<PAGE 1>
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 March 31, 1999
Commission file number 0-21976
ATLANTIC COAST AIRLINES HOLDINGS, 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 May 3, 1999, there were 19,513,323 shares of common stock, par
value $.02 per share, outstanding.
<PAGE 2>
Part I. Financial Information
Item 1. Financial Statements
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31, 1999
(In thousands except for share data and par 1998 (Unaudited)
values)
Assets
<S> <C> <C>
Current:
Cash and cash equivalents $ 64,412 $ 56,206
Short term investments 63 64
Accounts receivable, net 30,210 33,176
Expendable parts and fuel inventory, 3,377 3,782
net
Prepaid expenses and other current 3,910 12,739
assets
Deferred tax asset 2,534 2,534
Total current assets 104,506 108,501
Notes receivable - 5,936
Property and equipment at cost, net of
accumulated depreciation and amortization 88,326 88,628
Preoperating costs, net of accumulated
amortization 1,486 -
Intangible assets, net of accumulated 2,382 2,422
amortization
Debt issuance costs, net of accumulated
amortization 3,420 3,665
Aircraft deposits 21,060 21,801
Other assets 6,446 6,737
Total assets $ 227,626 $ 237,690
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 5,262 $ 4,702
Current portion of long-term debt 3,450 3,451
Current portion of capital lease 1,334 1,060
obligations
Accrued liabilities 26,330 27,789
Total current liabilities 36,376 37,002
Long-term debt, less current portion 63,289 62,704
Capital lease obligations, less current 1,446 1,103
portion
Bridge loan - 5,936
Deferred tax liability 6,238 6,238
Deferred credits, net 9,900 10,208
Total liabilities 117,249 123,191
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares issued
20,821,001 and 20,981,623 respectively;
shares outstanding 19,348,501 and 416 419
19,509,123 respectively
Additional paid-in capital 85,215 86,459
Less: Common stock in treasury, at cost, (17,069) (17,069)
1,472,500 shares
Retained earnings 41,815 44,690
Total stockholders' equity 110,377 114,499
Total liabilities and stockholders' $ 227,626 $ 237,690
equity
See accompanying notes to the condensed consolidated financial
statements.
</TABLE>
<PAGE 3>
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
(In thousands, except for per share data) 1998 1999
Operating revenues:
<S> <C> <C>
Passenger $ 56,693 $ 71,842
Other 1,362 1,162
Total operating revenues 58,055 73,004
Operating expenses:
Salaries and related costs 14,669 19,661
Aircraft fuel 5,065 6,639
Aircraft maintenance and materials 5,669 6,052
Aircraft rentals 8,267 10,378
Traffic commissions and related fees 9,118 11,879
Facility rents and landing fees 2,808 4,013
Depreciation and amortization 1,387 1,935
Other 5,197 6,770
Total operating expenses 52,180 67,327
Operating income 5,875 5,677
Other income (expense):
Interest expense (1,201) (1,214)
Interest income 439 1,047
Other, net 30 25
Total other income (expense) (732) (142)
Income before income tax provision 5,143 5,535
Income tax provision 2,160 1,772
Income before cumulative effect of
accounting change 2,983 3,763
Cumulative effect of accounting change, net of income - 888
tax
Net income $ 2,983 $ 2,875
Income per share:
Basic
Income before cumulative effect of accounting
change $0.20 $0.19
Cumulative effect of accounting change - $0.04
Net income $0.20 $0.15
Diluted
Income before cumulative effect of accounting
change $0.16 $0.18
Cumulative effect of accounting change - $0.04
Net income $0.16 $0.14
Weighted average shares used in computation:
-basic 15,162 19,445
-diluted 21,873 22,613
See accompanying notes to the condensed consolidated financial
statements.
