Item 1. Business
General
This Annual Report on Form 10-K contains forward- looking statements, particularly those statements identified by such words as "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 (the "Company"), one of the largest regional airlines based on total revenues in the United States, serving thirty-nine destinations in seventeen states as of March 1, 1997, with approximately 421 scheduled departures each 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 operates primarily from United's East Coast hub at Washington-Dulles International Airport ("Washington- Dulles"), which serves the Washington, D.C., and Northern Virginia markets. As of March 1, 1997, the Company operated a fleet of fifty-six turboprop aircraft. In 1996, approximately 65% of the Company's traffic was point-to-point local travel or on-line connections, 32% connected with United flights, and 3% connected to flights of other carriers.
The Company's code-sharing relationship with United has contributed significantly to the Company's growth. The Company coordinates its schedules with United, particularly at Washington- Dulles, where United operates a hub for both domestic flights and service to Europe and Mexico, and participates with United in cooperative advertising and marketing agreements. The Company has a shared market identity with United, lists its flights under United's "UA" flight designator code in airline computerized reservation systems ("CRSs") and other published schedules, and awards United's "Mileage Plus" frequent flyer miles to the Company's passengers. The Company also participates in United's "Apollo" reservation system and other major CRSs, uses the United Express logo and has exterior aircraft paint schemes similar to those of United.
The Company believes that its relationship with United is strong, and that United has significant business incentives for maintaining that relationship. At Washington-Dulles, United's operations are predominately international and transcontinental flights with a lesser number of short haul flights. The ability of the Company to provide service to some of United's short-haul markets in the Eastern United States enables United to continue to market, through the Company, frequent air service from its Washington-Dulles hub, thus adding incremental traffic to United's international and domestic flights.
Markets
As of March 1, 1997, the Company operated 181 non-stop flights from Washington-Dulles representing more flights from the airport than any other airline. During 1996, 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 56% of passenger traffic at Washington-Dulles during 1996.
The Company's top four cities based on frequency of operations are Washington-Dulles, Boston, New York-JFK and Newark. During 1996, the Company added additional flights to existing Washington-Dulles markets, added new routes from the Washington-Dulles, Boston and Newark airports and ceased operations in four markets. The Company increased operations in existing Washington-Dulles markets by four daily departures and added Detroit as a new market which will have an additional four flights per day by year end. Further, the Company added new non- Dulles flying from Boston, consisting of one new market with six daily departures; and Newark, with two new markets and ten daily departures. In 1996 the Company ceased operations in Wilkes- Barre/Scranton and Reading, PA, as well as Long Island and Elmira, NY, resulting in the elimination of thirteen daily departures from Washington-Dulles.
The following table sets forth the destinations currently served by the Company:
Albany, NY New Haven, CT Allentown, PA 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 Greensboro, NC State College, PA Harrisburg, PA Stewart, NY Hartford, CT Syracuse, NY Knoxville, TN Westchester County, NY Lynchburg, VA Washington-Dulles Manchester, NH
Fleet Description
As of March 1, 1997, the Company operated a fleet of fifty-six turboprop aircraft, consisting of twenty-nine British Aerospace Jetstream-32s ("J-32s") and twenty-seven British Aerospace Jetstream-41s ("J-41s"). The Company believes that its fleet of J-32 and J-41 aircraft, having varying capacities and ranges, allows it to match equipment to the market conditions on its routes.
As of February 23, 1997, the Company entered into an agreement in principle with Aero International (Regional) ("AI(R)"), acting as agent for British Aerospace (Operations) Limited, to acquire twelve new J-41 aircraft. Delivery of the aircraft began in March 1997 and will continue through mid-1999. Five aircraft are scheduled for delivery in 1997.
On January 28, 1997, the Company announced an agreement to acquire twelve Canadair Regional Jet Series 200 ER ("CRJ") aircraft from Bombardier, Inc. with options to acquire an additional thirty-six jets. Deliveries are scheduled to begin in July with revenue passenger service expected to begin in the fall. Four jets are scheduled for delivery in 1997 and eight in 1998. The CRJ is a fifty seat twin engine aircraft designed to serve medium-range and secondary markets. The Company is seeking to obtain approval from its marketing partner, United Airlines, to incorporate the regional jets into its existing United Express product. The Company believes that CRJs will allow it to capitalize on its strong position at Washington-Dulles in addition to pursuing other potential route opportunities in the Eastern United States. See "Outlook" in Item 7, below.
Aircraft lease expense during 1996 for the Company's aircraft was approximately $29.1 million.
Restructuring
In the second quarter 1994 the Company commenced a plan of restructuring to rationalize its fleet structure, eliminate unprofitable routes and operations, and recapitalize its finances. The key elements of the restructuring plan included the return of the Company's Embraer Brasilia ("EMB-120") and deHavilland Dash-8 ("Dash-8") aircraft to the lessors, the sale of spare parts and tooling associated with those aircraft, and the closure of the Company's flight operations in Florida. Management believes that the plan of restructuring addressed the Company's past financial difficulties and that the improved financial performance for the years ending December 31, 1996 and 1995 is largely attributable to the benefits of the restructuring, improved yield management, and a generally improved economic environment for airlines. There are no remaining reserves related to the restructuring.
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 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 1996 approximately 5% of the Company's passengers received their tickets as part of a Mileage Plus award. 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, 1998. The Company intends to negotiate a new United Express code-sharing agreement and expects United to continue the code-sharing relationship.
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 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. 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 annually 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 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.
The United Express Agreements also require the Company to obtain United's consent to operate aircraft with seating capacity for more than thirty passengers under the "United Express" name. The Company has sought United's consent and is awaiting United's response, regarding operating the CRJs under the code-sharing agreement. See "Outlook" in Item 7, below.
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 1996, the Company purchased approximately 80.2% of its fuel through 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. The Company's fuel purchasing agreement does not provide protection against fuel price increases and does not insure availability of supply. Fuel costs constituted 9.4%, 8.5%, and 9.6% of revenues in 1996, 1995, and 1994 respectively.
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, 1996, approximately 74% of the Company's passengers obtained their tickets 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 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, 1996, 16.4% of the Company's passengers utilized electronic tickets.
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 Washington National and Baltimore-Washington International airports.
During 1996, the Company continued to see a trend towards 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 1996, 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 is 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 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 September 1995, the Company signed a contract for the installation of 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). The Company expects that PROS IV will become fully operational during the second quarter of 1997.
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 1, 1997 the Company utilized ten slots at LaGuardia, nine slots at New York-JFK, and eleven slots at White Plains. Of the above slots, the Company controls four at LaGuardia and eight at White Plains. 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.
Employees
Labor Groups
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 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 1, 1997, AMFA represented 120 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 are also engaged in litigation, which is more fully described in Item 3, "Legal Proceedings," below. If that litigation were resolved in AMFA's favor, AMFA would be in a position to use self help, even if the NMB does not declare an impasse.
The Company's contract with the AFA will become amendable on April 30, 1997. The Company expects to continue operating under the terms of the existing agreement until new terms are negotiated.
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.
Annual turnover of Company pilots was approximately 18% during 1996, compared to 14% during 1995. In 1996, several of the major airlines began hiring greater numbers of pilots to satisfy added fleet capacity and to replace a larger percentage of retiring pilots compared to previous years. It is expected that hiring by all the major airlines will continue, resulting in a similar turnover rate in 1997. There are no assurances that the Company will be able to hire and train sufficient pilots to meet its operational requirements in the future.
Pilot Training
The Company performs pilot training in state-of-the- art, full motion simulators and conducts training in accordance with Federal Aviation Administration ("FAA") Part 121 regulations. In 1994, 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 eighteen months, the FAA has worked closely with the Company and the first phase of the program, development of standardized requirements, is now complete. The second phase of the project, operational implementation, began in August 1996.
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. On March 10, 1997, the Company received certification to operate under 14 CFR part 121.
The Company underwent an intensive, two-week FAA National Aerospace Inspection Program ("NASIP") audit during December 1995. The final audit report was issued on January 31, 1996 and 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.
Regulation
The airline industry is subject to extensive regulation of its operations. The Department of Transportation ("DOT") is authorized to establish consumer protection regulations; prohibit certain pricing practices; mandate conditions of carriage; and make ongoing determinations of a carrier's fitness, willingness and ability to provide air transportation. The DOT also has the power to bring proceedings for the enforcement of its regulations under the federal transportation statute, which may result in civil penalties, revocation of operating authority, and criminal sanctions.
The Company holds a certificate of public convenience and necessity issued by the DOT under the transportation statute which authorizes it to conduct air transportation of persons, property, and mail between all points in the United States, its territories and possessions. Such a certificate requires the holder to maintain DOT prescribed minimum levels of insurance and to comply with all applicable statutes and regulations.
The DOT has implemented regulations designed to prevent unfair, discriminatory, and deceptive practices in the operation of computerized reservation systems. These regulations do not prohibit or limit code-sharing or the practice of some computerized reservation system vendors to give display preference to on-line versus interline connecting flights. The DOT has stated that it views the practice as being consistent with the traveler's preference for on-line flights when reasonably convenient. The DOT must re-enact these regulations and/or revise them on or after December 31, 1997. There can be no assurance that the DOT will not amend its regulations to limit these practices in the future.
The DOT has proposed to adopt regulations to strengthen the requirement that carriers advise booking passengers that all or part of their air transportation may be provided by the code- share partner of the carrier accepting the passenger reservation. Because the Company relies on its code-share partner and travel agents to accept reservations on its behalf, the DOT rule, when made final, is not anticipated to have a significant impact on the cost of the Company's compliance with federal regulations.
Pursuant to the federal transportation statute, no more than 25% of the voting interest in an U.S. certificated air carrier, such as the Company, may be owned or controlled by persons who are not citizens of the United States. The December 1994 investment in the Company by a subsidiary of British Aerospace, PLC, complies with the statute.
The Company is subject to the jurisdiction of the FAA 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 airlines to obtain an operating certificate and operations specifications for the particular aircraft and types of operations conducted by the carrier, all of which are subject to suspension or revocation for cause. The FAA has the authority to bring proceedings for the enforcement of its regulations which may result in civil penalties or revocation of operating authority.
