UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 333-59359
FINE AIR SERVICES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 65-083857
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2261 N.W. 67TH AVENUE
BUILDING 700
MIAMI, FLORIDA 33122
(Address of principal executive offices) (Zip Code)
(305) 871-6606
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
The number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of September 30, 1998, was 3,000.
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FINE AIR SERVICES CORP.
FORM 10-Q
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998...................................................3
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1998.......................4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1998.............................5
Notes to Consolidated Financial
Statements...........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................9
PART II OTHER INFORMATION
Item 1. Legal
Proceedings.........................................................14
Item 6. Exhibits and Reports on Form 8-K....................................14
SIGNATURES ................................................................15
2
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FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 138,259,291 $ 2,276,912
Investment securities............................................. 43,094 56,602
Accounts receivable, net of allowance for losses of $1,590,000
and $1,247,000, respectively.................................... 14,900,662 14,847,410
Loans receivable, current portion................................. 1,130,669 430,669
Expendable parts.................................................. 369,373 545,998
Prepaid expenses and other current assets......................... 654,033 639,042
------------- -------------
Total current assets............................................ 155,357,122 18,796,633
------------- -------------
Property and equipment:
Flight equipment.................................................. 90,588,918 78,085,073
Other............................................................. 28,823,968 13,942,209
------------- -------------
119,412,886 92,027,282
Less accumulated depreciation and amortization.................... (44,903,812) (35,446,183)
------------- -------------
Net property and equipment........................................ 74,509,074 56,581,099
------------- -------------
Other assets:
Restricted cash................................................... 726,613 709,012
Accounts receivable from related party............................ 3,057,419 1,753,000
Loans receivable, less current portion............................ 3,249,948 3,569,331
Deposits and other assets......................................... 1,926,588 983,213
Deferred debt issuance costs...................................... 6,477,292 453,427
------------- -------------
Total assets $ 245,304,056 $ 82,845,715
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 0 $ 4,305,045
Accounts payable.................................................. 4,635,514 5,448,188
Interest payable.................................................. 5,889,824 801,256
Accrued expenses.................................................. 5,064,014 5,158,986
Capital lease obligation, current portion......................... 113,014 113,014
------------- -------------
Total current liabilities....................................... 15,702,366 15,826,489
Capital lease obligation, less current portion....................... 137,227 196,400
Long-term debt, less current portion................................. 0 24,779,630
9-7/8% Senior Notes due 2008......................................... 190,000,000 0
Other debt........................................................... 0 230,000
------------- -------------
Total liabilities............................................... 205,839,593 41,032,519
Commitments and contingencies ------------- -------------
Stockholders' equity:
Common stock, $0.01 par value; 3,000 shares authorized, issued
and outstanding................................................. 30 30
Retained earnings................................................. 39,464,433 41,799,668
Net unrealized holding gains on investment securities............. 0 13,498
------------- -------------
Total stockholders' equity...................................... 39,464,463 41,813,196
------------- -------------
Total liabilities and stockholders' equity...................... $ 245,304,056 $ 82,845,715
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Scheduled cargo services........... $ 18,912,853 $ 12,111,044 $ 55,703,530 $ 45,765,137
ACMI services...................... 7,996,195 6,540,163 24,051,398 23,886,095
Repairs, training and other........ 670,890 705,808 1,688,703 1,908,788
-------------- ------------- -------------- -------------
Total operating revenues......... 27,579,938 19,357,015 81,443,631 71,560,020
-------------- ------------- -------------- -------------
Operating expenses:
Flying operations.................. 10,081,268 8,313,104 29,708,849 27,502,987
Aircraft and traffic servicing..... 3,171,880 2,234,859 8,673,464 6,601,082
Maintenance........................ 5,029,063 4,535,241 13,101,583 10,588,511
General and administrative......... 4,592,878 4,288,874 13,166,538 11,760,805
Selling............................ 1,563,781 1,505,277 4,454,714 4,276,449
Depreciation and amortization...... 3,264,398 2,902,622 9,457,629 8,590,141
-------------- ------------- -------------- -------------
Total operating expenses......... 27,703,268 23,779,977 78,562,777 69,319,975
-------------- ------------- -------------- -------------
Operating income (loss).......... (123,330) (4,422,962) 2,880,854 2,240,045
-------------- ------------- -------------- -------------