</TABLE>
<PAGE 4>
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
(In thousands) 1998 1999
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,983 $ 2,875
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and Amortization 1,387 2,008
Write off of preoperating costs - 1,486
Amortization of deferred credits (74) (118)
Other 164 (4)
Changes in operating assets and
liabilities:
Accounts receivable (4,846) (3,314)
Expendable parts and fuel inventory (261) (404)
Prepaid expenses and other current assets (5,735) (8,933)
Preoperating costs (5) -
Accounts payable 55 (580)
Accrued liabilities 4,079 1,409
Net cash used in operating activities (2,253) (5,575)
Cash flows from investing activities:
Purchases of property and equipment (2,851) (1,689)
Purchases of short term investments (1) (1)
Maturities of short term investments 9,809 -
Funding obligation for regional terminal - (5,936)
Capitalized interest (net) - (453)
Refund of aircraft lease deposits and other 120 3
Payments for aircraft deposits and other (500) (500)
Net cash provided by (used in) investing 6,577 (8,576)
activities
Cash flows from financing activities:
Proceeds from bridge loan - 5,936
Payments of long-term debt (228) (584)
Payments of capital lease obligations (1,703) (326)
Deferred financing costs (356) (242)
Proceeds from exercise of stock options 598 1,161
Net cash (used in) provided by financing (1,689) 5,945
activities
Net increase (decrease) in cash and cash 2,635 (8,206)
equivalents
Cash and cash equivalents, beginning of period 39,167 64,412
Cash and cash equivalents, end of period $ 41,802 $56,206
See accompanying notes to the condensed consolidated financial
statements.
</TABLE>
<PAGE 5>
ATLANTIC COAST AIRLINES HOLDINGS, INC. 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 month period presented are not necessarily
indicative of the results to be expected for the year ending December 31,
1999. 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, 1998.
2. OTHER - COMMITMENTS
On July 2, 1998, the Company entered into a series of 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 Canadair 50-seat regional jet ("RJ") aircraft
scheduled for delivery between October 1998 and April 1999, is secured.
During the first quarter of 1999, the Company settled two of the swap
contracts, paying the counterparty approximately $110,000. The Company
also recognized a gain of approximately $210,000 from the ineffective
portion of one of the interest rate swap contracts that settled in the
first quarter of 1999. The Company is amortizing the effective portion of
hedge gains and losses over the term of the related aircraft leases. Had
the two remaining contracts settled as of March 31, 1999, neither the
Company nor the counterparty would have been obligated to make a payment.
The Metropolitan Washington Airport Authority ("MWAA"), in coordination
with the Company, has built an approximately 69,000 square foot regional
passenger concourse at Washington Dulles International Airport,
("Washington-Dulles"). The facility opened on May 2, 1999. 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
<PAGE 6>
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.
In February 1999, the Company entered into an asset-based lending
agreement with two financial institutions that provides the Company with
a $15 million bridge loan for the construction of the Company's regional
terminal at Washington-Dulles and a line of credit for up to $35 million
depending on the amount of assigned ticket receivables and the value of
certain rotable spare parts. The $35 million line of credit replaces a
previous $20 million line of credit. The interest rate on this line is
LIBOR plus from .25% to 1.75% depending on the Company's fixed charges
coverage ratio. The Company records a note receivable from MWAA in the
same amount as the borrowings on the bridge loan. MWAA has agreed to
reimburse principal borrowings but the Company will be responsible for
all interest costs. As of March 31, 1999, the Company had borrowed $5.9
million on the bridge loan and recorded a receivable from MWAA for $5.9
million.
As of March 31, 1999, the Company had firm commitments to acquire 27
additional RJs from Bombardier, Inc. In addition, the Company had options
to acquire a further 27 RJs. Of the 27 firm RJ orders, two were
delivered in April 1999, two were delivered in May 1999, three are
scheduled for delivery during the fourth quarter of 1999, nine are
scheduled for delivery in 2000, and eleven are scheduled for delivery in
2001. The value of the remaining 27 aircraft on firm order is
approximately $473 million. The Company intends to use a combination of
debt and lease financing to acquire these aircraft. The Company requires
United's approval to operate additional regional jets as United Express
beyond those on firm order as described above.
3. INCOME TAXES
For the first quarter 1999, the Company had a combined effective tax rate
for state and federal taxes of 32%, and a combined statutory tax rate for
state and federal taxes of approximately 40%. The Company's first quarter
effective tax rate was positively affected by the application of certain
1998 and prior years, state tax credits that were determined realizable
in 1999.
