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 June 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 July 31, 1996, there were 8,476,743 shares of common stock, par
value $.02 per share, outstanding.
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands except for share data and par 1996 1995
values) (Unaudited)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $12,741 $ 8,396
Accounts receivable, net 19,771 14,607
Expendable parts and fuel inventory, 1,595 1,850
net
Prepaid expenses and other current 2,584 1,758
assets
Total current assets 36,691 26,611
Property and equipment, net of accumulated
depreciation and amortization 15,359 15,513
Preoperating costs, net of accumulated
amortization 343 462
Intangible assets, net of accumulated 2,867 2,864
amortization
Deferred tax asset 1,500 1,500
Other assets 428 549
Total assets $57,188 $47,499
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 3,786 $ 3,532
Line of credit with financial 3,640 -
institution
Current portion of long-term debt 1,072 1,214
Current portion of capital lease 1,231 1,192
obligations
Accrued liabilities 16,656 16,121
Total current liabilities 26,385 22,059
Long-term debt, less current portion 2,733 3,260
Capital lease obligations, less current 3,497 3,794
portion
Other liabilities 396 -
Total liabilities 33,011 29,113
Commitments and contingencies
Redeemable Series A cumulative convertible
preferred stock, $.02 par
value,(liquidation preference of $3,825) - 3,825
shares authorized 8,000; shares issued and
outstanding 3,825 in 1995
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 17,000,000; shares issued
8,480,577 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 37,060 36,774
Less: Common stock in treasury, at cost,
12,500 shares (125) (125)
Accumulated deficit (12,928) (22,255)
Total stockholders' equity 24,177 14,561
Total liabilities and stockholders' $57,188 $47,499
equity
See accompanying notes to the consolidated financial statements.
</TABLE>
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
(In thousands except for earnings per 1996 1995 1996 1995
share data)
<S> <C> <C> <C> <C>
Revenues:
Passenger $49,566 $40,680 $86,696 $70,633
Other 800 725 1,526 1,452
Total revenues 50,366 41,405 88,222 72,085
Operating expenses:
Salaries and related costs 11,349 9,951 22,000 19,340
Aircraft fuel 4,209 3,197 7,903 6,192
Aircraft maintenance and materials 4,323 3,733 7,985 7,936
Aircraft rentals and landing fees 8,518 6,965 16,478 13,822
Traffic commissions and related fees 7,713 7,148 13,765 12,363
Depreciation and amortization 648 527 1,289 1,070
Other 4,566 4,201 8,907 8,468
Restructuring reversals (164) - (426) -
Total operating expenses 41,162 35,722 77,901 69,191
Operating income 9,203 5,683 10,321 2,894
Other income (expense):
Interest expense (306) (562) (549) (959)
Interest income 22 - 46 4
Other (expense) (9) - (9) -
Total other expense (292) (562) (512) (955)
Income before income tax provision 8,911 5,121 9,809 1,939
Income tax provision 446 - 482 -
Net income $8,464 $5,121 $9,327 $1,939
Earnings per common and common equivalent
-primary $0.94 $0.58 $1.04 $0.21
-fully diluted $0.94 $0.52 $1.04 $0.20
Weighted average common and common equivalent
shares:
-primary 9,005 8,675 8,964 8,560
-fully diluted 9,005 9,990 8,968 8,800
See accompanying notes to the consolidated financial statements.
