SECURITIES AND EXCHANGE
COMMISSION WASHINGTON,
D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-21976
ATLANTIC COAST AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Export Drive, Sterling, Virginia 20164
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 406-6500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
As of October 31, 1996, there were 8,477,909 shares of common stock,
par value $.02 per share, outstanding.
Page 1 of 22 sequentially numbered pages
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Balance Sheets
(In thousands except for share data and par September December 31,
values) 30, 1996 1995
(Unaudited)
Assets
Current:
Cash and cash equivalents $18,119 $ 8,396
Accounts receivable, net 18,858 14,607
Expendable parts and fuel inventory, 1,748 1,850
net
Prepaid expenses and other current 1,469 1,758
assets
Total current assets 40,194 26,611
Property and equipment, net of accumulated
depreciation and amortization 15,772 15,513
Preoperating costs, net of accumulated
amortization 284 462
Intangible assets, net of accumulated 2,936 2,864
amortization
Deferred tax asset 1,500 1,500
Other assets 610 549
Total assets $61,296 $47,499
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 3,950 $3,532
Line of credit with financial 6 -
institution
Current portion of long-term debt 1,051 1,214
Current portion of capital lease 1,458 1,192
obligations
Accrued liabilities 16,985 16,121
Total current liabilities 23,450 22,059
Long-term debt, less current portion 2,463 3,260
Capital lease obligations, less current 3,540 3,794
portion
Other liabilities 496 -
Total liabilities 29,949 29,113
Commitments and contingencies
Redeemable Series A cumulative convertible
preferred stock, $.02 par
value,(liquidation preference of $3,825)
shares authorized 8,000; shares issued and - 3,825
outstanding 3,825 in 1995
Stockholders' equity:
Preferred stock, $.02 par value per share;
shares authorized 4,992,000; no shares
issued or outstanding in 1996 or 1995 - -
Common stock: $.02 par value per share;
shares authorized 15,000,000; shares issued
8,490,409 in 1996 and 8,356,411 in 1995 170 167
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 37,099 36,774
Less: Common stock in treasury, at cost, (125) (125)
12,500 shares
Accumulated deficit (5,797) (22,255)
Total stockholders' equity 31,347 14,561
Total liabilities and stockholders' $61,296 $47,499
equity
See accompanying notes to the consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Operations
(Unaudited)
(In thousands except for earnings per share Three months ended
data) September 30,
1996 1995
Revenues:
Passenger $48,737 $43,122
Other 804 837
Total revenues 49,541 43,959
Operating expenses:
Salaries and related costs 10,802 10,426
Aircraft fuel 4,321 3,359
Aircraft maintenance and materials 4,735 3,794
Aircraft rentals and landing fees 8,452 7,650
Traffic commissions and related fees 7,477 7,114
Depreciation and amortization 772 556
Other 5,308 4,711
Restructuring charge reversals - (218)
Total operating expenses 41,867 37,392
Operating income 7,674 6,567
Other income (expense):
Interest expense (209) (442)
Interest income 108 8
Other income (expense) (4) 2
Total other expense (105) (432)
Income before income tax provision 7,569 6,135
Income tax provision 438 182
Net income $ 7,131 $5,953
Earnings per common and common equivalent shares:
-primary $0.79 $0.67
-fully diluted $0.79 $0.61
Weighted average common and common equivalent
shares:
-primary 8,996 8,810
-fully diluted 8,996 9,928
See accompanying notes to the consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Operations
(Unaudited)
(In thousands except for earnings per share Nine months ended
data) September 30,
1996 1995
Revenues:
Passenger $135,433 $113,756
Other 2,330 2,289
Total revenues 137,763 116,045
Operating expenses:
Salaries and related costs 32,802 29,766
Aircraft fuel 12,224 9,552
Aircraft maintenance and materials 12,720 11,730
Aircraft rentals and landing fees 24,930 21,472
Traffic commissions and related fees 21,242 19,477
Depreciation and amortization 2,061 1,626
Other 14,215 13,179
Restructuring charge reversals (426) (218)
Total operating expenses 119,768 106,584
Operating income 17,995 9,461
Other income (expense):
Interest expense (758) (1,400)
Interest income 154 12
Other income (expense) (13) 2
Total other expense (617) (1,386)
Income before income tax provision 17,378 8,075
Income tax provision 920 182
Net income $16,458 $ 7,893
Earnings per common and common equivalent
shares:
-primary $1.83 $0.88
-fully diluted $1.83 $0.82
Weighted average common and common equivalent
shares:
-primary 8,969 8,728
-fully diluted 8,969 9,915
See accompanying notes to the consolidated financial statements.
