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, 1997
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.)
515-A Shaw Road, Dulles, Virginia 20166
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 925-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
As of November 10, 1997, there were 7,186,099 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
December 31, September 30,
(In thousands except for share data and par 1996 1997
values) (Unaudited)
Assets
Current:
Cash and cash equivalents $ 21,470 $ 27,008
Short term investments - 16,333
Accounts receivable, net 15,961 20,996
Expendable parts and fuel inventory, net 1,759 2,552
Prepaid expenses and other current assets 2,554 2,609
Total current assets 41,744 69,498
Property and equipment, net of accumulated
depreciation and amortization 16,157 39,539
Preoperating costs, net of accumulated
amortization 225 1,594
Intangible assets, net of accumulated 2,882 2,670
amortization
Deferred tax asset 3,140 3,140
Debt issuance costs, net of accumulated - 3,350
amortization
Aircraft deposits 570 17,480
Other assets 40 17
Total assets $ 64,758 $ 137,288
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 3,770 $ 3,035
Current portion of long-term debt 1,319 1,499
Current portion of capital lease 1,497 1,648
obligations
Accrued liabilities 17,376 22,656
Total current liabilities 23,962 28,838
Long-term debt, less current portion 2,407 73,110
Capital lease obligations, less current 3,266 2,672
portion
Deferred credits 486 3,251
Total liabilities 30,121 107,871
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 8,607,599 in 1997 170 172
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 37,979
Less: Common stock in treasury, at cost, (125) (17,069)
12,500 shares in 1996, 1,472,500 shares in
1997
Accumulated earnings (deficit) (3,097) 8,335
Total stockholders' equity 34,637 29,417
Total liabilities and stockholders' $ 64,758 $ 137,288
equity
See accompanying notes to the consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three months ended September 30,
(In thousands) 1996 1997
Operating revenues:
$ $
Passenger 48,737 54,159
Other 804 705
Total operating revenues 49,541 54,864
Operating expenses:
Salaries and related costs 10,802 12,039
Aircraft fuel 4,321 4,514
Aircraft maintenance and materials 4,735 4,908
Aircraft rentals 7,339 7,745
Traffic commissions and related fees 7,477 8,937
Depreciation and amortization 772 877
Other 6,421 6,790
Total operating expenses 41,867 45,810
Operating income 7,674 9,054
Other income (expense):
Interest expense (209) (1,142)
Interest income 108 494
Other income (4) (55)
Total other expense (105) (703)
Income before income tax provision 7,569 8,351
Income tax provision 438 3,507
Net income $ 7,131 $ 4,844
Earnings per common and common equivalent shares:
-primary $0.79 $0.63
-fully diluted $0.79 $0.50
Weighted average common and common equivalent shares:
-primary 8,996 7,698
-fully diluted 8,996 10,881
See accompanying notes to the consolidated financial statements.
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Nine months ended September 30,
(In thousands) 1996 1997
Operating revenues:
Passenger $ 135,433 $ 147,209
Other 2,330 1,989
Total operating revenues 137,763 149,198
Operating expenses:
Salaries and related costs 32,802 35,772
Aircraft fuel 12,224 13,041
Aircraft maintenance and materia 12,720 11,916
Aircraft rentals 21,799 22,855
Traffic commissions and related fees 21,242 23,975
Depreciation and amortization 2,061 2,363
Other 17,346 19,217
Restructuring charges (reversals) (426) -
Total operating expenses 119,768 129,139
Operating income 17,995 20,059
Other income (expense):
Interest expense (758) (1,792)
Interest income 154 787
Other expense (13) (68)
Total other expense (617) (1,073)
Income before income tax provision 17,378 18,986
Income tax provision 920 7,555
Net income $ 16,458 $ 11,431
Earnings per common and common equivalent shares:
-primary $1.83 $1.33
-fully diluted $1.83 $1.23
Weighted average common and common equivalent shares:
-primary 8,969 8,599
-fully diluted 8,969 9,772
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 1997
Cash flows from operating activities:
Net income $ 16,458 $ 11,431
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,061 2,363
Provision for uncollectible accounts 95 60
Amortization of deferred financing costs 23 147
Amortization of deferred credits (16) (83)
Loss on disposal of fixed assets - 393
Changes in operating assets and liabilities:
Accounts receivable (4,346) (5,095)
Expendable parts and fuel inventory 207 (792)
Prepaid expenses and other current assets 289 (55)
Preoperating costs - (1,555)
Accounts payable 418 1,264
Accrued liabilities 1,198 5,280
Net cash provided by operating activities 16,387 13,358
Cash flows from investing activities:
Purchase of property and equipment (1,250) (24,305)
Increase in short term investments - (16,333)
Increase in aircraft and other deposits (61) (16,887)
Net cash used in investing activities (1,311) (57,525)
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 73,930
Repayments of long-term debt (960) (3,047)
Payments of capital lease obligations (848) (1,957)
Net increase in lines of credit 6 -
Due from financial institution - -
Increase in deferred credits 512 848
Increase in intangible assets (230) (3,417)
Proceeds from exercise of stock options 327 292
1995 cumulative preferred dividends paid in (335) -
1996
Redemption of Series A cumulative convertible
preferred stock (3,825) -
Purchase of common stock - (16,944)
Net cash (used in) provided by financing (5,353) 49,705
activities
Net increase in cash and cash equivalents 9,723 5,538
Cash and cash equivalents, beginning of period 8,396 21,470
Cash and cash equivalents, end of period $ 18,119 $ 27,008
See accompanying notes to the consolidated financial statements.
