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, 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 May 3, 1999 the Registrant had 34,289,156 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, 1999 and December 31, 1998
Consolidated Statements of Operations-
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 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 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
Signatures
ATLAS AIR, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1999 1998
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 325,927 $ 449,627
Short-term investments 22,069 22,187
Accounts receivable and other, net 71,538 86,234
Total current assets 419,534 558,048
Property and equipment:
Flight equipment 1,630,978 1,527,921
Other 12,727 11,584
1,643,705 1,539,505
Less accumulated depreciation (160,470) (146,311)
Net property and equipment 1,483,235 1,393,194
Other assets:
Debt issuance costs, net of
accumulated amortization
of $9,771 and $10,413 28,806 32,224
Deposits and other 2,994 5,403
31,800 37,627
Total assets $ 1,934,569 $ 1,988,869
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 65,248 $ 155,452
Accounts payable and accrued
liabilities 89,202 100,051
Income tax payable 179 8,034
Total current liabilities 154,629 263,537
Long-term debt, net of current
portion 1,146,132 1,166,460
Other liabilities 292,512 235,308
Deferred income tax liability 40,487 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;
34,394,414 and 33,819,882 shares
issued, respectively 344 338
Additional paid-in capital 192,583 178,131
Retained earnings 111,182 108,892
Deferred compensation -
Restricted Stock (707) --
Treasury Stock, at cost; 128,793
and 164,403 shares, respectively (2,593) (3,471)
Total stockholders' equity 300,809 283,890
Total liabilities and
stockholders' equity $ 1,934,569 $ 1,988,869
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
ATLAS AIR, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Revenues:
<S> <C> <C>
Contract services $135,378 $ 77,611
Charters, scheduled services and other 2,461 2,023
Total operating revenues 137,839 79,634
Operating expenses:
Flight crew salaries and benefits 11,361 6,757
Other flight-related expenses 10,829 6,519
Maintenance 30,271 20,521
Aircraft and engine rentals 11,505 1,241
Fuel and ground handling 3,075 2,002
Depreciation and amortization 19,167 12,230
Other 14,924 8,821
Total operating expenses 101,132 58,091
Operating income 36,707 21,543
Other income (expense):
Interest income 4,574 1,661
Interest expense (24,888) (14,775)
(20,314) (13,114)
Income before income taxes 16,393 8,429
Provision for income taxes (6,147) (3,119)
Income before extraordinary item and
cumulative effect of a change in
accounting principle 10,246 5,310
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 $2,237 $5,310
Basic earnings per share:
Income before extraordinary item and
cumulative effect of a change in
accounting principle $0.30 $0.16
Extraordinary item (0.19) --
Cumulative effect of a change in
accounting principle (0.04) --
Net income $0.07 $0.16
Weighted average common shares 33,950 33,716
Diluted earnings per share:
Income before extraordinary item and
cumulative effect of a change in
accounting principle $0.30 $0.16
Extraordinary item (0.19) --
Cumulative effect of a change in
accounting principle (0.04) --
Net income $0.07 $0.16
Weighted average common shares 34,327 33,834
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
ATLAS AIR, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1999 1998
Operating activities:
<S> <C> <C> <C> <C>
Net income $ 2,237 $ 5,310
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 19,167 12,372
Amortization of debt issuance costs,
lease financing costs and other 612 1,254
Non-cash portion of extraordinary
loss 2,491 --
Write-off of start-up costs 2,266 --
Change in deferred income tax payable 813 756
Changes in operating assets and
liabilities:
Accounts receivable and other 14,696 9,275
Deposits and other 2,409 (214)
Accounts payable and accrued
expenses (10,849) (8,819)
Income tax payable (7,855) 2,054
Net cash provided by operating
activities 25,987 21,988
Investment activities:
Purchase of property and equipment (85,808) (63,205)
Purchase of short-term investments (4,882) (23,722)
Maturity of short-term investments 5,000 106,996
Net cash (used in) provided by
investing activities (85,690) 20,069
Financing activities:
Issuance of Common Stock 14,458 1,035
Purchase of Treasury Stock (107) (120)
Issuance of Treasury Stock 230 161
Net proceeds from debt issuance and
lease financing 36,474 6,801
Principal payments on notes payable (114,523) (7,660)
Debt issuance costs and deferred lease
costs (529) (21,630)
Net cash (used in) financing
activities (63,997) (21,413)
Net (decrease) increase in cash (123,700) 20,644
Cash and cash equivalents at beginning
of period 449,627 41,334
Cash and cash equivalents at end of
period $ 325,927 $ 61,978
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
March 31, 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.
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 is effective for
fiscal years beginning after June 15, 1999 and may be implemented
as of the beginning of any fiscal quarter after June 15, 1998.
We have not yet quantified the impact, if any, of adopting SFAS
No. 133 on our financial statements and have not determined the
timing of or method of adoption of SFAS No. 133. However, SFAS
No. 133 could increase volatility in earnings and other
comprehensive income.