Atlantic Coast Airlines,
Inc. and
Subsidiary
Consolidated Statements of Cash
Flows
(Unaudited)
Nine months ended September 30,
(In thousands) 1996 1995
Cash flows from operating activities:
Net income $16,458 $7,893
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,061 1,635
Provision for uncollectible accounts 95 177
Amortization of finance costs 23 -
Amortization of deferred credits (16) -
Loss on disposal of fixed assets - (9)
Changes in operating assets and
liabilities:
Accounts receivable (4,346) (3,576)
Expendable parts and fuel inventory 207 985
Prepaid expenses and other current 289 2,953
assets
Accounts payable 418 (1,029)
Accrued liabilities 1,198 734
Net cash provided by operating activities 16,387 9,763
Cash flows from investing activities:
Purchase of property and equipment (1,250) (3,407)
Proceeds from sales of fixed assets - 2,833
Decrease (increase) in deposits (61) 62
Net cash used in investing activities (1,311) (512)
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 4,300
Payments of long-term debt (960) (854)
Payments of capital lease obligations (848) (526)
Net increase (decrease) in lines of credit 6 (6,356)
Decrease in intangible assets (230) -
Deferred credits 512 -
Proceeds from exercise of stock options 327 61
1995 cumulative preferred dividends paid in (335) -
1996
Redemption of Series A cumulative
convertible preferred stock (3,825) -
Net cash used in financing activities (5,353) (3,375)
Net increase in cash and cash equivalents 9,723 5,876
Cash and cash equivalents, beginning of period 8,396 2,290
Cash and cash equivalents, end of period $18,119 $8,166
See accompanying notes to the consolidated financial statements.
ATLANTIC COAST AIRLINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1996, and for the nine months
ended September 30, 1996, is unaudited)
1. BUSINESS AND BASIS OF PRESENTATION
Atlantic Coast Airlines, Inc. ("ACAI") is the holding company
of Atlantic Coast Airlines, ("ACA") one of the largest regional
airlines based on total revenues operating in the United States, serving
41 markets in seventeen states as of November 1, 1996. The
Company markets itself as "United Express" and is the only
code-sharing regional airline for United Airlines, Incorporated
("United") operating as United Express in the Eastern United States.
The Company operates primarily from United's East Coast hub at
Dulles International Airport located in Northern Virginia near
Washington, D.C.
The consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The information
furnished in the consolidated financial statements includes normal
recurring adjustments and reflects all other adjustments, including
restructuring charges reversals and other revisions to previous
estimates, which are, in the opinion of management, necessary for a
fair presentation of such consolidated financial statements. Results
of operations for the nine month period presented are not necessarily
indicative of the results to be expected for the year ending December
31, 1996. Certain information and footnote disclosures normally
included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements, and the notes thereto, included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
2. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common
shares and dilutive common stock equivalents outstanding. The
redeemable Series A cumulative convertible preferred stock did not
factor into the earnings per share computation for the current quarter
or the year to date because it was redeemed on March 29, 1996.
For the third quarter and the nine months ended September 30, 1995,
the result of the fully diluted common stock equivalents evaluation is
dilutive, therefore net income available for common shareholders
reflects the elimination of the dividend requirements for the
convertible preferred stock and the related interest expense for the
convertible debt while the average number of shares of common stock
and common stock equivalents outstanding are increased.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, December 31,
(In thousands) 1996 1995
Improvements to aircraft $ 2,350 $ 2,210
Flight equipment, primarily rotable parts 13,132 11,978
Maintenance and ground equipment 3,271 3,267
Computer hardware and software 1,435 1,178
Furniture and fixtures 296 272
Leasehold improvements 580 465
21,064 19,370
Less: Accumulated depreciation and
amortization 5,292 3,857
$15,772 $15,513
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
September 30, December 31,
(In thousands) 1996 1995
Accrued payroll and benefits $ 5,187 $ 4,554
Air traffic liability 2,441 2,690
Reservations and handling 2,166 2,155
Engine overhaul costs 3,038 2,242
Fuel 1,030 831
Other 3,123 3,649
$16,985 $16,121
5. DEBT AND PREFERRED STOCK
The Company redeemed $3.8 million in Series A cumulative
convertible preferred stock on March 29, 1996. The preferred stock
was issued to JSX Capital Corporation ("JSX"), a subsidiary of
British Aerospace, Inc. ("BAe") in December 1994 as part of a
$20 million financing arrangement consisting of a common stock
equity investment, the convertible preferred stock, and available
borrowings.