ATLANTIC COAST AIRLINES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1997, and for the nine months ended
September 30, 1997, 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 ("ACA"), (ACAI and ACA, 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 adjustments which are, in the
opinion of management, necessary for a fair presentation of such consolidated
financial statements. Results of operations for the three and nine month periods
presented are not necessarily indicative of the results to be expected for the
year ending December 31, 1997. Certain amounts as previously reported have been
reclassified to conform to the current year presentation. 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 condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements, and
the notes thereto, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position will be unaffected by
implementation of these new standards.
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. If the Financial Accounting Standards Board approves the
proposed guidelines, as expected, the Company believes the guidelines will most
likely take effect for fiscal years beginning after December 15, 1998.
Presently, the Company is deferring certain start-up costs related to the
introduction of the Canadair Regional Jets, Series 200 ER ("CRJ") and will
amortize such costs to expense ratably over four years. Should the proposed
guidelines become effective as proposed, the Company would be required to
expense any unamortized amounts of its previously capitalized start-up costs in
the first quarter of 1999, and such costs would be expensed as incurred.
2. SHORT TERM INVESTMENTS
As of September 30, 1997, the Company held $16.3 million of commercial paper and
municipal debt securities. The Company has classified these investments as
"available for sale" pursuant to Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities (SFAS
115)". The amortized costs of such investments as of September 30, 1997,
approximates fair market value due to the short term nature of the related
maturities. Accordingly, no adjustment has been made to the stockholders equity
section for any unrealized differences.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, September 30,
(In thousands) 1996 1997
Flight equipment, including rotable parts $14,014 $37,068
Maintenance and ground equipment 3,380 3,846
Improvements to aircraft 2,350 2,398
Computer hardware and software 1,464 1,854
Furniture and fixtures 296 422
Leasehold improvements 619 1,618
22,123 47,206
Less: Accumulated depreciation and
amortization 5,966 7,667
$16,157 $39,539
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31, September 30,
(In thousands) 1996 1997
Accrued payroll and employee benefits $4,929 $6,165
Accrued income taxes 103 3,151
Accrued interest - 1,016
Air traffic liability 2,703 1,857
Reservations and handling 2,454 2,413
Engine overhaul costs 3,311 3,440
Fuel 1,196 818
Other 2,680 3,796
$17,376 $22,656
5. DEBT
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 $50.0 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 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 $18.00 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 (the "Indenture"), 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.
On April 1, 1997, the Company executed a 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 July 1997 the Company retired $3.1 million of certain high interest rate
debt from the proceeds of the Notes.
6. OTHER - AIRCRAFT FINANCING TRANSACTIONS
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 condensed consolidated financial statements.
The Equipment Notes issued
with respect to the Leased Aircraft are not obligations of ACA or guaranteed by
ACAI. The Equipment Notes for the owned aircraft carry a weighted average
interest rate of approximately 7.5% with three notes maturing at January 1,
2008, and one 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 $1.0 million in each of the years of 1998
through 2001 and $1.1 million in 2002.
7. INCOME TAXES
The Company's estimated effective tax rate for the third quarter of 1997 was 42%
and is slightly higher than the statutory rate due to revisions in estimates and
permanent differences between taxable and book income. The Company estimates
that its combined state and federal effective tax rate will remain unchanged
during the fourth quarter of 1997.
8. EARNINGS PER COMMON SHARE
The computation of primary earnings per share is based on the weighted average
number of outstanding common shares during the period plus, when their effect is
dilutive, common stock equivalents consisting of certain shares subject to stock
options. On a fully diluted basis, both earnings and shares outstanding are
adjusted to assume the conversion of the Notes.
