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 June 30, 2000
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 (IRS 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 August 10, 2000, there were 21,087,551 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, June 30, 2000
(In thousands except for share data and par 1999 (Unaudited)
values)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 57,447 $ 60,114
Accounts receivable, net 31,023 46,529
Expendable parts and fuel inventory, 4,114 5,544
net
Prepaid expenses and other current 6,347 13,342
assets
Notes receivable 6,239 -
Deferred tax asset 2,850 2,850
Total current assets 108,020 128,379
Property and equipment at cost, net of
accumulated depreciation and amortization 133,160 136,332
Intangible assets, net of accumulated 2,232 2,115
amortization
Debt issuance costs, net of accumulated 3,309 2,378
amortization
Aircraft deposits 38,690 40,890
Other assets 8,342 9,977
Total assets $ 293,753 $ 320,071
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 5,343 $ 4,657
Current portion of long-term debt 4,758 4,434
Current portion of capital lease 1,627 1,545
obligations
Accrued liabilities 35,852 48,180
Total current liabilities 47,580 58,816
Long-term debt, less current portion 87,244 65,800
Capital lease obligations, less current 5,543 4,790
portion
Deferred tax liability 12,459 12,459
Deferred credits, net 15,403 18,687
Total liabilities 168,229 160,552
Stockholders' equity:
Common stock: $.02 par value per share;
shares authorized 65,000,000; shares issued
21,083,927 and 23,540,030 respectively;
shares outstanding 18,628,261 and
21,016,864 respectively 421 470
Additional paid-in capital 89,126 109,960
Less: Common stock in treasury, at cost,
2,455,666 shares and 2,523,166 shares, (34,106) (35,303)
respectively
Retained earnings 70,083 84,392
Total stockholders' equity 125,524 159,519
Total liabilities and stockholders' $ 293,753 $ 320,071
equity
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
<PAGE> 3
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
(In thousands, except for per share data) 1999 2000
<S> <C> <C>
Operating revenues:
Passenger $ 90,972 $ 114,181
Other 1,425 2,151
Total operating revenues 92,397 116,332
Operating expenses:
Salaries and related costs 20,651 26,181
Aircraft fuel 7,980 13,469
Aircraft maintenance and materials 6,314 8,931
Aircraft rentals 11,341 14,053
Traffic commissions and related fees 13,946 15,733
Facility rents and landing fees 4,569 4,634
Depreciation and amortization 2,176 2,648
Other 6,919 10,054
Total operating expenses 73,896 95,703
Operating income 18,501 20,629
Other income (expense):
Interest expense
(1,338) (1,692)
Interest income 848 1,064
Other, net (49) (95)
Total other income (expense) (539) (723)
Income before income tax provision 17,962 19,906
Income tax provision 6,894 7,877
Net income $ 11,068 $12,029
Income per share:
-basic $0.58 $0.62
-diluted $0.51 $0.56
Weighted average shares used in computation:
-basic 19,177 19,373
-diluted 22,224 21,771
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
<PAGE> 4
Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
(In thousands, except for per share data) 1999 2000
<S> <C> <C>
Operating revenues:
Passenger $ 162,814 $ 204,915
Other 2,587 3,916
Total operating revenues 165,401 208,831
Operating expenses:
Salaries and related costs 40,312 50,440
Aircraft fuel 14,620 26,601
Aircraft maintenance and materials 12,366 17,007
Aircraft rentals 21,720 26,773
Traffic commissions and related fees 25,825 28,977
Facility rents and landing fees 8,581 9,097
Depreciation and amortization 4,111 5,229
Other 13,689 19,538
Total operating expenses 141,224 183,662
Operating income 24,177 25,169
Other income (expense):
Interest expense
(2,497) (3,417)
Interest income 1,895 2,124
Other, net (79) (170)
Total other income (expense)
(681) (1,463)
Income before income tax provision and cumulative
effect of accounting change 23,496 23,706
Income tax provision 8,665 9,397
Income before cumulative effect of
accounting change 14,831 14,309
Cumulative effect of accounting change, net of (888) -
income tax
Net income $ 13,943 $14,309
Income per share:
Basic:
Income before cumulative effect of accounting $0.77 $0.75
change
Cumulative effect of accounting change (0.05) -
Net income $0.72 $0.75
Diluted:
Income before cumulative effect of accounting $0.68 $0.68
change
Cumulative effect of accounting change (0.04) -
Net income $0.64 $0.68
Weighted average shares used in computation:
-basic 19,310 19,000
-diluted 22,560 21,635
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
<PAGE> 5
Atlantic Coast Airlines
Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
(In thousands) 1999 2000
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,943 $14,309
Adjustments to reconcile net income to net cash
used in
Operating activities:
Depreciation and amortization 4,147 5,542
Write off of preoperating costs 1,486 -
Amortization of deferred credits (496) (748)
Capitalized interest (net) (671) (1,181)
Other 782 676
Changes in operating assets and liabilities:
Accounts and notes receivable (9,984) (10,683)
Expendable parts and fuel inventory (470) (1,495)
Prepaid expenses and other current assets (5,581) (7,022)
Accounts payable (174) 3,353
Accrued liabilities 8,880 12,066
Net cash provided by operating activities 11,862 14,817
Cash flows from investing activities:
Purchases of property and equipment (23,368) (7,527)
Funding Obligation for regional terminal (7,751)
Proceeds from sales of assets 4,493 50
Payments for aircraft deposits and other (net) (11,100) (2,300)
Net cash used in investing activities (37,726) (9,777)
Cash flows from financing activities:
Proceeds from issuance of long term debt 22,413 -
Payments of long-term debt (1,513) (1,947)
Payments of capital lease obligations (744) (835)
Deferred financing costs and other (283) 270
Purchase of treasury stock (14,966) (1,197)
Proceeds from exercise of stock options 1,157 1,336
Net cash provided by (used in) financing 6,064 (2,373)
activities
Net increase (decrease) in cash and cash (19,800) 2,667
equivalents
Cash and cash equivalents, beginning of period 64,412 57,447
Cash and cash equivalents, end of period $ 44,612 $ 60,114
</TABLE>
See accompanying notes to the condensed consolidated financial
statements.
<PAGE> 6
ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Atlantic Coast Airlines Holdings, Inc. ("ACAI")
and its wholly-owned subsidiaries, principally, Atlantic Coast Airlines
("ACA") and Atlantic Coast Jet, Inc. ("ACJet") (together, the "Company"),
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished in these unaudited
condensed 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 six month
periods presented are not necessarily indicative of the results to be
expected for the year ending December 31, 2000. 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, 1999.