The FAA has sought to impose civil penalties on the Company for alleged violations of passenger screening procedures, and in one instance for an alleged violation involving a non- revenue maintenance ferry flight. The Company has either contested the allegations or sought to enter into compromise agreements with the FAA to conclude the matters. It is not expected that the settlement of these matters will have a material adverse effect on the Company.
The Company is subject to the jurisdiction of the Federal Communications Commission regarding the use of radio facilities. Local governments and authorities in certain markets have adopted regulations governing various aspects of aircraft operations, including noise abatement, curfews, and use of airport facilities. The Company believes that it is in compliance with all such regulations in all material respects.
From time to time the DOT and FAA propose to adopt additional regulations on air carriers. Some of these proposals are the result of legislation. For example, the DOT is considering means by which air carriers can collect certain passenger related information not currently required to be collected (date of birth, social security number, emergency contact and telephone number). Other requirements may be imposed on air carriers as a result of the recent Vice Presidential Commission on Air Safety. For example, the industry is considering the operational consequences of implementing a more positive passenger-bag match system. The Company expects that certain proposals now under discussion will be implemented in some manner. A number of these proposals, in various forms now under discussion, could have a substantial financial impact on the air carrier industry including the Company. At this time, the Company cannot predict the extent to which these proposals may be imposed or their financial impact.
The Company is obligated to collect a U.S. transportation tax of 10% of passenger ticket revenue. This tax is known as the aviation trust tax or the "ticket tax". Recently the federal statute authorizing the ticket expired on two separate occasions, during the periods January 1, 1996 through August 26, 1996, and January 1, 1997 through March 6, 1997. Accordingly, the Company discontinued the collection of the ticket tax during this period consistent with industry practice. The ticket tax was most recently reinstated effective March 7, 1997, with an expiration date of September 20, 1997. The Congress has directed a study of FAA funding requirements and how it can best be met. As a result, the excise tax may be modified or replaced by a user fee. Such a change in the nature of this tax could, if adopted, affect the Company's overall exposure to these fees.
Management believes that the industry fare increases in 1996 resulted, in part, from the expiration of the transportation tax. The amount of increases due to this factor cannot be determined nor can the impact on revenue which resulted from the reinstatement of the tax or could result from the adoption of a user fee.
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 area of operations experiences more adverse weather during this period, causing a greater 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.
Charter and Freight Service
The Company uses available aircraft, primarily on weekends when there are fewer scheduled flights, to carry charter groups to destinations such as Atlantic City, New Jersey, and other regional destinations. The Company also carries mail and small packages on most of its flights. Total revenues from its charter flights and freight deliveries for 1996 were approximately 1% of the Company's total revenues.
Item 2.
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 accomodate through various arrangements the new flights it plans, and is exploring possible long-term solutions for assuring access to adequate facilities at Washington-Dulles. The Company leases all of its aircraft, which are described in Fleet Description, under various operating lease agreements.
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.
The Company currently leases approximately 30,000 square feet of hangar, shop and office space in Lynchburg, VA to maintain the fleet of J-32 and J-41 aircraft. The Company believes the Lynchburg facility is adequate to perform the maintenance functions for the existing fleet. The lease on the hangar complex is now on a month-to-month basis due to an on- going airport planning study by the Airport and the City of Lynchburg. The Company believes that its tenancy at the Lynchburg facility is not threatened by the short-term lease. The Company also leases approximately 3,800 square feet in the Signature Flight Support hangar at Washington-Dulles for aircraft maintenance. The 1996 rental expense for all maintenance facilities was approximately $0.2 million.
The Company has begun to address the need for expanding its facilities due to the planned increase in fleet size. The Company intends to build or lease a hangar facility of approximately 85,000 square feet for planned occupancy during 1998 large enough to consolidate its future maintenance operations. The final site has not been determined but the Washington-Dulles location is the leading contender for the new maintenance facility due to the presence of the Company's hub operation. The Company has applied to Loudoun County, VA for a tax exempt bond issuance facility in the amount of $11.0 million to finance the proposed facility.
Item 3.
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.
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. The Company believes that all claims resulting from this litigation remain fully covered under the Company's insurance policy. 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. As of March 21, 1997, the matter has not been set for trial.
The Company is in litigation with AMFA over the issue of whether AMFA has a right to strike prior to the exhaustion of mediation pursuant to the Railway Labor Act. See "Labor Groups" in Item 1, above. The legal issue arose over the Company's imposition of certain unilateral work rule changes during the period between union certification and an initial collective bargaining agreement. AMFA objected to this action, but the U.S. District Court for the Southern District of New York, on December 14, 1995, ruled in favor of the Company, declining to render AMFA's requested declaratory judgment and expressly stating that AMFA was prohibited from striking at that time. In Aircraft Mechanics Fraternal Association v. Atlantic Coast Airlines, 5 F.3d 90, the U.S. Court of Appeals for the Second Circuit affirmed the District Court's ruling. AMFA subsequently petitioned again to the U.S. Court of Appeals for the Second Circuit to consider the issue, not previously addressed by the Court, that the company's actions, while legal, should allow AMFA to engage in self-help, including the right to strike. The Second Circuit heard oral arguments on this matter in January 1997 and the parties are awaiting its decision.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fiscal quarter ended December 31, 1996, to a vote of the security holders of the Company through the solicitation of proxies or otherwise.
PART II
Item 5.
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.
1995 High Low First quarter 3.125 1.750 Second quarter 9.000 2.500 Third quarter 10.375 7.125 Fourth quarter 11.500 6.625
First quarter 16.250 7.375 Second quarter 17.125 12.625 Third quarter 15.875 11.000 Fourth quarter 13.125 9.250
First quarter 17.000 16.500 (through March 11, 1997)
As of March 11, 1997, the closing sales price of the Common Stock on Nasdaq/NM was $17.000 per share and there were approximately 123 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 $20.0 million financing agreement consisting of an equity investment and available borrowings. The preferred stock was convertible into common stock at the option of JSX at any time on or after September 15, 1997.
Item 6.
Item 6. Selected Financial Data
The following selected financial data relating to the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the Company's consolidated financial statements which have been audited by BDO Seidman, LLP, Independent Certified Public Accountants, whose report with respect thereto appears elsewhere in this Annual Report on Form 10-K. The following 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.
(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.
(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, 1996, 1995, 1994, 1993 and 1992, this percentage would have been 41.3%, 43.8%, 51.0%, 43.9% and 48.0%, 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, 1996, 1995, 1994, 1993 and 1992, cost per available seat mile would have been $0.210, $0.197, $0.206, $0.172 and $0.187, respectively.
(7) "Average yield per revenue passenger mile" represents the average passenger revenue received for each mile a revenue passenger is carried.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
General
In 1996 the Company posted a record profit of $19.2 million compared to a profit of $12.9 million for 1995, and a loss of $25.1 million in 1994. The improvement over 1995 and 1994 reflects increases in the Company's yields as well as a reduction in the break-even passenger load factor. Management believes that these improvements are due to, among other factors, the results of a major restructuring in 1994.
In the second quarter 1994 the Company commenced a plan of restructuring to rationalize its fleet structure, eliminate unprofitable routes and operations, and recapitalize its finances. The key elements of the restructuring plan included the return of the Company's EMB- 120 and Dash-8 aircraft to the lessors, the sale of spare parts and tooling associated with those aircraft, and the closure of the Company's flight operations in Florida.
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 profitability for 1995 and 1996.
Results of Operations
The Company earned net income of $19.2 million or $2.14 per fully diluted share in 1996 compared to net income of $12.9 million or $1.37 per fully diluted share in 1995, and a net loss of $25.1 million or $(3.67) per fully diluted share in 1994. During 1996, the Company generated operating income of $20.3 million compared to $12.8 million for 1995, and an operating loss of $23.3 million for 1994.
The improvement in operating results from 1995 to 1996 reflects a 10.2% increase in unit revenue (revenue per available seat mile) from $0.215 to $0.237 partially offset by a 6.6% increase in unit cost (cost per available seat mile), coupled with a 5.5% increase in available seat miles ("ASMs"). These results were achieved despite a challenging operating environment brought about by a 20.5% increase in the total cost per gallon of fuel in 1996.
The Company's 1995 operating results reflect the significant improvement over 1994 brought about by the Company's restructuring plan. Unit revenue increased 20.1% to 21.5 cents compared to 17.9 cents in 1994. Partially offsetting this was a 4.8% increase in unit costs as the process of removing larger capacity EMB-120 and Dash-8 aircraft and spare parts from the fleet continued through the second quarter 1995.
The Company's 1994 operating results reflect the operation of larger capacity EMB-120 and Dash-8 aircraft in addition to J-32s and J-41s; a separate Florida operation which was closed in the third quarter 1994; the recording of $8.1 million in restructuring charges and the write-off of $6.0 million in aircraft purchase options.
Fiscal Year 1996 vs. 1995
Operating Revenues
The Company's operating revenues increased 16.3% to $182.5 million in 1996 compared to $157.0 million in 1995. The increase resulted from a 13.4% increase in yield per revenue passenger mile ("RPM") to $.500 in 1996 compared from $.441 in 1995, and a 2.9% increase in RPMs. The increased traffic as measured in RPM's reflects a 5.5% increase in ASMs partially offset by a decrease in passenger load factor of 1.2 percentage points. Total passengers increased 2.7% year over year and length of haul remained unchanged.
Management believes that industry fare increases in 1996 resulted in part from the expiration of the aviation trust fund tax, also known as the "ticket tax", on December 31, 1995. The amount of the increases due to this factor cannot be determined, nor can the impact on revenue which resulted from the reinstatement of the tax on August 27, 1996. The ticket tax subsequently expired on December 31, 1996, and was reinstated for the period March 7, 1997, through September 30, 1997.
