25
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
Commission File Number
0-25732
ATLAS AIR, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1207329
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
538 Commons Drive, Golden, Colorado 80401
(Address of principal executive offices)(Zip Code)
(303) 526-5050
(Registrant's telephone number, including area code)
Indicated 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.
[ x ] Yes [ ] No
As of May 2, 1997 the Registrant had 22,450,229 shares of $.01
par value Common Stock outstanding.
ATLAS AIR, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets-
March 31, 1997 and December 31, 1996
Consolidated Statements of Operations-
Three Months Ended March 31, 1997 and 1996
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 27 - Financial Data Schedule
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1997 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,028 $ 9,793
Short-term investments 101,225 114,870
Accounts receivable, net and
other 56,752 49,603
Total current assets 180,005 174,266
Property and equipment:
Flight equipment 674,807 638,630
Other 6,170 3,933
680,977 642,563
Less accumulated depreciation (67,177) (58,293)
Net property and equipment 613,800 584,270
Other assets:
Debt issuance costs 13,154 12,382
Deposits 1,367 2,789
14,521 15,171
Total assets $808,326 $773,707
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt $ 27,633 $ 21,561
Accounts payable and accrued
expenses 46,947 47,763
Income tax payable 1,184 6,267
Total current liabilities 75,764 75,591
Long-term debt, net of current
portion 491,189 462,868
Deferred income tax payable 23,985 22,875
Commitments and contingencies
(Note 5)
Stockholders' equity:
Preferred Stock, $1 par value;
10,000,000 shares authorized;
no shares issued -- --
Common Stock, $0.01 par value;
50,000,000 shares authorized;
22,450,229 shares issued 225 225
Additional paid-in capital 172,841 172,841
Retained earnings 44,539 39,543
Treasury Stock, at cost; 5,418
and 5,850 shares,
respectively (217) (236)
Total stockholders' equity 217,388 212,373
Total liabilities and
stockholders' equity $808,326 $773,707
The accompanying notes are an integral part of these
consolidated financial statements.
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1997 1996
Revenues:
Contract services $ 76,816 $ 55,809
Scheduled services 3,252 414
Charters and other 1,981 2,426
Total operating revenues 82,049 58,649
Operating expenses:
Flight crew salaries and benefits 6,817 4,987
Other flight-related expenses 6,366 5,164
Maintenance 23,328 14,725
Aircraft and engine rentals 7,776 5,896
Fuel and ground handling 3,166 1,224
Depreciation and amortization 9,477 4,882
Other 7,977 6,361
Total operating expenses 64,907 43,239
Operating income 17,142 15,410
Other income (expense):
Interest income 1,909 1,146
Interest expense (11,157) (6,863)
(9,248) (5,717)
Income before income taxes 7,894 9,693
Provision for income taxes (2,881) (3,490)
Net income $ 5,013 $ 6,203
Net income per common share $ .22 $ .32
Weighted average common shares
outstanding 22,450 19,686
The accompanying notes are an integral part of these
consolidated financial statements.
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1997 1996
Operating activities:
Net income $ 5,013 $ 6,203
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 9,818 4,882
Amortization of debt issuance cost 767 331
Change in deferred income tax
payable 796 2,358
Changes in operating assets and
liabilities:
Accounts receivable and other (7,149) (14,560)
Deposits 1,422 (43)
Accounts payable and accrued
expenses (816) 9,378
Income tax payable (4,769) 796
Net cash provided by
operating activities 5,082 9,345
Investment activities:
Purchase of property and equipment (39,348) (63,747)
Purchase of short-term investments (56,428) --
Maturity of short-term investments 70,073 --
Net cash used in investing
activities (25,703) (63,747)
Financing activities:
Issuance of Common Stock -- 3,020
Purchase of Treasury Stock (161) (209)
Issuance of Treasury Stock 163 --
Borrowings on notes payable 67,537 24,787
Principal payments on notes payable (33,144) (4,903)
Debt issuance costs (1,539) (323)
Net cash provided by financing
activities 32,856 22,372
Net increase (decrease) in cash 12,235 (32,030)
Cash and cash equivalents at beginning
of period 9,793 96,990
Cash and cash equivalents at end of
period $ 22,028 $ 64,960
The accompanying notes are an integral part of these
consolidated financial statements.