2. OTHER COMMITMENTS
The Company periodically enters into a series of put and call contracts
as an interest rate hedge designed to limit its exposure to interest rate
changes on the anticipated issuance of permanent financing relating to
the delivery of aircraft. As such, effective gains or losses realized
when permanent financing is obtained will be amortized over the term of
the related aircraft lease or will be depreciated as part of the aircraft
acquisition cost for owned aircraft. In August 1999, the Company entered
into a series of three put and call contracts having an aggregate
notional amount of $23 million. These contracts matured between March
and May 2000. In March 2000, the Company settled the first set of
contracts and received approximately $138,000 from the counterparty. In
May 2000 the Company settled the remaining contracts and received
approximately $135,000.
In October 1999, the Company entered into commodity swap transactions to
hedge price changes on approximately 23,300 barrels of crude oil per
month for the period July through September 2000. The contracts provide
for an average fixed price equal to approximately 51 cents per gallon.
With these transactions and taking into account that Delta Air Lines,
Inc. bears the economic risk of fuel price fluctuations for future fuel
requirements associated with the Delta Connection program, the Company
has limited its exposure to fuel price increases on approximately 26% of
its anticipated jet fuel requirements for the third quarter 2000; and
18%, for the fourth quarter of 2000. Had the commodity swap transactions
settled on June 30, 2000, the Company would have realized a reduction of
approximately $826,000 in fuel expense. The company realized a
reduction in fuel expense of approximately $328,000 on swap contracts
settled in the second quarter.
<PAGE> 7
In February 1999, the Company entered into an asset-based lending
agreement with a financial institution that provides the Company with 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 replaced a previous $20 million line of credit and
will expire on September 30, 2001, or upon termination of the United
Express marketing agreement, whichever is sooner. The interest rate on
this line is LIBOR plus .75% to 1.75% depending on the Company's fixed
charge coverage ratio. At June 30, 2000 this interest rate was 8.18%. The
Company pledged $2.9 million of this line of credit to collateralize
letters of credit issued on behalf of the Company by a financial
institution. As of June 30, 2000, the available amount of credit under
the line was $32.1 million. As of June 30, 2000 there were no
outstanding borrowings on the $35 million line of credit.
As of June 30, 2000, the Company had firm orders for 37 Canadair Regional
Jets ("CRJs") with delivery dates scheduled through 2002, in addition to
the 29 previously delivered, and options for 27 additional CRJs.
Seventeen of the 37 firm ordered aircraft are for the United Express
operation and 20 are for the Delta Connection operation. The value of
the remaining 37 undelivered aircraft on firm order as of that date was
approximately $ 700 million. (See Footnote 9 Subsequent Events.)
As of June 30, 2000, the Company also had a firm order with Fairchild
Aerospace Corporation for 21 Fairchild Dornier 32 seat 328JET regional
jet aircraft ("328JET") with delivery dates scheduled through 2001, in
addition to the 4 previously delivered, and a conditional order for
fifteen 328JET and 40 Fairchild Dornier 44 seat 428JET regional jet
aircraft ("428JET"), and options for an additional 85 328JET/428JET jet
aircraft. The value of the aircraft on firm order was approximately $200
million and the value of the aircraft in the conditional order (excluding
the option aircraft) was approximately $600 million. The conditional
portion of the Fairchild Aerospace order was contingent on the Company
receiving United's approval to operate the 328JET/428JET aircraft in the
United Express operation. The Company at its option may waive the
condition and enter into commitments for firm delivery positions under
the Fairchild agreement. (See Footnote 9 Subsequent Events.)
3. NOTES RECEIVABLE
Included in notes receivable at December 31, 1999 was a note from the
Metropolitan Washington Airports Authority for $4.7 million related to
the financing of the construction costs of the regional terminal at
Washington-Dulles airport. This note was paid in full in April 2000. The
note receivable balance at December 31, 1999 also included a promissory
note from an executive officer of the Company dated as of May 24, 1999
with a balance, including accrued interest, of $1.5 million. This note
was paid in full during the first quarter of 2000.
4. INCOME TAXES
For the six month period ended June 30, 2000, the Company had a combined
effective tax rate for state and federal taxes of 39.6%, and a combined
statutory tax rate for state and federal taxes of approximately 40%. The
Company's effective tax rate for the six month period ended June 30, 1999
was 36.9% reflecting the application of certain 1998 and prior years
state tax credits that were determined realizable in 1999.
<PAGE> 8
5. INCOME PER SHARE
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 June 30,
(in thousands except for per share data) 1999 2000
<S> <C> <C>
Income (basic) $11,068 $12,029
Interest expense on 7% Convertible Notes net of tax 208 208
effect
Income (diluted) $11,276 $12,237
Weighted average shares outstanding (basic) 19,177 19,372
Incremental shares related to stock options 845 834
Incremental shares related to 7% Convertible 2,202 1,565
Notes
Weighted average shares outstanding (diluted) 22,224 21,771
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
Six months ended June 30,
(in thousands except for per share data) 1999 2000
<S> <C> <C>
Income (basic) $13,943 $14,309
Interest expense on 7% Convertible Notes net of tax 416 416
effect
Income (diluted) $14,359 $14,725
Weighted average shares outstanding (basic) 19,310 19,000
Incremental shares related to stock options 1,048 751
Incremental shares related to 7% Convertible 2,202 1,884
Notes
Weighted average shares outstanding (diluted) 22,560 21,635
</TABLE>
6. DEBT CONVERSION
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1, 2004
(the "Notes"), receiving net proceeds of approximately $55.6 million. The
Notes were convertible into shares of Common Stock, par value $0.02, of
the Company by the holders at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $9 per
share, subject to certain adjustments. On May 15, 2000, the Company
called the remaining $19.8 million of Notes outstanding for redemption at
104% of face value effective July 3, 2000. The Noteholders elected to
convert all of the Notes into common stock and approximately 2.2 million
shares were issued in exchange for the Notes during the period May 25,
2000 to June 26, 2000. The Company recorded a reduction to paid-in-
capital of approximately $471,000 for the unamortized debt issuance costs
relating to the Notes in connection with their conversion.
7. CUMULATIVE 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 were effective for 1999. The Company had previously
deferred certain start-up costs related to the introduction of the CRJs
and was expensing such costs 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.
<PAGE> 10
8. DELTA CONNECTION AGREEMENT
In November 1999, the Company reached a ten year agreement with Delta Air
Lines, Inc. to operate regional jet aircraft as part of the Delta
Connection program on a fee-per-departure basis. Under the fee-per-
departure structure, the Company bears the risk to operate the flight
schedule, and Delta assumes the risk of marketing and selling seats to
the traveling public. Delta may terminate the agreement at any time if
the Company fails to maintain certain performance standards, and may
terminate without cause, effective no earlier than two years after
commencement of operations, by providing 180 days notice to the Company.
