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 June 30, 1999
[ ] 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 August 2, 1999 the Registrant had 34,328,550 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-
June 30, 1999 and December 31, 1998
Consolidated Statements of Operations-
Quarter and Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1999 and 1998
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
Financial Data Schedule
Signatures
<TABLE>
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1999 1998
(Unaudited)
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 312,290 $ 449,627
Short-term investments 32,258 22,187
Accounts receivable and other, net 86,766 86,234
Total current assets 431,314 558,048
Property and equipment:
Flight equipment 1,793,816 1,527,921
Other 15,687 11,584
1,809,503 1,539,505
Less accumulated depreciation (168,354) (146,311)
Net property and equipment 1,641,149 1,393,194
Other assets:
Debt issuance costs, net of
accumulated amortization of
$11,247 and $10,413 29,581 32,224
Deposits and other 3,176 5,403
32,757 37,627
Total assets $2,105,220 $1,988,869
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 71,937 $ 155,452
Accounts payable and accrued expenses 97,014 100,051
Income tax payable 126 8,034
Total current liabilities 169,077 263,537
Long-term debt, net of current portion 1,341,145 1,166,460
Other liabilities 231,882 235,308
Deferred income tax payable 46,932 39,674
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;
34,432,196 and 33,819,882 shares
issued, respectively 344 338
Additional paid-in capital 194,996 178,131
Retained earnings 124,477 108,892
Deferred Compensation
- Restricted Stock (606) --
Treasury Stock, at cost; 142,041 and
164,403 shares, respectively (3,027) (3,471)
Total stockholders' equity 316,184 283,890
Total liabilities and
stockholders' equity $2,105,220 $1,988,869
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<TABLE>
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Revenues:
<S> <C> <C> <C> <C>
Contract services $135,025 $ 85,567 $270,403 $163,178
Charters, scheduled
services and other 3,543 2,383 6,004 4,406
Total operating
revenues 138,568 87,950 276,407 167,584
Operating expenses:
Flight crew salaries and 10,313 7,692 21,674 14,449
benefits
Other flight-related 10,791 5,458 21,620 11,977
expenses
Maintenance 30,071 20,995 60,342 41,516
Aircraft and engine
rentals 11,012 945 22,517 2,186
Fuel and ground handling 4,377 1,745 7,452 3,747
Depreciation and
amortization 16,824 13,007 35,991 25,237
Other 14,073 6,590 28,997 15,411
Total operating
expenses 97,461 56,432 198,593 114,523
Operating income 41,107 31,518 77,814 53,061
Other income (expense):
Interest income 4,121 2,931 8,695 4,592
Interest expense (23,996) (18,410) (48,884) (33,185)
(19,875) (15,479) (40,189) (28,593)
Income before income taxes 21,232 16,039 37,625 24,468
Provision for income taxes (7,962) (5,934) (14,109) (9,053)
Income before extraordinary
item and cumulative effect
of a change in accounting
principle 13,270 10,105 23,516 15,415
Extraordinary item:
Loss from extinguishment of
debt, net of applicable
tax benefit of $3,872 -- -- (6,593) --
Cumulative effect of a
change in accounting
principle:
Write-off of start-up costs,
net of applicable tax
benefit of $850 -- -- (1,416) --
Net income $ 13,270 $ 10,105 $ 15,507 $ 15,415
Basic earnings per share:
Income before extraordinary
item and cumulative effect
of a change in accounting
principle $ 0.39 $ 0.30 $ 0.68 $ 0.46
Extraordinary item -- -- (0.19) --
Cumulative effect of a
change in accounting
principle -- -- (0.04) --
Net income $ 0.39 $ 0.30 $ 0.45 $ 0.46
Weighted average common
shares 34,279 33,707 34,156 33,711
Diluted earnings per share:
Income before extraordinary
item and cumulative effect
of a change in accounting
principle $ 0.38 $ 0.30 $ 0.68 $ 0.46
Extraordinary item -- -- (0.19) --
Cumulative effect of a
change in accounting
principle -- -- (0.04) --
Net income $ 0.38 $ 0.30 $ 0.45 $ 0.46
Weighted average common
shares 34,570 33,896 34,449 33,865
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<TABLE>
ATLAS AIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
Operating activities:
<S> <C> <C> <C> <C>
Net income $ 15,507 $ 15,415
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 35,991 25,411
Amortization of debt issuance costs,
lease financing costs and other 1,171 2,606
Non-cash portion of extraordinary loss 2,491 --
Write-off of start-up costs 2,266 --
Change in deferred income tax payable 7,258 756
Changes in operating assets and
liabilities:
Accounts receivable and other (532) 8,487
Deposits and other 2,227 303
Accounts payable and accrued expenses (3,037) (4,404)
Income tax payable (7,908) 7,989
Net cash provided by operating
activities 55,434 56,563
Investment activities:
Purchase of property and equipment (246,244) (153,554)
Purchase of short-term investments (15,071) (44,594)
Maturity of short-term investments 5,000 122,896
Net cash used in investing
activities (256,315) (75,252)
Financing activities:
Issuance of Common Stock 16,871 1,035
Purchase of Treasury Stock (775) (2,632)
Issuance of Treasury Stock 489 412
Net proceeds from debt issuance and lease
financing 177,074 195,408
Principal payments on notes payable (129,444) (15,468)
Debt issuance costs and deferred lease
costs (671) (27,900)
Net cash provided by financing
activities 63,544 150,855
Net (decrease) increase in cash (137,337) 132,166
Cash and cash equivalents at beginning of
period 449,627 41,334
Cash and cash equivalents at end of period $ 312,290 $ 173,500
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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" or "Atlas") as of
June 30, 1999 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, 1998
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 March 1998, the Accounting Standards Executive Committee
("AcSEC") of the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998.
