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 March 31, 1999
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 65-0838357
(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 [X] No [ ]
The number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of March 31, 1999, was 3,000.
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FINE AIR SERVICES CORP.
FORM 10-Q
INDEX
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited).....3
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and 1999 (unaudited)....................................................4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1999 (unaudited)....................................................5
Notes to Consolidated Financial Statements (unaudited).................................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
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FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
1998 1999
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ASSETS (unaudited)
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Current assets:
Cash and cash equivalents .................................... $ 124,632,274 $ 232,766
Investment securities ........................................ 49,577 44,721
Accounts receivable, net of allowance for losses of
$1,608,000 and $1,673,000, respectively .................... 12,240,690 14,493,941
Loans receivable, current portion ............................ 2,470,757 3,627,005
Interest receivable .......................................... -- 551,094
Expendable parts ............................................. 302,325 231,190
Prepaid expenses and other current assets .................... 487,287 222,623
Aircraft parts inventory ..................................... -- 21,539,303
------------- -------------
Total current assets ....................................... 140,182,910 40,942,643
------------- -------------
Property and equipment:
Flight equipment ............................................. 91,339,013 192,171,538
Other ........................................................ 36,013,106 31,456,477
------------- -------------
127,352,119 223,628,015
Less accumulated depreciation and amortization ............... (44,892,542) (49,457,267)
------------- -------------
Net property and equipment ................................... 82,459,577 174,170,748
------------- -------------
Other assets:
Restricted cash .............................................. 303,504 306,935
Accounts receivable from related party ....................... 3,849,707 4,203,399
Loans and accounts receivable, less current portion .......... 9,351,084 15,204,702
Aircraft and engines held for sale ........................... -- 21,879,500
Deposits and other assets .................................... 1,594,731 1,234,099
Deferred debt issuance costs ................................. 6,316,209 6,119,723
------------- -------------
Total assets ............................................... $ 244,057,722 $ 264,061,749
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 4,186,345 $ 6,181,047
Interest payable ............................................. 1,653,248 6,590,564
Accrued expenses ............................................. 5,750,111 23,571,469
Capital lease obligation, current portion .................... 135,445 139,827
------------- -------------
Total current liabilities .................................. 11,725,149 36,482,907
------------- -------------
Capital lease obligation, less current portion .................. 81,752 43,715
9-7/8% Senior Notes due 2008 .................................... 190,000,000 190,000,000
Other liabilities ............................................... -- 553,982
------------- -------------
Total liabilities .......................................... 201,806,901 227,080,604
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value; 3,000 shares authorized, issued
and outstanding ............................................ 30 30
Retained earnings ............................................ 42,244,318 36,979,498
Net unrealized holding gains on investment securities ........ 6,473 1,617
------------- -------------
Total stockholders' equity ................................. 42,250,821 36,981,145
------------- -------------
Total liabilities and stockholders' equity ................. $ 244,057,722 $ 264,061,749
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The accompanying notes are an integral part of these financial statements
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FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1999
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Revenues:
Scheduled cargo services ........................ $ 17,225,189 $ 20,760,520
ACMI services ................................... 7,510,656 4,412,604
Repairs, training and other ..................... 408,183 2,665,943
------------ ------------
Total operating revenues ...................... 25,144,028 27,839,067
------------ ------------
Operating expenses:
Flying operations ............................... 8,895,716 8,722,997
Aircraft and traffic servicing .................. 2,555,745 3,395,336
Maintenance ..................................... 3,740,235 4,789,878
General and administrative ...................... 4,667,864 4,848,373
Selling ......................................... 1,383,666 1,633,906
Cost of sales - aircraft parts................... -- 408,975
Depreciation and amortization ................... 3,142,885 4,576,974
------------ ------------
Total operating expenses ...................... 24,386,111 28,376,439
------------ ------------
Operating income (loss) ....................... 757,917 (537,372)
------------ ------------
Other income (expense):
Interest income ................................. 118,752 1,984,295
Interest expense ................................ (654,727) (5,175,852)
Gain on insurance settlement .................... 3,388,574 --
Other, net ...................................... 78,416 (234,121)
------------ ------------
Total other, net .............................. 2,931,015 (3,425,678)
------------ ------------
Net income (loss) .................................. $ 3,688,932 $ (3,963,050)
============ ============
Net income (loss) per common share - basic ......... $ 1,229.64 $ (1,321.02)
============ ============
Weighted average number of common shares
outstanding...................................... 3,000 3,000
============ ============
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The accompanying notes are an integral part of these financial statements
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FINE AIR SERVICES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1999