The Delta Connection agreement provides the Company with certain rights
in the event of termination without cause. The Company has ordered 20
CRJs from Bombardier, Inc. and 25 328JETs from Fairchild Aerospace
Corporation for this new venture. The Company established a new
subsidiary, Atlantic Coast Jet, Inc. ("ACJet"), to operate as Delta
Connection. On July 21, 2000, ACJet completed the application and
approval process with the applicable federal agencies and obtained
authority to conduct scheduled passenger air transportation using
328JETs, and began commercial service as a Delta Connection carrier on
August 1, 2000. The Company has taken delivery of seven 328JET aircraft
as of August 1, 2000. These seven aircraft were financed under temporary
leases with Fairchild Aerospace Corporation. The Company is in the
process of obtaining permanent financing.
9. SUBSEQUENT EVENTS
On July 6, 2000 the Company entered into six interest rate forward
transactions maturing between August 2000 and January 2001 as an interest
rate hedge designed to limit its exposure to interest rate changes on the
anticipated issuance of permanent financing relating to the delivery of
six aircraft. These transactions settle on the first day of the month in
which the aircraft are scheduled to be delivered and have an aggregate
notional value of $51 million. Effective gains or losses realized when
permanent financing is obtained will be amortized over the term of the
related aircraft lease or will be depreciated as part of the aircraft
acquisition cost for owed aircraft. In August, the Company settled the
first of these interest rate forward transactions by paying the
counterparty approximately $35,000.
As of August 10, 2000, the Company was operating a fleet of 97 aircraft
comprised of 30 CRJ's, seven 328JET's, 32 J41's and 28 J32's. In August
2000, the Company announced it had reached agreement with Bombardier,
Inc. to acquire an additional 30 CRJ's, 3 of which are firm orders and 27
of which are conditional upon United Airlines approval which condition
may be waived by the Company. With this additional order, as of August
10, 2000 the Company had firm orders for 39 CRJ's in addition to the 30
previously delivered, conditional orders for 27 CRJ's, and options for an
additional 80 CRJ's. In addition, the Company also received additional
option aircraft, bringing total options to 80 aircraft. Excluding the
conditional aircraft, the value of the remaining 39 undelivered firm
ordered aircraft is approximately $700 million.
The Company previously announced its order with Fairchild Aerospace
Corporation for Fairchild Dornier 328JET and Fairchild Dornier 428JET
aircraft. The 428JET aircraft was an aircraft under development, with
initial deliveries scheduled for 2003. In August 2000, Fairchild
notified the Company that it had made the decision to cancel the 428
program, and that it would not fulfill this portion of the order.
Fairchild also confirmed that this decision does not affect its 328JET
program. As of August 10, 2000 the Company had firm orders for 18
328JETs in addition to the seven previously delivered, conditional orders
for 15 328JETs, and options for an additional 85 328JETs. The
cancellation of the 428JET program provides the Company with certain
rights under the purchase agreement. The Company's August 2000 order for
additional CRJs described above partially replaces the future capacity
previously intended to be filled through 428JETs.
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Second Quarter Operating Statistics
<TABLE>
<CAPTION>
Increase
Three months ended June 30, 1999 2000 (Decrease)
<S> <C> <C> <C>
Revenue passengers carried 861,355 946,637 9.9%
Revenue passenger miles ("RPMs") 277,781 311,726 12.2%
(000's)
Available seat miles ("ASMs") (000's) 454,967 509,970 12.1%
Passenger load factor 61.1% 61.1% N/A
Break-even passenger load factor(1) 48.6% 50.1% 1.5 pts
Revenue per ASM (cents) 20.0 22.4 12.0%
Yield (cents) 32.7 36.6 11.9%
Cost per ASM (cents) 16.2 18.8 16.0%
Average passenger fare $105.62 $120.62 14.2%
Average passenger segment (miles) 322 329 2.2%
Revenue departures (completed) 48,608 48,316 (0.6)%
Revenue block hours 64,373 62,601 (2.8)%
Aircraft utilization (block hours) 9.0 7.8 (13.3)%
Average cost per gallon of fuel (cents) 68.2 101.0 48.1%
Aircraft in service (end of period) 80 93 16.2%
</TABLE>
(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.
Comparison of three months ended June 30, 2000, to three months ended
June 30, 1999.
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. Factors that
could cause the Company's future results to differ materially from the
expectations described here include: the response of the Company's
competitors to the Company's business strategy, market acceptance of new
regional jet service, the costs of implementing jet service, the cost of
fuel, United Airline's proposed merger with USAirways, Inc., the
resulting effects on United and USAirway's regional carriers assuming the
merger is completed, the demand for and performance of United Airlines'
operations, the ability of the Company to obtain favorable financing
terms for its aircraft, the ability of the aircraft manufacturers to
deliver aircraft on schedule, the ability to identify, implement and
profitably operate new business opportunities, the ability to hire and
retain employees, satisfactory resolution of amendable union contracts,
the weather, changes in and satisfaction of regulatory requirements
including requirements relating to fleet expansion, general economic and
industry conditions, and the factors discussed below and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. The
Company does not intend to update these forward-looking statements prior
to its next required filing with the Securities and Exchange Commission.
<PAGE> 12
General
In the second quarter of 2000 the Company posted net income of
$12.0 million compared to net income of $11.1 million for the second
quarter of 1999. In the three months ended June 30, 2000, the Company
earned pretax income of $19.9 million compared to $18.0 million in the
three months ended June 30, 1999. Unit revenues, revenue per ASM
("RASM"), increased 12% to 22.4 cents, while unit costs, operating cost
per ASM ("CASM"), increased 16.0% to 18.8 cents compared to the second
quarter 1999. This resulted in operating margin decreasing to 17.7% for
the second quarter of 2000 from 20.0% for the second quarter of 1999.
Total passengers increased 9.9% in the second quarter of 2000 compared to
the second quarter of 1999 to 946,637 passengers. The percentage increase
in yield is primarily the result of generally higher business fares
realized by airlines and improved yield management using United's Orion
system compared to the second quarter 1999.
Operating Revenues
The Company's operating revenues increased 25.9% to $116.3
million in the second quarter of 2000 compared to $92.4 million in the
second quarter of 1999. The increase resulted from a 12.1% increase in
ASMs and an 11.9% increase in yield (ratio of passenger revenue to
revenue passenger miles) while load factor remained the same at 61.1%.
The increase in ASMs is the result of service expansion
utilizing additional Canadair 50 seat Regional Jets ("CRJs"). The
Company was operating 29 CRJs as of June 30, 2000 as compared to 20 as of
June 30, 1999. The average aircraft stage length for all aircraft in the
fleet increased 3% to 279 miles for the second quarter of 2000 as
compared to 271 miles for the second quarter of 1999. The average
aircraft stage length of the CRJ for the second quarters of 1999 and 2000
remained the same at 431 miles.