ATLAS AIR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Unaudited Consolidated Financial Statements
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting only of normal recurring items) necessary to present
fairly the financial position of Atlas Air, Inc. and its wholly-
owned subsidiaries (collectively, the "Company") as of March 31,
1997 and the results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to the Securities and Exchange Commission's
rules and regulations. The results of operations for the periods
presented are not necessarily indicative of the results to be
expected for the full year. Management believes the disclosures
made are adequate to ensure that the information is not
misleading, and suggests that these financial statements be read
in conjunction with the Company's December 31, 1996 audited
financial statements.
2. Reclassifications
Certain prior year amounts have been reclassified to conform
to current year presentation.
3. Recently Issued Accounting Standard
In February, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings per Share." The purpose of SFAS No. 128 is to
simplify the computation of earnings per share ("EPS") and to
make the U.S. standard for computing EPS more compatible with the
EPS standards of other countries and with that of the
International Accounting Standards Committee. The effective date
for the application of SFAS No. 128 for both interim and annual
periods is after December 15, 1997. Earlier application is not
permitted. The Company does not expect the application of SFAS
No. 128 to have a material impact on its EPS calculation.
4. Short-Term Investments
Proceeds from the secondary public offering of the Company's
Common Stock in May 1996, plus additional funds, were invested in
various held-to-maturity securities, as defined in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," which requires investments in debt securities to be
classified as held-to-maturity and measured at amortized cost in
the statement of financial position only if the reporting
enterprise has the positive intent and ability to hold those
securities to maturity. The following table sets forth the
aggregate fair value, gross unrealized holding gains, gross
unrealized holding losses, and amortized/accreted cost basis by
major security type as of March 31, 1997 (in thousands):
Gross Gross
Unrealized Unrealized (Amorti-
Aggregate Holding Holding zation)
Security Type Fair Value Gains Losses Accretion
Commercial Paper $ 9,956 $ - $ 2 $ (43)
Medium Term Notes 24,732 10 1 55
U.S. Government
Agencies 31,180 7 80 (46)
Corporate Notes 11,265 1 5 184
Market Auction
Preferreds 10,500 - - -
Corporate Bonds 6,990 - 13 1
Foreign Debt
Securities 5,056 - 23 5
Totals $ 99,679 $ 18 $ 124 $ 166
In addition, there was $1.4 million of accrued interest on Short-
Term Investments at March 31, 1997. Interest earned on these
investments and maturities of these investments are reinvested in
similar securities.
5. Commitments and Contingencies
In January 1996, the Company entered into a contract with
Langdon Asset Management, Inc. for the purpose of acquiring six
Boeing 747-200 passenger aircraft (the "Thai Aircraft") and
certain spare engines and spare parts from Thai Airways
International Public Company Limited ("Thai Airways"). The Thai
Aircraft are being converted into freighter configuration by The
Boeing Company ("Boeing") and are being delivered to the Company
for placement into service between the end of the third quarter
of 1996 and year-end 1997. The average cost of the six aircraft,
including conversion costs, is expected to approximate $45
million. The Company has placed a nonrefundable deposit of $3
million with Thai Airways with respect to its acquisition of the
Thai Aircraft. The first of these aircraft was placed into
service by the Company at the end of September 1996. The Company
obtained financing from Finova Capital Corporation for
approximately 80% of the cost of this aircraft. In August and
September 1996, the second and third Thai Aircraft were delivered
to Boeing for conversion into freighter configuration. These
aircraft were re-delivered to the Company and placed into service
by the Company in the fourth quarter of 1996 and the end of the
first quarter of 1997, respectively. The fourth Thai Aircraft
was purchased in November 1996 and delivered to Boeing for
conversion into freighter configuration for re-delivery to the
Company in the second quarter of 1997. Financing for the
acquisition and conversion of the second, third and fourth Thai
Aircraft was secured through the Aircraft Credit Facility (see
Note 3 of the Company's December 31, 1996 audited financial
statements). The fifth and sixth Thai Aircraft will be purchased
from Thai Airways in April 1997 and delivered to Boeing for
conversion into freighter configuration for re-delivery to the
Company during the second half of 1997. The Company expects to
finance the acquisition and conversion of the remaining Thai
Aircraft through the Aircraft Credit Facility.