On July 2, 1997, the Company repurchased 1.46 million shares of Common Stock
from a subsidiary of British Aerospace PLC ("British Aerospace"). This had the
effect of reducing the weighted average number of outstanding common shares for
both primary and fully diluted calculations. Fully diluted earnings per share
reflects adjustments to net income available for common shareholders for the
elimination of related interest expense, net of tax, for the Notes. In addition,
the fully diluted weighted average number of outstanding shares was increased by
approximately 3.2 million shares to reflect the assumed conversion of the Notes.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Third Quarter Operating Results
Increase
(Decrease)
Three months ended September 30, 1996 1997 % Change
Revenue passengers carried 397,563 476,857 19.9%
Revenue passenger miles ("RPMs") 97,895 119,881 22.5%
(000's)
Available seat miles ("ASMs") (000's) 201,271 222,267 10.4%
Passenger load factor 48.6% 53.9% 5.3 pts
Break-even passenger load factor 1 41.0% 44.9% 3.9 pts
Revenue per ASM (cents) 24.2 24.4 0.8%
Yield (cents) 49.8 45.2 (9.2%)
Cost per ASM (cents) 20.8 20.6 (1.0%)
Average passenger fare $122.59 $113.58 (7.4%)
Average passenger segment (miles) 246 251 2.0%
Revenue departures 35,801 37,661 5.2%
Revenue block hours 45,043 47,665 5.8%
Aircraft utilization (block hours) 9.5 9.3 (2.1%)
Average cost per gallon of fuel (cents) 81.4 78.4 (3.7%)
Aircraft in service (end of period) 57 60 5.3%
Comparison of three months ended September 30, 1997, to three months ended
September 30, 1996.
Results of Operations
The following Management's Discussion and Analysis contains
forward-looking statements and information that are based on management's
current expectations as of the date of this document. When used herein, the
words "anticipate", "believe", "estimate" and "expect" and similar expressions,
as they relate to the Company's management, are intended to identify such
forward-looking statements. Such forward-looking statements are subject to
risks, uncertainties, assumptions and other factors that may cause the actual
results of the Company to be materially different from those reflected in such
forward-looking statements. Such factors include, among others, the extent to
which the Company's operation of CRJs is coordinated with the marketing and
related agreements between the Company and United (the "United Express
Agreements"), the costs of implementing CRJ service, the response of the
Company's competitors to the Company's business strategy, the ability of the
Company to obtain favorable financing terms for its aircraft, market acceptance
of the new CRJ service, routes and schedules offered by the Company, the cost of
fuel, the weather, general economic conditions, satisfaction of regulatory
requirements, and the factors discussed below and in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. The Company does not intend
to update these forward-looking statements prior to its next required filing
with the Securities and Exchange Commission.
General
In the third quarter of 1997 the Company posted net income of $4.8
million compared to net income of $7.1 million for the third quarter of 1996.
The Company's third quarter 1997 results contain a provision for income taxes
which approximates the statutory rates. The third quarter of 1996 contained a
significantly smaller provision for income taxes due to the existence of a net
operating loss carryforward. See Note 7, Condensed Consolidated Financial
Statements. In the three months ended September 30, 1997, the Company earned
pretax income of $8.4 million compared to $7.6 million in the three months ended
September 30, 1996.
Operating Revenues
The Company's operating revenues increased 10.7% to $54.9 million in
the third quarter of 1997 compared to $49.5 million in the third quarter of
1996. The increase resulted from a 10.4% increase in ASMs and an increase in
load factor of 5.3 percentage points, partially offset by a 9.2% decrease in
yield.
The reduction in yield is related in part to the existence of the
ticket tax during the entire third quarter 1997 which was not in effect for most
of the third quarter 1996. Revenue per ASM improved slightly by 0.8% quarter
over quarter. Total passengers increased 19.9% in the third quarter of 1997
compared to the third quarter of 1996.
Operating Expenses
The Company's operating expenses increased 9.4% in the third quarter
of 1997 compared to the third quarter of 1996 due primarily to a 10.4% increase
in ASMs, and a 19.9% increase in passengers. The increase in ASMs reflects the
net addition of three British Aerospace Jetstream - 41 ("J-41") aircraft during
the first half of 1997.
A summary of operating expenses as a percentage of operating revenues
and cost per ASM for the three months ended September 30, 1996, and 1997 is as
follows:
1996 1997
Percent Cost Percent Cost
of of
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 21.8% 5.4 22.0% 5.4
Aircraft fuel 8.7% 2.1 8.2% 2.0
Aircraft maintenance and 9.5% 2.4 8.9% 2.2
materials
Aircraft rentals 14.8% 3.6 14.1% 3.5
Traffic commissions and related 15.1% 3.7 16.3% 4.0
fees
Depreciation and amortization 1.6% 0.4 1.6% 0.4
Other 13.0% 3.2 12.4% 3.1
Total 84.5% 20.8 83.5% 20.6
Cost per ASM decreased 1.0% to 20.6 cents during the third quarter of
1997 compared to 20.8 cents during the third quarter of 1996 primarily due to a
10.4% increase in ASMs in the third quarter of 1997 compared to the third
quarter of 1996. The increase in ASMs resulted from the net addition of three
J-41 aircraft and a 5.8% increase in block hours.
