $1.29 $2.15 $1.61
Extraordinary item (0.29) - 0.04 - -
============== =============== ============== ================= =============
Net income (loss) per share $(0.28) $(3.67) $1.33 $2.15 $1.61
============== =============== ============== ================= =============
Weighted average number of shares used
in computation (in thousands)
Basic 6,083 6,858 8,342 8,481 7,824
Diluted 6,083 6,858 9,871 8,920 9,756
Selected Operating Data:
Departures 97,291 134,804 131,470 137,924 146,069
Revenue passengers carried 1,445,878 1,545,520 1,423,463 1,462,241 1,666,975
Revenue passenger miles (000s) (2) 381,489 393,013 348,675 358,725 419,977
Available seat miles (000s) (3) 853,668 885,744 731,109 771,068 861,222
Passenger load factor (4) 44.7% 44.3% 47.7% 46.5% 48.8%
Breakeven passenger load factor (5) 43.9% 47.0% 43.9% 41.4% 41.8%
Revenue per available seat mile $0.175 $0.179 $0.215 $0.237 $0.239
Cost per available seat mile (6) $0.171 $0.189 $0.198 $0.211 $0.205
Average yield per revenue passenger $0.382 $0.397 $0.441 $0.500 $0.482
mile (7)
Average fare $101 $101 $108 $123 $122
Average passenger trip length (miles) 264 254 245 245 252
Aircraft in service (end of period) 62 56 54 57 65
Destinations served (end of period) 54 42 41 39 43
Consolidated Balance Sheet Data:
Working capital (deficiency) $(3,935) (4,488) $4,552 $17,782 $45,177
Total assets 52,448 40,095 47,499 64,758 148,992
Long-term debt and capital leases, less
current 5,941 6,675 7,054 5,673 76,146
portion
Redeemable common stock warrants - - - - -
Redeemable Series A, Cumulative,
Convertible, - 3,825 3,825 - -
Preferred Stock
Total stockholders' equity 19,595 1,922 14,561 34,637 34,805
(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 or 1997.
(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,
1993, 1994, 1995, 1996 and 1997, this percentage would have been
43.9%, 51.0%, 43.8%, 41.3% and 41.8%, 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, 1993,
1994, 1995, 1996 and 1997, cost per available seat mile would have
been $0.172, $0.206, $0.197, $0.210 and $0.205 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 1997, Atlantic Coast Airlines, Inc. ("ACAI") and its
wholly-owned subsidiary, Atlantic Coast Airlines ("ACA"), together ("the
Company"), posted a profit of $14.5 million compared to a profit of $19.2
million for 1996, and $12.9 million in 1995. The reduced profitability from 1996
to 1997 is primarily due to an increase in the Company's provision for income
taxes of approximately $12.3 million in 1997 as compared to approximately
$500,000 for 1996. The increase in the tax provision in 1997 reflects the full
utilization of net operating loss carryforwards in 1996 and the use of a more
conservative approach to estimating permanent differences between taxable and
book income. Pretax income increased 37% from 1996 to 1997 principally caused by
a 2.3 point load factor gain and a 2.8% reduction in cost per available seat
mile ("ASM") partially offset by a 3.6% reduction in yield. The improvement from
1995 to 1996 reflects increases in the Company's yields as well as a reduction
in the break-even passenger load factor. Management believes that the
improvement from 1995 to 1996 is attributable to the benefits realized from a
major restructuring in 1994. 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 operating profits for 1995, 1996 and 1997.
Results of Operations
The Company earned net income of $14.5 million or $1.61 per
diluted share in 1997 compared to net income of $19.2 million or $2.15 per
diluted share in 1996, and $12.9 million or $1.33 per diluted share in 1995.
During 1997, the Company generated operating income of $28.9 million compared to
$20.3 million for 1996, and $12.8 million for 1995. Operating margins for 1997,
1996 and 1995 were 14.1%, 11.1% and 8.2%, respectively.
The improvement in operating results from 1996 to 1997 reflects a 1.0%
increase in unit revenue (revenue per ASM) from $0.237 to $0.239 coupled with an
11.7% increase in ASMs and a 2.8% decrease in unit cost (cost per ASM.
The improvement in operating results from 1995 to 1996
reflects a 10.2% increase in unit revenue (revenue per ASM) from $0.215 to
$0.237 coupled with a 5.5% increase in ASMs partially offset by a 6.6% increase
in unit cost (cost per ASM). These results were achieved despite a challenging
operating environment brought about by a 20.5% increase in the cost per gallon
of fuel in 1996.
Fiscal Year 1996 vs. 1997
Operating Revenues
The Company's operating revenues increased 12.6% to $205.4 million in 1997
compared to $182.5 million in 1996. The increase resulted from an 11.7% increase
in ASMs, an increase in load factor of 2.3 points, partially offset by a 3.6%
decrease in yield.
The reduction in yield is related in part to the reinstatement
of the federal excise ticket tax from March 7, 1997 through the remainder of the
year. During 1996, this tax was only in effect from August 27, 1996 to December
31, 1996. Total passengers increased 14.0% in 1997 compared to 1996 as a result
of the 11.7% increase in ASMs and 2.3 point increase in load factor.
Operating Expenses
The Company's operating expenses increased 8.8% to $176.5
million in 1997 compared to $162.2 million in 1996 due primarily to an 11.7%
increase in ASMs, and a 14.0% increase in passengers. The increase in ASMs
reflects the net addition of five British Aerospace Jetstream-41 ("J-41")
aircraft during 1997.
A summary of operating expenses as a percentage of operating revenue and
operating cost per ASM for the years ended December 31, 1996 and 1997 is as
follows:
Year Ended December 31,
1996 1997
------------------------------ --------------------------------
Percent of Cost Percent of Cost
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)
--------------- ---------------- ------------- ----------------
Salaries and related costs 24.4% 5.8 24.2% 5.8
Aircraft fuel 9.4% 2.2 8.6% 2.1
Aircraft maintenance and materials 9.2% 2.2 8.2% 2.0
Aircraft rentals 16.0% 3.8 14.4% 3.4
Traffic commissions and related fees 15.6% 3.7 15.9% 3.8
Depreciation and amortization 1.6% .4 1.7% .4
Other 13.0% 3.0 12.9% 3.0
---------------- ------------- ---------------- ---------------
Total (before reversals of
restructuring charges) 89.2% 21.1 85.9% 20.5
---------------- ------------- ---------------- ---------------
Costs per ASM before reversals of restructuring charges
decreased 2.8% to 20.5 cents in 1997 compared to 21.1 cents in 1996 primarily
due to an 11.7% increase in ASMs in 1997 compared to 1996, offset by a 14.0%
increase in passengers carried. The increase in ASMs resulted from the net
addition of five J-41 aircraft and five 50-seat Canadair Regional Jets ("CRJ")
aircraft along with a 1.8% improvement in daily aircraft block hour utilization.
Salaries and related costs per ASM remained unchanged at 5.8
cents in 1997 compared to 1996. In absolute dollars, salaries and related
expenses increased 11.9% from $44.4 million in 1996 to $49.7 million in 1997.
The increase resulted from additional flight payroll related to a contractual
increase in May 1996 and February 1997 and a 10.7% increase in profit sharing
expense year over year.
The cost per ASM of aircraft fuel decreased to 2.1 cents in
1997 compared to 2.2 cents in 1996. The total cost of fuel per gallon decreased
4.2% to 79.3 cents in 1997 compared to 82.8 cents in 1996. In absolute dollars,
aircraft fuel expense increased 4.1% from $17.1 million in 1996 to $17.8 million
in 1997.
The cost per ASM of aircraft maintenance and materials
decreased to 2.0 cents in 1997 compared to 2.2 cents in 1996. The decreased
maintenance expense resulted primarily from the receipt of performance guarantee
fees from an overhaul vendor. In absolute dollars, aircraft maintenance and
materials expense increased 0.6% from $16.8 million in 1996 to $16.9 million in
1997.
The cost per ASM of aircraft rentals decreased to 3.4 cents in
1997 compared to 3.8 cents in 1996. The decreased unit costs reflect the
refinancing to lower rental rates of eleven used J-41 aircraft and the purchase
by the Company of three used J-41s. All of these transactions were accomplished
in the second half of 1997. In absolute dollars, aircraft rentals increased 1.7%
from $29.1 million in 1996 to $29.6 million in 1997.
The cost per ASM of traffic commissions and related fees
increased to 3.8 cents in 1997 compared to 3.7 cents in 1996. The increased
commissions reflect the contractual increases in program fees paid to United and
a higher percentage of tickets sold by travel agencies. Commission rates as a
percent of total passenger revenue fluctuate based on the mix of commissionable
and non-commissionable tickets, and have changed due to a cap on the total
amount of commission that travel agents can earn. Commissions as a percentage of
total passenger revenue averaged 7.3% in 1997 and 7.4% in 1996. Related fees
include program fees to United and segment booking fees for reservations. In
absolute dollars, traffic commissions and related fees increased 14.3% from
$28.6 million in 1996 to $32.7 million in 1997.
The cost per ASM of depreciation and amortization remained
unchanged at 0.4 cents in 1997 compared to 1996. Absolute increases in
depreciation expense were offset by increases in ASMs. The absolute increase
results primarily from the purchase of four J-41 aircraft (one of these aircraft
was new to the fleet in 1997), additional rotable spare parts associated with
additional J-41 aircraft, improvements to aircraft, leasehold improvements and
purchases of computer equipment. In absolute dollars, depreciation and
amortization expense increased 28.6% from $2.8 million in 1996 to $3.6 million
in 1997.
The cost per ASM of other operating expenses remained
unchanged at 3.0 cents in 1997 compared to 1996. Absolute increases were offset
by increased ASMs. The absolute increase in expenses are primarily attributable
to increased facility rents and distressed passenger expenses. In absolute
dollars, other operating expenses increased 11.4% from $23.7 million in 1996 to
$26.4 million in 1997.
As a result of the foregoing expense items, total operating
expenses before reversals of restructuring charges were approximately $176.5
million for 1997, an increase of 8.5% compared to $162.6 million in 1996. Total
ASMs increased 11.7% year over year and the cost per ASM decreased from 21.1
cents for 1996 to 20.5 cents for 1997.
The Company reversed excess restructuring reserves of $426,000
in 1996 (0.1 cents per ASM). 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. As of December 31, 1996, there were no
remaining reserves related to the restructuring.
Interest expense, net of interest income, was $2.2 million in
1997 and $672,000 in 1996. The increased expense reflects the Company's issuance
in July 1997 of $57.5 million of 7% convertible debt and $16.4 million of
equipment notes associated with pass through trust certificates issued in
September 1997 reduced by a significant increase in the Company's cash balances
in 1997 and use of proceeds from the convertible debt to repay higher interest
bearing debt.
