FLYI INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

Commission file number 0-21976

FLYi, INC.

(Exact name of registrant as specified in its charter)


Delaware		13-3621051

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


45200 Business Court, Dulles, Virginia		20166

(Address of principal executive offices)		(Zip Code)

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

Atlantic Coast Airlines Holdings, Inc.

(Former name, former address and former fiscal year, if changed since last report)

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

Yes [X] No [ ]

As of August 2, 2004, there were 45,339,810 shares of common stock, par value $.02 per share, outstanding.

Part I. Financial Information
Item 1. Financial Statements

FLYi, Inc.
Condensed Consolidated Balance Sheets


					June 30, 2004
(In thousands except for share and per share data)	December 31, 2003				(Unaudited)
Assets
Current:
Cash and cash equivalents		$	95,879		$	121,284
Short term investments			202,055			224,147
Restricted cash			—			5,954
Accounts receivable, net			9,071			19,438
Expendable parts and fuel inventory, net			18,440			18,938
Prepaid expenses and other current assets			58,341			122,568
Deferred tax asset			14,592			17,708

Total current assets			398,378			530,037
Restricted cash			14,829			16,428
Property and equipment at cost, net of accumulated depreciation and amortization			314,800			309,801
Intangible assets, net of accumulated amortization			1,730			1,730
Debt issuance costs, net of accumulated amortization			2,804			5,579
Aircraft deposits			46,990			68,495
Other assets			3,713			2,273

Total assets		$	783,244		$	934,343

Liabilities and Stockholders’ Equity
Current:
Current portion of long-term debt		$	8,927		$	37,604
Current portion of capital lease obligations			159			485
Accounts payable			24,842			35,737
Air traffic liability			2,569			9,964
Accrued liabilities			88,366			87,371
Accrued aircraft early retirement charge			2,666			9,449

Total current liabilities			127,529			180,610
Long-term debt, less current portion			133,971			245,448
Capital lease obligations, less current portion			356			1,040
Deferred tax liability			42,267			39,304
Deferred credits, net			102,115			96,493
Accrued aircraft early retirement charge, less current portion			15,313			32,978
Other long-term liabilities			2,279			2,658

Total liabilities			423,830			598,531

Stockholders’ equity:
Common stock: $.02 par value per share; shares authorized 130,000,000; shares issued 50,404,287 and 50,404,787 respectively; shares outstanding 45,333,310 and 45,333,810, respectively			1,008			1,008
Additional paid-in capital			152,485			152,488
Less: Common stock in treasury, at cost, 5,070,977 and 5,070,977 shares respectively			(35,718	)		(35,718	)
Accumulated other comprehensive income			(5	)		(158	)
Retained earnings			241,644			218,192

Total stockholders’ equity			359,414			335,812

Total liabilities and stockholders’ equity		$	783,244		$	934,343

See accompanying notes to the condensed consolidated financial statements.

FLYi, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)


Three months ended June 30,
(In thousands, except for per share data)	2003			2004
Operating revenues:
Passenger	$	223,720		$	189,708
Other		3,410			778

Total operating revenues		227,130			190,486

Operating expenses:
Salaries and related costs		53,657			53,539
Aircraft fuel		32,458			39,042
Aircraft maintenance and materials		20,390			23,012
Aircraft rentals		32,356			31,254
Sales and marketing		5,831			17,709
Facility rents and landing fees		12,674			12,673
Depreciation and amortization		7,009			10,400
Other		20,135			22,017
Aircraft early retirement charge		(34,586	)		21,867

Total operating expenses		149,924			231,513

Operating income (loss)		77,206			(41,027	)
Other income (expense):
Interest income		250			1,349
Interest expense		(1,324	)		(4,097	)
Government compensation		1,520			—
Other, net		(136	)		(114	)

Total other income (expense)		310			(2,862	)

Income (loss) before income tax provision		77,516			(43,889	)
Income tax provision (benefit)		31,781			(16,813	)

Net income (loss)	$	45,735		$	(27,076	)

Income (loss) per share:
Basic:
Net income (loss)	$	1.01		$	(0.60	)

Diluted:
Net income (loss)	$	1.01		$	(0.60	)

Weighted average shares outstanding:
-Basic		45,247			45,334
-Diluted		45,344			45,334

See accompanying notes to the condensed consolidated financial statements.