Salaries and related costs per ASM remained unchanged at 5.4 cents in
the third quarter of 1997 compared to the third quarter of 1996. In absolute
dollars, salaries and related costs increased 11.5% from $10.8 million in the
third quarter of 1996 to $12.0 million in the third quarter of 1997. The
increase resulted primarily from additional flight crew hours as well as a
contractual rate increase for pilots effective March 1, 1997.
The cost per ASM of aircraft fuel decreased to 2.0 cents in the third
quarter of 1997 compared to 2.1 cents in the third quarter of 1996. In absolute
dollars, aircraft fuel expense increased 4.5% from $4.3 million in the third
quarter of 1996 to $4.5 million in the third quarter of 1997. The increased fuel
cost resulted from the 5.8% increase in block hours, partially offset by a 3.7%
decrease in the average cost per gallon of fuel. Aircraft fuel prices fluctuate
with a variety of factors, including the price of crude oil, and future
increases or decreases cannot be predicted with a high degree of certainty.
There is no assurance that future increases will not adversely affect the
Company's operating expenses.
The cost per ASM of aircraft maintenance and materials decreased to
2.2 cents in the third quarter of 1997 compared to 2.4 cents in the third
quarter of 1996. In absolute dollars, aircraft maintenance and materials expense
increased 3.7% from $4.7 million in the third quarter of 1996 to $4.9 million in
the third quarter of 1997. The increased expense resulted from an increase in
the average age of the fleet, expiration of warranty coverage on certain
aircraft, and rate increases in contract maintenance agreements.
The Company's maintenance accounting policy is a combination of
expensing events as incurred and accruals for maintenance events. Maintenance
accruals are estimated on a cost per flight hour or per cycle basis for all
aircraft, including those under warranty.
The cost per ASM of aircraft rentals decreased to 3.5 cents for the
third quarter of 1997 compared to 3.6 cents for the third quarter of 1996. In
absolute dollars, aircraft rentals increased 5.5% from $7.3 million in the third
quarter of 1996 to $7.7 million in the third quarter of 1997 reflecting the net
addition of three J-41 aircraft.
The cost per ASM of traffic commissions and related fees increased to
4.0 cents in the third quarter of 1997 compared to 3.7 cents in the third
quarter of 1996. In absolute dollars, traffic commissions and related fees
increased 19.5% from $7.5 million in the third quarter of 1996 to $8.9 million
in the third quarter of 1997. The increase in costs resulted from an 11.1%
increase in passenger revenue, a 19.9% increase in passengers, and contractual
rate increases in program fees paid to United Airlines, Inc. ("United").
The cost per ASM of depreciation and amortization was unchanged at
0.4 cents in the third quarter of 1997 compared to the third quarter of 1996. In
absolute dollars, depreciation and amortization increased 13.6% from $0.8
million in the third quarter of 1996 to $0.9 million in the third quarter of
1997 primarily as a result of additional spare parts associated with the CRJs
and the net addition of three J-41 aircraft.
The cost per ASM of other operating expenses decreased to 3.1 cents
in the third quarter of 1997 from 3.2 cents in the third quarter of 1996. In
absolute dollars, other operating expenses increased 5.7% from $6.4 million in
the third quarter of 1996 to $6.8 million in the third quarter of 1997. The
increased costs result primarily from increased facilities rentals at
Washington-Dulles International Airport ("Washington-Dulles").
As a result of the foregoing changes in operating expenses, and a
10.4% increase in ASMs, total cost per ASM decreased to 20.6 cents in the third
quarter of 1997 compared to 20.8 cents in the third quarter of 1996. In absolute
dollars, total operating expenses increased 9.4% from $41.9 million in the third
quarter of 1996 to $45.8 million in the third quarter of 1997.
The Company's combined effective tax rate for state and federal taxes
during the third quarter of 1997 was approximately 42% as compared to 6.0% for
the third quarter 1996 which included the effect of a net operating loss
carryforward. The Company estimates that the effective tax rate will remain
unchanged in the fourth quarter of 1997.