<PAGE 7>
4. 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>
<CAPTION>
Three months ended March 31,
(in thousands except for per share data) 1998 1999
<S> <C> <C>
Income (basic) $2,983 $2,875
Interest expense on 7% Convertible Notes net of tax
effect 479 208
Income (diluted) $3,462 $3,083
Weighted average shares outstanding (basic) 15,162 19,445
Incremental shares related to stock options 880 966
Incremental shares related to 7% Convertible 5,831 2,202
Notes
Weighted average shares outstanding (diluted) 21,873 22,613
</TABLE>
5. CUMMULATIVE EFFECT OF ACCOUNTING CHANGE
The American Institute of Certified Public Accountants 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 are effective for 1999. The Company had previously
deferred certain start-up costs related to the introduction of the RJs
and was amortizing such costs to expense ratably over four years. In
January 1999, the Company recorded a charge for the remaining unamortized
balance of approximately $888,000, net of $598,000 of income tax,
associated with previously deferred preoperating costs.
6. SUBSEQUENT EVENTS
On April 21, 1999, the Company's Board of Directors approved a plan to
repurchase up to five percent of its current outstanding shares in the
open market over the next twelve months. These shares would be purchased
from time to time in open market or private transactions depending on
market conditions.
<PAGE 8>
The Company took delivery of two RJ aircraft in April 1999 and two in May
1999. Three were financed under leverage leases for term of approximately
16.5 years, and one was purchased using mortgage debt financing. The two
aircraft delivered in April 1999, settled the remaining two interest rate
swap contracts, with the Company paying approximately $45,000 to the
counterparty.
In April 1999, the Company entered into commodity swap transactions to
hedge price changes on approximately 18,700 barrels of jet fuel per month
during the period from July to September 1999. The contracts provide for
an average fixed price of 45.5 cents per gallon of jet fuel with any
gains or losses recognized as a component of fuel expense during the
period in which the Company purchases fuel. Also in April 1999, the
Company entered into a call option contract to hedge price changes on
approximately 19,300 barrels of crude oil per month during the period
from October to December 1999. The contract provides for a premium
payment of approximately $75,400 and sets a cap on the maximum price
equal to approximately 42 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 period in which the
Company purchases fuel. With these additional transactions, the Company
has now hedged approximately 80% of its jet fuel requirements for the
second quarter of 1999 and 20% for the second half of 1999.
In May 1999, the Company took possession of the passenger terminal
facility under its Use Agreement and Premise lease with MWAA. Facility
rents for the net increase in terminal space at Washington-Dulles is
expected to increase initially approximately 15%. In connection with this
additional space, the Company is returning portions of the space it
previously occupied. The final lease rate will be determined based upon
final selection of funding methods and rates. MWAA has notified the
Company that $10 million will be funded through passenger facility
charges ("PFC") and that the remaining amount will be funded from other
authority funds, including bond funding or additional PFC funding if it
becomes available.
On May 4, 1999, the Company entered into two interest rate swap contracts
having an aggregate notional amount of $13 million to hedge its exposure
by approximately 37%, to interest rate changes until permanent financing
for two RJ aircraft scheduled for delivery in October and November 1999,
is secured.
<PAGE 9>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Quarter Operating Statistics
<TABLE>
<CAPTION>
Increase
Three months ended March 31, 1998 1999 (Decrease
)
<S> <C> <C> <C>
Revenue passengers carried 464,993 649,872 39.8%
Revenue passenger miles ("RPMs")(000's) 139,596 209,272 49.9%
Available seat miles ("ASMs") (000's) 284,981 396,133 39.0%
Passenger load factor 49.0% 52.8% 3.8 pts
Break-even passenger load factor 1 43.9% 48.7% 4.8 pts
Revenue per ASM (cents) 19.9 18.1 (9.0%)
Yield (cents) 40.6 34.3 (15.5%)
Cost per ASM (cents) 18.3 17.0 (7.1%)
Average passenger fare $121.92 $110.55 (9.3%)
Average passenger segment (miles) 300 322 7.3%
Revenue departures (completed) 38,986 42,783 9.7%
Revenue block hours 51,237 56,993 11.2%
Aircraft utilization (block hours) 9.1 8.9 (2.2%)
Average cost per gallon of fuel (cents) 69.1 65.5 (5.2%)
Aircraft in service (end of period) 68 76 11.8%
</TABLE>
Comparison of three months ended March 31, 1999, to three months ended
March 31, 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, aircraft remarketing and fleet rationalization
costs, and the factors discussed below and in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. The Company does not
intend to update these forward-looking statements prior to its next
required filing with the Securities and Exchange Commission.