FLYi, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)


Six months ended June 30,
(In thousands, except for per share data)	2003			2004
Operating revenues:
Passenger	$	422,322		$	399,146
Other		9,017			3,391

Total operating revenues		431,339			402,537

Operating expenses:
Salaries and related costs		109,178			107,505
Aircraft fuel		72,309			77,991
Aircraft maintenance and materials		42,650			44,190
Aircraft rentals		64,095			62,961
Sales and marketing		12,267			25,084
Facility rents and landing fees		24,701			25,802
Depreciation and amortization		13,119			17,694
Other		46,549			45,433
Aircraft early retirement charge		(34,586	)		28,618

Total operating expenses		350,282			435,278

Operating income (loss)		81,057			(32,741	)
Other income (expense):
Interest income		1,203			2,138
Interest expense		(2,692	)		(6,999	)
Government compensation		1,520			—
Other, net		(189	)		(346	)

Total other expense		(158	)		(5,207	)

Income (loss) before income tax provision		80,899			(37,948	)
Income tax provision (benefit)		33,169			(14,496	)

Net income (loss)	$	47,730		$	(23,452	)

Income (loss) per share:
Basic:
Net income (loss)	$	1.06		$	(0.52	)

Diluted:
Net income (loss)	$	1.05		$	(0.52	)

Weighted average shares outstanding:
-Basic		45,236			45,334
-Diluted		45,334			45,334

See accompanying notes to the condensed consolidated financial statements.

FLYi, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)


Six months ended June 30,
(In thousands)	2003			2004
Cash flows from operating activities:
Net income (loss)	$	47,730		$	(23,452	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		13,512			18,192
Loss on disposal of fixed assets		1,282			984
Provision for inventory obsolescence		348			743
Amortization and write-off of deferred credits		(3,314	)		(5,595	)
Amortization of deferred financing costs		249			615
Capitalized interest (net)		914			(369	)
Other		31			—
Changes in operating assets and liabilities:
Accounts receivable		(23,533	)		(9,432	)
Expendable parts and fuel inventory		(3,475	)		(1,241	)
Prepaid expenses and other current assets		(48,808	)		(34,970	)
Accounts payable		8,899			10,763
Accrued liabilities		(4,596	)		25,149

Net cash used in operating activities		(10,761	)		(18,613	)

Cash flows from investing activities:
Purchases of property and equipment		(70,149	)		(12,768	)
Proceeds from sales of assets		—			230
Purchases of short term investments		(199,700	)		(214,825	)
Sales of short term investments		210,935			192,580
Increase in restricted cash		—			(7,553	)
Refunds of aircraft deposits		2,400			—
Payments of aircraft deposits and other		(1,802	)		(31,206	)

Net cash used in investing activities		(58,316	)		(73,542	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		60,078			125,000
Payments of long-term debt		(1,850	)		(3,846	)
Payments of capital lease obligations		(711	)		(207	)
Deferred financing costs and other		(77	)		(3,391	)
Purchase of treasury stock		(131	)		—
Proceeds from exercise of stock options		1,105			4

Net cash provided by financing activities		58,414			117,560

Net (decrease) increase in cash and cash equivalents		(10,663	)		25,405
Cash and cash equivalents, beginning of period		29,261			95,879

Cash and cash equivalents, end of period	$	18,598		$	121,284

See accompanying notes to the condensed consolidated financial statements.

FLYi, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the accounts of FLYi, Inc. (“FLYi”) 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 and six 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. Certain prior period amounts have been reclassified to conform to the current period presentation.