Other income (expense):
Interest income.................... 2,110,543 36,249 2,940,221 107,207
Interest expense................... (4,859,541) (202,134) (7,403,077) (636,222)
Gain on insurance settlement....... 0 3,905,373 0 3,905,373
Initial public offering costs...... 0 (978,243) 0 (978,243)
Other, net......................... 7,677 (926,953) 3,271,684 (874,983)
-------------- ------------- -------------- -------------
Total other, net................. (2,741,321) 1,834,292 (1,191,172) 1,523,132
-------------- ------------- -------------- -------------
Net (loss) income..................... $ (2,864,651) $ (2,588,670) $ 1,689,682 $ 3,763,177
============== ============= ============== =============
Net (loss) income per common
share - basic...................... $ (954.88) $ (862.89) $ 563.23 $ 1,254.39
============== ============= ============== =============
Weighted average number of common shares
outstanding........................ 3,000 3,000 3,000 3,000
============== ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
<TABLE>
<CAPTION>
FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 1,689,682 $ 3,763,177
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary gain on repurchase of Senior Notes......................... (165,520) 0
Depreciation and amortization............................................ 9,457,629 8,590,141
Amortization of deferred debt issuance costs............................. 344,078 0
Bad debt expense......................................................... 352,359 661,910
Excess of insurance proceeds over net book value of assets destroyed..... 0 (3,905,373)
Loss on sales of investment securities................................... 0 23,546
Changes in operating assets and liabilities:
Accounts receivable.................................................... (1,710,030) 8,403,198
Expendable parts....................................................... 176,625 176,625
Prepaid expenses and other assets...................................... (958,366) (1,365,912)
Accounts payable....................................................... (812,674) 1,036,653
Interest payable....................................................... 5,088,568 (209,553)
Accrued expenses....................................................... (94,972) 618,476
Other liabilities...................................................... (230,000) 0
------------- -------------
Total adjustments.................................................... 11,447,697 14,029,711
------------- -------------
Net cash provided by operating activities.............................. 13,137,379 17,792,888
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment......................................... (27,337,214) (13,392,451)
Increase in restricted cash................................................. (17,601) (514,956)
Proceeds from sales of investment securities................................ 0 119,165
Increase in loans receivable................................................ (700,000) 0
Proceeds from insurance settlement.......................................... 0 6,500,000
Principal payments on notes receivable...................................... 319,383 0
------------- -------------
Net cash used in investing activities.................................. (27,735,432) (7,288,242)
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt................................................ 212,000,000 0
Deferred debt issuance costs................................................ (6,702,413) 0
Principal payments on long-term debt........................................ (50,584,675) (1,334,369)
Payment on line of credit................................................... 0 (700,000)
Distributions to stockholders............................................... (4,024,917) (3,163,523)
Payments of capital lease obligations....................................... (107,563) 0
------------- -------------
Net cash provided by (used in) financing activities.................... 150,580,432 (5,197,892)
------------- -------------
Increase in cash and cash equivalents......................................... 135,982,379 5,306,754
Cash and cash equivalents, beginning of period................................ 2,276,912 972,058
------------- -------------
Cash and cash equivalents, end of period...................................... $ 138,259,291 $ 6,278,812
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. OPERATIONS AND BASIS OF PRESENTATION
Fine Air Services Corp. and subsidiaries (the "Company") is primarily
engaged in interstate, overseas and foreign charter and scheduled air
transportation of cargo and mail pursuant to authority granted by the United
States Department of Transportation and operates in the United States, South and
Central America, and the Caribbean. The Company has worldwide charter authority
granted by the United States Department of Transportation and is also engaged in
aircraft leasing and repair and maintenance. The consolidated financial
statements include the accounts of the Fine Air Services Corp. and its wholly
owned subsidiaries, Fine Air Services, Inc. ("Fine Air") and Agro Air
Associates, Inc. ("Agro Air"). All significant intercompany accounts and
transactions have been eliminated.
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles for interim
financial information and the rules and regulations of the Securities and
Exchange Commission (the "SEC"). The unaudited consolidated interim financial
information reflects all normal recurring adjustments, which are, in the opinion
of management, necessary for a fair representation of the interim unaudited
consolidated financial statements. The balance sheet at December 31, 1997
included herein has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by
generally accepted accounting principles for completed financial statements.