</TABLE>
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
(In thousands) 1996 1995
Cash flows from operating activities:
<S> <C> <C>
Net income $9,327 $1,939
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,292 1,070
Provision for uncollectible accounts 30 170
Amortization of finance costs 14 -
Changes in operating assets and
liabilities:
Accounts receivable (5,194) (4,353)
Expendable parts and fuel inventory 255 907
Prepaid expenses and other current (826) 3,564
assets
Accounts payable 254 (696)
Accrued liabilities 870 (636)
Net cash provided by operating activities 6,022 1,965
Cash flows from investing activities:
Purchase of property and equipment (697) (2,530)
Proceeds from sales of fixed assets 16 3,715
Decrease in deposits 121 62
Increase in intangible assets (107) -
Net cash (used in) provided by investing (667) 1,247
activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 4,300
Payments of long-term debt (668) (565)
Payments of capital lease obligations (506) (369)
Net increase (decrease) in lines of credit 3,640 (6,357)
Deferred credits 396 -
Proceeds from exercise of stock options 288 53
1995 cumulative preferred dividends paid in (335) -
1996
Redemption of Series A cumulative
convertible preferred stock (3,825) -
Net cash used in financing activities (1,010) (2,938)
Net increase in cash and cash equivalents 4,345 274
Cash and cash equivalents, beginning of period 8,396 2,290
Cash and cash equivalents, end of period $12,741 $2,564
See accompanying notes to the consolidated financial statements.
</TABLE>
ATLANTIC COAST AIRLINES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 1996, and for the six months ended
June 30, 1996, is unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been
prepared by Atlantic Coast Airlines, Inc. ("ACAI") and its subsidiary,
Atlantic Coast Airlines, (together, 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
out of period adjustments, which are, in the opinion of management,
necessary for a fair presentation of such consolidated financial
statements. Results of operations for the six 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 second quarter of 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. For the six months ended June 30, 1995, the
result of this evaluation is antidilutive, therefore the net income
available for primary and fully diluted earnings per share is the
same.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1996 1995
<S> <C> <C>
Improvements to aircraft $ 2,328 $ 2,210
Flight equipment, primarily rotable parts 12,380 11,978
Maintenance and ground equipment 3,523 3,267
Computer hardware and software 1,271 1,178
Furniture and fixtures 287 272
Leasehold improvements 501 465
20,290 19,370
Less: Accumulated depreciation and
amortization 4,931 3,857
$15,359 $15,513
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1996 1995
<S> <C> <C>
Accrued payroll and employee benefits $ 5,825 $ 4,554
Air traffic liability 2,762 2,690
Interest 75 99
Aircraft rents 564 583
Reservations and handling 1,941 2,155
Engine overhaul costs 2,818 2,242
Fuel 805 831
Other 1,866 2,967
$16,656 $16,121
</TABLE>
5. DEBT
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. in December 1994 as part of a $20 million financing agreement
consisting of an equity investment and available borrowings. The
preferred stock was convertible into common stock at the option of JSX
at any time on or after September 15, 1997.
6. INCOME TAXES
The Company's estimated effective tax rate for the second quarter of
1996 was 5%. This rate is significantly lower than the statutory rate
due to the expected utilization of net operating loss carryforwards
and other tax credits. A significant increase in projected pretax
income would be the primary reason for any future revision in the
estimated effective 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, unused aircraft ferrying reserves, legal
fees, and other miscellaneous items. 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Second Quarter Operating Results
<TABLE>
<CAPTION>
Favorable
(Unfavorable)
Three months ended June 30, 1996 1995 % Change
<S> <C> <C> <C>
Revenue passenger miles (RPM's) 96,679 92,322 4.7%
(000's)
Available seat miles (ASM's) (000's) 196,870 176,887 11.3%
Passenger load factor 49.1% 52.2% (3.1 pts)
Revenue passengers carried 396,089 372,529 6.3%
Average yield per RPM (cents) $0.513 $0.441 16.4%
Cost per ASM (cents) <F1> $0.210 $0.202 (3.9%)
Average passenger trip length 244 248 (1.5%)
(miles)
Break-even passenger load factor <F2> 40.2% 44.9% 4.7 pts
<FN>
<F1>
"Cost per available seat mile" represents total operating expenses (in
1996, before reversal of restructuring charges) divided by available
seat miles.
<F2>
"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 (in 1996, before
reversal of restructuring charges).