Operating Expenses
The Company's operating expense increased 12.6% in 1996 over 1995 reflecting increased ASMs and unit costs. 1996 unit costs increased 6.6% to 21.1 cents compared to 19.8 cents in 1995 reflecting increases in passenger and revenue related costs (traffic commissions and booking fees) associated with a 13.4% increase in yield, increased profit sharing costs related to the higher net income in 1996, and a 28.7% increase in the total cost of fuel. A summary of operating expenses as a percent of operating revenues and operating cost per ASM for the years ended December 31, 1996 and 1995 is as follows:
Salaries and related expenses were $44.4 million in 1996, an increase of 9.2% as compared to $40.7 million for 1995. Total employees increased approximately 8.0% to 1,370 in 1996. In addition, a contractual rate increase of 4.5% for flight attendants became effective in May 1996. Total block hours increased 5.7% or 9,350 hours compared to 1995 resulting in a corresponding increase in flight payroll. Profit sharing expense increased 80.4% or $1.6 million reflecting the Company's higher level of profitability in 1996.
Aircraft fuel expense was $17.1 million in 1996, an increase of 28.7% compared to $13.3 million in 1995. The increase in 1996 fuel expense resulted primarily from a 20.5% increase in the total cost per gallon due to increases in aircraft fuel prices, the 4.3 cents per gallon fuel tax imposed by the federal government in October 1995, and a 5.7% increase in block hours. The average cost per gallon, including into-plane fees, was 82.8 cents in 1996 and 68.7 cents in 1995. The price of fuel in the first quarter 1997 has moderated somewhat, however, there can be no assurance that the trend of lower fuel prices will continue.
Aircraft maintenance and materials expense was $16.8 million in 1996, an increase of 10.4% compared to $15.3 million in 1995. The increase in 1996 resulted primarily from a 5.7% increase in block hours as well as an increase in the average age of the fleet, expiration of warranty coverage on certain aircraft and rate increases in contract maintenance for engines.
The Company's maintenance accounting policy is a combination of expensing events as incurred and accruals for maintenance events. The Company accrues for current and future maintenance events on an ongoing basis which it feels will be sufficient to cover maintenance costs for aircraft. Maintenance accruals are estimated on a cost per flight hour basis for all aircraft including those under warranty.
Aircraft rental and landing fees were $33.3 million in 1996, an increase of 13.1% compared to $29.5 million in 1995. The increased expense reflects two additional J-41 aircraft delivered in 1996 and the full year effect of aircraft delivered in 1995.
Traffic commissions and related fees were $28.6 million in 1996, an increase of 10.1% compared to $25.9 million in 1995. The increased commission in 1996 reflects the increased passenger revenue in 1996. 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 which can be claimed by travel agents. 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.
Depreciation and amortization expense was $2.8 million in 1996, an increase of 27.1% compared to $2.2 million in 1995. The increase in 1996 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.
Other operating expenses were $19.5 million in 1996, an increase of 10.0% compared to $17.8 million in 1995. The increase in other operating expenses during 1996 is primarily attributed to increased glycol costs related to severe winter weather during the first quarter of 1996, increased legal fees related to union negotiations, and increased pilot training costs.
The Company reversed excess restructuring reserves of $0.4 million in 1996 and $0.5 million in 1995. 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. There are no remaining reserves related to the restructuring.
Interest expense net of interest income was $0.6 million in 1996 and $1.7 million in 1995. The decreased expense reflects reduced borrowings under the Company's accounts receivable financing facility and the early retirement of a $4.0 million convertible term note to JSX in December 1995.
The Company recorded a provision for income taxes of approximately $0.5 million for 1996 as compared to a benefit of approximately $1.2 million in 1995. The benefit recorded in 1995 reflects the adjustment for the deferred tax asset of $1.5 million in the fourth quarter of 1995, net of valuation allowance. The effective tax rate in 1996 of approximately 2.3% is significantly less than the statutory federal and state rates due principally to the full utilization of the operating loss carryforwards and elimination of the valuation allowance.
The Company has recorded a net deferred tax asset of $3.1 million at December 31, 1996. The Company believes that realization of the net deferred tax asset is more likely than not because of profitable operations over the past two years due largely to the success of the restructuring of its aircraft fleet initiated in 1994; continued profitability in the Company's operations; and the utilization of the existing net operating losses.
The Company expects the effective tax rate in 1997 to approximate statutory federal and state rates. There are no operating loss carryforwards available for 1997.
Fiscal Year 1995 vs. 1994
Operating Revenues
The Company's operating revenues decreased 1.2% to $157.0 million in 1995 compared to $158.9 million in 1994. The decrease resulted from an 11.3% decrease in RPMs resulting from 7.9% fewer passengers carried. Yield per RPM increased 11.1% to $.441 in 1995 versus $.397 in 1994, partially offset by a 11.3% reduction in RPMs. Load factor increased in 1995 by 3.4 load factor points caused by ASMs decreasing by 17.5% more than offsetting the decrease in RPMs.
Operating Expenses
1995 unit costs increased 4.8% to 19.8 cents versus 18.9 cents in 1994 as a result of a 17.5% decrease in ASMs brought about by the 1994 restructuring plan which simplified fleet types through the elimination of larger capacity aircraft. The increased unit costs also resulted from passenger and revenue related costs associated with the higher yield and load factor, and the costs of profit sharing in 1995.
A summary of operating expenses as a percent of operating revenues, and operating cost per ASM for the years ended December 31, 1995, and 1994 is as follows:
Salaries and related expenses were $40.7 million for 1995, a decrease of 2.1% compared to $41.6 million for 1994. In 1995 salaries and related expenses were $0.9 million less than 1994 reflecting the reduction in flight crews and ground personnel resulting from the Company's restructuring in 1994. Offsetting this savings was profit sharing expense of $2.0 million based on the Company's 1995 profit. There was no profit sharing in 1994.
Aircraft fuel expense was $13.3 million in 1995, a decrease of 12.4% for 1995 compared to $15.2 million in 1994. The average cost per gallon including into-plane fees, was 68.7 cents in 1995 and 67.0 cents in 1994. Fuel expense in 1995 decreased 12.4% from 1994 reflecting the reduced level of operations in 1995 and the utilization of more fuel efficient J-41's instead of EMB-120 and Dash-8 aircraft.
Aircraft maintenance and materials expense was $15.3 million in 1995, a decrease of 31.7% compared to $22.3 million in 1994. The reduction of maintenance expense in 1995 of $7.0 million reflects the fleet simplification associated with the Company's restructuring in 1994.
Aircraft rental and landing fees were $29.5 million in 1995, a decrease of 26.6% compared to $40.1 million in 1994. The reduced 1995 expense resulted from the elimination of the larger EMB-120 and Dash-8 aircraft. The reduction was partially offset by increased rental expense related to the 1995 deliveries of nine J-41 aircraft.
Traffic commissions and related fees were $25.9 million in 1995. Traffic commissions and related fees in 1995 were relatively unchanged from 1994 primarily reflecting the same level of revenue compared to 1994. 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 which can be claimed by travel agents. Commission as a percentage of total passenger revenue averaged 8.0% in 1995, and 7.9% in 1994. Related fees include program fees to United and segment booking fees for reservations.
Depreciation and amortization expense was $2.2 million in 1995, a decrease of 3.8% compared to $2.3 million in 1994. The 1995 decrease reflects the elimination of spare parts inventory related to the fleet simplification offset by increases in spare parts for the delivery of new J-41 aircraft. There were no significant changes in amortization in 1995.
Other operating expenses were $17.8 million in 1995, a decrease of 13.8% compared to $20.6 million in 1994. The decrease in other operating expenses during 1995 is primarily attributed to a reduction in facility rental expense related to the Company's restructuring in 1994, reduced glycol expense due to more normal winter weather, and reduced hull insurance expense due to the fleet simplification.
Amortization and write-off of intangible assets were negligible in 1995. In 1994 the Company wrote off $6.0 million related to EMB-120 aircraft purchase options as part of the restructuring plan.
Restructuring expense and reversals were a $0.5 million credit in 1995 and an expense of $8.1 million in 1994. The credit in 1995 reflected elimination of remaining unused restructuring reserves for pilot requalification, return conditions, spare parts reconciliation, and miscellaneous professional fees. The restructuring charge of $8.1 million in 1994 consisted primarily of reserves for EMB- 120 and Dash-8 return conditions, maintenance base closings, and the elimination of the Florida operation.
Interest expense net of interest income was $1.7 million in 1995 and $2.2 million in 1994. Interest expense was lower in 1995 compared to 1994 reflecting reduced borrowings on the receivables facility as well as reduced borrowings from JSX.
In the first quarter of 1995 the Company borrowed $4.0 million under a convertible term loan agreement. On December 29, 1995, the Company prepaid the note at a discount which resulted in an extraordinary gain of $0.4 million.
The Company recorded a deferred tax asset, net of valuation allowance, and a corresponding income tax benefit of $1.5 million in the fourth quarter of 1995. Realization of the deferred tax asset was dependent upon the Company generating pretax income of at least $4.0 million in 1996. Based on the operating results in 1994, management believed that it was more likely than not that the Company would achieve at least this pretax income level in 1996. The actual pretax income for 1996 was $19.6 million.
The Company recorded a provision for income taxes, before the income tax benefit of $1.5 million, of approximately $0.3 million for 1995. The provision is insignificant in relation to pretax income of approximately $11.3 million due to utilization of net operating losses. The net operating loss carryforward for 1995 was $14.7 million.
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 extent to which the Company's operation of CRJs is coordinated with the Company's code-sharing relationship, the response of the Company's competitors to the Company's business strategy, market acceptance of the new service (including jet service), routes and schedules offered by the Company, the cost of fuel, the weather, and satisfaction of regulatory requirements.
A central element of the Company's business strategy is expansion of its aircraft fleet. The Company has commitments to acquire twelve 29-seat J-41 aircraft during the period March 1997 through mid-1999, and twelve 50-seat CRJs from July 1997 through 1998. The introduction of these aircraft, particularly the CRJs, will expand the Company's business into new markets. In general, introduction of new markets into the Company's route system results, at least in the short-term, in operating expenses that may not be matched by increases in operating revenues.