These interim results of operations for the three and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of results that may
be expected for the full fiscal years. The unaudited consolidated financial
statements herein should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Registration Statement on
Form S-4, as amended (File No. 333-59359), declared effective by the SEC on
October 5, 1998.
The accounting policies followed for interim financial reporting are
the same as those disclosed in Note 2 of the Notes to the Company's consolidated
financial statements for the year ended December 31, 1997.
2. EARNINGS PER SHARE
Basic earnings or loss per common share is computed by dividing income
or loss by the weighted average number of common shares outstanding. During the
periods ended September 30, 1998 and 1997, there were no dilutive securities
outstanding.
3. INCOME TAXES
The Company has elected to be taxed as an S corporation and each of
Fine Air and Agro Air have elected to be taxed as a qualified sub-chapter S
subsidiary under provisions of the Internal Revenue Code. Accordingly, the
Company is not subject to Federal and State income taxes. Instead, the taxable
income is included in the individual income tax returns of the stockholders.
The Company's tax returns for the years ended December 31, 1993 and
1994 are currently under examination by the Internal Revenue Service. The
examination relates specifically to the Company's treatment of certain repairs
and maintenance, including safety checks mandated by the Federal Aviation
Administration, as expenses for tax purposes. Should the Internal Revenue
Service take the position that these costs should have been capitalized and
subsequently depreciated, a substantial assessment could result. Because the
examination is in process, the amount of such an assessment is not presently
determinable. The Company believes that its treatment of such costs as
deductible for tax purposes is proper and is prepared to defend its position
vigorously, if it becomes necessary.
6
<PAGE>
4. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
For the nine month periods ended September 30, 1998 and 1997, sales to
the Company's largest customer comprised 10% and 14%, respectively, of total
operating revenues. For the three month periods ended September 30, 1998 and
1997, such sales were 7% and 13%, respectively, of total operating revenues.
This customer also accounted for 35% and 20% of net accounts receivable at
September 30, 1998 and December 31, 1997, respectively. The Company also holds a
note receivable from this customer in the amount of $3,680,617 as of September
30, 1998.
On March 31, 1998, the Company and this customer entered into a
security agreement, whereby the customer granted the Company an unconditional
and continuing security interest in all of the customer's tangible and
intangible assets (the "Collateral"). The Company has historically offered
extended ACMI lease payments to this customer. It is management's intent to
continue to provide this customer with sufficient aircraft so that the customer
is able to operate at the same or at an increased level of operations.
Management believes that the Collateral is sufficient to ensure the
recoverability of the customer's accounts and note receivable balances.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 requires that public entities report financial and descriptive
information about its reportable operating segments, generally on the basis that
it is used internally for evaluating segment performance. Required disclosure
includes segment profit or loss, certain specific revenue and expense items and
segment assets. It requires reconciliation of disclosed segment information to
the entity's financial statements. Management is currently evaluating the
requirements of SFAS No. 131, which will be implemented for the year ending
December 31, 1998.
6. RELATED PARTY TRANSACTIONS
By December 31, 1999, the Company will be required to install hushkits
on all of its existing fleet of 14 DC-8 aircraft to comply with noise abatement
regulations issued by the Federal Aviation Administration (the "FAA").
Management intends to acquire at least 16 hushkits (including 14 for its
existing DC-8 aircraft and two spares) at an estimated average cost of
approximately $2.25 million per hushkit, which represents the cost to
manufacture and install each hushkit plus $125,000, or approximately $36.0
million in the aggregate. The Company intends to purchase the hushkits from
Quiet Technology Venture, Ltd., ("QTV"), an entity in which its stockholders
have a controlling interest. Management believes that the cost of $2.25 million
per hushkit is significantly lower than the cost of comparable hushkits
applicable to the Company's models of DC-8 aircraft. There can be no assurance
that the costs of acquiring and installing the hushkits on the Company's fleet
will not exceed this estimate or that this installation will be completed on a
timely basis.
As of September 30, 1998 and December 31 1997 the Company had
cumulative advances to QTV of $21,509,000 and $8,804,000, respectively, for the
manufacture of hushkits on its behalf. Such advances represent the cost basis of
the hushkits manufactured (finished goods, work-in-process and raw materials).