</FN>
</TABLE>
<TABLE>
<CAPTION>
Aircraft in service at June 30: 1996 1995
<S> <C> <C>
British Aerospace Jetstream-32 ("J- 29 30
32")
British Aerospace Jetstream-41 ("J- 28 24
41")
Total aircraft 57 54
</TABLE>
Comparison of three months ended June 30, 1996, to three months ended
June 30, 1995.
In the second quarter of 1996 the Company had consolidated
net income of $8.5 million compared to net income of $5.1 million in
the second quarter of 1995. The improvement in financial performance
resulted primarily from 21.6% more revenue generated largely by higher
yields. This was partially offset by an increase in operating expenses
of 15.2%, largely reflecting an increase in the level of operations,
increased cost of fuel and costs related to more revenue and profits.
Total revenue increased approximately $9.0 million or 21.6%
during the second quarter of 1996 over the same quarter in 1995. This
increase was due to a 6.3% increase in revenue passengers carried and
increases in fares in the Company's markets. In the second quarter of
1996 average yield increased 7.2 cents per RPM, or 16.4%, to 51.3
cents versus 44.1 cents in 1995 reflecting improvement in the
Company's yield management and the effect of industry fare increases.
The average fare per passenger in the second quarter of 1996 increased
14.6% compared to the second quarter of 1995. 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 will result
from reinstatement of the tax. Revenue passenger miles increased 4.7%
while ASM's increased 11.3%, resulting in a 3.1 percentage point
decrease in load factor from 52.2% to 49.1%.
Salaries and related costs increased $1.4 million or 14.0%
in the second quarter of 1996 versus the same period in 1995. The
increased expenses are largely a result of additional salary expense
for flight and ground personnel associated with a 9.0% increase in
block hours flown, profit sharing program costs of approximately $1.0
million in the second quarter of 1996 compared to approximately $0.6
million in the second quarter of 1995, and contractual wage increases
for flight attendants.
Aircraft fuel expense increased approximately $1.0 million
or 31.7% in the second quarter of 1996 compared to the second quarter
of 1995. The increase in fuel expense resulted primarily from a 9.0%
increase in block hours and a 16.2% increase in the total cost per
gallon of fuel. The cost increase in the second quarter of 1996
resulted from both higher fuel prices 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
approximately $0.6 million or 15.8% in the second quarter of 1996
compared to the second quarter of 1995. The increase resulted largely
from the maintenance of an average of six additional J-41 aircraft,
offset by favorable adjustments of $0.3 million related to aircraft
parts inventory and the recording of credits from engine and aircraft
manufacturers.
Aircraft rentals and landing fees increased approximately
$1.6 million or 22.3% in the second quarter of 1996 compared to the
second quarter of 1995. The increase resulted from rent and landing
fees associated with an average of six additional J-41 aircraft, as
well as increases in landing fee rates.
Traffic commissions and related fees increased approximately
$0.6 million or 7.9% in the second quarter of 1996 compared to the
second quarter of 1995. The increase is attributable to a 21.8%
increase in passenger revenue, a 6.3% increase in revenue passengers
and a contractual rate increase in the program fees paid to United.
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 by United in September
1995 of electronic tickets.
Depreciation and amortization increased approximately $0.1
million or 23.0% in the second quarter of 1996 compared to the same
period in 1995. The increase results primarily from the acquisition of
additional rotable spare parts and computer equipment since the second
quarter of 1995.
The total of other operating expenses increased $0.4 million
or 8.7% in the second quarter of 1996 compared to the second quarter
of 1995. Year over year differences included an increase of $0.2
million in glycol de-icing expense due to late invoices related to the
severe winter weather, an increase in commissary expense due to an
inventory adjustment of $0.2 million, and an increase in J-41 pilot
training expense of $0.3 million. These increases were partially
offset by favorable adjustments of prior period accruals for denied
boarding compensation and passenger claims expense of $0.3 million,
and a favorable adjustment in facilities rents of $0.2 million. The
remaining components net to a unfavorable variance of $0.2 million.
