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, 1998
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, INC.
Formerly known as 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 9, 1998, there were 19,218,538 shares of common stock,
par value $.02 per share, outstanding.
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Balance Sheets
<TABLE>
December 31, September 30,
(In thousands except for share data and par 1997 1998
values) (Unaudited)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 39,167 $ 52,430
Short term investments 10,737 63
Accounts receivable, net 21,621 31,018
Expendable parts and fuel inventory, 2,477 3,053
net
Prepaid expenses and other current 2,855 8,479
assets
Total current assets 76,857 95,043
Property and equipment at cost, net of
accumulated depreciation and amortization 40,638 70,949
Preoperating costs, net of accumulated
amortization 2,004 1,615
Intangible assets, net of accumulated 2,613 3,612
amortization
Deferred tax asset 688 688
Debt issuance costs, net of accumulated
amortization 3,051 3,055
Aircraft deposits 19,040 19,420
Other assets 4,101 4,975
Total assets $ 148,992 $ 199,357
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 4,768 $ 5,417
Current portion of long-term debt 1,851 3,038
Current portion of capital lease 1,730 1,411
obligations
Accrued liabilities 23,331 32,003
Total current liabilities 31,680 41,869
Long-term debt, less current portion 73,855 51,279
Capital lease obligations, less current 2,290 1,705
portion
Deferred credits 6,362 7,224
Total liabilities 114,187 102,077
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares issued
16,006,514 and 20,671,997 respectively;
shares outstanding 14,270,198 and 320 413
19,199,497 respectively
Additional paid-in capital 40,151 79,846
Less: Common stock in treasury, at cost, (17,069) (17,069)
1,472,500 shares
Retained earnings 11,403 34,090
Total stockholders' equity 34,805 97,280
Total liabilities and stockholders' $ 148,992 $ 199,357
equity
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
Three months ended September 30,
<S> <C> <C> <C> <C>
(In thousands, except for per share 1997 1998
data)
Operating revenues:
Passenger $ 54,159 $ 76,890
Other 705 1,210
Total operating revenues 54,864 78,100
Operating expenses:
Salaries and related costs 12,039 17,598
Aircraft fuel 4,514 6,434
Aircraft maintenance and materials 4,908 5,982
Aircraft rentals 7,745 9,543
Traffic commissions and related fees 8,937 10,641
Depreciation and amortization 877 1,532
Other 6,790 9,315
Total operating expenses 45,810 61,045
Operating income 9,054 17,055
Other income (expense):
Interest expense (1,142) (712)
Interest income 494 1,079
Other, net (55) (28)
Total other income (expense) (703) 339
Income before income tax provision 8,351 17,394
Income tax provision 3,507 6,781
Net income $ 4,844 $ 10,613
Net income per share:
-basic $0.34 $0.55
-diluted $0.26 $0.49
Weighted average shares used in
computation:
-basic 14,189 19,198
-diluted 21,149 22,244
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
Nine months ended September 30,
<S> <C> <C> <C> <C>
(In thousands, except for per share 1997 1998
data)
Operating revenues:
Passenger $147,209 $ 208,398
Other 1,989 3,516
Total operating revenues 149,198 211,914
Operating expenses:
Salaries and related costs 35,772 48,776
Aircraft fuel 17,237 13,041
Aircraft maintenance and materials 11,916 17,579
Aircraft rentals 22,855 26,760
Traffic commissions and related fees 23,975 31,154
Depreciation and amortization 2,363 4,380
Other 19,217 25,740
Total operating expenses 129,139 171,626
Operating income 20,059 40,288
Other income (expense):
Interest expense (1,792) (2,860)
Interest income 787 3,016
Debt conversion expense - (1,410)
Other, net (68) 33
Total other income (expense) (1,073) (1,221)
Income before income tax provision 18,986 39,067
Income tax provision 7,555 16,380
Net income $ 11,431 $ 22,687
Net income per share:
-basic $0.71 $1.28
-diluted $0.64 $1.07
Weighted average shares used in
computation:
-basic 16,070 17,737
-diluted 18,825 22,143
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
Atlantic Coast Airlines Holdings, Inc.
and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C>
Nine months ended September 30,
(In thousands) 1997 1998
Cash flows from operating activities:
Net income $ 11,431 $22,687
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,045 3,858
Amortization of intangibles and preoperating
costs 319 522
Amortization of deferred credits (83) (550)
Debt conversion expense - 1,410
Capitalized interest - (1,241)
Other 628 633
Changes in operating assets and
liabilities:
Accounts receivable (5,095) (8,273)
Expendable parts and fuel inventory (822) (615)
Prepaid expenses and other current assets (55) (6,764)
Preoperating costs (1,555) (5)
Accounts payable 226 649
Accrued liabilities 3,529 8,653
Other assets - 93
Net cash provided by operating activities 10,568 21,057
Cash flows from investing activities:
Purchases of property and equipment (23,265) (32,194)
Proceeds from sale-leaseback - 1,318
Purchases of short term investments (16,333) -
Maturities of short term investments - 10,678
Refund of aircraft lease deposits and other 250 120
Payments for aircraft deposits and other (17,137) (500)
Net cash used in investing activities (56,485) (20,578)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 73,930 16,767
Payments of long-term debt (3,047) (1,787)
Payments of capital lease obligations (1,957) (2,320)
Deferred financing costs (1,667) (1,625)
Proceeds from receipt of deferred credits 848 96
Proceeds from exercise of stock options 292 1,653
Purchase of treasury stock (16,944) -
Net cash provided by financing activities 51,455 12,784
Net increase in cash and cash equivalents 5,538 13,263
Cash and cash equivalents, beginning of period 21,470 39,167
Cash and cash equivalents, end of period $ 27,008 $
52,430
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
ATLANTIC COAST AIRLINES HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared
by Atlantic Coast Airlines Holdings, 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, 1998. 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, 1997.
2. OTHER - COMMITMENTS
During the fourth quarter of 1997, the Company entered into an agreement
with Aero International (Regional) for the purchase of one additional
Jetstream 41 ("J-41") aircraft which was delivered under an interim
manufacturer financing arrangement until third party financing could be
obtained. On September 28, 1998, the Company purchased this aircraft
through a combination of cash and secured debt financing.