The costs of the hushkits noted above have been recorded by the Company as
rotable parts within property and equipment since QTV has deeded title for all
such hushkits and related parts to the Company. The Company capitalizes such
advances when made, which is contemporaneous with the transfer of deed of the
related parts from QTV to the Company. Depreciation will commence on the
hushkits as they are installed on the aircraft.
For the nine months ended September 31, 1998 and 1997, the Company
recorded revenues (repairs, training and other) of approximately $1,505,000 and
$1,060,000, respectively, relating to work performed for QTV. At September 30,
1998 and December 31, 1997, $3,057,000 and $1,753,000 relating to those revenues
were included in accounts receivable, non-current, respectively. The receivable
outstanding as of September 30, 1998 is expected to be realized through the
installation of hushkits produced by QTV.
7
<PAGE>
7. SENIOR NOTES
On June 5, 1998, the Company consummated the sale of $200,000,000
principal amount of 9-7/8% Senior Notes due June 1, 2008. Interest on the Senior
Notes is payable on a semi-annual basis on June 1 and December 1 of each year,
commencing December 1, 1998. The Senior Notes are general unsecured obligations
of the Company and are fully and unconditionally guaranteed by Fine Air and Agro
Air (the "Subsidiary Guarantors") on a joint and several basis.
Separate financial statements of the Subsidiary Guarantors are not
presented because: (i) Fine Air Services Corp. is a holding company with no
independent operations; (ii) each of the Subsidiary Guarantors is a wholly-owned
subsidiary of the Company and together comprise all of the Company's direct and
indirect subsidiaries; and (iii) management has determined that such information
is not material to investors.
On August 14, 1998, the Company repurchased $10,000,000 principal
amount of the Senior Notes at 95% of the face value thereof plus accrued
interest of approximately $203,000.
Contemporaneous with the sale of the Senior Notes, the Company repaid
all outstanding long-term debt.
8. LITIGATION SETTLEMENT
In January 1997, the Company obtained a $3,400,000 judgment against a
former insurance carrier. The judgment was appealed, and final adjudication was
made in February 1998. On March 3, 1998, the Company received the full amount
of the judgment, which was recognized as other income during the three months
ended March 31, 1998.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES.
Revenues increased 43% to $27.6 million in the third quarter of 1998
from $19.3 million in the third quarter of 1997, primarily due to an increase in
revenues from scheduled cargo services of $6.8 million. Revenues in the third
quarter of 1997 were adversely affected by a twenty-three day cessation of
operations in September of 1997. Total block hours flown by the Company's fleet
increased 30.9% to 5,946 in the third quarter of 1998 from 4,544 in the third
quarter of 1997 due primarily to an increase of 1,389 hours flown for the
Company's scheduled cargo services.
Revenues from scheduled cargo services increased 56.2% to $18.9 million
in the third quarter of 1998 from $12.1 million in the third quarter of 1997,
due to an increase in tons of freight transported. Hours flown in scheduled
cargo services increased 69.2% from 2,007 hours to 3,396 hours. Tons of freight
transported increased 50.9% to 24,048 in the third quarter of 1998 from 15,933
in the third quarter of 1997, primarily as a result of increased sales efforts
by the Company's domestic and international sales network in 1998 and the
temporary cessation of operations during September 1997.
Revenues from ACMI services increased 23.1% to $8.0 million in the
third quarter of 1998 from $6.5 million in the third quarter of 1997, due
primarily to increased ACMI rates. Total block hours flown for ACMI services
increased 0.1% to 2,550 in the third quarter of 1998 from 2,539 in the third
quarter of 1997.
Revenues from repairs, training and other decreased to $671,000 in the
third quarter of 1998 from $706,000 in the third quarter of 1997.
OPERATING EXPENSES.
Flying operations expenses increased 21.7% to $10.1 million in the
third quarter of 1998 from $8.3 million in the third quarter of 1997, due
primarily to costs associated with the increase in block hours flown in the
third quarter of 1998. As a percentage of total revenues, flying operations
expenses decreased to 36.6% in the third quarter of 1998 from 43.0% in the third
quarter of 1997 primarily as a result of lower fuel prices in 1998.
