Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
Commission file number 0-21976
ATLANTIC COAST AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3621051
(State of incorporation) (IRS Employer
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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock par value $ .02 NASDAQ National Market
(Title of Class) (Name of each exchange on which registered)
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__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 2, 1998 was approximately $253,399,036.
As of March 2, 1998 there were 9,107,786 shares of Common Stock of the
registrant issued and 7,635,286 shares of Common Stock were outstanding.
Documents Incorporated by Reference
Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
- --------------------- -----------------
Proxy Statement for 1998 Annual Meeting of Shareholders Part III, Items 10-13
PART I
Item 1. Business
General
This Annual Report on Form 10-K contains forward-looking
statements, particularly those statements identified by such words as
"anticipates", "believes", "plans" or "expects". Actual results may differ based
on a variety of factors including costs, competitive reactions, and marketplace
demand for services on the Company's routes.
Atlantic Coast Airlines, Inc. ("ACAI"), is the holding company
of Atlantic Coast Airlines ("ACA"), together, (the "Company"), a large regional
airline, serving 44 destinations in 19 states in the Eastern United States as of
March 2, 1998 with nearly 500 scheduled non-stop flights system-wide every
weekday. The Company markets itself as "United Express" and is the only
code-sharing regional airline for United Airlines, Inc. ("United") operating as
United Express in the Eastern United States. The Company caters primarily to
business travelers with its principle operations at Washington-Dulles
International Airport ("Washington-Dulles"), which serves the Northern Virginia
and Washington, D.C. markets. The Company coordinates its schedules with United,
particularly at Washington-Dulles, where United operates 63 daily departures to
31 cities in the U.S., Europe and Mexico. As of March 2, 1998, the Company
operated a fleet of 67 aircraft (six regional jets and 61 turboprop aircraft)
having an average age of approximately five years.
Summary of Company Strategy
The Company's long-term corporate objective is to achieve
sustained earnings growth by focusing its resources in the following areas:
1. Implementation of the Regional Jet Fleet and Expansion of
the Washington-Dulles Hub: In the fourth quarter of 1997, the Company placed
into service its first five 50-seat Canadair Regional Jets ("CRJs"). One CRJ was
delivered in January 1998 with eight additional CRJs scheduled for delivery in
the remainder of the year and nine in 1999. The Company has options to acquire
25 additional CRJs.
The Company anticipates that it will utilize CRJs as part of
its strategy to grow at Washington-Dulles airport by reclaiming passenger
traffic lost when United downsized its Washington-Dulles schedule in the early
1990's and by increasing market share, principally in markets beyond the
economic operating range of its turboprop aircraft. The Company believes that
utilizing CRJs in this manner will provide additional connecting passengers to
both its turboprop fleet and United's jets flying from Washington-Dulles. The
Company also believes that the CRJs could also be deployed as a complement to
its existing turboprop service in the short-haul, high-density markets and could
provide additional capacity during peak business travel times.
In December 1997, the Company petitioned the U.S. Department
of Transportation ("DOT") for 42 arrival/departure slots at Chicago's O'Hare
Airport to serve seven cities currently without nonstop service to Chicago. If
granted, the Company would utilize as many as six CRJs operating as United
Express pursuant to agreements with United Airlines (see discussion on slots
below).
2. Capitalize on and Promote the Company's Identity with
United Airlines: The Company intends to capitalize on and promote its
code-sharing relationship with United, which has contributed significantly to
the Company's growth. The Company has a shared market identity with United,
lists its flights under United's two letter flight designator code in airline
Computer Reservation Systems ("CRSs") and other published schedules and awards
United's "Mileage Plus" frequent flyer miles to its passengers. The Company
coordinates its schedules with United, particularly at Washington-Dulles, and
participates with United in cooperative advertising and marketing agreements. In
most cities served by the Company, United provides all airport facilities and
related ground support services. The Company also participates in United's
"Apollo" reservation system and all major CRSs, uses the United Express logo and
has exterior aircraft paint schemes similar to those of United.
The Company markets itself as "United Express" under its
United Express Agreements ("Agreements") with United Airlines. These Agreements,
originally scheduled to expire on March 31, 1998, have been extended for one
year.
3. Continue to Emphasize Operational Safety and Efficiency:
For over three years, the Company has worked with the Federal Aviation
Administration ("FAA") to develop enhanced pilot training and cockpit
decision-making procedures under two programs: the Advanced Qualification
Program ("AQP") and the Advanced Crew Resource Management Program ("ACRM"). AQP
and ACRM focus training curriculums on individual technical skills and crew
interaction scenarios. The FAA selected the Company to participate in a grant to
study how ACRM can be integrated with standard operational procedures such as
crew briefings and checklists. The Company anticipates that it will continue to
enhance and improve these programs in cooperation with the FAA.
The Company is also in the process of installing in its
aircraft an enhanced navigational aid which utilizes global positioning
satellite ("GPS") technology. Once implemented, the Company anticipates that GPS
will reduce both aircraft block hours and pilot workloads. On July 18, 1997, the
FAA approved the Company's use of GPS on certain routes. Full implementation of
GPS is contingent on FAA approval for use in all of the Company's operational
areas.
During 1997, the Company equipped most of its aircraft with an
automated aircraft time reporting system, which enables the Company to more
efficiently communicate with flight crews and further automate the flight
tracking process. In addition, this system improves the timeliness and accuracy
of flight information communicated and displayed to the Company's passengers.
During 1997, the Company performed most aircraft overnight and
heavy-maintenance checks in Lynchburg, Virginia, approximately 160 miles from
Washington-Dulles. In February 1998, the Company occupied its new maintenance
hangar at Washington-Dulles. Moving its maintenance operation to the larger
facility at Washington-Dulles accommodates the Company's expanding fleet and has
enabled the Company to eliminate aircraft ferrying costs. In addition, because
the new facility increases the proximity of maintenance technicians and spare
parts, the Company believes it will improve completion factor by reducing flight
cancellations (see discussion on leased facilities below).
Markets
As of March 2, 1998, the Company scheduled 218 non-stop
flights from Washington-Dulles representing more flights from that airport than
any other airline. During 1997, the Company accounted for more passenger
boardings from Washington-Dulles than any airline other than United. On a
combined basis, the Company and United generated approximately 55% of passenger
traffic at Washington-Dulles during 1997.
The Company's top four cities based on frequency of operations
are Washington-Dulles, Boston, New York-JFK and Newark. During 1997, the Company
added additional flights to existing Washington-Dulles markets, added new routes
from the Washington-Dulles, Boston and New York-JFK airports and ceased
operations in one market. The Company increased operations in existing
Washington-Dulles markets by 23 daily departures and added new service to three
cities: Fort Myers, FL; Jacksonville, FL; and Nashville, TN. Further, the
Company added new non-Dulles flights from Boston, consisting of one new market
with five daily departures; and New York-JFK with two new markets and eight
daily departures. In 1997, the Company ceased operations to New Haven, CT,
resulting in the elimination of four daily departures from Washington-Dulles. In
1997, the Company also provided seasonal service to Martha's Vineyard and
Nantucket, MA from Washington-Dulles.
The following table sets forth the destinations currently
served (or scheduled for service on the date indicated) by the Company, as of
March 2, 1998:
Albany, NY Manchester, NH
Allentown, PA Nashville, TN
Atlanta, GA New York, NY (Kennedy)
Baltimore, MD New York, NY (LaGuardia)
Binghamton, NY Newark, NJ
Boston, MA Newport News, VA
Buffalo, NY Norfolk, VA
Burlington, VT Philadelphia, PA
Charleston, SC Pittsburgh, PA
Charleston, WV Portland, ME
Charlottesville, VA Providence, RI
Cleveland, OH Raleigh-Durham, NC
Columbus, OH Richmond, VA
Dayton, OH Roanoke, VA
Detroit, MI Rochester, NY
Fort Myers, FL Savannah, GA (4/1/98)
Greensboro, NC State College, PA
Harrisburg, PA Stewart, NY
Hartford, CT Syracuse, NY
Indianapolis, IN (3/16/98) Tampa, FL
Jacksonville, FL Westchester County, NY
Knoxville, TN Washington-Dulles, VA
Lynchburg, VA Wilmington, NC
Worcester, MA (4/16/98)
Fleet Description
Fleet Expansion: As of March 2, 1998, the Company operated a
fleet of six CRJs and 61 turboprop aircraft, consisting of 29 British Aerospace
Jetstream-32 ("J-32s") and 32 British Aerospace Jetstream-41 ("J-41").
As of March 4, 1998, the Company had a total of 17 CRJs on
order from Bombardier, Inc., in addition to the six delivered, and held options
for 25 additional CRJs. The initial order for 12 CRJs and 36 options was placed
on January 28, 1997. Options were exercised on November 20, 1997 for an
additional six firm and six conditional CRJ deliveries. On March 4, 1998, five
of the six conditional orders were converted to firm orders and the remaining
one was restored to option status. The first six CRJs were delivered in the
third and fourth quarters of 1997, and January 1998. Eight additional deliveries
are scheduled in 1998 and nine deliveries are scheduled in 1999.
The Company accepted delivery of four new J-41s during the
first half of 1997, and had additional J-41s on order pursuant to a purchase
agreement with British Aerospace, dated February 23, 1997, the ("BA J-41
Agreement"). On May 29, 1997, British Aerospace announced that it would no
longer manufacture the J-41 as part of its regular product line. On July 2,
1997, the Company and British Aerospace amended the BA J-41 Agreement to cancel
any further deliveries pursuant to this agreement. On December 4, 1997, the
Company entered into a short term lease agreement and took delivery of a new
J-41.
