ATLANTIC COAST AIRLINES HOLDINGS INC - 10-Q Quarterly Report

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

ATLANTIC COAST AIRLINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

As of November 1, 2003, there were 45,333,310 shares of common stock, par value $.02 per share, outstanding.

Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Balance Sheets


			December 31, 2002			September 30, 2003
(In thousands except for share and per share data)						(Unaudited)

Assets
Current:
	Cash and cash equivalents		$	29,261		$	13,925
	Short term investments			213,360			211,720
	Accounts receivable, net			13,870			26,082
	Expendable parts and fuel inventory, net			14,317			17,210
	Prepaid expenses and other current assets			38,610			89,130
	Deferred tax asset			16,114			12,001

		Total current assets		325,532			370,068
Restricted cash				—			14,816
Property and equipment at cost, net of accumulated depreciation and amortization				195,413			287,922
Intangible assets, net of accumulated amortization				1,741			1,730
Debt issuance costs, net of accumulated amortization				3,249			2,958
Aircraft deposits				44,810			44,210
Other assets				4,393			4,171

		Total assets	$	575,138		$	725,875

Liabilities and Stockholders’ Equity
Current:
	Accounts payable		$	22,475		$	20,029
	Current portion of long-term debt			4,900			7,444
	Current portion of capital lease obligations			1,449			1,138
	Accrued liabilities			84,377			88,252
	Accrued aircraft early retirement charge			14,700			1,844

		Total current liabilities		127,901			118,707
Long-term debt, less current portion				53,540			107,651
Capital lease obligations, less current portion				751			59
Deferred tax liability				22,384			40,206
Deferred credits, net				61,903			102,022
Accrued aircraft early retirement charge, less current portion				31,768			10,039
Other long-term liabilities				1,523			1,749

		Total liabilities		299,770			380,433

Stockholders’ equity:
Common stock: $.02 par value per share; shares authorized 130,000,000; shares issued 50,255,184 and 50,403,662 respectively; shares outstanding 45,195,115 and 45,332,685 respectively				1,005			1,008
Additional paid-in capital				151,103			152,228
Less: Common stock in treasury, at cost, 5,060,069 and 5,070,977 shares respectively				(35,586	)		(35,717	)
Retained earnings				158,846			227,908
Accumulated other comprehensive income				—			15

		Total stockholders’ equity		275,368			345,442

		Total liabilities and stockholders’ equity	$	575,138		$	725,875

Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

Three months ended September 30,

(In thousands, except for per share data)

2002

2003

Operating revenues:

Passenger

192,220

217,279

Other

2,813

3,757

Total operating revenues

195,033

221,036

Operating expenses:

Salaries and related costs

51,389

51,845

Aircraft fuel

31,156

35,119

Aircraft maintenance and materials

19,655

20,317

Aircraft rentals

28,293

32,406

Traffic commissions and related fees

5,517

5,682

Facility rents and landing fees

11,197

13,102

Depreciation and amortization

5,534

7,780

Other

21,673

17,411

Aircraft early retirement charge

7,568

—

Total operating expenses

181,982

183,662

Operating income

13,051

37,374

Other income (expense):

Interest income

1,436

588

Interest expense

(1,061

)

(1,797

)

Other, net

(10

)

Total other income

394

(1,219

)

Income before income tax provision

13,445

36,155

Income tax provision

4,945

14,823

Net income

8,500

21,332

Income per share:

Basic:

Net income

0.19

0.47

Diluted:

Net income

0.19

0.47

Weighted average shares outstanding:

-Basic

45,194

45,333

-Diluted

45,484

45,425

Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

Nine months ended September 30,

(In thousands, except for per share data)

2002

2003

Operating revenues:

Passenger

548,522

639,601

Other

7,670

12,774

Total operating revenues

556,192

652,375

Operating expenses:

Salaries and related costs

146,253

161,023

Aircraft fuel

82,809

107,428

Aircraft maintenance and materials

53,616

62,967

Aircraft rentals

82,356

96,501

Traffic commissions and related fees

15,786

17,949

Facility rents and landing fees

32,696

37,803

Depreciation and amortization

15,067

20,899

Other

59,423

63,960

Aircraft early retirement charge

2,804

(34,586

)

Total operating expenses

490,810

533,944

Operating income

65,382

118,431

Other income (expense):

Interest income

3,154

1,791

Interest expense

(3,284

)

(4,489

)

Government compensation

944

1,520

Other, net

620

(199

)

Total other income (expense)

1,434

(1,377

)

Income before income tax provision

66,816

117,054

Income tax provision

26,560

47,992

Net income

40,256

69,062

Income per share:

Basic:

Net income

0.89

1.53

Diluted:

Net income

0.87

1.52

Weighted average shares outstanding:

-Basic

44,997

45,269

-Diluted

46,136

45,365

Atlantic Coast Airlines Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)


*Nine months ended September 30,*
(In thousands)				2002			2003

Cash flows from operating activities:
	Net income			$	40,256		$	69,062
	Adjustments to reconcile net income to net cash used in operating activities:
		Depreciation and amortization			15,641			21,455
		Loss on disposal of assets			360			1,672
		Amortization of deferred credits			(3,616	)		(5,629	)
		Capitalized interest (net)			(419	)		984
		Other			2,127			1,031
		Changes in operating assets and liabilities:
			Accounts receivable		5,419			(12,276	)
			Expendable parts and fuel inventory		(4,552	)		(3,516	)
			Prepaid expenses and other current assets		(35,090	)		(50,520	)
			Accounts payable		4,692			1,585
			Accrued liabilities		29,049			(8,550	)