In the second quarter of 1996 the Company reversed excess
restructuring reserves of $0.2 million related to the Dash-8 aircraft.
The reversal consisted of reserves for restructuring related
receivables and the closure of the Stewart/Newburg, New York
maintenance base. 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.
Total operating expenses increased approximately $5.4
million during the second quarter of 1996 compared to the same period
last year, largely reflecting an 11.3% increase in ASM's, due
primarily to the addition of an average of six J-41 aircraft. The cost
per available seat mile increased from 20.2 cents in the second
quarter of 1995 to 21.0 cents in the same period 1996. The increased
cost per available seat mile reflects the increased costs in aircraft
rentals, wages, and fuel.
The Company's estimated effective tax rate for the second
quarter of 1996 was 5% and is significantly lower than the statutory
rate due to the expected utilization of net operating loss
carryforwards and tax credits. A significant increase in projected
pretax income would be the primary reason for any future revision in
the estimated effective tax rate.
Six Months Operating Results
<TABLE>
<CAPTION>
Favorable
(Unfavorable
)
Six months ended June 30, 1996 1995 % Change
<S> <C> <C> <C>
Revenue passenger miles (RPM's) 169,431 162,730 4.1%
(000's)
Available seat miles (ASM's) (000's) 370,625 352,218 5.2%
Passenger load factor 45.7% 46.2% (0.5 pts)
Revenue passengers carried 695,663 658,776 5.6%
Average yield per RPM (cents) $0.512 $0.434 18.0%
Cost per ASM (cents) <F1> $0.211 $0.196 (7.6%)
Average passenger trip length (miles) 244 247 (1.4%)
Break-even passenger load factor <F2> 40.5% 44.3% 3.8 pts
<FN>
<F1>
"Cost per available seat mile" represents total operating expenses (in
1996, before reversal of restructuring charges) divided by available
seat miles.
<F2>
"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 (in 1996, before
reversal of restructuring charges).
</FN>
</TABLE>
Comparison of six months ended June 30, 1996, to six months ended
June 30, 1995.
In the first six months of 1996 the Company had consolidated
net income of $9.3 million compared to a net income of $1.9 million in
the first six months of 1995. The improvement in financial performance
resulted primarily from 22.4% additional revenue generated by higher
yields and increased revenue passengers, partially offset by an
increase in operating expenses of 12.6%, largely reflecting increased
aircraft rent due to additional aircraft, increased salary expenses,
fuel prices, additional passenger related costs, profit sharing
expenses, and increased weather related costs. The increase in
operating expenses would have been greater except for restructuring
charge reversals and other out-of-period adjustments discussed below.
Total revenue increased approximately $16.1 million or 22.4%
during the first six months of 1996 over the same period in 1995. This
increase is due to a 5.6% increase in revenue passengers carried and
increases in fares in the Company's markets. In the first six months
of 1996 average yield increased 7.8 cents per RPM, or 18.0%, to 51.2
cents versus 43.4 cents reflecting improvement in the Company's yield
management and the effect of industry fare increases. The average fare
per passenger for the first six months of 1996 increased 16.2%
compared to the first six months of 1995. 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 directly due to this factor
cannot be determined. Revenue passenger miles increased 4.1% while
ASM's increased 5.2% leading to a 0.5 percentage point decrease in
load factor from 46.2% to 45.7%.
Salaries and related costs increased $2.7 million or 13.8%
in the first six months of 1996 versus the same period in 1995. The
increased expenses largely reflect additional salary expense for
flight and ground personnel associated with a 6.5% increase in actual
block hours, profit sharing program costs of $1.6 million in the first
six months of 1996 compared to $0.6 million in the first six months of
1995, and contractual wage increases for flight attendants.