In order to operate the CRJs under the "United Express" name, the Company must obtain United's consent under the United Express Agreements. The Company has sought United's consent, and is awaiting United's response regarding incorporating the CRJs into its existing United Express product. While the Company currently operates only under the "United Express" name, the Company believes that it will be able to operate CRJs successfully regardless of whether such operation is under the United Express Agreements. Nonetheless, the Company believes that its results of operations could be adversely affected unless the CRJs are operated under the United Express Agreements.
The Company must complete several training, operational, and administrative requirements before commencing CRJ service. The Company expects that it will be able to satisfy such requirements during 1997. The Company has not previously operated jet aircraft but will operate these aircraft under the same FAA regulatory requirements as it does with it's current fleet of aircraft. The Company believes that the market will support the new routes and schedules which the Company's expanded fleet will enable it to implement. In addition, the Company expects that its customers will find the new CRJs acceptable for relatively longer flights, enhancing the Company's ability to compete in a broader geographic market.
The Company will incur significant expenses in its fleet expansion program. Under the Company's contracts to acquire CRJs, the Company is required to make deposits with the manufacturer totaling $15.0 million on or before April 1, 1997. The Company deposited $4.0 million on January 9, 1997, and will execute a short term promissory note with the manufacturer for the remaining $11.0 million at 8% annual interest. The April 1, 1997 note will be payable in full including accumulated interest, upon delivery of the first aircraft in July 1997.
In addition, the CRJs and the additional J-41s will significantly increase the Company's lease obligations. The Company is exploring various third party lease financing arrangements for the aircraft. However, the Company has backup lease financing arrangements or sufficient financing support with the manufacturer of both the CRJs and J-41s such that the Company believes it will be able to acquire the aircraft at competitive rates.
In 1997 the Company anticipates capital spending of approximately $16.3 million, consisting of $9.8 million in spare parts related to the acquisition of the CRJs, $3.0 million in additional rotable spare parts and engines for the J-41s, $2.5 million for a state- of-the-art Aircraft Communications and Satellite Navigation System ("ACASNS"), and $1.0 million for other capital assets. The Company anticipates that it will be able to arrange financing for the 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.
Liquidity and Capital Resources
The Company's balance sheet improved significantly during 1996. Cash and cash equivalents as of December 31, 1996 were $21.5 million or an increase of $13.1 million over 1995. Working capital increased to $17.8 million as compared to $4.6 million at December 31, 1995.
During 1996, cash provided by operating activities was $20.7 million compared to $15.7 million in 1995. The 31.9% increase in annual cash flow from operating activities primarily reflects the improvement in the Company's net income for 1996 compared to 1995.
Accounts receivable increased by $1.4 million to $16.0 million at December 31, 1996, an increase of 9.3% compared to $14.6 million for 1995. The year over year increase is attributed to increased passenger ticket receivables resulting from higher passenger revenue in December 1996 versus December 1995. Prepaid expenses and other current assets increased by $0.8 million to $2.6 million at December 31, 1996, an increase of 45.3% compared to $1.8 million for 1995. The increase results from increased prepaid insurance, fuel, and deposits related to aircraft financing. Current liabilities increased by $1.9 million to $24.0 million at December 31, 1996, an increase of 8.6% compared to $22.1 million at December 31, 1995. The increase results from a larger current portion of long-term debt and capital lease obligations as well as increased reserves for maintenance events.
Cash used in investing activities was $2.2 million for 1996 compared to $2.0 million for 1995. The use of cash in 1996 related to the acquisition of rotable spare parts and a spare engine to support the additional deliveries of J-41 aircraft. Cash used in investing activities in 1995 consisted of the purchase of equipment for leasehold improvements to aircraft pertaining to Traffic Collision Avoidance Systems, and the acquisition of spare parts and a spare engine related to the deliveries of J-41 aircraft.
Cash used in financing activities in 1996 was $5.4 million or a decrease of 28.9% compared to $7.6 million in 1995. During 1996 the Company made payments of $1.9 million on long term debt and capital lease obligations, redeemed the Series A Cumulative Convertible Preferred Stock for $4.2 million, including the 1995 accumulated dividend of $0.3 million, and received $0.7 million in proceeds from stock options. In 1995 the Company received proceeds from long term debt of $4.2 million primarily related to borrowings on a convertible term loan in the first quarter of 1995. The Company made payments on long term debt and capital lease obligations of $5.5 million including the early retirement in December 1995 of the convertible term loan. The Company also paid $6.4 million in 1995 to close out the outstanding balance at December 31, 1994, of an asset-based lending agreement with a financial institution.
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 $20.0 million. 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 general intangibles and as of December 31, 1996, there was no outstanding balance.
In December 1994, the Company completed a plan of recapitalization with an aircraft supplier that included an $11.0 million equity investment consisting of common stock and Series A Cumulative Convertible Preferred Stock, creation of a term loan facility in the amount of $4.0 million and a revolving line of credit of $5.0 million.
In the first quarter of 1995 the Company borrowed $4.0 million on the term loan facility. On December 29, 1995, the Company fully prepaid the loan at a discount and recorded an extraordinary gain of $0.4 million. On March 29, 1996, the Company redeemed the Series A Cumulative Convertible Preferred Stock in the amount of $3.8 million. Dividends for the first quarter of 1996 were not paid due to the redemption before quarter end in accordance with the terms of the preferred stock agreement. The Company never borrowed against the revolving line of credit facility created during the December 1994 recapitalization and on June 12, 1996 the Company canceled the facility.
Aircraft
The Company has significant lease obligations on aircraft which are classified as operating leases and not reflected as liabilities on the Company's balance sheets. (See Note 8 to the Consolidated Financial Statements.) The remaining terms of the leases range from less than one year to fourteen years. The Company's minimum rental payments in 1997 under all non-cancelable aircraft operating leases with remaining terms of more than one year were approximately $28.9 million as of December 31, 1996. The foregoing amount does not include five J-41 aircraft and four CRJ aircraft scheduled for delivery in 1997 as the financing arrangements have not been concluded at this time.
As of February 23, 1997 the Company entered into an agreement with AI(R) to acquire twelve new J-41 aircraft. The agreement will allow the Company to take advantage of favorable third party financing while allowing the refinancing of existing J-41s which are currently financed through the manufacturer. The Company believes that it will be able to obtain third party financing on favorable terms although there is no certainty that such financing will be available or in place before the commencement of deliveries. The delivery schedule provides for the Company to take delivery of these aircraft beginning in the first quarter of 1997 and continuing through mid-1999.
On January 8, 1997, the Company entered into an agreement with Bombardier, Inc. to purchase twelve Canadair Regional Jets with options for thirty-six additional aircraft. The delivery schedule provides for the Company to take delivery of four aircraft in 1997 commencing in July. The remaining eight aircraft will be delivered during 1998. Under the terms of the agreement, the Company is required to make deposits with the manufacturer totaling $15.0 million on or before April 1, 1997. The Company deposited $4.0 million on January 9, 1997 and will execute a short term promissory note with the manufacturer for the remaining $11.0 million at 8% annual interest. The April 1, 1997 note will be payable in full including accumulated interest, upon delivery of the first aircraft in July 1997.
On December 30, 1994, the Company agreed to acquire from British Aerospace twenty additional J-41 aircraft. Nine aircraft were delivered as of December 31, 1995 and two aircraft were delivered in the first quarter of 1996. The remaining nine aircraft were converted to options to acquire aircraft which the Company chose not to exercise.
In 1996, the Company refinanced the operating leases on two J-41 aircraft that it took delivery of in the first quarter of 1996 and two J-41 aircraft it had been operating. The refinancing resulted in more competitive lease rates compared to prior leases. The Company will actively continue to seek competitive leasing arrangements to replace its existing aircraft leases.
Capital Equipment and Debt Service
In 1997 the Company anticipates capital spending of approximately $16.3 million consisting primarily of $9.8 million in spare parts related to the acquisition of regional jets, $3.0 million in additional rotable spare parts and engines for the J-41s, $2.5 million for ACASNS, and $1.0 million for other capital assets. The Company anticipates that it will be able to arrange financing for the 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.
Debt service for 1997 is estimated to be approximately $3.5 million reflecting increased borrowings related to the purchase of spare engines, spare parts and insurance premium financing. 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, availability of manufacturer and third party financing, and a $20.0 million accounts receivable credit facility 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 June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (SFAS 125)". SFAS 125 provides accounting and reporting standards for transfers of financial assets using a financial-components approach which focuses on control. Under this approach, following a transfer of financial assets, a company recognizes the financial assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. SFAS 125 is applicable to the Company's borrowings under its line of credit collateralized by accounts receivable. The Company evaluated the financing transaction using the criteria set forth in SFAS 125 and concluded that it did not transfer control of its accounts receivable to the financial institution. Consequently, the Company believes that adoption of SFAS 125, as of January 1, 1997, will not have a material impact on its fiscal 1997 financial or operating results.
On March 3, 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No, 128, "Earnings per Share (SFAS 128)". SFAS 128 provides a different method of calculating earnings per share than is currently used in accordance with APB Opinion 15. SFAS 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to existing fully diluted earnings per share. Using the principles set forth in SFAS 128, Basic earnings (loss) per share would have been $(3.67), $1.55, and $2.27 for 1994, 1995 and 1996, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedule included in Item 14.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
The information required by this Part III (Items 10, 11, 12 and 13) is hereby incorporated by reference from the Company's definitive proxy statement which is expected to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 not later than 120 days after the end of the fiscal year covered by this report.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The Financial Statements listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10- K.
2. Financial Statement Schedules
The Financial Statement Schedules listed in the accompanying index to financial statements are filed as part of this Annual Report on Form 10-K.