Other revenues increased 51% reflecting the reimbursement from
Delta Air Lines, Inc. of amounts incurred related to certain pilot
training for the Delta Connection operation.
<PAGE> 13
Operating Expenses
The Company's operating expenses increased 29.5% in the second
quarter of 2000 compared to the second quarter of 1999 due primarily to:
a 48.1% increase in the price per gallon of jet fuel coupled with a 17.1%
increase in the average fuel burn rate to 213 gallons per hour; a 12.1%
increase in ASMs; a 9.9% increase in passengers carried; and continued
expenses for the certification and start-up of the ACJet operation. The
increase in ASMs, passengers and burn rate reflects the net addition of
nine CRJs into scheduled service since the end of the second quarter of
1999. A summary of operating expenses as a percentage of operating
revenues and cost per ASM for the three months ended June 30, 1999, and
2000 is as follows:
<TABLE>
<CAPTION>
Three Months ended June 30
1999 2000
<S> <C> <C> <C> <C>
Percent of Cost Percent of Cost
Operating Per ASM Operating Per ASM
Revenues (cents) Revenues (cents)
Salaries and related costs 22.4% 4.5 22.5% 5.1
Aircraft fuel 8.6% 1.8 11.6% 2.6
Aircraft maintenance and 6.8% 1.4 7.7% 1.8
materials
Aircraft rentals 12.3% 2.5 12.1% 2.8
Traffic commissions and related 15.1% 3.1 13.5% 3.1
fees
F Facility rents and landing fees 4.9% 1.0 4.0% 0.9
Depreciation and amortization 2.4% 0.4 2.3% 0.5
Other 7.5% 1.5 8.6% 2.0
Total 80.0% 16.2 82.3% 18.8
</TABLE>
Cost per ASM increased 16.0% on a year-over-year basis to 18.8
cents during the second quarter of 2000 primarily due to a 48.1% increase
in the year over year price per gallon of jet fuel and the continued
expenses associated with the certification and start-up of ACJet.
Salaries and related costs per ASM increased 13.3% to 5.1 cents
in the second quarter of 2000 compared to 4.5 cents in the second quarter
of 1999. In absolute dollars, salaries and related costs increased 26.8%
from $20.7 million in the second quarter of 1999 to $26.2 million in the
second quarter of 2000. The increase resulted primarily from additional
flight crews, customer service personnel and maintenance personnel to
support the Company's already increased and future level of operations
including ACJet.
The cost per ASM of aircraft fuel increased to 2.6 cents in the
second quarter of 2000 compared to 1.8 cents in the second quarter of
1999. In absolute dollars, aircraft fuel expense increased 68.8% from
$8.0 million in the second quarter of 1999 to $13.5 million in the second
quarter of 2000. The increased fuel expense resulted from the 48.1%
increase in the average cost per gallon of fuel from 68.2 cents to $1.01
including applicable taxes and into-plane fees and the 17.1% increase in
the average burn rate per hour of jet fuel consumed. The Company hedged
approximately 14% of its jet fuel requirements for the second quarter of
2000 as compared to hedging approximately 80% of its jet fuel
requirements for the second quarter of 1999. The Company reduced its fuel
expense by approximately $328,000 during the second quarter of 2000 as a
result of its fuel hedging activity as compared to incurring
approximately $45,000 in additional costs during the second quarter of
1999. 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 reduce its exposure to fuel
price increases during the remainder of 2000. See "Other Commitments".
<PAGE> 14
The cost per ASM of aircraft maintenance and materials
increased to 1.8 cents in the second quarter of 2000 compared to 1.4
cents in the second quarter of 1999. In absolute dollars, aircraft
maintenance and materials expense increased 41.4% from $6.3 million in
the second quarter of 1999 to $8.9 million in the second quarter of 2000.
The increased expense resulted from the increase in the size of the total
fleet, introduction of a maintenance contract covering the GE engines
operating on the CRJ fleet, and the continual increase in the average age
of the jet and turboprop fleets including the expiration of the
manufacturer's warranty on nine CRJ's.
The cost per ASM of aircraft rentals increased 12% to 2.8 cents
for the second quarter of 2000 compared to 2.5 cents for the second
quarter of 1999. In absolute dollars, aircraft rentals increased 23.9%
from $11.3 million in the second quarter of 1999 to $14.1 million in the
second quarter of 2000, reflecting the addition of the eight CRJ since
June 30, 1999 and four 328JET aircraft during the second quarter of 2000.
The 328JET aircraft are part of the ACJet operation, which were not in
revenue service during the second quarter and therefore contributed zero
ASMs, however the lease costs are included in aircraft rentals for the
period.
The cost per ASM of traffic commissions and related fees
remained the same at 3.1 cents for the second quarter of 2000 and the
second quarter of 1999. In absolute dollars, traffic commissions and
related fees increased 12.8% from $13.9 million in the second quarter of
1999 to $15.7 million in the second quarter of 2000. The increase
resulted from a 25.5% increase in passenger revenues and a 9.9% 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 decreased
from 1.0 cents in the second quarter of 1999 to 0.9 cents in the second
quarter of 2000. In absolute dollars, facility rents and landing fees
increased 1.4% from $4.5 million in the second quarter of 1999 to $4.6
million in the second quarter of 2000.
The cost per ASM of depreciation and amortization increased to
0.5 cents for the second quarter of 2000 from 0.4 cents for the second
quarter of 1999. In absolute dollars, depreciation and amortization
increased 21.7% from $2.2 million in the second quarter of 1999 to $2.6
million in the second quarter of 2000 primarily as a result of additional
rotable spare parts associated with the CRJs and the purchase of two CRJs
in the second half of 1999.
The cost per ASM of other operating expenses increased to 2.0
cents in the second quarter of 2000 from 1.5 cents in the second quarter
of 1999. In absolute dollars, other operating expenses increased 45.3%
from $6.9 million in the second quarter of 1999 to $10.1 million in the
second quarter of 2000. The increased costs result primarily from the
9.9% increase in revenue passengers which resulted in higher passenger
handling costs and $1.4 million in continued expenses for ACJet pre-
operating activities including regulatory compliance, employee
recruitment, training, establishment of operating infrastructure,
establishment of third party contractual arrangements, and aircraft
proving runs.
<PAGE> 15
As a result of the foregoing changes in operating expenses and
a 12.1% increase in ASMs, total cost per ASM increased to 18.8 cents in
the second quarter of 2000 compared to 16.2 cents in the second quarter
of 1999. In absolute dollars, total operating expenses increased 29.5%
from $73.9 million in the second quarter of 1999 to $95.7 million in the
second quarter of 2000.
