SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2004

Commission file number 0-21976

ATLANTIC COAST AIRLINES HOLDINGS, INC.

Registrant’s telephone number, including area code: (703) 650-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ          No o

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

Yes þ          No o

As of May 1, 2004, there were 45,333,810 shares of common stock, par value $.02 per share, outstanding.

Part I. Financial Information

Item 1. Financial Statements

See accompanying notes to the condensed consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

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

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the accounts of Atlantic Coast Airlines Holdings, Inc. (“ACAI”) and its wholly owned subsidiary, Atlantic Coast Airlines (“ACA”), (collectively, the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated in consolidation. The information furnished in these 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 months presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2004. 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, 2003.

2. STOCKHOLDERS’ EQUITY

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.

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3. DEBT

Long-term debt consists of the following at December 31, 2003 and March 31, 2004, respectively:

In February 2004, the Company sold $125 million of Convertible Senior Notes (“Notes”). The Notes have an interest rate of 6% and are convertible into Atlantic Coast Airlines Holdings, Inc. common stock at a conversion rate of 90.2690 shares per $1,000 principal amount of the Notes (a conversion price of approximately $11.08) once the Company’s common stock share price reaches 120% of the conversion price or $13.30. The Notes mature in 2034 and interest is payable semi-annually beginning August 15, 2004. The Company may redeem the Notes either in whole or in part beginning 2007 at the redemption price, plus accrued and unpaid interest and liquidated damages, if any. The holders may require the Company to repurchase the Notes on February 15 of 2009, 2014, 2019, 2024 and 2029 at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest and liquidated damages, if any.

The Company has agreed to register the resale of the Notes and the sale of the shares of the Company’s Common Stock issuable upon conversion of the Notes pursuant to a shelf registration statement filed with the U.S. Securities and Exchange Commission. If the registration statement is not filed by May 25, 2004 or declared effective by August 23, 2004, or if the Company does not keep it available for requisite periods, then the Company may be required to pay liquidated

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damages to the holders of the Notes and shares received upon conversion. The liquidated damages would be in the form of payment (in addition to any interest that may be payable) on the principal amount or value of the securities entitled to registration, at a rate per annum equal to 0.25% or 0.50%, depending on the circumstances.

4. INCOME TAXES

The Company’s effective tax rate for federal and state income taxes was 39.0% for the three months ended March 31, 2004, as compared to 41.0% for the three months ended March 31, 2003.

5. INCOME PER SHARE

Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted average number of common shares outstanding and common stock equivalents, which consist of shares subject to stock options computed using the treasury stock method. A reconciliation of the numerator and denominator used in computing basic and diluted income per share is as follows:

6. COMPREHENSIVE INCOME

Comprehensive income includes changes in the unrealized gains and losses on available-for-sale securities. The following statements present comprehensive income for:

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7. SUPPLEMENTAL CASH FLOW INFORMATION

8. AIRCRAFT EARLY RETIREMENT CHARGE

The Company anticipates utilizing an all jet fleet as it moves forward with its plans to become an independent low-fare carrier. Therefore, the J-41 turboprops currently operated by the Company in its United Express operations will be retired upon their exit from the United Express program. As the aircraft exit the United Express program, the Company records a charge for the retirement of leased aircraft. The Company retired three leased J-41s in the first quarter 2004 and recorded a charge of $6.8 million pre-tax. No aircraft early retirement charges were recorded in first quarter 2003.

The Company currently anticipates that 17 of the remaining J-41s will be early retired during the second quarter 2004 and the last five remaining J-41s will be retired in the third quarter 2004. The Company estimates that it will expense approximately $45 million (pre-tax) relating to the remaining 18 leased J-41s as the aircraft are retired. The estimated charge currently assumes no remarketing income will be received based on the limited market demand for these aircraft. However, the Company plans to actively remarket these J-41s through leasing, subleasing or outright sale of the aircraft and will make adjustments to the estimated charge as deemed necessary based on its ability to remarket the aircraft. Any sales arrangements involving leased aircraft may require the Company to make payments to the lessor to cover shortfalls between sale prices and lease stipulated loss values.

As of March 31, 2004, the Company had liabilities of $23.3 million accrued for the seven leased J-41 aircraft that have been early retired and not yet disposed of.

Changes in the aircraft early retirement charge liability for the quarters ending March 31, 2003 and March 31, 2004, respectively, are as follows:

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9. COMMITMENTS AND CONTINGENCIES

Restricted Cash

On July 31, 2003, the Company entered into a new agreement with Wachovia that replaced a previous 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 $16.1 million on deposit with Wachovia as collateral for letters of credit issued on behalf of the Company as of March 31, 2004.

On January 9, 2004, the Company posted a $10.0 million cash bond with regard to a preliminary injunction enjoining Mesa Air Group, Inc. (“Mesa”) from proceeding with its consent solicitation or exchange offer announced in October 2003. The bond was posted as required by the United States District Court of the District of Columbia’s order dated December 30, 2003. At the District Court’s direction, the cash bond was placed in an interest bearing account invested in U.S. Treasury Bills.