Fleet Composition: The following table describes the
Company's fleet of aircraft, scheduled deliveries and options as of March 4,
1998:
Future Scheduled
Number of Aircraft Passenger Capacity Average Age in Deliveries/
Years Options
British Aerospace J-32 29 19 8.2 -
British Aerospace J-41 32 29 3.2 -
Canadair Regional Jets 6 50 .4 17/25
-- -- -----
67 5.1 17/25
== =====
Regional Jet Implementation
During the third quarter of 1997 the Company successfully
completed line certification of the Regional Jet. Accordingly, the Company
received authorization to conduct operations under the provisions of the FAA
Part 121 regulations. The Company is operating the CRJs under the same FAA
regulatory requirements mandated by the FAA for all other CRJ, and larger jet,
carriers. The Company believes that the market will support existing
high-density routes and new routes and schedules that the Company's expanded
fleet will facilitate. In addition, the Company expects that its customers will
find the new CRJs acceptable for relatively longer flights, thereby enhancing
the Company's ability to compete in a broader geographic market.
The United Express Agreements required the Company to obtain
United's consent to operate the 50-seat CRJs under the "United Express" name
which consent was obtained on November 22, 1997. All CRJ routes operated as
United Express must receive prior approval from United. While the Company's
request for that consent was pending, United agreed in August 1997 to reimburse
the Company for its estimated aircraft lease and associated flight crew expenses
for its CRJs that were delivered but not in operation during the period from
September 11, 1997 through December 31, 1997. On November 22, 1997, the Company
began scheduled CRJ passenger service to four cities. From November 22 to
December 7, 1997, in order to expedite the introduction of United Express CRJ
service, United agreed to reimburse the Company for the block hour costs
associated with providing CRJ service to three of these cities. United received
the revenue from these flights. The United subsidy associated with aircraft
lease and flight crew expenses also ceased after December 7, 1997.
United Express Agreements
The Company's code-sharing and related agreements with United
(the "United Express Agreements") define the Company's relationship with United.
The United Express Agreements authorize the Company to use United's "UA" flight
designator code to identify its flights and fares in the major CRSs, including
United's "Apollo" reservation system, to use the United Express logo and
exterior aircraft paint schemes and uniforms similar to those of United, and to
otherwise advertise and market its association with United.
Company passengers may participate in United's "Mileage Plus"
frequent flyer program and are eligible to receive a certain minimum number of
United frequent flyer miles for each of the Company's flights. Mileage Plus
members are also eligible to redeem their awards on the Company's route system.
In 1997, approximately 60% of the Company's passengers participated in United's
"Mileage Plus" frequent flyer program. The Company limits the number of "Mileage
Plus" tickets that may be used on its flights and believes that the
displacement, if any, of revenue passengers is minimal.
The United Express Agreements also provide for coordinated
schedules and through-fares. A through-fare is a fare offered by a major air
carrier to prospective passengers who, in order to reach a particular
destination, transfer between the major carrier and its code-sharing partner.
Generally, these fares are less expensive than purchasing the combination of
local fares. United establishes all through-fares and allows the Company a
portion of these fares on a fixed rate or formula basis subject to periodic
adjustment. The United Express Agreements also provide for interline baggage
handling, and for reduced airline fares for eligible United and Company
personnel and families. The United Express code-sharing agreement expires on
March 31, 1999.
Under the United Express Agreements, United provides a number
of additional services to the Company. These include publication of the fares,
rules and related information that are part of the Company's contracts of
carriage for passengers and freight; publication of the Company's flight
schedules and related information; provision of toll-free reservations services;
provision of ground support services at many of the airports served by both
United and the Company; provision of ticket handling services at United's
ticketing locations; provision of airport signage at airports where both the
Company and United operate; provision of United ticket stock and related
documents; provision of expense vouchers, checks and cash disbursements to
Company passengers inconvenienced by flight cancellations, diversions and
delays; and cooperation in the development and execution of advertising,
promotion, and marketing efforts featuring United Express and the relationship
between United and the Company. In return for these services, the Company pays
United monthly fees based on the total number of revenue passengers boarded by
the Company on its flights for the month. The fee escalates periodically over
the term of the United Express Agreements.
The United Express Agreements require the Company to obtain
United's consent to operate service between city pairs as "United Express". If
the Company experiences net operating expenses that exceed revenues for three
consecutive months on any required route, the Company may withdraw from that
route if United and the Company are unable to negotiate an alternative mutually
acceptable level of service for that route. The United Express Agreements also
require the Company to obtain United's approval if it chooses to enter into
code-sharing arrangements with other carriers, but do not prohibit United from
competing, or from entering into agreements with other airlines who would
compete, on routes served by the Company. The United Express Agreements may be
canceled if the Company fails to meet certain financial tests or performance
standards or fails to maintain certain minimum flight frequency levels, events
which the Company, based on experience to date, believes to be unlikely.
The United Express Agreements restrict the ability of the
Company to merge with another company or dispose of certain assets or aircraft
without offering United a right of first refusal to acquire the Company or such
assets or aircraft. United also has a right of first refusal with respect to
issuance by the Company of shares of its Common Stock if, as a result of the
issuance, certain of the Company's stockholders and their permitted transferees
do not own at least 50% of the Company's Common Stock after such issuance.
Because those Company stockholders and their permitted transferees own
substantially less than 50% today, management believes that such a right is
unlikely to be exercised.
Lufthansa Agreement
In October 1997, the Company entered into a code-sharing
agreement with Lufthansa German Airlines, which permits Lufthansa to place its
airline code on flights operated by the Company. In addition, the United
Express-Lufthansa agreement provides a wide range of benefits for code-share
passengers including the ability to check in once at their initial departure
city and receive boarding passes and seat assignments for the flights on both
carriers while their luggage is automatically checked through to their final
destination. Members of the Lufthansa Miles & More frequent flyer program
receive mileage credit for these flights. In January 1998, the Company added the
Lufthansa code to flights operated in ten city pair markets.
The following markets served by the Company now carry both the
United Airlines (UA) and Lufthansa (LH) designator codes on selected flights:
Washington-Dulles to Greensboro, NC; Charlottesville, VA; Cleveland, OH;
Norfolk, VA; Richmond, VA; Roanoke, VA; Syracuse, NY; Newport News, VA;
Pittsburgh, PA; and Raleigh-Durham, NC.
Fuel
The Company has not experienced difficulties with fuel
availability and expects to be able to obtain fuel at prevailing prices in
quantities sufficient to meet its future requirements. During 1997, the Company
purchased approximately 78% of its fuel from United Aviation Fuels Corporation
("UAFC"), an affiliate of United taking advantage of the affiliate's significant
buying power and fuel purchasing expertise. On March 17, 1997, the Company
renewed its fuel purchasing agreement with the United affiliate and obtained a
reduction in the base price of fuel at its Washington-Dulles hub. In January and
March 1998, the Company entered into fixed price fuel purchase agreements with
UAFC for the delivery of 33,000 barrels per month at Washington-Dulles. The
purchase contracts, representing approximately 46% of the Company's anticipated
1998 fuel requirements, expire December 31, 1998.
Marketing
The Company's advertising and promotional programs emphasize
the Company's close affiliation with United, including coordinated flight
schedules and the ability of the Company's passengers to participate in United's
"Mileage Plus" frequent flyer program. The Company's services are marketed
primarily by means of listings in CRSs and the Official Airlines Guide,
advertising and promotions, and through direct contact with travel agencies and
corporate travel departments. For the year ended December 31, 1997,
approximately 82% of the Company's passenger revenue was derived from ticket
sales generated through travel agencies and corporate travel departments. In
marketing to travel agents, the Company relies on personal contacts and direct
mail campaigns, provides familiarization flights, and hosts group presentations
and other functions to acquaint travel agents with the Company's services. Many
of these activities are conducted in cooperation with United marketing
representatives. In addition, the Company and United jointly create radio and
print advertising in markets served by the Company.
In February 1998, the Company announced that it would offer
double Mileage Plus miles to passengers on several United Express regional jet
markets from February 1 to April 15, 1998. Those flights include service between
Washington-Dulles International Airport and Fort Myers, Jacksonville and Tampa,
FL; as well as Atlanta, GA; Nashville, TN; and Raleigh-Durham, NC.
In September 1995, the Company became a participant in
United's electronic ticketing program. This program allows customers to travel
on flights of United and the Company without the need for a paper ticket. The
primary benefit of this program is improved customer service and reduced
ticketing costs. For the year ended December 31, 1997, 25.6% of the Company's
passengers utilized electronic tickets up from 18.4% for the year ended December
31, 1996.
Competition
The Company competes primarily with regional and major air
carriers as well as with ground transportation. The Company's competition from
other air carriers varies from location to location, type of aircraft (both
turbo-prop and jet), and in certain cities, comes from carriers which serve the
same destinations as the Company but through different hubs. The Company
believes that its ability to compete in its market areas is strengthened by its
code-sharing relationship with United, which has a substantial presence at
Washington-Dulles, thereby enhancing the importance of the "UA" flight
designator code on the East Coast. The Company seeks to compete with other
airlines by offering frequent flights. In addition, the Company's competitive
position benefits from the large number of participants in United's "Mileage
Plus" frequent flyer program who fly regularly to or from the markets served by
the Company.
At its Washington-Dulles hub, the Company faces limited direct
nonstop competition from other carriers. In eleven of its markets from Dulles,
other airlines have competing turboprop and/or jet service. There are no other
airlines serving the Company's remaining twenty-seven Dulles markets with
nonstop flights. However, flights to the Company's Washington-Dulles
destinations are also offered by other carriers from Ronald Reagan Washington
National and Baltimore-Washington International airports.
During 1997, the Company continued to see a trend toward a
lower percentage of its passengers connecting to United Airlines flights through
its Dulles hub. One potential cause for this trend was additional competition
for connecting passengers from other hub networks in the region controlled by
some of United's principal competitors. In 1997, regional jet operations were a
much larger part of these competing hub networks. As a result, the Company's
turbo-prop to jet connections with its code-share partner United are
increasingly competing with these other hub networks' jet to jet connections.
Some passengers may perceive jet to jet connections more favorably due to a
jet's shorter elapsed flight time and comfort relative to a turbo-prop aircraft.