In March 1996, the Company entered into an agreement with
Federal Express Corporation ("Federal Express") to lease five 747-
200 freighter aircraft (the "Federal Express Aircraft"), plus
spare engines. The first four Federal Express Aircraft were
delivered to the Company between March 1996 and September 1996.
The remaining Federal Express Aircraft was delivered to the
Company in April 1997. Each Federal Express Aircraft has a lease
term ending in January 1998. The lease rate is $450,000 per
month per aircraft. In addition, the Company purchased on
January 2, 1997 a Boeing 747 simulator from Federal Express for a
purchase price of $2.1 million.
In January 1997, the Company extended two of its existing
contracts with China Airlines, which were not otherwise due for
renewal until 1998. Each of the contracts was extended for a
further three years into the year 2001. In addition, the Company
entered into long-term ACMI contracts with two South American
carriers for 1997 and beyond.
On January 21, 1997, the Company signed a Letter of
Commitment to enter into a $25 million revolving line of credit
for general working capital purposes with Bank One, Colorado,
N.A. ("Bank One"), subject to final documentation. Standby
Letters of Credit would also be issued under the line of credit
for the purpose of obtaining trade credit. Payment of interest
only would be required monthly, with principal due in full at
maturity, March 3, 1998. The covenants of this line of credit
would be similar to those of the Aircraft Credit Facility.
On February 28, 1997, the Company entered into the Second
Amended and Restated Credit Agreement with respect to its
existing Aircraft Credit Facility. The purpose of the amendment
was to increase the revolving line from $175 million to $275
million for the purpose of acquiring additional aircraft,
including spare engines and modification costs associated with
cargo configuration, as necessary. In addition, certain sections
of the existing Aircraft Credit Facility were modified slightly,
in order to permit the Company to enter into the revolving line
of credit with Bank One.
On March 28, 1997, the Company refinanced one of its
aircraft with Nationsbanc Leasing Corporation ("Nationsbanc").
This aircraft was previously financed through the Aircraft Credit
Facility. As such, this refinancing increases the availability
of funds under the Aircraft Credit Facility by approximately $25
million. The Nationsbanc financing provides for a fixed interest
rate of 9.16% and a seven year term, extendible under certain
circumstances to ten years.
On September 21, 1993 and June 4, 1994, the FAA issued
Airworthiness Directives requiring the inspection and replacement
of certain engine components with which the Company must comply
by December 1997 at an estimated aggregate cost of $1.1 million
for all of the aircraft in the Company's fleet. In November
1994, the FAA issued Nacelle Strut Modification Service Bulletins
which are expected to be converted into Airworthiness Directives.
The Company's aircraft would have to be brought into compliance
with such Airworthiness Directives within the next five years at
an estimated cost of approximately $500,000 for each aircraft in
its fleet. The FAA has also issued Directives relating to pylon
modifications. The Company has 12 aircraft to be modified
pursuant to these Directives prior to March 2000 at a total
modification cost of approximately $7.2 million. As part of the
FAA's overall aging aircraft program, it has issued Directives
requiring certain additional aircraft modifications to be
accomplished prior to the aircraft reaching 20,000 cycles. The
average cycle time for the 12 aircraft (excluding the Federal
Express Aircraft) is 12,000 cycles and the average cycles
operated per year is 800 cycles. The Company estimates that the
modification costs per aircraft will range between $2 million and
$3 million. Between now and the year 2000, only one aircraft is
expected to reach the 20,000 cycle limit and the entire current
fleet will require modification prior to the year 2009. It is
possible that additional Service Bulletins or Airworthiness
Directives applicable to the types of aircraft included in the
Company's fleet could be issued in the future. The cost of
compliance with such Airworthiness Directives cannot currently be
estimated, but could be substantial.