4. Short-Term Investments
Proceeds from the 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
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, 1999 (in thousands):
<TABLE>
<CAPTION>
Gross Gross (Amorti-
Aggregate Unrealized Unrealized zation)
Fair Holding Holding
Security Type Value Gains Losses Accretion
Included in cash and
cash equivalents:
<S> <C> <C> <S> <C> <C> <C>
Commercial Paper $ 57,189 $ -- $ 5 $ 57
Corporate Bonds 16,900 -- -- --
Market Auction
Preferreds 194,775 -- -- --
Totals $ 268,864 $ -- $ 5 $ 57
Included in short-
term investments:
U.S. Government
Agencies $ 10,000 $ -- $ -- $ --
Market Auction
Preferreds 12,000 -- -- --
Totals $ 22,000 $ -- $ -- $ --
</TABLE>
In addition, accrued interest on cash equivalents and short-term
investments at March 31, 1999 was approximately $554,000.
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 the four 747-400 freighter aircraft that were
delivered in July, August, October and December 1998 and debt
financing for an additional aircraft delivered in December 1998.
In April 1999, the Company arranged financing (to be obtained
through leveraged leases or secured debt financings) for the
remaining five aircraft, four of which are scheduled for delivery
in 1999 and one in 2000. See discussions of EETCs 1998-1 and
EETCs 1999-1 below. In February 1999, the Company exercised
options for two additional 747-400 freighter aircraft, which are
scheduled for delivery in 2000. The Company has not yet arranged
financing for these 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 $129.6
million of pre-delivery deposits outstanding at March 31, 1999
which were included in flight equipment. The Company expects to
pay an additional $21.9 million in 1999 in pre-delivery deposits
in accordance with the firm order pre-delivery deposits schedule
for seven aircraft, including the two option aircraft. 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 March 31, 1999,
there was $219.4 million of deferred aircraft obligations
included in other liabilities, and the combined interest rate was
approximately 7.08%.
In February 1998, the Company completed an offering of
$538.9 million of Enhanced Equipment Trust Certificates ("EETCs
1998-1"). The EETCs 1998-1 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. The cash proceeds from the EETCs 1998-1 were used
to finance (through four leveraged leases and one secured debt
financing) the acquisition of the first five new 747-400
freighter aircraft from Boeing which were delivered to the
Company during the period July 1998 through December 1998. In
connection with the secured debt financing, the Company took
ownership of the aircraft and executed equipment notes in the
aggregate amount of $107.9 million with a weighted average
interest rate of 7.6%.
In January 1999, the Company 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 its $100 million of 12 1/4% Equipment
Notes due 2002. In the first quarter of 1999, the Company
recorded a $6.6 million one-time extraordinary loss from the
extinguishment of debt, net of an applicable tax benefit of
approximately $3.9 million. The extinguishment of this debt
eliminated liens on three 747-200 freighter aircraft.
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.
In February 1999, the Company 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, the $650 million
Shelf Registration was used to issue $543.6 million of Enhanced
Equipment Trust Certificates (see Note 7). Shortly thereafter,
the remainder of the $650 million Shelf Registration was replaced
by a new $250 million Shelf Registration (see Note 7).
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 result in 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 of the GE
engines. These two aircraft are expected to be re-delivered to
the Company, one each in the second and third quarters of 1999.
On a prospective basis, and as a result of the re-engineing, the
Company also expects to incur lower maintenance costs related to
these two aircraft compared to the costs it has experienced to
date.
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 these
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.
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. 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.
7. Subsequent Events
In April 1999, the Company completed an offering of $543.6
million Enhanced Equipment Trust Certificates ("EETCs 1999-1"),
which represented a substantial portion of the $650 million Shelf
Registration. The EETCs 1999-1 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. The cash proceeds from the EETCs 1999-1 transaction
were deposited with an escrow agent and will be used to finance
(through either leveraged leases or secured debt financings) the
acquisition cost of five of the remaining seven firm new 747-400
freighter aircraft from Boeing scheduled to be delivered in 1999
and 2000. In connection therewith, the Company intends to seek
certain owner participants who will commit lease equity financing
to be used in leveraged leases for some of these aircraft.
In April 1999, the Company 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.
In April 1999, the Company received notification from the
National Mediation Board ("NMB") that Atlas' crew members have
voted to be represented by the Air Line Pilots Association
("ALPA"). The Company expects its labor costs to decline
initially since its Profit Sharing 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, the
Company on May 6, 1999, 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
Company's Profit Sharing Plan violates the Railway Labor Act, and
seeking restoration of profit sharing pay and punitive damages.