The Company recorded a provision for income taxes of
approximately $12.3 million for 1997, compared to a provision for income taxes
of approximately $500,000 in 1996. The 1996 effective tax rate of approximately
2.3% is significantly less than the statutory federal and state rates due
principally to the full utilization of net operating loss carryforwards and the
elimination of the valuation allowance. The 1997 effective tax rate of
approximately 46% is higher than the statutory federal and state rates. The
Company believes the higher effective tax rate is nonrecurring and reflects a
more conservative approach to estimating permanent differences between taxable
and book income. The Company expects a more normalized effective tax rate in
1998. The Company has recorded a net deferred tax asset of approximately
$688,000 at December 31, 1997 compared to $3.1 million at December 31, 1996. No
net operating loss carryforwards were available for 1997.
Fiscal Year 1995 vs. 1996
Operating Revenues
The Company's operating revenues increased 16.2% to $182.5
million in 1996 compared to $157 million in 1995. The increase resulted from a
5.5% increase in ASMs and a 13.3% increase in yield, partially offset by a 1.2
percentage point decrease in passenger load factor.
The increase in yield is related in part to the expiration of
the ticket tax on December 31, 1995. The increase in yield caused by this factor
cannot be determined nor can the impact on revenue that resulted from the
reinstatement of the tax on August 27, 1996. Revenue per ASM improved 10.2% year
over year. Total passengers increased 2.7% in 1996 compared to 1995.
Operating Expenses
The Company's operating expenses increased 12.6% in 1996 compared to 1995
due primarily to a 5.5% increase in ASMs, and a 2.7% increase in passengers. The
increase in ASMs reflects the addition of two J-41 aircraft.
A summary of operating expenses as a percentage of operating revenues and
operating cost per ASM for the years ended December 31, 1995 and 1996 is as
follows:
Year Ended December 31,
1995 1996
------------------------------ ------------------------------
Percent of Cost Percent of Cost
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)
--------------- -------------- -------------- ---------------
Salaries and related costs 25.9% 5.7 24.4% 5.8
Aircraft fuel 8.5% 1.8 9.4% 2.2
Aircraft maintenance and materials 9.7% 2.1 9.2% 2.2
Aircraft rentals 16.5% 3.5 16.0% 3.8
Traffic commissions and related fees 16.5% 3.5 15.6% 3.7
Depreciation and amortization 1.4% .3 1.6% .4
Other 13.6% 2.9 13.0% 3.0
--------------- -------------- -------------- ---------------
Total (before reversals of
restructuring charges) 92.1% 19.8 89.2% 21.1
--------------- -------------- -------------- ---------------
Cost per ASM before reversals of restructuring charges
increased 6.6% to 21.1 cents in 1996 compared to 19.8 cents in 1995 primarily
due to the increased cost of fuel, increases in aircraft rental expense and
landing fees from additional aircraft and additional traffic commissions and
related fees resulting from a 16.3% increase in total operating revenue. These
factors were slightly offset by a 5.5% increase in ASMs.
Salaries and related costs per ASM increased to 5.8 cents in
1996 compared to 5.7 cents in 1995. The increase resulted from additional flight
payroll related to a contractual increase in May 1996 and an 80.4% increase in
profit sharing year over year. In absolute dollars, salaries and related
expenses increased 9.1% from $40.7 million in 1995 to $44.4 million in 1996.
The total cost per ASM of aircraft fuel increased to 2.2 cents
in 1996 compared to 1.8 cents in 1995. The total cost of fuel per gallon
increased 20.5% due to increases in aircraft fuel prices and the 4.3 cents per
gallon fuel tax imposed by the federal government in October 1995. The average
cost per gallon, including into-plane fees, was 82.8 cents in 1996 and 68.7
cents in 1995. In absolute dollars, aircraft fuel expense increased 28.6% from
$13.3 million in 1995 to $17.1 million in 1996.
The cost per ASM of aircraft maintenance and materials
increased to 2.2 cents in 1996 compared to 2.1 cents in 1995. The increased
maintenance expense resulted primarily from an increase in the average age of
the fleet, the expiration of warranty coverage on certain aircraft and rate
increases in contract maintenance for engines. In absolute dollars, aircraft
maintenance and materials expense increased 9.8% from $15.3 million in 1995 to
$16.8 million in 1996.
The cost per ASM of aircraft rentals increased to 3.8 cents in
1996 compared to 3.5 cents in 1995. The increased expenses reflect two
additional J-41 aircraft delivered in 1996 and the full year effect of aircraft
delivered in 1995. In absolute dollars, aircraft rentals increased 12.4% from
$25.9 million in 1995 to $29.1 million in 1996.
The cost per ASM of traffic commissions and related fees
increased to 3.7 cents in 1996 compared to 3.5 cents in 1995. The increased
commission reflects the increase in passenger revenue and contractual increases
in program fees paid to United. 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 that travel agents can claim. 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. In absolute dollars, traffic commissions and related fees
increased 10.4% from $25.9 million in 1995 to $28.6 million in 1996.
The cost per ASM of depreciation and amortization increased to
0.4 cents in 1996 compared to 0.3 cents in 1995. The increase 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. In absolute dollars, depreciation and
amortization expense increased 27.3% from $2.2 million in 1995 to $2.8 million
in 1996.
The cost per ASM of other operating expenses increased to 3.0
cents in 1996 compared to 2.9 cents in 1995. The increased expenses are
primarily attributable to increased glycol costs resulting from relatively
severe winter weather, additional pilot training costs and increased legal fees.
In absolute dollars, other operating expenses increased 11.3% from $21.3 million
in 1995 to $23.7 million in 1996.
As a result of the foregoing components, total operating
expenses before reversals of restructuring charges were approximately $162.6
million for 1996, an increase of 12.4% compared to $144.6 million in 1995. Total
ASMs increased 5.5% year over year and the cost per ASM increased from 19.8
cents for 1995 to 21.1 cents for 1996.
The Company reversed excess restructuring reserves of $426,000
in 1996 (0.1 cents per ASM) and $521,000 in 1995 (0.1 cents per ASM). 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. As
of December 31, 1996, there were no remaining reserves related to the
restructuring.
Interest expense, net of interest income, was $672,000 in 1996
and $1.7 million in 1995. The decreased expense reflects reduced borrowings
under the Company' accounts receivable financing facility and the early
retirement of a $4 million convertible term note to British Aerospace in
December 1995.
The Company recorded a provision for income taxes of
approximately $500,000 for 1996, compared to a benefit of approximately $1.2
million in 1995. The benefit recorded in 1995 reflects the recognition of the
deferred tax asset of $1.5 million in the fourth quarter of 1995, net of
valuation allowance. The 1996 effective tax rate of approximately 2.3% is
significantly less than the statutory federal and state rates due principally to
the full utilization of net operating loss carryforwards and the elimination of
the valuation allowance. The Company recorded a net deferred tax asset of $3.1
million at December 31, 1996.
Outlook
This Outlook section and the Liquidity and Capital Resources
section below contain forward-looking statements. The Company's actual results
may differ significantly from the results discussed in forward-looking
statements. Factors that could cause the Company's future results to differ
materially from the expectations described here include the response of the
Company's competitors to the Company's business strategy, market acceptance of
CRJ service to new destinations, the cost of fuel, the weather, satisfaction of
regulatory requirements and general economic and industry conditions.
A central element of the Company's business strategy is
expansion of its aircraft fleet. At December 31, 1997, the Company had
commitments to acquire 18 additional 50-seat CRJs, one of which was delivered in
January 1998. The introduction of these aircraft will expand the Company's
business into new markets. In general, service to new markets may result in
increased operating expenses that may not be immediately offset by increases in
operating revenues.
Liquidity and Capital Resources
The Company's balance sheet improved significantly during 1997
compared to 1996. As of December 31, 1997, the Company had cash and cash
equivalents of $39.2 million and working capital of $45.2 million compared to
$21.5 million and $17.8 million respectively as of December 31, 1996. During the
year ended December 31, 1997, cash and cash equivalents increased $17.7 million,
reflecting net cash provided by operating activities of $21.3 million, net cash
used in investing activities of $55.2 million (related to deposits for the CRJs,
purchases of equipment and increases in short term investments) and net cash
provided by financing activities of $51.6 million. Net cash provided by
financing activities increased principally due to the receipt of net proceeds of
$55.6 million in July 1997 from the issuance of convertible notes due 2004
partially offset by the $16.9 million purchase of the Company's common stock
from British Aerospace in July 1997.
As of December 31, 1996 the Company had cash and cash
equivalents of $21.5 million and working capital of $17.8 million compared to
$8.4 million and $4.6 million respectively as of December 31, 1995. During 1996,
cash and cash equivalents increased $13.1 million, reflecting net cash provided
by operations of $20.1 million, net cash used in investing activities of $2.2
million (related to purchases or spare parts and equipment) and net cash used in
financing activities of $4.9 million (primarily related to the redemption of
preferred stock and payments on long-term debt and capital lease obligations).
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 million, depending on the amount of assigned ticket receivables. 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 there were no borrowings under the line
during 1997. The Company pledged $7.7 million of this line of credit as
collateral to secure letters of credit issued on behalf of the Company by a
financial institution.
In June 1997, the Industrial Development Authority of Loudoun
County, Virginia ("IDA") approved a $9.4 million tax exempt bond issuance in
connection with the Company's proposed construction of a maintenance facility at
Washington-Dulles. The Company has paid approximately $500,000 to cover the
costs associated with furnishing and equipping the new facility. These bonds
were issued under a variable interest rate structure for a twenty-five year term
including a requirement for a monthly sinking fund provision, and are
collateralized by a $9.6 million letter of credit issued on behalf of the
Company by a financial institution. The letter of credit is collateralized by
the Company's leasehold deed of trust on the maintenance facility and $4.9
million of the Company's line of credit. The Company will be obligated to pay
rent for the facility and the underlying land leasehold, the proceeds from which
the IDA will make the required interest and sinking fund payments on the bond
obligation. In the event of a default, the Company would be obligated to
reimburse the financial institution to the maximum amount of the letter of
credit. Annual rent is subject to escalation every five years. In February 1998,
the Company occupied this building and began paying rent.