Upon acquisition of an aircraft, the Company determines
whether or not the aircraft is in compliance with Airworthiness
Directives and tries to anticipate all future compliance
requirements. The necessary work to bring the aircraft into
compliance is then scheduled at the time of conversion of the
aircraft to freighter configuration, in order to minimize
unscheduled maintenance events.
6. Subsequent Events
On April 12, 1997, the Company took delivery of the fifth
Federal Express Aircraft and subsequently placed the aircraft in
service as a spare support unit. The lease rate for this
aircraft is $450,000 per month and the lease terminates in
January 1998.
The Company has reached agreement with Citicorp Investor
Lease, Inc. ("Citicorp") for the purchase of one 747-200
passenger aircraft (the "Citicorp Aircraft") for a purchase price
of $25 million, including two spare engines. In connection with
the purchase of the Citicorp Aircraft, the Company has agreed to
assume Citicorp's lessor interest in the lease of such aircraft
to Philippine Airlines ("PAL") for the remainder of the lease
term (June 1998). The Company is currently negotiating with PAL
for the early termination of the lease and delivery to the
Company of the Citicorp Aircraft (along with a separate 747-200
passenger aircraft similarly acquired by the Company in December
1996) for conversion to freighter configuration, although there
can be no assurances in that regard. The Company closed on its
purchase of the Citicorp Aircraft on May 12, 1997.
On April 24, 1997, Israel Aircraft Industries, Ltd. ("IAI"),
the former lessor of an aircraft leased by the Company, filed a
complaint against the Company in the U.S. District Court Eastern
District of New York in which IAI seeks damages of approximately
$9 million with respect to engine repair work and the return
condition of the aircraft. The Company believes that the
allegations in the complaint brought by IAI are substantially
without merit. No determination can be made at this time as to
the possible outcome.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company, through its predecessors, began its operations
on April 22, 1992 with one Boeing 747-200 High Gross Weight
Aircraft in the service of China Airlines and expanded its
operations to a second Boeing 747-200 High Gross Weight Aircraft
in November 1992. These operations were undertaken on behalf of
the Company by another carrier utilizing pilot crews, dispatch
facilities, maintenance operations and other services provided by
such carrier. As a result, the Company's operations prior to
1993 were primarily limited to aircraft leasing and start-up
activities. The Company initiated cargo services under the name
of Atlas Air, Inc. in February 1993.
The table below sets forth selected financial and operating
data for the first quarter of 1997 and the four quarters of the
years ended December 31, 1996 and 1995 (dollars in thousands).
1997 1996
1st 1st
Quarter Quarter
Total operating revenues $82,049 $58,649
Operating expenses 64,907 43,239
Operating income 17,142 15,410
Other income (expense) (9,248) (5,717)
Net income 5,013 6,203
Block hours 15,443 11,125
Average aircraft operated 17.2 10.8
Operating margin 20.9% 26.3%
1996
Cumu- 4th 3rd 2nd 1st
lative Quarter Quarter Quarter Quarter
Total operating
revenues $315,659 $104,715 $79,681 $72,614 $58,649
Operating
expenses 227,596 74,775 59,635 49,947 43,239
Operating
income 88,063 29,940 20,046 22,667 15,410
Other income
(expense) (28,475) (8,569) (7,207) (6,982) (5,717)
Net income 37,838 13,397 8,201 10,037 6,203
Block hours 59,445 18,803 15,444 14,073 11,125
Average aircraft
operated 14.7 18.4 15.4 14.0 10.8
Operating
margin 27.9% 28.6% 25.2% 31.2% 26.3%
1995
Cumu- 4th 3rd 2nd 1st
lative Quarter Quarter Quarter Quarter
Total operating
revenues $171,267 $56,142 $47,769 $38,418 $28,938
Operating
expenses 128,593 39,982 34,844 28,370 25,397
Operating
income 42,674 16,160 12,925 10,048 3,541
Other income
(expense) (16,435) (4,014) (4,805) (4,287) (3,330)
Net income 17,831 8,352 5,568 3,861 50
Block hours 33,265 10,809 9,076 7,568 5,812
Average aircraft
operated 7.7 9.4 8.2 6.9 6.1
Operating
margin 24.9% 28.8% 27.1% 26.2% 12.2%
Operating Revenues and Results of Operations
Total operating revenues for the quarter ended March 31,
1997 increased to $82.0 million compared to $58.6 million for the
same period in 1996, an increase of approximately 40%. The
average number of aircraft in the Company's fleet during the
first quarter of 1997 was 17.2 compared to 10.8 during the same
period in 1996. Total block hours for the first quarter of 1997
were 15,443 compared to 11,125 for the same period in 1996, an
increase of approximately 39%, principally reflecting the
increase in the size of the Company's fleet. Revenue per block
hour increased by approximately 1% to $5,313 for the first
quarter of 1997 compared to $5,272 for the first quarter of 1996.