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Cash flows from operating activities:
Net income (loss) ............................................................. $ 3,688,932 $ (3,963,050)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization .............................................. 3,142,885 4,576,974
Amortization of deferred debt issuance costs ............................... -- 200,366
Bad debt expense ........................................................... 99,000 66,000
Changes in operating assets and liabilities; net of effects from acquisition
Accounts receivable ...................................................... 536,006 (4,682,809)
Interest receivable ...................................................... -- (551,094)
Expendable parts ......................................................... 58,875 71,135
Prepaid expenses and other assets ........................................ 225,286 625,296
Aircraft parts inventory ................................................. -- 318,684
Accounts payable ......................................................... (1,012,422) 1,994,702
Interest payable ......................................................... 208,074 4,937,316
Accrued expenses ......................................................... 499,249 (195,229)
Other liabilities ........................................................ -- 553,982
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Total adjustments ...................................................... 3,756,953 7,915,323
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Net cash provided by operating activities ................................ 7,445,885 3,952,273
------------- -------------
Cash flows from investing activities:
Acquisition (Note 6) .......................................................... -- (110,000,000)
Purchases of property and equipment ........................................... (6,740,566) (12,009,045)
Increase in restricted cash ................................................... (6,833) (3,431)
Loan issued for acquisition ................................................... -- (5,000,000)
Principal payments on notes receivable ........................................ 104,101 --
------------- -------------
Net cash used in investing activities .................................... (6,643,298) (127,012,476)
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Cash flows from financing activities:
Deferred debt issuance costs .................................................. -- (3,880)
Principal payments on long-term debt .......................................... (714,286) --
Distributions to stockholders ................................................. (166,630) (1,301,770)
Payments of capital lease obligations ......................................... (32,825) (33,655)
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Net cash used in financing activities .................................... (913,741) (1,339,305)
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Decrease in cash and cash equivalents ........................................... (111,154) (124,399,508)
Cash and cash equivalents, beginning of period .................................. 2,276,912 124,632,274
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Cash and cash equivalents, end of period ........................................ $ 2,165,758 $ 232,766
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The accompanying notes are an integral part of these financial statements
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FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(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, repair and maintenance and parts sales.
The consolidated financial statements include the accounts of Fine Air
Services Corp. and its wholly- owned subsidiaries, Fine Air Services, Inc.
("Fine Air"), Agro Air Associates, Inc. ("Agro Air"), and Fine/AAA Interair,
Inc. ("Fine/AAA"). Fine/AAA was incorporated to sell and distribute aircraft
spare parts to third parties and to support the operating subsidiaries of the
Company. 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, 1998
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 months ended March 31, 1999
and 1998 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 Annual Report on Form 10-K for the year ended December
31, 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, 1998.
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 March 31, 1999 and 1998, 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, Agro Air and Fine/AAA 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, 1995, 1996,
and 1997 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 an assessment, if any, is not presently
determinable. The Company believes that its treatment
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of such costs as deductible for tax purposes is proper and is prepared to defend
its position vigorously, if it becomes necessary.
4. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
For the three-month periods ended March 31, 1999 and 1998, sales to the
Company's largest ACMI customer comprised 7.1% and 11.2%, respectively, of total
operating revenues. This customer also accounted for 28% and 29% of net accounts
receivable at March 31, 1999 and December 31, 1998, respectively. The Company
also holds a note receivable from this customer in the amount of $3,455,539 as
of March 31, 1999.
On March 31, 1998, the Company and its largest ACMI 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"). Subsequently, the stockholders of this
customer pledged 100% of their common stock as additional 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. RELATED PARTY TRANSACTIONS
By December 31, 1999, the Company will be required to install hushkits
on 14 DC-8 aircraft to comply with noise abatement regulations issued by the
Federal Aviation Administration (the "FAA"). During September 1998, the Company
entered into a Consent Agreement with the FAA whereby the Company is required to
physically hushkit its aircraft in accordance with an accelerated schedule; six
planes were required to be huskitted by December 31, 1998, an additional three
planes were required to be hushkitted by March 31, 1999 and another three must
be hushkitted by August 31, 1999. As of March 31, 1999, the Company was in
compliance with the Consent Agreement.
As of December 31, 1999, management intends to have acquired at least
16 hushkits (including 14 for its 51, 54, 55, and 61 series 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 continue 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 lower than the
cost of comparable hushkits applicable to the Company's models of DC-8 aircraft.