The Company completed third party financings for seven 50 seat Canadair
Regional Jets ("CRJ's) during the first nine months of 1998. The Company
entered into leveraged operating lease transactions for terms of 16.5
years at the time of delivery for six aircraft, and purchased one
aircraft delivered in September through a combination of cash and secured
debt financing.
The combined total additional debt related to the CRJ and J-41 aircraft
acquisitions is approximately $16.8 million with repayment terms of 8 to
16.5 years.
On September 8, 1998, the Company exercised options for ten additional
CRJ aircraft, bringing the total number of firm aircraft on order as of
September 30, 1998 to 21. In addition, the Company has options to acquire
an additional 27 aircraft. Of the 21 firm CRJ orders, one was delivered
on October 28, 1998, one is scheduled for delivery during the remainder
of the fourth quarter, nine are scheduled for delivery in 1999, seven are
scheduled for delivery in 2000 and three are scheduled for delivery in
2001. The value of the undelivered aircraft is approximately $370
million.
In the second quarter of 1998, the Company announced that the
Metropolitan Washington Airport Authority ("MWAA") in coordination with
the Company, will build an approximately 70,000 square foot regional
passenger concourse at Washington Dulles International Airport. The
facility is scheduled to open during the second quarter of 1999. The
facility will be designed, financed, constructed, operated and maintained
by MWAA, and will be leased to the Company. The lease rate will be
determined based upon final selection of funding methods and rates, and
on the final scope of the project. MWAA has agreed to fund the
construction through the proceeds of bonds and, subject to approval by
the FAA, passenger facility charges ("PFC"). Until MWAA obtains bond
funding or funding through PFCs, the Company has agreed to obtain its own
interim financing from a third party lender to fund a portion of the
total program cost of the regional concourse not to exceed $15 million.
MWAA has agreed to replace the Company's interim financing with the
proceeds of bonds or, if obtained, PFC funds, no later than one year
following the substantial completion date of the project. If MWAA
replaces the interim financing with bond financing, the Company's lease
cost will increase by the debt service amount. The Company expects to
obtain financing commitments for this obligation during the fourth
quarter of 1998.
In July 1997, the Company entered into a series of interest rate swap
contracts having an aggregate notional amount of $39.8 million. The swaps
were executed by purchasing six contracts maturing between March and
September 1998 with a third party as the counterparty. The interest rate
hedge was designed to limit approximately 40% of the Company's exposure
to interest rate changes until permanent financing for the six CRJ
aircraft scheduled for delivery between March and September 1998 was
secured. During the first nine months of 1998, the Company settled the
six contracts, paying the counterparty approximately $2.3 million, and is
amortizing this cost over the life of the related aircraft leases or has
capitalized the cost as part of the aircraft acquisition cost for owned
aircraft.
In July 1998, the Company entered into six additional interest rate swap
contracts having an aggregate notional amount of $51.8 million. The
swaps were executed by purchasing six contracts maturing between October
1998 and April 1999. The interest rate hedge is designed to limit
approximately 50% of the Company's exposure to interest rate changes
until permanent financing for six additional CRJ aircraft, which are
scheduled for delivery between October 1998 and April 1999, is secured.
Gains or losses resulting from the interest rate swap contracts will be
deferred until the contracts are settled and then amortized over the
aircraft lease term or capitalized as part of acquisition cost, if
purchased, and depreciated over the life of the aircraft. The Company
would have been obligated to pay the counterparty approximately $3.5
million had these contracts settled on September 30, 1998 or
approximately $1.4 million had these contracts settled on November 4,
1998.
During the first half of 1998, the Company entered into contracts to
purchase aircraft fuel at a fixed price from United Aviation Fuels
Corporation, a wholly owned subsidiary of United Airlines. The Company
has remaining commitments to purchase 33,000 barrels of fuel per month,
during October through December 1998, at a delivered price per gallon
including taxes and into-plane fees of 63.4 cents per gallon.
In September 1998, the Company entered into a call option to
hedge price changes on approximately 17,000 barrels of jet fuel per month
during the period from January 1999 to June 1999. The contract provides
for a premium payment of approximately $151,000 and sets a cap on the
maximum price equal to 46.30 cents per gallon of jet fuel excluding taxes
and into-plane fees, with the premium and any gains on this contract to
be recognized as a component of fuel expense during the hedge period. In
October 1998 and in November 1998, the Company entered into commodity
swap transactions to hedge price changes. Each swap contract is for
approximately 17,000 barrels of jet fuel per month during the period from
January 1999 to June 1999. The contracts require monthly cash settlements
in which the Company pays a fixed price of 46.05 cents per gallon for the
October contract and a fixed price of 42.65 cents per gallon for the
November contract, and receives a floating rate per gallon based on
market prices (these prices exclude taxes and into-plane fees). Any gains
or losses are recognized as a component of fuel expense during the hedge
period. With these three transactions the Company has hedged
approximately 52% of its jet fuel requirements for the first half of
1999.
3. INCOME TAXES
For the third quarter 1998, the Company had a combined effective tax rate
for state and federal taxes of 39%, and a combined statutory tax rate for
state and federal taxes of approximately 41%. The reduced effective rate
in the third quarter of 1998 is primarily due to a credit of
approximately $424,000 recorded in the third quarter of 1998 related to
differences between the estimated state income tax expense for the 1997
tax year and the final 1997 state income tax expense as filed on the
returns.
4. STOCK DIVIDEND
On April 14, 1998, the Company declared a 2-for-1 stock split payable as
a stock dividend on May 15, 1998. The stock dividend was contingent on
shareholder approval to increase the number of authorized Common Shares
from 15,000,000 to 65,000,000 shares. Shareholder approval was obtained
on May 5, 1998. The effect of this stock split is reflected in the
calculation of income per share and shareholders' equity as presented
herein for the prior year information and the three and nine month
periods ended September 30, 1998.
5. INCOME PER SHARE
The computation of basic income per share is computed by dividing net
income by the weighted average number of common shares outstanding.