Aircraft fuel expense increased approximately $1.7 million
or 27.6% in the first six months of 1996 compared to the first six
months of 1995. The increase in fuel expense resulted primarily from a
6.5% increase in block hours and an 18.6% increase in the total cost
per gallon of fuel. The cost increase in the first six months of 1996
resulted from both higher fuel prices 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 $0.1
million or 0.6% in the first six months of 1996 compared to the first
six months of 1995. This increase largely results from the addition of
an average of seven J-41 aircraft offset by favorable adjustments of
$0.3 million from parts inventory adjustments and credits received
from manufacturers.
Aircraft rentals and landing fees increased approximately
$2.7 million or 19.2% in the first six months of 1996 compared to the
first six months of 1995. The increase results primarily from the
addition of an average of seven additional J-41 aircraft. The increase
also results from more landings associated with a 7.1% increase in
departures, and increased landing fee rates.
Traffic commissions and related fees increased approximately
$1.4 million or 11.3% in the first six months of 1996 compared to the
first six months of 1995. The increase is attributable to a 22.7%
increase in passenger revenue, a 5.6% increase in revenue passengers
and a contractual rate increase in the program fees paid to United.
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. Segment booking
fees increased primarily due to the greater number of transactions per
passenger resulting from additional rebookings brought about by the
severe winter weather on the East Coast during the first quarter of
1996.
Depreciation and amortization increased approximately $0.2
million or 20.5% in the first six months of 1996 compared to the same
period in 1995. The increase results primarily from the acquisition of
additional rotable spare parts and computer equipment since June 1995.
The total of other operating expenses increased $0.4 million
or 5.2% in the first six months of 1996 compared to the first six
months of 1995. Year over year differences included an increase of
$0.5 million in glycol de-icing expense due to the severe winter
weather, an increase in commissary expense due to an inventory
adjustment of 0.2 million, and an increase in J-41 pilot training
expense of $0.4 million. These increases were partially offset by
favorable adjustments of prior period accruals for denied boarding
compensation and passenger claims expense of $0.6 million, and a $0.2
million credit from an engine manufacturer. The remaining components
net to a favorable variance of $0.1 million.
In the first six months of 1996 the Company reversed excess
restructuring reserves of $0.4 million related to the Dash-8. The
reversal consisted of $0.2 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.
Total operating expenses increased approximately $8.7
million during the first six months of 1996 compared to the same
period last year. Operating expenses increased as a result of greater
passenger related expenses associated with the higher number of
passengers and revenue as well as aircraft rentals, fuel, and
increased profit sharing expenses. Cost per available seat mile
increased from 19.6 cents for the first six months of 1995 to 21.1
cents for the same period in 1996. The increased cost per available
seat mile reflects the increased costs in aircraft rentals, fuel,
passenger fees, and profit sharing costs.
The Company's estimated effective tax rate for first six
months of 1996 was approximately 5% and is significantly lower than
the statutory rate due to the expected utilization of net operating
loss carryforwards and tax credits. A significant increase in
projected pretax income would be the primary reason for any future
revision in the estimated effective tax rate.
Outlook
This Management's Discussion and Analysis contains forward-
looking statements which involve risks and uncertainties. The
Company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that could cause
the Company's future results to differ materially include the level of
customer demand, the competitive environment, the price of fuel and
the factors discussed below and in the Company's report on Form 10-K
for the year ended December 31, 1995.
In June 1996, the Company and an affiliate of British
Aerospace agreed to convert to options the Company's order for nine
additional J-41 aircraft under a 1994 agreement. The Company believes
that the option arrangement provides it with greater flexibility in
planning and implementing its future aircraft fleet decisions. In this
regard, the Company is exploring the feasibility of acquiring 50-seat
regional jet or turboprop aircraft. Acquiring such aircraft would
enable the Company to increase capacity in existing markets and to
provide service to new markets. If the Company determines to acquire
50-seat jet aircraft for operation under the "United Express" name, it
must obtain the consent of United Airlines, Incorporated and satisfy
various regulatory requirements.