The Company's operating results improved by 11% from a $15.4
million operating profit for the first quarter of 1996 to an
operating profit of $17.1 million for the first quarter of 1997.
Results of operations were adversely impacted by higher than
normal maintenance costs and amortization of induction costs
associated with the Federal Express Aircraft. In addition, the
Company incurred $1.2 million of costs related to the return of
two leased aircraft to the lessors. Net income of $6.2 million
for the first quarter of 1996 declined to a net income of $5.0
million for the first quarter of 1997.
Operating expenses
The Company's principal operating expenses include flight
crew salaries and benefits; other flight-related expenses;
maintenance; aircraft and engine rentals; fuel costs and ground
handling; depreciation and amortization; and selling, general and
administrative expenses.
Flight crew salaries and benefits include all such expenses
for the Company's pilot work force. Flight crew salaries and
benefits increased to $6.8 million in the first quarter of 1997
compared to $5.0 million in the same period of 1996, due to
increases in the number of aircraft in the Company's fleet and
aircraft block hours. While actual expense increased by
approximately 37% during the first quarter of 1997, on a block
hour basis this expense declined by 2% to $441 per hour for the
first quarter of 1997 from $448 per hour for the same period in
1996.
Other flight-related expenses include hull and liability
insurance on the Company's fleet of Boeing 747 aircraft, crew
travel and meal expenses, initial and recurring crew training
costs and other expenses necessary to conduct its flight
operations.
Other flight-related expenses increased to $6.4 million in
the first quarter of 1997 compared to $5.2 million in 1996, or
approximately 23%, primarily due to the larger fleet size. In
addition, the Company obtained a reduction in its aircraft hull
and liability insurance rates based on its increased size and
favorable operating history. On a block hour basis, other flight-
related expenses declined by 11% to $412 per hour for the first
quarter of 1997 compared to $464 per hour for the same period in
1996.
Maintenance expenses include all expenses related to the
upkeep of the aircraft, including maintenance, labor, parts,
supplies and maintenance reserves. The costs of C Checks and
engine overhauls not otherwise covered by maintenance reserves,
are capitalized as they are incurred and amortized over the life
of the maintenance event. In addition, in January 1995 the
Company contracted with KLM for a significant part of its regular
maintenance operations and support on a fixed cost per flight
hour basis. Effective October 1996, certain aircraft engines
were additionally accepted into the GE engine maintenance
program, also on a fixed cost per flight hour basis, pursuant to
a 10 year maintenance agreement.
Maintenance expense increased to $23.3 million in the first
quarter of 1997 from $14.7 million in the same period of 1996, or
approximately 58%, primarily due to the increase in the Company's
average fleet size. In addition, there were approximately $1.2
million of maintenance charges recorded in the first quarter of
1997 associated with the return of two leased aircraft to the
lessors. Excluding these one-time charges, on a block hour
basis, maintenance expense increased by 8% during the first
quarter of 1997 over the year-earlier period, primarily due to
higher costs associated with the Federal Express Aircraft.