The amounts on deposit with Wachovia and the cash bond are shown as restricted cash on the Company’s balance sheet as of March 31, 2004.

Aircraft

During the second quarter of 2003, the Company entered into an agreement with Bombardier to amend its aircraft purchase agreement. Under the revised agreement, the Company had future commitments for six CRJs to be delivered in late 2004 and an additional 28 CRJs to be delivered in 2005. These commitments are subject to certain conditions that, unless waived by the Company, will not be satisfied as a result of United’s rejection of the United Express agreement. In the event the Company does not waive these conditions by April 2005, deposits and progress payments currently held by Bombardier will be used to repay any outstanding debt owed to Bombardier on the two CRJs delivered in October 2003 and thereafter any remaining balance will be converted into credit memoranda which may be applied to the purchase of other aircraft, goods or 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 $30.1 million.

In November 2003, the Company entered into a binding memorandum of understanding with Airbus for a firm order of ten A319 aircraft and five A320 aircraft. In April 2004, the Company finalized the purchase agreement with Airbus. The order for five Airbus A320 aircraft is convertible into an order for five A319 aircraft at the option of the Company.

In addition to the purchase agreement with Airbus, the Company entered into leasing commitments from operating lessors for ten additional A319 aircraft in November 2003. During the first quarter of 2004, the Company executed the lease agreements for the ten Airbus A319 aircraft with third party leasing companies. The leased aircraft will be delivered beginning in September 2004 through May 2005. The initial lease terms for the aircraft range from five to twelve years. In addition, the leases require the Company to post security deposits, and to make monthly rent and maintenance reserve payments to the third party leasing companies.

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10. SUBSEQUENT EVENTS

In April 2004, the Company reached an agreement with United Airlines providing for United to reject in bankruptcy its United Express agreement with the Company and for a transition schedule and exit plan for the Company’s United Express operations. The agreement was approved by the bankruptcy court overseeing United’s bankruptcy. The transition is scheduled to begin June 4, 2004 and continue through August 5, 2004. The Company’s fleet of CRJs and J-41s will exit the United Express Program in stages over the two month transition.

In April 2004, the Company received formal notification from Delta Air Lines that it will end its fee-per-block hour agreement with the Company by invoking its right under the Delta Connection Agreement to terminate without cause upon 180 days notice. Under the terms of the Company’s Delta Connection Agreement, if Delta terminates without cause, the Company has the right during the 180-day notification period to require Delta to assume the leases on some or all of the 30 328JETs used in the Company’s Delta Connection operation. If the Company exercises its right to require Delta to assume the leases on the 328JETs, the Company may not be able to extinguish its obligation under the leases for these aircraft if Delta or Delta’s assignee fails to meet certain financial conditions under the applicable leases at the time Delta becomes obligated to assume the leases.

In April 2004, the Company finalized the contract for the previously announced firm order of 15 Airbus single aisle aircraft and entered into lease agreements for two additional Airbus A319 aircraft with initial lease terms of 12 years.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

First Quarter Operating Statistics

¹“Cost per ASM (cents), adjusted” excludes an aircraft early retirement charge of $6.8 million in 2004 and no adjustment in 2003. See “Operating Expenses,” below.

Comparison of three months ended March 31, 2004, to three months ended March 31, 2003.

Results of Operations

     Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements and information that is based on management’s current expectations as of the date of this document. When used herein, the words “anticipate”, “believe”, “estimate” and “expect” and similar expressions, as they relate to the Company or its management, are intended to identify such forward-looking statements. Such forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause the actual results of the Company to be materially different from those reflected in such forward-looking statements. Such risks and uncertainties include, among others: the ability of the Company to implement its transition out of the United Express and Delta Connection programs; the ability to effectively implement its low-fare business strategy utilizing regional jets and Airbus aircraft, and to compete effectively as a low-fare carrier, including passenger response to the Company’s new service, and the response of United or other competitors with respect to service levels and fares in markets to be operated by the Company; the effects of high fuel prices on the Company; the ability of government agencies involved in airport operations to handle the

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increased number of flights and passengers anticipated at Dulles Airport without interference with airline operations; the ability to complete the acquisition of, obtain certification for, and secure financing of, its Airbus aircraft, and to successfully integrate these aircraft into its fleet; the ability to redeploy or assign to Delta or others the leases of the 328JET aircraft currently used in the Company’s Delta Connection operations: the possibility that the Company will remain obligated under the leases for 328JET aircraft currently used in the Delta Connection operations even if assigned to Delta, and would be obligated to fulfill those obligations should Delta default at any time prior to the expiration of the leases; unexpected costs or procedural complications arising from the insolvency of Fairchild Dornier GmbH, the manufacturer and equity owner of the 328JETs; the ability to successfully remarket the J-41 aircraft; the ability to successfully hire and train employees in sufficient numbers to implement the transition; the ability to reach agreement with AMFA and AFA-CWA on mutually satisfactory contracts; and general economic and industry conditions, any of which may impact the Company, its aircraft manufacturers and its other suppliers in ways that the Company is not currently able to predict. Certain of these and other risk factors are more fully disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The Company does not intend to update these forward-looking statements prior to its next required filing with the Securities and Exchange Commission.