Aircraft and traffic servicing expenses increased 45.5% to $3.2 million
in the third quarter of 1998 from $2.2 million in the third quarter of 1997, due
primarily to costs associated with the increase in scheduled cargo services. As
a percentage of total revenues, aircraft and traffic servicing expenses
increased to 11.6% in the third quarter of 1998 from 11.4% in the third quarter
of 1997, due to the Company's emphasis on scheduled cargo service.
Maintenance expenses increased 11.1% to $5.0 million in the third
quarter of 1998 from $4.5 million in the third quarter of 1997 primarily due to
the addition of personnel to handle the increase in block hours and increased
line maintenance costs associated with domestic ACMI contracts operated outside
of the maintenance hub. As a percentage of total revenues, maintenance expenses
decreased to 18.1% in the third quarter of 1998 from 23.3% in the third quarter
of 1997.
General and administrative expenses increased 7.0% to $4.6 million in
the third quarter of 1998 from $4.3 million in the third quarter of 1997, due
primarily to increased salary expense and professional fees to support expanding
operations and the build-up of the Company's infrastructure. As a percentage of
total revenues, general
9
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and administrative expenses decreased to 16.7% in the third quarter of 1998
from 22.3% in the third quarter of 1997.
Selling expenses increased 6.7% to $1.6 million in the third quarter of
1998 from $1.5 million in the third quarter of 1997. As a percentage of total
revenues, selling expenses decreased to 5.8% in the third quarter of 1998 from
7.8% in the third quarter of 1997.
Depreciation and amortization expenses increased 13.8% to $3.3 million
in the third quarter of 1998 from $2.9 million in the third quarter of 1997, due
primarily to increases in capitalized maintenance costs as well as equipment and
leasehold improvements. As a percentage of total revenues, depreciation and
amortization expenses decreased to 12.0% in the third quarter of 1998 from 15.0%
in the third quarter of 1997.
OPERATING INCOME (LOSS). Operating loss improved to $0.1 million in the
third quarter of 1998 from $4.4 million in the third quarter of 1997. The
Company's operating margin improved to (0.1%) in the third quarter of 1998 from
(22.8%) in the third quarter of 1997.
INTEREST AND OTHER INCOME, NET. Interest and other income, net
decreased $4.5 million in the third quarter of 1998 compared to the third
quarter of 1997. Other income in the third quarter of 1997 included a gain on
insurance settlement of $3.9 million partially offset by non-recurring expenses
(rescinded initial public offering costs and FAA Consent Agreement costs) of
approximately $2 million. Interest expense net of interest income increased
$2.6 million in the third quarter of 1998 due primarily to the $200 million
issuance of 9-7/8% senior notes.
NET INCOME (LOSS). As a result of the above factors, net loss increased
to $2.9 million in the third quarter of 1998 from $2.6 million in the third
quarter of 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES.
Revenues increased 13.7% to $81.4 million for the nine months ended
September 30, 1998 from $71.6 million for the nine months ended September 30,
1997, due to an increase in revenues from scheduled cargo services of $9.9
million. Total block hours flown by the Company's fleet increased 12.2% to
17,827 for the nine months ended September 30, 1998 from 15,888 for the nine
months ended September 30, 1997, due to an increase in hours flown from
scheduled cargo services of 2,666 hours partially offset by a decrease in ACMI
hours of 728 hours.
Revenues from scheduled cargo services increased 21.6% to $55.7 million
for the nine months ended September 30, 1998 from $45.8 million for the nine
months ended September 30, 1997, due to increases in tons of freight transported
and the introduction of two new markets. Scheduled hours increased 38.6% from
6,912 hours to 9,578 hours. Revenue from scheduled cargo service operations in
1997 included $2.2 million of fuel surcharges assessed during the first half of
1997. Tons of freight transported increased 25.4% to 70,087 for the nine months
ended September 30, 1998 from 55,907 for the nine months ended September 30,
1997, primarily as a result of increased sales efforts by the Company's domestic
and international sales network in 1998 and the temporary cessation of
operations during September 1997.
Revenues from ACMI services increased 0.4% to $24.0 million for the
nine months ended September 30, 1998 from $23.9 million for the nine months
ended September 30, 1997. During 1998, the Company emphasized its scheduled
cargo service. Total block hours flown for ACMI services decreased 8.8% to 8,248
for the nine months ended September 30, 1998 from 8,976 for the nine months
ended September 30, 1997.