The Company believes that the public's favorable perception of regional jets
supports its strategy for acquisition of these aircraft to mitigate any loss of
passengers to operators already using regional jets.
The Aviation Deregulation Act of 1978 (the "1978 Act")
eliminated many regulatory constraints on airline competition, thereby freeing
airlines to set prices and, with limited exceptions, to establish domestic
routes without the necessity of seeking government approval. The airline
industry is highly competitive, and there are few barriers to entry in the
Company's markets. Furthermore, larger carriers with greater resources can
impact the Company's markets through fare adjustments as well as flight schedule
modifications.
Yield Management
The Company closely monitors its inventory and pricing of
available seats by use of a computerized yield management system. In March 1997,
the Company implemented a state-of-the-art revenue management system, PROS IV,
marketed by PROS Strategic Solutions. This system enables the Company's revenue
control analysts, on a flight by flight basis, to establish the optimal
allocation of seats by fare class (the number of seats made available for sale
at various fares) to maximize system revenue.
Slots
Slots are reservations for takeoffs and landings at specified
times and are required by governmental authorities to operate at certain
airports. The Company utilizes takeoff and landing slots at the LaGuardia, New
York-JFK and White Plains, New York airports. Airlines may acquire slots by
governmental grant, by lease or purchase from other airlines, or by loan when
another airline does not use a slot but desires to avoid governmental
reallocation of a slot for lack of use. All leased and loaned slots are subject
to renewal and termination provisions.
As of March 2, 1998 the Company utilized 18 slots at
LaGuardia, 15 slots at New York-JFK, and six slots at White Plains. Of the above
slots, the Company controls five at LaGuardia and three at White Plains. The
LaGuardia slots are issued under FAA regulations which provide that although a
carrier may be a holder of a slot, it has no property interest in such slot.
These slots can be withdrawn without compensation under certain circumstances.
The other slots utilized by the Company are either loaned or leased from other
carriers and are subject to varying renewal dates. The Company believes that as
slots expire it will be able to either renew the lease or find substitute slots
at similar prices.
In December 1997, the Company applied to the U.S. Department
of Transportation ("DOT") for 42 slots to operate three daily round-trip flights
with 50-passenger regional jet aircraft between Chicago's O'Hare International
Airport and each of the following cities: Charleston, WV; Duluth, MN;
Fayetteville, AK; Montgomery, AL; Shreveport, LA; Springfield/Branson, MO; and
Wilkes-Barre/Scranton, PA. These flights would connect to ACA's code-share
partner, United, and other United Express operators at United's Chicago hub. An
affiliate of American Airlines, Inc., operating as American Eagle, has also
requested the DOT grant it slots to serve Chicago O'Hare from the same cities.
The DOT is expected to issue an order granting or denying the carrier requests
for slots to serve these city pair markets. There can be no assurance whether
any or all slots will be granted to the Company by the DOT.
Employees
As of March 2, 1998, the Company had 1,454 full-time and
151 part-time employees, classified as follows:
Classification Full-Time Part-Time
Pilots 566 -
Flight attendants 191 -
Station personnel 277 139
Maintenance personnel 120 1
Administrative and clerical personnel 286 11
Management 14 -
--------------- ---------------
Total employees 1,454 151
=============== ===============
The Company's pilots are represented by the Airline Pilots
Association ("ALPA"), its flight attendants by the Association of Flight
Attendants ("AFA"), and its mechanics by the Aircraft Mechanics Fraternal
Association ("AMFA").
The ALPA collective bargaining agreement was amended on
February 26, 1997 and is effective for three years. The new contract modifies
work rules to allow more flexibility, includes regional jet pay rates, and
transfers pilots into the Company's employee benefit plans. The Company believes
that the incremental cost as a result of the amendments to the contract will not
have any material effect on the Company's financial position or results of its
operations over the life of the agreement.
On March 11, 1994, AMFA was certified by the National
Mediation Board (the "NMB") as the collective bargaining representative elected
by mechanics and related employees of the Company. As of March 2, 1998, AMFA
represented 110 of the Company's employees. The Company and AMFA have been
attempting to negotiate an initial contract under federal mediation since
December 1994, but have so far failed to reach agreement. The NMB has indicated
that it is in favor of continuing the negotiations, and the Company anticipates
participating in further negotiations. If, at some point, the NMB should decide
that the parties are deadlocked, the NMB could declare an impasse along with a
thirty day cooling off period. At the conclusion of that period if an agreement
has not been reached, AMFA would have the authority to use self help, up to and
including the right to strike.
The Company and AMFA were also engaged in litigation which
arose over certain work rule issues. In September 1997, the U.S. Court of
Appeals for the Second Circuit ruled in favor of the Company on all matters
pending before it, thereby resolving the pending litigation.
The Company's contract with the AFA became amendable on April
30, 1997. In March 1998, a tentative agreement between the Company and AFA was
rejected by a vote of the members. The Company expects to resume negotiations
during the second calendar quarter of 1998 and will continue to operate under
the terms of the existing agreement until negotiations are completed.
The Company believes that the wage rates and benefits for
other employee groups are comparable to similar groups at other regional
airlines. The Company is unaware of any significant organizing activities by
labor unions among its other non-union employees at this time.
As the Company continues to pursue its growth strategy, its
employee staffing needs and recruitment efforts are expected to increase
commensurately. Due to competitive local labor markets and normal attrition to
the major airlines, there can be no assurance that the Company will be able to
satisfy its hiring requirements. The Company has committed additional resources
to its employee retention efforts. Annual turnover of Company pilots was
approximately 11% during 1997, compared to 18% during 1996.
Pilot Training
The Company performs pilot training in state-of-the-art, full
motion simulators and conducts training in accordance with FAA Part 121
regulations. In 1993, the Company initiated an Advanced Qualification Program
("AQP") to enhance pilot training in both technical and Crew Resource Management
("CRM") skills. The FAA has recognized the Company's leadership in CRM training
by selecting the Company to participate in a FAA sponsored training grant. The
principal objective of the grant is to develop a prototype training program that
provides carriers with a more efficient approach for integrating CRM procedures
into standard operating procedures. For the past two and one half years, the
Company has worked closely with the FAA and George Mason University in the
development of proceduralized CRM. The second and final phase of the project,
operational implementation, began in August 1996 and is expected to be completed
in 1998.
Aviation Safety
On December 20, 1995, the FAA issued regulation 14 CFR Part
119, requiring air carriers operating aircraft under 14 CFR Part 135, with a
seating capacity of ten to thirty seats, excluding crew members, to comply with
and be certified under the more stringent air carrier safety regulation 14 CFR
Part 121 by March 20, 1997. The Company has had an internal audit program for
flight operations in place since October 1993 and has been training all of its
flight crews under CFR Part 121 since February 1994. Additionally, the Company
appointed a safety officer during 1995. The Company continues to emphasize
safety in its daily operations and plans to implement several new programs for
flight crews in 1997.
From time to the time, the FAA conducts inspections of air
carriers with varying degrees of intensity. The Company underwent an intensive,
two-week FAA Regional Aerospace Inspection Program ("RASIP") audit during the
fourth quarter of 1997. The final audit report consisted of recommendations and
minor findings, none of which resulted in civil penalties. The Company responded
to the findings and believes that it has met and continues to meet the required
standards for safety and operational performance. The Company's airline
operations will continue to be audited by the FAA for compliance with applicable
safety regulations.
Regulation
Economic. With the passage of the Deregulation Act, much of
the regulation of domestic airline routes and rates was eliminated. The DOT
still has extensive authority to issue certificates authorizing carriers to
engage in air transportation, establish consumer protection regulations,
prohibit certain unfair or anti-competitive pricing practices, mandate
conditions of carriage and make ongoing determinations of a carrier's fitness,
willingness and ability to provide air transportation. The DOT can also bring
proceedings for the enforcement of its regulations under applicable federal
statutes, which proceedings may result in civil penalties, revocation of
operating authority or criminal sanctions.
The Company holds a certificate of public convenience and
necessity, issued by the DOT, that authorizes it to conduct air transportation
of persons, property and mail between all points in the United States, its
territories and possessions. This certificate requires that the Company maintain
DOT-prescribed minimum levels of insurance, comply with all applicable statutes
and regulations and remain continuously "fit" to engage in air transportation.
Based on conditions in the industry, or as a result of
Congressional directives or statutes, the DOT from time to time proposes and
adopts new regulations or amends existing regulations. For example, the DOT has
implemented extensive regulations to prevent unfair, discriminatory and
deceptive practices by CRSs. Currently, these rules are being re-examined by the
DOT in light of changing market conditions since they were last recodified in
1992. The DOT must either re-enact these regulations or revise them on or before
March 31, 1999.
The DOT has also enacted rules establishing guidelines for
setting reasonable airport charges and procedural rules for challenging such
charges. The DOT has recently adopted a compliance policy regarding the
increasing use of ticketless travel and the consumer-related notices that must
be supplied to passengers before travel. The DOT has also proposed rules to
implement a statutory directive and a Presidential Commission recommendation to
improve notice to families of passengers involved in aviation accidents. The DOT
is considering the means by which it will require domestic and international
carriers to collect additional passenger-related information, including
emergency contact names and telephone numbers and other identifying information.
The DOT has estimated that the cost to the industry of obtaining this
information from each passenger could be significant.
Safety. The FAA regulates the safety-related activities of air
carriers. The Company is subject to the FAA's jurisdiction with respect to
aircraft maintenance and operations, equipment, ground facilities, flight
dispatch, communications, training, weather observation, flight personnel and
other matters affecting air safety. To ensure compliance with its regulations,
the FAA requires that airlines under its jurisdiction obtain an operating
certificate and operations specifications for the particular aircraft and types
of operations conducted by such airlines. The Company possesses an Air Carrier
Certificate issued by the FAA and related authorities authorizing it to conduct
operations with turboprop and turbojet equipment. In addition, the FAA has
approved the Company's commencement of CRJ service. The Company's authority to
conduct operations is subject to suspension, modification or revocation for
cause. The FAA has authority to bring proceedings to enforce its regulations,
which proceedings may result in civil or criminal penalties or revocation of
operating authority.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft and the
mandatory removal and replacement of parts that have failed or may fail in the
future. In addition, the FAA from time to time amends its regulations which such
amended regulations may impose additional regulatory burdens on the Company such
as the installation of new safety-related items (collision and windshear
avoidance systems and enhanced flight data recorders). Depending upon the scope
of the FAA's order and amended regulations, these requirements may cause the
Company to incur substantial, unanticipated expenses.