Aircraft and engine rentals include the cost of leasing
aircraft and spare engines, as well as the cost of short-term
engine leases required to replace engines removed from the
Company's aircraft for either scheduled or unscheduled
maintenance and any related short-term replacement aircraft lease
costs.
Aircraft and engine rentals were $7.8 million in the first
quarter of 1997 compared to $5.9 million in the same period of
1996, or an increase of approximately 32%. During the first
quarter of 1997, the Company leased one additional aircraft as
compared to the first quarter of 1996. In addition, the Company
incurred approximately $.5 million of sub-service aircraft rental
expense during January 1997 associated with the transition of
returning two aircraft to the lessors. Engine rentals were
comparable for the same year over year periods.
Because of the nature of the Company's ACMI contracts with
its airline customers, under which the Company is responsible
only for the ownership cost and maintenance of the aircraft and
for supplying aircraft crews and insurance, the Company's airline
customers bear all other operating expenses, including fuel and
fuel servicing; marketing costs associated with obtaining cargo;
airport cargo handling; landing fees; ground handling; aircraft
push-back and de-icing services; and specific cargo and mail
insurance. As a result, the Company incurs fuel and ground
handling expenses only when it operates on its own behalf, either
in scheduled services, for ad hoc charters or for ferry flights.
Fuel expenses for the Company's non-ACMI contract services
include both the direct cost of aircraft fuel as well as the cost
of delivering fuel into the aircraft. Ground handling expenses
for non-ACMI contract service include the costs associated with
servicing the Company's aircraft at the various airports to which
it operates as well as other direct flight related costs.
Fuel and ground handling costs increased by 159% to $3.2
million for the first quarter of 1997 compared to $1.2 million
for the first quarter of 1996. This was primarily due to a 130%
increase in scheduled service, charter and other non-ACMI block
hours to 614 block hours in the first quarter of 1997 from 267
block hours in the year-earlier period. In addition, fuel costs
have increased year over year for the same period.
Depreciation and amortization expense includes depreciation
on aircraft, spare parts and ground equipment, and the
amortization of capitalized major aircraft maintenance and engine
overhauls.
Depreciation and amortization expense increased to $9.5
million in the first quarter of 1997 from $4.9 million in the
same period of 1996, or approximately 94%. This increase
reflects the increase in owned aircraft and engines for the first
quarter of 1997 over the same period in 1996.
Other operating expenses include salaries, wages and
benefits for all employees other than pilots; accounting and
legal expenses; supplies; travel and meal expenses, excluding
those of the aircraft crews; commissions; and other miscellaneous
operating costs.
Other operating expenses increased to $8.0 million in the
first quarter of 1997 from $6.4 million in the same period of
1996, or approximately 25%, reflecting the increase in the
Company's operations. On a block hour basis, these expenses
decreased to $517 per hour in the first quarter of 1997 from $572
per hour in the same period of 1996, or 10%. This decrease in
cost was due to concerted efforts made to minimize overhead
growth during the Company's increased business activity.
Other Income (Expense)
Other income (expense) consists of interest income and
interest expense. Interest income increased to $1.9 million for
the first quarter of 1997 from $1.1 million in the same period of
1996, primarily due to the investment of $99.6 million of funds
received from the secondary public offering in May 1996,
partially offset by the use of initial public offering proceeds
not utilized as of the first quarter of 1996. Interest expense
increased to $11.2 million in the first quarter of 1997 from $6.9
million in the same period of 1996, or approximately 63%,
resulting from the increase in financed flight equipment between
these periods.
Income Taxes
Pursuant to the provisions of SFAS No. 109 "Accounting for
Income Taxes," the Company has recorded a tax provision based on
tax rates in effect during the period. Accordingly, the Company
accrued taxes at the rate of 36.5% during the first quarter of
1997 and 36.0% during the first quarter of 1996. Due to
significant capital costs, which are depreciated at an
accelerated rate for tax purposes, a majority of the Company's
tax provision in the first quarters of 1997 and 1996 is deferred.