This statement was adopted in the first quarter of 1999 and did
not have a material impact on the financial statements of the
Company.
In April 1998, the AcSEC issued SOP 98-5 "Reporting on the
Costs of Start-up Activities." SOP 98-5 provides guidance on the
financial reporting of start-up costs and organization costs and
requires such costs to be expensed as incurred. In accordance
with SOP 98-5, initial application should be reported as the
cumulative effect of a change in accounting principle. SOP 98-5
is effective for financial statements for fiscal years beginning
after December 15, 1998. During 1998, the Company deferred
certain start-up costs related to the introduction of new Boeing
747-400 freighter aircraft into its fleet. This statement was
adopted in the first quarter of 1999 and the net-of-tax effect of
its application was a one-time charge of approximately $1.4
million. In 1999, the Company expects to continue to incur
costs associated with the introduction of additional new Boeing
747-400 freighter aircraft into its fleet and will expense these
costs as incurred.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes
in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133, as amended by SFAS
No. 137, is effective for years beginning after June 15, 2000 and
may be implemented as of the beginning of any fiscal quarter
after June 15, 1998. The Company has not yet quantified the
impact, if any, of adopting SFAS No. 133 on its financial
statements and has not determined the timing of or method of its
adoption of SFAS No. 133. However, SFAS No.133 could increase
volatility in earnings and other comprehensive income.
4. Short-Term Investments
The unused proceeds from the Company's financings and the
return of pre-delivery deposits by Boeing 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
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 June
30, 1999 (in thousands):
<TABLE>
Gross Gross (Amorti-
Aggregate Unrealized Unrealized zation)
Security Type Fair Value Holding Holding Accretion
Gains Losses
Included in cash and
cash equivalents:
<S> <C> <C> <C> <S> <C> <C> <C>
Commercial Paper $ 96,948 $ -- $ 12 $ 74
Corporate Bonds 16,475 -- -- --
Market Auction 133,550 -- -- --
Preferreds
Totals $ 246,973 $ -- $ 12 $ 74
Included in short-
term investments:
U.S.Government
Agencies $ 14,998 $ -- $ 2 $ --
Market Auction
Preferreds 17,000 -- -- --
Totals $ 31,998 $ -- $ 2 $ --
</TABLE>
In addition, accrued interest on cash equivalents and short-term
investments at June 30, 1999 was approximately $470,000.
Interest earned on these investments and related maturities are
reinvested in similar securities.
5. Commitments and Contingencies
In June 1997, the Company entered into the Boeing Purchase
Agreement to purchase 10 new 747-400 freighter aircraft to be
powered by engines acquired from GE, with options to purchase up
to 10 additional 747-400 aircraft. The Company arranged leveraged
lease financing for four 747-400 freighter aircraft and debt
financing for one 747-400 freighter aircraft that were delivered
in 1998. In April 1999, the Company arranged Enhanced Equipment
Trust Certificates debt financing ("1999 EETCs") for the
remaining five aircraft, four of which have been or will be
delivered in 1999, and one in 2000. The 1999 EETCs are not
direct obligations of, or guaranteed by, the Company and
therefore are not included in its consolidated financial
statements until such time that the Company draws upon the
proceeds to take delivery and ownership of an aircraft. In
February 1999, the Company exercised options for two additional
747-400 freighter aircraft, which are currently scheduled for
delivery in 2000. The Company has not yet arranged financing for
those two aircraft. 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. Based on the current
expected firm aircraft delivery schedule, the Company expects the
maximum total amount of pre-delivery deposits at any time
outstanding will be approximately $162.3 million, which was paid
as of June 30, 1998. There were approximately $120.0 million of
pre-delivery deposits outstanding at June 30, 1999 which were
included in flight equipment. Upon each delivery, Boeing refunds
to the Company the pre-delivery deposits associated with the
delivered 747-400 freighter aircraft. 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 June 30, 1999, there was $160.3 million of
deferred aircraft obligations included in other liabilities, and
the combined interest rate was approximately 7.06%.