The Company believes that its operating results have
benefited from improved yield management. In the third quarter of 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 domestic and international airlines currently use the
PROS IV system, the Company believes that it will be the first
regional airline to install PROS IV. The Company's PROS IV system is
scheduled to become fully operational during the second half of 1996
and, subject to successful implementation and operation and continued
demand in the Company's markets, is expected to begin producing
benefits during this period.
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 half 1996 was
$9.8 million. The Company believes that it is likely that the
remaining portion of the net operating loss carryforward at June 30,
1996 will be fully utilized in the third quarter of 1996. Accordingly,
the Company may increase its estimated effective tax rate for the
third and fourth quarters based on pretax net income.
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 $6.0 million
for the first six months of 1996, compared to $2.0 million for the
same period of 1995.
Restructuring
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, unused aircraft ferrying reserves, legal
fees, and other miscellaneous items. 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.
Other Financing
In December 1994 the Company completed its plan of
recapitalization with an aircraft supplier which included the
conversion of an outstanding loan on a revolver credit facility of
$10.0 million to equity, an additional $1.0 million cash equity
investment, creation of a term loan facility in the amount of $4.0
million, and a new revolver line of credit facility of $5.0 million
which was reduced to $2.5 million on June 30, 1995.
In the first quarter 1995 the Company borrowed $4.0 million
on the term loan facility. On December 29, 1995, the Company fully
prepaid the loan at a discount and recorded an extraordinary gain of
$0.4 million.
The Company refinanced the operating leases on the two J-41
aircraft that it took delivery of in the first quarter of 1996, which
was the first time the Company had financed aircraft without
manufacturer support. The refinancing resulted in more competitive
lease rates compared to the prior leases. The Company will continue to
evaluate competitive leasing arrangements as they arise.
As of June 30, 1996, the Company terminated the revolver
credit facility. The Company does not intend to renew it.
During the first quarter of 1995, the Company entered into a
loan agreement for $0.3 million payable over a three year period
commencing March 1, 1995, at an interest rate of 9.0% per annum. The
proceeds of the loan were used to purchase two de-ice trucks for use
at the Company's hub operations at Washington-Dulles.
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 second quarter of 1996 were not owed due to
redemption before quarter end in accordance with the terms of the
preferred stock agreement.
Purchases of capital equipment for the second quarter of
1996 were $0.9 million compared to $2.7 million in the same period of
1995. Capital equipment purchased in 1996 consisted primarily of
leasehold improvements to aircraft pertaining to Traffic Collision
Avoidance Systems, repainting of aircraft, purchases of rotable spare
parts related to deliveries of J-41 aircraft, purchases of ground
service equipment, and purchases of computers and other office
equipment. For the remainder of 1996 the Company anticipates spending
less than $3.5 million on rotable spare parts, spare engines,
software, facility improvements, and other capital expenditures.
The Company took delivery of two J-41 aircraft during the
first quarter of 1996. These aircraft were initially delivered on a
long-term lease from the manufacturer. On June 28, 1996, the aircraft
were sold to FINOVA Capital Corporation and leased to the Company on
more favorable terms than the original lease. The future lease
obligations related to these aircraft is $13.8 million.
Debt service as of June 30, 1996, is $1.8 million compared
to $2.5 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.
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.
Operating Cash Flow
The Company receives substantially all of its airline ticket
revenue 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 between
ACH settlements. The line is principally secured by the Company's
interline accounts receivable, and unprocessed tickets.
Accounts receivable increased $5.2 million to $19.8 million
at June 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
$0.3 million during the first six months of 1996 to $1.6 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 increased to $2.6
million at June 30, 1996, compared to $1.8 million at December 31,
1995, due to the prepayment of aircraft insurance, rents, and other
miscellaneous prepaid expenses.