6. INCOME TAXES
The Company's estimated effective tax rate for the third quarter
of 1996 was 5.8%. This rate is significantly lower than the
statutory rate due to the expected utilization of net
operating loss carryforwards. The Company expects to utilize
the remaining net operating loss carryforward in the fourth
quarter 1996. In 1997, the Company expects the effective tax rate
to approximate the statutory tax rate.
7. RESTRUCTURING CHARGES
In 1994 the Company commenced a major restructuring plan. The
basis of the plan was to simplify the fleet by eliminating the
Embraer Brasilia EMB-120 ("EMB-120") and deHavilland Dash-8
("Dash-8") aircraft fleets in conjunction with the elimination of
unprofitable routes, the consolidation of maintenance bases and
other cost saving measures.
The Company concluded the accounting for the EMB-120
restructuring plan as of December 31, 1995 and the Dash-8
restructuring plan as of June 30, 1996. There are no remaining
reserves related to the EMB-120 or Dash-8 restructuring and all
obligations have been satisfied.
During the first quarter of 1996 the Company reversed
excess restructuring reserves of approximately $0.3 million
related to estimated return provisions. During the second quarter
of 1996 the Company reversed remaining unused restructuring
reserves of $0.2 million related to the sale of surplus parts
inventory to Mesa Air Group, Inc., ("Mesa") and the closure
of the Dash-8 maintenance facility in Stewart/Newburg, New
York. There were no restructuring related transactions during the
third quarter of 1996.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Third Quarter Operating Results
Three months ended September 30, Increase
(Decrease) (Scheduled Service) 1996 1995
% Change
Revenue passenger miles (RPM's) 97,895 97,984 (0.1%)
(000's)
Available seat miles (ASM's) (000's) 201,271 191,562 5.1%
Passenger load factor 48.6% 51.2% (2.6pts)
Revenue passengers carried 397,563 400,665 (0.8%)
Average passenger fare $122.59 $107.63 13.9%
Average yield per RPM (cents) 49.8 44.0 13.2%
Total revenues per ASM (cents) 24.6 22.9 7.4%
Cost per ASM (cents) 1 20.8 19.6 6.1%
Average passenger trip length 246 245 0.4%
(miles)
Break-even passenger load factor 2 41.0% 43.6% (2.6pts)
Revenue departures (completed) 35,801 35,036 2.2%
Revenue block hours (completed) 45,043 42,860 5.1%
Aircraft in service at September 30: 1996 1995
BAe 29 seat Jetstream-41 ("J-41") 28 25
BAe 19 seat Jetstream-32 ("J-32") 29 30
Total aircraft 57 55
Comparison of three months ended September 30, 1996, to three months
ended September 30, 1995.
In the third quarter of 1996 the Company had
consolidated net income of $7.1 million compared to net income of
$6.0 million in the third quarter of 1995. The improvement in financial
performance resulted primarily from 12.7% more revenue generated largely by
higher yields. This was partially offset by an increase in operating
expenses of 12.0%, reflecting an increase in the number of aircraft and
the level of operations, increased cost of fuel, increased
aircraft maintenance costs, increased weather related costs and
variable costs related to increased revenue and profitability.
Total revenue increased approximately $5.6 million or
12.7% during the third quarter of 1996 over the same quarter in
1995. This increase was due primarily to increases in average
passenger fares earned. In the third quarter of 1996 average yield
increased 5.8 cents per RPM, or 13.2% versus 1995, reflecting the effect
of industry fare increases and advances in the Company's yield
management. The average fare per passenger in the third quarter
of 1996 increased 13.9% compared to the third quarter of 1995.