Diluted income per share is computed by dividing net income by the
weighted average number of common shares outstanding and common stock
equivalents, which consist of shares subject to stock options computed
using the treasury stock method. In addition, under the if-converted
method, dilutive convertible securities are included in the denominator
while related interest expense, net of tax, for convertible debt is added
to the numerator. A reconciliation of the numerator and denominator used
in computing basic and diluted income per share is as follows:
<TABLE>
Three Months Nine Months
Ended September Ended September
30, 30,
<S> <C> <C> <C> <C>
(in thousands) 1997 1998 1997 1998
Net income (basic) 4,844 10,613 11,431 22,687
Interest expense on 7% Convertible
Notes net of tax effect 597 183 597 979
Net income (diluted) 5,441 10,796 12,028 23,666
Weighted average shares outstanding 14,189 19,198 16,070 17,737
(basic)
Incremental shares related to 726 844 677 894
stock options
Incremental shares related to 7%
Convertible Notes 6,234 2,202 2,078 3,512
Weighted average shares 21,149 22,244 18,825 22,143
outstanding (diluted)
</TABLE>
6. DEBT CONVERSION
The Company temporarily reduced the conversion price of its 7%
Convertible Subordinated Notes ("Notes") during the period March 25 -
April 8, 1998. During this period, holders of $31.7 million of the Notes
submitted their Notes for conversion to common stock. These Notes were
converted into 1.8 million (pre stock dividend) shares of common stock,
which includes an additional 28,087 pre stock dividend shares issued as
the result of the reduced conversion price. The Company recorded a one-
time non-cash, non-operating charge of approximately $1.4 million during
the second quarter of 1998 as the fair market value of these additional
shares.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income",
which requires, effective January 1, 1998, that comprehensive income and
the associated income tax expense or benefit be reported in financial
statements with the same prominence as other financial statements with an
aggregate amount of comprehensive income reported in that statement. For
the periods presented in this Form 10-Q, the Company did not have any
separately reported components of comprehensive income and therefore, no
separate Statement of Comprehensive Income is presented.
The American Institute of Certified Public Accountants has issued
Statement of Position 98-5 on accounting for start-up costs, including
preoperating costs related to the introduction of new fleet types by
airlines. The new accounting guidelines will take effect for fiscal
years beginning after December 15, 1998. The Company has deferred
certain start-up costs related to the introduction of the CRJs and is
amortizing such costs to expense ratably over four years. The Company
will be required to expense any remaining unamortized amounts as of
January 1, 1999 as a cumulative effect of a change in accounting
principle. The Company estimates the remaining unamortized balance for
deferred start-up costs will be approximately $1.5 million on January 1,
1999.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not designated
as hedging instruments, or for the ineffective portion of a hedging
instrument, the change in fair value will affect current period earnings.
The Company will adopt Statement No. 133 during its first quarter of
fiscal 2000 and is currently assessing the impact this statement will
have on interest rate swaps and any future hedging contracts that may be
entered into by the Company.
8. STOCKHOLDERS' EQUITY
The Company's shareholders amended the 1995 stock option plan which
provides for the issuance of options to purchase Common Stock of the
Company to certain employees and directors of the Company. After
reflecting the change for the stock dividend, the amendment increased the
aggregate number of shares of Common Stock that can be issued under the
1995 plan from 1,500,000 to 2,500,000. As of September 30, 1998, 780,682
shares are available for grant.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Third Quarter Operating Statistics
<TABLE>
<S> <C> <C> <C>
Increase
Three months ended September 30, 1997 1998 (Decrease)
Revenue passengers carried 476,857 712,556 49.4%
Revenue passenger miles ("RPMs") 119,881 221,746 85.0%
(000's)
Available seat miles ("ASMs") (000's) 222,018 381,503 71.8%
Passenger load factor 54.0% 58.1% 4.1 pts
Break-even passenger load factor 1 45.0% 45.2% 0.2 pts
Revenue per ASM (cents) 24.7 20.5 (17.0%)
Yield (cents) 45.2 34.7 (23.2%)
Cost per ASM (cents) 20.6 16.0 (22.3%)
Average passenger fare $113.5 $107.9 (5.0%)
8 1
Average passenger segment (miles) 251 311 23.9%
Revenue departures 39,371 46,085 17.1%
Revenue block hours 47,665 59,264 24.3%
Aircraft utilization (block hours) 8.6 9.2 7.0%
Average cost per gallon of fuel (cents) 78.4 67.9 (13.4%)
Aircraft in service (end of period) 60 72 20.0%
</TABLE>
Comparison of three months ended September 30, 1997, to three months
ended September 30, 1998.
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 costs of implementing regional jet 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 regional jet service,
routes and schedules offered by the Company, the success of the Company's
and other third party's Year 2000 remediation efforts, the cost of fuel,
the weather, general economic conditions, changes in and 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,
1997. 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 1998 the Company posted net income of
$10.6 million compared to net income of $4.8 million for the third
quarter of 1997. In the three months ended September 30, 1998, the
Company earned pretax income of $17.4 million compared to $8.4 million in
the three months ended September 30, 1997.
Operating Revenues
The Company's operating revenues increased 42.4% to $78.1
million in the third quarter of 1998 compared to $54.9 million in the
third quarter of 1997. The increase resulted from a 71.8% increase in
ASMs and an increase in load factor of 4.1 percentage points, offset by a
23.2% decrease in yield.
The increase in ASM's is the result of service expansion
utilizing the 50 seat Canadair Regional Jet ("CRJ"), first introduced
into service during the fourth quarter of 1997. The Company was operating
12 CRJ's as of September 30, 1998. The longer stage length of the CRJ
results in the average aircraft stage length for the third quarter 1998
increasing 14.5% over the third quarter 1997 to 271 miles.
The quarter over quarter percentage reduction in yield is
primarily the result of the 23.9% increase in the average passenger trip
length to 311 miles and the use of lower introductory fares in new CRJ
markets. Total passengers increased 49.4% in the third quarter of 1998
compared to the third quarter of 1997.
Operating Expenses
The Company's operating expenses increased 33.3% in the third
quarter of 1998 compared to the third quarter of 1997 due primarily to a
71.8% increase in ASMs and a 49.4% increase in passengers carried. The
increase in ASMs reflects the net addition of 12 CRJ's into scheduled
service since the end of the third quarter of 1997.