The FAA requires air carriers to adopt and enforce procedures
designed to safeguard property, ensure airport security and screen passengers to
protect against terrorist acts. The FAA, from time to time, imposes additional
security requirements on air carriers and airport authorities based on specific
threats or world conditions or as otherwise required. The FAA and the industry
are cooperating to test a system by which passengers and their baggage would be
more closely monitored to ensure that no bag is checked without a passenger
boarding the aircraft. The Company incurs substantial expense in complying with
current security requirements and it cannot predict what additional security
requirements may be imposed in the future or the cost of complying with such
requirements.
Associated with the FAA's security responsibility is its
program to ensure compliance with rules regulating the transportation of
hazardous materials. The Company both accepts and ships approved hazardous
materials for transportation and must train its employees to identify and
properly handle such materials. The FAA enforces its hazardous material
regulations by the imposition of civil penalties, which can be substantial.
Other Regulation. In the maintenance of its aircraft fleet and
ground equipment, the Company handles and uses many materials that are
classified as hazardous. The Environmental Protection Agency and similar local
agencies have jurisdiction over the handling and processing of these materials.
The Company is also subject to the oversight of the Occupational Safety and
Health Administration concerning employee safety and health matters. The Company
is subject to the Federal Communications Commission's jurisdiction regarding the
use of radio facilities.
The Airport Noise Control Act ("ANCA") requires that airlines
phase-out the operation of certain types of aircraft. None of the Company's
aircraft are subject to the phase-out provisions of ANCA. While ANCA generally
preempts airports from imposing unreasonable local noise rules that restrict air
carrier operations, airport operators may implement reasonable and
nondiscriminatory local noise abatement procedures, which procedures could
impact the ability of the Company to serve certain airports, particularly in
off-peak hours. Certain local noise rules adopted prior to ANCA were
grandfathered under the statute.
Federal Excise Taxes. Ticketing airlines are obligated to
collect a U.S. transportation excise tax on passenger ticket sales. This tax,
known as the aviation trust tax or the "ticket tax" is used to defray the cost
of FAA operations and other aviation programs. Recently, the federal statute
authorizing the ticket tax expired on two separate occasions - from January 1,
1996 through August 26, 1996, and from January 1, 1997 through March 6, 1997.
Ticketing airlines did not collect the ticket tax during these periods. The
ticket tax was most recently reinstated effective March 7, 1997, with an
expiration date of September 30, 1997. Beginning on October 1, 1997, a revised
formula for determining the ticket tax took effect. Under this revised formula,
the ticket tax is now comprised of a percentage of the passenger ticket price
plus a flat fee for each segment flown, and will be adjusted annually. For the
period from October 1, 1997 through September 30, 1998, the ticket tax will
equal nine percent of passenger ticket price plus $1 per segment.
Seasonality
As is common in the industry, the Company experiences lower
demand for its product during the period of December through February. Because
the Company's services and marketing efforts are focused on the business
traveler, this seasonality of demand is somewhat greater than for airlines which
carry a larger proportion of leisure travelers. In addition, the Company's
principal geographic area of operations experiences more adverse weather during
this period, causing a great77er percentage of the Company's and other airlines'
flights to be canceled. These seasonal factors have combined in the past to
reduce the Company's capacity, traffic, profitability, and cash generation for
this three month period as compared to the rest of the year.
Item 2. Properties
Leased Facilities
Airports
The Company leases gate and ramp facilities at all of the
airports it serves and leases ticket counter and office space at those locations
where ticketing is handled by Company personnel. Payments to airport authorities
for ground facilities are generally based on a number of factors, including
space occupied as well as flight and passenger volume. The Company believes that
it can accommodate through various arrangements the new flights it plans, and is
exploring possible long-term solutions for assuring access to adequate
facilities at Washington-Dulles.
Corporate Offices
On February 15, 1997, the Company established new headquarters
in Dulles, VA. The new facility provides over 45,000 square feet in one building
for the executive, administrative, training and system control departments. This
facility compares to the previous space consisting of approximately 28,500
square feet divided between two buildings. The Company believes that the new
headquarters provides adequate facilities to conduct its current and planned
operations.
Maintenance Facilities
The FAA's safety regulations mandate periodic inspection and
maintenance of commercial aircraft. The Company performs most maintenance,
service and inspection of its aircraft and engines at its maintenance facilities
using its own personnel.
In February 1998, the Company occupied its new 90,000 square
foot aircraft maintenance facility comprised of 60,000 square feet of hangar
space and 30,000 square feet of support space at Washington-Dulles. The Company
has consolidated all maintenance functions to this facility which includes
hangar, shop and office space necessary to maintain the Company's growing fleet.
Item 3. Legal Proceedings
The Company is a party to routine litigation and FAA
proceedings incidental to its business, none of which is likely to have a
material effect on the Company's financial position or the results of its
operations.
The Company is a party to an action pending in the United States District
Court for the Southern District of Ohio, Peter J. Ryerson, administrator of the
estate of David Ryerson, v. Atlantic Coast Airlines, Case No. C2-95-611. This
action is more fully described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995. On March 10, 1997, the Court granted
Plaintiff's motion to the effect that liability would not be limited to those
damages available under the Warsaw Convention. The Company is currently unable
to estimate the monetary award, if any, resulting from this litigation, but
believes it remains fully covered under the Company's insurance policy.
The Company is also a party to an action pending in the United States Court
of Appeals for the Fourth Circuit known as Afzal v. Atlantic Coast Airlines,
Inc. (No. 98-1011). This action is an appeal of the December 1997 decision
granted in favor of the Company in a case claiming wrongful termination of
employment brought in the United States District Court for the Eastern District
of Virginia known as Afzal v. Atlantic Coast Airlines, Inc. (Civil Action No.
96-1537-A). The Company does not expect the outcome of this case to have any
material adverse effect on its financial condition or results of its operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal quarter ended December 31, 1997,
to a vote of the security holders of the Company through the solicitation of
proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock, par value $.02 per share (the
"Common Stock"), is traded on the Nasdaq National Market ("Nasdaq/NM") under the
symbol "ACAI". Trading of the Common Stock commenced on July 21, 1993.
The following table sets forth the reported high and low
closing sale prices of the Common Stock on the Nasdaq/NM for the periods
indicated:
1996 High Low
---- ---- ---
First quarter $16.250 $7.375
Second quarter 17.125 12.625
Third quarter 15.875 11.000
Fourth quarter 13.125 9.25
1997
First quarter $17.000 $11.800
Second quarter 17.250 12.250
Third quarter 22.000 15.500
Fourth quarter 31.875 18.500
1998
First quarter $45.000 $29.750
(through March 2, 1997)
As of March 2, 1998, the closing sales price of the Common
Stock on Nasdaq/NM was $44.00 per share and there were approximately 109 holders
of record of Common Stock.
The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any Common Stock cash dividends in the
foreseeable future. The Company intends to retain earnings to finance the growth
of its operations. The payment of Common Stock cash dividends in the future will
depend upon such factors as earnings levels, capital requirements, the Company's
financial condition, the applicability of any restrictions imposed upon the
Company's subsidiary by certain of its financing agreements, and other factors
deemed relevant by the Board of Directors. In addition, Atlantic Coast Airlines,
Inc. is a holding company and its only significant asset is its investment in
its subsidiary, Atlantic Coast Airlines.
In January 1996, the Company's Board of Directors declared
dividends of approximately $0.3 million on its Redeemable Series A Cumulative
Convertible Preferred Stock representing the cumulative dividend for the full
year 1995. The Company paid these dividends in February 1996. On March 29, 1996,
the Company redeemed all of the preferred stock for $3.8 million. The preferred
stock was issued to JSX Capital Corporation ("JSX"), a subsidiary of British
Aerospace, Inc. in December 1994 as part of a $20 million financing agreement
consisting of an equity investment and available borrowings.
On July 2, 1997, the Company issued $50 million aggregate
principal amount of 7.0% Convertible Subordinated Notes due July 1, 2004 (the
"Notes"), pursuant to Rule 144A under the Securities Act of 1933, and received
net proceeds of approximately $48.3 million related to the sale of the Notes. On
July 18, 1997, the Company received additional net proceeds of $7.3 million for
the exercise of the over-allotment option. The notes are convertible into shares
of Common Stock, par value $0.02 of the Company (the "Common Stock") by the
holders at any time after sixty days following the latest date of original
issuance thereof and prior to maturity, unless previously redeemed or
repurchased, at a conversion price of $18 per share, subject to certain
adjustments. The Company may not call the notes for redemption prior to July 1,
2000.
In January 1998, $5.9 million face amounts of Notes were
converted at the option of several holders into 330,413 shares of the Company's
Common Stock. On March 3, 1998, the Company notified holders of the Notes that
the Company was temporarily reducing the conversion price in order to induce the
holders to redeem their Notes for Common Stock. If all remaining holders of the
Notes converted to Common Stock pursuant to this inducement, approximately
46,000 shares of Common Stock will be issued representing the reduction
component of the conversion price. The holders have until April 8, 1998 to
accept the Company's inducement.
In July 1997, the Company repurchased 1.46 million shares of
the Company's Common Stock from British Aerospace for $16.9 million using a
portion of the proceeds received from the issuance of the Notes.