Revenue passenger miles decreased 0.1% year over year while ASM's
increased 5.1%, resulting in a 2.6 percentage point decrease in load
factor. Total revenue also includes a favorable adjustment of $0.4
million related to revised estimates for air traffic liability.
Management believes that the industry fare
increases resulted in part from the expiration of the aviation
trust fund tax, also known as the "ticket tax", on December 31,
1995. The amount of the increases due to this factor cannot be
determined, nor can the impact on revenue that has resulted and
may result from thereinstatement of the tax on August 27, 1996.
The ticket tax will expire on December 31, 1996, and it is not known if
the tax will be renewed at that time.
Salaries and related costs increased $0.4 million or 3.6%
in the third quarter of 1996 versus the same period in 1995. The
increased expenses are largely a result of additional flight
crew hours and ground personnel to support the Company's increased
level of flight operations, increased profit sharing/incentive
program costs of approximately $0.2 million over the third quarter of
1995, and contractual wage increases for flight attendants as of
May 1, 1996. The increase is partially offset by a credit of $0.2
million that the Company recognized resulting from an audit of workers'
compensation premiums.
Aircraft fuel expense increased approximately $1.0
million or 28.6% in the third quarter of 1996 compared to the third
quarter of 1995. The increase in fuel expense resulted primarily from
a 23.1% increase in the total cost per gallon as a result of
substantial aircraft fuel price increases and the 4.3 cent per
gallon fuel tax imposed in October of 1995, as well as a 5.1%
increase in block hours. Aircraft fuel prices fluctuate with a
variety of factors, including the price of oil, and future increases
or decreases cannot be predicted with a high degree of certainty.
There can be no assurance that further increases will not adversely
affect the Company's operating costs.
Aircraft maintenance and materials expense
increased approximately $0.9 million or 24.8% in the third
quarter of 1996 compared to the third quarter of 1995. The
increase resulted from the expiration of the warranty coverage for
certain aircraft, costs associated with three additional J-41 aircraft
and rate increases in contract maintenance for engines.
Aircraft rentals and landing fees increased
approximately $0.8 million or 10.5% in the third quarter of 1996
compared to the third quarter of 1995. The increase resulted
from rent and landing fees associated with an average of three
additional J-41 aircraft, as well as increased landing fee rates
at several of the airports the Company serves.
Traffic commissions and related fees increased
approximately $0.4 million or 5.1% in the third quarter of 1996
compared to the third quarter of 1995. The increase is
attributable to a 13.0% increase in passenger revenue, and rate
increases in the computer reservation system and other passenger fees
paid to United and other airlines. The increased fees also resulted
from rebooking of passengers due to cancellations and delays associated
with the summer storms experienced on the East Coast. The increase was
offset by a decrease in the effective commission rate as a
result of the commission cap on travel agency tickets implemented
by the industry in 1995 and the introduction of electronic tickets
by United for United Express carriers in September 1995. In
addition, the Company recorded favorable adjustments of $0.3 million
related to revised estimates for passenger fees.
Depreciation and amortization increased approximately
$0.2 million or 38.8% in the third quarter of 1996 compared to
the same period in 1995. The increase results primarily from the
acquisition of additional
rotable spare parts associated with additional aircraft,
improvements to aircraft, facility leasehold improvements, and
other capital expenditures since the third quarter of 1995.
The total of other operating expenses increased $0.6
million or 12.7% in the third quarter of 1996 compared to the third
quarter of 1995. Quarter over quarter differences include an
increase of $0.3 million in glycol de-icing expense due to delayed
vendor invoicing for costs associated with the previous winter, an
increase of $0.2 million in professional and technical fees, and an
increase in pilot training and other miscellaneous charges of $0.1
million.
Total operating expenses increased approximately
$4.5 million during the third quarter of 1996 compared to the same
period last year, largely due to fuel cost increases, higher
aircraft maintenance costs, costs associated with an average
of three additional aircraft and the resulting 5.1% increase in
ASM's. The cost per available seat mile increased from 19.6 cents in
the third quarter of 1995 to 20.8 cents in the same period 1996.