10
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Revenues from repairs, training and other decreased to $1.7 million for
the nine months ended September 30, 1998 from $1.9 million for the nine months
ended September 30, 1997, due primarily to a decrease in third party engine
repairs.
OPERATING EXPENSES.
Flying operations expenses increased 8.0% to $29.7 million for the nine
months ended September 30, 1998 from $27.5 million for the nine months ended
September 30, 1997, due primarily to increased intermodal/interline
transportation and other costs associated with the increase in scheduled cargo
service block hours and tons transported and increased crew costs associated
with the increase in total block hours. The increased costs were partially
offset by a decrease in fuel costs. As a percentage of total revenues, flying
operations expenses decreased to 36.5% for the nine months ended September 30,
1998 from 38.4% for the nine months ended September 30, 1997, primarily as a
result of decreased fuel prices.
Aircraft and traffic servicing expenses increased 31.8% to $8.7 million
for the nine months ended September 30, 1998 from $6.6 million for the nine
months ended September 30, 1997, due primarily to the addition of personnel to
handle the increase in scheduled cargo services, and other cargo related
expenses associated with the increase in tonnage. As a percentage of total
revenues, aircraft and traffic servicing expenses increased to 10.7% for the
nine months ended September 30, 1998 from 9.2% for the nine months ended
September 30, 1997, due to the Company's emphasis on scheduled cargo service.
Maintenance expenses increased 23.6% to $13.1 million for the nine
months ended September 30, 1998 from $10.6 million for the nine months ended
September 30, 1997, due primarily to the increase in block hours operated and to
an increase in field line maintenance requirements associated with new domestic
ACMI contracts. As a percentage of total revenues, maintenance expenses
increased to 16.1% for the nine months ended September 30, 1998 from 14.8% for
the nine months ended September 30, 1997.
General and administrative expenses increased 11.0% to $13.1 million
for the nine months ended September 30, 1998 from $11.8 million for the nine
months ended September 30, 1997, due primarily to increased rent, telephone,
security, and office expenses to support expanding operations and the build-up
of the Company's infrastructure. As a percentage of total revenues, general and
administrative expenses decreased to 16.1% for the nine months ended September
30, 1998 from 16.5% for the nine months ended September 30, 1997.
Selling expenses increased 4.7% to $4.5 million for the nine months
ended September 30, 1998 from $4.3 million for the nine months ended September
30, 1997, primarily due to an increase in commissions and other selling expenses
associated with the increase in scheduled cargo revenues, partially offset by a
$310,000 decrease in provision for bad debts. As a percentage of total revenues,
selling expenses decreased to 5.5% for the nine months ended September 30, 1998
from 6.0% for the nine months ended September 30, 1997.
Depreciation and amortization expenses increased 11.6% to $9.6 million
for the nine months ended September 30, 1998 from $8.6 million for the nine
months ended September 30, 1997, due primarily to increased amortization of
capitalized maintenance costs. As a percentage of total revenues, depreciation
and amortization expenses decreased to 11.8% for the nine months ended September
30, 1998 from 12.0% for the nine months ended September 30, 1997.
OPERATING INCOME. Operating income increased 28.6% to $2.9 million for
the nine months ended September 30, 1998 from $2.2 million for the nine months
ended September 30, 1997. The Company's operating margin increased to 3.5% for
the nine months ended September 30, 1998 from 3.1% for the nine months ended
September 30, 1997.
INTEREST AND OTHER INCOME, NET. Interest and other income, net
decreased $2.7 million for the nine months ended September 30, 1998 compared to
the nine months ended September 30, 1997, due primarily to increased
11
<PAGE>
interest expense net of interest income of $3.9 million in 1998 and a gain on
insurance settlement of $3.9 million recorded in 1997, partially offset by a
gain of $3.4 million related to a lawsuit judgment in 1998. Interest expense
increased to $7.4 million for the nine months ended September 30, 1998 from
$600,000 thousand for the nine months ended September 30, 1997 due primarily to
added borrowings and the accrued interest related to the $200 million issuance
of 9-7/8% senior notes.