As of December 31, 1998 and March 31, 1999, the Company had net
advances to QTV of $27,139,000 and $19,924,000 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 commences on the hushkits when they
are installed on the aircraft.
For the three months ended March 31, 1998, and 1999, the Company
recorded revenues (repairs, training and other) of approximately $176,000 and
$354,000, respectively, relating to work performed for QTV. At December 31, 1998
and March 31,1999, $3,850,000 and $4,203,000 relating to those revenues were
included in accounts receivable, non-current, respectively. The receivable
outstanding as of March 31, 1999 is expected to be realized through the purchase
of hushkits produced by QTV.
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6. ACQUISITION
On February 5, 1999, the Company entered into agreements (the
"Agreements") to acquire 100% of the capital stock of Arrow Air, Inc. (the
"Stock Purchase") as well as other assets (the "Asset Purchase"). Such assets
consist of 12 DC-8 cargo aircraft, one passenger DC-8 aircraft, three cargo
L1011-200 aircraft, one passenger L1011-500 aircraft, approximately 132
serviceable and repairable aircraft engines, inventories of aircraft and engine
parts and equipment relating to certain repair shops ("Assets"). The aggregate
purchase price of $115 million was loaned to the sellers pending approval of the
transaction under the Hart Scott Rodino Antitrust Improvements Act of 1976. On
March 10, 1999, the Asset Purchase was completed, and $110 million of the $115
million loan was cancelled.
A summary of assets acquired and liabilities assumed follows:
Assets acquired:
Aircraft and flight equipment $ 84,279,000
Aircraft and flight equipment
held for sale 21,880,000
Aircraft parts inventory 21,858,000
------------
128,017,000
Liabilities assumed (18,017,000)
-------------
$110,000,000
============
Pursuant to the terms of the Agreements, the Company has elected to
sell certain of the Assets back to the Seller at agreed upon values. In the
event that the Company does not receive the agreed upon minimum values
(essentially 90% of the agreed upon estimated fair market value of such Assets)
by July 19, 1999, the Seller has agreed to "make whole" the Company for any
short-fall in the actual net proceeds received from the sale of such Assets. To
secure such "make whole" obligation, the Company received first mortgages from
the Seller on two McDonnell Douglas cargo DC-8 aircraft and one McDonnell
Douglas cargo DC-10 aircraft, which aircraft were not included in the Asset
Purchase.
On April 9, 1999, the Company consummated the Stock Purchase by
canceling the remaining $5 million of the loan.
7. SENIOR NOTES
On June 5, 1998, the Company consummated the sale of $200,000,000
9-7/8% Senior Notes due June 1, 2008. On August 14, 1998, the Company
repurchased $10,000,000 face value of the Senior Notes. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES.
Revenues increased 10.8% to $27.8 million in the first quarter of 1999
from $25.1 million in the first quarter of 1998, primarily due to an increase in
scheduled revenues of $3.6 million, and repairs, training and other of $2.3
million, partially offset by a $3.1 million decrease in ACMI revenues. Total
block hours flown by the Company's fleet decreased 10.4% to 4,979 in the first
quarter of 1999 from 5,556 in the first quarter of 1998 due primarily to a
decrease of 990 ACMI hours.
Revenues from scheduled cargo services increased 20.9% to $20.8 million
in the first quarter of 1999 from $17.2 million in the first quarter of 1998,
due to an increase in scheduled hours flown to existing markets and the
introduction of service to two new markets. Scheduled hours increased 14.4% from
2,869 hours to 3,281 hours. Tons of freight transported increased 21.9% to
26,783 in the first quarter of 1999 from 21,966 in the first quarter of 1998,
primarily as a result of increased sales efforts by the Company's domestic and
international sales network, the addition of two new markets subsequent to the
first quarter of 1998 and the introduction of the L-1011 widebody aircraft
service in the first quarter of 1999.
Revenues from ACMI services decreased 41.3% to $4.4 million in the
first quarter of 1999 from $7.5 million in the first quarter of 1998, due
primarily to a decrease in domestic demand from integrated carriers, which
typically return a higher ACMI rate. Total block hours flown for ACMI services
decreased 36.8% to 1,697 in the first quarter of 1999 from 2,687 in the first
quarter of 1998.
Revenues from repairs, training and other increased 661.8% to $2.7
million in the first quarter of 1999 from $408,000 in the first quarter of 1998,
primarily due to revenues of $1.5 million from aircraft leases and $766,000 from
the sale of aircraft parts. The leased aircraft and the aircraft parts business
were acquired in connection with the Asset Purchase which was completed on March
10, 1999 (See Note 6 of Notes to Financial Statements).