The increased cost per available seat mile largely reflects the
increased costs of fuel, aircraft maintenance, wages and weather
related costs.
The Company's estimated effective tax rate for the
third quarter of 1996 was 5.8%. This rate is significantly lower
than the statutory rate due to the expected utilization of net
operating loss carryforwards. The Company expects to utilize
the remaining net operating loss carryforward in the fourth
quarter of 1996. In 1997, the Company expects the effective
tax rate to approximate the statutory rate.
Nine Months Operating Results
Nine months ended September 30, Increase
(Decrease)
(Scheduled Service) 1996 1995 % Change
Revenue passenger miles (RPM's) 267,326 260,714 2.5%
(000's)
Available seat miles (ASM's) (000's) 571,896 543,780 5.2%
Passenger load factor 46.7% 47.9% (1.2pts)
Revenue passengers carried 1,093,226 1,059,441 3.2%
Average passenger fare $123.88 $107.37 15.4%
Average yield per RPM (cents) 50.7 43.6 16.3%
Total revenue per ASM (cents) 24.1 21.3 13.1%
Cost per ASM (cents) 3 21.0 19.6 7.0%
Average passenger trip length 245 246 (0.4%)
(miles)
Break-even passenger load factor 4 40.6% 44.1% (3.5pts)
Revenue departures (completed) 102,570 97,213 5.5%
Revenue block hours (completed) 127,923 120,683 6.0%
Comparison of nine months ended September 30, 1996, to nine months
ended September 30, 1995.
In the first nine months of 1996 the Company had
consolidated net income of $16.5 million compared to a net income of
$7.9 million in the first nine months of 1995. The improvement in
financial performance resulted primarily from 18.7% additional revenue
generated by higher average fares and increased revenue passengers,
partially offset by an increase in operating expenses of 12.4%,
largely reflecting increased aircraft rent and landing fees due to
additional aircraft, fuel costs, salary expenses, additional revenue
and passenger related costs, profit sharing/incentive program
expenses, and increased weather related costs. The increase in
operating expenses were partially offset by restructuring charge
reversals and other revisions to estimates discussed below.
Total revenue increased approximately $21.7 million or 18.7%
during the first nine months of 1996 over the same period in 1995.
This increase is due to increases in average passenger fares earned
and a 3.2% increase in revenue passengers carried. In the first nine
months of 1996 average yield increased 7.1 cents per RPM, or 16.3%
versus 1995 reflecting advances in the Company's yield management and
the effect of industry fare increases. The average fare per passenger
for the first nine months of 1996 increased 15.4% compared to the
first nine months of 1995. Revenue passenger miles increased 2.5%
while ASM's increased 5.2% year over year resulting in a 1.2
percentage point decrease in load factor. Total revenue also includes
a favorable adjustment of $0.4 million related to revised estimates
for air traffic liability.
Management believes that the industry fare
increases resulted in part from the expiration of the aviation
trust fund tax, also known as the "ticket tax", on December 31,
1995. The amount of the increases due to this factor cannot be
determined, nor can the impact on revenue that resulted or may result
from the reinstatement of the tax on August 27, 1996. The ticket tax will
expire on December 31, 1996 and it is not known if the tax will be renewed
at that time.
Salaries and related costs increased $3.0 million or 10.2%
in the first nine months of 1996 versus the same period in 1995.
The increased expenses are largely a result of additional flight
crew hours and ground personnel to support the Company's increased
level of flight operations, additional profit sharing/incentive
program costs of $1.2 million compared to the first nine
months of 1995, and contractual wage increases for flight
attendants as of May 1, 1996. The increase is partially offset by
a credit of $0.2 million that the Company recognized resulting
from an audit of workers' compensation premiums.
Aircraft fuel expense increased approximately $2.7
million or 28.0% in the first nine months of 1996 compared to the
first nine months of 1995. The increase in fuel expense resulted
primarily from a 20.2% increase in the total cost per gallon of
fuel as well as the increased level of operations. Fuel costs per
gallon increased during the first nine months of 1996 as a result
of substantial aircraft fuel price increases and the 4.3 cent per
gallon fuel tax imposed in October of 1995. Aircraft fuel
prices fluctuate with a variety of factors, including the price
of oil, and future increases or decreases cannot be predicted with a
high degree of certainty. There can be no assurance that further
increases will not adversely affect the Company's operating
costs.