NET INCOME. As a result of the above factors, net income decreased
52.2% to $1.7 million for the nine months ended September 30, 1998 from $3.8
million for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's primary source of liquidity
consisted of $138.3 million in cash and cash equivalents compared to $2.3
million at December 31, 1997. The Company had working capital of $139.7 million
at September 30, 1998, compared to $3.0 million at December 31, 1997. In June
1998, the Company received net proceeds of approximately $193.5 million from the
sale of $200 million principal amount of 9-7/8% Senior Notes due 2008 (the
"Senior Notes"). Of such amount, the Company used approximately $41.1 million to
repay other indebtedness.
Net cash provided by operating activities was $17.8 million and $13.1
million during the nine months ended September 30, 1997 and 1998, respectively.
This decrease in cash flow from operating activities was due primarily to lower
credit sales in December 1997 compared to December 1996. Consequently, cash
provided by the decrease in accounts receivable was $8.4 million for the nine
months ended September 30, 1997 compared to cash used in the increase in
accounts receivable of $1.7 million for the nine months ended September 30,
1998. In addition, net income decreased by $2.1 million, and interest payable
increased $5.1 million for the nine months ended September 30, 1998 compared to
a $0.2 million increase for the same period in 1997.
Net cash used in investing activities was $7.3 million and $27.8
million for the nine month periods ended September 30, 1997 and 1998,
respectively. This increase resulted primarily from $12.7 million in advances to
QTV during the nine months ended September 30, 1998 relating to the manufacture
of hushkits required to be installed on the Company's DC-8 aircraft and an
increase of $4.1 million relating to capitalized engine overhaul and heavy
maintenance for the nine month period ended September 30, 1998 as compared to
the nine month period ended September 30, 1997. In addition, net cash used in
investing activities was partly offset in the nine month period ended September
30, 1997 by the receipt of insurance proceeds of $6.5 million.
Net cash provided by financing activities was $150.6 million for the
nine month period ending September 30, 1998 compared to net cash used in
financing activities of $5.2 million for the same period in the prior year. This
increase resulted primarily from the $193.5 million of net proceeds received by
the Company from the sale of the Senior Notes plus an additional $12.0 million
term note relating to the purchase of an L-1011 aircraft, partially offset by
the repayment of all existing debt other than the Senior Notes in the amount of
$41.1 million and the purchase of $10 million principal amount of Senior Notes
with accrued interest for a discounted total of approximately $9.7 million. The
Company made distributions to its shareholders of $3.2 million and $4.0 million
in the nine months ended September 30, 1997 and 1998, respectively, primarily to
enable the shareholders to pay income taxes related to the Company's income.
During May 1998, the Company also made a distribution to its shareholders of
approximately $3.5 million in excess of amounts required by the shareholders to
pay income taxes.
The Company has a $45 million credit facility with NationsCredit
Commercial Corporation (the "Existing Credit Facility"), which expires in
November 2000. Borrowings under the Existing Credit Facility bear interest at
the bank's prime rate plus 0.75%. The unused portion of the line of credit is
subject to a fee at the rate of .30% per annum. Borrowings under the Existing
Credit Facility are collateralized by substantially all of the Company's
existing assets. As of September 30, 1998, no amounts were outstanding under the
Existing Credit Facility.
12
<PAGE>
The Company's tax returns for the years ended December 31, 1993 and
1994 are currently under examination by the Internal Revenue Service ("IRS").
The examination relates specifically to the Company's treatment of certain
repairs and maintenance, including safety checks mandated by the FAA, as
expenses for tax purposes. The Company believes that its treatment of such costs
as deductible for tax purposes is proper and is prepared to defend its position
vigorously, if it becomes necessary. Should the IRS take the position that these
costs should have been capitalized and subsequently depreciated, a substantial
assessment could result. Any such assessment will be taxable directly to the S
Companies' shareholders, rather than to the Company, and the Company will be
required to indemnify such shareholders for the amount of the assessment and any
taxes incurred by them on account of the receipt of such indemnity payment.
Because the examination is in process, the amount of such an assessment is not
presently determinable.
The Company has no material commitments for future capital
expenditures, apart from normal scheduled major airframe and engine repairs and
maintenance and the hushkitting of its DC-8 aircraft. The Company will be
required to install hushkits on its existing fleet of 14 DC-8 aircraft by
December 31, 1999 to comply with noise abatement regulations. The Company
estimates that the average cost of such hushkits will be approximately $2.25
million per aircraft, and that the aggregate cost to the Company to hushkit its
14 DC-8s and to acquire two spare hushkits will be $36.0 million, approximately
$24.6 million of which had been incurred as of September 30, 1998. The Company
intends to purchase hushkits for this purpose from a related party. Management
believes that the cost of the hushkits to be purchased from the related party
will be significantly lower than the cost of other hushkits available in the
market.