A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the three months ended September 30, 1997,
and 1998 is as follows:
<TABLE> Three Months ended September 30,
1997 1998
<S> <C> <C> <C> <C>
Percent Cost Percent Cost
of of
Operati Per ASM Operatin Per ASM
ng g
Revenue (cents) Revenue (cents)
s s
Salaries and related costs 21.9% 5.4 22.5% 4.6
Aircraft fuel 8.2% 2.0 8.2% 1.7
Aircraft maintenance and 8.9% 2.2 7.7% 1.6
materials
Aircraft rentals 14.1% 3.5 12.2% 2.5
Traffic commissions and related 16.3% 4.0 13.6% 2.8
fees
Depreciation and amortization 1.7% 0.4 2.1% 0.4
Other 12.4% 3.1 11.9% 2.4
Total 83.5% 20.6 78.2% 16.0
</TABLE>
Cost per ASM decreased 22.3% to 16.0 cents during the third
quarter of 1998 compared to 20.6 cents during the third quarter of 1997
primarily due to the introduction of 12 CRJ's since the end of the third
quarter of 1997. The CRJ, with its longer average aircraft stage length,
is a more unit cost-efficient aircraft than the Company's turboprop
aircraft.
Salaries and related costs per ASM decreased 14.8% to 4.6 cents
in the third quarter of 1998 compared to the third quarter of 1997. In
absolute dollars, salaries and related costs increased 46.2% from $12.0
million in the third quarter of 1997 to $17.6 million in the third
quarter of 1998. The increase resulted primarily from additional flight
crews, customer service personnel and maintenance personnel to support
the 12 regional jets added during the past year.
The cost per ASM of aircraft fuel decreased to 1.7 cents in the
third quarter of 1998 compared to 2.0 cents in the third quarter of 1997.
In absolute dollars, aircraft fuel expense increased 42.5% from $4.5
million in the third quarter of 1997 to $6.4 million in the third quarter
of 1998. The increased fuel expense resulted from the 24.3% increase in
revenue block hours, partially offset by a 13.4% decrease in the average
cost per gallon of fuel from 78.4 cents to 67.9 cents including
applicable taxes and into-plane fees. The CRJ aircraft burn more fuel
than the J-41 and J-32 turboprop aircraft on a per ASM basis. Due to
this fact, even though the price per gallon of fuel decreased 13.4%, the
remaining costs per ASM for the third quarter 1998, excluding fuel
expense, decreased by 23.1% to 14.3 cents compared to the third quarter
of 1997. In January and March 1998, the Company entered into contracts to
purchase fuel at fixed prices from United Aviation Fuels Corporation, a
wholly owned subsidiary of United Airlines. During the third quarter, the
Company purchased approximately 99,000 barrels under these contracts at a
per gallon price of 66.1 cents including taxes and into-plane fees.
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
Company has entered into contracts to minimize its exposure to fuel price
increases during the first half of 1999. See "Other Commitments".
The cost per ASM of aircraft maintenance and materials
decreased 27.3% to 1.6 cents in the third quarter of 1998 compared to the
third quarter of 1997. In absolute dollars, aircraft maintenance and
materials expense increased 21.9% from $4.9 million in the third quarter
of 1997 to $6.0 million in the third quarter of 1998. The increased
expense resulted from the increase in the size of the CRJ fleet and an
increase in the average age of the turboprop fleet.
The cost per ASM of aircraft rentals decreased 28.6% to 2.5
cents for the third quarter of 1998 compared to 3.5 cents for the third
quarter of 1997. This decrease is the result of adding 12 CRJ aircraft
which have lower per unit costs than the turboprop fleet, and refinancing
19 of its J-41 aircraft, primarily during the third and fourth quarters
of 1997, at significantly reduced rental rates. In absolute dollars,
aircraft rentals increased 23.2% from $7.7 million in the third quarter
of 1997 to $9.5 million in the third quarter of 1998, reflecting the
addition of the 12 CRJ aircraft.
The cost per ASM of traffic commissions and related fees
decreased to 2.8 cents in the third quarter of 1998 compared to 4.0 cents
in the third quarter of 1997. In absolute dollars, traffic commissions
and related fees increased 19.1% from $8.9 million in the third quarter
of 1997 to $10.6 million in the third quarter of 1998. The increase
resulted from a 42.0% increase in passenger revenues and a 49.4% increase
in revenue passengers. These increases were offset by a reduction in the
travel agency commission rate and a reduction in the percentage of
commissionable tickets on a quarter over quarter basis.
The cost per ASM of depreciation and amortization remained
unchanged at 0.4 cents. In absolute dollars, depreciation and
amortization increased 74.7% from $0.9 million in the third quarter of
1997 to $1.5 million in the third quarter of 1998 primarily as a result
of additional rotable spare parts associated with the CRJs and the
purchase of four previously leased J-41 aircraft at the end of the third
quarter of 1997.
The cost per ASM of other operating expenses decreased to 2.4
cents in the third quarter of 1998 from 3.1 cents in the third quarter of
1997. In absolute dollars, other operating expenses increased 37.2% from
$6.8 million in the third quarter of 1997 to $9.3 million in the third
quarter of 1998. The increased costs result primarily from the 17.1%
increase in the number of departures and the 49.4% increase in revenue
passengers which resulted in higher landing fees, facility rents and
passenger handling costs.
As a result of the foregoing changes in operating expenses, and
a 71.8% increase in ASMs, total cost per ASM decreased to 16.0 cents in
the third quarter of 1998 compared to 20.6 cents in the third quarter of
1997. In absolute dollars, total operating expenses increased 33.3% from
$45.8 million in the third quarter of 1997 to $61.0 million in the third
quarter of 1998.
The Company's combined effective tax rate for state and federal
taxes during the third quarter of 1998 was approximately 39% as compared
to 42% for the third quarter of 1997. This decrease is due to a credit of
approximately $424,000 recorded in the third quarter of 1998 related to
differences between the estimated state income tax expense for the 1997
tax year and the final 1997 state income tax expense as filed on the
returns.
Nine Months Operating Statistics
<TABLE>
<S> <C> <C> <C>
Increase
Nine months ended September 30, 1997 1998 (Decrease)
Revenue passengers carried 1,200,616 1,823,766 51.9%
Revenue passenger miles ("RPMs") 298,494 564,661 89.2%
(000's)
Available seat miles ("ASMs") (000's) 617,574 1,001,072 62.1%
Passenger load factor 48.3% 56.4% 8.1 pts
Break-even passenger load factor 2 41.7% 45.5% 3.8 pts
Revenue per ASM (cents) 24.2 21.2 (12.4%)
Yield (cents) 49.3 36.9 (25.2%)
Cost per ASM (cents) 20.9 17.1 (18.2%)
Average passenger fare $122.61 $114.27 (6.8%)
Average passenger segment (miles) 249 310 24.5%
Revenue departures 111,016 130,541 17.6%
Revenue block hours 134,179 165,921 23.7%
Aircraft utilization (block hours) 8.3 8.9 7.2%
Average cost per gallon of fuel (cents) 80.1 68.2 (14.9%)
Aircraft in service (end of period) 60 72 20.0%
</TABLE>
Comparison of nine months ended September 30, 1997, to nine months ended
September 30, 1998.