2. STOCKHOLDERS’ EQUITY

The Company applies the provisions of Statement of Financial Accounting Standards (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 Accounting Principles Board (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 June 30,
(in thousands except for per share data)	2003			2004
Net income (loss), as reported	$	45,735		$	(27,076	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—			—
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(1,129	)		(1,161	)

Pro forma net income (loss)	$	44,606		$	(28,237	)

Earnings (loss) per share:
Basic - as reported	$	1.01		$	(0.60	)

Basic - pro forma	$	.99		$	(0.62	)

Diluted - as reported	$	1.01		$	(0.60	)

Diluted - pro forma	$	.98		$	(0.62	)


*Six months ended June 30,*
*(in thousands except for per share data)*	2003			2004
Net income (loss), as reported	$	47,730		$	(23,452	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		14			—
Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2,119	)		(2,803	)

Pro forma net income (loss)	$	45,625		$	(26,255	)

Earnings (loss) per share:
Basic - as reported	$	1.06		$	(0.52	)

Basic - pro forma	$	1.01		$	(0.58	)

Diluted – as reported	$	1.05		$	(0.52	)

Diluted - pro forma	$	1.01		$	(0.58	)

3. DEBT

Long-term debt consists of the following at December 31, 2003 and June 30, 2004, respectively:


	December 31,
(in thousands)	2003		June 30, 2004
Equipment Notes associated with Pass Through Trust Certificates, due January 1, 2008 and January 1, 2010, principal payable annually through January 1, 2006 and semi-annually thereafter through maturity, interest payable semi-annually at 7.49% throughout term of notes, collateralized by four J-41 aircraft.	$	10,008	$	10,008
Notes payable to institutional lenders, due between October 23, 2010 and May 15, 2015, principal payable semiannually with interest ranging from 5.65% to 7.63% through maturity, collateralized by four CRJ aircraft.		41,794		40,086
Note payable to institutional lender, due October 2, 2006, principal payable semiannually with interest at 6.56%, collateralized by one J-41 aircraft.		1,738		1,472
Notes payable to institutional lender, due November 2019, principal payable semiannually with interest at 5.11%, collateralized by four CRJ aircraft.		58,897		57,685
Notes payable, due October 2005, principal payable monthly with variable rate based on 1-month LIBOR rate plus 2.25% through maturity, collateralized by two CRJ aircraft.		30,461		29,801
Notes payable to Airbus for deferrable predelivery payments, due upon delivery of aircraft with interest at 6.5%		—		19,000
6% Convertible Senior notes – due 2034		—		125,000

Total		142,898		283,052
Less: Current Portion		8,927		37,604

	$	133,971	$	245,448

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 FLYi, 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. In connection with this sale, the Company granted the initial purchaser an option to purchase, on or before March 22, 2004, up to an additional $25 million principal amount of the Notes. The Company and the initial purchaser agreed to extend the option exercise period through April 19, 2004. The initial

purchaser did not exercise the option to purchase these additional notes. The Company filed a registration statement with the U.S. Securities and Exchange Commission on May 24, 2004 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. This registration statement, as amended, was declared effective on July 2, 2004.

In April 2004, the Company finalized the purchase agreement for the previously announced firm order of 15 Airbus single aisle aircraft. The agreement specifies Airbus will allow the Company to defer a portion of the predelivery payments for each aircraft as part of a financing arrangement with the manufacturer. The portion of the deferred predelivery payment is payable upon delivery of the aircraft plus accrued interest at an interest rate of 6.5%. Delivery of the purchased aircraft will begin in July 2005.

4. INCOME TAXES

The Company’s net loss for the second quarter 2004 and the six months ended June 30, 2004 reflect a benefit from income taxes of approximately 38.3% and 38.2% respectively, as compared to income tax expense of 41.0% for the three and six months ended June 30, 2003. The Company will realize this tax benefit as a carry back of net operating losses against taxes paid for the 2002 and 2003 tax years. The Company estimates that the total amount of its two year tax carry-back may be exhausted by the projected losses to be incurred for the remainder of 2004. The ability to record a tax benefit from future losses once the carry-back amount is exhausted will depend on the Company being able to generate taxable income in the future periods.