          General

          Net income in the first quarter was $3.6 million, or $.08 per share on a diluted basis compared to $2.0 million or $.04 per share on a diluted basis for the same period last year. Net income for the first quarter of 2004 reflects the effects of an additional $3.3 million in passenger revenues related to the reconciliation of 2003 code share activity, an aircraft early retirement charge of $6.8 million in 2004 for the retirement of three leased J-41 aircraft, and approximately $4.5 million in 2004 for costs associated with the implementation of the Company’s independent low-fare carrier business strategy.

          Net income for the first quarter of 2003 reflects that increased 2003 and 2004 fee-per-departure rates paid by United Airlines were not set until the second quarter 2003, $1.0 million was paid to Delta in the first quarter of 2003 to remove contractual restrictions on the use of the Company’s ACJet subsidiary and its operating certificate, and $0.9 million was accrued in first quarter 2003 for additional maintenance and potential interest costs associated with a rate dispute with a vendor.

          Operating Revenues

          Passenger revenues increased 5.5% to $209.4 million for the three months ended March 31, 2004 from $198.6 million for the three months ended March 31, 2003. In 2003, the Company agreed to rate adjustments with its code share partners subsequent to the first quarter. The rate adjustments were retroactively applied to first quarter 2003 departures; therefore, an adjustment to passenger revenue of $12.3 million was recorded in the second quarter of 2003 related to first quarter departures. In the first quarter of 2004, the Company recognized $3.3 million in revenue related to the reconciliation of 2003 code share activity. Other factors that negatively impacted revenue for the first quarter of 2004 were decreases in departures resulting from aircraft utilization being lowered by United, the temporary grounding of the 328JETs for

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unscheduled engine maintenance, and the decrease in pass-through revenue related to the lower cost of fuel per gallon in first quarter 2004 compared to first quarter 2003.

          Other revenue decreased 53.4% to $2.6 million compared to $5.6 million for the same period last year. The decrease is primarily the result of decreased charter revenue from the Company’s charter operation in first quarter 2004 compared to first quarter 2003. The decrease in charter revenue was due to the Company’s decision, in March 2003, to continue to service its existing clients but to de-emphasize the solicitation of new charter business and to redeploy the 328JETs from the charter operations to the Delta operations because of unscheduled maintenance of the 328JETs used in the Delta operations.

          Operating Expenses

          A summary of operating expenses as a percentage of operating revenues and cost per ASM for the three months ended March 31, 2003, and 2004 is as follows:

          Total operating expenses increased 1.7% to $203.8 million for the quarter ended March 31, 2004 compared to $200.4 million for the quarter ended March 31, 2003. The primary cause of the increase in operating expenses was an early aircraft retirement charge of $6.8 million offset by decreases in salaries and related costs of $1.5 million, aircraft fuel of $0.9 million, and other expenses of $1.6 million. Other changes in relative costs per ASM that are not primarily attributable to the changes in capacity are as follows:

          The cost per ASM of salaries and related expenses decreased 4.0% to 4.8 cents in the first quarter of 2004 compared to 5.0 cents in the first quarter of 2003 primarily as a result of a salary reduction program implemented in second quarter 2003 and the reduction in employees related to the transition of certain outstations to other United Express partners.

          The cost per ASM of aircraft fuel decreased to 3.4 cents in the first quarter of 2004 compared to 3.6 cents in the first quarter of 2003. The decrease is primarily a result of a 3.3% decrease in the average cost per gallon of fuel to $1.24 in the first quarter of 2004 from $1.29 in the first quarter of 2003.

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          The cost per ASM of maintenance decreased 5.0% due primarily to $0.9 million in additional maintenance and potential interest costs associated with a rate dispute with a vendor that was included in first quarter 2003.

          Cost per ASM of facility rents and landing fees increased slightly to 1.2 cents in the first quarter of 2004 from 1.1 cents for the first quarter of 2003. The increase is primarily the result of increases in landing fees in the current year and the increase of CRJs used in the United program which have a higher landing fee rate.

          The cost per ASM of other operating expenses decreased to 2.2 cents in the first quarter of 2004 from 2.4 cents in the first quarter of 2003. In absolute dollars, other operating expenses decreased 6.0% to $24.8 million in the first quarter of 2004 from $26.4 million in the first quarter of 2003. The decreased costs were primarily the result of a $1.0 million payment to Delta to remove contractual restrictions on the use of the Company’s ACJet subsidiary and its operating certificate incurred in first quarter of 2003, reduction in insurance costs of $1.0 million, and a decrease in training costs of $1.9 million offset by an increase in legal costs of $1.0 million for the continuing litigation costs related to Mesa and approximately $4.2 million of additional legal and professional costs related to the implementation of the Independence Air business strategy.