Nine Months Operating Results
Increase
(Decrease)
Nine months ended September 30, 1996 1997 % Change
Revenue passengers 1,093,226 1,200,616 9.8%
Revenue passenger miles ("RPMs") 267,326 298,494 11.7%
(000's)
Available seat miles ("ASMs") 571,896 617,823 8.0%
(000's)
Passenger load factor 46.7% 48.3% 1.6 pts
Break-even passenger load factor 40.7% 41.7% 1.0 pts
Revenue per ASM (cents) 23.7 23.8 0.4%
Yield (cents) 50.7 49.3 (2.7%)
Cost per ASM (cents)2 21.0 20.9 (0.5%)
Average passenger fare $123.88 $122.61 (1.0%)
Average passenger segment (miles) 245 249 1.6%
Revenue departures 109,909 111,016 1.0%
Revenue block hours 127,923 134,179 4.9%
Aircraft utilization (block hours) 9.7 9.4 (3.1%)
Average cost per gallon of fuel 79.8 80.1 0.4%
(cents)
Aircraft in service (end of period) 57 60 5.3%
Comparison of nine months ended September 30, 1997, to nine months ended
September 30, 1996.
Results of Operations
Operating Revenues
The Company's operating revenues increased 8.3% to $149.2 million in
the first nine months of 1997 compared to $137.8 million for the first nine
months of 1996. The increase resulted from an 8.0% increase in ASMs as well as a
1.6 percentage point increase in load factor partially offset by a 2.7% decrease
in yield.
The reduction in yield is related in part to the reinstatement of
the 10.0% ticket tax on March 7, 1997, which was not in effect for the period
January 1 through August 26, 1996. Revenue per ASM increased slightly by 0.4%
and revenue passengers increased 9.8% during the first nine months of 1997
compared to the first nine months of 1996.
Operating Expenses
The Company's operating expenses increased 7.4% in the first nine
months of 1997 compared to operating expenses before reversals of restructuring
charges in the first nine months of 1996 due primarily to an 8.0% increase in
ASMs, and a 9.8% increase in revenue passengers. The increased capacity reflects
the net addition of three J-41s during the first nine months of 1997.
A summary of operating expenses as a percentage of operating revenues
and cost per ASM for the nine months ended September 30, 1996, and 1997 is as
follows:
1996 1997
Percent Cost Percent Cost
of of
Operating per ASM Operating per ASM
Revenues (cents) Revenue (cents)
Salaries and related costs 23.8% 5.8 24.0% 5.8
Aircraft fuel 8.9% 2.1 8.7% 2.1
Aircraft maintenance and 9.2% 2.2 8.0% 1.9
materials
Aircraft rentals 15.8% 3.8 15.3% 3.7
Traffic commissions and related 15.4% 3.7 16.1% 3.9
fees
Depreciation and amortization 1.5% 0.4 1.6% 0.4
Other 12.6% 3.0 12.9% 3.1
Total (before restructuring
charge
reversals) 87.2% 21.0 86.6% 20.9
Cost per ASM before reversals of restructuring charges decreased
slightly to 20.9 cents during the first nine months of 1997 compared to 21.0
cents during the first nine months of 1996 primarily due to an 8.0% increase in
ASMs. The increased ASMs resulted from the net addition of three J-41 aircraft
and a 4.9% increase in block hours.
Salaries and related costs per ASM remained unchanged at 5.8 cents for
the first nine months of 1997 compared to the first nine months of 1996. In
absolute dollars, salaries and related costs increased 9.1% to $35.8 million
from $32.8 million year over year. The increase results primarily from
additional flight crew hours, profit sharing and a contractual rate increase for
pilots effective March 1, 1997.
The cost per ASM of aircraft fuel was unchanged at 2.1 cents in the
first nine months of 1997 compared to the first nine months of 1996. In absolute
dollars, aircraft fuel expense increased 6.7% to $13.0 million from $12.2
million year over year. The increased fuel cost resulted from the 4.9% increase
in block hours and a 0.4% increase in the average cost per gallon of fuel.
The cost per ASM of aircraft maintenance and materials decreased to
1.9 cents in the first nine months of 1997 compared to 2.2 cents in the first
nine months of 1996. In absolute dollars, aircraft maintenance and materials
expense decreased 6.3% to $11.9 million from $12.7 million year over year.
During the first nine months of 1997 the Company recognized credits of
approximately $0.9 million for manufacturer penalties related to engine
overhauls and dispatch reliability, and $0.4 million related to reimbursements
for engine spare parts, offset by increased maintenance related to the net
addition of three J-41 aircraft and the expiration of warranty coverage for
certain aircraft.
The cost per ASM of aircraft rentals decreased to 3.7 cents in the
first nine months of 1997 compared to 3.8 cents for the first nine months of
1996. In absolute dollars, aircraft rentals increased 4.8% to $22.9 million from
$21.8 million year over year. The increase resulted primarily from the net
addition of three J-41 aircraft.