In November 1998, the Company entered into a contract with
Boeing to re-engine the only two Pratt & Whitney ("P&W") powered
aircraft in its fleet from P&W engines to GE engines, in order to
improve the performance of the aircraft and to improve the
standardization of its fleet. The Company acquired the GE
engines and other parts required for such re-engineing from a
third party. The Company believes that these re-engineing
efforts will have no material financial impact due to the recent
sale of the P&W engines, coupled with the value derived from the
unused parts associated with the acquisition. The first re-
engined aircraft was returned to the Company in June 1999. The
Company expects the second re-engined aircraft to be returned in
the third quarter of 1999. On a prospective basis, and as a
result of these re-engineing efforts, the Company expects to
incur lower maintenance costs related to these two aircraft
compared to the costs it has experienced to date.
In January 1999, the Company purchased a Boeing Business Jet
("BBJ") from Boeing for approximately $32 million and immediately
delivered the BBJ to a third party for installation of the
interior business configuration. Shortly thereafter, the Company
entered into a sale-leaseback transaction with GE Capital to
finance the BBJ. This aircraft will be used to transport the
Company's executives on business trips throughout the world. The
Company's Chairman, President and CEO has agreed to share in the
acquisition costs and capital improvement costs of the BBJ.
Under the FAA's Directives issued under its "Aging Aircraft"
program, the Company is subject to extensive aircraft
examinations and will be required to undertake structural
modifications to its fleet 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. Five of the Company's Boeing 747-200
aircraft will have to be brought into compliance with such
Directives by March 2000 at an estimated total cost of
approximately $2.5 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 747-200
aircraft will range between $2 million and $3 million. Twelve
aircraft of the 747-200 fleet have already undergone the major
portion of such modifications. The remaining eleven 747-200
aircraft will require modification prior to the year 2009. Other
Directives have been issued that require inspections and minor
modifications to Boeing 747-200 aircraft. The newly manufactured
747-400 freighter aircraft were delivered to the Company in
compliance with all existing FAA Directives at their respective
delivery dates. On December 3, 1998, the FAA issued a Directive
ordering Boeing 747 operators to change fuel pump procedures to
prevent dry tank operation that could result in ignition of the
center fuel or horizontal stabilizer tanks. Compliance with this
Directive may adversely impact the Company's customers' operating
costs and schedules. It is possible that additional Directives
applicable to the types of aircraft or engines included in our
fleet could be issued in the future, the cost of which could be
substantial.
In April 1999, the Company received notification from the
National Mediation Board ("NMB") that Atlas' crew members voted
for representation by the Air Line Pilots Association ("ALPA").
The Company expects its labor costs to decline initially since
its profit sharing plan (the "Plan") excludes from the category
of eligible employees, those employees who have been certified by
the NMB for representation. In response to ALPA's claims that
such an exclusion violates the Railway Labor Act, on May 6, 1999,
the Company filed an action in the United States District Court
for the District of Columbia seeking a declaratory judgment
confirming, inter alia, the enforceability of the Plan's
exclusion. On May 10, 1999, ALPA filed a counterclaim in that
action, alleging that the exclusion of its members from the Plan
violates the Railway Labor Act, and seeking restoration of profit
sharing pay. The Company believes ALPA's claim to be without
merit and intends to vigorously defend against the counterclaim.
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. On June 15, 1999, the Court
granted the Company's request for summary judgment to dismiss the
most substantial of ASI's claims. Additionally, the Court
granted a motion by ASI for summary judgment on one claim of
approximately $500,000, plus interest, for which the Company had
previously reserved. As a result of the Court's recent findings,
ASI's alleged claims have been reduced to approximately $1.3
million. ASI's claim for punitive damages was dismissed in
earlier proceedings. The Company intends to vigorously defend
against the remaining ASI claims.
6. Stockholders' Equity
In January 1999, the Company announced a 3-for-2 stock split
in the form of a stock dividend to stockholders of record at the
close of business on January 25, 1999. The new shares were
delivered on February 8, 1999. The share data and earnings per
share data for all periods presented in these consolidated
financial statements have been restated to reflect the stock
split.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
We provide airport-to-airport cargo transportation services
throughout the world to major international air carriers
generally under three- to five-year fixed-rate contracts which
typically require that we supply aircraft, crew, maintenance and
insurance (the "ACMI Contracts"). The cargo operations of our
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 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 us, and are expected to
continue to do so in the future. As a result, our revenues
typically decline in the first quarter of the year as our
contractual aircraft utilization level temporarily decreases. We
seek to schedule, to the extent possible, our major aircraft
maintenance activities during this period to take advantage of
any unutilized aircraft time.
The aircraft acquisitions and lease arrangements are
described in Note 6 of our December 31, 1998 Consolidated
Financial Statements. The timing of when an aircraft enters our
fleet can affect not only annual performance, but can make
quarterly results vary, thereby affecting the comparability of
operations from period to period. In addition, the number of
aircraft utilized from period to period as spare or maintenance
back-up aircraft may also cause quarterly results to vary.
The table below sets forth selected financial and operating
data for the first and second quarters of 1999 and 1998 (dollars
in thousands).