3. Exhibits
Exhibit Number Description of Exhibit 3.1*** Restated Certificate of Incorporation of the Company. 3.1(a)** Certificate of Correction to the Restated Certificate of Incorporation. 3.2** Restated By-laws of the Company. 4.1* Specimen Common Stock Certificate. 4.2* Stockholders' Agreement, effective as of October 15, 1991, among the Company, the stockholders and the holder of warrants of the Company named on the signature pages thereto and a trust established pursuant to the Atlantic Coast Airlines, Inc. Employee Stock Ownership Plan, together with Amendment and Second Amendment thereto dated as of February 24, 1992 and May 1, 1992 respectively. 4.3* Registration Rights Agreement, dated as of September 30, 1991, among the Company and the stockholders named on the signature pages thereto (the "Stockholders Registration Rights Agreement"). 4.4* Form of amendment to the Stockholders Registration Rights Agreement. 4.16*** Registration Rights Agreement, dated as of December 30, 1994, by and between JSX Capital Corporation and Atlantic Coast Airlines, Inc. 10.1* Atlantic Coast Airlines, Inc. 1992 Stock Option Plan. 10.2** Restated Atlantic Coast Airlines, Inc. Employee Stock Ownership Plan, effective October 11, 1991, as amended through December 31, 1996. 10.4** Restated Atlantic Coast Airlines 401(k) Plan, as amended through February 3, 1997. 10.6#* United Express Agreement, dated October 1, 1991, among United Airlines, Inc., Atlantic Coast Airlines and the Company, together with Amendment No. 1, dated as of April 1, 1993. 10.7#* Agreement to Lease British Aerospace Jetstream-41 Aircraft, dated December 23, 1992, between British Aerospace, Inc. and Atlantic Coast Airlines. 10.12(b)**** Amendment and Restated Severance Agreement, dated as of October 18, 1995 between the Company and Kerry B. Skeen. 10.12(c)** First Amendment To Severance Agreement For Kerry B. Skeen effective as of October 16, 1996. 10.12(h)** Form of Severance Agreement. The Company has entered into substantially identical agreements with Thomas J. Moore and with Michael S. Davis, both dated as of January 1, 1997. 10.12(i)** Severance Agreement dated as of January 28, 1997, between the Company and James B. Glennon. 10.12(j)**Promissory Note in the amount of $75,000 issued to Paul H. Tate to the Company dated February 19, 1997 and payable September 30, 1997. 10.13(a)** Form of Indemnity Agreement. The Company has entered into substantially identical agreements with the individual members of its Board of Directors. 10.20*** Stock Purchase Agreement, dated the 30th day of December 1994, by and among JSX Capital Corporation, Atlantic Coast Airlines, and Atlantic Coast Airlines, Inc. 10.21*** Acquisition Agreement, dated as of December 30, 1994, by and among Jetstream Aircraft, Inc., JSX Capital Corporation, and Atlantic Coast Airlines. 10.21(a)** Amendment Number One to Acquisition Agreement, dated as of June 17, 1996, by and among Jetstream Aircraft, Inc., JSX Capital Corporation, and Atlantic Coast Airlines. 10.23** Loan and Security Agreement, dated as of October 12, 1995, between Atlantic Coast Airlines and Shawmut Capital Corporation. 10.24**** Stock Incentive Plan of 1995. 10.25**** Form of Incentive Stock Option Agreement. The Company enters into this agreement with employees who have been granted incentive stock options pursuant to the Stock Incentive Plans. 10.26**** Form of Non-Qualified Stock Option Agreement. The Company enters into this agreement with employees who have been granted non-qualified stock options pursuant to the Stock Incentive Plans. 10.27**** Split Dollar Agreement, dated as of December 29, 1995, between the Company and Kerry B. Skeen. 10.27(a)** Form of Split Dollar Agreement. The Company has entered into substantially identical agreements with Thomas J. Moore and with Michael S. Davis, both dated as of July 1, 1996. 10.28**** Split Dollar Agreement, dated as of December 29, 1995, between the Company and James B. Glennon. 10.29**** Agreement of Assignment of Life Insurance Death Benefit As Collateral, dated as of December 29, 1995, between the Company and Kerry B. Skeen. 10.29(a)** Form of Agreement of Assignment of Life Insurance Death Benefit As Collateral. The Company has entered into substantially identical agreements with Thomas J. Moore and with Michael S. Davis, both dated as of July 1, 1996. 10.30**** Agreement of Assignment of Life Insurance Death Benefit As Collateral, dated as of December 29, 1995, between the Company and James B. Glennon. 10.31** Summary of Senior Management Bonus Program. The Company has adopted a plan in substantially the form as outlined in this Exhibit for 1997. 10.32**** Summary of "Share the Success" Profit Sharing Plan. The Company has adopted a plan in substantially this form for 1997 and 1996. 10.40#** Purchase Agreement between Bombardier Inc. and Atlantic Coast Airlines Relating to the Purchase of Canadair Regional Jet Aircraft dated January 8, 1997. 10.50#** Purchase Agreement for Twelve Jetstream 4100 Aircraft between Atlantic Coast Airlines and Aero International (Regional) as agent for and on behalf of British Aerospace (Operations) Limited dated February 23, 1997. 10.60** Form of Lease Agreement between Atlantic Coast Airlines and Finova Capital Corporation. The Company has entered into four substantially identical agreements during 1996 for four J-41 aircraft. 11.1** Computation of Per Share Earnings. 21.1* Subsidiaries of the Company. 23.1** Consent of BDO Seidman.
# Portions of this document have been omitted pursuant to a request for confidential treatment. * Filed as an Exhibit to Form S-1, Registration No. 33- 62206, effective July 20, 1993, incorporated herein by reference. ** To be filed as an Amendment to this Annual Report on Form 10-K for the fiscal year ended December 31, 1996. *** Filed as an Exhibit to the Annual Report on Form 10-K for the fiscal year ended December 31, 1994, incorporated herein by reference. **** Filed as an Exhibit to the Annual report on Form 10-K for the fiscal year ended December 31, 1995, incorporated herein by reference.
(b) Reports on Form 8-K. The Company did not file any current reports on Form 8-K during the fourth quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 25, 1997.
ATLANTIC COAST AIRLINES, INC.
By: /S/ C. Edward Acker C. Edward Acker Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 25, 1997.
Name Title
/S/ C. Edward Acker C. Edward Acker Chairman of the Board of Directors
/S/ Kerry B. Skeen President Kerry B. Skeen Chief Executive Officer (principal executive officer)
/S/ Paul H. Tate Senior Vice President Paul H. Tate Chief Financial Officer (principal financial and accounting officer) /S/ John M. Sullivan /S/ Gordon A. Cain John M. Sullivan Gordon A. Cain Director Director
/S/ Robert E. Buchanan /S/ James J. Kerley Robert E. Buchanan James J. Kerley Director Director
/S/ Joseph W. Elsbury /S/ James C. Miller Joseph W. Elsbury James C. Miller Director Director
ATLANTIC COAST AIRLINES, INC.
AND FINANCIAL STATEMENT SCHEDULE (Item 14(a))
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants
Consolidated:
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
FINANCIAL STATEMENT SCHEDULE:
Report of Independent Certified Public Accountants on Financial Statement Schedule S-1 Schedule II - Valuation and Qualifying Accounts S-5
All other financial statement schedules are omitted as the required information is presented in the financial statements or the notes thereto or is not necessary.
1. Summary of Accounting (a)Basis of Presentation Policies The consolidated financial statements included herein have been prepared by Atlantic Coast Airlines, Inc. ("ACAI") and its wholly-owned subsidiary, Atlantic Coast Airlines ("ACA"), (together, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates predominantly in the air transportation industry providing scheduled service for passengers to thirty-nine destinations in seventeen eastern states of the United States.
(b)Cash and Cash Equivalents
The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents.
(c)Airline Revenues
Passenger fares and cargo revenues are recorded as operating revenues at the time transportation is provided. The value of unused passenger tickets sold by the Company is included in current liabilities. Accounts receivable are stated net of allowances for uncollectible accounts of approximately $550,000 and $287,000 at December 31, 1995 and 1996, respectively.
The Company participates in United Airlines, Inc.'s ("United") Mileage Plus frequent flyer program. The Company does not accrue for incremental costs for mileage accumulation relating to this program, since the impact is immaterial.
(d)Concentrations of Credit Risk
The Company provides commercial air transportation in the eastern United States. Substantially all of the Company's passenger tickets are sold by other air carriers. The Company has a significant concentration of its accounts receivable with other air carriers with no collateral. At December 31, 1995 and 1996, accounts receivable from air carriers totaled approximately $13,036,000 and $14,306,000, respectively. Such accounts receivable are assigned to a financial institution in connection with the Company's line of credit arrangement (see Note 6). Of the total amount, approximately $8,983,000 and $11,044,077, at December 31, 1995 and 1996, respectively, were due from United. Accounts receivable losses have been insignificant.
(e)Risks and Uncertainties
The airline industry is highly competitive and volatile. The Company competes primarily with other air carriers and, particularly with respect to its shorter flights, with ground transportation. Airlines primarily compete in areas of pricing, scheduling and type of equipment. The Company's operations are primarily dependent upon business-related travel and are not subject to wide seasonal fluctuation. However, some seasonal decline does occur during portions of the winter months due to lesser demand. The ability of the Company to compete with ground transportation and other air carriers depends upon public acceptance of its aircraft and the provision of convenient, frequent and reliable service to its markets at reasonable rates.
The Company entered into a code-sharing agreement with United, which expires on March 31, 1998. The agreement allows the Company to operate under United's colors, utilize the "United Express" name and identify its flights using United's designator code. The Company believes that its relationship with United substantially enhances its ability to compete for passengers. The loss of the Company's affiliation with United could have a material adverse effect on the Company's business.
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. The agreement is for three years and is amendable on February 28, 2000. The new contract modifies work rules to allow more flexibility, introduces 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 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 1, 1997, AMFA represented 120 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 were deadlocked, then the NMB could declare an impasse along with a thirty day cooling off period. At the conclusion of that period if an agreement had not been reached, AMFA would have the authority to use self help, up to and including the right to strike. The Company and AMFA are also engaged in litigation, which is more fully described in Item 3, "Legal Proceedings," below. If that litigation were resolved in AMFA's favor, AMFA would be in a position to use self help, even if the NMB does not declare an impasse.
The Company's contract with the AFA will become amendable on April 30, 1997. The Company expects to continue operating under the terms of the agreement until new terms are negotiated.
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 significant organizing activities by labor unions among other non-union employees at this time.
(f)Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principals requires management to make certain estimates and assumptions regarding valuation of assets, recognition of liabilities for costs such as aircraft maintenance, differences in timing of air traffic billings from United and other airlines and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
(g)Expendable Parts
Expendable parts and supplies are stated at the lower of average cost or market, less an allowance for obsolescence. Expendable parts and supplies are charged to expense as they are used.