The cost per ASM of traffic commissions and related fees increased to
3.9 cents in the first nine months of 1997 compared to 3.7 cents in the first
nine months of 1996. In absolute dollars, traffic commissions and related fees
increased 12.9% to $24.0 million from $21.2 million year over year. The increase
resulted primarily from an 8.7% increase in passenger revenue, a 9.8% increase
in passengers and contractual rate increases in program fees paid to United.
The cost per ASM of depreciation and amortization remained unchanged
at 0.4 cents for the first nine months of 1997 compared to the first nine months
of 1996. In absolute dollars, depreciation and amortization increased 14.7% to
$2.4 million from $2.1 million year over year. The increase resulted primarily
from the acquisition of rotable spare parts associated with additional CRJ and
J-41 aircraft, ground equipment, computer and office equipment and facility
leasehold improvements.
The cost per ASM of other operating expenses increased to 3.1 cents
in the first nine months of 1997 from 3.0 cents in the first nine months of
1996. In absolute dollars, other operating expenses increased 10.8% to $19.2
million from $17.3 million year over year. The increase resulted primarily from
higher facility rentals at Washington-Dulles and passenger claims expense
partially offset by reduced glycol expense.
As a result of the foregoing changes in operating expenses and an
8.0% increase in ASMs, total cost per ASM before reversals of restructuring
charges decreased slightly to 20.9 cents in the first nine months of 1997
compared to 21.0 cents during the first nine months of 1996. In absolute
dollars, total operating expenses increased 7.8% from $119.8 million in first
nine months of 1996 to $129.1 million in the first nine months of 1997.
The Company generated operating income of $20.1 million and earned
income before income tax provision of $19.0 million for the first nine months of
1997 compared to operating income of $18.0 million and income before income tax
provision of $17.4 million for the first nine months of 1996. Results for the
first nine months of 1996 also included a reversal of excess restructuring
reserves of $0.4 million.
In the first nine months of 1997 the Company recorded net income of
$11.4 million compared to net income of $16.5 million for the first nine months
of 1996. The Company's results for the first nine months of 1997 reflect an
estimated effective tax rate of approximately 40% as compared to the results for
the first nine months of 1996 which reflect an estimated effective tax rate of
approximately 5% due to the existence of a net operating loss carryforward.
Outlook
This Outlook section contains forward-looking statements which are
subject to the risks and uncertainties set forth above on pages 11 and 12.
A central element of the Company's growth strategy is the expansion
of its aircraft fleet, primarily through the addition of regional jets. Regional
jets have greater flying range and capacity and generally operate at a lower
unit cost than the Company's turboprop aircraft. In addition, regional jets fly
faster and provide a higher degree of passenger comfort than the Company's
turboprops. Accordingly, the introduction of the CRJs to the Company's fleet is
expected to expand the Company's business into new markets and expand the
Company's customer base.
The United Express Agreements require that the Company obtain
United's consent to operate the CRJs under the "United Express" name, and the
Company is seeking such consent. Pending final agreement with United regarding
operation of the CRJs as United Express, or in the event such an agreement is
not reached, the Company anticipates entering into an alternative arrangement
whereby United would provide many of the same services relating to the CRJs as
United currently provides for the Company's turboprops operating under the
United Express Agreements. In the event that the Company is unable to enter such
an arrangement with United, the Company may enter into agreements with other
parties to provide the ground support and other services needed to operate the
CRJs. To the extent that the Company does not contract with third parties for
such services, the Company would provide at least some of them directly.
Alternatively, the Company could, subject to United's consent, enter into a
code-sharing arrangement with other parties for its CRJs.
On November 18, 1997, the United pilots represented by the Airline
Pilots Association ("ALPA") will vote on a proposal by United management to
allow the operation of the CRJs under the United Express program. The proposal
has been reviewed by the ALPA Master Executive Council representing United
pilots which has presented it to the pilots with a recommendation for passage.
The addition of the CRJs to the Company's fleet will result in
increased lease obligations and operating, maintenance, airport, training,
personnel and other expenses. The Company is exploring various third party lease
financing arrangements for these and other aircraft. United has also agreed to
reimburse the Company for its aircraft lease expense for the CRJs and for the
cost of the associated flight crews related to the CRJs that are delivered but
not in operation during the period September 11, 1997 through December 31, 1997.
On March 11, 1994, the Aircraft Mechanics Fraternal Association
("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 November 1, 1997, AMFA represented 115 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 failed to reach
an agreement. A tentative agreement was reached with AMFA in June 1997 but
failed ratification by the membership in July 1997. The NMB has indicated that
it favors 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 may declare an impasse and a thirty day cooling
off period. If an agreement has not been reached at the conclusion of that
period, AMFA would have the authority to use self-help, including the right to
strike. The Company and AMFA are also engaged in litigation which is described
more fully below.