Seasonality
The cargo operations of the Company's airline customers are
seasonal in nature, with peak activity occurring traditionally in
the second half of the year, and with a significant decline
occurring in the first quarter. This decline in cargo activity
is largely due to the decrease in shipping that occurs following
the December and January holiday seasons associated with the
celebration of Christmas and the Chinese New Year. Certain of
the Company's customers have, in the past, elected to use that
period of the year to exercise their contractual options to
cancel a limited number (generally not more than 5%) of cargo
flights with the Company, and are expected to continue to do so
in the future. As a result, the Company's revenues typically
decline in the first quarter of the year as its minimum
contractual aircraft utilization level temporarily decreases.
The Company seeks to schedule, to the extent possible, its major
aircraft maintenance activities during this period to take
advantage of any unutilized aircraft time.
In the first quarter of 1997, the Company's customers opted
to take the majority of their contractual cancellations, in
contrast to last year's first period, when very few cancellations
occurred.
Liquidity and Capital Resources
At March 31, 1997, the Company had cash and cash equivalents
of approximately $22.0 million, short-term investments of
approximately $101.2 million and working capital of approximately
$104.2 million. During the first quarter of 1997, cash and cash
equivalents increased approximately $12.2 million, principally
reflecting cash provided from operations of $5.1 million,
proceeds from equipment financings of $67.5 million and net
proceeds from the sale and purchase of short-term investments of
$13.6 million, partially offset by investments in flight and
other equipment of $39.3 million, principal reductions of
indebtedness of $33.1 million and debt issuance costs of $1.5
million.
Due to the contractual nature of the Company's business, the
Company's management does not consider its operations to be
highly working capital-intensive in nature. Because most of the
non-ACMI costs normally associated with operations are borne by
and directly paid for by the Company's customers, the Company
does not incur significant costs in advance of the receipt of
corresponding revenues. Moreover, ACMI costs, which are the
responsibility of the Company, are generally incurred on a
regular, periodic basis ranging from flight hours to months.
These costs are largely matched by revenue receipts, as the
Company's contracts require regular payments from its customers,
based upon current flight activity, generally every two to four
weeks. As a result, the Company has not in the past had a
requirement for a working capital facility. The Company has,
however, in light of the continued growth of its operations,
reached agreement with a lender for the provision of a $25
million working capital facility, subject to final documentation,
although there can be no assurance that such a facility will
ultimately be finalized. In addition, Standby Letters of Credit
would also be issued under the line of credit for the purpose of
obtaining trade credit.
In May 1996, the Company entered into a $175 million
revolving credit facility (the "Aircraft Credit Facility")
provided by two lenders for the acquisition and conversion of
flight equipment. The Company made drawings upon the facility in
the aggregate amount of $113.5 million through December 31, 1996
with respect to the Thai Aircraft, associated spare engines and
an aircraft previously leased by the Company. In the first
quarter of 1997, $36.2 million was drawn down under the facility
with respect to the purchase of the PAL Aircraft and the related
spare engine, which occurred on December 31, 1996, and with
respect to the re-delivery of the third Thai Aircraft upon
conversion to freighter configuration in January 1997.
In February 1997, the $175 million Aircraft Credit Facility
was expanded by an additional $100 million for the same purposes
and under the same terms and conditions as the initial facility.
The revolving period and subsequent term loan period for the
additional $100 million will be coterminous with the period under
the initial facility. Certain financial tests must be met before
each purchase of aircraft and related drawdown on the facility.
To date, the Company has met these tests. If in the future, the
Company cannot meet such tests because of the difficult
sequencing of aircraft acquisition, aircraft conversion and
customer contracts, the Company believes that other financing
sources would be available to the Company or the Company would
acquire aircraft using its internal cash or seek a waiver of any
necessary conditions. The Company commenced draw downs under the
additional $100 million facility in the second quarter of 1997.