Aircraft maintenance and materials expense increased
$1.0 million or 8.4% in the first nine months of 1996 compared to
the first nine months of 1995. This increase largely results from an
average of six additional J-41 aircraft, the expiration of the
warranty coverage for certain aircraft, and rate increases in
contract maintenance for engines. The increase is offset by
favorable inventory adjustments and credits received from engine
and aircraft manufacturers of $0.4 million.
Aircraft rentals and landing fees increased
approximately $3.5 million or 16.1% in the first nine months of 1996
compared to the first nine months of 1995. The increase resulted
from rent and landing fees associated with the additional J-41
aircraft, as well as increased landing fee rates at several of
the airports the Company serves.
Traffic commissions and related fees increased
approximately $1.8 million or 9.1% in the first nine months of 1996
compared to the first nine months of 1995. The increase is
attributable to a 19.1% increase in passenger revenue, a 3.2% increase
in revenue passengers and rate increases in the computer reservations
systems and other passenger fees paid to United and other
airlines. The increase was offset by a decrease in the effective
commission rate as a result of the commission cap on travel agency
tickets implemented in 1995 and the introduction of electronic
tickets by United for United Express carriers in September of
1995. In addition, the Company recorded favorable adjustments of
$0.3 million related to revised estimates for passenger fees.
Depreciation and amortization increased approximately
$0.4 million or 26.8% in the first nine months of 1996 compared to
the same period in 1995. The increase results primarily from the
acquisition of additional rotable spare parts, improvements to aircraft,
facility leasehold improvements and other capital expenditures since the
first nine months of 1995.
The total of other operating expenses increased $1.0
million or 7.9% in the first nine months of 1996 compared to the
first nine months of 1995. Year over year differences included an
increase of $0.7 million in glycol de-icing expense due to severe winter
weather, an increase in pilot training expense of $0.6 million, an
increase in passenger food service of $0.3 million, reflecting an
adjustment to reconcile book to physical inventory, partially
offset by favorable adjustments of prior period accruals for
denied boarding compensation and passenger claims expense of $0.6
million, and a $0.3 million credit from an engine manufacturer.
The remaining components result in an unfavorable variance of $0.3
million.
In the first nine months of 1996 the Company reversed
excess restructuring reserves of $0.5 million. The reversal
consisted of $0.3 million related to estimated return provisions
and $0.2 million related to ferrying costs, legal fees, reserves
for spare parts and the closure of the Stewart/Newburg, New York
maintenance base. There are no remaining reserves for
restructuring and all obligations pertaining to the restructuring
have been satisfied.
Total operating expenses increased approximately
$13.2 million during the first nine months of 1996 compared to
the same period last year. Operating expenses primarily increased
as a result of aircraft rentals, fuel, passenger fees and
commissions, salaries, profit sharing, and maintenance expenses.
Cost per available seat mile increased from 19.6 cents for the
first nine months of 1995 to 21.0 cents for the same period in 1996.
The Company's estimated effective tax rate for first nine
months of 1996 was 5.3%. This rate is significantly lower than the
statutory rate due to the expected utilization of net operating
loss carryforwards. The Company expects to utilize the remaining
net operating loss carryforward in the fourth quarter 1996. In
1997, the Company expects to the effective tax rate to approximate
the statutory tax rate.
Outlook
This Outlook Section contains forward-looking
statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results
discussed in the forwardlooking statements. Factors that could
cause the Company's future results to differ materially include
the level of customer demand, the competitive environment, the cost
of fuel and the factors discussed below and in the Company's report
on Form 10-K for the year ended December 31, 1995.
The Air Line Pilots Association ("ALPA")
collective bargaining agreement became amendable on March 31, 1996.
On a formal request by ALPA, the Company has agreed to
negotiate possible amendments to certain sections of the contract, which
it hopes to accomplish within the next six months. The Company expects to
continue operating under the terms of the existing agreement until
new terms are negotiated.
The Company believes that its operating results
have benefited from its advances in yield management. In 1995 the
Company signed a contract for the installation of PROS IV,
a revenue management system marketed by PROS Strategic Systems that
is designed to further enhance the Company's yield management.