The Company's combined effective tax rate for state and federal
taxes during the second quarter of 2000 was approximately 39.6% as
compared to 38.4% for the second quarter of 1999. This increase is due to
the application of certain 1998 and prior, state tax credits that were
determined realizable in 1999. The Company anticipates that it may
qualify for additional state tax credits which, if they materialize, will
have the effect of lowering the effective tax rate below 40% for the
third and fourth quarters of 2000.
<TABLE>
<CAPTION>
Six Months Operating Statistics
Increase
(Decrease)
Six months ended June 30, 1999 2000 % Change
<S> <C> <C> <C>
Revenue passengers carried 1,511,227 1,712,566 13.3%
Revenue passenger miles ("RPMs") 487,053 559,331 14.8%
(000's)
Available seat miles ("ASMs") (000's) 851,100 992,802 16.6%
Passenger load factor 57.2% 56.3% (0.9) pts
Break-even passenger load factor(2) 48.7% 49.4% 0.7 pts
Revenue per ASM (cents) 19.1 20.6 7.9%
Yield (cents) 33.4 36.6 9.6%
Cost per ASM (cents) 16.6 18.5 11.5%
Average passenger fare $107.74 119.65 11.1%
Average passenger segment (miles) 322 327 1.61%
Revenue departures 91,391 94,953 3.9%
Revenue block hours 121,366 122,697 1.1%
Aircraft utilization (block hours) 8.7 7.9 (9.2%)
Average cost per gallon of fuel (cents) 66.9 103.3 54.3%
Aircraft in service (end of period) 80 93 16.3%
</TABLE>
(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.
Comparison of six months ended June 30, 1999, to six months ended June
30, 2000.
<PAGE> 16
Results of Operations
General
In the first half of 2000, the Company posted net income of
$14.3 million compared to income of $14.8 million, excluding the
cumulative effect of an accounting charge of $888,000 prescribed by
Statement of Position 98-5, for the first half of 1999. For the six
months ended June 30, 2000, the Company earned pretax income of $23.7
million compared to $23.5 million for the six months ended June 30, 1999.
Unit revenues, RASM, increased 7.9% to 20.6 cents period over period,
while unit costs, CASM, increased 11.5% to 18.5 cents period over period.
This resulted in the operating margin decreasing to 12.1% for the first
half of 2000 from 14.6% for the first half of 1999.
Operating Revenues
The Company's operating revenues increased 26.3% to $208.8
million in the first half of 2000 compared to $165.4 million in the first
half of 1999. The increase resulted from a 16.6% increase in ASMs and a
9.6% increase in yield, partially offset by a decrease in load factor of
0.9 percentage points.
The increase in ASM's is the result of service expansion
utilizing the CRJ. The Company was operating 29 CRJ's as of June 30,
2000 as compared to 20 as of June 30, 1999. The longer stage length of
the CRJ results in the average aircraft stage length for the first half
of 2000 increasing 2.3% over the first half of 1999 to 279 miles.
The period over period percentage increase in yield is
primarily the result of generally higher business fares realized by
airlines as a result of the near industry-wide implementation of a fuel
surcharge in February 2000, and improved yield management using United's
Orion system compared to the first six months of 1999. Total passengers
increased 13.3% in the first half of 2000 compared to the first half of
1999.
Other revenues increased 51.4% reflecting the reimbursement
from Delta Air Lines, Inc. of amounts incurred related to pilot training
for the Delta Connection operation.
Operating Expenses
The Company's operating expenses increased 30.1% in the first
half of 2000 compared to the first half of 1999 due primarily to: a 54.3%
increase in the price per gallon of jet fuel coupled with a 16.6%
increase in the average fuel burn rate to 210 gallons per hour; a 16.6%
increase in ASMs; a 13.3% increase in passengers carried; and continued
expenses for the certification and start-up of the ACJet operation. The
increase in ASMs, passengers and burn rate reflects the net addition of
nine CRJs into scheduled service since June 30, 1999.
<PAGE> 17
A summary of operating expenses as a percentage of operating revenues and
cost per ASM for the six months ended June 30, 1999, and 2000 is as
follows:
<TABLE>
<CAPTION>
1999 2000
Percent of Cost Percent of Cost
Operating Per ASM Operating per ASM
Revenues (cents) Revenues (cents)
<<S> <C> <C> <C> <C>
Salaries and related costs 24.4% 4.7 24.2% 5.1
Aircraft fuel 8.8% 1.7 12.7% 2.7
Aircraft maintenance and 7.5% 1.5 8.1% 1.7
materials
Aircraft rentals 13.1% 2.6 12.8% 2.7
Traffic commissions and related 15.6% 3.0 13.9% 2.9
fees
F Facility rents and landing fees 5.2% 1.0 4.4% 0.9
Depreciation and amortization 2.5% 0.5 2.5% 0.5
Other 8.3% 1.6 9.3% 2.0
Total 85.4% 16.6 87.9% 18.5
</TABLE>
Cost per ASM increased 11.5% to 18.5 cents during the first
half of 2000 compared to 16.6 cents during the first half of 1999
primarily due to a 54.3% increase in the year over year price per gallon
of jet fuel and the continued expenses associated with the certification
and start-up of ACJet.
Salaries and related costs per ASM increased 8.5% to 5.1 cents
in the first half of 2000 compared to the first half of 1999. In absolute
dollars, salaries and related costs increased 25.1% from $40.3 million in
the first half of 1999 to $50.4 million in the first half of 2000. The
increase resulted primarily from additional flight crews, customer
service personnel and maintenance personnel to support the Company's
already increased and future level of operations including ACJet.
The cost per ASM of aircraft fuel increased 58.8% to 2.7 cents
for the first half of 2000 as compared to 1.7 cents for the first half of
1999. In absolute dollars, aircraft fuel expense increased 82% from
$14.6 million in the first half of 1999 to $26.6 million in the first
half of 2000. The increased fuel expense resulted from the 54.3% increase
in the average cost per gallon of fuel from 66.9 cents to $1.03 including
applicable taxes and into-plane fees, and the 16.6% increase in the
average burn rate per hour of jet fuel. The Company hedged approximately
6.5% of its jet fuel requirements for the first half of 2000 as compared
to hedging approximately 77% of its jet fuel requirements for the first
half of 1999. The Company reduced its fuel expense by approximately
$328,000 during the first half of 2000 as a result of its fuel hedging
activity as compared to incurring approximately $595,000 in additional
costs during the first half of 1999. 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 reduce its exposure to fuel price increases during the
remainder of 2000. See "Other Commitments".