Net cash provided by operating activities					53,867			15,298

Cash flows from investing activities:
	Purchases of property and equipment				(28,025	)		(74,671	)
	Proceeds from sales of assets				28			—
	Purchases of short term investments				(488,975	)		(316,440	)
	Sales of short term investments				309,820			318,095
	Increase in restricted cash				—			(14,816	)
	Refunds of aircraft deposits				3,400			2,400
	Payments of aircraft deposits and other				(14,170	)		(1,845	)

Net cash used in investing activities					(217,922	)		(87,277	)

Cash flows from financing activities:
	Proceeds from issuance of long-term debt				—			60,078
	Payments of long-term debt				(3,258	)		(3,423	)
	Payments of capital lease obligations				(1,015	)		(1,081	)
	Deferred financing costs and other				57			95
	Purchase of treasury stock				(283	)		(132	)
	Proceeds from exercise of stock options				7,041			1,106

Net cash provided by financing activities					2,542			56,643

Net decrease in cash and cash equivalents					(161,513	)		(15,336	)
Cash and cash equivalents, beginning of period					173,669			29,261

Cash and cash equivalents, end of period				$	12,156		$	13,925

ATLANTIC COAST AIRLINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The accompanying consolidated financial statements include the accounts of Atlantic Coast Airlines Holdings, Inc. (“ACAI”) and its wholly owned subsidiaries, Atlantic Coast Airlines (“ACA”) and Atlantic Coast Jet, LLC (“ACJet”), (collectively, the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission. ACJet and its predecessor have not had any operating activity since June 30, 2001. All significant intercompany accounts and transactions have been eliminated in consolidation. The information furnished in these unaudited condensed consolidated financial statements reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such consolidated financial statements. Results of operations for the three and nine months presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2003. Certain amounts as previously reported have been reclassified to conform to the current period presentation. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

The Company applies the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to account for its stock options. SFAS No. 123 allows companies to continue to apply the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations and provide pro forma net income and pro forma earnings per share disclosures for employee stock options granted as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. The Company accounts for non-employee stock option awards in accordance with SFAS No. 123.

As a result of applying APB Opinion No. 25, and related interpretations to the current period, no stock-based employee compensation cost is reflected in net income, as all options granted to employees had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.


*Three months ended September 30,*
*(in thousands except for per share data)*		2002			2003

Net income, as reported		$	8,500		$	21,332
Less total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1,660	)		(1,717	)

Pro forma net income		$	6,840		$	19,615

Earnings per share:
	Basic — as reported	$	.19		$	.47

	Basic — pro forma	$	.15		$	.43

	Diluted — as reported	$	.19		$	.47

	Diluted — pro forma	$	.15		$	.43


*Nine months ended September 30,*
*(in thousands except for per share data)*		2002			2003

Net income, as reported		$	40,256		$	69,062
Less total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(4,898	)		(3,836	)

Pro forma net income		$	35,358		$	65,226

Earnings per share:
	Basic — as reported	$	.89		$	1.53

	Basic — pro forma	$	.79		$	1.44

	Diluted — as reported	$	.87		$	1.52

	Diluted — pro forma	$	.77		$	1.44

On September 28, 2001, the Company entered into an asset-based lending agreement with Wachovia Bank, N.A. (“Wachovia”) that initially provided the Company with a line of credit for up to $25.0 million. Under the terms of the line of credit, it was necessary for the Company to request a covenant waiver as a result of the Chapter 11 bankruptcy filing by United Airlines. In order to obtain this waiver, the Company agreed to reduce the size of the line of credit to $17.5 million and to revise certain covenants. On July 31, 2003, the Company entered into a new agreement with Wachovia which replaced the line of credit. This new agreement, which has no expiration date, provides for the issuance of letters of credit, and is collateralized by certificates of deposit. Under this agreement, the Company has $14.8 million on deposit with Wachovia as collateral for letters of credit issued on behalf of the Company. The amounts on deposit with Wachovia are shown as restricted cash on the Company’s balance sheet as of September 30, 2003.

As of September 30, 2003, the Company had firm orders for 36 Bombardier CRJ200s (“CRJs”) in addition to the 85 previously delivered, and options for 80 additional CRJs. Due to the United bankruptcy, the effect of the war with Iraq, and the state of the financing markets, the Company entered into an agreement with Bombardier during the second quarter of 2003 regarding financing and aircraft delivery schedules. Under the revised agreement, the Company took delivery of six CRJs in May 2003 and committed to accept two additional CRJs which were delivered in October 2003. The Company also has future commitments for six CRJs to be delivered in late 2004 and 28 CRJs to be delivered in 2005. These post-2003 commitments are subject to certain conditions which, unless waived by the Company, would not be satisfied if the Company is pursuing its plan to operate as a low-fare airline. In the event these conditions are not met and not waived by the Company by April 2005, deposits and progress payments for any then undelivered aircraft would be first used to repay any outstanding debt on the two CRJs delivered in October 2003 with any remaining balance converted into credit memoranda for the purchase of other aircraft, goods and services from Bombardier. Currently, the Company has $38.8 million on deposit with Bombardier for aircraft orders and has outstanding debt owed to Bombardier, resulting from the financing of the two CRJs delivered in October 2003, of $30.7 million.


Delaware		13-3621051
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

45200 Business Court, Dulles, Virginia		20166
(Address of principal executive offices)		(Zip Code)