Item 6. Selected Financial Data
The following selected financial data under the caption
"Consolidated Financial Data" and "Consolidated Balance Sheet Data" relating to
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 have been derived
from the Company's consolidated financial statements. The following selected
operating data under the caption "Selected Operating Data" have been derived
from Company records. The data should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Annual Report on Form 10-K.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and related operating data)
Consolidated Financial Data: Years ended December 31,
1993 1994 1995 1996 1997
---------------- ---------------- ---------------- -------------- ------------
Operating revenues:
Passenger revenues $145,786 $156,047 $153,918 $179,370 $202,540
Total operating revenues 149,103 158,919 156,968 182,484 205,444
Operating expenses:
Salaries and related costs 35,162 41,590 40,702 44,438 49,661
Aircraft fuel 15,397 15,189 13,303 17,124 17,766
Aircraft maintenance and materials 19,714 22,345 15,252 16,841 16,860
Aircraft rentals 31,087 35,565 25,947 29,137 29,570
Traffic commissions and related fees 22,914 25,913 25,938 28,550 32,667
Depreciation and amortization 1,654 2,329 2,240 2,846 3,566
Other 20,608 25,167 21,262 23,711 26,411
Write-off of intangible assets - 6,000 - - -
Restructuring charges (reversals) - 8,099 (521) (426) -
---------------- ---------------- ---------------- --------------
------------
Total operating expenses 146,536 182,197 144,123 162,221 176,501
---------------- ---------------- ---------------- -------------- ------------
Operating income (loss) 2,567 (23,278) 12,845 20,263 28,943
---------------- ---------------- ---------------- -------------- ------------
Interest expense (2,298) (2,153) (1,802) (1,013) (3,450)
Interest income 60 - 66 341 1,284
Other (expenses) income (225) 295 181 17 62
---------------- ---------------- ---------------- -------------- ----------
Total non operating expenses (2,463) (1,858) (1,555) (655) (2,104)
---------------- ---------------- ---------------- -------------- ------------
Income (loss) before income tax expense
and extraordinary item 104 (25,136) 11,290 19,608 26,839
Income tax provision (benefit) 67 - (1,212) 450 12,339
---------------- ---------------- ---------------- -------------- ------------
Income (loss) before extraordinary item 37 (25,136) 12,502 19,158 14,500
Extraordinary item (1) (1,780) - 400 - -
---------------- ---------------- ---------------- -------------- ------------
Net Income (loss) $(1,743) $(25,136) $12,902 $19,158 $14,500
================ ================ ================ ============== ============
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share and related operating data)
Years ended December 31,
1993 1994 1995 1996 1997
-------------- -------------- -------------- ----------------- -------------
Income (loss) per share:
Basic:
Income (loss) before extraordinary item $0.01 $(3.67) $1.46 $2.25 $1.85
Extraordinary item (0.29) - 0.05 - -
============== =============== ============== ================= =============
Net income (loss) per share $(0.28) $(3.67) $1.51 $2.25 $1.85
============== =============== ============== ================= =============
Diluted:
Income (loss) before extraordinary item $0.01 $(3.67) $1.29 $2.15 $1.61
Extraordinary item (0.29) - 0.04 - -
============== =============== ============== ================= =============
Net income (loss) per share $(0.28) $(3.67) $1.33 $2.15 $1.61
============== =============== ============== ================= =============
Weighted average number of shares used
in computation (in thousands)
Basic 6,083 6,858 8,342 8,481 7,824
Diluted 6,083 6,858 9,871 8,920 9,756
Selected Operating Data:
Departures 97,291 134,804 131,470 137,924 146,069
Revenue passengers carried 1,445,878 1,545,520 1,423,463 1,462,241 1,666,975
Revenue passenger miles (000s) (2) 381,489 393,013 348,675 358,725 419,977
Available seat miles (000s) (3) 853,668 885,744 731,109 771,068 861,222
Passenger load factor (4) 44.7% 44.3% 47.7% 46.5% 48.8%
Breakeven passenger load factor (5) 43.9% 47.0% 43.9% 41.4% 41.8%
Revenue per available seat mile $0.175 $0.179 $0.215 $0.237 $0.239
Cost per available seat mile (6) $0.171 $0.189 $0.198 $0.211 $0.205
Average yield per revenue passenger $0.382 $0.397 $0.441 $0.500 $0.482
mile (7)
Average fare $101 $101 $108 $123 $122
Average passenger trip length (miles) 264 254 245 245 252
Aircraft in service (end of period) 62 56 54 57 65
Destinations served (end of period) 54 42 41 39 43
Consolidated Balance Sheet Data:
Working capital (deficiency) $(3,935) (4,488) $4,552 $17,782 $45,177
Total assets 52,448 40,095 47,499 64,758 148,992
Long-term debt and capital leases, less
current 5,941 6,675 7,054 5,673 76,146
portion
Redeemable common stock warrants - - - - -
Redeemable Series A, Cumulative,
Convertible, - 3,825 3,825 - -
Preferred Stock
Total stockholders' equity 19,595 1,922 14,561 34,637 34,805
(1) In connection with the early extinguishment of certain senior notes,
in 1993 the Company recorded an extraordinary charge of $1,779,583
resulting from the write-off of the unamortized portion of debt
discount and the deferred finance costs associated with the
extinguished debt; and in 1995 an extraordinary gain of $400,000
related to the early extinguishment of debt. No similar
extinguishments were recognized in 1996 or 1997.
(2) "Revenue passenger miles" or "RPMs" represent the number of miles
flown by revenue passengers.
(3) "Available seat miles" or "ASMs" represent the number of seats
available for passengers multiplied by the number of scheduled miles
the seats are flown.
(4) "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger
miles by available seat miles.
(5) "Breakeven passenger load factor" represents the percentage of seats
filled by revenue passengers for the airline to break even after
operating expenses, less other revenues and excluding restructuring
and write-offs of intangible assets. Had restructuring and write-offs
of intangible assets been included for the years ended December 31,
1993, 1994, 1995, 1996 and 1997, this percentage would have been
43.9%, 51.0%, 43.8%, 41.3% and 41.8%, respectively.
(6) "Operating cost per available seat mile" represents total operating
expenses excluding restructuring and write-offs of intangible assets
divided by available seat miles. Had restructuring and write-offs of
intangible assets been included for the years ended December 31, 1993,
1994, 1995, 1996 and 1997, cost per available seat mile would have
been $0.172, $0.206, $0.197, $0.210 and $0.205 respectively.
(7) "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is
carried.
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition
General
In 1997, Atlantic Coast Airlines, Inc. ("ACAI") and its
wholly-owned subsidiary, Atlantic Coast Airlines ("ACA"), together ("the
Company"), posted a profit of $14.5 million compared to a profit of $19.2
million for 1996, and $12.9 million in 1995. The reduced profitability from 1996
to 1997 is primarily due to an increase in the Company's provision for income
taxes of approximately $12.3 million in 1997 as compared to approximately
$500,000 for 1996. The increase in the tax provision in 1997 reflects the full
utilization of net operating loss carryforwards in 1996 and the use of a more
conservative approach to estimating permanent differences between taxable and
book income. Pretax income increased 37% from 1996 to 1997 principally caused by
a 2.3 point load factor gain and a 2.8% reduction in cost per available seat
mile ("ASM") partially offset by a 3.6% reduction in yield. The improvement from
1995 to 1996 reflects increases in the Company's yields as well as a reduction
in the break-even passenger load factor. Management believes that the
improvement from 1995 to 1996 is attributable to the benefits realized from a
major restructuring in 1994. As a result of these actions, coupled with
improvements in yield management, marketing, and a generally improved economic
environment for airlines, the Company returned to profitability in the second
quarter 1995, achieving record operating profits for 1995, 1996 and 1997.
Results of Operations
The Company earned net income of $14.5 million or $1.61 per
diluted share in 1997 compared to net income of $19.2 million or $2.15 per
diluted share in 1996, and $12.9 million or $1.33 per diluted share in 1995.
During 1997, the Company generated operating income of $28.9 million compared to
$20.3 million for 1996, and $12.8 million for 1995. Operating margins for 1997,
1996 and 1995 were 14.1%, 11.1% and 8.2%, respectively.
The improvement in operating results from 1996 to 1997 reflects a 1.0%
increase in unit revenue (revenue per ASM) from $0.237 to $0.239 coupled with an
11.7% increase in ASMs and a 2.8% decrease in unit cost (cost per ASM.
The improvement in operating results from 1995 to 1996
reflects a 10.2% increase in unit revenue (revenue per ASM) from $0.215 to
$0.237 coupled with a 5.5% increase in ASMs partially offset by a 6.6% increase
in unit cost (cost per ASM). These results were achieved despite a challenging
operating environment brought about by a 20.5% increase in the cost per gallon
of fuel in 1996.
Fiscal Year 1996 vs. 1997
Operating Revenues
The Company's operating revenues increased 12.6% to $205.4 million in 1997
compared to $182.5 million in 1996. The increase resulted from an 11.7% increase
in ASMs, an increase in load factor of 2.3 points, partially offset by a 3.6%
decrease in yield.
The reduction in yield is related in part to the reinstatement
of the federal excise ticket tax from March 7, 1997 through the remainder of the
year. During 1996, this tax was only in effect from August 27, 1996 to December
31, 1996. Total passengers increased 14.0% in 1997 compared to 1996 as a result
of the 11.7% increase in ASMs and 2.3 point increase in load factor.
Operating Expenses
The Company's operating expenses increased 8.8% to $176.5
million in 1997 compared to $162.2 million in 1996 due primarily to an 11.7%
increase in ASMs, and a 14.0% increase in passengers. The increase in ASMs
reflects the net addition of five British Aerospace Jetstream-41 ("J-41")
aircraft during 1997.