In addition, on March 28, 1997, the Company refinanced one
of its aircraft with Nationsbanc Leasing Corporation
("Nationsbanc"). This aircraft was previously financed through
the Aircraft Credit Facility. As such, this refinancing
increases the availability of funds under the Aircraft Credit
Facility by approximately $25 million. The Nationsbanc financing
provides for a fixed interest rate of 9.16% and a seven year
term, extendible under certain circumstances to ten years.
The Company has an agreement, subject to acceptable rates,
terms and conditions, with Alitalia to utilize, or find other
parties to utilize, an amount of Alitalia's maintenance services
with an aggregate cost of $25 million over a five-year period
ending in June 2000. Pursuant to the Company's maintenance
agreement with KLM, engines may be upgraded when inducted into
the maintenance pool in order to improve engine reliability and
to lower Company operating costs. When such costs are incurred
and identified, they are capitalized and amortized over the
remaining life of each applicable engine. The Company expects to
incur between $10 million and $15 million for such upgrades over
the term of the contract.
On September 21, 1993 and June 4, 1994, the FAA issued
Airworthiness Directives requiring the inspection and replacement
of certain engine components with which the Company must comply
by December 1997 at an estimated aggregate cost of $1.1 million
for all of the aircraft in the Company's fleet. In November
1994, the FAA issued Nacelle Strut Modification Service Bulletins
which are expected to be converted into Airworthiness Directives.
The Company's aircraft would have to be brought into compliance
with such Airworthiness Directives within the next five years at
an estimated cost of approximately $500,000 for each aircraft in
its fleet. The FAA has also issued Directives relating to pylon
modifications. The Company has 12 aircraft to be modified
pursuant to these Directives prior to March 2000 at a total
modification cost of approximately $7.2 million. As part of the
FAA's overall aging aircraft program, it has issued Directives
requiring certain additional aircraft modifications to be
accomplished prior to the aircraft reaching 20,000 cycles. The
average cycle time for the 12 aircraft (excluding the Federal
Express Aircraft) is 12,000 cycles and the average cycles
operated per year is 800 cycles. The Company estimates that the
modification costs per aircraft will range between $2 million and
$3 million. Between now and the year 2000, only one aircraft is
expected to reach the 20,000 cycle limit and the entire current
fleet will require modification prior to the year 2009. It is
possible that additional Service Bulletins or Airworthiness
Directives applicable to the types of aircraft included in the
Company's fleet could be issued in the future. The cost of
compliance with such Airworthiness Directives cannot currently be
estimated, but could be substantial.
The Company is in negotiations for the acquisition of
additional aircraft, principally for delivery to the Company in
1998 and beyond.
The Company believes that the cash flow generated from its
operations and the proceeds from the May 1996 public offering of
its Common Stock, coupled with the availability of the above
referenced Aircraft Credit Facility, will be sufficient to meet
its normal ongoing liquidity needs for 1997, including the
acquisition of the remaining Thai Aircraft.
Forward-looking Information
To the extent that any of the statements contained herein
relating to the Company's expectations, assumptions and other
Company matters are forward-looking, they are made in reliance
upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements are based on
current expectations that involve a number of uncertainties and
risks that could cause actual results to differ materially from
those projected in the forward-looking statements, including, but
not limited to, risks associated with: worldwide business and
economic conditions; product demand and the rate of growth in the
air cargo industry; the impact of competitors and competitive
aircraft and aircraft financing availability; the ability to
attract and retain new and existing customers; normalized
aircraft operating costs and reliability; management of growth;
the continued productivity of its workforce; dependence on key
personnel; and regulatory matters. For additional information
regarding these and other risk factors, reference is made to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996.
ATLAS AIR, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports filed on Form 8-K
None.
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.
ATLAS AIR, INC.
(Registrant)
Date: May 12, 1997 By: /s/ Richard H. Shuyler
Richard H. Shuyler
Senior Vice President - Finance
Chief Financial Officer and
Treasurer (Principal Accounting
Officer)
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