<PAGE> 18
The cost per ASM of aircraft maintenance and materials
increased 13.3% to 1.7 cents in the first half of 2000 compared to the
first half of 1999. In absolute dollars, aircraft maintenance and
materials expense increased 37.5% from $12.4 million in the first half of
1999 to $17.0 million in the first half of 2000. The increased expense
resulted from the increase in the size of the total fleet, introduction
of a maintenance contract covering the GE engines operating on the CRJ
fleet effective in the third quarter 1999, and the continual increase in
the average age of the jet and turboprop fleets including the expiration
of the manufacturer's warranty on nine CRJ's.
The cost per ASM of aircraft rentals increased to 2.7 cents for
the first half of 2000 compared to 2.6 cents for the first half of 1999.
In absolute dollars, aircraft rental expense increased 23.3% to $26.8
million. The increase is the result of adding eight CRJ since June 30,
1999 and four 328JET aircraft during the second quarter 2000. The 328JET
aircraft are part of the ACJet operation, which were not in revenue
service during the first half of 2000 and therefore contributed zero
ASMs, however the lease costs are included in aircraft rentals for the
period.
The cost per ASM of traffic commissions and related fees
decreased to 2.9 cents in the first half of 2000 compared to 3.0 cents in
the first half of 1999. In absolute dollars, traffic commissions and
related fees increased 12.2%, from $25.8 million in the first half of
1999 to $29.0 million in the first half of 2000. The increase resulted
from a 25.9% increase in passenger revenues and a 13.3% increase in
passengers.
The cost per ASM of facility rents and landing fees decreased
10%, from 1.0 cent in the first half of 1999 to 0.9 cent for the first
half of 2000. In absolute dollars, facility rents and landing fees
increased 6.0% from $8.6 million in the first half of 1999 to $9.1
million in the first half of 2000. The increased costs result primarily
from the 3.9% increase in the number of departures and to the heavier
landing weight of the CRJ aircraft.
The cost per ASM of depreciation and amortization remained the
same at 0.5 cents. In absolute dollars, depreciation and amortization
increased 27.2% from $4.1 million in the first half of 1999 to $5.2
million in the first half of 2000 primarily as a result of additional
rotable spare parts and engines associated with the CRJs and the purchase
of one CRJ in the second half of 1999.
The cost per ASM of other operating expenses increased to 2.0
cents in the first half of 2000 from 1.6 cents in the first half of 1999.
In absolute dollars, other operating expenses increased 42.7% from $13.7
million in the first half of 1999 to $19.5 million in the first half of
2000. The increased costs result primarily from the 13.3% increase in
revenue passengers which resulted in higher passenger handling costs and
$3.0 million in expenses for ACJet pre-operating activities including
regulatory compliance, employee recruitment, training, establishment of
operating infrastructure, establishment of third party contractual
arrangements, and aircraft proving runs.
As a result of the foregoing changes in operating expenses, and
a 16.6% increase in ASMs, total cost per ASM increased to 18.5 cents in
the first half of 2000 compared to 16.6 cents in the first half of 1999.
In absolute dollars, total operating expenses increased 30.1% from $141.2
million in the first half of 1999 to $183.7 million in the first half of
2000.
The Company's combined effective tax rate for state and federal
taxes during the first half of 2000 was approximately 39.6% as compared
to 36.9% for the first half of 1999. This increase is due to the
application of certain 1998 and prior, state tax credits that were
determined realizable in 1999. The Company anticipates that it may
qualify for additional state tax credits which, if they materialize, will
have the effect of lowering the effective tax rate below 40% for the
third and fourth quarters of 2000.
<PAGE> 19
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 11
and 12.
As of August 10, 2000, the Company was operating a fleet of 97
aircraft comprised of 30 CRJ's, seven 328JET's, 32 J41's and 28 J32's. In
August 2000, the Company announced it had reached agreement with
Bombardier, Inc. to acquire an additional 30 CRJ's, 3 of which are firm
orders and 27 of which are conditioned upon United Airlines approval,
which condition may be waived by the Company. With this additional
order, as of August 10, 2000 the Company had firm orders for 39 CRJ's in
addition to the 30 previously delivered, conditional orders for 27 CRJ's,
and options for an additional 80 CRJ's. The continued delivery of these
additional jet aircraft into the United Express and Delta Connection
programs 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 previously announced its order with Fairchild
Aerospace Corporation for 328JET and 428JET aircraft. The 428JET aircraft
was an aircraft under development, with initial deliveries scheduled for
2003. In August 2000, Fairchild notified the Company that it had made
the decision to cancel the 428 program, and that it would not fulfill
this portion of the order. Fairchild also confirmed that this decision
does not affect its 328JET program. As of August 10, 2000 the Company
had firm orders for 18 328JETs in addition to the seven previously
delivered, conditional orders for 15 328JETs, and options for an
additional 85 328JETs. The cancellation of the 428JET program provides
the Company with certain rights under the purchase agreement. The
Company's August 2000 order for additional CRJs described above partially
replaces the future capacity previously intended to be filled through
428JETs.
The Company continues to assess plans to phase out its 28
leased 19 seat J32 aircraft used in the United Express operation by the
end of 2001. The Company continues to analyze its phase-out plan,
including quantification of expected costs related to the removal of the
J32 from the fleet. The timing of approval by United to operate the
328JET and/or additional CRJ aircraft as United Express will also be a
factor in analyzing the J32 phase-out plan. The Company expects to
conclude its assessment of phase out plans by the end of 2000.
During the first seven months of 2000, ACJet was engaged in pre-
operating activities including regulatory compliance, employee
recruitment, training, establishment of operating infrastructure,
establishment of third party contractual arrangements, and aircraft
proving runs. During the first quarter of 2000, ACJet was issued a
certificate of public convenience and necessity by the DOT. On July 21,
2000, ACJet received its FAA operating certificate for the 328JETs after
demonstrating that it has the necessary organization and technical
ability to safely provide air transportation, and satisfying certain
environmental requirements. Initial Delta Connection service to Richmond,
VA, Columbia, SC, and Greensboro, NC from New York's LaGuardia Airport
commenced on August 1, 2000. Service to Portland, ME, Providence, RI,
and Greenville, SC will commence in mid August.
<PAGE> 20
During August 2000 United Airlines announced that a combination
of issues related to labor negotiations, unusually severe weather, record
numbers of passengers and a strained air traffic system have had a major
impact on its operations throughout the summer. United has cancelled or
delayed many recent flights, and has reduced its flight schedule through
October. United has stated that the future flight cancellations are in
response to a shortage of United's pilots due to its pilots' refusal to
work overtime pending labor negotiations. The Company's labor force is
not covered by agreements affecting United's work force. Therefore,
while United's labor issues have not directly affected the Company's
flight operations, the effect, if any, on the Company's revenues of the
issues affecting United, and the surrounding publicity, is uncertain.