A summary of operating expenses as a percentage of operating revenue and
operating cost per ASM for the years ended December 31, 1996 and 1997 is as
follows:
Year Ended December 31,
1996 1997
------------------------------ --------------------------------
Percent of Cost Percent of Cost
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)
--------------- ---------------- ------------- ----------------
Salaries and related costs 24.4% 5.8 24.2% 5.8
Aircraft fuel 9.4% 2.2 8.6% 2.1
Aircraft maintenance and materials 9.2% 2.2 8.2% 2.0
Aircraft rentals 16.0% 3.8 14.4% 3.4
Traffic commissions and related fees 15.6% 3.7 15.9% 3.8
Depreciation and amortization 1.6% .4 1.7% .4
Other 13.0% 3.0 12.9% 3.0
---------------- ------------- ---------------- ---------------
Total (before reversals of
restructuring charges) 89.2% 21.1 85.9% 20.5
---------------- ------------- ---------------- ---------------
Costs per ASM before reversals of restructuring charges
decreased 2.8% to 20.5 cents in 1997 compared to 21.1 cents in 1996 primarily
due to an 11.7% increase in ASMs in 1997 compared to 1996, offset by a 14.0%
increase in passengers carried. The increase in ASMs resulted from the net
addition of five J-41 aircraft and five 50-seat Canadair Regional Jets ("CRJ")
aircraft along with a 1.8% improvement in daily aircraft block hour utilization.
Salaries and related costs per ASM remained unchanged at 5.8
cents in 1997 compared to 1996. In absolute dollars, salaries and related
expenses increased 11.9% from $44.4 million in 1996 to $49.7 million in 1997.
The increase resulted from additional flight payroll related to a contractual
increase in May 1996 and February 1997 and a 10.7% increase in profit sharing
expense year over year.
The cost per ASM of aircraft fuel decreased to 2.1 cents in
1997 compared to 2.2 cents in 1996. The total cost of fuel per gallon decreased
4.2% to 79.3 cents in 1997 compared to 82.8 cents in 1996. In absolute dollars,
aircraft fuel expense increased 4.1% from $17.1 million in 1996 to $17.8 million
in 1997.
The cost per ASM of aircraft maintenance and materials
decreased to 2.0 cents in 1997 compared to 2.2 cents in 1996. The decreased
maintenance expense resulted primarily from the receipt of performance guarantee
fees from an overhaul vendor. In absolute dollars, aircraft maintenance and
materials expense increased 0.6% from $16.8 million in 1996 to $16.9 million in
1997.
The cost per ASM of aircraft rentals decreased to 3.4 cents in
1997 compared to 3.8 cents in 1996. The decreased unit costs reflect the
refinancing to lower rental rates of eleven used J-41 aircraft and the purchase
by the Company of three used J-41s. All of these transactions were accomplished
in the second half of 1997. In absolute dollars, aircraft rentals increased 1.7%
from $29.1 million in 1996 to $29.6 million in 1997.
The cost per ASM of traffic commissions and related fees
increased to 3.8 cents in 1997 compared to 3.7 cents in 1996. The increased
commissions reflect the contractual increases in program fees paid to United and
a higher percentage of tickets sold by travel agencies. Commission rates as a
percent of total passenger revenue fluctuate based on the mix of commissionable
and non-commissionable tickets, and have changed due to a cap on the total
amount of commission that travel agents can earn. Commissions as a percentage of
total passenger revenue averaged 7.3% in 1997 and 7.4% in 1996. Related fees
include program fees to United and segment booking fees for reservations. In
absolute dollars, traffic commissions and related fees increased 14.3% from
$28.6 million in 1996 to $32.7 million in 1997.
The cost per ASM of depreciation and amortization remained
unchanged at 0.4 cents in 1997 compared to 1996. Absolute increases in
depreciation expense were offset by increases in ASMs. The absolute increase
results primarily from the purchase of four J-41 aircraft (one of these aircraft
was new to the fleet in 1997), additional rotable spare parts associated with
additional J-41 aircraft, improvements to aircraft, leasehold improvements and
purchases of computer equipment. In absolute dollars, depreciation and
amortization expense increased 28.6% from $2.8 million in 1996 to $3.6 million
in 1997.
The cost per ASM of other operating expenses remained
unchanged at 3.0 cents in 1997 compared to 1996. Absolute increases were offset
by increased ASMs. The absolute increase in expenses are primarily attributable
to increased facility rents and distressed passenger expenses. In absolute
dollars, other operating expenses increased 11.4% from $23.7 million in 1996 to
$26.4 million in 1997.
As a result of the foregoing expense items, total operating
expenses before reversals of restructuring charges were approximately $176.5
million for 1997, an increase of 8.5% compared to $162.6 million in 1996. Total
ASMs increased 11.7% year over year and the cost per ASM decreased from 21.1
cents for 1996 to 20.5 cents for 1997.
The Company reversed excess restructuring reserves of $426,000
in 1996 (0.1 cents per ASM). The Company established the reserves with a charge
of $8.1 million in 1994. The reversals reflected remaining unused reserves for
pilot requalification, return conditions, spare parts reconciliation and
miscellaneous professional fees. As of December 31, 1996, there were no
remaining reserves related to the restructuring.
Interest expense, net of interest income, was $2.2 million in
1997 and $672,000 in 1996. The increased expense reflects the Company's issuance
in July 1997 of $57.5 million of 7% convertible debt and $16.4 million of
equipment notes associated with pass through trust certificates issued in
September 1997 reduced by a significant increase in the Company's cash balances
in 1997 and use of proceeds from the convertible debt to repay higher interest
bearing debt.
The Company recorded a provision for income taxes of
approximately $12.3 million for 1997, compared to a provision for income taxes
of approximately $500,000 in 1996. The 1996 effective tax rate of approximately
2.3% is significantly less than the statutory federal and state rates due
principally to the full utilization of net operating loss carryforwards and the
elimination of the valuation allowance. The 1997 effective tax rate of
approximately 46% is higher than the statutory federal and state rates. The
Company believes the higher effective tax rate is nonrecurring and reflects a
more conservative approach to estimating permanent differences between taxable
and book income. The Company expects a more normalized effective tax rate in
1998. The Company has recorded a net deferred tax asset of approximately
$688,000 at December 31, 1997 compared to $3.1 million at December 31, 1996. No
net operating loss carryforwards were available for 1997.
Fiscal Year 1995 vs. 1996
Operating Revenues
The Company's operating revenues increased 16.2% to $182.5
million in 1996 compared to $157 million in 1995. The increase resulted from a
5.5% increase in ASMs and a 13.3% increase in yield, partially offset by a 1.2
percentage point decrease in passenger load factor.
The increase in yield is related in part to the expiration of
the ticket tax on December 31, 1995. The increase in yield caused by this factor
cannot be determined nor can the impact on revenue that resulted from the
reinstatement of the tax on August 27, 1996. Revenue per ASM improved 10.2% year
over year. Total passengers increased 2.7% in 1996 compared to 1995.
Operating Expenses
The Company's operating expenses increased 12.6% in 1996 compared to 1995
due primarily to a 5.5% increase in ASMs, and a 2.7% increase in passengers. The
increase in ASMs reflects the addition of two J-41 aircraft.
A summary of operating expenses as a percentage of operating revenues and
operating cost per ASM for the years ended December 31, 1995 and 1996 is as
follows:
Year Ended December 31,
1995 1996
------------------------------ ------------------------------
Percent of Cost Percent of Cost
Operating per ASM Operating per ASM
Revenues (cents) Revenues (cents)
--------------- -------------- -------------- ---------------
Salaries and related costs 25.9% 5.7 24.4% 5.8
Aircraft fuel 8.5% 1.8 9.4% 2.2
Aircraft maintenance and materials 9.7% 2.1 9.2% 2.2
Aircraft rentals 16.5% 3.5 16.0% 3.8
Traffic commissions and related fees 16.5% 3.5 15.6% 3.7
Depreciation and amortization 1.4% .3 1.6% .4
Other 13.6% 2.9 13.0% 3.0
--------------- -------------- -------------- ---------------
Total (before reversals of
restructuring charges) 92.1% 19.8 89.2% 21.1
--------------- -------------- -------------- ---------------
Cost per ASM before reversals of restructuring charges
increased 6.6% to 21.1 cents in 1996 compared to 19.8 cents in 1995 primarily
due to the increased cost of fuel, increases in aircraft rental expense and
landing fees from additional aircraft and additional traffic commissions and
related fees resulting from a 16.3% increase in total operating revenue. These
factors were slightly offset by a 5.5% increase in ASMs.
Salaries and related costs per ASM increased to 5.8 cents in
1996 compared to 5.7 cents in 1995. The increase resulted from additional flight
payroll related to a contractual increase in May 1996 and an 80.4% increase in
profit sharing year over year. In absolute dollars, salaries and related
expenses increased 9.1% from $40.7 million in 1995 to $44.4 million in 1996.
The total cost per ASM of aircraft fuel increased to 2.2 cents
in 1996 compared to 1.8 cents in 1995. The total cost of fuel per gallon
increased 20.5% due to increases in aircraft fuel prices and the 4.3 cents per
gallon fuel tax imposed by the federal government in October 1995. The average
cost per gallon, including into-plane fees, was 82.8 cents in 1996 and 68.7
cents in 1995. In absolute dollars, aircraft fuel expense increased 28.6% from
$13.3 million in 1995 to $17.1 million in 1996.
The cost per ASM of aircraft maintenance and materials
increased to 2.2 cents in 1996 compared to 2.1 cents in 1995. The increased
maintenance expense resulted primarily from an increase in the average age of
the fleet, the expiration of warranty coverage on certain aircraft and rate
increases in contract maintenance for engines. In absolute dollars, aircraft
maintenance and materials expense increased 9.8% from $15.3 million in 1995 to
$16.8 million in 1996.
The cost per ASM of aircraft rentals increased to 3.8 cents in
1996 compared to 3.5 cents in 1995. The increased expenses reflect two
additional J-41 aircraft delivered in 1996 and the full year effect of aircraft
delivered in 1995. In absolute dollars, aircraft rentals increased 12.4% from
$25.9 million in 1995 to $29.1 million in 1996.