(h)Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets which range from five to fifteen years. Amortization of capital leases is included in depreciation expense.
(i)Preoperating Costs
Preoperating costs represent the cost of integrating new types of aircraft. Such costs, which consist primarily of flight crew training, are deferred and amortized over a period of four years on a straight-line basis.
(j)Intangible Assets
Goodwill, representing the excess of cost above the fair value of net assets acquired in the acquisition of ACA, is being amortized by the straight-line method over twenty years. The primary financial indicator used by the Company to assess the recoverability of its goodwill is undiscounted future cash flows from operations. The amount of impairment, if any, is measured based on projected future cash flows using a discount rate reflecting the Company's average cost of funds. Slots are being amortized by the straight-line method over twenty years.
(k)Maintenance
The Company's maintenance accounting policy is a combination of expensing events as incurred and accruals for maintenance events. The Company accrues for current and future maintenance events on an ongoing basis which it feels will be sufficient to cover maintenance costs for aircraft. Maintenance accruals are estimated on a cost per flight hour basis for all aircraft including those under warranty.
(l)Income Taxes
The Company accounts for deferred income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts for existing assets and liabilities and respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled.
(m)Stock options
The Company accounts for its fixed-price stock- based compensation plans using the principles set forth in APB Opinion 25. Under these principles, the Company records no charge to expense at the grant date because it grants stock options at an exercise price equal to the current market price and the measurement date is the grant date.
(n)Earnings per Share
Primary earnings per share is computed by dividing income, after deducting preferred dividend requirements, by the weighted average number of common shares outstanding and common stock equivalents. For both primary and fully diluted earnings per share, common stock equivalents consist of shares subject to stock options computed using the treasury stock method.
For the calculation of fully diluted earnings per share in 1995, the outstanding convertible preferred stock is considered in the weighted average number of common shares when its effect is dilutive.
Common equivalent shares consisting of unissued shares under options and redeemable convertible preferred stock have been excluded from the computation for 1994 because their effect is antidilutive.
Primary earnings per share reflect the dilution of outstanding stock options as if the options were exercised at the beginning of the period or the issuance date, whichever is later, and as if the funds obtained thereby were used to purchase common stock at the average market price during the period. Fully diluted earnings per share reflect the assumed exercise of outstanding stock options as if the funds obtained thereby were used to purchase common stock at the ending market price in order to reflect the maximum potential dilution. For the years ended December 31, 1995 and 1996, all of the Company's securities were dilutive. Common and common equivalent shares outstanding for fully diluted earnings per share also include the weighted average effect of the convertible preferred stock. The effect on outstanding common shares for the convertible debt was not considered due to the repayment during 1995. (o)Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (SFAS 125)". SFAS 125 provides accounting and reporting standards for transfers of financial assets using a financial-components approach which focuses on control. Under this approach, after a transfer of financial assets, a company recognizes the financial assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. SFAS 125 is applicable to the Company's borrowings under its line of credit collateralized by accounts receivable. The Company evaluated the financing transaction using the criteria set forth in SFAS 125 and concluded that it did not transfer control of its accounts receivable to the financial institution. Consequently, the Company believes that adoption of SFAS 125, as of January 1, 1997, will not have a material impact on its fiscal 1997 financial or operating results.
On March 3, 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No, 128, "Earnings per Share (SFAS 128)". SFAS 128 provides a different method of calculating earnings per share than is currently used in accordance with APB Opinion 15. SFAS 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to existing fully diluted earnings per share. Using the principles set forth in SFAS 128, Basic earnings (loss) per share would have been $(3.67), $1.55, and $2.27 for 1994, 1995 and 1996, respectively.
(p)Reclassifications
Certain amounts as previously reported have been reclassified to conform to the current year presentation.
2. Prepaid Prepaid expenses and other current assets consist of Expenses the following: and Other Current (in thousands) Assets December 31, 1996 1995 Prepaid rent $ 62 $ - Prepaid fuel 237 33 Prepaid insurance 1,448 1,137 Deposits, primarily for aircraft 726 496 Prepaid other 81 92 $ 2,554 $1,758
3. Property Property and equipment consist of and the following: Equipment (in thousands) December 31, 1996 1995 Improvements to aircraft 2,350 2,210 Flight equipment, primarily 14,014 11,978 rotable spare parts Maintenance and ground equipment 3,380 3,267 Computer hardware and software 1,464 1,178 Furniture and fixtures 296 272 Leasehold improvements 619 465 22,123 19,370 Less: Accumulated depreciation 5,966 3,857 and amortization $16,157 $15,513
4. Intangible Intangible assets consist of Assets the following:
(in thousands) December 31, 1996 1995 Goodwill $ 3,173 $ 3,172 Slots 350 350 Deferred financing costs 270 77 3,793 3,599 Less: Accumulated 911 735 amortization $ 2,882 $ 2,864
On December 1, 1995, the Company transferred its rights with respect to five of the Company's eighteen landing slots at Westchester County Airport (White Plains, NY) to United. In accordance with the agreement, the Company received cash and certain slot leases at LaGuardia airport from United. The Company recognized a gain of approximately $177,000 from the sale of the five slots, which is reflected as other income in the accompanying statement of operations for the year ended December 31, 1995.
5. Accrued Accrued liabilities consist of the following: Liabilities (in thousands) December 31, 1996 1995 Accrued payroll and employee $ 4,929 $ 4,554 benefits Air traffic liability 2,703 2,690 Interest 13 99 Aircraft rents 564 583 Reservations and handling 2,454 2,155 Engine and airframe overhaul 3,311 2,242 costs Fuel 1,196 831 Other 2,206 2,967 $ 17,376 $ 16,121
6. Debt On November 1, 1995, the Company entered into a line of credit agreement with a financial institution which, based on a specified percentage of outstanding interline receivables (financing base), provides for borrowings of up to $20 million. Interest is payable monthly at a rate of prime (8.25% at December 31, 1996) plus 1.25%. Under the terms of the line of credit agreement, at December 31, 1996, the Company's borrowing limit was approximately $8.6 million. There was no balance outstanding under the line of credit at December 31, 1995, or December 31, 1996. The line of credit is collateralized by interline receivables and general intangibles, and will expire on November 1, 1998, or upon termination of the United Express marketing agreement whichever is sooner.
Through October 31, 1995, the Company had a line of credit arrangement with a financial institution which, based on a specified percentage of outstanding interline receivables (financing base), provided for borrowings of up to $17 million. Interest was payable monthly at a rate of prime (8.5% at December 31, 1994) plus 2.0%. The weighted average interest rate for the year ended December 31, 1994 was 9.13%. At December 31, 1994, the Company's available borrowing was approximately $3,187,000 and the outstanding balance was approximately $6,357,000. The line of credit was collateralized by interline receivables, unprocessed tickets, inventories and equipment.
Long-term debt consists of the following: (in thousands) December 31, 1996 1995 Note payable to institutional lender, due October 1, 2000, principal and interest payable in monthly installments of $776 $934 $20,369 with interest at 10%, collateralized by engines
Note payable to airport authority, due April 1, 2001, principal payable monthly with interest at 6.5% through March 31, 760 907 1995 and prime plus 1.5% thereafter through maturity, collateralized by expendable parts inventory
Note payable to institutional lender, due May 1, 1999, principal and interest payable in monthly installments of 520 695 $20,734 with interest at 12%, collateralized by aircraft engines
Note payable to institutional lender, due October 1, 1998, principal payable monthly with interest at 6.27%, 466 - unsecured Note payable to institutional lender, due December 31, 1999, principal and interest payable in monthly installments 448 574 of $14,026 with interest at 8%, collateralized by spare parts
Note payable to other airline, due March 31, 1998, principal payable in quarterly installments of $38,400 with interest at 192 346 9%, collateralized by ground support equipment
Note payable to institutional lender, due May 1, 1999, principal and interest payable in monthly installments of 253 339 $10,112 with interest at 12%, collateralized by spare parts
Note payable to institutional lender for two de-icing trucks, due March 1, 1998, principal and interest payable in 128 225 monthly installments of $9,469 with interest at 9%, collateralized by the trucks
Note payable to institutional lender, due October 1, 2000, principal and interest payable in monthly installments of 177 215 $4,731 with interest at 10%, collateralized by spare parts
Note payable to institutional lender, due March 12, 1996, principal and interest payable in monthly installments of - 42 $14,115 with interest at 8.5%, collateralized by spare parts
Other 6 198 Total 3,726 4,474 Less: Current Portion 1,319 1,214 $2,407 $3,260
On December 30, 1994, the Company entered into a $20 million financing agreement with JSX Capital Corporation ("JSX"), an affiliate of British Aerospace, Inc. ("BAI"). This arrangement included the conversion of an outstanding loan on a revolving credit facility of $10.0 million to equity, an additional $1.0 million cash equity investment, creation of a term loan facility in the amount of $4.0 million, issuance of redeemable convertible preferred stock of approximately $3.8 million, and a new revolving line of credit facility of $5.0 million.
The $4.0 million convertible term loan was due October 31, 1999, with interest at prime plus 2%, payable monthly, except that through June 30, 1995, interest was deferrable and could be added to the principal balance, at the Company's option. The principal repayment consisted of 12 equal payments of principal (plus the pro rata portion of any unpaid interest) payable on April 30, July 31, and October 31 of the years 1996 through 1999. Any principal or interest unpaid as of October 31, 1999, could, at the option of JSX, be converted into common stock at $7.00 per share at any time thereafter until paid. The term loan was collateralized by the Company's fixed assets and accounts receivable. During 1995, the Company prepaid the balance in full at a discount which resulted in an extraordinary gain of $400,000.
A total of 3,825 shares of Series A Redeemable Convertible Preferred Stock at $1,000 per share with liquidation preference of full face amount plus accrued and unpaid dividends was issued, resulting in total proceeds of $3,825,000. The shares were to be redeemed by the Company at the end of 7 years. The shares may be redeemed earlier at the option of the Company. The Company redeemed, at par, the Series A Redeemable, Convertible, Preferred Stock on March 29, 1996.