Results of Operations
General
In the first three quarters of 1998, the Company posted net
income of $22.7 million compared to net income of $11.4 million for the
first three quarters of 1997. In the nine months ended September 30,
1998, the Company earned pretax income of $39.1 million compared to $19.0
million in the nine months ended September 30, 1997.
Operating Revenues
The Company's operating revenues increased 42.0% to $211.9
million in the first three quarters of 1998 compared to $149.2 million in
the first three quarters of 1997. The increase resulted from a 62.1%
increase in ASMs and an increase in load factor of 8.1 percentage points,
partially offset by a 25.2% decrease in yield.
The increase in ASM's is largely the result of service
expansion of the 50 seat CRJ, first introduced into service during the
fourth quarter of 1997, and the addition of five British Aerospace
Jetstream - 41 ("J-41") aircraft during 1997. The Company operated 12
CRJ's as of September 30, 1998. The longer stage length of the CRJ
results in the average aircraft stage length for the first three quarters
of 1998 increasing 12.7% over the first three quarters of 1997 to 266
miles.
The year over year percentage reduction in yield is related in
part to the temporary expiration of the ticket tax from January 1, 1997
to March 6, 1997 and to the 24.5% increase in the average passenger trip
length. Total passengers increased 51.9% in the first three quarters of
1998 compared to the first three quarters of 1997.
Operating Expenses
The Company's operating expenses increased 32.9% in the first
three quarters of 1998 compared to the first three quarters of 1997 due
primarily to a 62.1% increase in ASMs and a 51.9% increase in passengers
carried. The increase in ASMs reflects the net addition of 12 CRJ's in
scheduled service since the third quarter of 1997 and five J-41 aircraft
during 1997.
A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the nine months ended September 30, 1997,
and 1998 is as follows:
<TABLE> Nine months ended September 30,
1997 1998
<S> <C> <C> <C> <C>
Percent Cost Percent Cost
of of
Operati Per ASM Operatin Per ASM
ng g
Revenue (cents) Revenue (cents)
s s
Salaries and related costs 24.0% 5.8 23.0% 4.9
Aircraft fuel 8.7% 2.1 8.1% 1.7
Aircraft maintenance and 8.0% 1.9 8.3% 1.7
materials
Aircraft rentals 15.2% 3.7 12.6% 2.7
Traffic commissions and related 16.1% 3.9 14.7% 3.1
fees
Depreciation and amortization 1.6% 0.4 2.2% 0.4
Other 12.8% 3.1 12.1% 2.6
Total 86.4% 20.9 81.0% 17.1
</TABLE>
Cost per ASM decreased 18.2% to 17.1 cents during the first
nine months of 1998 compared to 20.9 cents during the first nine months
of 1997. This decrease was primarily due to the introduction of a more
unit cost-efficient aircraft, the CRJ, with its longer average aircraft
stage length, in addition to the refinancing of 19 J-41 aircraft, mostly
in the second half of 1997. The increase in ASMs resulted from the net
addition of 12 CRJ's and five J-41 aircraft.
Salaries and related costs per ASM decreased 15.5% to 4.9 cents
in the first three quarters of 1998 compared to the first three quarters
of 1997. In absolute dollars, salaries and related costs increased 36.4%
from $35.8 million in the first three quarters of 1997 to $48.8 million
in the first three quarters of 1998. The increase resulted primarily from
additional flight crews, customer service personnel and maintenance
personnel to support the 12 regional jets and five additional J-41
aircraft.
The cost per ASM of aircraft fuel decreased to 1.7 cents in the
first three quarters of 1998 compared to 2.1 cents in the first three
quarters of 1997. In absolute dollars, aircraft fuel expense increased
32.2% from $13.0 million in the first three quarters of 1997 to $17.2
million in the first three quarters of 1998. The increased fuel cost
resulted from the 23.7% increase in block hours, partially offset by a
14.9% decrease in the average cost per gallon of fuel from 80.1 cents to
68.2 cents including taxes and into-plane fees. During the first three
quarters of 1998, the Company purchased 264,000 barrels of jet fuel from
UAFC at fixed price of 61.0 cents per gallon including taxes and into-
plane fees. 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 10.5% to 1.7 cents in the first three quarters of 1998 compared
to the first three quarters of 1997. In absolute dollars, aircraft
maintenance and materials expense increased 47.5% from $11.9 million in
the first three quarters of 1997 to $17.6 million in the first three
quarters of 1998. The increased expense resulted from the increase in the
size of the fleet and an increase in the average age of the turboprop
fleet.
The cost per ASM of aircraft rentals decreased to 2.7 cents for
the first three quarters of 1998 compared to 3.7 cents for the first
three quarters of 1997. This decrease is the result of adding 12 CRJ
aircraft which have lower per unit costs than the turboprop fleet, and
refinancing 19 of its J-41 aircraft, primarily during the third and
fourth quarters of 1997 at significantly reduced rental rates. In
absolute dollars, aircraft rentals increased 17.1% from $22.9 million in
the first three quarters of 1997 to $26.8 million in the first three
quarters of 1998 reflecting the additional aircraft, offset by savings
resulting from the refinancing of the J-41 leases.
The cost per ASM of traffic commissions and related fees
decreased to 3.1 cents in the first three quarters of 1998 compared to
3.9 cents in the first three quarters of 1997. In absolute dollars,
traffic commissions and related fees increased 29.9% from $24.0 million
in the first three quarters of 1997 to $31.2 million in the first three
quarters of 1998. The increase in costs resulted from a 41.6% increase in
passenger revenues and a 51.9% increase in revenue passengers. These
increases were partially offset by the industry wide reduction in the
travel agency commission rate from 10% to 8% enacted in late 1997. Since
substantially all passenger revenues are derived from interline sales,
the Company did not begin realizing the savings from this reduction until
February 1998.
The cost per ASM of depreciation and amortization remained the
same at 0.4 cents for the first three quarters of 1998 compared to the
first three quarters of 1997. In absolute dollars, depreciation and
amortization increased 85.4% from $2.4 million in the first three
quarters of 1997 to $4.4 million in the first three quarters of 1998
primarily as a result of additional rotable spare parts associated with
the CRJs and the purchase of four previously leased J-41 aircraft in the
third quarter of 1997.