On July 2, 1997, the Company issued $50 million aggregate
principal amount of 7% Convertible Subordinated Notes due July 1, 2004 ("the
Notes"). The Company received net proceeds of approximately $48.3 million
related to the sale of the Notes. In addition, the Company granted the initial
purchasers a thirty day option to purchase up to an additional $7.5 million
aggregate principal amount of the Notes solely to cover over-allotments. On July
18, 1997, the Company received net proceeds of $7.3 million related to the
exercise of this option. The net proceeds of the Note offering have been used to
support the introduction of the Company's regional jet fleet, repurchase 1.46
million shares of the Company's Common Stock from British Aerospace as described
below, retire higher interest rate debt and for general corporate purposes.
The Notes are convertible into shares of Common Stock, unless
previously redeemed or repurchased, at a conversion price of $18 per share,
subject to certain adjustments. Interest on the Notes is payable on April 1 and
October 1 of each year, commencing October 1, 1997. The Notes are not redeemable
by the Company until July 1, 2000. Thereafter, the Notes will be redeemable, at
any time, on at least 15 days notice at the option of the Company, in whole or
in part, at the redemption prices set forth in the Indenture dated July 2, 1997,
in each case, together with accrued interest.
In January 1998, $5.9 million face amount of Notes were
converted by several holders into 330,413 shares of the Company's Common Stock.
On March 3, 1998, the Company notified holders of the Notes
that the Company was temporarily reducing the conversion price in order to
induce the Note holders to convert their Notes into Common Stock. The Note
holders have until April 8, 1998 to accept the Company's inducement.
In April 1997, the Company executed a short term promissory note for
deposits totaling $11 million related to the acquisition of the CRJs. The
promissory note was paid in full on July 2, 1997 from the net proceeds of the
Notes.
In July 1997, the Company repurchased 1.46 million shares of
the Company's Common Stock from British Aerospace for approximately $16.9
million from the net proceeds of the sale of the Notes as described above. The
stock was repurchased at a 22.5% discount from the average of the closing bid
prices during the period June 24 through June 30, 1997.
During July 1997, the Company retired $3.1 million of other high interest
rate debt from the proceeds of the Notes. In January 1998, the Company retired
an additional $1.4 million in capital lease obligations.
In September 1997, approximately $112 million of pass through
certificates were issued in a private placement by separate pass through trusts,
which purchased with the proceeds, equipment notes (the "Equipment Notes")
issued in connection with (i) leveraged lease transactions relating to four
J-41s and six CRJs (delivered or expected to be delivered), all of which are or
will be leased to the Company (the "Leased Aircraft"), and (ii) the financing of
four J-41s owned by the Company (the "Owned Aircraft"). The Equipment Notes
issued with respect to the Owned Aircraft are direct obligations of ACA,
guaranteed by ACAI and are included in the accompanying consolidated financial
statements. The Equipment Notes issued with respect to the Leased Aircraft are
not obligations of ACA or guaranteed by ACAI.
With respect to one CRJ leased aircraft, at December 31, 1997
(the "Prefunded Aircraft"), the proceeds from the sale of the Equipment Notes
were deposited into collateral accounts, to be released at the closing of a
leveraged lease related to the Prefunded Aircraft. In January 1998, an equity
investor purchased this aircraft and entered into a leveraged lease with the
Company and the collateral accounts were released.
Other Commitments
In July 1997, the Company entered into a series of interest
rate swap contracts in the amount of $39.8 million. The swaps were executed by
purchasing six contracts maturing between March and September 1998 with
Bombardier, Inc. as the counter party. The interest rate hedge is designed to
limit approximately 50% of the Company's exposure to interest rate changes until
permanent financing for its second six CRJ aircraft, which are scheduled for
delivery between March and September 1998, is secured. At December 31, 1997, had
all contracts settled on that date, the Company would have been obligated to pay
the counter party approximately $1.4 million.
In January 1998, the Company entered into a contract to
purchase fuel from United Aviation Fuels Corporation ("UAFC"), a wholly-owned
subsidiary of United Airlines during the period February through September 1998.
The Company has committed to purchase 33,000 barrels of fuel per month during
the term of this contract at a delivered price excluding taxes and into plane
fees of 52.2 cents per gallon. In March 1998, the Company extended the contract
through December 1998 committing to purchase 33,000 barrels per month, October
through December, at a delivered price excluding taxes and into plane fees of
50.35 cents per gallon. Fuel purchased under this arrangement represents
approximately 46% of the Company's anticipated 1998 fuel requirements.
The Company has started to review its computer systems and
application programs for year 2000 compliance. The Company believes that the
cost to modify any of its non-compliant systems or applications will not have a
material effect on its financial position or results of its operations. However,
the Company can not give any assurances that the systems of other parties upon
which the Company must rely, will be year 2000 compliant on a timely basis.
Examples of systems operated by others that the Company may use and or rely upon
are: FAA Air Traffic Control, Computer Reservation Systems for travel agent
sales and United Airlines' reservation, passenger check in and ticketing
systems. The Company's business, financial condition and or results of
operations could be materially adversely affected by the failure of its systems
and applications or those operated by others.
Aircraft
The Company has significant lease obligations for aircraft
that are classified as operating leases and therefore are not reflected as
liabilities on the Company's balance sheet. The remaining terms of such leases
range from less than one year to sixteen and a half years. The Company's total
rent expense in 1997 under all non-cancelable aircraft operating leases with
remaining terms of more than one year was approximately $29.2 million. As of
December 31, 1997, the Company's minimum rental payments for 1998 under all
non-cancelable aircraft operating leases with remaining terms of more than one
year were approximately $36 million.
As of March 4, 1998, the Company had a total of 17 CRJs on
order from Bombardier, Inc., in addition to the six delivered, and held options
for 25 additional CRJs. The initial order for 12 CRJs and 36 options was placed
on January 28, 1997. Options were exercised on November 20, 1997 for an
additional six firm and six conditional CRJ deliveries. On March 4, 1998, five
of the six conditional orders were converted to firm orders and the remaining
one was restored to option status. The first five CRJs were delivered in the
third and fourth quarters of 1997. Two additional CRJs have been delivered
during the first quarter 1998 under operating leases. Seven additional
deliveries are scheduled in 1998 and nine deliveries are scheduled in 1999 which
the Company is obligated to purchase and finance (including leveraged leases) at
an approximate capital cost of $296 million.
On February 23, 1997, the Company entered into an agreement
with Aero International (Regional) (the "BA J-41 Agreement") to acquire 12 new
J-41 aircraft, and into a related agreement that gave the Company permission to
refinance through third parties up to fifteen previously delivered J-41 aircraft
that were under leases supported by British Aerospace. The new aircraft were to
be delivered under long-term leases with British Aerospace, but were also
eligible for third party financing. Four of the new aircraft had been delivered
as of May 29, 1997, when British Aerospace announced that it would no longer
manufacture the J-41 as part of its regular product line. On July 2, 1997, the
Company and British Aerospace amended the BA J-41 Agreement to cancel any
further deliveries of J-41s pursuant to the BA J-41 Agreement. As part of the
amended BA J-41 Agreement, the Company received certain manufacturer credits and
support. The amendment also provides that British Aerospace will provide
additional asset value support for such contemplated third party financings.
During 1997, the Company completed third party financings of
eighteen J-41 aircraft as follows: On August 1, 1997, three new J-41s through
leveraged leases with a third party; on September 15, 1997, two used J-41s
through single investor leases with a third party; on September 26, 1997, four
used J-41s through leveraged leases with a third party as part of the pass
through certificates as described above; on September 26, 1997, one new and
three used J-41s purchased by the Company with debt as part of the pass through
certificates; on September 30, 1997, two used J-41s through single investor
leases with a third party, and on December 30, 1997, three used J-41s through
single investor leases with a third party. All of these aircraft were already on
lease to the Company at the time of closing, and prior leases were terminated as
part of these transactions. As compared to the prior leases, these refinancings
have resulted in reduced payment obligations, shorter lease terms, and improved
return conditions. On February 13, 1998, the Company entered into a single
investor lease with a third party for the last J-41 eligible for refinancing.
In November 1997, the Company entered into a lease and
purchase agreement with Aero International (Regional) for the acquisition of one
additional new J-41. The Company will be required to arrange third party
financing of this aircraft, or to purchase it outright, during the second
quarter of 1998, subject to the aircraft being properly modified by Aero
International.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft and the
mandatory removal and replacement of parts that have failed or may fail in the
future. In addition, the FAA from time to time amends its regulations which such
amended regulations may impose additional regulatory burdens on the Company such
as the installation of new safety-related items (collision and windshear
avoidance systems and enhanced flight data recorders). Depending upon the scope
of the FAA's order and amended regulations, these requirements may cause the
Company to incur substantial, unanticipated expenses.
Capital Equipment and Debt Service
In 1998 the Company anticipates capital spending of
approximately $60 million consisting primarily of $40 million to own two CRJs
and one J-41 aircraft, $17 million for spare parts, engines and equipment, and
$3 million for other capital assets. The Company anticipates that it will be
able to arrange financing for the aircraft and 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. The Company currently has an agreement in
principle from a third party for approximately $126 million in debt financing
associated with the purchase of nine CRJ's to be delivered in 1998 and 1999.
Debt service for 1998 is estimated to be approximately $9.2
million reflecting increased borrowings related to the issuance of the 7%
Convertible Subordinated Notes and the purchase of four J-41 aircraft. 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, the accounts receivable credit
facility, and other available equipment financing 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 July 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income", which requires that comprehensive income and the associated income tax
expense or benefit be reported in financial statements with the same prominence
as other financial statements with an aggregate amount of comprehensive income
reported in that same financial statement. "Comprehensive Income" refers to
revenues, expenses, gains and losses that under GAAP are not included in net
income. The impact of SFAS No. 130 will not change levels of net income, but
will result in new disclosure requirements for the Company.
In July 1997, the FASB also issued Statement No. 131 ("SFAS
No. 131"), "Disclosures About Segments of an Enterprise and Related Information"
which requires disclosure for each segment, for which the chief operating
decision maker organizes the company for making operating decisions and
assessing performance. Reportable segments are based on products and services,
geography, legal structure, management structure and any manner in which
management disaggregates the company. The impact of SFAS No. 131 will also
result in new disclosure requirements for the Company.
Recently, the American Institute of Certified Public
Accountants issued a proposed statement of position on accounting for start-up
costs, including preoperating costs related to the introduction of new fleet
types by airlines. The proposed accounting guidelines would require companies to
expense start-up costs as incurred. The FASB recently approved the proposed
guidelines, and they will take effect for fiscal years beginning after December
15, 1998. The Company has deferred certain start-up costs related to the
introduction of the CRJs and is amortizing such costs to expense ratably over
four years. The Company will be required to expense any unamortized amounts
remaining as of January 1, 1999. The Company estimates the remaining unamortized
balance for deferred start-up costs will be approximately $1.4 million on
January 1, 1999.