OPERATING EXPENSES.
Flying operations expenses decreased 2.2% to $8.7 million in the first
quarter of 1999 from $8.9 million in the first quarter of 1998, due primarily to
decreased fuel expense as a result of lower fuel prices. As a percentage of
total revenues, flying operations expenses decreased to 31.3% in the first
quarter of 1999 from 35.5% in the first quarter of 1998.
Aircraft and traffic servicing expenses increased 30.8% to $3.4 million
in the first quarter of 1999 from $2.6 million in the first quarter of 1998, due
primarily to costs associated with an increase in scheduled cargo tons carried.
As a percentage of total revenues, aircraft and traffic servicing expenses
increased to 12.2% in the first quarter 1999 from 10.4% in the third quarter
1998, due to the Company's emphasis on scheduled cargo service.
Maintenance expenses increased 29.7% to $4.8 million in the first
quarter of 1999 from $3.7 million in the first quarter of 1998, due primarily to
additional labor costs. During the first quarter of 1999, the Company maintained
additional maintenance personnel in anticipation of a higher level of ACMI
operations. As a percentage of total revenues, maintenance expenses increased to
17.3% in the first quarter of 1999 from 14.7% in the first quarter of 1998.
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General and administrative expenses increased 2.1% to $4.8 million in
the first quarter of 1999 from $4.7 million in the first quarter of 1998. As a
percentage of total revenues, general and administrative expenses decreased to
17.3% in the first quarter of 1999 from 18.7% in the first quarter of 1998.
Selling expenses increased 14.3% to $1.6 million in the first quarter
of 1999 from $1.4 million in the first quarter of 1998, primarily as a result of
increased sales personnel salaries and increased commissions associated with the
increase in scheduled cargo revenue. As a percentage of total revenues, selling
expenses increased to 5.8% in the first quarter of 1999 from 5.6% in the first
quarter of 1998.
Cost of sales-aircraft parts totaled $409,000 in the first quarter of
1999 and consisted of the acquisition cost of the spare parts sold and any costs
associated with repairs, overhaul or certification of such parts.
Depreciation and amortization expenses increased 48.4% to $4.6 million
in the first quarter of 1999 from $3.1 million in the first quarter of 1998, due
primarily to increases in capitalized maintenance costs and additional
depreciation for one L-1011 aircraft, six newly installed hushkits, and
depreciation for aircraft acquired in connection with the March 10, 1999 Asset
Purchase (See Note 6 of Notes to Financial Statements). As a percentage of total
revenues, depreciation and amortization expenses increased to 16.5% in the first
quarter of 1999 from 12.4% in the first quarter of 1998.
OPERATING INCOME/LOSS. Operating results decreased to a $0.5 million
loss in the first quarter of 1999 from $0.8 million income in the first quarter
of 1998. The Company's operating margin decreased to (1.8%) in the first quarter
of 1999 from 3.2% in the first quarter of 1998 primarily as a result of a
decrease in ACMI revenues and increases in operating expenses.
INTEREST AND OTHER INCOME, NET. Interest and other income net decreased
$6.3 million in the first quarter of 1999 compared to the first quarter of 1998.
Net interest expense increased $2.5 million in the first quarter of 1999 due
primarily to accrued interest related to the $190 million of 9-7/8% Senior Notes
outstanding during the period. Furthermore, the first quarter of 1998 was
favorably impacted with a $3.4 million insurance settlement.
NET INCOME/LOSS. As a result of the above factors, the Company had a
$4.0 million loss in the first quarter of 1999 compared to $3.7 million net
income in the first quarter of 1998
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's primary source of liquidity
consisted of $233,000 in cash and cash equivalents compared to $124.6 million at
December 31, 1998, cash flows expected to be generated from operations, and its
availability under the existing $45 million line of credit. The Company had
working capital of $4.5 million at March 31, 1999, compared to $128.5 million at
December 31, 1998. The decrease in working capital was due principally to the
use of cash for the Asset Purchase (See Note 6 of Notes to Financial
Statements).
Net cash provided by operating activities was $7.4 million and $4.0
million during the three months ended March 31, 1998 and 1999, respectively.
This decrease in cash flow from operating activities was due primarily to a net
loss of $4.0 million for the three months ended March 31, 1999 compared to net
income of $3.7 million for the same period in the prior year, offset by changes
in certain operating assets and liabilities, primarily accounts receivable,
accounts payable and interest payable.