<TABLE>
1999
Cumu- 2nd 1st
lative Quarter Quarter
<S> <C> <C> <C>
Total operating revenues $276,407 $138,568 $137,839
Operating expenses 198,593 97,461 101,132
Operating income 77,814 41,107 36,707
Other income (expense) (40,189) (19,875) (20,314)
Net income 15,507 (1) 13,270 2,237
Block hours 47,792 23,861 23,931
Average aircraft operated 27.7 28.4 27.0
Operating margin 28.2% 29.7% 26.6%
</TABLE>
<TABLE>
1998
Cumu- 2nd 1st
Lative Quarter Quarter
<S> <C> <C> <C>
Total operating revenues $167,584 $87,950 $79,634
Operating expenses 114,523 56,432 58,091
Operating income 53,061 31,518 21,543
Other income (expense) (28,593) (15,479) (13,114)
Net income 15,415 (1) 10,105 5,310
Block hours 32,216 16,828 15,388
Average aircraft operated 17.3 17.7 17.0
Operating margin 31.7% 35.8% 27.1%
</TABLE>
__
(1) After extraordinary item and cumulative effect of a change
in accounting principle.
Operating Revenues and Results of Operations
Total operating revenues for the quarter ended June 30, 1999
increased to $138.6 million from $88.0 million for the same
period in 1998, or approximately 58%. This reflected the
increase in the average number of aircraft in our fleet during
the second quarter of 1999, to 28.4 aircraft compared to 17.7
during the same period in 1998, or an increase of approximately
60%. Total block hours for the second quarter of 1999 were
23,861 compared to 16,828 for the same period in 1998, an
increase of approximately 42%, principally reflecting the
increase in the average number of aircraft in our fleet, somewhat
offset by the impact of two aircraft out of service which were
being re-engined for most of the second quarter of 1999. Revenue
per block hour increased by approximately 11% to $5,807 for the
second quarter of 1999 compared to $5,226 for the second quarter
of 1998. This was substantially due to the increase in the
number of 747-400 freighter aircraft in our fleet and the
increase in the volume of charter operations period over period,
for which the rate per block hour was higher in order to offset
additional operating costs borne by us under such arrangements.
Charter operations are performed on an ad hoc basis and are
dependent upon surplus availability of our aircraft and customer
demand. Additionally, the revenue per block hour for the 747-400
aircraft in the second quarter of 1999 was higher than that for
the 747-200 aircraft, reflecting the higher pricing structure of
the 747-400 customer contracts.
Our operating results improved by approximately 30% from a
$31.5 million operating profit for the second quarter of 1998 to
an operating profit of $41.1 million for the second quarter of
1999. Results of operations were favorably impacted by the
substantial increase in the size of our fleet and the newer 747-
400 freighter aircraft, slightly offset by the higher percentage
of leased aircraft compared to owned aircraft in our fleet period
over period. Net income of $10.1 million for the second quarter
of 1998 increased by approximately 31% to a net income of $13.3
million for the second quarter of 1999.
Total operating revenues for the six months ended June 30,
1999 increased to $276.4 million from $167.6 million for the same
period in 1998, or approximately 65%. This reflected the
increase in the average number of aircraft in our fleet during
the first half of 1999, to 27.7 aircraft compared to 17.3 during
the same period in 1998, an increase of approximately 60%. Total
block hours for the first half of 1999 were 47,792 compared to
32,216 for the same period in 1998, an increase of approximately
48%, principally reflecting higher utilization per average
aircraft period over period. Revenue per block hour increased by
approximately 11% to $5,784 for the first six months of 1999
compared to $5,202 for the same period in 1998. This was
substantially due to the increase in the number of 747-400
freighter aircraft in our fleet and the increase in the volume of
charter operations period over period, as discussed above.
Our operating results improved by approximately 47% from a
$53.1 million operating profit for the first six months of 1998
to an operating profit of $77.8 million for the first six months
of 1999. Results of operations were favorably impacted by the
increase in 747-400 freighter aircraft in our fleet, partially
offset by the increase in leased aircraft compared to owned
aircraft. Net income of $15.4 million for the first half of 1998
increased by 1% to a net income of $15.5 million for the first
half of 1999. In the first quarter of 1999, we recorded an
extraordinary charge from the extinguishment of the $100 million
12 1/4% Senior Notes and a one-time charge associated with the
write-off of start-up costs related to the introduction of new
Boeing 747-400 freighter aircraft into our fleet, as required by
SOP 98-5 (as defined). Net income before extraordinary item and
cumulative effect of a change in accounting principle for the
first half of 1999 was $23.5 million, or an increase of
approximately 53% compared to the first half of 1998.
Operating Expenses
Our 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 our pilot work force. Flight crew salaries and benefits
increased to $10.3 million in the second quarter of 1999 compared
to $7.7 million in the same period of 1998, or approximately 34%,
principally reflecting the increase in the size of our fleet
quarter over quarter. On a block hour basis, this expense
decreased by approximately 5% to $432 per hour for the second
quarter of 1999 from $457 per hour for the same period in 1998.
For the first six months of 1999, actual expense increased by
approximately 50%, from $14.4 million to $21.7 million, primarily
due to the increase in the size of our fleet period over period.
On a block hour basis, this expense increased to $454 per hour
from $449 per hour for the same period in 1998, or approximately
1%.
Other flight-related expenses include aircraft hull and
liability insurance, crew travel and meal expenses, initial and
recurrent crew training costs and other expenses necessary to
conduct our flight operations.
Other flight-related expenses increased to $10.8 million in
the second quarter of 1999 compared to $5.5 million for the same
period of 1998, and to $21.6 million in the six months ended June
30, 1999 compared to $12.0 million in the six months ended June
30, 1998, or approximately 98% and 81%, respectively. On a block
hour basis, other flight-related expenses increased by
approximately 40% to $452 per hour for the second quarter of 1999
compared to $324 per hour for the same period in 1998, and by
approximately 22% to $452 per hour for the six months ended June
30, 1999 compared to $372 per hour for the same period in 1998.
These increases were primarily due to the impact of added
training and travel costs associated with the introduction of the
five new 747-400 freighter aircraft into our fleet in the second
half of 1998 and preparation for the five additional new 747-400
freighter aircraft remaining to be delivered in 1999 and 2000.
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, D
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 January 1995, we
contracted with KLM for a significant part of our 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. During 1998, we entered into separate
long-term contracts with Lufthansa Technik for the airframe
maintenance and with GE for the engine maintenance of the 747-400
freighter aircraft, effective with the introduction of the 747-
400 freighter aircraft into our fleet in the second half of 1998.
Maintenance expense increased to $30.1 million in the second
quarter of 1999 from $21.0 million in the same period of 1998,
and to $60.3 million in the six months ended June 30, 1999 from
$41.5 million in the six months ended June 30, 1998, or
approximately 43% and 45%, respectively, primarily due to the
increased size of our fleet. On a block hour basis, maintenance
expense increased by approximately 1% quarter over quarter and
decreased by approximately 2% for the first half of 1999 compared
to the year-earlier period.
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 our
aircraft for either scheduled or unscheduled maintenance and any
related short-term replacement aircraft lease costs.
Aircraft and engine rentals were $11.0 million in the second
quarter of 1999 compared to $0.9 million in the same period of
1998, and were $22.5 million in the first half of 1999 compared
to $2.2 million in the first half of 1998, or an increase of
approximately 1065% and 930%, respectively. The quarter and six-
month increases were due to the additional leasing of four new
747-400 freighter aircraft.
Because of the nature of our ACMI Contracts, our airline
customers bear all other operating expenses. As a result, we do
not incur fuel and ground handling expenses except when we
operate on our own behalf either in scheduled services, for ad
hoc charters or for ferry flights. Fuel expenses for our 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 services include
the costs associated with servicing our aircraft at the various
airports to which we operate.
Fuel and ground handling costs increased by approximately
151% to $4.4 million for the second quarter of 1999 from $1.7
million for the second quarter of 1998, and increased by
approximately 99% to $7.5 million for the first half of 1999 from
$3.7 million for the first half of 1998. The quarter over
quarter and six-month year over year increases were primarily due
to increased charter activity.
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 $16.8
million in the second quarter of 1999 from $13.0 million in the
same period of 1998, and to $36.0 million in the first half of
1999 from $25.2 million in the year-earlier period, or
approximately 29% and 43%, respectively. These increases reflect
the increase in owned aircraft, engines and spare parts for the
second quarter of 1999 and the first half of 1999 over the same
periods in 1998. In addition, there was an increase in spare
parts associated with the introduction of the 747-400 freighter
aircraft into our fleet in the second half of 1998.
Other operating expenses include salaries, wages, benefits,
travel and meal expenses for non-crew members and other
miscellaneous operating costs.
Other operating expenses increased to $14.1 million in the
second quarter of 1999 from $6.6 million in the same period of
1998, and to $29.0 million for the first half of 1999 from $15.4
million for the same period of 1998, or approximately 114% and
88%, respectively. On a block hour basis, these expenses
increased to $590 per hour in the second quarter of 1999 from
$392 per hour in the same period of 1998, and to $607 per hour
for the first half of 1999 from $478 per hour in the same period
of 1998, or approximately 51% and 27%, respectively. These
increases in cost from the prior year periods were due primarily
to additional personnel and other resources required for the
expansion of our fleet and operations.
Other Income (Expense)
Other income (expense) consists of interest income and
interest expense. Interest income increased to $4.1 million in
the second quarter of 1999 from $2.9 million in the same period
of 1998, and to $8.7 million for the first six months of 1999
from $4.6 million for the first six months of 1998, primarily due
to the investment of proceeds from our issuance of $175 million
of 9 1/4% Senior Notes in April 1998, $150 million of 9 3/8%
Senior Notes in November 1998 and the return of deposits and
proceeds from financing the 747-400 freighter aircraft deliveries
in the second half of 1998 and thus far in 1999. Interest
expense increased to $24.0 million in the second quarter of 1999
from $18.4 million in the same period of 1998, and to $48.9
million in the first half of 1999 from $33.2 million in the year-
earlier period, or approximately 30% and 47%, respectively.
These increases also resulted from the financing associated with
the purchase of five additional aircraft in the second half of
1998 and the issuance of 9 1/4% Senior Notes in April 1998 and
$150 million of 9 3/8% Senior Notes in November 1998.
Income Taxes
Pursuant to the provisions of SFAS No. 109 "Accounting for
Income Taxes," we have recorded a tax provision based on tax
rates in effect during the period. Accordingly, we accrued for
taxes at the rate of 37.5% during the second quarter and first
half of 1999 and 37.0% during the second quarter and first half
of 1998. Due to significant capital costs, which are depreciated
at an accelerated rate for tax purposes, a significant portion of
our tax provision in these periods is deferred.
Liquidity and Capital Resources
At June 30, 1999, we had cash and cash equivalents of
approximately $312.3 million, short-term investments of
approximately $32.3 million and working capital of approximately
$262.2 million. During the first half of 1999, cash and cash
equivalents decreased approximately $137.3 million, primarily
reflecting the purchase of flight and other equipment of $246.2
million, purchase of short-term investments of $10.1 million (net
of maturities), principal reductions of indebtedness of $129.4
million, debt issuance costs of $0.7 million and purchases of
treasury stock (net of proceeds from issuance) of $0.3 million;
partially offset by cash provided from operations of $55.4
million, proceeds from equipment financings of $177.1 million and
net proceeds from the issuance of common stock of $16.9 million.
Our overall borrowing level increased to $1.4 billion at June 30,
1999 from $1.3 billion at December 31, 1998.
In June 1997, we entered into the Boeing Purchase Agreement
to purchase 10 new 747-400 freighter aircraft to be powered by
engines acquired from GE, with options to purchase up to 10
additional 747-400 aircraft. We arranged leveraged lease
financing for four 747-400 freighter aircraft and debt financing
for one 747-400 freighter aircraft delivered in 1998. In April
1999, we arranged EETC debt financing for the remaining five
aircraft, four of which have been or will be delivered in 1999,
and one in 2000. See discussions of 1999 EETCs below. In
February 1999, we exercised options for two additional 747-400
freighter aircraft, which are currently scheduled for delivery in
2000. We have not yet arranged financing for those two aircraft.
The Boeing Purchase Agreement requires that we 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. Based on the current expected firm aircraft delivery
schedule, we expect the maximum total amount of pre-delivery
deposits at any time outstanding will be approximately $162.3
million, which was paid as of June 30, 1998. There were
approximately $120.0 million of pre-delivery deposits outstanding
at June 30, 1999 which were included in flight equipment. Upon
each delivery, Boeing refunds us the pre-delivery deposits
associated with the delivered 747-400 freighter aircraft. In
addition, the Boeing Purchase Agreement provides for a deferral
of a portion of the pre-delivery deposits (deferred aircraft
obligations) for which we accrue and pay interest quarterly at 6-
month LIBOR, plus 2.0%. As of June 30, 1999, there was $160.3
million of deferred aircraft obligations included in other
liabilities, and the combined interest rate was approximately
7.06%.
In November 1998, we entered into a contract with Boeing to
re-engine the only two Pratt & Whitney ("P&W") powered aircraft
in our fleet from P&W engines to GE engines, in order to improve
the performance of the aircraft and to improve the
standardization of our fleet. We acquired the GE engines and
other parts required for such re-engineing from a third party.
We believe that these re-engineing efforts will have no material
financial impact due to the recent sale of the P&W engines,
coupled with the value derived from the unused parts associated
with the acquisition. The first re-engined aircraft was returned
to us in June 1999. We expect the second re-engined aircraft to
be returned in the third quarter of 1999. On a prospective
basis, and as a result of these re-engineing efforts, we expect
to incur lower maintenance costs related to these two aircraft
compared to the costs we have experienced to date.
In January 1999, we announced a 3-for-2 stock split in the
form of a stock dividend to stockholders of record at the close
of business on January 25, 1999. The new shares were delivered
on February 8, 1999. The share data and earnings per share data
for all periods presented in these consolidated financial
statements have been restated to reflect the stock split.
In January 1999, we purchased a Boeing Business Jet ("BBJ")
from Boeing for approximately $32 million and immediately
delivered the BBJ to a third party for installation of the
interior business configuration. Shortly thereafter, we entered
into a sale-leaseback transaction with GE Capital to finance the
BBJ. This aircraft will be used to transport our executives on
business trips throughout the world. Our Chairman, President and
CEO has agreed to share in the acquisition costs and capital
improvement costs of the BBJ.
In January 1999, we used a portion of the proceeds from the
previous issuance of $150 million of 9 3/8% Senior Notes to
redeem at 108% all of our $100 million of 12 1/4% Equipment Notes
due 2002. We recorded an approximate $6.6 million one-time
extraordinary charge from the extinguishment of debt, which is
net of an applicable tax benefit of approximately $3.9 million,
in the first quarter of 1999 associated with this redemption.
The extinguishment of this debt eliminated liens on three 747-200
freighter aircraft.
In February 1999, we filed a $650 million shelf registration
statement (the "$650 million Shelf Registration") with the
Securities and Exchange Commission, which was declared effective
shortly thereafter. The $650 million Shelf Registration provided
for debt or equity financing, or a combination of both, the net
proceeds from which were available for general corporate
purposes, including but not limited to, repayment of
indebtedness, capital expenditures, repurchase of common stock
and acquisitions.
In April 1999, we completed an offering of $543.6 million
Enhanced Equipment Trust Certificates ("1999 EETCs"), which
represented a substantial portion of the $650 million Shelf
Registration. The 1999 EETCs are not direct obligations of, or
guaranteed by, us and therefore are not included in our
consolidated financial statements until such time that we draw
upon the proceeds to take delivery and ownership of an aircraft.
The cash proceeds from the 1999 EETCs transaction were deposited
with an escrow agent and a portion of the proceeds was used in
the second and third quarters of 1999 to finance, through secured
debt financings, the debt portion of the acquisition cost of
three new 747-400 freighter aircraft from Boeing. In connection
with these secured debt financings, we executed equipment notes
in the aggregate amount of $325.1 million, with a weighted
average interest rate of 7.6%. The remaining proceeds from the
1999 EETCs will be used to finance (through either leveraged
leases or secured debt financings) the debt portion of the
acquisition cost of two of the remaining five firm new 747-400
freighter aircraft from Boeing scheduled to be delivered to us in
1999 and 2000. In connection therewith, we intend to seek
certain owner participants who will commit lease equity financing
to be used in leveraged leases of such aircraft.
In April 1999, we filed a new $250 million shelf
registration statement (the "$250 million Shelf Registration")
with the Securities and Exchange Commission as a replacement for
the $106.4 million of funds remaining under the $650 million
Shelf Registration. The $250 million Shelf Registration provides
for debt or equity financing, or a combination of both, the net
proceeds from which will be available for general corporate
purposes, including but not limited to, repayment of
indebtedness, capital expenditures, repurchase of common stock
and acquisitions. The $250 million Shelf Registration was
declared effective May 10, 1999.
Due to the contractual nature of our business, management
does not consider our 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
our customers, we do not incur significant costs in advance of
the receipt of corresponding revenues. Moreover, ACMI costs,
which are our responsibility, are generally incurred on a
regular, periodic basis on either a flight hour or calendar month
basis. These costs are largely matched by revenue receipts, as
our contracts require regular payments from our customers based
upon current flight activity, generally every two to four weeks.
As a result, we have not had a requirement for a working capital
facility.
Under the FAA's Directives issued under its "Aging Aircraft"
program, the Company is subject to extensive aircraft
examinations and will be required to undertake structural
modifications to its fleet 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. Five of the Company's Boeing 747-200
aircraft will have to be brought into compliance with such
Directives by March 2000 at an estimated total cost of
approximately $2.5 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 747-200
aircraft will range between $2 million and $3 million. Twelve
aircraft of the 747-200 fleet have already undergone the major
portion of such modifications. The remaining eleven 747-200
aircraft will require modification prior to the year 2009. Other
Directives have been issued that require inspections and minor
modifications to Boeing 747-200 aircraft. The newly manufactured
747-400 freighter aircraft were delivered to the Company in
compliance with all existing FAA Directives at their respective
delivery dates. On December 3, 1998, the FAA issued a Directive
ordering Boeing 747 operators to change fuel pump procedures to
prevent dry tank operation that could result in ignition of the
center fuel or horizontal stabilizer tanks. Compliance with this
Directive may adversely impact the Company's customers' operating
costs and schedules. It is possible that additional Directives
applicable to the types of aircraft or engines included in its
fleet could be issued in the future, the cost of which could be
substantial.
From time to time we engage in discussions with third
parties regarding the possible acquisition or sale of aircraft in
our fleet. We are currently in discussions with third parties
for the possible acquisition and sale of additional aircraft for
1999 and beyond.
We believe that cash on hand and the cash flow generated
from our operations, combined with the proceeds of the $175
million of 9 1/4% Senior Notes, the $543.6 million of 1999 EETCs
and the $150 million of 9 3/8% Senior Notes, will be sufficient
to meet our normal ongoing liquidity needs for the next twelve
months.