The Company did not borrow against the $5.0 million revolving credit facility during 1995 . On July 1, 1995, the maximum amount of the revolving credit facility was reduced to $2.5 million as specified in the original agreement. The Company never borrowed against the revolving credit facility and the Company terminated the facility in June 1996.
During 1994, the Company entered into a revolving line of credit arrangement with JSX which allowed it to borrow a maximum of $10,000,000. Interest was payable monthly at rates ranging from prime plus 3% to prime plus 5% depending on the level of borrowings. This revolving line of credit arrangement was repaid by the Company issuing common and preferred stock in connection with the financing arrangement entered into on December 30, 1994. As of December 31, 1996, the portions of long-term debt due in the five subsequent years are as follows:
(in thousands) 1997 $ 1,319 1998 1,161 1999 753 2000 427 2001 66 $ 3,726
At December 31, 1996, the Company met all covenants associated with its debt and marketing agreements. In October 1996, the Company entered into an agreement to purchase the ACASNS Systems for $2.5 million to be financed by the supplier subsequent to year-end. The payments will be made in thirty-one installments on each installation for all aircraft in the Company's fleet.
7. Obligations The Company leases certain equipment for Under noncancellable terms of more than one year. Interest Capital rates for these leases range from 8.0% to 19.45%. The Leases net book value of the equipment under capital leases at December 31, 1995, and 1996 is $5,190,182, and $5,187,298 respectively. The leases were capitalized at the present value of the lease payments.
At December 31, 1996, the future minimum payments, by year and in the aggregate, together with the present value of the net minimum lease payments, are as follows:
(in thousands) Year Ending December 31, 1997 $ 1,762 1998 1,649 1999 1,541 2000 412 2001 94 Future minimum lease payments 5,458 Amount representing interest 695 Present value of minimum lease 4,763 payments Less: Current maturities 1,497 $ 3,266
8. Operating The Company leases its principal administrative and Leases flight facilities under operating leases expiring in 2004 with no options for renewal. Future minimum lease payments will average approximately $400,000 per year for a total of $2,800,000 through the end of the lease.
The Company's lease agreements generally provide that the Company pay taxes, maintenance, insurance and other operating expenses applicable to leased assets. Operating lease expense was $40,312,627; $30,498,699; and $33,789,204 for the years ended December 31, 1994, 1995 and 1996, respectively.
Future minimum lease payments under noncancellable aircraft operating leases at December 31, 1996 are as follows:
(in thousands) Year ending December 31, 1997 $ 28,924 1998 28,738 1999 28,738 2000 28,738 2001 28,738 2002 - 2006 122,814 2007 - 2011 60,452 Total minimum lease $ 327,142 payments
On February 23, 1997, the Company entered into an agreement with AI(R) to acquire twelve new J-41 aircraft. Delivery of the twelve aircraft began in March 1997 and will continue through mid 1999 with five aircraft scheduled for delivery in 1997.
On January 28, 1997, the Company announced an agreement with Bombardier, Inc. to purchase twelve Canadair Regional Jets with options for thirty-six additional aircraft. The delivery schedule provides for the Company to take delivery of four aircraft in 1997 commencing in July. The remaining eight aircraft will be delivered during 1998. Under the terms of the agreement, the Company is required to make deposits with the manufacturer totaling $15.0 million on or before April 1, 1997. The Company deposited $4.0 million on January 9, 1997, and will execute a short term promissory note with the manufacturer for the remaining $11.0 million at 8% annual interest. The note on April 1, 1997 will be payable in full including accumulated interest, upon delivery of the first aircraft in July 1997.
9. Stockholders' Stock Option Plans Equity The Company has two nonqualified stock option plans which provide for the issuance of options to purchase common stock of the Company to employees and directors of the Company. Under the plans, options are granted by the compensation committee of the board of directors and become exercisable over a three year period, commencing one year after the date of the grant.
The Company has reserved 1,500,000 shares of common stock for issuance upon the exercise of options granted under the plan. The purchase price of the stock is 100% of its fair market value at the date of grant.
Stock option transactions were as follows:
Options outstanding, December 31,1993 709,105 Granted (at $2.875 to $8.25 per share) 69,000 Exercised (at $2.08 to $2.50 per share) (22,080) Canceled (70,170) Expired (at $2.08 to $2.50 per share) (28,333) Options outstanding, December 31, 1994 657,522 Granted (at $2.50 to $8.875 per share) 184,667 Exercised (at $2.08 to $9.75) (31,941) Canceled (77,336) Options outstanding, December 31,1995 732,912 Granted (at $6.375 to $16.125 per share) 397,500 Exercised (at $9.375 to $17.125) (142,499) Canceled (29,501) Options outstanding, December 31,1996 958,412 Exercisable at December 31, 1996 479,779 Available for grant at December 31,1996 324,757
The exercise price of stock options at December 31, 1996, ranged from $2.08 to $16.125 per share with a weighted average exercise price and remaining contractual life of $10.25 and 7.5 years, respectively.
The estimated per share weighted average fair value of stock options granted during 1995 and 1996 was $4.75 and $10.50, respectively, on the date of grant. A risk-free interest rate of 5.80% and 5.25% for 1995 and 1996, and a 135% and 240% volatility rate for 1995 and 1996, respectively, with an expected life of ten years for both 1995 and 1996, was assumed in estimating the fair value.
The following summarizes the pro forma effects assuming compensation for such awards had been recorded based upon the estimated fair value (in thousands, except per share data):
1996 1995 As Pro As Pro Reported Forma Reported Forma
Net Income $19,158 $15,223 $12,902 $12,146
Primary earnings per share $2.14 $1.70 $1.44 $1.39
Fully diluted earnings per $2.14 $1.70 $1.37 $1.29 share
Preferred Stock
The Board of Directors of the Company is authorized to provide for the issuance by the Company of preferred stock in one or more series and to fix the rights, preferences, privileges, qualifications, limitations and restrictions thereof, including, without limitation, dividend rights, dividend rates, conversion rights, voting rights, terms of redemption or repurchase, redemption or repurchase prices, limitations or restrictions thereon, liquidation preferences and the number of shares constituting any series or the designation of such series, without any further vote or action by the stockholders. The issuance of any series of preferred stock may have an adverse effect on the rights of holders of common stock, and could decrease the amount of earnings and assets available for distribution to holders of common stock. In addition, any issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company.
At December 31, 1995, and 1996, the Company had 5,000,000 shares of $.02 par value preferred stock authorized. 8,000 of those shares were designated in 1994 as Series A Cumulative Convertible Preferred Stock, of which 3,825 shares were issued as of December 31, 1995. These shares were issued in connection with a financing arrangement entered into by the Company on December 30, 1994 (see Note 6). In January 1996, the Company's Board of Directors declared dividends of $334,688 on its Series A Cumulative Convertible Preferred Stock. This represents accrued dividends for the year ended December 31, 1995, in accordance with the financing arrangement entered into by the Company in December 1994 (see Note 6). The Company paid these dividends in February 1996. As of December 31, 1995, this amount was reflected in accrued liabilities in the accompanying financial statements.
The Company redeemed $3.8 million in Series A Cumulative Convertible Preferred Stock on March 29, 1996. The preferred stock was issued to JSX in December 1994 as part of a $20 million financing agreement consisting of an equity investment and available borrowings. The preferred stock was convertible into common stock at the option of JSX at any time on or after September 15, 1997.
10. Employee Effective October 11, 1991, the Company established an Benefit Employee Stock Ownership Plan (the "ESOP") covering Plans substantially all employees. For each of the years 1992 through 1995, the Company made contributions to the ESOP which were used in part to make loan and interest payments. For the year ended December 31, 1995, the Company made contributions to the ESOP amounting to $131,040. No contribution was made in 1996. Shares of common stock acquired by the ESOP are to be allocated to each employee based on the employee's annual compensation.
Effective January 1, 1992, the Company adopted a 401(k) Plan (the "Plan"). The Plan covers substantially all full-time employees who meet the Plan's eligibility requirements. Employees may elect a salary reduction contribution up to 17% of their annual compensation not to exceed the maximum amount allowed by the Internal Revenue Service.
The Company may make a discretionary contribution to the Plan each year; no such contribution was made by the Company for the year ended December 31, 1994. However, the Company did make contributions of $16,000 and $28,920 for the years ended December 31, 1995 and 1996, respectively. Effective October 1, 1994, the Plan was amended to require the Company to make contributions to the Plan for eligible pilots in exchange for certain concessions. These contributions are in excess of any discretionary contributions made for the pilots under the original terms of the plan. The contribution is 100% vested and equal to 3% of the first $15,000 of compensation plus 2% of compensation in excess of $15,000. The Company's contributions for the pilots shall not exceed 15% of the Company's adjusted net income before extraordinary items for such plan year. The Company's obligations to make contributions with respect to all plan years in the aggregate is limited to $2.5 million. Contribution expense was approximately $370,000 and $395,000 for 1996 and 1995 respectively. No contribution was made for 1994.
Effective June 1, 1995, the Plan was amended to allow the Company to make a discretionary matching contribution for non-union employees equal to 25% of salary contributions up to 4% of total compensation. Effective April 1, 1997, all eligible pilots will be included under the original terms of the Plan.
In addition to the pilot 401(k), the Company has profit sharing programs which result in periodic payments to all eligible employees. Compensation, which is based on attainment of certain performance and financial goals, was approximately $2.6 million and $1.2 million in 1996 and 1995, respectively.