The Company's contract with the Association of Flight Attendants
("AFA") became amendable on April 30, 1997. Negotiations regarding amendments to
this contract began in August 1997 and are continuing. The Company will continue
to operate under the terms of the existing agreement until new terms are
negotiated.
The Company was obligated to collect a U.S. transportation excise tax
of 10% of passenger ticket revenue through September 30, 1997. A revised formula
for ticket tax collections for travel commenced October 1, 1997. The new formula
is comprised of a percentage of passenger ticket revenue plus a per segment fee,
adjusted on an annual basis. For the period October 1, 1997, through September
30, 1998, the ticket tax will be equal to 9% of passenger ticket revenue plus a
$1 per flight segment fee. Management does not anticipate that this change will
have a material impact on passenger revenues for the next twelve months.
Liquidity and Capital Resources
The Company's working capital improved during the first nine months of
1997 compared to the first nine months of 1996. As of September 30, 1997, the
Company had cash, cash equivalents, and short term investments of $43.3 million
and working capital of $40.7 million compared to $18.1 million and $16.7 million
respectively as of September 30, 1996. During the first nine months of 1997,
cash and cash equivalents increased by $5.5 million, reflecting net cash
provided by operating activities of $13.4 million, net cash used in investing
activities of $57.5 million and net cash provided by financing activities of
$49.7 million. The net cash provided by operating activities is primarily the
result of the net income from operations. The net cash used in investing
activities consisted primarily of deposits for CRJs, the acquisition of four
J-41s as part of a pass through certificate financing described below, and
increases in short term investments. The net cash provided by financing
activities consisted primarily of the proceeds from the sale of $57.5 million of
7.0% Convertible Subordinated Notes due July 1, 2004 (the "Notes") discussed
below, and the issuance of $16.4 million in equipment notes related to the pass
through certificates, and partially offset by the use of funds to repurchase
1.46 million shares of Common Stock also described below.
Other Financing
The Company has an asset-based lending agreement with a financial
institution that provides the Company with a line of credit of up to $20.0
million, 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 general intangibles, and there were no
borrowings under the line during the first nine months of 1997. The Company
pledged $4.5 million of this line of credit as collateral for a $9.6 million
letter of credit (including interest component) issued in connection with the
Company's new maintenance facility at Washington-Dulles.
On July 2, 1997, the Company issued $50.0 million aggregate principal
amount of 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 and will be 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 $18.00 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.
As of November 1, 1997, none of the Notes had been converted into
shares of Common Stock.
In April 1997, the Company executed a short term promissory note for
deposits 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 on 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 July 1997, the Company entered into a zero cost collar interest
rate hedge in the amount of $39.8 million. The hedge was executed by purchasing
six contracts maturing between March and September 1998 with Banker's Trust
Canada as the counter party. The 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.
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 condensed 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 six Leased Aircraft (comprised of two CRJs that have
not been delivered and four CRJs for which equity financing has not been put in
place) (the "Prefunded Aircraft"), the proceeds from the sale of the Equipment
Notes have been deposited into collateral accounts, to be released at the
closing of leveraged leases related to the Prefunded Aircraft. The Company is
seeking commitments from prospective equity investors with respect to such
Prefunded Aircraft. If, on June 30, 1998, leveraged leases with respect to the
Prefunded Aircraft have not closed, the Company will be required to purchase
such aircraft and assume the related Equipment Notes, however, if such aircraft
have not been delivered to the Company by the manufacturer at such time, the
related Equipment Notes will be redeemed. Before June 30, 1998, to the extent
that earnings on funds in the collateral accounts are insufficient to fund
interest accrued and payable on the Equipment Notes, the Company is obligated to
pay such interest on demand.
Aircraft
In January 1997, the Company entered into an agreement with
Bombardier, Inc. to purchase twelve CRJs with options for thirty-six additional
aircraft. The delivery schedule provides for the Company to take delivery of
five aircraft in 1997 commencing in July, with the remaining seven aircraft to
be delivered during 1998. The first four aircraft were delivered in July,
August, September, and October 1997, respectively.
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 will receive 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 the third quarter of 1997, the Company completed third party
financings of fifteen 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; and on September 30, 1997, two 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. Four other J-41s in the Company's fleet are also eligible for
refinancing, and the Company is soliciting offers from third party lessors on
terms similar to certain of the recent transactions. The number, if any, of
these J-41 aircraft that are ultimately refinanced, the terms of refinancing,
and the closing dates, all remain under negotiation and are subject to market
conditions.
In November, 1997, the Company entered into a term sheet 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, no later than April 15, 1998.