The cost per ASM of traffic commissions and related fees
increased to 3.7 cents in 1996 compared to 3.5 cents in 1995. The increased
commission reflects the increase in passenger revenue and contractual increases
in program fees paid to United. Commission rates fluctuate based on the mix of
commissionable and non-commissionable tickets, and have changed due to a cap on
the total amount of commission that travel agents can claim. Commission as a
percentage of total passenger revenue averaged 7.4% in 1996 and 8.0% in 1995.
Related fees include program fees to United and segment booking fees for
reservations. In absolute dollars, traffic commissions and related fees
increased 10.4% from $25.9 million in 1995 to $28.6 million in 1996.
The cost per ASM of depreciation and amortization increased to
0.4 cents in 1996 compared to 0.3 cents in 1995. The increase results primarily
from the acquisition of additional rotable spare parts associated with
additional J-41 aircraft, improvements to aircraft, leasehold improvements and
purchases of computer equipment. There were no significant changes in
amortization in either 1996 or 1995. In absolute dollars, depreciation and
amortization expense increased 27.3% from $2.2 million in 1995 to $2.8 million
in 1996.
The cost per ASM of other operating expenses increased to 3.0
cents in 1996 compared to 2.9 cents in 1995. The increased expenses are
primarily attributable to increased glycol costs resulting from relatively
severe winter weather, additional pilot training costs and increased legal fees.
In absolute dollars, other operating expenses increased 11.3% from $21.3 million
in 1995 to $23.7 million in 1996.
As a result of the foregoing components, total operating
expenses before reversals of restructuring charges were approximately $162.6
million for 1996, an increase of 12.4% compared to $144.6 million in 1995. Total
ASMs increased 5.5% year over year and the cost per ASM increased from 19.8
cents for 1995 to 21.1 cents for 1996.
The Company reversed excess restructuring reserves of $426,000
in 1996 (0.1 cents per ASM) and $521,000 in 1995 (0.1 cents per ASM). The
Company established the reserves with a charge of $8.1 million in 1994. The
reversals reflected remaining unused reserves for pilot requalification, return
conditions, spare parts reconciliation and miscellaneous professional fees. As
of December 31, 1996, there were no remaining reserves related to the
restructuring.
Interest expense, net of interest income, was $672,000 in 1996
and $1.7 million in 1995. The decreased expense reflects reduced borrowings
under the Company' accounts receivable financing facility and the early
retirement of a $4 million convertible term note to British Aerospace in
December 1995.
The Company recorded a provision for income taxes of
approximately $500,000 for 1996, compared to a benefit of approximately $1.2
million in 1995. The benefit recorded in 1995 reflects the recognition of the
deferred tax asset of $1.5 million in the fourth quarter of 1995, net of
valuation allowance. The 1996 effective tax rate of approximately 2.3% is
significantly less than the statutory federal and state rates due principally to
the full utilization of net operating loss carryforwards and the elimination of
the valuation allowance. The Company recorded a net deferred tax asset of $3.1
million at December 31, 1996.
Outlook
This Outlook section and the Liquidity and Capital Resources
section below contain forward-looking statements. The Company's actual results
may differ significantly from the results discussed in 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
CRJ service to new destinations, the cost of fuel, the weather, satisfaction of
regulatory requirements and general economic and industry conditions.
A central element of the Company's business strategy is
expansion of its aircraft fleet. At December 31, 1997, the Company had
commitments to acquire 18 additional 50-seat CRJs, one of which was delivered in
January 1998. The introduction of these aircraft will expand the Company's
business into new markets. In general, service to new markets may result in
increased operating expenses that may not be immediately offset by increases in
operating revenues.
Liquidity and Capital Resources
The Company's balance sheet improved significantly during 1997
compared to 1996. As of December 31, 1997, the Company had cash and cash
equivalents of $39.2 million and working capital of $45.2 million compared to
$21.5 million and $17.8 million respectively as of December 31, 1996. During the
year ended December 31, 1997, cash and cash equivalents increased $17.7 million,
reflecting net cash provided by operating activities of $21.3 million, net cash
used in investing activities of $55.2 million (related to deposits for the CRJs,
purchases of equipment and increases in short term investments) and net cash
provided by financing activities of $51.6 million. Net cash provided by
financing activities increased principally due to the receipt of net proceeds of
$55.6 million in July 1997 from the issuance of convertible notes due 2004
partially offset by the $16.9 million purchase of the Company's common stock
from British Aerospace in July 1997.
As of December 31, 1996 the Company had cash and cash
equivalents of $21.5 million and working capital of $17.8 million compared to
$8.4 million and $4.6 million respectively as of December 31, 1995. During 1996,
cash and cash equivalents increased $13.1 million, reflecting net cash provided
by operations of $20.1 million, net cash used in investing activities of $2.2
million (related to purchases or spare parts and equipment) and net cash used in
financing activities of $4.9 million (primarily related to the redemption of
preferred stock and payments on long-term debt and capital lease obligations).
Other Financing
The Company has an asset-based lending agreement with a
financial institution that provides the Company with a line of credit of up to
$20 million, depending on the amount of assigned ticket receivables. Borrowings
under the line of credit can provide the Company a source of working capital
until proceeds from ticket coupons are received. The line is collateralized by
all of the Company's receivables and there were no borrowings under the line
during 1997. The Company pledged $7.7 million of this line of credit as
collateral to secure letters of credit issued on behalf of the Company by a
financial institution.
In June 1997, the Industrial Development Authority of Loudoun
County, Virginia ("IDA") approved a $9.4 million tax exempt bond issuance in
connection with the Company's proposed construction of a maintenance facility at
Washington-Dulles. The Company has paid approximately $500,000 to cover the
costs associated with furnishing and equipping the new facility. These bonds
were issued under a variable interest rate structure for a twenty-five year term
including a requirement for a monthly sinking fund provision, and are
collateralized by a $9.6 million letter of credit issued on behalf of the
Company by a financial institution. The letter of credit is collateralized by
the Company's leasehold deed of trust on the maintenance facility and $4.9
million of the Company's line of credit. The Company will be obligated to pay
rent for the facility and the underlying land leasehold, the proceeds from which
the IDA will make the required interest and sinking fund payments on the bond
obligation. In the event of a default, the Company would be obligated to
reimburse the financial institution to the maximum amount of the letter of
credit. Annual rent is subject to escalation every five years. In February 1998,
the Company occupied this building and began paying rent.
On July 2, 1997, the Company issued $50 million aggregate
principal amount of 7% Convertible Subordinated Notes due July 1, 2004 ("the
Notes"). The Company received net proceeds of approximately $48.3 million
related to the sale of the Notes. In addition, the Company granted the initial
purchasers a thirty day option to purchase up to an additional $7.5 million
aggregate principal amount of the Notes solely to cover over-allotments. On July
18, 1997, the Company received net proceeds of $7.3 million related to the
exercise of this option. The net proceeds of the Note offering have been used to
support the introduction of the Company's regional jet fleet, repurchase 1.46
million shares of the Company's Common Stock from British Aerospace as described
below, retire higher interest rate debt and for general corporate purposes.
The Notes are convertible into shares of Common Stock, unless
previously redeemed or repurchased, at a conversion price of $18 per share,
subject to certain adjustments. Interest on the Notes is payable on April 1 and
October 1 of each year, commencing October 1, 1997. The Notes are not redeemable
by the Company until July 1, 2000. Thereafter, the Notes will be redeemable, at
any time, on at least 15 days notice at the option of the Company, in whole or
in part, at the redemption prices set forth in the Indenture dated July 2, 1997,
in each case, together with accrued interest.
In January 1998, $5.9 million face amount of Notes were
converted by several holders into 330,413 shares of the Company's Common Stock.
On March 3, 1998, the Company notified holders of the Notes
that the Company was temporarily reducing the conversion price in order to
induce the Note holders to convert their Notes into Common Stock. The Note
holders have until April 8, 1998 to accept the Company's inducement.
In April 1997, the Company executed a short term promissory note for
deposits totaling $11 million related to the acquisition of the CRJs. The
promissory note was paid in full on July 2, 1997 from the net proceeds of the
Notes.
In July 1997, the Company repurchased 1.46 million shares of
the Company's Common Stock from British Aerospace for approximately $16.9
million from the net proceeds of the sale of the Notes as described above. The
stock was repurchased at a 22.5% discount from the average of the closing bid
prices during the period June 24 through June 30, 1997.
During July 1997, the Company retired $3.1 million of other high interest
rate debt from the proceeds of the Notes. In January 1998, the Company retired
an additional $1.4 million in capital lease obligations.
In September 1997, approximately $112 million of pass through
certificates were issued in a private placement by separate pass through trusts,
which purchased with the proceeds, equipment notes (the "Equipment Notes")
issued in connection with (i) leveraged lease transactions relating to four
J-41s and six CRJs (delivered or expected to be delivered), all of which are or
will be leased to the Company (the "Leased Aircraft"), and (ii) the financing of
four J-41s owned by the Company (the "Owned Aircraft"). The Equipment Notes
issued with respect to the Owned Aircraft are direct obligations of ACA,
guaranteed by ACAI and are included in the accompanying consolidated financial
statements. The Equipment Notes issued with respect to the Leased Aircraft are
not obligations of ACA or guaranteed by ACAI.
With respect to one CRJ leased aircraft, at December 31, 1997
(the "Prefunded Aircraft"), the proceeds from the sale of the Equipment Notes
were deposited into collateral accounts, to be released at the closing of a
leveraged lease related to the Prefunded Aircraft. In January 1998, an equity
investor purchased this aircraft and entered into a leveraged lease with the
Company and the collateral accounts were released.
Other Commitments
In July 1997, the Company entered into a series of interest
rate swap contracts in the amount of $39.8 million. The swaps were executed by
purchasing six contracts maturing between March and September 1998 with
Bombardier, Inc. as the counter party. The interest rate hedge is designed to
limit approximately 50% of the Company's exposure to interest rate changes until
permanent financing for its second six CRJ aircraft, which are scheduled for
delivery between March and September 1998, is secured. At December 31, 1997, had
all contracts settled on that date, the Company would have been obligated to pay
the counter party approximately $1.4 million.