A number of competitive and regulatory developments are
affecting the markets and environment in which the Company competes. In
May 2000, United Airlines and US Airways announced their intentions to
merge. Subsequently other major airlines have indicated that they are
engaging in merger discussions. It is not clear whether the United-
USAirways merger will be consummated, or whether other major airlines
will also merge. If the United-USAirways merger is completed, the
implications for the regional airlines with code share agreements with
these two major airlines is also uncertain. The Company believes that
its agreements with United Airlines for its United Express franchise and
with Delta Airlines for its Delta Connection franchise position it
favorably for continued success even if industry consolidation does
occur.
Beginning in 2000, US Airways began a reduction in its
Washington-Dulles operation, and has continued to reduce flights
throughout the year. As of August 1, 2000 US Airways competed with the
Company in 14 markets from Washington-Dulles. This has reversed
USAirway's expansion at Washington-Dulles that took place during 1999.
The number of markets in which US Airways competed with the Company from
Washington-Dulles had increased from five at December 31, 1998 to 21 at
December 31, 1999. The increased competition came from US Airways
Mainline, Shuttle, MetroJet, and US Airways Express.
Four of the nation's busiest airports are subject to FAA
regulations limiting the number of hourly take off and landings. The
Company conducts flight operations at three of the four airports--New
York's LaGuardia and JF Kennedy (JFK) airports and Chicago's O'Hare
airport. The right to conduct a take off or landing during a certain
time of the day is called a slot. Legislation granting the Secretary of
Transportation authority to grant exemptions from these FAA rules was
recently enacted in May 2000. As a result the DOT has provisionally
granted exemptions from the FAA rules to all carriers that qualify under
the statute for an exemption. Essentially a carrier is entitled to
exemption slots to serve LaGuardia, JFK and O'Hare if the carrier
operates with small equipment (less than 71 seats) to defined small
airports if the carrier did not previously provide such service. Also
carriers that had not previously served any of the three airports or did
not offer more than 10 flights per day to such airport can do so by
operating up to 10 flights per day at each airport to communities of any
size. In addition, the legislation provides that all FAA slot controls
will be eliminated at O'Hare after July 1, 2002 and after January 1, 2007
for LaGuardia and JFK. The Company has utilized this legislation to add
service from Chicago O'Hare to Columbia, SC, Greenville/Spartanburg, SC,
and Tulsa, OK, and has increased flying in other O'Hare markets. The
Company also filed as a Delta Connection carrier to conduct additional
operations at LaGuardia. In addition to the opportunities the new law
affords the Company it will also increase competitive pressure at these
airports, the effect of which cannot be determined at this time. The
company continues to evaluate additional growth opportunities made
available by this legislation.
<PAGE> 21
Fuel price increases in the second half of 1999 and to date in
2000 have had a material impact on cost of operations throughout the
airline industry. In February 2000, most airlines including the Company
implemented a fuel surcharge of $10 each way on most domestic non-sale
airfares. The Company's results will continue to be affected by fuel
price volatility. In October 1999, the Company entered into commodity
swap transactions to hedge price changes on approximately 13,300 barrels
of crude oil per month for the second quarter 2000 and on approximately
23,300 barrels of crude oil per month for the third quarter 2000. The
contracts provide for an average fixed price equal to approximately 52.6
cents per gallon for the second quarter of 2000 and 51 cents per gallon
for the third quarter of 2000. The Company reduced its total cost of
fuel in the second quarter 2000 by approximately $328,000. With the
remaining transaction and taking into account that Delta Air Lines, Inc.
bears the economic risk of fuel price fluctuations for future fuel
requirements associated with the Delta Connection program, the Company
has limited its exposure to fuel price increases on approximately 26% of
its anticipated jet fuel requirements for the third quarter 2000, and 18%
for the fourth quarter of 2000.
Liquidity and Capital Resources
As of June 30, 2000, the Company had cash, cash equivalents and
short-term investments of $60.1 million and working capital of $69.6
million compared to $44.7 million and $55.2 million respectively as of
June 30, 1999. During the first six months of 2000, cash and cash
equivalents increased by $2.7 million, reflecting net cash provided by
operating activities of $14.8 million, net cash used in investing
activities of $9.8 million, and net cash used in financing activities of
$2.4 million. The net cash provided by operating activities is primarily
the result of net income for the period of $14.3 million, an increase of
$12.1 million in accrued liabilities resulting from the increased
operation and an increase in income taxes payable, and non cash
depreciation and amortization expenses of $5.5 million, offset by an $7.0
million increase in prepaid expenses related to aircraft rent and a $10.7
million increase in receivables due to the increase in passenger
revenues. In order to minimize total aircraft rental expense over the
entire life of the related aircraft leveraged lease transactions, the
Company has uneven semiannual lease payment dates of January 1 and July
1. Approximately 37% of the Company's annual lease payments are due in
January and 26% in July. The net cash used in investing activities
consisted primarily of the purchase of property and equipment including
aircraft spare parts, and aircraft deposits related to the aircraft on
order. Financing activities consisted primarily of proceeds from the
exercise of stock options, offset by the repurchase of the Company's
stock under the stock repurchase program and payments on long term debt
and capital lease obligations.
<PAGE> 22
Other Financing
In February 1999, the Company entered into an asset-based lending
agreement with a financial institution that provides the Company with 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 replaced a previous $20 million line of credit and
was originally set to expire on September 30, 2000. On July 1, 2000 the
line of credit was automatically renewed for one additional year, under
the existing terms, to now expire on September 30, 2001. The interest
rate on this line is LIBOR plus from .75% to 1.75% depending on the
Company's fixed charge coverage ratio. The Company has pledged $2.9
million of the line of credit to collateralize letters of credit issued
on behalf of the Company by a financial institution. As of June 30, 2000,
the available amount of credit under the $35 million line was $32.1
million.
In July 1997, the Company issued $57.5 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1, 2004
(the "Notes"), receiving net proceeds of approximately $55.6 million. The
Notes were convertible into shares of Common Stock, par value $0.02, of
the Company by the holders at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $9 per
share, subject to certain adjustments. On May 15, 2000, the Company
called the remaining $19.8 million of Notes outstanding for redemption at
104% of face value effective July 3, 2000. The Noteholders elected to
convert all of the Notes into common stock and approximately 2.2 million
shares were issued in exchange for the Notes during the period May 25,
2000 to June 26, 2000.
Other Commitments
On July 6, 2000 the Company entered into six interest rate
forward transactions maturing between August 2000 and January 2001 as an
interest rate hedge designed to limit its exposure to interest rate
changes on the anticipated issuance of permanent financing relating to
the delivery of six aircraft. These transactions settle on the first day
of the month in which the aircraft will be delivered and have an
aggregate notional amount of $51 million. Effective gains or losses
realized when permanent financing is obtained will be amortized over the
term of the related aircraft lease or will be depreciated as part of the
aircraft acquisition cost for owed aircraft. In August, the Company
settled the first of these bond forward transactions by paying the
counterparty approximately $35,000.