The cost per ASM of other operating expenses decreased to 2.6
cents in the first three quarters of 1998 from 3.1 cents in the first
three quarters of 1997. In absolute dollars, other operating expenses
increased 33.9% from $19.2 million in the first three quarters of 1997 to
$25.7 million in the first three quarters of 1998. The increased costs
result primarily from the 17.6% increase in the number of departures and
the 51.9% increase in revenue passengers.
As a result of the foregoing changes in operating expenses and
a 62.1% increase in ASMs, total operating cost per ASM decreased to 17.1
cents in the first three quarters of 1998 compared to 20.9 cents in the
first three quarters of 1997. In absolute dollars, total operating
expenses increased 32.9% from $129.1 million in the first three quarters
of 1997 to $171.6 million in the first three quarters of 1998.
The Company's combined effective tax rate for state and federal
taxes during the first nine months of 1998 was approximately 41.9% as
compared to 39.8% for the first nine months of 1997. This increase is
primarily due to the effect of a one time non-cash, non-operating charge
taken in the second quarter of 1998 of approximately $1.4 million related
to the reduced conversion price accepted by certain holders of the
Company's 7% Notes. This was partially offset by a credit of
approximately $424,000 recorded in the third quarter of 1998 related to
differences between the estimated state income tax expense for the 1997
tax year and the final 1997 state income tax expense as filed on the
returns.
Outlook
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth above on pages 12
and 13.
As of November 01, 1998, the Company was operating 28 J32's, 32
J41's, and 13 CRJ's. The Company has firm orders to acquire an
additional 20 CRJ's and options to acquire another 27 CRJ's. The expected
delivery schedule for the 20 firm orders is as follows; one during the
fourth quarter of 1998, nine in 1999, seven in 2000, and three in 2001.
The introduction of these additional CRJ aircraft will expand the
Company's business into new markets and increase capacity in existing
markets. In general, service to new markets and increased capacity to
existing markets will result in increased operating expense that may not
be immediately offset by increases in operating revenues.
During 1998 the U.S. Department of Transportation granted to
the Company slot exemptions to perform regional jet services between
Chicago's O'Hare International Airport and a total of five named
communities, provided the Company continuously serves these communities.
The Company inaugurated non-stop service from Chicago to Charleston, WV
on August 3, 1998, to Springfield/Branson, MO on September 1, 1998, and
to Wilkes-Barre/Scranton, PA on October 1, 1998. The Company has
announced that it will replace turboprop service provided by another
United Express carrier with the Company's CRJ service from Chicago to
Fargo, ND, Sioux Falls, SD, and Peoria, IL, all effective December 15,
1998. All of these flights connect to United's Chicago hub complex. All
will be served utilizing either slot exemption authority or slots
transferred from other parties.
The Company's contract with the Association of Flight
Attendants ("AFA") became amendable on April 30, 1997. In October 1998,
a new four year agreement was ratified by the AFA. In June 1998, the
Company received notification that its mechanics, represented by the
Aircraft Mechanics Fraternal Association, had ratified the Company's four
year contract proposal. The Company does not anticipate the terms of
these two new contracts to have a material effect on its future results
of operations or financial condition.
In conjunction with its September 1998 announcement of firming
orders for ten option CRJ aircraft, the Company also announced that it is
exploring alternatives to accelerate the retirement of its fleet of 28
leased 19 seat British Aerospace Jetstream J-32 ("J-32") aircraft. The
Company is targeting the phase-out of the J-32 fleet from its United
Express operation by the end of 2001. The Company intends to complete its
analysis of a phase-out plan including the quantification of any one-
time, fleet rationalization charge in the first quarter of 1999. The
Company has operating lease commitments with remaining lease terms
ranging from three to seven years. While the aggregate minimum lease
commitments on these J-32 aircraft is approximately $42 million as of
September 1998, the Company expects any charge from the phase-out to be
significantly less.
Liquidity and Capital Resources
As of September 30, 1998, the Company had cash, cash
equivalents and short-term investments of $52.5 million and working
capital of $53.2 million compared to $43.3 million and $40.7 million
respectively as of September 30, 1997. During the first nine months of
1998, cash and cash equivalents increased by $13.3 million, reflecting
net cash provided by operating activities of $21.1 million, net cash used
in investing activities of $20.6 million and net cash provided by
financing activities of $12.8 million. The net cash provided by
operating activities is primarily the result of net income for the period
of $22.7 million, non cash depreciation and amortization expenses of $4.4
million, and the non cash debt inducement expense of $1.4 million, offset
by a $5.6 million increase in prepaid expenses related to aircraft rent.
The net cash used in investing activities consisted primarily of the
purchase of property and equipment totaling $32.2 million. The Company
purchased one CRJ and one J-41, which was delivered in December 1997
under an interim lease, during the third quarter of 1998. These capital
expenditures were partially offset by the maturity of $10.7 million in
short term investments and $1.3 million in proceeds from the sale-
leaseback of aircraft rotable spare parts. The net cash provided by
financing activities consisted primarily of the proceeds from the
issuance of long term debt related to the aircraft acquisitions and the
proceeds received from the exercise of stock options offset by payments
of long-term debt and capital lease obligations.
Other Financing
The Company has an asset-based lending agreement with a
financial institution that provides the Company with a line of credit of
up to $20.0 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.
There were no borrowings under the line during the first nine months of
1998. The Company has pledged $12.5 million of this line of credit as
collateral to secure letters of credit, principally for the Company's
maintenance facility and aircraft financings, which were issued on behalf
of the Company by a financial institution. At September 30, 1998, the
available amount of credit was $7.5 million.
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7% Convertible Subordinated Notes due July 1, 2004
("the Notes"). The Notes are convertible into shares of Common Stock,
unless previously redeemed or repurchased, at a conversion price of $9
per share, (after giving effect to the stock split on May 15, 1998)
subject to certain adjustments. Interest on the Notes is payable on
April 1 and October 1 of each year. The Notes are not redeemable by the
Company until July 1, 2000.