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:


Three months ended June 30,
(in thousands)	2003		2004
Income (loss) (basic and diluted)	$	45,735	$	(27,076	)

Weighted average shares outstanding (basic)		45,247		45,334
Incremental shares related to stock options		97		—

Weighted average shares outstanding (diluted)		45,344		45,334

Number of antidilutive options outstanding		4,406		5,925


Six months ended June 30,
(in thousands)	2003		2004
Income (basic and diluted)	$	47,730	$	(23,452	)

Weighted average shares outstanding (basic)		45,236		45,334
Incremental shares related to stock options		98		—

Weighted average shares outstanding (diluted)		45,334		45,334

Number of antidilutive options outstanding		4,459		5,687

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:


Three months ended June 30,
(in thousands)	2003			2004
Net income (loss)	$	45,735		$	(27,076	)
Other comprehensive income - net change in unrealized gain/loss on available-for-sale securities		(5	)		(163	)

Comprehensive income (loss)	$	45,730		$	(27,239	)


Six months ended June 30,
(in thousands)	2003		2004
Net income (loss)	$	47,730	$	(23,452	)
Other comprehensive income - net change in unrealized gain/loss on available-for-sale securities		3		(153	)

Comprehensive income (loss)	$	47,733	$	(23,605	)

7. SUPPLEMENTAL CASH FLOW INFORMATION


Six months ended June 30,
(in thousands)	2003		2004
Cash paid during the period for:
Interest	$	2,022	$	3,833
Income taxes		435		5,148
Non-cash transactions
Purchase of aircraft		52,577		—
Financed aircraft deposits		—		19,000

8. AIRCRAFT EARLY RETIREMENT CHARGE

The Company is utilizing an all jet fleet with its operations as an independent low-fare carrier. Therefore, the British Aerospace Jetstream (“J-41s”) 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 thirteen J-41s during the second quarter 2004, ten of which were leased. The Company recorded an aircraft early retirement charge of $21.9 million (pre-tax) and $28.6 million (pre-tax) for the three months and six months ended June 30, 2004, respectively. The estimated charge relates to the retirement of ten leased J-41s in the second quarter and a total of thirteen leased J-41s (includes three leased J-41s retired in first quarter) for the six months ended June 30, 2004. The estimated early retirement charge in the second quarter assumes remarketing income of $3.2 million (pre-tax) over the remaining terms of the leases based on current market conditions for subleasing transactions of J-41s. The Company plans to actively remarket these J-41s through subleasing of the aircraft. As of June 30, 2004, the Company has written down the book value of its five owned J-41s to current estimated fair market value.

The last nine remaining J-41s (five scheduled and four spares) will be retired in the third quarter 2004. The Company estimates that it will expense approximately $21 million (pre-tax) relating to the remaining eight leased J-41s as these aircraft are retired in August 2004. The remaining owned aircraft has already been written down to estimated fair market value.

As of June 30, 2004, the Company had net liabilities of $42.4 million accrued for the seventeen leased J-41 aircraft that have been early retired and placed in long term storage. The Company will make adjustments to the estimated accrued liabilities 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. Any sales involving owned aircraft that were originally financed through the Equipment Notes associated with Pass Through Trust Certificates, due January 1, 2008 and January 1, 2010, will require payment of the unpaid principal balance and accrued interest, if any, plus a make-whole premium as stipulated in the agreements.

During the second quarter of 2003, the Company reversed a portion of the J-41 charge previously taken by recording a $34.6 million (pre-tax) credit to income due to delays in the Company’s retirement schedule for its J-41 turboprop fleet as a result of uncertainty over the Company’s contractual relationship with United. As of June 30, 2003, the Company had liabilities of $11.9 million accrued for the two J-41 aircraft that had been early retired and placed in long-term storage.


(in thousands)	2003			2004
Beginning balance as of January 1	$	46,468		$	17,979
Estimated charge for aircraft early retirement (excludes the write-off of deferred credits of $463 in 2004)		—			29,081
Reversal of estimated charge for aircraft early retirement		(34,586	)		—
Prepaid lease payments applied to liability		—			(2,058	)
Accretion of interest		—			415
Cash payments	</