While several major U.S. and foreign airlines currently use the
PROS IV system, the Company believes that it is the first
regional airline to acquire PROS IV. Testing of the PROS IV
system at the Company began during the third quarter of this
year, with nearly full functionality of the system expected by
year-end. The Company is currently testing and calibrating the
features of the system and full benefits of the system are
anticipated to be realized by the second quarter of 1997.
As of December 31, 1995 the Company had net operating
loss carryforwards for income tax reporting purposes of
approximately $14.7 million. The Company's pretax net income for the
first nine months of 1996 was $17.4 million. The Company believes
that it is likely that the net operating loss carryforward will be
fully utilized by taxable net income by December 31, 1996.
Accordingly, the Company may increase its estimated effective tax
rate for the fourth quarter based on the level of pretax net income
and the amount of deferred tax assets.
Liquidity and Capital Resources
The Company has financed its working capital
requirements through a combination of internally generated funds
and supplemental borrowings under an accounts receivable financing
facility. The net cash provided by operating activities of the
Company was $16.4 million for the first nine months of 1996,
compared to $9.8 million for the same period of 1995.
The Company believes that, in the absence of changes in
the nature of the Company's operations or other circumstances, its
cash flow from operations, the accounts receivable credit
facility, and available equipment and other financing will be
sufficient to meet its working capital needs, capital expenditures,
and debt service requirements for the next twelve months.
Other Financing
In June 1996, the Company refinanced the operating leases
on the two J-41 aircraft delivered during the first quarter of
1996, which was the first time the Company had financed aircraft
without manufacturer support. The refinancing resulted in more
favorable terms compared to the prior leases. The Company will
continue to evaluate competitive leasing arrangements as they
arise.
Capital Equipment and Debt Service
On March 29, 1996, the Company redeemed the Series
A cumulative convertible preferred stock in the amount of $3.8
million. Dividends for the first quarter of 1996 were not
owed due to redemption before quarter end in accordance with the
terms of the preferred stock agreement.
Capital expenditures for the nine months of 1996 were
$1.2 million compared to $3.4 million in the same period of 1995.
Capital expenditures in 1996 consisted primarily of rotable
spare parts including a spare J-41 engine, PROS IV software for
yield management, facility leasehold improvements, purchases of
ground service equipment, and computers and other office equipment. For the
remainder of 1996 the Company anticipates spending up to $3.3
million on rotable spare parts, the Aircraft Communications
Addressing and Reporting System/Flight Management System, ground service
equipment, facility improvements, and other capital expenditures.
The Company took delivery of two J-41 aircraft during the
first quarter of 1996. As with the other aircraft, these aircraft were
initially delivered on a long-term lease from the manufacturer.
Subsequently, on June 28, 1996, the aircraft were sold to an equipment
leasing company for a direct lease with the Company on more favorable
terms than previous leases. The future lease obligations related to
these aircraft is $14.2 million.
Debt service including capital leases as of September 30,
1996, is $3.3 million compared to $3.8 million in the same period of
1995. The decrease is due primarily to the reduction of interest
expense related to the prepayment of the $4.0 million term loan, and
the retirement of other long term debt.
Operating Cash Flow
The Company bills substantially all of its earned airline
ticket revenue to United and other carriers under interline agreements
through the Airline Clearing House ("ACH"), which settles at the end
of the month following the month during which the revenue was earned.
The Company has a line of credit with a financial institution to
provide an adequate cash flow if needed, between ACH settlements. The
line is principally secured by the Company's interline accounts
receivable and unprocessed tickets.
Accounts receivable increased $4.3 million to $18.9 million
at September 30, 1996, compared to $14.6 million at December 31, 1995.
The increase is primarily attributed to the increased passenger ticket
receivables resulting from a higher volume of passenger transactions
as well as an increase in average value of tickets.
Expendable parts and fuel inventory decreased approximately
$0.1 million during the first nine months of 1996 to $1.7 million due
to a reduction in inventory stocking levels. The parts inventory
consists of spare parts for the J-32 and J-41 aircraft.
Prepaid expenses and other current assets decreased to $1.5
million at September 30, 1996, compared to $1.8 million at December
31, 1995, due to the recovery of short term deposits placed at
airports, and amortization of prepaid insurance, partially offset by
an increase in prepaid fuel and aircraft rents.