In January 1998, approximately $5.9 million of the Notes were
converted, pursuant to their original terms, into 330,413 shares (pre
stock dividend) of Common Stock. From March 20, 1998 to April 8, 1998,
the Company temporarily reduced the conversion price from $18 to $17.72
for holders of the Notes. During this period, $31.7 million of the Notes
converted into approximately 1.8 million shares (pre stock dividend) of
Common Stock. As a result of this temporary price reduction, the Company
recorded a one-time, non-cash, non-operating charge to earnings during
the second quarter of 1998 of $1.4 million representing the fair value of
the additional shares distributed upon conversion.
The Company's effective income tax rate for the first nine
months of 1998 was 41.9% which is expected to be the effective tax rate
for the full year.
Other Commitments
In July 1997, the Company entered into a series of interest
rate swap contracts having an aggregate notional amount of $39.8 million.
The swaps were executed by purchasing six contracts maturing between
March and September 1998 with a third party as the counterparty. The
interest rate hedge was designed to limit approximately 40% of the
Company's exposure to interest rate changes until permanent financing for
the six CRJ aircraft scheduled for delivery between March and September
1998 was secured. During the first nine months of 1998, the Company
settled the six contracts, paying the counterparty approximately $2.3
million, and is amortizing this cost over the life of the related
aircraft leases or has capitalized the cost as part of the aircraft
acquisition cost for owned aircraft. On July 2, 1998, the Company entered
into additional interest rate swap contracts having an aggregate notional
amount of $51.8 million to hedge its exposure, by approximately 50%, to
interest rate changes until permanent financing for six CRJ aircraft
scheduled for delivery between October 1998 and April 1999, is secured.
The Company would have been obligated to pay the counterparty
approximately $3.5 million had these contracts settled on September 30,
1998 or approximately $1.4 million had these contracts settled on
November 4, 1998.
During the first half of 1998, the Company entered into
contracts to purchase aircraft fuel at a fixed price from United Aviation
Fuels Corporation, a wholly owned subsidiary of United Airlines. The
Company has remaining commitments to purchase 33,000 barrels of fuel per
month, during October through December 1998, at a delivered price per
gallon including taxes and into-plane fees of 63.4 cents per gallon.
In September 1998, the Company entered into a call option to
hedge price changes on approximately 17,000 barrels of jet fuel per month
during the period from January 1999 to June 1999. The contract provides
for a premium payment of approximately $151,000 and sets a cap on the
maximum price equal to 46.30 cents per gallon of jet fuel excluding taxes
and into-plane fees, with the premium and any gains on this contract to
be recognized as a component of fuel expense during the hedge period. In
October 1998 and in November 1998, the Company entered into commodity
swap transactions to hedge price changes. Each swap contract is for
approximately 17,000 barrels of jet fuel per month during the period from
January 1999 to June 1999. The contracts require monthly cash settlements
in which the Company pays a fixed price of 46.05 cents per gallon for the
October contract and a fixed price of 42.65 cents per gallon for the
November contract, and receives a floating rate per gallon based on
market prices (these prices exclude taxes and into-plane fees). Any gains
or losses are recognized as a component of fuel expense during the hedge
period. With these three transactions the Company has hedged
approximately 52% of its jet fuel requirements for the first half of
1999.
In the second quarter of 1998, the Company announced that the
Metropolitan Washington Airport Authority ("MWAA"), in coordination with
the Company, will build an approximately 70,000 square foot regional
passenger concourse at Washington Dulles International Airport. The
facility is scheduled to open during the second quarter of 1999. The new
facility will offer improved passenger amenities and operational
enhancements, and will provide additional space to support the Company's
expanded operations resulting from the introduction of CRJs. The
facility will be designed, financed, constructed, operated and maintained
by MWAA, and will be leased to the Company. The lease rate will be
determined based upon final selection of funding methods and rates, and
on the final scope of the project. MWAA has agreed to fund the
construction through the proceeds of bonds and, subject to approval by
the FAA, passenger facility charges ("PFC"). Until MWAA obtains bond
funding or funding through PFCs, the Company has agreed to obtain its own
interim financing from a third party lender to fund a portion of the
total program cost of the regional concourse for approximately $15
million. MWAA has agreed to replace the Company's interim financing with
the proceeds of bonds or, if obtained, PFC funds, no later than one year
following the substantial completion date of the project. If MWAA
replaces the interim financing with bond financing, the Company's lease
cost will increase by the debt service amount. The Company expects to
obtain financing commitments for this obligation during the fourth
quarter of 1998.
In the fourth quarter of 1998, the Company began using United
Airlines' "ORION" revenue management system for flights departing January
31, 1999 and beyond. The PROS IV revenue management system, which has
been used by the Company since May 1997, will no longer be used as of
that date. ORION will allow the Company to take advantage of state of the
art "Origin and Destination" management capabilities. As with the
previous system, revenue management analysts will continue to monitor
forecasts and make adjustments for changes in demand and behavior. The
ORION system gives the Company additional capabilities in forecasting and
optimizing all of the passenger itineraries that flow over the entire
United/United Express network. Management believes that ORION will
further promote maximization of passenger revenue, although there can be
no assurance regarding the ultimate effect on revenue. The Company
believes that the recognition of termination obligations associated with
the discontinuance of PROS IV, will be immaterial to future operating
periods.
Aircraft
As of September 30, 1998, the Company had firm commitments to
acquire 21 additional CRJ's from Bombardier, Inc. In addition, the
Company had options to acquire a further 27 CRJ's. Of the 21 firm CRJ
orders, one was delivered on October 28, one is scheduled for delivery
during the fourth quarter of 1998, nine are scheduled for delivery in
1999, seven are scheduled for delivery in 2000, and three are scheduled
for delivery in 2001. The value of the remaining aircraft on firm order
is approximately $370 million. The Company intends to use a combination
of debt financing and lease financing to acquire these aircraft.
Capital Equipment and Debt Service
Capital expenditures for the first nine months of 1998 were
$32.2 million compared to $23.3 million for the same period in 1997.
Capital expenditures for 1998 have consisted primarily of the purchase of
one CRJ aircraft, one J-41 aircraft, rotable spare parts for the CRJ and
J-41 aircraft, facility leasehold improvements, ground equipment, and
computer and office equipment. For the remainder of 1998, the Company
anticipates spending approximately $25.5 million for: one CRJ aircraft,
(this aircraft may be lease financed depending on market conditions),
rotable spare parts related to the CRJ and J-41 aircraft, ground service
equipment, facilities, computers and software.