11. Income The provision (benefit) for income taxes includes Taxes the following components:
(in thousands) Year Ending December 31, 1996 1995 1994 Federal and state: Current 2,090 288 - Deferred (1,640) (1,500) - Total provision(benefit) $ 450 $(1,212) $ -
A reconciliation of income tax expense (benefit) for taxes on income at the applicable federal and state statutory income tax rates (35% federal statutory rate and 5% state statutory rate for 1994, 1995 and 1996) to the tax provision (benefit) recorded is as follows:
(in thousands) Year ending December 31, 1996 1995 1994 Income tax expense (benefit) $6,863 $4,092 $(8,798) at statutory rate Increase (decrease) in tax expense (benefit): State income taxes, net 980 585 (1,257) of federal benefit Change in valuation reserve for (1,640) (1,500) - deferred tax asset Generation (utilization) of net (5,811) (4,677) 10,055 operating loss carryforward Alternative minimum tax expense - 210 - ("AMT") Other 58 78 - Income tax expense $ 450 $(1,212) $ - (benefit)
Deferred income taxes result from temporary differences which are the result of provisions of the tax laws that either require or permit certain items of income or expense to be reported for tax purposes in different periods than for financial reporting.
The following is a summary of the Company's deferred income taxes as of December 31, 1996, and 1995:
(in thousands) December 31, 1996 1995
Deferred tax assets: Engine overhaul $1,324 $897 reserve Intangible assets 1,195 1,396 Net operating - 5,840 loss carryforward Restructuring - 204 accrual Revenue valuation 1,362 1,443 reserves Reserve for bad 265 436 debts Alternative minimum tax 661 244 credit carryforwards Other 358 330 5,165 10,790 Valuation allowance - (7,667) Net deferred tax 5,165 3,123 assets Deferred tax liabilities: Depreciation (1,935) (1,438) Preoperating costs (90) (185)
Total (2,025) (1,623) deferred tax liabilities Net deferred income $3,140 $1,500 taxes
The valuation allowance established in 1995 was eliminated in 1996 as the Company believes that the future realization of the deferred tax asset is more likely than not.
The Tax Reform Act of 1986 enacted an alternative minimum tax system, generally effective for taxable years beginning after December 31, 1986. The Company is subject to alternative minimum tax of approximately $1.1 million for the year ended December 31, 1996. This amount of AMT tax in excess of regular tax may be utilized as a credit carryover against income tax payable in future periods. The Company has alternative minimum tax credit carryforwards available of approximately $661,000 at December 31, 1996.
12. Aircraft Commitments As of February 23, 1997, the Company entered into an agreement in principle with AI(R) to acquire twelve new J-41 aircraft. Delivery of the twelve aircraft is to began in March 1997 and will continue through mid 1999. In 1997 five aircraft are scheduled for delivery.
On January 28, 1997, the Company announced its decision to acquire twelve CRJs from Bombardier, Inc. with the option to acquire an additional thirty-six jets. Deliveries are scheduled to begin as early as July 1997 with revenue passenger service expected to begin in the Fall. Four jets are scheduled for delivery in 1997 and eight in 1998. The CRJ is a fifty seat passenger twin engine aircraft designed to serve medium-range and small markets. The Company is currently working with its marketing partner, United Airlines, in an effort to incorporate the regional jets into its existing United Express product.
The Company is exploring various third party lease financing arrangements for the aircraft. However, the Company has backup lease financing arrangements or sufficient financing support with the manufacturer such that the Company believes it will be able to acquire the aircraft at competitive rates.
Brasilia Options
The Company acquired options to purchase ten Brasilia aircraft at a total purchase price of approximately $68 million as part of the ACA acquisition in 1991. This agreement was amended during 1992 and delivery dates were extended through October 1995. The Company assigned a value of $6 million to these options. These options were charged to expense during 1994 in connection with the Company's restructuring plan (see Note 13).
Employment Agreements
In October 1995, the Company executed an amended employment agreement with its President and Chief Executive Officer . The agreement is effective through October 1998 after which it will extend automatically for successive twelve-month periods unless either party terminates it upon 60 days notice. The Company will pay the President and Chief Executive Officer a specific annual salary subject to annual review and adjustment. The officer is also eligible to participate in the Company's incentive bonus and stock option plans.
Maintenance Facility
The Company has also begun to address the need for expanding its facilities due to the planned increase in fleet size. The Company intends to build or lease a hangar facility of approximately 85,000 square feet for planned occupancy during 1998 large enough to consolidate its future maintenance operations. The final site has not been determined but the Washington- Dulles location is the leading contender for the new maintenance facility due to the existence of the Company's hub operation. The Company has applied to Loudoun County, VA for a tax exempt bond issuance facility in the amount of $11.0 million to finance the proposed facility.
13. In 1994 the Company commenced a major restructuring Restructuring plan. The basis of the plan was to simplify the Charges fleet by eliminating the EMB-120 and Dash-8 aircraft fleets in conjunction with the elimination of unprofitable routes, the consolidation of maintenance bases and other cost saving measures.
As of December 31, 1995, the Company's restructuring plan regarding the elimination of the EMB-120 aircraft is complete. All aircraft were returned as of December 31, 1994, and all spare parts were delivered as of the end of the second quarter 1995. In the second quarter 1994 the Company reserved approximately $2.2 million including $0.4 million in unamortized financing credits for EMB-120 restructuring, and $6.0 million related to EMB-120 purchase options.
For the full year 1995 the Company paid approximately $1.9 million against remaining reserves as of December 31, 1994, for a total of $2.6 million since the reserves were established in 1994. These payments also included return condition payments to British Aerospace for J-31 aircraft received from WestAir. The Company received net proceeds from WestAir during 1995 of $2.1 million representing proceeds for spare parts and J-31 return condition payments, offset by EMB-120 return condition payments due WestAir.
There are no remaining reserves related to restructuring.
As of December 31, 1995, the Company's restructuring plan regarding the elimination of the Dash-8 aircraft was substantially complete. All aircraft were returned as of the end of the first quarter 1995, and all spare parts were delivered as of the end of the second quarter 1995. In the third and fourth quarters of 1994 the Company reserved approximately $5.4 million for Dash-8 restructuring.
For the full year 1995 the Company paid $4.0 million net of reimbursements from United against remaining reserves as of December 31, 1994, for a total of $4.3 million since the reserves were established in 1994. The Company also reversed excess reserves of $0.5 million related to pilot requalification and engine overhaul reserves.
The Company received approximately $2.6 million from United consisting of excess return condition payments and reimbursements for Dash-8 maintenance and spare parts repair costs previously paid for by the Company.
The Company concluded the accounting for the EMB- 120 restructuring plan as of December 31, 1995 and the Dash-8 restructuring plan as of June 30, 1996. There are no remaining reserves related to restructuring.
14. Litigation The Company is a party to routine litigation incidental to its business, none of which is likely to have a material effect on the Company's financial position. As of March 20, 1997, the Company had no FAA proposed civil penalties pending.
The Company is a party to an action pending in the United States District Court for the Southern District of Ohio known as 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. The Company believes that all claims resulting from this litigation remain fully covered under the Company's insurance policy. 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. As of March 21, 1997, the matter has not been set for trial.
The Company is in litigation with AMFA over the issue of whether AMFA has a right to strike prior to the exhaustion of mediation pursuant to the Railway Labor Act. The legal issue arose over the Company's imposition of certain unilateral work rule changes during the period between union certification and an initial collective bargaining agreement. AMFA objected to this action, but the U.S. District Court for the Southern District of New York, on December 14, 1995, ruled in favor of the Company, declining to render AMFA's requested declaratory judgment and expressly stating that AMFA was prohibited from striking at that time. In Aircraft Mechanics Fraternal Association v. Atlantic Coast Airlines, 5 F.3d 90, the U.S. Court of Appeals for the Second Circuit affirmed the District Court's ruling. AMFA subsequently petitioned again to the U.S. Court of Appeals for the Second Circuit to consider the issue, not previously addressed by the Court, that the company's actions, while legal, should allow AMFA to engage in self-help, including the right to strike. The Second Circuit heard oral arguments on this matter in January 1997 and the parties are awaiting its decision.
15. Related The Company paid approximately $42,500 and $25,000 Party for the years ended December 31, 1994 and 1995, respectively, in consulting fees to The Acker Group, Transactions a Company owned by one of the Company's officers/stockholders. The agreement under which the fees were paid ended as of February 1995.
16. Financial In December 1995, the Company adopted Statement of Financial Accounting Standards No. 107, "Disclosure Instruments of Fair Value of Financial Instruments" (SFAS 107). SFAS 107 requires the disclosure of the fair value of financial instruments; however, this information does not represent the aggregate net fair value of the Company. Some of the information used to determine fair value is subjective and judgmental in nature; therefore, fair value estimates, especially for less marketable securities, may vary. The amounts actually realized or paid upon settlement or maturity could be significantly different.
Unless quoted market price indicates otherwise, the fair values of cash and cash equivalents generally approximate market because of the short maturity of these instruments. The Company has estimated the fair value of long-term debt based on quoted market prices for similar loans. The estimated fair value of the redeemable preferred stock was obtained by consulting with the holder which is knowledgeable in the valuation of such a financial instrument.
The estimated fair values of the Company's financial instruments, none of which are held for trading purposes, are summarized as follows (brackets denote liability):
(in thousands) December 31, December 31, 1996 1995 Estimated Estimated Carrying Carrying Fair Fair Amount Value Amount Value Cash and cash $21,470 $21,470 $8,396 $8,396 equivalents Long-term debt (excludes capital lease (3,726) (3,912) (4,474) (4,275) obligations)
Redeemable preferred - - 3,825 4,160 stock
17. Supplemental Cash Flow Year ended 1996 1995 1994 Information December 31, (in thousands) Supplemental disclosures of cash flow information: Cash paid $ 883 $1,804 $1,967 during the 1,319 190 - period: - Interest - Income taxes
The following noncash investing and financing activities took place in 1994, 1995 and 1996:
In 1994 the Company acquired approximately $2,485,000 in rotable parts under capital lease obligations and by the issuance of notes. These purchases were financed by suppliers.
In 1995 the Company acquired approximately $2,250,388 in rotable parts under capital lease obligations and by issuing notes. These purchases were financed by suppliers.
In December 1995 the Company accrued dividends of $334,688 on its Series A Cumulative Convertible Preferred Stock (see Note 9).
In 1996, the Company acquired approximately $1,194,569 in rotable parts, ground equipment, telephone system upgrades and Director's and Officer's Liability Insurance under capital lease obligations and by issuing notes. These purchases were financed by suppliers and outside lenders.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Schedule II
ATLANTIC COAST AIRLINES, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS