6
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, 1998
[ ] 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 4, 1998 the Registrant had 22,495,753 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, 1998 and December 31, 1997
Consolidated Statements of Operations-
Three Months Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1998 and 1997
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
Exhibit 27 - Financial Data Schedule
Signatures
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 61,978 $ 41,334
Short-term investments 28,361 111,635
Accounts receivable and other, net 46,427 55,702
Total current assets 136,766 208,671
Property and equipment:
Flight equipment 1,269,459 1,154,562
Other 7,946 7,607
1,277,405 1,162,169
Less accumulated depreciation (100,593) (98,959)
Net property and equipment 1,176,812 1,063,210
Other assets:
Debt issuance costs, net of
accumulated amortization 20,451 21,705
Deferred lease costs 21,630 --
Deposits and other 4,043 3,829
46,124 25,534
Total assets $1,359,702 $1,297,415
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 49,025 $ 40,049
Accounts payable and accrued
expenses 79,286 88,105
Income tax payable 2,208 154
Total current liabilities 130,519 128,308
Long-term debt, net of current portion 726,191 736,026
Deferred aircraft obligations 225,936 163,167
Deferred income tax payable 31,841 31,085
Commitments and contingencies
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;
22,511,659 and 22,450,229 shares
issued, respectively 225 225
Additional paid-in capital 177,288 176,253
Retained earnings 68,098 62,803
Treasury Stock, at cost; 15,906 and
19,073 shares, respectively (396) (452)
Total stockholders' equity 245,215 238,829
Total liabilities and
stockholders' equity $1,359,702 $1,297,415
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 amounts)
(Unaudited)
Three Months Ended
March 31,
1998 1997
Revenues:
Contract services $77,611 $ 76,816
Scheduled services 185 3,252
Charters and other 1,838 1,981
Total operating revenues 79,634 82,049
Operating expenses:
Flight crew salaries and benefits 6,757 6,817
Other flight-related expenses 6,519 6,366
Maintenance 20,521 23,328
Aircraft and engine rentals 1,241 7,776
Fuel and ground handling 2,002 3,166
Depreciation and amortization 12,230 9,477
Other 8,821 7,977
Total operating expenses 58,091 64,907
Operating income 21,543 17,142
Other income (expense):
Interest income 1,661 1,909
Interest expense (14,775) (11,157)
(13,114) (9,248)
Income before income taxes 8,429 7,894
Provision for income taxes (3,119) (2,881)
Net income $ 5,310 $ 5,013
Basic earnings per share:
Net income $ .24 $ .22
Weighted average common shares 22,478 22,450
Diluted earnings per share:
Net income $ .24 $ .22
Weighted average common shares 22,556 22,543
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,
1998 1997
Operating activities:
Net income $ 5,310 $ 5,013
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 12,372 9,818
Amortization of debt issuance costs 1,254 767
Change in deferred income tax
payable 756 1,110
Changes in operating assets and
liabilities:
Accounts receivable and other 9,275 (7,149)
Deposits and other (214) 1,422
Accounts payable and accrued
expenses (8,819) (816)
Income tax payable 2,054 (5,083)
Net cash provided by operating
activities 21,988 5,082
Investment activities:
Purchase of property and equipment (63,205) (39,348)
Purchase of short-term investments (23,722) (56,428)
Maturity of short-term investments 106,996 70,073
Net cash provided by (used in)
investing activities 20,069 (25,703)
Financing activities:
Issuance of Common Stock 1,035 --
Purchase of Treasury Stock (120) (161)
Issuance of Treasury Stock 161 163
Borrowings on notes payable 6,801 67,537
Principal payments on notes payable (7,660) (33,144)
Debt issuance costs -- (1,539)
Deferred lease costs (21,630) --
Net cash (used in) provided by
financing activities (21,413) 32,856
Net increase in cash 20,644 12,235
Cash and cash equivalents at beginning
of period 41,334 9,793
Cash and cash equivalents at end of
period $ 61,978 $ 22,028
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, 1998 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, 1997 audited financial statements
included in its Annual Report on Form 10-K.
2. Reclassifications
Certain prior year amounts have been reclassified to
conform to current year presentation.
3. Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130 "Reporting Comprehensive Income," which
establishes standards for reporting and display of
comprehensive income and its components in a full set of
general purpose financial statements. The objective of SFAS
No. 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic
events of the period other than transactions with owners.
Comprehensive income includes net income plus other
comprehensive income (other revenues, expenses, gains, and
losses that under Generally Accepted Accounting Principles
bypass net income). On January 1, 1998, the Company
implemented SFAS No. 130. The Company believes that other
comprehensive income is not material and as such the Company
has not included a separate presentation of other
comprehensive income in its financial statements.
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, 1998 (in thousands):
Aggregate Gross Gross (Amorti-
Unrealized Unrealized zation)
Security Type Fair Holding Holding Accretion
Value Gains Losses
Medium Term Notes $ 4,993 $ -- $ 6 $ --
U.S. Government
Agencies 20,085 -- 6 108
Market Auction
Preferreds 2,900 -- -- --
Totals $ 27,978 $ -- $ 12 $ 108
In addition, there was approximately $371,000 of accrued
interest on Short-Term Investments at March 31, 1998.
Interest earned on these investments and maturities of these
investments are reinvested in similar securities. In April
1998, the Company invested approximately $169.5 million of
proceeds from the sale of its 9 1/4% Senior Notes in similar
securities (see Note 6).
5. Commitments and Contingencies
In January and February 1998, pursuant to an early lease
termination agreement negotiated in November 1997, the Company
delivered to Boeing for modification to cargo configuration
the aircraft acquired from Marine Midland Bank in December
1996 and the aircraft acquired from Citicorp Investor Lease,
Inc. in May 1997. The first aircraft was re-delivered to the
Company at the end of April 1998 and the second aircraft is
expected to be re-delivered to the Company early in the third
quarter of 1998. The financing for the modification to cargo
configuration is secured under the Aircraft Acquisition Credit
Facility (as defined in the Company's Form 10-K for 1997), for
which the Company borrowed a total of $3.3 million during the
first quarter of 1998 with respect to these aircraft. At the
end of April 1998, the Company borrowed an additional $13.8
million associated with the final payment for the modification
of the first aircraft upon its re-delivery to the Company.
In February 1998, the Company completed an offering of
$538.9 million of Pass Through Certificates, also known as
enhanced equipment trust certificates (the "EETCs"). The
EETCs are not direct obligations of, or guaranteed by, the
Company and therefore are not included in the Company's
consolidated financial statements. The cash proceeds from the
transaction were deposited with an escrow agent and will be
used to finance (through either leveraged leases or secured
debt financings) the debt portion of the acquisition cost of
five of the 10 new 747-400 freighter aircraft from Boeing
scheduled to be delivered to the Company during the period
July 1998 through December 1998. In connection therewith, the
Company intends to seek certain owner participants who will
commit lease equity financing to be used in leveraged leases
of such aircraft. In November and December 1997, the Company
entered into three Treasury Note hedges, approximating $300
million of principal, for the purpose of minimizing the risk
associated with the fluctuations in interest rates, which are
the basis for the pricing of the EETCs which were priced in
January 1998. The effect of the hedge resulted in a deferred
cost of $6.3 million, which will be amortized over the
expected twenty-year life associated with this financing.
There can be no assurance that the Company will be able to
obtain sufficient financing to fund the purchase of the
remaining five 747-400 freighter aircraft, or if such
financing is available, that it will be available on a
commercially reasonable basis. If it is unable to do so, the
Company could be required to modify its expansion plans or to
incur higher than anticipated financing costs, which could
have a material adverse effect on the Company.
In April 1998, the Company consummated the offering of
$175 million of unsecured 9 1/4% Senior Notes due 2008 (see
Note 6).
The Company recently entered into a sublease and ramp use
agreement with American Airlines, Inc. for 145,000 square feet
of hangar, office and parking space at Miami International
Airport in support of the Company's increased operations. The
lease is for a period in excess of four years and commences
July 1, 1998, at a monthly rate of approximately $105,000,
subject to an annual escalation factor.
Under the FAA's Directives issued under its "Aging
Aircraft" program, the Company is subject to extensive
aircraft examinations and may be required to undertake
structural modifications to address the problem of corrosion
and structural fatigue. In November 1994, Boeing issued
Nacelle Strut Modification Service Bulletins which have been
converted into Directives by the FAA. Eleven of the Company's
Boeing 747-200 aircraft will have to be brought into
compliance with such Directives within the next three years at
an estimated total cost of approximately $5.5 million. As
part of the FAA's overall aging aircraft program, it has
issued Directives requiring certain additional aircraft
modifications to be accomplished. 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 will require modification and nine additional
aircraft will require modification prior to the year 2009.
The remaining eight aircraft in service have already undergone
such modifications. The one aircraft undergoing modification
to freighter configuration will receive the Nacelle Strut
Modification as part of the freighter conversion. Other
Directives have been issued that require inspections and minor
modifications to Boeing 747-200 aircraft. It is possible that
additional Directives applicable to the types of aircraft or
engines included in the Company's fleet could be issued in the
future, the cost of which could be substantial.
On February 24, 1997, the Company filed a complaint for
declaratory judgment in the Colorado District Court, Jefferson
County against Israel Aircraft Industries Ltd. ("IAI") for
mechanical problems the Company experienced with respect to an
aircraft the Company sub-leased from IAI. The Company is
seeking approximately $4 million in damages against IAI to be
offset by the amount, if any, the Company owes IAI pursuant to
the sub-lease. IAI had the case removed to the U.S. District
Court, District of Colorado on April 21, 1997 and has filed
counterclaims alleging damages of approximately $9 million
based on claims arising from the sub-lease. The Company
intends to vigorously defend against all of IAI's claims.
In March 1997, Air Support International, Inc. ("ASI")
filed a complaint against the Company in the U.S. District
Court, Eastern District of New York alleging actual and
punitive damages of approximately $13.5 million arising from
the Company's refusal to pay commissions which ASI claims it
is owed for allegedly arranging certain ACMI Contracts. The
Company intends to vigorously defend against all of ASI's
claims.
6. Subsequent Events
In April 1998, the Company consummated the offering of
$175 million of unsecured 9 1/4% Senior Notes at 99.867%
due 2008 (the "9 1/4% Senior Notes"). The proceeds of the
offering will be used to repay $80 million of the Aircraft
Acquisition Credit Facility and for general corporate
purposes, which may include the partial funding of the
redemption of the Company's outstanding 12 1/4% Pass Through
Certificates due 2002 (the "Equipment Notes"), which are
subject to redemption at the option of the Company on or after
December 1, 1998. Interest on the 9 1/4% Senior Notes is
payable semi-annually on April 15 and October 15 of each year,
commencing October 15, 1998. The 9 1/4% Senior Notes are
redeemable at the option of the Company, in whole or in part,
at any time on or after April 15, 2003, pursuant to a defined
schedule. The 9 1/4% Senior Notes are unsubordinated
indebtedness of the Company, ranking pari passu in right of
payment with all existing and future unsubordinated
indebtedness of the Company and senior in right of payment to
all subordinated indebtedness of the Company.The 9 1/4% Senior
Notes are effectively subordinated, however, to all secured
indebtedness of the Company and all existing and future
liabilities of the Company's subsidiaries.
The Company is finalizing negotiations for the
refinancing of one aircraft in the amount of approximately $45
million, currently financed under the Aircraft Acquisition
Credit Facility. There can be no assurance that this
refinancing will be completed.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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 first quarter
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% per year) of guaranteed hours 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 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.
The aircraft acquisitions, lease arrangements and
modification schedule are described in Note 6 of the Company's
December 31, 1997 consolidated financial statements. The
timing of when an aircraft enters the Company's fleet can
affect not only annual performance, but can make quarterly
results vary, thereby affecting the comparability of
operations from period to period.
The table below sets forth selected financial and
operating data for the first quarter of 1998 and the four
quarters of the years ended December 31, 1997 and 1996
(dollars in thousands).
1998 1997
1st 1st
Quarter Quarter
Total operating revenues $79,634 $82,049
Operating expenses 58,091 64,907
Operating income 21,543 17,142
Other income (expense) (13,114) (9,248)
Net income 5,310 5,013
Block hours 15,388 15,443
Average aircraft operated 17.0 17.2
Operating margin 27.1% 20.9%
1997
4th 3rd 2nd 1st
Cumulative Quarter Quarter Quarter Quarter
Total operating
revenues $401,041 $120,893 $104,197 $93,902 $82,049
Operating
expenses 345,039 93,112 82,464 104,556 64,907
Operating
income (loss) 56,002 27,781 21,733 (10,654) 17,142
Other income
(expense) (45,469) (13,383) (11,930) (10,908) (9,248)
Net income 23,429 9,143 6,225 3,048 5,013
Block hours 75,254 22,333 19,937 17,541 15,443
Average
aircraft
operated 19.5 20.9 20.4 19.5 17.2
Operating
margin
(deficit) 14.0% 23.0% 20.9% (11.4)% 20.9%
1996
4th 3rd 2nd 1st
Cumulative 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%
Operating Revenues and Results of Operations
Total operating revenues for the quarter ended March 31,
1998 decreased to $79.6 million from $82.0 million for the
same period in 1997, or approximately 3%. The average number
of aircraft in the Company's fleet during the first quarter of
1998 was 17.0 compared to 17.2 during the same period in 1997.
Total block hours for the first quarter of 1998 were 15,388
compared to 15,443 for the same period in 1997, a decrease of
less than 1%, principally reflecting the comparability in the
size of the Company's fleet period over period. Revenue per
block hour decreased by approximately 3% to $5,175 for the
first quarter of 1998 compared to $5,313 for the first quarter
of 1997. This was substantially due to the decrease in the
volume of scheduled service operations period over period, for
which the rate per block hour is higher due to additional
operating costs borne by the Company under such arrangements.
Scheduled service operations are performed on an ad hoc basis
and are dependent upon excess availability of the Company's
aircraft and customer demand.
The Company's operating results improved by 26% from a
$17.1 million operating profit for the first quarter of 1997
to an operating profit of $21.5 million for the first quarter
of 1998. Results of operations were favorably impacted by
lower maintenance costs due to the return of the five aircraft
which the Company had leased from Federal Express Corporation
(the "FedEx Aircraft") upon lease termination at the beginning
of 1998. The FedEx Aircraft experienced significantly higher
maintenance costs compared to the other aircraft in the
Company's fleet. In addition, operating results improved due
to the increase in the percentage of owned aircraft compared
to leased aircraft in the Company's fleet period over period.
Net income of $5.0 million for the first quarter of 1997
increased to a net income of $5.3 million for the first
quarter of 1998.
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 other
expenses.
Flight crew salaries and benefits include all such
expenses for the Company's pilot work force. Flight crew
salaries and benefits of $6.8 million in the first quarter of
1998 was comparable to the same period of 1997, due to the
comparability in the number of aircraft in the Company's fleet
and aircraft block hours. On a block hour basis, this expense
declined by less than 1% to $439 per hour for the first
quarter of 1998 from $441 per hour for the same period in
1997.
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 slightly to $6.5
million in the first quarter of 1998 from $6.4 million in
1997, or approximately 2%, primarily due to the comparable
fleet size. On a block hour basis, other flight-related
expenses increased by approximately 3% to $424 per hour for
the first quarter of 1998 from $412 per hour for the same
period in 1997.
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 additional
aircraft engines were 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 decreased to $20.5 million in the
first quarter of 1998 from $23.3 million in the same period of
1997, or approximately 12%, primarily due to the return of the
FedEx Aircraft upon lease termination at the beginning of the
first quarter of 1998. In addition, there were approximately
$1.2 million of maintenance charges recorded in the first
quarter of the year-earlier period associated with the return
of two leased aircraft to the lessors. Excluding the one-time
charges in the year-earlier period, on a block hour basis,
maintenance expense decreased by 7% in the first quarter of
1998 compared to the first quarter of 1997.
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 $1.2 million in the
first quarter of 1998 compared to $7.8 million in the same
period of 1997, or a decrease of approximately 84%. During
the first quarter of 1998, the Company leased one aircraft as
compared to the first quarter of 1997 in which the Company
leased five aircraft. In addition, the Company did not incur
any cost for engine rentals in the first quarter of 1998 due
to the increase in spare engines over the year-earlier period.
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 decreased by 37% to $2.0
million for the first quarter of 1998 from $3.2 million for
the first quarter of 1997. This was primarily due to a 38%
decrease in scheduled service, charter and other non-ACMI
block hours to 379 block hours in the first quarter of 1998
from 614 block hours in the year-earlier 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 $12.2
million in the first quarter of 1998 from $9.5 million in the
same period of 1997, or approximately 29%. This increase
reflects the increase in owned aircraft and engines for the
first quarter of 1998 over the same period in 1997.
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 $8.8 million in the
first quarter of 1998 from $8.0 million in the same period of
1997, or approximately 11%, reflecting the increase in the
Company's operations. On a block hour basis, these expenses
increased to $573 per hour in the first quarter of 1998 from
$517 per hour in the same period of 1997, or 11%. This
increase in cost was due primarily to additional personnel and
other resources necessary to properly manage the Company's
increased operations and to prepare for the introduction of
the 747-400 aircraft into the Company's fleet in the second
half of 1998.
Other Income (Expense)
Other income (expense) consists of interest income and
interest expense. Interest income decreased to $1.7 million
in the first quarter of 1998 from $1.9 million in the same
period of 1997, primarily due to the use of the Company's cash
and cash equivalents and short-term investments for the
purchase of aircraft and general corporate purposes. Interest
expense increased to $14.8 million in the first quarter of
1998 from $11.2 million in the same period of 1997, or
approximately 32%, 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 37.0% during the
first quarter of 1998 and 36.5% during the first quarter of
1997. Due to significant capital costs, which are depreciated
at an accelerated rate for tax purposes, a significant portion
of the Company's tax provision in the first quarters of 1998
and 1997 is deferred.
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash
equivalents of approximately $62.0 million, short-term
investments of approximately $28.4 million and working capital
of approximately $6.2 million. During the first quarter of
1998, cash and cash equivalents increased approximately $20.6
million, principally reflecting cash provided from operations
of $22.0 million, proceeds from equipment financings of $6.8
million, net proceeds from the maturity and purchase of short-
term investments of $83.3 million and proceeds from the
exercise of stock options of $1.0 million, partially offset by
investments in flight and other equipment of $63.2 million,
principal reductions of indebtedness of $7.7 million and
deferred lease costs associated with the financing of the 747-
400 freighter aircraft of $21.6 million.
In June 1997, the Company entered into the Boeing
Purchase Agreement to purchase 10 new 747-400 freighter
aircraft to be powered by GE engines. The Boeing Purchase
Agreement requires that the Company pay pre-delivery deposits
to Boeing prior to the delivery date of each 747-400 freighter
aircraft in order to secure delivery of the 747-400 freighter
aircraft and to defray a portion of the manufacturing costs.
The Company expects the maximum total amount of pre-delivery
deposits at any time outstanding will be approximately $155
million, approximately $136.1 million of which was paid as of
March 31, 1998. For the remainder of 1998 and for the year
1999, the Company expects to pay $36.6 million and $42.6
million, respectively, in accordance with the pre-delivery
deposits schedule. In addition, the Boeing Purchase Agreement
provides for a deferral of a portion of the pre-delivery
deposits (deferred aircraft obligations) for which the Company
accrues and pays interest quarterly at 6-month LIBOR, plus
2.0%. As of March 31, 1998, there was $225.9 million of
deferred aircraft obligations outstanding and the combined
interest rate was 7.8%.
In January and February 1998, pursuant to an early lease
termination agreement negotiated in November 1997, the Company
delivered to Boeing for modification to cargo configuration
the aircraft acquired from Marine Midland Bank in December
1996 and the aircraft acquired from Citicorp Investor Lease,
Inc. in May 1997. The first aircraft was re-delivered to the
Company at the end of April 1998 and the second aircraft is
expected to be re-delivered to the Company early in the third
quarter of 1998. The financing for the modification to cargo
configuration is secured under the Aircraft Acquisition Credit
Facility (as defined in the Company's Form 10-K for 1997), for
which the Company borrowed a total of $3.3 million during the
first quarter of 1998 with respect to these aircraft. At the
end of April 1998, the Company borrowed an additional $13.8
million associated with the final payment for the modification
of the first aircraft upon its re-delivery to the Company.
In February 1998, the Company completed an offering of
$538.9 million of Pass Through Certificates, also known as
enhanced equipment trust certificates (the "EETCs"). The
EETCs are not direct obligations of, or guaranteed by, the
Company and therefore are not included in the Company's
consolidated financial statements. The cash proceeds from the
transaction were deposited with an escrow agent and will be
used to finance (through either leveraged leases or secured
debt financings) the debt portion of the acquisition cost of
five of the 10 new 747-400 freighter aircraft from Boeing
scheduled to be delivered to the Company during the period
July 1998 through December 1998. In connection therewith, the
Company intends to seek certain owner participants who will
commit lease equity financing to be used in leveraged leases
of such aircraft. In November and December 1997, the Company
entered into three Treasury Note hedges, approximating $300
million of principal, for the purpose of minimizing the risk
associated with the fluctuations in interest rates, which are
the basis for the pricing of the EETCs which were priced in
January 1998. The effect of the hedge resulted in a deferred
cost of $6.3 million, which will be amortized over the
expected twenty-year life associated with this financing.
There can be no assurance that the Company will be able to
obtain sufficient financing to fund the purchase of the
remaining five 747-400 freighter aircraft, or if such
financing is available, that it will be available on a
commercially reasonable basis. If it is unable to do so, the
Company could be required to modify its expansion plans or to
incur higher than anticipated financing costs, which could
have a material adverse effect on the Company.
In April 1998, the Company consummated the offering of
$175 million of unsecured 9 1/4% Senior Notes at 99.867%
due 2008 (the "9 1/4% Senior Notes"). The proceeds of the
offering will be used to repay $80 million of the Aircraft
Acquisition Credit Facility and for general corporate
purposes, which may include the partial funding of the
redemption of the Company's outstanding 12 1/4% Pass Through
Certificates due 2002 (the "Equipment Notes"), which are
subject to redemption at the option of the Company on or after
December 1, 1998. Interest on the 9 1/4% Senior Notes is
payable semi-annually on April 15 and October 15 of each year,
commencing October 15, 1998. The 9 1/4% Senior Notes are
redeemable at the option of the Company, in whole or in part,
at any time on or after April 15, 2003, pursuant to a defined
schedule. The 9 1/4% Senior Notes are unsubordinated
indebtedness of the Company, ranking pari passu in right of
payment with all existing and future unsubordinated
indebtedness of the Company and senior in right of payment to
all subordinated indebtedness of the Company. The 9 1/4% Senior
Notes are effectively subordinated, however, to all secured
indebtedness of the Company and all existing and future
liabilities of the Company's subsidiaries.
The Company recently entered into a sublease and ramp use
agreement with American Airlines, Inc. for 145,000 square feet
of hangar, office and parking space at Miami International
Airport in support of the Company's increased operations. The
lease is for a period in excess of four years and commences
July 1, 1998, at a monthly rate of approximately $105,000,
subject to an annual escalation factor.
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 is exploring the possibility of
entering into an unsecured line of credit for general working
capital purposes.
Under the FAA's Directives issued under its "Aging
Aircraft" program, the Company is subject to extensive
aircraft examinations and may be required to undertake
structural modifications to address the problem of corrosion
and structural fatigue. In November 1994, Boeing issued
Nacelle Strut Modification Service Bulletins which have been
converted into Directives by the FAA. Eleven of the Company's
Boeing 747-200 aircraft will have to be brought into
compliance with such Directives within the next three years at
an estimated total cost of approximately $5.5 million. As
part of the FAA's overall aging aircraft program, it has
issued Directives requiring certain additional aircraft
modifications to be accomplished. 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 will require modification and nine additional
aircraft will require modification prior to the year 2009.
The remaining eight aircraft in service have already undergone
such modifications. The one aircraft undergoing modification
to freighter configuration will receive the Nacelle Strut
Modification as part of the freighter conversion. Other
Directives have been issued that require inspections and minor
modifications to Boeing 747-200 aircraft. It is possible that
additional Directives applicable to the types of aircraft or
engines included in the Company's fleet could be issued in the
future, the cost of which could be substantial.
The Company has initiated a review of its internal
information systems for any Year 2000 transition problems
through a company-wide effort, assisted by Year 2000
experienced consultants, to address internal Year 2000 system
issues and, jointly with industry trade groups, to address
issues related to key business partners which are common to
other air carriers. The Company has not completed the
development of the remediation approach for all affected
areas. As a result, the Company cannot estimate what the
total cost will be to implement remediation efforts for all
critical operational systems. However, due to the Company's
relatively young systems, the Company's advanced client server
and data base architecture, and the Company's partial reliance
on vendor stated Year 2000 compliant third-party systems, the
Company is confident that such remediation efforts will not be
material. The Company expects to complete the assessment and
development stages of this plan by mid-1998, at which time it
expects to be able to make a reasonable cost estimate.
Implementation of all remediation efforts is scheduled to be
completed in early 1999.
The Company has started an ongoing program to review the
status of key supplier Year 2000 compliance efforts. While
the Company believes it is taking all appropriate steps to
assure Year 2000 compliance, it is dependent on key business
partner compliance to some extent. The Year 2000 problem is
pervasive and complex, as virtually every computer operation
will be affected in some way. Consequently, no assurance can
be given that Year 2000 compliance can be achieved without
costs that might affect future financial results or cause
reported financial information not to be necessarily
indicative of future operating results or future financial
condition.
The Company is finalizing negotiations for the
refinancing of one aircraft in the amount of approximately $45
million, currently financed under the Aircraft Acquisition
Credit Facility. There is no assurance that this refinancing
will be completed.
From time to time the Company engages in discussions with
third parties regarding possible acquisitions of aircraft that
could expand the Company's operations. The Company is in
discussions with third parties for the possible acquisition of
additional aircraft for delivery in 1998 and beyond.
The Company believes that cash on hand, the cash flow
generated from its operations and the proceeds from the May
1996 public offering of its Common Stock, the August 1997
placement of the Senior Notes and the April 1998 placement of
the 9 1/4% Senior Notes, coupled with availability under the
Aircraft Acquisition Credit Facility and the proceeds of the
EETCs, will be sufficient to meet its normal ongoing liquidity
needs, at least through 1998.
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, 1997.
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 11, 1998 By: /s/ Stephen C. Nevin
Stephen C. Nevin
Vice President and Chief Financial
Officer
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 61978
<SECURITIES> 28361
<RECEIVABLES> 46427
<ALLOWANCES> 9275
<INVENTORY> 0
<CURRENT-ASSETS> 136766
<PP&E> 1176812
<DEPRECIATION> 100593
<TOTAL-ASSETS> 1359702
<CURRENT-LIABILITIES> 130519
<BONDS> 726191
0
0
<COMMON> 225
<OTHER-SE> 244990
<TOTAL-LIABILITY-AND-EQUITY> 1359702
<SALES> 79634
<TOTAL-REVENUES> 79634
<CGS> 0
<TOTAL-COSTS> 58091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13114
<INCOME-PRETAX> 8429
<INCOME-TAX> 3119
<INCOME-CONTINUING> 5310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5310
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