<PAGE 10)
General
In the first quarter of 1999, the Company posted net income of
$3.8 million, excluding the cumulative effect of an accounting charge of
$888,000 prescribed by Statement of Position 98-5, compared to net income
of $3.0 million for the first quarter of 1998. Pretax income for the
three months ended March 31, 1999 was $5.5 million as compared to $5.1
million for the three months ended March 31, 1998.
Operating Revenues
The Company's operating revenues increased 25.7% to $73.0
million in the first quarter of 1999 compared to $58.1 million in the
first quarter of 1998. The increase resulted from a 39.0% increase in
ASMs and an increase in load factor of 3.8 percentage points, partially
offset by a 15.5% decrease in yield.
The increase in ASM's is the result of service expansion
utilizing the Canadair 50 seat Regional Jet ("RJ"), first introduced into
service during the fourth quarter of 1997. The Company was operating 16
RJs as of March 31, 1999 as compared to seven as of March 31, 1998. The
longer stage length of the RJ results in the average aircraft stage
length for the first quarter 1999 of 274 miles, a 6.3% increase over the
first quarter 1998.
The quarter over quarter percentage reduction in yield is
primarily the result of the 7.3% increase in the average passenger trip
length to 322 miles, the unusually high number of weather cancellations
during the first quarter of 1999 compared to the first quarter of 1998,
that particularly disrupted high yield business travelers, and marketing
initiatives undertaken by the Company. Total passengers increased 39.8%
in the first quarter of 1999 compared to the first quarter of 1998.
Operating Expenses
The Company's operating expenses increased 29.0% in the first
quarter of 1999 compared to the first quarter of 1998 due primarily to a
39.0% increase in ASMs and a 39.8% increase in passengers carried. The
increase in ASMs reflects the net addition of nine RJs into scheduled
service since the end of the first quarter of 1998. A summary of
operating expenses as a percentage of operating revenues and cost per ASM
for the three months ended March 31, 1998, and 1999 is as follows:
<PAGE 11>
<TABLE>
<CAPTION> Three Months ended March 31,
1998 1999
Percent Cost Percent Cost
of of
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
<S> <C> <C> <C> <C>
Salaries and related costs 25.3% 5.1 26.9% 5.0
Aircraft fuel 8.7% 1.8 9.1% 1.7
Aircraft maintenance and 9.8% 2.0 8.3 1.5
materials
Aircraft rentals 14.2% 2.9 14.2 2.6
Traffic commissions and related 15.7% 3.2 16.3% 3.0
fees
Facility rents and landing fees 4.8% 1.0 5.5% 1.0
Depreciation and amortization 2.4% 0.5 2.7% 0.5
Other 9.0% 1.8 9.3% 1.7
Total 89.9% 18.3 92.2% 17.0
</TABLE>
Cost per ASM decreased 7.2% on a year-over-year basis to 17.0
cents during the first quarter of 1999 primarily due to the introduction
of nine RJs since the end of the first quarter of 1998. The RJ, 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 2.0% to 5.0 cents
in the first quarter of 1999 compared to the first quarter of 1998. In
absolute dollars, salaries and related costs increased 34.0% from $14.7
million in the first quarter of 1998 to $19.7 million in the first
quarter of 1999. The increase resulted primarily from additional flight
crews, customer service personnel and maintenance personnel to support
the Company's increased level of operations.
The cost per ASM of aircraft fuel decreased to 1.7 cents in the
first quarter of 1999 compared to 1.8 cents in the first quarter of 1998.