Year 2000
We have performed a review of our internal information
systems for Year 2000 ("Y2K") automation problems through a
company-wide effort, assisted by Y2K experienced consultants, to
address internal Y2K system issues and, jointly with industry
trade groups, issues related to key business partners which are
common to other air carriers. As a result, we do not anticipate
that Y2K compliance will have a material financial impact. We
have completed an inventory of our computer network environment
and an assessment of the effort involved to bring our internal
computer system environment to full Y2K compliance. Due to our
relatively modern systems, advanced client server, development
and data base architecture, and our partial reliance on vendor
representations regarding Y2K compliant third-party systems,
related remediation efforts are believed to be minimal and
achievable. Third-party hardware and software used by us are,
for the most part, Y2K compliant; those that are not compliant
are expected to become compliant by the end of the third quarter
of 1999. Initial review of our 747-200 and 747-400 aircraft
computer systems indicate that most all of the systems are
compliant, and those that are not compliant are being addressed
by Boeing sub-contractors. Boeing has performed flight and
ground testing of its 747-200 and 747-400 aircraft and has
concluded that there are no flight safety issues related to the
Y2K date rollover related to our aircraft. We have developed
contingency plans for all the systems that are critical to our
operations. These contingency plans are designed to reduce the
likelihood that our operations will be interrupted by Y2K related
issues. We have reviewed the status of key supplier/business
partner Y2K compliance efforts. While we believe we are taking
all appropriate steps to assure our Y2K compliance, we are
dependent on key supplier/business partner compliance to some
extent. As of July 31, 1999, we are seeking alternate
supplier/business partners in circumstances whereby existing
supplier/business partners were not Y2K compliant.
Common to all airlines is the state of Y2K readiness of
airports. The results of a study undertaken by the Air Transport
Association to determine the process which domestic airports are
using to achieve Y2K compliance indicates that most domestic
airports used by us have made substantial progress towards being
Y2K compliant. A similar project undertaken by the International
Air Transport Association indicates that although some
international airports have made progress towards Y2K compliance
in recent months, most airports used by us are behind schedule.
We are diligently working in conjunction with regulatory
agencies, governing authorities, and customer airlines to ensure
that the most current information is available to us and
contingency plans are in place.
All company-controllable systems have been Y2K tested and
are compliant as of July 31, 1999. Third-party and
supplier/business partner systems have been fully addressed in
the form of compliance remediation, plans for timely remediation,
or contingency plans. The Y2K problem is pervasive and complex,
as virtually every global computer operation will be affected in
some way. Consequently, no assurance can be given that all
company-used third-party systems and suppliers/business partners
can achieve Y2K compliance. We expect that the costs incurred to
become Y2K compliant will not exceed $300,000.
Forward-looking Information
Certain statements included or incorporated by reference in
this Form 10-Q constitute "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 2lE of the Exchange Act. Such
forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual
results, levels of activity, performance or achievements or
industry results, to be materially different from any future
results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. In
addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "believe" or
"continue" or the negative thereof or variations thereon or
similar terminology. Although we believe that the expectations
reflected in such forward-looking statements are reasonable, we
can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results
to differ materially from our expectations are disclosed under
"Risk Factors" and elsewhere in our Annual Report on Form 10-K
for December 31, 1998.
To the extent that any of the statements contained herein
relating to our 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 and complying with FAA policies;
- - the continued productivity of our workforce;
- - dependence on key personnel; and
- - other regulatory requirements.
As a result of the foregoing and other factors, no assurance
can be given as to our future results and achievements. Neither
we nor any other person assumes responsibility for the accuracy
and completeness of these statements.
ATLAS AIR, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1997, Air Support International, Inc. ("ASI") filed
a complaint against us in the U.S. District Court, Eastern
District of New York alleging actual and punitive damages of
approximately $13.5 million arising from our refusal to pay
commissions which ASI claims it is owed for allegedly arranging
certain ACMI Contracts. On June 15, 1999, the Court granted our
request for summary judgment to dismiss the most substantial of
ASI's claims. Additionally, the Court granted a motion by ASI
for summary judgment on one claim of approximately $500,000, plus
interest, for which we had previously reserved. As a result of
the Court's recent findings, ASI's alleged claims have been
reduced to approximately $1.3 million. ASI's claim for punitive
damages was dismissed in earlier proceedings. We intend to
vigorously defend against the remaining ASI claims.
In April 1999, we received notification from the National
Mediation Board ("NMB") that our crew members have voted to be
represented by the Air Line Pilots Association ("ALPA"). We
expect our labor costs to decline initially since our profit
sharing plan (the "Plan") excludes from the category of eligible
employees, those employees who have been certified by the NMB for
representation. In response to ALPA's claims that such an
exclusion violates the Railway Labor Act, on May 6, 1999, we
filed an action in the United States District Court for the
District of Columbia seeking a declaratory judgment confirming,
inter alia, the enforceability of the Plan's exclusion. On May
10, 1999, ALPA filed a counterclaim in that action, alleging that
the exclusion of its members from our Plan violates the Railway
Labor Act, and seeking restoration of profit sharing pay. We
believe ALPA's claim to be without merit and intend to vigorously
defend against the counterclaim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Financial Data Schedule
b. Reports filed on Form 8-K
Report on Form 8-K dated April 26, 1999, regarding
notification received from the National Mediation
Board that our pilots voted to be represented by
the Air Line Pilots Association (ALPA).
Report on Form 8-K dated April 13, 1999, regarding
the 1999 EETCs financing.
Report on Form 8-K dated January 26, 1999,
regarding the $650 million Shelf Registration.
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: August 13, 1999 By: /s/ Stephen C. Nevin
Stephen C. Nevin
Vice President and Chief
Financial Officer
Principal Accounting Officer
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