Debt service including capital leases for the nine months ended
September 30, 1998 was $4.1 million compared to $5.0 million in the same
period of 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.
Year 2000 Compliance
Background:
The "Year 2000 problem" refers to potential disruptions arising from the
inability of computer and embedded microprocessor systems to process or
operate with data inputs involving the years beginning with 2000 and, to
a lesser extent, involving the year 1999.
State of readiness:
The Company is highly reliant on computer systems and embedded
technologies of third party vendors and contractors and governmental
agencies, such as the CRS systems, United Airlines, aircraft and parts
manufacturers, the U.S. Federal Aviation Administration, the U.S.
Department of Transportation, and MWAA and other local airport
authorities. The Company has sent questionnaires to these third party
vendors, contractors and government agencies and is continuing to assess
which of their systems may be affected by year 2000 issues and what the
status of their remediation plans are. The Company expects to complete
this evaluation process by January 31, 1999. The Company also has
surveyed its internal information technology ("IT") systems and embedded
operating systems to evaluate and prioritize those which require year
2000 remediation. The Company has completed remediation and testing of
approximately 90% of its internal IT systems, and has or will soon
commence work on the Company's remaining IT systems, which it currently
expects to complete by March 31, 1999.
Costs:
The Company has utilized existing resources and has not incurred any
significant costs to implement its year 2000 plan to date. The Company
does not utilize older mainframe computer technology in any of its
internal IT systems. In addition, most of its hardware and software were
acquired within the last few years, and many functions are operated by
third parties or the government. Because of this, the Company believes
that the cost to modify its own non-year 2000 compliant systems or
applications will not have a material effect on its financial position or
the results of its operations.
Risks:
The Company's year 2000 compliance efforts are heavily dependent on year
2000 compliance by governmental agencies, United Airlines, CRS vendors
and other critical vendors and suppliers. The failure of any one of
these mission critical functions (which the Company believes to be the
most likely worst case scenario), such as a shut-down of the air traffic
control system, could result in the reduction or suspension of the
Company's operations and could have a material adverse effect on the
Company's financial position and results of its operations. The failure
of other systems could cause disruptions in the Company's flight
operations, service delivery and/or cash flow.
Contingency plans:
The Company has not yet developed year 2000 contingency plans. The
Company intends to closely monitor the year 2000 compliance efforts of
the third parties upon which it is heavily reliant and its own internal
remediation efforts. The Company intends to develop contingency plans
after March 31, 1999, based on the information available as of that date.
While certain of the Company's systems could be handled manually, under
certain scenarios the Company may not be able to operate in the absence
of certain systems, in which cases the Company would need to reduce or
suspend operations until such systems were restored to operational
status.
Recent Accounting Pronoucements
In 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income", which requires, effective January 1, 1998, that comprehensive
income and the associated income tax expense or benefit be reported in
financial statements with the same prominence as other financial
statements with an aggregate amount of comprehensive income reported in
that statement. For the periods presented in this Form 10Q, the Company
did not have any separately reported components of comprehensive income
and therefore, no separate Statement of Comprehensive Income is
presented.
The American Institute of Certified Public Accountants has
issued a statement of position on accounting for start-up costs,
including preoperating costs related to the introduction of new fleet
types by airlines. The new accounting guidelines will take effect for
fiscal years beginning after December 15, 1998. The Company has deferred
certain start-up costs related to the introduction of the CRJs and is
amortizing such costs to expense ratably over four years. The Company
will be required to expense any unamortized amounts remaining as of
January 1, 1999. The Company estimates the remaining unamortized balance
for deferred start-up costs will be approximately $1.4 million on January
1, 1999.
In June 1998, the FASB issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards for derivative instruments
and all hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until
the hedged item affects earnings. For derivatives that are not designated
as hedging instruments, or for the ineffective portion of a hedging
instrument, the change in fair value will affect current period earnings.
The Company will adopt Statement No. 133 during its first quarter of
fiscal 2000 and is currently assessing the impact this statement will
have on interest rate swaps and any future hedging contracts that may be
entered into by the Company.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED September 30, 1998
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation incidental to its
business, none of which is likely to have a material effect on the
Company's financial position.
The Company was a party to an action in the United States
District Court for the Southern District of Ohio, known as Peter J.
Ryerson, administrator of the estate of David Ryerson, v. Atlantic Coast
Airlines, Case No. C2-95-611. This action was settled during the third
quarter of 1998 and has been dismissed with prejudice. The settlement
terms were fully covered under the Company's insurance policy.
ITEM 2. Changes in Securities.
None to report.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None to report.
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11.1 Computation of Per Share Income.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None to report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
November 16, 1998 By: /S/ Paul H. Tate
Paul H. Tate
Senior Vice President and Chief
Financial Officer
November 16, 1998 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
at the operating income level.
2 "Break-even passenger load factor" represents the percentage of ASMs
which must be flown by revenue passengers for the airline to break-even
at the operating income level.
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
Three Months Nine Months
Ended September Ended September 30,
30,
<S> <C> <C> <C> <C>
(in thousands) 1997 1998 1997 1998
Net income (basic) 4,844 10,613 11,431 22,687
Interest expense on 7% Convertible
Notes net of tax effect 597 183 597 979
Net income (diluted) 5,441 10,796 12,028 23,666
Weighted average shares
outstanding (basic) 14,189 19,198 16,070 17,737
Incremental shares related to stock 726 844 677 894
options
Incremental shares related to 7%
Convertible Notes 6,234 2,202 2,078 3,512
Weighted average shares outstanding 21,149 22,244 18,825 22,143
(diluted)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 52,430
<SECURITIES> 63
<RECEIVABLES> 31,018
<ALLOWANCES> 0
<INVENTORY> 3,053
<CURRENT-ASSETS> 95,043
<PP&E> 70,949
<DEPRECIATION> 0
<TOTAL-ASSETS> 199,357
<CURRENT-LIABILITIES> 41,869
<BONDS> 0
0
0
<COMMON> 413
<OTHER-SE> 96,867
<TOTAL-LIABILITY-AND-EQUITY> 199,357
<SALES> 208,398
<TOTAL-REVENUES> 211,914
<CGS> 0
<TOTAL-COSTS> 171,626
<OTHER-EXPENSES> 1,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,860
<INCOME-PRETAX> 39,067
<INCOME-TAX> 16,380
<INCOME-CONTINUING> 22,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,687
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.07
</TABLE>