In absolute dollars, aircraft fuel expense increased 31.1% from $5.1
million in the first quarter of 1998 to $6.6 million in the first quarter
of 1999. The increased fuel expense resulted from the 11.2% increase in
revenue block hours, partially offset by a 5.2% decrease in the average
cost per gallon of fuel from 69.1 cents to 65.5 cents including
applicable taxes and into-plane fees. This benefit was partially offset
by the delivery of additional RJ aircraft which burn more fuel than the J-
41 and J-32 turboprop aircraft on a per ASM basis. The Company had hedged
approximately 80% of its jet fuel requirements for the first quarter of
1999 at an average price, excluding taxes and into-plane fees, of
approximately 42.5 cents per gallon. The Company incurred approximately
$550,000 in additional fuel costs during the first quarter of 1999 as a
result of its fuel hedging activity. There can be no assurance that
future increases in fuel prices will not adversely affect the Company's
operating expenses. The Company has entered into additional hedge
transactions to minimize its exposure to fuel price increases during the
remainder of 1999. See "Other Commitments".
<PAGE 12>
The cost per ASM of aircraft maintenance and materials
decreased 25.0% to 1.5 cents in the first quarter of 1999 compared to the
first quarter of 1998. The large decrease in per ASM cost is due to the
addition of seven 50-seat RJs since the first quarter of 1998. In
absolute dollars, aircraft maintenance and materials expense increased
6.8% from $5.7 million in the first quarter of 1998 to $6.1 million in
the first quarter of 1999. The increased expense resulted from the
increase in the size of the RJ fleet and an increase in the average age
of the turboprop fleet. In the first quarter, the Company did not incur
any significant charges for engine or airframe overhauls of its RJ fleet
The cost per ASM of aircraft rentals decreased 10.3% to 2.6
cents for the first quarter of 1999 compared to 2.9 cents for the first
quarter of 1998. This decrease is the result of leasing seven additional
RJ aircraft which generally have lower per ASM ownership costs than the
turboprop aircraft. In absolute dollars, aircraft rentals increased
25.5% from $8.3 million in the first quarter of 1998 to $10.4 million in
the first quarter of 1999, reflecting the addition of the seven RJ
aircraft.
The cost per ASM of traffic commissions and related fees
decreased to 3.0 cents in the first quarter of 1999 compared to 3.2 cents
in the first quarter of 1998. In absolute dollars, traffic commissions
and related fees increased 30.3% from $9.1 million in the first quarter
of 1998 to $11.9 million in the first quarter of 1999. The increase
resulted from a 26.7% increase in passenger revenues and a 39.8% increase
in revenue passengers. These increases were partially offset by a
reduction in the travel agency commission rate.
The cost per ASM of facility rents and landing fees remained
unchanged at 1.0 cents. In absolute dollars, facility rents and landing
fees increased 42.9% from $2.8 million in the first quarter of 1998 to
$4.0 million in the first quarter of 1999. The increased costs result
primarily from the 9.7% increase in the number of departures.
The cost per ASM of depreciation and amortization remained
unchanged at 0.5 cents. In absolute dollars, depreciation and
amortization increased 39.5% from $1.4 million in the first quarter of
1998 to $1.9 million in the first quarter of 1999 primarily as a result
of additional rotable spare parts associated with the RJs and the
purchase of two RJs in the second half of 1998.
The cost per ASM of other operating expenses decreased to 1.7
cents in the first quarter of 1999 from 1.8 cents in the first quarter of
1998. In absolute dollars, other operating expenses increased 30.3% from
$5.2 million in the first quarter of 1998 to $6.8 million in the first
quarter of 1999. The increased costs result primarily from the 39.8%
increase in revenue passengers which resulted in higher passenger
handling costs.
<PAGE 13>
As a result of the foregoing changes in operating expenses, and
a 39.0% increase in ASMs, total cost per ASM decreased to 17.0 cents in
the first quarter of 1999 compared to 18.3 cents in the first quarter of
1998. In absolute dollars, total operating expenses increased 29.0% from
$52.2 million in the first quarter of 1998 to $67.3 million in the first
quarter of 1999.