Item 8. Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report for the year ended December 31, 1997
Report of Independent Certified Public Accountants for the
years ended December 31, 1995 and 1996 34 December 31, 1995 and 1996
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 38 December 31, 1995, 1996 and
1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Coast Airlines, Inc.
We have audited the accompanying consolidated balance sheet of Atlantic Coast
Airlines, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Coast
Airlines, Inc. and subsidiary as of December 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Washington, D.C. KPMG Peat Marwick LLP
January 28, 1998, except as to note 17,
which is as of March 4, 1998
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Atlantic Coast Airlines, Inc.
We have audited the accompanying consolidated balance sheet of Atlantic Coast
Airlines, Inc. and Subsidiary, as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Coast
Airlines, Inc. and Subsidiary at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Washington, D.C.
January 24, 1997, except for Note 18, The date which is May 29, 1997
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Balance Sheets
(In thousands, except for share data and par values)
December 31,
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 21,470 $ 39,167
Short term investments - 10,737
Accounts receivable, net 15,961 21,621
Expendable parts and fuel inventory, net 1,759 2,477
Prepaid expenses and other current assets 2,554 2,855
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total current assets 41,744 76,857
Property and equipment at cost, net of accumulated depreciation and
amortization 16,157 40,638
Preoperating costs, net of accumulated amortization 225 2,004
Intangible assets, net of accumulated amortization 2,882 2,613
Deferred tax asset 3,140 688
Debt issuance costs, net of accumulated amortization - 3,051
Aircraft deposits 570 19,040
Other assets 40 4,101
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total assets $ 64,758 $ 148,992
- ------------------------------------------------------------------------------------ ----------------- ------------------
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 3,770 $ 4,768
Current portion of long-term debt 1,319 1,851
Current portion of capital lease obligations 1,497 1,730
Accrued liabilities 17,376 23,331
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total current liabilities 23,962 31,680
Long-term debt, less current portion 2,407 73,855
Capital lease obligations, less current portion 3,266 2,290
Deferred credits, net 486 6,362
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total liabilities 30,121 114,187
- ------------------------------------------------------------------------------------ ----------------- ------------------
Stockholders' equity:
Preferred Stock, $.02 par value per share; shares authorized
5,000,000; no shares issued or outstanding in 1996 or 1997 - -
Common stock: $.02 par value per share; shares authorized 15,000,000; shares
issued 8,498,910 in 1996 and 8,739,507 in 1997; shares outstanding 8,486,410
in 1996 and 7,267,007 in 1997 170 175
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 40,296
Less: Common stock in treasury, at cost, 12,500 shares in 1996 and 1,472,500
shares in 1997 (125) (17,069)
Retained earnings (deficit) (3,097) 11,403
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total Stockholders' Equity 34,637 34,805
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total Liabilities and Stockholders' Equity $ 64,758 $ 148,992
- ------------------------------------------------------------------------------------ ----------------- ------------------
Commitments and Contingencies
- ------------------------------------------------------------------------------------ ----------------- ------------------
See accompanying notes to consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Operations
(In thousands, except for per share data)
Years ended December 31,
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
Operating revenues:
Passenger $ 153,918 $ 179,370 $ 202,540
Other 3,050 3,114 2,904
- ---------------------------------------------------------------------------------------------------------------------------
Total operating revenues 156,968 182,484 205,444
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and related costs 40,702 44,438 49,661
Aircraft fuel 13,303 17,124 17,766
Aircraft maintenance and materials 15,252 16,841 16,860
Aircraft rentals 25,947 29,137 29,570
Traffic commissions and related fees 25,938 28,550 32,667
Depreciation and amortization 2,240 2,846 3,566
Other 21,262 23,711 26,411
Restructuring charges (reversals)
(521) (426) -
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 144,123 162,221 176,501
Operating income 12,845 20,263 28,943
- ---------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense
(1,802) (1,013) (3,450)
Interest income 66 341 1,284
Other income 181 17 62
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense
(1,555) (655) (2,104)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax provision (benefit)
and extraordinary 11,290 19,608 26,839
item
Income tax provision (benefit) 450 12,339
(1,212)
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 12,502 19,158 14,500
Extraordinary Item 400 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 12,902 $ 19,158 $ 14,500
- ---------------------------------------------------------------------------------------------------------------------------
Income per share:
Basic
Income before extraordinary item $1.46 $2.25 $1.85
Extraordinary item 0.05 - -
-----------------------------------------------------
Net income $1.51 $2.25 $1.85
=====================================================
Diluted
Income before extraordinary item $1.29 $2.15 $1.61
Extraordinary item 0.04 - -
-----------------------------------------------------
Net income $1.33 $2.15 $1.61
=====================================================
Weighted average shares used in computation:
Basic 8,342 8,481 7,824
Diluted 9,871 8,920 9,756
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Stockholders' Equity
(In thousands, except for share data)
Common Stock Additional Treasury Stock Retained
----------------------------Paid-In ----------------------------- Earnings
Capital (Deficit)
Shares Amount Shares Amount
- ---------------------------------------- ------------------------- ------------ ---------------------------- ------------------
Balance, December 31, 1994 8,324,470 $ 166 $ 36,703 12,500 $ (125) $ (34,822)
Exercise of common stock options 31,941 1 71 - -
Preferred stock dividends declared - - - - (335)
Net Income - - - -
12,902
- ---------------------------------------- ------------- ----------- ------------ -------------- ------------- -----------------
Balance, December 31, 1995 8,356,411 167 36,774 12,500 (125) (22,255)
Exercise of common stock options 142,499 3 351 - -
Tax benefit of stock option exercise - - 564 - -
Net Income - - - - 19,158
- ---------------------------------------- ------------- ----------- ------------ -------------- ------------- -----------------
Balance December 31, 1996 8,498,910 170 37,689 12,500 (125) (3,097)
Exercise of common stock options 240,597 5 1,250 - -
Tax benefit of stock option exercise - - 1,357 - -
Purchase of treasury stock - - - 1,460,000 (16,944) -
Net Income - - - -
14,500
- ---------------------------------------- ------------- ----------- ------------ -------------- ------------- -----------------
Balance December 31, 1997 8,739,507 $ 175 $ 40,296 1,472,500 $ (17,069) $ 11,403
- ---------------------------------------- ------------- ----------- ------------ -------------- ------------- -----------------
See accompanying notes to consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31,
1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 12,902 $ 19,158 $ 14,500
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Extraordinary gain (400) - -
Depreciation and amortization 1,815 2,434 3,111
Amortization of intangibles and preoperating costs 425 412 455
Provision for uncollectible accounts 229 387 168
Provision for inventory obsolescence 120 50 63
Amortization of deferred credits - (27) (243)
Amortization of debt issuance costs - - 181
(Increase) decrease in deferred tax asset (1,500) (1,640) 2,452
Net (gain) loss on disposal of fixed assets (7) 1 450
Amortization of debt discount and finance 7 46 76
costs
Gain on disposal of (177) - -
slots
Changes in operating assets and liabilities:
Accounts receivable (1,169) (1,741) (5,829)
Expendable parts and fuel inventory 686 41 (781)
Prepaid expenses and other current assets 2,814 (796) 403
Preoperating costs - - (2,057)
Other assets 62 - -
Accounts payable (1,393) 238 998
Accrued liabilities 1,259 1,590 7,313
---------------------------------------------------------
Net cash provided by operating activities 15,673 20,153 21,260
Net cash provided by (used in) operating activities Cash flows from investing
activities:
Purchase of property and equipment (4,260) (2,128) (26,005)
Proceeds from sales of fixed assets 1,916 - -
Purchase of short term investments - - (10,737)
Proceeds from sale of intangible assets 375 - -
Payments for aircraft and other deposits - (61) (18,447)
---------------------------------------------------------
Net cash used in investing activities (1,969) (2,189) (55,189)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 4,210 486 75,220
Payments of long-term debt (4,769) (1,234) (3,241)
Payments of capital lease obligations (689) (1,171) (2,258)
Net decrease in lines of credit (6,356) - -
Proceeds from receipt of deferred credits and other - 513 809
Deferred financing costs (66) (239) (3,215)
Payment of convertible preferred stock dividend - (335) -
Redemption of convertible preferred stock - (3,825) -
Proceeds from exercise of stock options 72 915 1,255
Purchase of treasury stock - - (16,944)
Net cash (used in) provided by financing activities (7,598) (4,890) 51,626
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents 6,106 13,074 17,697
Cash and cash equivalents, beginning of year 2,290 8,396 21,470
---------------------------------------------------------
Cash and cash equivalents, end of year $ 8,396 $ 21,470 $ 39,167
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
39
1. Summary of Accounting (a) Basis of Presentation
Policies
The accompanying consolidated financial
statements include the accounts of 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. As of December
31, 1997, the Company operated in the air
transportation industry providing scheduled
service for passengers to 40 destinations
in 17 eastern states of the United States.
All of the Company's flights are currently
operated under a code sharing agreement
with United Airlines, Inc. ("United") and
are identified as United Express flights in
computer reservation systems.
(b) Cash, Cash Equivalents and Short-Term
Investments
The Company considers investments with an
original maturity of three months or less
when purchased to be cash equivalents.
Investments with an original maturity
greater than three months are considered
short-term investments. All short-term
investments are considered to be available
for sale. Due to the short maturities
associated with the Company's investments,
the amortized cost approximates fair market
value. Accordingly, no adjustment has been
made to record unrealized holding gains and
losses.
(c) Airline Revenues
Passenger fares and cargo revenues are
recorded as operating revenues at the time
transportation is provided. 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, $287,000 and
$269,000 at December 31, 1995, 1996 and
1997, respectively. Amounts charged to
costs and expenses for uncollectible
accounts in 1995, 1996 and 1997 were
$229,000, $387,000 and $168,000
respectively. Write-off to accounts
receivable were none, $650,000 and $186,000
in 1995, 1996 and 1997, 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 because the Company believes such
costs are immaterial. Incremental costs for
awards redeemed on the Company's flights
are expensed as incurred.
(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, 1996 and 1997, accounts
receivable from air carriers totaled
approximately $14.3 million and $18.7
million, respectively. Such accounts
receivable serve as collateral to a
financial institution in connection with
the Company's line of credit arrangement.
Of the total amount, approximately $11
million and $14.8 million at December 31,
1996 and 1997, respectively, were due from
United. Historically, 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 operates under a code-sharing
agreement with United, which expires on
March 31, 1999. 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 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 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.
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. 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's contract with the AFA became
amendable on April 30, 1997. In March 1998,
a tentative agreement between the Company
and AFA was rejected by a vote of the
members. The Company expects to resume
negotiations during the second calendar
quarter of 1998 and will continue to
operate under the terms of the existing
agreement until negotiations are completed.