Accounts payable increased to $3.8 million at June 30, 1996,
compared to $3.5 million at December 31, 1995, largely due to the
timing of a quarterly insurance premium payment.
A revolving line of credit balance of $3.6 million secured
by interline accounts receivable remained outstanding at month-end due
to the timing of the cash receipt from the ACH. The loan was repaid
in full on July 2, 1996.
Long-term debt decreased $0.7 million in the first six
months of 1996 as a result of scheduled payments on existing debt.
Capital lease obligations decreased approximately $0.3 million during
the first six months of 1996, also due to scheduled payments made on
the Company's various leases partially offset by the addition of $0.2
million in spare parts on an existing capital lease agreement.
Accrued liabilities increased to $16.7 million at June 30,
1996, from $16.1 million at December 31, 1995. The major components of
the change are as follows:
Accrued payroll and employee benefits increased $1.3 million due
to accruals for profit sharing and wages and benefits.
Accrued reservations and handling fees decreased approximately
$0.2 million reflecting adjustments for account reconciliation.
Accrued engine overhaul costs increased approximately $0.6
million due to increased engine reserves resulting from a 6.5%
increase in year over year block hours.
All other accrued liabilities decreased approximately $0.8
million due to the elimination of restructuring reserves as of
June 1996 and the payment of preferred dividends for 1995 in
February of 1996.
ATLANTIC COAST AIRLINES, INC.
FISCAL QUARTER ENDED June 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 ACAI has the right to make unilateral work rule changes, no
matter how small, the union may have a right to strike. ACAI 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.
The annual meeting of shareholders of the Company was held in
Herndon, Virginia on May 22, 1996. Of the 8,464,577 shares of common
stock outstanding on the record date, 6,696,906 were present by proxy.
Those shares were voted on the matters before the meeting as follows:
A. Election of Directors
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
C. Edward Acker 6,690,772 6,134
Kerry B. Skeen 6,691,649 5,257
Gordon Cain 6,692,075 4,831
Robert E. Buchanan 6,691,849 5,057
Joseph W. Elsbury 6,692,149 4,757
James J. Kerley 6,692,125 4,781
James C. Miller III 6,690,772 6,134
John M. Sullivan 6,691,849 5,057
James B. Glennon 6,690,999 5,907
</TABLE>
B. Proposal to adopt the 1995 Stock Incentive Plan. This
proposal is fully described in the Company's Proxy statement of April
10, 1996.
For: 5,090,517 Against: 607,224 Abstain: 6,544 Not Voted 992,621
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
A report on Form 8-K was filed on April 9, 1996, reporting
the redemption of the Company's Series A cumulative
convertible preferred stock on March 29, 1996.
A report on Form 8-K was filed on June 26, 1996, reporting
that the Company had reached agreement with Aero
International to allow the Company's existing qualified
order for nine J-41 aircraft to convert to options without
penalty.
A report on Form 8-K was filed on July 23, 1996, reporting
to the SEC three statements released to the press in the
month of July. These press releases discussed second quarter
traffic results, third party financing for two J-41
aircraft, and record second quarter profits.
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.
<TABLE>
<S> <C>
August 12, 1996 By: /S/ James B. Glennon
James B. Glennon
Senior Vice President and Chief
Financial Officer
August 12, 1996 By: /S/ Kerry B. Skeen
Kerry B. Skeen
President and Chief Executive
Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,741
<SECURITIES> 0
<RECEIVABLES> 19,771
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,391
<PP&E> 15,359
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,188
<CURRENT-LIABILITIES> 26,385
<BONDS> 0
0
0
<COMMON> 170
<OTHER-SE> 24,007
<TOTAL-LIABILITY-AND-EQUITY> 57,188
<SALES> 0
<TOTAL-REVENUES> 88,222
<CGS> 0
<TOTAL-COSTS> 77,901
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 9,809
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<NET-INCOME> 9,327
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