The Company's combined effective tax rate for state and federal
taxes during the first quarter of 1999 was approximately 32% as compared
to 42% for the first quarter of 1998. This decrease is due to the
application of certain 1998 and prior, state tax credits that were
determined realizable in 1999. The Company anticipates its effective tax
rate for the remainder of 1999 to be approximately 40%.
In January 1999, the Company recorded a charge for the
remaining unamortized balance of approximately $888,000, net of income
tax, associated with previously deferred preoperating costs.
Outlook
This outlook section contains forward-looking statements which
are subject to the risks and uncertainties set forth above on pages 9 and
10. As of May 14, 1999, the Company was operating a fleet of 80 aircraft
comprised of 20 regional jets, 32 J41's and 28 J32's. The Company has
remaining firm orders for an additional 23 RJs and options for another
27. The delivery schedule for the 23 firm orders is as follows: three are
scheduled for the fourth quarter of 1999, nine in 2000, and eleven in
2001. The continued introduction of these additional RJ 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.
The Company is continually assessing its fleet requirements,
including the feasibility of operating less than 50-seat regional jets.
The Company requires United's approval to operate additional regional
jets as United Express beyond the total number of RJs already in service
and on firm order as described above.
The Company, as previously announced, is continuing to assess
plans which target the phase-out of the 28 leased 19 seat J32 aircraft
from the United Express operation by the end of 2001. The Company
intends to complete its analysis of a phase-out plan, including
quantification of expected costs related to fleet rationalization, before
the end of the year.
<PAGE 14>
During 1999 US Airways has announced and begun to implement new
service from Washington-Dulles to various cities. New and announced
service includes operations as mainline US Airways, MetroJet, Shuttle,
and US Airways Express. As of May 1, 1999, the Company served 45 cities
out of Washington-Dulles. US Airways service existed in 7 of the
Company's markets as of December 31, 1998 and 18 as of May 1, 1999, and
will exist in 20 of the Company's markets at some time during the third
quarter of 1999 once all announced service has been implemented.
Generally this service has utilized fare structures similar to that
implemented by the Company. However, two of the implemented markets and
one announced market are served by MetroJet, which offers fares
significantly lower than that which has typically been offered by the
Company. The increased competition by US Airways in the Company's markets
could adversely affect the Company's results of operations or financial
position. The Company continually monitors and responds to the effects
competition has on its routes, fares and frequencies, and believes that
it can compete effectively with US Airways. However, there can be no
assurances that US Airways' continued expansion at Washington-Dulles will
not have a material adverse effect on the Company's future results of
operations or financial position in the current or any future quarters.
In early 1999, United announced its intention to increase its
level of activity at Washington-Dulles by 60% beginning in April and May
1999. The Company believes that United's announced increase will add
approximately 6,800 additional daily seat departures to the United/United
Express operation at Washington-Dulles. The Company, in concert with
United, also announced either increased frequencies or upgraded
equipment, or both, in all of its markets affected by the US Airways
expansion.
Liquidity and Capital Resources
As of March 31, 1999, the Company had cash, cash equivalents
and short-term investments of $56.3 million and working capital of $71.5
million compared to $42.7 million and $44.2 million respectively as of
March 31, 1998. During the first three months of 1999, cash and cash
equivalents decreased by $8.2 million, reflecting net cash used in
operating activities of $5.6 million, net cash used in investing
activities of $8.6 million, and net cash provided by financing activities
of $5.9 million. The net cash used in operating activities is primarily
the result of net income for the period of $2.9 million, and non cash
depreciation and amortization expenses of $3.5 million, offset by an $8.9
million increase in prepaid expenses related to aircraft rent and a $3.3
million increase in receivables due to the increase in passenger
revenues. In order to minimize the costs related to the aircraft
leveraged lease transactions, the Company has uneven semiannual lease
payment dates of January 1 and July 1. Approximately 33% of the Company's
annual lease payments are due in January and 30% in July. The net cash
used in investing activities consisted primarily of the funding of the
obligation for the regional terminal, purchases of property and equipment
and payments of other deposits. Financing activities consisted primarily
of drawing on a bridge loan arranged to fund the Company's obligation for
the construction of the new regional Terminal at Washington - Dulles
International Airport, and proceeds from the exercise of stock options,
partially offset by payments on long term debt and capital lease
obligations.