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 principles requires management
to make certain estimates and assumptions
regarding valuation of assets, recognition
of liabilities for costs such as aircraft
maintenance, differences in timing of air
traffic billings from United and other
airlines, operating revenues and expenses
during the period and disclosure of
contingent assets and liabilities at the
date of the financial statements. Actual
results could differ from those estimates.
(g) Expendable Parts
Expendable parts and supplies are stated at
the lower of cost or market, less an
allowance for obsolescence of $120,000,
$169,950 and $232,601 for the years ended
December 31, 1995, 1996 and 1997,
respectively. Expendable parts and supplies
are charged to expense as they are used.
Amounts charged to costs and expenses for
obsolescence in 1995, 1996 and 1997 were
$120,000, $49,950 and $62,652 respectively.
(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. The Company
periodically evaluates whether events and
circumstances have occurred which may
impair the estimated useful life or the
recoverability of the remaining balance of
its long-lived assets. If such events or
circumstances were to indicate that the
carrying amount of these assets would not
be recoverable, the Company would estimate
the future cash flows expected to result
from the use of the assets and their
eventual disposition. If the sum of the
expected future cash flows (undiscounted
and without interest charges) is less than
the carrying amount of the asset, an
impairment loss would be recognized by the
Company.
(i) Preoperating Costs
Preoperating costs represent the cost of
integrating new types of aircraft. Such
costs, which consist primarily of flight
crew training and aircraft ownership
related costs, are deferred and amortized
over a period of four years on a
straight-line basis.
In 1997, the Company capitalized
approximately $1.8 million of these costs
related to the introduction of the Canadair
Regional Jet ("CRJ") into the Company's
fleet. Accumulated amortization of
preoperating costs at December 31, 1996 and
1997 were $722,000 and $53,000,
respectively. In 1997, the J-41
preoperating costs were completely
amortized and written off.
(j) Intangible Assets
Goodwill of approximately $3.2 million,
representing the excess of cost above the
fair value of net assets acquired in the
acquisition of ACA, is being amortized by
the straight-line method over twenty years.
The primary financial indicator used by the
Company to assess the recoverability of its
goodwill is undiscounted future cash flows
from operations. The amount of impairment,
if any, is measured based on projected
future cash flows using a discount rate
reflecting the Company's average cost of
funds. Slots are being amortized by the
straight-line method over twenty years.
Accumulated amortization of intangible
assets at December 31, 1996 and 1997 was
$911,000 and $1.1 million, respectively.
(k) Maintenance
The Company's maintenance accounting policy
is a combination of expensing events as
incurred and accruing for certain
maintenance events. The Company accrues for
current and future maintenance events on an
ongoing basis at rates it estimates will be
sufficient to cover maintenance costs for
the aircraft. For the J-32 aircraft, the
Company accrues for engine overhaul costs
on a per flight hour basis. For the J-41
aircraft, the Company accrues for airframe
component and engine overhaul costs on a
per flight hour basis. For the CRJ
aircraft, the Company accrues for the
replacement of engine life limited parts on
a per cycle basis. All other maintenance
costs are expensed as incurred.
(l) Deferred Credits
The Company accounts for lease incentives
provided by the aircraft manufacturers as
deferred credits. These credits are
amortized on a straight-line basis as a
reduction to lease expense over the
respective lease term. The lease incentives
are credits that may be used to purchase
spare parts, satisfy aircraft return
conditions and or be applied against future
rental payments.
(m) 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.
(n) Stock Options
The Company accounts for its stock-based
compensation plans using the intrinsic
value method prescribed under Accounting
Principles Board (APB) No. 25. Under these
principles, the Company records
compensation expense for stock options only
if the exercise price is less than the fair
market value of the stock on the
measurement date.
(o) Income Per Share
On March 3, 1997 the Financial Accounting
Standards Board issued Statement of
Financial Accounting Standards No, 128,
"Earnings per Share (SFAS 128)", which
became effective for the Company's fiscal
year ended December 31, 1997 and required
restatement of previously reported earnings
per share data. SFAS 128 provides for the
calculation of Basic and Diluted income per
share.
Basic income per share is computed by
dividing net income, after deducting any
preferred dividend requirements, by the
weighted average number of common shares
outstanding. Diluted income per share is
computed by dividing net income, after
deducting any preferred dividend
requirements, by the weighted average
number of common shares outstanding and
common stock equivalents, which consist of
shares subject to stock options computed
using the treasury stock method. In
addition, dilutive convertible securities
are included in the denominator while
interest, net of tax, for convertible debt
is included in the numerator. In 1995, the
dilutive effect of the convertible
preferred stock and the convertible debt
are included in the calculation of diluted
income per share. In 1996, convertible
preferred stock is included, but the
convertible debt was retired in 1995 and
therefore, not included in the 1996
calculation. In 1997, the calculation
included the dilutive effect of new
convertible debt, but not the convertible
preferred stock as it was redeemed in 1996.
A reconciliation of the numerator and
denominator used in computing income per
share is as follows (in thousands except
per share amounts):
1995 1996 1997
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
---------------------------------------------------------------------------------------------------------------
Share calculation:
Average number of common shares
outstanding 8,342 8,342 8,481 8,481 7,824 7,824
Common stock equivalents
due to assumed exercise of - 414 - 311 - 350
options
Common stock equivalents due to
assumed conversion of preferred
stock - 546 - 128 - -
Common stock equivalents due to
assumed conversion of
convertible debt - 568 - - - 1,582
--------------------------------------------------------------------------
Total common shares and common stock
equivalents 8,342 9,871 8,481 8,920 7,824 9,756
--------------------------------------------------------------------------
Adjustments to net income:
Net income $ 12,902 $ 12,902 $ 19,158 $ 19,158 $ 14,500 $ 14,500
Less: Preferred dividend
requirements based on average
number of preferred shares (335) - (64) - - -
Less: Interest expense net of tax - 237 - - - 1,187
--------------------------------------------------------------------------
Net income available to common
shareholders $ 12,567 $ 13,139 $ 19,094 $ 19,158 $ 14,500 $ 15,686
--------------------------------------------------------------------------
Net income per share $ 1.51 $ 1.33 $ 2.25 $ 2.15 $ 1.85 $ 1.61
---------------------------------------------------------------------------------------------------------------
(p) Reclassifications
Certain amounts as previously reported have
been reclassified to conform to to the
current year presentation.
2. Property and
Equipment Property and equipment consist of the following:
(in thousands)
December 31, 1996 1997
---------------------------------------------------------- ---------------- ---------------
Owned aircraft and improvements - $ 18,916
Improvements to leased aircraft $ 2,350 3,521
Flight equipment, primarily rotable spare parts 14,014 18,456
Maintenance and ground equipment 3,380 4,166
Computer hardware and software 1,464 2,029
Furniture and fixtures 296 445
Leasehold improvements 619 1,831
---------------------------------------------------------- ---------------- ---------------
22,123 49,364
Less: Accumulated depreciation and amortization 5,966 8,726
---------------------------------------------------------- ---------------- ---------------
$ 16,157 $ 40,638
---------------------------------------------------------- ---------------- ---------------
3. Accrued Accrued liabilities consist of the following:
Liabilities
(in thousands)
December 31, 1996 1997
---------------------------------------------------------- ---------------- ---------------
Accrued payroll and employee benefits $ 4,929 $ 6,914
Air traffic liability 2,703 1,404
Interest 13 1,352
Aircraft rents 564 1,644
Reservations and handling 2,454 2,441
Engine and airframe overhaul costs 3,311 3,589
Fuel 1,196 977
Accrued taxes payable - 2,704
Other 2,206 2,306
---------------------------------------------------------- ---------------- ---------------
$17,376 $23,331
---------------------------------------------------------- ---------------- ---------------
4. 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.
The line of credit is collateralized by accounts receivables and
general intangibles and will expire on September 30, 2000, or
upon termination of the United Express marketing agreement,
whichever is sooner. Interest is payable monthly at an annual
rate of prime plus 1% (8.5% at December 31, 1997). The Company
has pledged approximately $7.7 million of this line as collateral
to secure letters of credit issued on behalf of the Company. At
December 31, 1997, the Company's remaining available borrowing
limit was approximately $4 million. There was no balance
outstanding under the line of credit at December 31, 1996, or
December 31, 1997.
Long-term debt consists of the following:
(in thousands)
December 31,
1996 1997
----------------------------------------------------------------------------- ------------------ ----------------
Convertible subordinated notes, principal due July 1, 2004,
interest payable in semi-annual installments on the
outstanding principal with interest
at 7%, unsecured. $ - $57,500
EquipmentNotes associated with Pass Through Trust Certificates,
due January 1, 2008 and January 1, 2010, principal payable
annually
through January 1, 2006 and semi-annually thereafter through
maturity, interest payable semi-annually at 7.49% throughout
term of notes,
collateralized by J-41 aircraft. - 16,431
Notes to institutional lenders, originally due between March 1998
and April 2001, principal and interest payable in monthly
installments ranging between $9,500 and $40,000, with
interest from 6.5% to 12%, collateralized by flight
equipment, spare engines and parts, and
ground equipment. 2,302 331
Note payable to supplier, due May 15, 2000, principal payable monthly with
interest at 6.74%, unsecured. - 1,225
Note payable to airport authority, due April 1, 2001, principal
payable monthly with interest at 6.5% through March 31, 1995
and prime plus
1.5% thereafter through maturity, collateralized by expendable parts 760 -
inventory.
Note payable to institutional lender, due October 1, 1998, principal payable
monthly with interest at 6.61%, unsecured. 466 217
Note payable to other airline, due March 31, 1998, principal
payable in quarterly installments of $38,400 with interest at
9%, collateralized
by ground support equipment. 192 -
Other 6 2
----------------------------------------------------------------------------- ------------------ ----------------
Total 3,726 75,706
----------------------------------------------------------------------------- ------------------ ----------------
Less: Current Portion 1,319 1,851
----------------------------------------------------------------------------- ------------------ ----------------
$2,407 $73,855
----------------------------------------------------------------------------- ------------------ ----------------
In September 1997, approximately $112 million of
pass through certificates were issued in a
private placement by separate pass through
trusts, which used the proceeds to purchase
equipment notes (the "Equipment Notes") issued in
connection with (i) leveraged lease transactions
relating to four J-41s and six CRJs (delivered or
expected to be delivered), all of which are or
will be leased to the Company (the "Leased
Aircraft"), and (ii) the financing of four J-41s
owned by the Company (the "Owned Aircraft"). The
Equipment Notes issued with respect to the Owned
Aircraft are direct obligations of ACA,
guaranteed by ACAI and are included as debt
obligations in the accompanying financial
statements. The Equipment Notes issued with
respect to the Leased Aircraft are neither debt
obligations of ACA nor guaranteed by ACAI. The
Equipment Notes for the Owned Aircraft carry a
weighted average interest rate of approximately
7.49% with three Equipment Notes maturing on
January 1, 2008, and one Equipment Note maturing
January 1, 2010. The aggregate principal amount
of the notes is approximately $16.4 million.