Capital Equipment and Debt Service
Capital expenditures for the first nine months of 1997 were $25.9
million compared to $2.1 million for the same period in 1996. Capital
expenditures in the first nine months of 1997 consisted primarily of the
purchase of four J-41 aircraft, rotable spare parts for the J-41 and CRJ
aircraft, facility leasehold improvements, ground equipment, computer and office
equipment, and other capital expenditures. For the remainder of 1997 the Company
anticipates spending approximately $5.0 million for rotable spare parts related
to J-41 and CRJ aircraft, ground service equipment, facilities, computers, and
software.
Debt service including capital leases for the nine months ended
September 30, 1997, was $7.7 million compared to $3.3 million in the same period
of 1996. The increase is primarily the result of interest payments relating to
the $57.5 million Notes issued in July 1997 as well as interest payments
associated with the pass through certificates issued in connection with the
acquisition of four J-41 aircraft in September 1997.
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.
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. If the Financial Accounting Standards Board approves
the proposed guidelines, as expected, the Company believes the guidelines will
most likely take effect for fiscal years beginning after December 15, 1998.
Presently, the Company is deferring certain start-up costs related to the
introduction of the CRJs and will amortize such costs to expense ratably over
four years. Should the proposed guidelines become effective as proposed, the
Company would be required to expense any unamortized amounts of its previously
capitalized start-up costs in the first quarter of 1999, and such costs would be
expensed as incurred.
ATLANTIC COAST AIRLINES, INC.
FISCAL QUARTER ENDED June 30, 1997
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation and FAA proceedings
incidental to its business, none of which is likely to have a material effect on
the Company's financial position.
The Company is also engaged in litigation with AMFA over whether AMFA
has a right to strike prior to the exhaustion of mediation pursuant to the
Railway Labor Act. This issue arose when the Company imposed certain work rule
changes during the period between union certification and an initial collective
bargaining agreement. On December 14, 1995, the U.S. District Court for the
Southern District of New York declined to render a declaratory judgment
requested by AMFA and expressly stated that AMFA was prohibited from striking at
that time. In Aircraft Mechanics Fraternal Association v. Atlantic Coast
Airlines, 55 F.3d 90 (1995). The U.S. Court of Appeals for the Second Circuit
affirmed the District Court's ruling. AMFA subsequently petitioned the U.S.
Court of Appeals for the Second Circuit to consider whether the Company's
actions, although legal, should allow AMFA to engage in self-help, including the
right to strike even if the NMB does not declare an impasse. On September 4,
1997, the court ruled in favor of the Company. AMFA has the right to appeal this
decision but had not done so as of November 13, 1997.
The Company is also a party to an action pending in the United States
District Court for the Eastern District of Virginia, Afzal v. Atlantic Coast
Airlines, Civil Action No. 96-1537-A. Plaintiff alleges that the Company
violated Title VII of the Civil Rights Act of 1964 in terminating his employment
as a pilot. The Company believes that it has meritorious defenses; however,
there can be no assurance as to the outcome of the case or that the Company will
not incur any liability in connection with the proceeding.
ITEM 2. Changes in Securities.
On July 2, 1997, the Company issued $50.0 million aggregate principal
amount of 7.0% Convertible Subordinated Notes due July 1, 2004 as further
discussed in the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997.
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
11.1 Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on October 6, 1997, reporting the
closing of the sale of approximately $112 million of its pass through
certificates, pursuant to Rule 144A under the Securities Act of 1933
on September 25, 1997.
A report on Form 8-K was filed on October 29, 1997, indicating
a change in auditors.
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, 1997 By: /S/ Paul H. Tate
Paul H. Tate
Senior Vice President and Chief
Financial Officer
November 14, 1997 By: /S/ Kerry B. Skeen
Kerry B. Skeen
President and Chief Executive
Officer
- -------------------------------
1 "Break-even passenger load factor" represents the percentage of ASMs which
must be flown by revenue passengers for the airline to break-even after
operating expenses excluding amounts related to restructuring. 2 "Cost per ASM"
for the nine month period ended September 30, 1996 and 1997 represents total
operating expenses excluding amounts related to restructuring divided by ASMs.
Exhibit 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(In thousands except for earnings Primary Primary
per share data) Fully Fully
Earnings Diluted Earnings Diluted
per Earnings per Earnings
Common per Common per
Share Common Share Common
Share Share
September 30, 1997 Three months Nine months
Share calculation:
Average number of common shares 7,093 7,093 8,035 8,035
outstanding
Common stock equivalents due to 463 398 420 402
assumed exercise of options
Common stock equivalents due to 3,117 1,039
assumed conversion of debt
Total common shares and common 7,698 10,881 8,599 9,772
stock equivalents
Adjustments to net income:
Net income $4,844 $4,844 $11,431 $11,431
Plus: Interest expense on 564 564
converted debt
Net income available to common 4,844 5,408 11,431 11,995
shareholders
Earnings per share .63 .50 1.33 1.23
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