<PAGE 15>
Other Financing
In February 1999, the Company entered into an asset-based
lending agreement with two financial institutions that provides the
Company with a $15 million bridge loan for the construction of the
Company's regional terminal at Washington-Dulles International Airport
and a line of credit for up to $35 million depending on the amount of
assigned ticket receivables and the value of certain rotable spare parts.
The $35 million line of credit replaces a previous $20 million line of
credit. The interest rate on this line is LIBOR plus from .25% to 1.75%
depending on the Company's fixed charges coverage ratio. The Company
records a note receivable from MWAA in the same amount as the borrowings
on the bridge loan. MWAA has agreed to reimburse principal borrowings but
the Company will be responsible for all interest costs. The Company has
pledged $2.9 million of the line of credit as collateral to secure
letters of credit issued on behalf of the Company by a financial
institution. As of March 31, 1999, the available amount of credit under
the line was $21.5 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. 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. As of March 31, 1999 $19.9 million of the Notes remain
outstanding.
Other Commitments
On July 2, 1998, the Company entered into a series of 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 RJ aircraft scheduled for delivery
between October 1998 and April 1999, is secured. During the first quarter
of 1999, the Company settled two of the swap contracts, paying the
counterparty approximately $110,000. The Company also recognized a gain
of approximately $210,000 from the ineffective portion of one of the
hedge transactions that settled in the first quarter of 1999. The Company
is amortizing the effective portion of hedge gains and losses over the
term of the related aircraft leases. The two remaining contracts settled
in April 1999, with the Company paying the counterparty approximately
$45,000.
<PAGE 16>
In April 1999, the Company entered into commodity swap
transactions to hedge price changes on approximately 18,700 barrels of
jet fuel per month during the period from July to September 1999. The
contracts provide for an average fixed price of 45.5 cents per gallon of
jet fuel with any gains or losses recognized as a component of fuel
expense during the period in which the Company purchases fuel. Also in
April 1999, the Company entered into a call option contract to hedge
price changes on approximately 19,300 barrels of crude oil per month
during the period from October to December 1999. The contract provides
for a premium payment of approximately $75,400 and sets a cap on the
maximum price equal to approximately 42 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
period in which the Company purchases fuel. With these additional
transactions, the Company has hedged approximately 80% of its jet fuel
requirements for the second quarter of 1999 and 20% for the second half
of 1999.
On May 4, 1999, the Company entered into two interest rate swap
contracts having an aggregate notional amount of $13 million to hedge its
exposure by approximately 37%, to interest rate changes until permanent
financing for two RJ aircraft scheduled for delivery in October and
November 1999, is secured.
Aircraft
As of May 14, 1999, the Company had firm commitments to acquire
23 additional RJs from Bombardier, Inc. In addition, the Company had
options to acquire a further 27 RJs. The value of the remaining 23
undelivered aircraft on firm order is approximately $403 million. The
Company intends to use a combination of debt and lease financing to
acquire these aircraft. The Company requires United's approval to operate
additional regional jets as United Express beyond those on firm order as
described above.
Capital Equipment and Debt Service
Capital expenditures for the first three months of 1999 were
$1.7 million compared to $2.9 million for the same period in 1998.
Capital expenditures for 1999 have consisted primarily of the purchase of
rotable spare parts for the RJ and J-41 aircraft, facility leasehold
improvements, ground equipment, and computer and office equipment. For
the remainder of 1999, the Company anticipates spending approximately $49
million for: two RJ aircraft, (a portion of the purchase price to be
mortgage debt financed), rotable spare parts related to the RJ and J-41
aircraft, ground service equipment, facilities, computers and software.
Debt service including capital leases for the three months
ended March 31, 1999 was $910,000 compared to $1.9 million in the same
period of 1998.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the asset-based 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.
<PAGE 17>
YEAR 2000
Background
The "Year 2000 problem" refers to the 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. As
used by the Company, "year 2000 ready" means that a system will function
in the year 2000 without modification or adjustment, or with a one-time
manual adjustment.