Aggregate principal payments for the next five
years will be approximately $1 million in each of
the years of 1998 through 2001 and $1.1 million
in 2002.
With respect to one CRJ leased aircraft, at
December 31, 1997 (the "Prefunded Aircraft"), the
proceeds from the sale of the Equipment Notes
were deposited into collateral accounts, to be
released at the closing of a leveraged lease
related to the Prefunded Aircraft. In January
1998, an equity investor purchased this aircraft
and entered into a leveraged lease with the
Company and the collateral accounts were
released.
Pursuant to a Purchase Agreement executed on June
27, 1997, between the Company and Alex. Brown &
Sons, Incorporated and The Robinson-Humphrey
Company, Inc. as Initial Purchasers, on July 2,
1997, the Company issued $50 million aggregate
principal amount of 7% Convertible Subordinated
Notes due July 1, 2004 (the "Notes"), pursuant to
Rule 144A under the Securities Act of 1933, and
received net proceeds of approximately $48.3
million related to the sale of the Notes. On July
18, 1997 the Company issued an additional $7.5
million aggregate principal amount of the Notes
to cover over-allotments, and received net
proceeds of $7.3 million related to the exercise
of the over-allotment option.
The Notes are convertible into shares of Common
Stock, par value $0.02 of the Company (the
"Common Stock") by the holders at any time after
sixty days following the latest date of original
issuance thereof and prior to maturity, unless
previously redeemed or repurchased, at a
conversion price of $18 per share, subject to
certain adjustments. Interest on the Notes is
payable on April 1 and October 1 of each year,
commencing October 1, 1997. The Notes are not
redeemable by the Company until July 1, 2000.
Thereafter, the Notes will be redeemable, at any
time, on at least 15 days notice at the option of
the Company, in whole or in part, at the
redemption prices set forth in the Indenture
dated July 2, 1997, in each case, together with
accrued interest. The Notes are unsecured and
subordinated in right of payment in full to all
existing and future Senior Indebtedness as
defined in the Indenture. The holders of the
Notes have certain registration rights with
respect to the Notes and the underlying Common
Stock (see subsequent events footnote).
On April 1, 1997, the Company executed an $11
million short-term promissory note for deposits
related to the acquisition of CRJs. The
promissory note was paid in full on July 2, 1997
from the proceeds of the Notes issued on July 2,
1997 as described above. During 1997, the Company
retired $3.1 million of certain high interest
rate debt with the proceeds of the Notes. 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 million to
equity, an additional $1 million cash equity
investment, creation of a term loan facility in
the amount of $4 million, issuance of redeemable
convertible preferred stock of approximately $3.8
million, and a new revolving line of credit
facility of $5 million.
The $4 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 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 $3.8 million. The
shares were to be redeemed by the Company at the
end of seven years and were redeemable at the
option of the Company, prior to redemption. The
Company redeemed, at par, the Series A Redeemable
Convertible Preferred Stock on March 29, 1996.
As of December 31, 1997, maturities of long-term
debt are as follows:
(in thousands)
-------------------------------------------------
1999 1,650
2000 1,403
2001 1,042
2002 1,115
2003-2010 68,645
-------------------------------------------------
$75,706
-------------------------------------------------
The Company has various financial covenant
requirements associated with its debt and
marketing agreements. These covenants require
meeting certain financial ratio tests, including
tangible net worth, net earnings, current ratio
and debt service levels.
5. Obligations Under Capital Leases
The Company leases certain equipment for noncancellable terms of more
than one year. The net Under Capital book value of the equipment under
capital leases at December 31, 1996 and 1997 is $5.2 million Leases
and $4.5 million, respectively. The leases were capitalized at the
present value of the lease payments. Interest rates for these leases
ranged from 2.3% to 18.1%.
At December 31, 1997, 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,
-------------------------------------------------
1998 $ 1,820
1999 1666
2000 581
2001 201
2002 19
-------------------------------------------------
Future minimum lease payments 4,287
Amount representing interest 267
-------------------------------------------------
Present value of minimum lease payments 4,020
Less: Current maturities 1,730
-------------------------------------------------
$ 2,290
-------------------------------------------------
6. Operating Leases
The Company leases its principal administrative, airport and
maintenance facilities under Leases operating leases expiring from
2002 to 2023. Future minimum lease payments will average approximately
$2.4 million per year.
Future minimum lease payments under noncancellable aircraft operating
leases at December 31, 1997 are as follows:
(in thousands)
Year ending December 31,
-------------------------------------------------
1998
1999 35,146
2000 34,909
2001 33,304
2002 32,708
2003 - 2007 134,212
2008 - 2012 60,413
2013 - 2014 12,829
------------------------------------------------
Total minimum lease payments $ 379,558
-------------------------------------------------
The noncancellable aircraft operating lease
commitments above reflect amounts for one CRJ
pursuant to an operating lease with a third party
that was not signed until January 1998. As of
December 31, 1997, and prior to entering into the
long term operating lease in January 1998, the
Company was obligated to pay rent to the
manufacturer under a month to month operating
lease agreement. Certain of the Company's leases
require aircraft to be in a specified maintenance
condition at lease termination or upon return of
the aircraft.
The Company's lease agreements generally provide
that the Company pay taxes, maintenance,
insurance and other operating expenses applicable
to leased assets. Operating lease expense was
$30.5 million; $33.8 million; and $35.7 million
for the years ended December 31, 1995, 1996 and
1997, respectively.
7. 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
certain employees and directors of the Company.
Under the plans, options are granted by the
compensation committee of the board of directors
and vest over a 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.
A summary of the status of the Company's stock
options as of December 31, 1995, 1996 and 1997 and
changes during the periods ending on those dates
is presented below:
1995 1996 1997
---- ---- ----
Weighted-average Weighted-average Weighted-average
exercise exercise exercise price
price price
Shares Shares Shares
------------- ------------- ------------ ------------- ------------- --------------
Outstanding at beginning of year 653,002 $ 2.32 729,558 $ 2.86 958,392 $6.32
Granted 140,500 $ 5.30 395,500 $ 11.42 342,000 $17.82
Exercised 31,941 $ 2.25 142,499 $ 2.49 240,597 $5.20
Canceled 32,003 $ 3.02 24,167 $ 7.85 31,334 $10.89
------------- ------------- ------------ ------------- ------------- --------------
Outstanding at end of year 729,558 $ 2.86 958,392 $ 6.32 1,028,461 $10.27
------------- ------------- ------------ ------------- ------------- --------------
Options exercisable at year-end 541,889 $ 2.23 531,443 $ 3.34 458,284 $4.54
------------- ------------- ------------ ------------- ------------- --------------
Weighted-average fair value of options
granted during the year $4.03 $8.49 $12.98
The following table summarizes information about fixed stock options
at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-average
Number remaining Weighted-average Number Weighted-average
outstanding at contractual life exercise price exercisable exercise price
Range of exercise price 12/31/97 (years) 12/31/97
- ------------------------------------ ----------------- ----------------- ----------------- ----------------- -----------------
$2.08 - $3.45 340,500 4.9 $ 2.15 321,503 $ 2.12
$3.45 - $6.90 22,000 7.0 $ 4.25 15,333 $ 4.08
$6.90 - $10.35 116,619 7.9 $ 8.96 51,613 $ 8.83
$10.35 - $13.80 247,342 8.9 $12.41 58,170 $11.89
$13.80 - $17.25 162,500 9.1 $15.63 11,665 $16.04
$17.25 - $20.70 9,500 9.7 $19.17 0 $ 0.00
$20.70 - $24.15 127,500 9.8 $22.17 0 $ 0.00
$27.60 - $31.05 2,500 10.0 $30.50 0 $ 0.00
----------------- ----------------- ----------------- ----------------- -----------------
1,028,461 7.6 $10.27 458,284 $ 4.54
A risk-free interest rate of 5.8%, 5.25% and 5.8%
for 1995, 1996, and 1997, a volatility rate of
76%, 71% and 50% for 1995, 1996 and 1997, with an
expected life of 7.5 years for 1995, 1996 and
1997, was assumed in estimating the fair value. No
dividend rate was assumed for any of the years.
The following summarizes the pro forma effects
assuming compensation for such awards had been
recorded based upon the estimated fair value. The
proforma information disclosed below does not
include the impact of awards made prior to January
1, 1995 (in thousands, except per share data):
1995 1996 1997
As Reported Pro As Reported Pro Forma As Reported Pro Forma
Forma
--------------- -------------- ------------- ------------- --------------- --------------
Net Income $ 12,902 $ 12,819 $ 19,158 $ 18,117 $ 14,500 $ 13,436
Basic earnings
per share $ 1.51 $ 1.50 $ 2.25 $ 2.13 $ 1.85 $ 1.72
Diluted earnings per
share $ 1.33 $ 1.30 $ 2.15 $ 2.03 $ 1.61 $ 1.50
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.
At December 31, 1996, and 1997, 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.
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. The Company paid these dividends
in February 1996.
The Company redeemed $3.8 million in Series A
Redeemable Cumulative Convertible Preferred Stock
on March 29, 1996.
8. Employee Benefit Plans
The Company established an Employee Stock Ownership Plan (the "ESOP")
covering substantially Plans 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 contributions were made in 1996 or 1997.
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.
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 $395,000, $370,000,
and $445,000 for 1995, 1996 and 1997, respectively.
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.
Contribution expense was approximately $13,000, $29,000 and $133,000
for 1995, 1996 and 1997, respectively. Effective April 1, 1997, all
eligible pilots were 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.
Profit sharing compensation, which is based on attainment of certain
performance and financial goals, was approximately $1.2 million, $2.6
million, and $3.6 million in 1995, 1996 and 1997, respectively.