The Company believes that the net proceeds from the sale of the Senior
Notes, together with cash flows expected to be generated by operations, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 18 months.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
SFAS No. 131 requires that public entities report financial and descriptive
information about its reportable operating segments, generally on the basis that
it is used internally for evaluating segment performance. Required disclosure
includes segment profit or loss, certain specific revenue and expense items and
segment assets. It requires reconciliations of disclosed segment information to
the entity's financial statements. Management is currently evaluating the
requirements of SFAS No. 131, which will be implemented for the year ending
December 31, 1998.
SEASONALITY
The Company's business has been, and is expected to continue to be,
seasonal in nature, with a majority of the Company's revenues and operating
income falling in the second half of the year (principally the fourth quarter).
The Company's fourth quarter revenues and operating income are typically higher
due to an increase in freight transported in anticipation of and during the
holiday season. In addition to increased fourth quarter revenues from scheduled
cargo services, the Company typically has realized a majority of its ACMI
service revenues from flights conducted during this period.
YEAR 2000 COMPLIANCE
The Company has been assessing the impact that the Year 2000 issue will
have on its computer systems, including both hardware and software. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable years. The Company has completed the
first phase of this project, which included an inventory of its computer network
environment and an assessment of the effort involved to bring its internal
computer system environment to full Year 2000 compliance. Third-party hardware
and software used by the Company are, for the most part, Year 2000 compliant;
those that are not compliant will be upgraded or replaced.
13
<PAGE>
Initial review of the Company's DC-8 and L-1011 aircraft computer systems
indicate that most of the systems are compliant. The Company has also
initiated formal communications with all of its significant suppliers, vendors
and/or large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. Assuming that remediation projects can be implemented as planned, the
Company believes future costs relating to the Year 2000 issue, which will be
expensed as incurred, will not have a material adverse effect on the Company's
business, operations or financial condition.
While the Company believes it is taking all the necessary steps to
assure its Year 2000 compliance, it is dependent on key business partner
compliance to some extent. The Company plans to have all company controllable
systems tested and compliant by mid-1999. The Year 2000 problem is pervasive and
complex as virtually all computer systems worldwide will be affected in some
way. Consequently, no assurance can be given that all Company used third-party
systems and vendors/suppliers can achieve Year 2000 compliance.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a result of the August 1997 accident, the Company is currently
subject to lawsuits brought by the families of the individuals who died and
several businesses that were affected by the accident and is aware of other
claims pending which have not reached litigation. All such litigation is being
defended by the Company's insurance carrier, without reservation of rights, and
management has not reason to believe that the Company's liability insurance
coverage will not be sufficient to cover all claims arising from the accident.
While the Company is from time to time involved in litigation in the
ordinary course of its business, there are no material legal proceedings
currently pending against the Company or to which any of its property is
subject.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
September 30, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
FINE AIR SERVICES CORP.
Date: November 13, 1998 By: /s/ BARRY H. FINE
------------------------------------
Barry H. Fine
President and Chief Executive Officer
By: /s/ ORLANDO M. MACHADO
-------------------------------------
Orlando M. Machado
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 138,259
<SECURITIES> 43
<RECEIVABLES> 23,929
<ALLOWANCES> (1,590)
<INVENTORY> 369
<CURRENT-ASSETS> 155,357
<PP&E> 119,413
<DEPRECIATION> (44,904)
<TOTAL-ASSETS> 245,304
<CURRENT-LIABILITIES> (15,702)
<BONDS> (190,000)
0
0
<COMMON> 0
<OTHER-SE> (39,464)
<TOTAL-LIABILITY-AND-EQUITY> (245,304)
<SALES> (81,444)
<TOTAL-REVENUES> (81,444)
<CGS> 0
<TOTAL-COSTS> 78,563
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 352
<INTEREST-EXPENSE> 7,403
<INCOME-PRETAX> 1,690
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,690
<EPS-PRIMARY> 563.23
<EPS-DILUTED> 563.23
</TABLE>