State of Readiness
The Company is highly reliant on information technology ("IT")
systems and non-IT embedded technologies of third party vendors and
contractors and governmental agencies, such as the CRS systems, United,
aircraft and parts manufacturers, the FAA, the DOT, and MWAA and other
local airport authorities. The Company sent questionnaires to these
third party vendors, contractors and government agencies. For all mission
critical and key vendors, the Company has received a response and has
assessed which of their systems may be affected by year 2000 issues and
what the status of their remediation plans are. All mission critical and
key vendors have stated that they will be year 2000 compliant by June 30,
1999. In cases where the Company has not received assurances from non
critical third parties that their systems are year 2000 ready, it is
initiating further mail or phone correspondence. The Company also has
surveyed its internal IT and non-IT systems and embedded operating
systems to evaluate and prioritize those which are not year 2000 ready.
The Company has completed remediation and testing of all of its internal
IT and non-IT systems as of April 30, 1999.
Costs
The Company has utilized existing resources and has not
incurred any significant costs to evaluate or remediate year 2000 issues
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's cost to modify its own non-year 2000 ready systems or
applications did not have a material effect on its financial position or
the results of its operations.
<PAGE 18>
Risks
The Company's remaining year 2000 compliance efforts are
heavily dependent on year 2000 compliance by governmental agencies,
United, CRS vendors and other critical vendors and suppliers. The
failure of any one of these mission critical vendors and suppliers to
become year 2000 compliant (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
Contingency Plans
The Company is still in the process of developing year 2000
contingency plans. The Company continues to closely monitor the year
2000 compliance efforts of the third parties upon which it is heavily
reliant and its own internal remediation efforts. 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. Any such reduction or
suspension could have a material adverse effect upon the Company's
financial condition and results of operations.
Recent Accounting Pronoucements
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.
<PAGE 19>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For the remainder of 1999, the Company has hedged its exposure
to jet fuel price fluctuations by entering into jet fuel option contracts
for approximately 80% of its estimated fuel requirements for the second
quarter of 1999 and 20% for the second half of 1999. Based on the
Company's projected fuel consumption of approximately 35 million gallons
for the remainder of 1999, a one cent increase in the average annual
price of jet fuel would increase the Company's aircraft fuel expense by
approximately $352,000.
The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. On May 4, 1999, the Company entered into two interest rate swap
contracts having an aggregate notional amount of $13 million to hedge its
exposure by approximately 37%, to interest rate changes until permanent
financing for two RJ aircraft scheduled for delivery in October and
November 1999, is secured. A one percentage point decrease in interest
rates from the Company's call contracts would increase the Company's
annual aircraft lease or ownership costs associated with these contracts
by $60,000.
<PAGE 20>
.
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED MARCH 31, 1999
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 is 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. In May 1999 the United States
Court of Appeals for the Fourth Circuit vacated a decision for summary
judgment previously granted in favor of the Company and remanded the case
for trial. The Company believes that it has meritorious defenses and does
not expect the outcome of this case to have a material adverse effect on
its financial condition or results of its operations.
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.
<PAGE 21>
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None to report.
<PAGE 22>
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.
May 17, 1998 By: /S/ Paul H. Tate
Paul H. Tate
Senior Vice President and Chief
Financial Officer
May 17, 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 56,206
<SECURITIES> 64
<RECEIVABLES> 33,176
<ALLOWANCES> 0
<INVENTORY> 3,782
<CURRENT-ASSETS> 108,501
<PP&E> 88,628
<DEPRECIATION> 0
<TOTAL-ASSETS> 237,690
<CURRENT-LIABILITIES> 37,002
<BONDS> 0
0
0
<COMMON> 419
<OTHER-SE> 114,080
<TOTAL-LIABILITY-AND-EQUITY> 114,499
<SALES> 71,842
<TOTAL-REVENUES> 73,004
<CGS> 0
<TOTAL-COSTS> 67,327
<OTHER-EXPENSES> 142
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,214
<INCOME-PRETAX> 5,535
<INCOME-TAX> 1,772
<INCOME-CONTINUING> 5,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 888
<NET-INCOME> 2,875
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
</TABLE>