9. Income Taxes
The provision (benefit) for income taxes includes the following
components:
(in thousands)
Year Ending December 31, 1995 1996 1997
------------------------------------------------------------------------------------------------
Federal:
238 1,699 7,342
Deferred (1,230) (1,344) 1,907
--------------------------------------- ------------------ ----------------- -------------------
Total federal provision (benefit) (992) 355 9,249
--------------------------------------- ------------------ ----------------- -------------------
State:
Current 50 391 2,545
Deferred (270) (296) 545
--------------------------------------- ------------------ ----------------- -------------------
Total state provision (benefit) (220) 95 3,090
--------------------------------------- ------------------ ----------------- -------------------
Total provision (benefit) $ (1,212) $ 450 $ 12,339
--------------------------------------- ------------------ ----------------- -------------------
A reconciliation of income tax expense (benefit)
at the applicable federal statutory income tax
rate of 35% to the tax provision (benefit)
recorded is as follows:
(in thousands)
Year ending December 31, 1995 1996 1997
--------------------------------------- ------------------ ------------------ ------------------
Income tax expense
at statutory rate $ 4,092 $ 6,863 $ 9,394
Increase (decrease) in tax
expense (benefit):
Change in valuation
allowance (1,500) (1,640) -
Utilization of net operating
loss carryforward (4,677) (5,811) -
Alternative minimum tax
expense ("AMT") 210 - -
Permanent differences
and other 78 58 937
State income taxes, net
of federal benefit 585 980 2,008
--------------------------------------- ------------------ ------------------ ------------------
--------------------------------------- ------------------ ------------------
Income tax expense (benefit) $(1,212) $ 450 $12,339
--------------------------------------- ------------------ ------------------ ------------------
Deferred income taxes result from temporary
differences which are the result of provisions of
the tax laws that either require or permit certain
items of income or expense to be reported for tax
purposes in different periods than for financial
reporting purposes.
The following is a summary of the Company's
deferred income taxes as of December 31, 1996, and
1997:
(in thousands)
December 31, 1996 1997
------------------------------------------------ -------------------------- ------------------
Deferred tax assets:
Engine overhaul reserve $ 1,324 $ 1,489
Intangible assets 1,195 1,139
Revenue valuation reserves 1,362 746
Reserve for bad debts 265 150
Alternative minimum tax
credit 661 -
carryforwards
Deferred credits - 1,940
Other 358 715
----------------------------------------- ------ -------------------------- ------------------
Total deferred tax assets 5,165 6,179
Deferred tax liabilities:
Depreciation and amortization (1,935) (4,614)
Preoperating costs (90) (828)
Other - (49)
------------------------------------------ ----- -------------------------- ------------------
Total deferred tax liabilities (2,025) (5,491)
------------------------------------------ ----- -------------------------- ------------------
Net deferred income tax assets $ 3,140 $ 688
------------------------------------------ ----- -------------------------- ------------------
No valuation allowance was established in either
1996 or 1997 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 not subject to alternative minimum
tax for the year ended December 31, 1997. An AMT
tax credit carryover of approximately $564,000 was
fully utilized in 1997.
The Company recorded a provision for income taxes
of approximately $500,000 for 1996, compared to a
provision for income taxes of approximately $12.3
million in 1997. The 1996 effective tax rate of
approximately 2.3% is significantly less than the
statutory federal and state rates due principally
to the full utilization of net operating loss
carryforwards and the elimination of the valuation
allowance. The 1997 effective tax rate of
approximately 46% is higher than the statutory
federal and state rates. The higher effective tax
reflects a more conservative approach to
estimating permanent differences between taxable
and book income.
10. Commitments Aircraft
As of December 31, 1997, the Company had a total
of 18 CRJs on order from Bombardier, Inc. The
initial order for 12 CRJs and 36 options was
placed on January 28, 1997. Options were
exercised on November 20, 1997 for an additional
six firm and six conditional CRJ deliveries. The
first five CRJs were delivered in the third and
fourth quarters of 1997. Nine deliveries are
scheduled in 1998 and nine deliveries are
scheduled in 1999. The capital cost to the
Company for these 18 deliveries is approximately
$166.5 million in 1998 and $166.5 million in
1999. As of December 31, 1997, the Company has
made $15 million of non-refundable aircraft
purchase deposits on these aircraft (see
Footnote 17, Subsequent Events).
The Company is exploring various third party
lease financing arrangements for future
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. The Company
currently has an agreement in principle from a
third party for approximately $126 million in
debt financing associated with the purchase of
nine CRJ's to be delivered in 1998 and 1999.
In July 1997, the Company entered into a series
of interest rate swap contracts in the amount of
$39.8 million. The swaps were executed by
purchasing six contracts maturing between March
and September 1998 with Bombardier, Inc. as the
counter party. The interest rate hedge is
designed to limit approximately 50% of the
Company's exposure to interest rate changes
until permanent financing for its second six CRJ
aircraft, which are scheduled for delivery
between March and September 1998, is secured. At
December 31, 1997, had all contracts settled on
that date, the Company would have been obligated
to pay the counter party approximately $1.4
million. Gains or losses resulting from the
interest rate swap contracts will be deferred
until the contracts are settled.
Maintenance Facility
In June 1997, the Industrial Development
Authority of Loudoun County, Virginia ("IDA")
approved a $9.4 million tax exempt bond issuance
in connection with the Company's proposed
construction of a maintenance facility at
Washington-Dulles. These bonds were issued under
a variable interest rate structure for a
twenty-five year term including a requirement
for a monthly sinking fund provision, and are
collateralized by a $9.6 million letter of
credit issued on behalf of the Company by a
financial institution. The letter of credit is
collateralized by $4.9 million of the Company's
line of credit and the Company's leasehold deed
of trust on the maintenance facility. The
Company will be obligated to pay rent for the
facility and the underlying land leasehold, the
proceeds from which the IDA will make the
required interest and sinking fund payments. In
the event of a default, the Company would be
obligated to reimburse the financial institution
to the maximum amount of the letter of credit.
Annual rent is subject to escalation every five
years. In February 1998, the Company occupied
this building and began paying rent.
11. Restructuring
In 1994 the Company commenced a major restructuring plan. The basis of
the plan was to Charges simplify the 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 a result, the Company established an $11
million reserve for restructuring costs in 1994. The Company reversed
$521,000 and $426,000 of reserves in 1995 and 1996, respectively.
There are no remaining reserves on the Company's balance sheet related
to the restructuring.
12. 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.
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. 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. The Company is
currently unable to estimate the monetary award, if any, resulting
from this litigation, but believes it remains fully covered under the
Company's insurance policy.
The Company is also a party to an action pending in the United States
Court of Appeals for the Fourth Circuit known as Afzal v. Atlantic
Coast Airlines, Inc. (No. 98-1011). This action is an appeal of the
December 1997 decision granted in favor of the Company in a case
claiming wrongful termination of employment brought in the United
States District Court for the Eastern District of Virginia known as
Afzal v. Atlantic Coast Airlines, Inc. (Civil Action No. 96-1537-A).
The Company does not expect the outcome of this case to have any
material adverse effect on its financial condition or results of its
operations.
13. Related Party Transactions
The Company paid approximately $25,000 for the year ended December 31,
1995 in consulting Transactions fees to The Acker Group, a Company
owned by one of the Company's officers/stockholders. The agreement
under which the fees were paid ended as of February 1995.
14. Financial Instruments
In December 1995, the Company adopted Statement of Financial
Accounting Standards No. Instruments 107, "Disclosure 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 and short term investments 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.
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, 1996 December 31, 1997
------------------------------- ------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- -------------- ----------------
Cash and cash equivalents $21,470 $21,470 $39,167 $ 39,167
Short-term investments - - 10,737 10,737
Long-term debt (3,726) (3,912) (75,706) (120,125)
------------------------------ --------------- --------------- -------------- ----------------
15. Supplemental Cash Flow Information
Year ended December 31, (in thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period
for:
1995 1996 1997
---- ---- ----
- Interest $1,804 $ 883 $1,778
- Income taxes 190 1,319 5,767
------------------------------ --------------- -------------------- --------------------------
The following non cash investing and financial
activities took place in 1995, 1996 and 1997:
In 1995, the Company acquired $2.3 million 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 $335,000 on its Series A Cumulative
Convertible Preferred Stock (see Note 9).
In 1996, the Company acquired $1.2 million 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.
In 1997, the Company acquired $2.9 million in
rotable parts, spare engines, market planning
software and other fixed assets and expendable
parts under capital lease obligations and
through the use of manufacturers credits. As of
December 31, 1997, there was a remaining
balance of $700,000 in unused manufacturer
credits which is reflected in prepaid expenses
and other current assets.
In November 1997, the Company received $4.3
million in additional manufacturers credits of
which $261,000 was received in cash by the end
of 1997 leaving a balance of $4.1 million due
from the manufacturer as of December 31, 1997.
Such amount has been classified as other
assets.
16. Year 2000 Compliance
The Company has started to review its computer systems and application
programs for Compliance year 2000 compliance. The Company believes
that the cost to modify any of its non-compliant systems or
applications will not have a material effect on its financial position
or results of its operations. However, the Company can not give any
assurances that the systems of other parties upon which the Company
must rely, will be year 2000 compliant on a timely basis. Examples of
systems operated by others that the Company may use and or rely upon
are: FAA Air Traffic Control, Computer Reservation Systems for travel
agent sales and United Airlines' reservation, passenger check in and
ticketing systems. The Company's business, financial condition and or
results of operations could be materially adversely affected by the
failure of its systems and applications or those operated by others.
17. Subsequent Events
In January 1998, holders of approximately $5.9 million face amount of
the 7% Events Convertible Subordinated Notes ("Notes") exercised their
option to convert the Notes into 330,413 shares of the Company's
common stock. On March 3, 1998, the Company notified the remaining
holders of the Notes that the Company was reducing the conversion
price in order to induce the Note holders to redeem their Notes for
common stock. The Note holders have until April 8, 1998 to accept the
Company's inducement. The Company will record a non-operating one time
charge for the fair value of the cost of the inducement. If all
holders of the Notes accept the Company's inducement, the fair value
of the cost of the inducement would be approximately $2.3 million.
In January 1998, the Company entered into a contract to purchase fuel
from United Aviation Fuels Company ("UAFC"), a wholly-owned subsidiary
of United Airlines during the period February through September 1998.
The Company has committed to purchase 33,000 barrels of fuel per month
during the term of this contract at a delivered price excluding taxes
and into plane fees of 52.2 cents per gallon. In March 1998, the
Company extended the contract through December 1998, committing to
purchase 33,000 barrels per month, October through December, at a
delivered price excluding taxes and into plane fees of 50.35 cents per
gallon. Fuel purchased under this arrangement represents approximately
46% of the Company's anticipated 1998 fuel requirements.
On March 4, 1998, the Company agreed to a one-year extension until
March 31, 1999 of its code sharing agreements with United Airlines,
Inc.