In January 1998, the Company entered into a contract to
purchase fuel from United Aviation Fuels Corporation ("UAFC"), a wholly-owned
subsidiary of United Airlines during the period February through September 1998.
The Company has committed to purchase 33,000 barrels of fuel per month during
the term of this contract at a delivered price excluding taxes and into plane
fees of 52.2 cents per gallon. In March 1998, the Company extended the contract
through December 1998 committing to purchase 33,000 barrels per month, October
through December, at a delivered price excluding taxes and into plane fees of
50.35 cents per gallon. Fuel purchased under this arrangement represents
approximately 46% of the Company's anticipated 1998 fuel requirements.
The Company has started to review its computer systems and
application programs for year 2000 compliance. The Company believes that the
cost to modify any of its non-compliant systems or applications will not have a
material effect on its financial position or results of its operations. However,
the Company can not give any assurances that the systems of other parties upon
which the Company must rely, will be year 2000 compliant on a timely basis.
Examples of systems operated by others that the Company may use and or rely upon
are: FAA Air Traffic Control, Computer Reservation Systems for travel agent
sales and United Airlines' reservation, passenger check in and ticketing
systems. The Company's business, financial condition and or results of
operations could be materially adversely affected by the failure of its systems
and applications or those operated by others.
Aircraft
The Company has significant lease obligations for aircraft
that are classified as operating leases and therefore are not reflected as
liabilities on the Company's balance sheet. The remaining terms of such leases
range from less than one year to sixteen and a half years. The Company's total
rent expense in 1997 under all non-cancelable aircraft operating leases with
remaining terms of more than one year was approximately $29.2 million. As of
December 31, 1997, the Company's minimum rental payments for 1998 under all
non-cancelable aircraft operating leases with remaining terms of more than one
year were approximately $36 million.
As of March 4, 1998, the Company had a total of 17 CRJs on
order from Bombardier, Inc., in addition to the six delivered, and held options
for 25 additional CRJs. The initial order for 12 CRJs and 36 options was placed
on January 28, 1997. Options were exercised on November 20, 1997 for an
additional six firm and six conditional CRJ deliveries. On March 4, 1998, five
of the six conditional orders were converted to firm orders and the remaining
one was restored to option status. The first five CRJs were delivered in the
third and fourth quarters of 1997. Two additional CRJs have been delivered
during the first quarter 1998 under operating leases. Seven additional
deliveries are scheduled in 1998 and nine deliveries are scheduled in 1999 which
the Company is obligated to purchase and finance (including leveraged leases) at
an approximate capital cost of $296 million.
On February 23, 1997, the Company entered into an agreement
with Aero International (Regional) (the "BA J-41 Agreement") to acquire 12 new
J-41 aircraft, and into a related agreement that gave the Company permission to
refinance through third parties up to fifteen previously delivered J-41 aircraft
that were under leases supported by British Aerospace. The new aircraft were to
be delivered under long-term leases with British Aerospace, but were also
eligible for third party financing. Four of the new aircraft had been delivered
as of May 29, 1997, when British Aerospace announced that it would no longer
manufacture the J-41 as part of its regular product line. On July 2, 1997, the
Company and British Aerospace amended the BA J-41 Agreement to cancel any
further deliveries of J-41s pursuant to the BA J-41 Agreement. As part of the
amended BA J-41 Agreement, the Company received certain manufacturer credits and
support. The amendment also provides that British Aerospace will provide
additional asset value support for such contemplated third party financings.
During 1997, the Company completed third party financings of
eighteen J-41 aircraft as follows: On August 1, 1997, three new J-41s through
leveraged leases with a third party; on September 15, 1997, two used J-41s
through single investor leases with a third party; on September 26, 1997, four
used J-41s through leveraged leases with a third party as part of the pass
through certificates as described above; on September 26, 1997, one new and
three used J-41s purchased by the Company with debt as part of the pass through
certificates; on September 30, 1997, two used J-41s through single investor
leases with a third party, and on December 30, 1997, three used J-41s through
single investor leases with a third party. All of these aircraft were already on
lease to the Company at the time of closing, and prior leases were terminated as
part of these transactions. As compared to the prior leases, these refinancings
have resulted in reduced payment obligations, shorter lease terms, and improved
return conditions. On February 13, 1998, the Company entered into a single
investor lease with a third party for the last J-41 eligible for refinancing.
In November 1997, the Company entered into a lease and
purchase agreement with Aero International (Regional) for the acquisition of one
additional new J-41. The Company will be required to arrange third party
financing of this aircraft, or to purchase it outright, during the second
quarter of 1998, subject to the aircraft being properly modified by Aero
International.
In order to ensure the highest level of safety in air
transportation, the FAA has authority to issue maintenance directives and other
mandatory orders relating to, among other things, inspection of aircraft and the
mandatory removal and replacement of parts that have failed or may fail in the
future. In addition, the FAA from time to time amends its regulations which such
amended regulations may impose additional regulatory burdens on the Company such
as the installation of new safety-related items (collision and windshear
avoidance systems and enhanced flight data recorders). Depending upon the scope
of the FAA's order and amended regulations, these requirements may cause the
Company to incur substantial, unanticipated expenses.
Capital Equipment and Debt Service
In 1998 the Company anticipates capital spending of
approximately $60 million consisting primarily of $40 million to own two CRJs
and one J-41 aircraft, $17 million for spare parts, engines and equipment, and
$3 million for other capital assets. The Company anticipates that it will be
able to arrange financing for the aircraft and spares through a combination of
manufacturer and third party financing arrangements on favorable terms, although
there is no certainty that such financing will be available or in place before
the commencement of deliveries. The Company currently has an agreement in
principle from a third party for approximately $126 million in debt financing
associated with the purchase of nine CRJ's to be delivered in 1998 and 1999.
Debt service for 1998 is estimated to be approximately $9.2
million reflecting increased borrowings related to the issuance of the 7%
Convertible Subordinated Notes and the purchase of four J-41 aircraft. The
foregoing amount does not include additional debt that may be required for the
financing of the CRJ spare parts and engines.
The Company believes that, in the absence of unusual
circumstances, its cash flow from operations, the accounts receivable credit
facility, and other available equipment financing will be sufficient to meet its
working capital needs, capital expenditures, and debt service requirements for
the next twelve months.
Inflation
Inflation has not had a material effect on the Company's
operations.
Recent Accounting Pronouncements
In July 1997, the Financial Accounting Standards Board
("FASB") issued Statement No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income", which requires that comprehensive income and the associated income tax
expense or benefit be reported in financial statements with the same prominence
as other financial statements with an aggregate amount of comprehensive income
reported in that same financial statement. "Comprehensive Income" refers to
revenues, expenses, gains and losses that under GAAP are not included in net
income. The impact of SFAS No. 130 will not change levels of net income, but
will result in new disclosure requirements for the Company.
In July 1997, the FASB also issued Statement No. 131 ("SFAS
No. 131"), "Disclosures About Segments of an Enterprise and Related Information"
which requires disclosure for each segment, for which the chief operating
decision maker organizes the company for making operating decisions and
assessing performance. Reportable segments are based on products and services,
geography, legal structure, management structure and any manner in which
management disaggregates the company. The impact of SFAS No. 131 will also
result in new disclosure requirements for the Company.
Recently, the American Institute of Certified Public
Accountants issued a proposed statement of position on accounting for start-up
costs, including preoperating costs related to the introduction of new fleet
types by airlines. The proposed accounting guidelines would require companies to
expense start-up costs as incurred. The FASB recently approved the proposed
guidelines, and they will take effect for fiscal years beginning after December
15, 1998. The Company has deferred certain start-up costs related to the
introduction of the CRJs and is amortizing such costs to expense ratably over
four years. The Company will be required to expense any unamortized amounts
remaining as of January 1, 1999. The Company estimates the remaining unamortized
balance for deferred start-up costs will be approximately $1.4 million on
January 1, 1999.
Item 8. Consolidated Financial Statements
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report for the year ended December 31, 1997
Report of Independent Certified Public Accountants for the
years ended December 31, 1995 and 1996 34 December 31, 1995 and 1996
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 38 December 31, 1995, 1996 and
1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
The Board of Directors and Stockholders
Atlantic Coast Airlines, Inc.
We have audited the accompanying consolidated balance sheet of Atlantic Coast
Airlines, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Coast
Airlines, Inc. and subsidiary as of December 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Washington, D.C. KPMG Peat Marwick LLP
January 28, 1998, except as to note 17,
which is as of March 4, 1998
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Atlantic Coast Airlines, Inc.
We have audited the accompanying consolidated balance sheet of Atlantic Coast
Airlines, Inc. and Subsidiary, as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Coast
Airlines, Inc. and Subsidiary at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Washington, D.C.
January 24, 1997, except for Note 18, The date which is May 29, 1997
Atlantic Coast Airlines, Inc.
and Subsidiary
Consolidated Balance Sheets
(In thousands, except for share data and par values)
December 31,
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 21,470 $ 39,167
Short term investments - 10,737
Accounts receivable, net 15,961 21,621
Expendable parts and fuel inventory, net 1,759 2,477
Prepaid expenses and other current assets 2,554 2,855
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total current assets 41,744 76,857
Property and equipment at cost, net of accumulated depreciation and
amortization 16,157 40,638
Preoperating costs, net of accumulated amortization 225 2,004
Intangible assets, net of accumulated amortization 2,882 2,613
Deferred tax asset 3,140 688
Debt issuance costs, net of accumulated amortization - 3,051
Aircraft deposits 570 19,040
Other assets 40 4,101
- ------------------------------------------------------------------------------------ ----------------- ------------------
Total assets $ 64,758 $ 148,992
- -------------------------------------------------------------