In October 1999, the Company entered into commodity swap
transactions to hedge price changes on approximately 23,300 barrels of
crude oil per month for the period July through September 2000. The
contracts provide for an average fixed price equal to approximately 51
cents per gallon. With these transactions and taking into account that
Delta Air Lines, Inc. bears the economic risk of fuel price fluctuations
for future fuel requirements associated with the Delta Connection
program, the Company has limited its exposure to fuel price increases on
approximately 26% of its anticipated jet fuel requirements for the third
quarter 2000; and 18%, for the fourth quarter of 2000. Had the commodity
swap transactions settled on June 30, 2000, the Company would have
realized a reduction of approximately $826,000 in fuel expense.
<PAGE> 23
Aircraft
As of August 10, 2000, the Company had a total of 39 CRJs on firm
order, 27 CRJs on conditional order, and held options for 80 additional
CRJs. The Company also had on firm order with Fairchild Aerospace
Corporation, 18 328JETs, and a conditional order for 15 328JETs, and held
options for 85 328JETs. The Company is obligated to purchase and finance
(including the possible use of leveraged leases) the 57 firm ordered
aircraft at an approximate capital cost of $900 million. The Company
expects to take delivery of eight CRJ's and seven 328JET's during the
remainder of 2000, and anticipates leasing these deliveries on terms
similar to previously delivered aircraft. Scheduled deliveries for future
years excluding conditional and option aircraft are 18 CRJ's and 11
328JET's in 2001 and 13 CRJ's in 2002.
The conditional order for 27 CRJ aircraft is conditioned on the
Company receiving United's approval to operate the additional jets as
United Express. The value of the aircraft in the conditional order
(excluding the option aircraft) is approximately $500 million. The
Company at its option may waive the condition and enter into commitments
for firm delivery positions.
Capital Equipment and Debt Service
Capital expenditures for the first six months of 2000 were $7.5
million compared to $23.4 million for the same period in 1999. Capital
expenditures for 2000 include, spare jet engines, rotable spare parts for
the CRJ, 328JET, and J-41 aircraft, ground equipment, and computer and
office equipment. Capital expenditures for the first six months of 1999
included the purchase of a CRJ aircraft. For the remainder of 2000, the
Company anticipates spending approximately $14 million for: rotable spare
parts related to the CRJ, 328JET, and J-41 aircraft, ground service
equipment, facilities, leasehold improvements, telecommunications
systems, computers and software.
Debt service including capital leases, for the six months ended
June 30, 2000 was $2.8 million compared to $2.2 million in the same
period of 1999.
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.
Recent Accounting Pronouncements
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.
<PAGE> 24
In July 1999, the FASB issued Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an Amendment of FASB Statement
No. 133" which defers the effective date of Statement No. 133 by one
year. In June 2000, the FASB issued Statement No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities an
amendment to FASB Statement No. 133", which provides additional guidance
and amendments to Statement No. 133. Therefore, the Company will adopt
Statement No. 133 during its first quarter of fiscal 2001 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's principal market risk results from changes in jet
fuel pricing and in interest rates.
For 2000, the Company has hedged a portion of its exposure to
jet fuel price fluctuations by entering into commodity swap contracts for
approximately 8% of its estimated 2000 fuel requirements for the United
Express program. The swap contracts are designed to provide protection
against sharp increases in the price of jet fuel. In addition, Delta Air
Lines, Inc. bears the economic risk of fuel price fluctuations for the
fuel requirements of the Company's Delta Connection program. Based on the
Company's projected fuel consumption for the year 2000, a one-cent
increase in the average annual price per gallon of jet fuel would
increase the Company's annual aircraft fuel expense by approximately
$606,000.
The Company's exposure to market risk associated with changes
in interest rates relates to the Company's commitment to acquire regional
jets. The Company has periodically entered into put and call contracts
and bond forward transactions designed to limit the Company's exposure to
interest rate changes until permanent financing is secured upon delivery
of the CRJs. The Company had no call contracts or forward transactions
outstanding at the end of the second quarter.
.
<PAGE> 25
ATLANTIC COAST AIRLINES HOLDINGS, INC.
FISCAL QUARTER ENDED June 30, 2000
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company is a party to routine litigation incidental to its
business, none of which the Company believes is likely to have a material
effect on the Company's financial position.
ITEM 2. Changes in Securities.
> In July 1997, the Company issued $57.5 million aggregate
principal amount > of 7.0% Convertible Subordinated Notes due July 1,
2004 (the "Notes"), > receiving net proceeds of approximately $55.6
million. The Notes are > convertible into shares of Common Stock, par
value $0.02, of the Company > by the holders at any time prior to
maturity, unless previously redeemed > or repurchased, at a conversion
price of $9 per share, subject to certain > adjustments. On May 15, 2000,
the Company called the remaining $19.8 million of Notes outstanding for
redemption at 104% > of face value effective July 3, 2000. The
Noteholders elected to convert all of the Notes into common stock and
approximately 2.2 million shares were issued in exchange for the Notes.
ITEM 3. Defaults Upon Senior Securities.
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of the Company was held in
Herndon, Virginia on May 24, 2000. Of the 18,681,291 shares of common
stock outstanding and entitled to vote on the record date, 17,028,545
were present by proxy. Those shares were voted on the matters before the
meeting as follows:
1. Election of Directors For Withheld
Kerry B. Skeen 16,962,015 66,530
Thomas J. Moore 16,978,316 50,229
C. Edward Acker 16,972,822 55,723
Robert E. Buchanan 16,979,286 49,259
Susan MacGregor Coughlin 16,979,136 49,409
Daniel L. McGinnis 16,977,036 51,509
James C. Miller 16,979,056 49,489
Judy Shelton 16,976,806 51,739
John M. Sullivan 16,979,286 49,259
<PAGE> 26
2. To ratify adoption of the Company's 2000 Stock Incentive Plan.
For Against Abstain Not Voted
10,003,863 4,730,627 27,427 2,266,628
3. To ratify appointment of KPMG, LLP as the Company's independent
auditors for the current year.
For Against Abstain
17,004,933 18,427 5,185
ITEM 5. Other Information.
None to report.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.24(a) ACAI 2000 Stock Incentive Plan
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
8K filed July 11, 2000 re 7% Note conversion
<PAGE> 27
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.
August 11, 2000 By: /S/ Richard J. Surratt
Richard J. Surratt
Senior Vice President and Chief
Financial Officer
August 11, 2000 By: /S/ Kerry B. Skeen
Kerry B. Skeen
Chairman and Chief Executive
Officer