On March 4, 1998, the Company converted five conditional orders for
CRJ's into firm deliveries. With this change, the Company will take
delivery of nine CRJ's in 1998 and an additional nine in 1999. The
Company also has options for 25 additional CRJ's. The Company took
delivery under operating leases, one CRJ in January and one in March,
1998.
18. Recent Accounting
Pronouncements
Recently, the American Institute of Certified Public Accountants
issued a proposed statement of position on accounting for start-up
costs, including preoperating costs related to the introduction of new
fleet types by airlines. The proposed accounting guidelines would
require companies to expense start-up costs as incurred. The FASB
recently approved the proposed guidelines and they will take effect
for fiscal years beginning after December 15, 1998. The Company has
deferred certain start-up costs related to the introduction of the
CRJs and is amortizing such costs to expense ratably over four years.
The Company will be required to expense any unamortized amounts
remaining as of January 1, 1999. The Company estimates the remaining
unamortized balance for deferred start-up costs will be approximately
$1.4 million on January 1, 1999.
19. Selected
Quarterly
Financial Dat
(Unaudited)
(in thousands, except per share amounts)
Quarter Ended
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
Operating revenues $41,114 $53,220 $54,864 $56,246
Operating income 1,037 9,968 9,054 8,884
Net income 703 5,885 4,844 3,068
Net income per share
Basic $ 0.08 $ 0.69 $ 0.68 $ 0.43
Diluted $ 0.08 $ 0.67 $ 0.51 $ 0.34
Weighted average shares
outstanding 8,501 8,510 7,093 7,197
Quarter Ended
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
Operating revenues $37,857 $50,366 $49,541 $44,720
Operating income 1,118 9,203 7,674 2,268
Net income 862 8,464 7,131 2,701
Net income per share
Basic $ 0.10 $ 1.00 $ 0.84 $ 0.32
Diluted $ 0.10 $ 0.96 $ 0.81 $ 0.31
Weighted average shares
outstanding 8,355 8,467 8,477 8,479
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Reference is hereby made to the Company's Form 8K Item 4. filed October
29, 1997.
PART III
The information required by this Part III (Items 10, 11, 12
and 13) is hereby incorporated by reference from the Company's definitive proxy
statement which is expected to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements listed in the
index in Part II, Item 8, are filed as part of this
report.
2. Consolidated Financial Statement Schedules
Reference is hereby made to the Consolidated
Financial Statements and the Notes thereto included
in this filing in Part II, Item 8.
3. Exhibits
Exhibit
Number Description of Exhibit
3.1 (note 6) Restated Certificate of Incorporation of the Company.
3.1(a) (note 4) Certificate of Correction to the Restated Certificate of Incorporation.
3.2 (note 4) Restated By-laws of the Company.
4.1 (note 7) Specimen Common Stock Certificate.
4.2 (note 7) Stockholders' Agreement, effective as of October 15, 1991, among the Company, the stockholders and
the holder of warrants of the Company named on the signature pages thereto and a trust established
pursuant to the Atlantic Coast Airlines, Inc. Employee Stock Ownership Plan, together with Amendment
and Second Amendment thereto dated as of February 24, 1992 and May 1, 1992 respectively.
4.3 (note 7) Registration Rights Agreement, dated as of September 30, 1991,among the Company and the stockholders
named on the signature pages thereto(the "Stockholders Registration Rights Agreement").
4.4 (note 7) Form of amendment to the Stockholders Registration Rights Agreement.
4.17 (note 3) Indenture, dated as of July 2, 1997, between the Company and First Union National Bank of Virginia
4.18 (note 3) Registration Rights Agreement, dated as of July 2, 1997, by and among the Company, Alex. Brown & Sons
Incorporated and the Robinson-Humphrey Company, Inc.
10.1 (note 7) Atlantic Coast Airlines, Inc. 1992 Stock Option Plan.
10.2 (note 4) Restated Atlantic Coast Airlines, Inc. Employee Stock Ownership Plan, effective October 11, 1991, as
amended through December 31, 1996.
10.4 (note 4) Restated Atlantic Coast Airlines 401(k) Plan, as amended through February 3, 1997.
10.4(a) (note 1) Amendment to the Atlantic Coast Airlines 401(k) Plan effective May 1, 1997
10.6 (notes 7 & 8) United Express Agreement, dated October 1, 1991, among United Airlines, Inc., Atlantic Coast Airlines
and the Company, together with Amendment No. 1, dated as of April 1, 1993.
10.6(a) (note 1) Third Amendment to United Express Agreement, dated March 3, 1998, among United Airlines, Inc.,
Atlantic Coast Airlines and the Company.
10.7 (notes 7 & 8) Agreement to Lease British Aerospace Jetstream-41 Aircraft, dated December 23, 1992, between British
Aerospace, Inc. and Atlantic Coast Airlines.
10.12(b) (note 5) Amendment and Restated Severance Agreement, dated as of October 18, 1995 between the Company and
Kerry B. Skeen.
10.12(c) (note 4) First Amendment To Severance Agreement For Kerry B. Skeen effective as of October 16, 1996.
10.12(h) (note 4) 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, and with Paul H. Tate,
dated as of February 1, 1998.
10.13(a) (note 4) Form of Indemnity Agreement.The Company has entered into substantially identical agreements with the
individual members of its Board of Directors.
10.20 (note 6) 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 (note 6) Acquisition Agreement, dated as of December 30, 1994, by and among Jetstream Aircraft, Inc., JSX
Capital Corporation, and Atlantic Coast Airlines.
10.21(a) (note 4) Amendment Number One to Acquisition Agreement, dated as of June 17, 1996, by and among Jetstream
Aircraft, Inc., JSX Capital Corporation, and Atlantic Coast Airlines.
10.23 (note 4) Loan and Security Agreement, dated as of October 12, 1995, between Atlantic Coast Airlines and
Shawmut Capital Corporation.
10.23(a) (note 1) First Amendment to Loan and Security Agreement dated June 1, 1997 among the Company, Atlantic Coast
Airlines, and Fleet Capital Corporation.
10.23(b) (note 1) Second Amendment to Loan and Security Agreement dated December 1, 1997 among the Company, Atlantic
Coast Airlines, and Fleet Capital Corporation.
10.24 (note 5) Stock Incentive Plan of 1995.
10.25 (note 5) 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 (note 5) 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 (note 5) Split Dollar Agreement, dated as of December 29, 1995, between the Company and Kerry B. Skeen.
10.27(a) (note 4) 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, and with Paul H. Tate, dated
as of February 1, 1998.
10.29 (note 5) 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) (note 4) 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, and with Paul H.
Tate, dated as of February 1, 1998.
10.31 (note 4) Summary of Senior Management Bonus Program. The Company has adopted a plan in substantially the form
as outlined in this exhibit for 1998 and 1997.
10.32 (note 1) Summary of "Share the Success" Profit Sharing Plan. The Company has adopted a plan in substantially
this form for 1998, 1997 and 1996.
10.40 (notes 4 & 8) Purchase Agreement between Bombardier Inc. and Atlantic Coast Airlines Relating to the Purchase of
Canadair Regional Jet Aircraft dated
January 8, 1997.
10.50(a) (note 1) Form of Purchase Agreement, dated September 19, 1997, among the Company, Atlantic Coast Airlines,
Morgan Stanley & Co. Incorporated and First
National Bank of Maryland, as Trustee.
10.50(b) (note 1) Form of Pass Through Trust Agreement, dated as of September 25, 1997, among the Company, Atlantic
Coast Airlines, and First National Bank of Maryland, as Trustee.
10.50(c) (note 1) Form of Pass Through Trust Certificate.
10.50(d) (note 1) Form of Participation Agreement, dated as of September 30, 1997, Atlantic Coast Airlines, as Lessee
and Initial Owner Participant, State Street Bank and Trust Company of Connecticut, National
Association, as Owner Trustee, the First National Bank of Maryland, as Indenture Trustee,
Pass-Through Trustee, and Subordination Agent, including, as exhibits thereto, Form of Lease
Agreement, Form of Trust Indenture and Security Agreement, and Form of Trust Agreement.
10.50(e) (note 1) Guarantee, dated as of September 30, 1997, from the Company.
10.60 (note 4) 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.
10.80 (note 1) Ground Lease Agreement Between The Metropolitan Washington Airports Authority And Atlantic Coast
Airlines dated as of June 23, 1997
10.90 (notes 1 & 8) ISDA Master Agreement between the Company and Bombardier Inc. dated as of July 11, 1997.
11.1 Computation of Per Share Income.
21.1 (note 7) Subsidiaries of the Company.
23.1 (note 1) Consent of KPMG Peat Marwick.
23.2 (note 1) Consent of BDO Seidman.
Notes
(1) To be filed as an Amendment to this Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
(2) Filed as an Exhibit to the Amendment to the Annual Report on form 10-K/A filed on November 25, 1997, incorporated
herein by reference.
(3) Filed as an Exhibit to the Quarterly Report on Form 10-Q for the three month period ended June 30, 1997, incorporated
herein by reference.
(4) Filed as an Amendment to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996, incorporated
herein by reference.
(5) Filed as an Exhibit to the Annual report on Form 10-K for the fiscal year ended December 31, 1995, incorporated herein
by reference.
(6) Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31,1994, incorporated herein
by reference.
(7) Filed as an Exhibit to Form S-1, Registration No. 33-62206, effective July 20, 1993, incorporated herein by reference.
(8) Portions of this document have been omitted pursuant to a request for confidential treatment that has been granted.
Reports on Form 8-K.
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Date Subject
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October 6, 1997 Item 5. Other Events: Announcement of closing the sale
of $111.6 million of Pass Through Trust Certificates.
October 29, 1997 Item 4. Change in Registrant's Certifying Accountants.
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on
March 16, 1998.
ATLANTIC COAST AIRLINES, INC.
By: _________________________
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 16, 1998.
Name Title
Chairman of the Board of Directors
- ---------------------------------------------------
C. Edward Acker
Director, President
- --------------------------------------------------- and Chief Executive Officer
Kerry B. Skeen (principal executive officer)
Director, Executive Vice President
- --------------------------------------------------- and Chief Operating Officer
Thomas J. Moore
Senior Vice President, Treasurer and
- --------------------------------------------------- Chief Financial Officer
Paul H. Tate (principal financial officer)
Vice President, Financial Planning and Controller
- --------------------------------------------------- (principal accounting officer)
David W. Asai
- --------------------------------------------------- -----------------------------------------------------------
John Sullivan Susan M. Coughlin
Director Director
- --------------------------------------------------- -----------------------------------------------------------
Robert Buchanan James Kerley
Director Director
- --------------------------------------------------- -----------------------------------------------------------
Joseph Elsbury James Miller
Director Director