Accounts payable increased $0.4 million to $3.9 million at
September 30, 1996, compared to $3.5 million at December 31, 1995,
largely due to increased purchases from vendors and timing of
payments.
Long-term debt decreased $1.0 million in the first nine
months of 1996 as a result of scheduled payments on existing debt.
Total capital lease obligations decreased approximately $0.1 million
during the first nine months of 1996. The Company added $0.9 million
in capital leases of rotable parts during this period offset by
payments of $0.8 million.
Accrued liabilities increased to $17.0 million at September
30, 1996, from $16.1 million at December 31, 1995. The major
components of the change are as follows:
Accrued payroll and benefits increased $0.6 million due to
increased profit sharing/incentive program benefits to be paid within
the next six months.
Accrued air traffic liability decreased approximately $0.3
million reflecting adjustments to current and prior period estimates
for interline settlement differences.
Accrued engine overhaul costs increased approximately $0.8
million due to increased engine reserves primarily resulting from a
5.8% increase in year over year block hours.
All other accrued liabilities decreased approximately $0.5
million primarily due to the elimination of restructuring reserves
as of June 1996 and the payment in the first quarter of 1996 of
preferred dividends for
1995.
Restructuring
In 1994 the Company commenced a major restructuring plan.
The basis of the plan was to 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.
The Company concluded the accounting for the EMB-120
restructuring plan as of December 31, 1995 and the Dash-8
restructuring plan as of June 30, 1996. There are no remaining
reserves related to the EMB-120 or Dash-8 restructuring and all
obligations have been satisfied.
During the first quarter of 1996 the Company reversed excess
restructuring reserves of approximately $0.3 million related to
estimated return provisions. During the second quarter of 1996 the
Company reversed remaining unused restructuring reserves of $0.2
million related to the sale of surplus parts inventory to Mesa Air
Group, Inc., ("Mesa") and the closure of the Dash-8 maintenance
facility in Stewart/Newburg, New York.
ATLANTIC COAST AIRLINES, INC.
FISCAL QUARTER ENDED September 30, 1996
Part II . Other Information
ITEM 1. Legal Proceedings.
In a suit filed against the Company on November 2, 1994,
in U.S. District Court for the Southern District of New York,
the Aircraft Mechanics Fraternal Association (AMFA),
representing the Company's mechanics, challenged the right of
the Company to make certain work rule changes between the time
of the union certification in March 1994 and prior to an initial
collective bargaining agreement. On November 9, 1994, the District
Court upheld the Company's right to make those changes. AMFA
subsequently appealed to the U.S. Court of Appeals for the Second
Circuit. On May 19, 1995, the Court of Appeals affirmed the
District Court's decision in favor of the Company, Aircraft
Mechanics Fraternal Association v. Atlantic Coast Airlines, 55 F.
3d 90.
On August 1, 1995, AMFA filed a motion for
declaratory judgment on a remaining cause of action in the first
case, asserting that if the Company has the right to make
unilateral work rule changes, no matter how small, the union may
have a right to strike.
The Company opposed this motion, and on December 18, 1995, the
U.S. District Court ruled in the Company's favor, including the
explicit holding that the union is prohibited from striking
under current circumstances. AMFA has appealed this decision to
the U.S. Court of Appeals for the Second Circuit.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None to report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES, INC.
November 14, 1996 By: /S/ James B. Glennon
James B. Glennon
Senior Vice President and Chief
Financial Officer
November 14, 1996 By: /S/ Kerry B. Skeen
Kerry B. Skeen
President and Chief Executive
Officer
_______________________________
1 "Cost per available seat mile" represents total operating expenses
excluding amounts related to restructuring divided by available seat
miles.
2 "Break-even passenger load factor" represents the percentage of
available seat miles which must be flown by revenue passengers for
the airline to break-even after operating expenses excluding amounts
related to restructuring.
3 "Cost per available seat mile" represents total operating expenses
excluding amounts related to restructuring divided by available seat
miles.
4 "Break-even passenger load factor" represents the percentage of
available seat miles which must be flown by revenue passengers for
the airline to break-even after operating expenses excluding amounts
related to restructuring.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED
AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
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