Net cash used in investing activities was $6.6 million and $127.0
million for the three month periods ended March 31, 1998 and 1999, respectively.
This increase was due principally to the $110.0 million acquisition of assets
used in the operations of Arrow Air, Inc., whose common stock was acquired by
the Company on April 9, 1999. In addition, purchases of property and equipment
increased by $5.3 million from $6.7 million for the three months
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ended March 31, 1998 to $12.0 million for the same period ended March 31, 1999
primarily due to additional advances to QTV for the manufacture of hushkits to
be installed on the Company's 51, 54, 55, and 61 series DC-8 aircraft. As of
March 31, 1998, a $5.0 million loan remained outstanding.
Net cash used in financing activities was $0.9 million and $1.3 million
for the three month periods ending March 31, 1998 and 1999, respectively. This
increase resulted primarily from $1.3 million in distributions to the
stockholders, the majority of which related to the settlement of the IRS
examination of certain maintenance costs relating to 1993 and 1994, offset by
principal payments on long-term debt of $0.7 million in the quarter ended March
31, 1998. No debt payments were required during the first quarter of 1999.
The Company has a $45 million credit facility with a commercial lender
(the "Credit Facility"), which expires in November 2000. Borrowings under the
Credit Facility bear interest at the lender'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 Credit Facility are collateralized primarily by 10 DC-8
aircraft, one L-1011 aircraft and certain receivables and inventories of the
Company. As of March 31, 1999, no amounts were outstanding under the Credit
Facility.
The Company's tax returns for the years ended December 31, 1995, 1996,
and 1997 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 an assessment, if any, 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.
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 51, 54, 55, and 61 series DC-8 aircraft.
The Company will be required to install hushkits on 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 14 DC-8s and to
acquire two spare hushkits will be $36.0 million, approximately all of which had
been incurred as of March 31, 1999. The Company is purchasing 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 will also purchase at
least four hushkits from a third party for aircraft acquired in connection with
the March 10, 1999 Asset Purchase (See Note 6 of Notes to Financial Statements)
at a cost of approximately $2.8 million each.
The Company believes that its current cash and cash equivalents, its
availability under the existing $45.0 million line of credit, and 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.
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 generated 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.
11
<PAGE>
YEAR 2000 COMPLIANCE
The Company has invested significant management and financial resources
in the development of information systems to facilitate its cargo, flight and
maintenance operations, provide its personnel accurate and timely information
and increase the level of service and information provided to its customers. The
Company continually assesses its management information systems and, as of March
31, 1999, had entered into agreements with certain software vendors to provide
information systems for maintenance and logistics management and cargo handling
management. Additionally, the Company has contracted with another software
vendor to replace existing financial applications systems. Assessment and
selection of systems for flight operations and crew management is currently
underway with system implementation scheduled for third quarter 1999. The cargo
management system is expected to be operable in the second quarter of 1999. The
financial systems are expected to be operable late in the second quarter of 1999
and the maintenance/logistics systems are scheduled to be implemented late in
the third quarter of 1999. These systems constitute the bulk of the company's
automation and should bring all core applications into Year 2000 compliance. The
cost of these systems will be approximately $3.5 million, of which approximately
$1.4 million had been incurred as of March 31, 1999.
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. 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. 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 no 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:
12
<PAGE>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K:
On March 25, 1999, the Company filed a current report on Form
8-K to report that on February 5, 1999, the Company entered
into an agreement of purchase and sale of assets with
International Air Leases of PR, Inc. ("IALPR") and Anthony
Tirri and a stock purchase agreement with IALPR and its
stockholders.
13
<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: May 24, 1999 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)
14
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
- ------- ----------------------
27 Financial Data Schedule
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 233
<SECURITIES> 45
<RECEIVABLES> 39,752
<ALLOWANCES> (1,673)
<INVENTORY> 21,770
<CURRENT-ASSETS> 40,943
<PP&E> 223,628
<DEPRECIATION> (49,457)
<TOTAL-ASSETS> 264,062
<CURRENT-LIABILITIES> (36,843)
<BONDS> (190,000)
0
0
<COMMON> 0
<OTHER-SE> (36,980)
<TOTAL-LIABILITY-AND-EQUITY> (264,062)
<SALES> (27,839)
<TOTAL-REVENUES> (27,839)
<CGS> 409
<TOTAL-COSTS> 28,376
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 66
<INTEREST-EXPENSE> 5,176
<INCOME-PRETAX> 3,963
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,963
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,963
<EPS-BASIC> 1321.02
<EPS-DILUTED> 1321.02
</TABLE>