The Company believes ALPA's claim to be without merit and intends
to vigorously defend against the counterclaim.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
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 reduction 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
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 quarter of 1999 and the four quarters of the
year ended December 31, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
1999 1998
1st 1st
Quarter Quarter
<S> <C> <C>
Total operating revenues $137,839 $79,634
Operating expenses 101,132 58,091
Operating income 36,707 21,543
Other income (expense) (20,314) (13,114)
Net income 2,237 (1) 5,310
Block hours 23,931 15,388
Average aircraft operated 27.0 17.0
Operating margin 26.6% 27.1%
(1) After extraordinary item and cumulative effect of
a change in accounting principle
</TABLE>
Operating Revenues and Results of Operations
Total operating revenues for the quarter ended March 31,
1999 increased to $137.8 million from $79.6 million for the same
period in 1998, or approximately 73%. The average number of
aircraft in our fleet during the first quarter of 1999 was 27.0
compared to 17.0 during the same period in 1998. Total block
hours for the first quarter of 1999 were 23,931 compared to
15,388 for the same period in 1998, an increase of approximately
56%, principally reflecting the increase in the size of our fleet
period over period. Revenue per block hour increased by
approximately 11% to $5,760 for the first quarter of 1999
compared to $5,175 for the first 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 first
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 70% from a
$21.5 million operating profit for the first quarter of 1998 to
an operating profit of $36.7 million for the first 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 higher flight crew
salaries and benefits, and other flight related expenses period
over period. In the first quarter of 1999, we recorded an
approximate $6.6 million extraordinary loss from the
extinguishment of the $100 million 12 1/4% Senior Notes, net of
an applicable tax benefit of approximately $3.9 million. In
addition, we recorded a one-time charge of approximately $1.4
million, net of an applicable tax benefit of approximately $.9
million, 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 upon adoption of SOP 98-5 (as defined).
Net income of $5.3 million for the first quarter of 1998
decreased to a net income of $2.2 million for the first quarter
of 1999, due to the extraordinary loss and the one-time charge.
Net income before extraordinary item and cumulative effect of a
change in accounting principle for the first quarter of 1999 was
$10.2 million.
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 $11.4 million in the first quarter of 1999 compared
to $6.8 million in 1998, due to the increase in the number of
aircraft in our fleet and aircraft block hours and, in
particular, to the initial increased crewing requirements of our
new 747-400 aircraft. While actual expense increased by
approximately 68% quarter over quarter, on a block hour basis
this expense increased by approximately 8% to $475 per hour for
the first quarter of 1999 from $439 per hour for the same period
in 1998.
Other flight-related expenses include hull and liability
insurance on our aircraft, 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 first quarter of 1999 from $6.5 million in the first quarter
of 1998, or approximately 66%. On a block hour basis, other
flight-related expenses increased approximately 7% to $453 per
block hour for the first quarter of 1999 from $424 per block hour
for the same period in 1998. This increase was primarily due to
the impact of added training and travel costs associated with the
introduction of the 747-400 freighter aircraft into our fleet in
the second half of 1998 and preparation for the four additional
new 747-400 freighter aircraft to be delivered this year.
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 addition, 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 $30.3 million in the first
quarter of 1999 from $20.5 million in the same period of 1998, or
approximately 48%, primarily due to the increased size of our
fleet. On a block hour basis, maintenance expense decreased by
approximately 5% in the first quarter of 1999 compared to the
first quarter of 1998, primarily reflecting the lower maintenance
costs associated with the new 747-400 aircraft.
Aircraft and engine rentals include the cost of leasing
aircraft and spare engines, as well as the cost of short-term
engine leases required to replace engines removed from our
aircraft for either scheduled or unscheduled maintenance and any
related short-term replacement aircraft lease costs.
Aircraft and engine rentals were $11.5 million in the first
quarter of 1999 compared to $1.2 million in the same period of
1998, or an increase of approximately 827%. During the first
quarter of 1999, we leased four 747-400 and one 747-200 aircraft
as compared to the first quarter of 1998 in which we leased one
747-200 aircraft.
Because of the nature of our ACMI Contracts (Aircraft, Crew,
Maintenance and Insurance) with our airline customers, under
which we are responsible for the ownership cost and maintenance
of the aircraft and for supplying aircraft crews and insurance,
our airline customers bear all other operating expenses. As a
result, we incur fuel and ground handling expenses only 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
54% to $3.1 million for the first quarter of 1999 from $2.0
million for the first quarter of 1998. This was primarily due to
increased charter activity during the first quarter of 1999,
partially offset by a decrease in scheduled service and other non-
ACMI block hours quarter over quarter.
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 $19.2
million in the first quarter of 1999 from $12.2 million in the
same period of 1998, or approximately 57%. This increase
primarily reflected an increase of approximately 38% in owned
aircraft for the first quarter of 1999 over the same period 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 $14.9 million in the
first quarter of 1999 from $8.8 million in the same period of
1998, or approximately 69%, reflecting the increase in our
operations. On a block hour basis, these expenses increased to
$624 per hour in the first quarter of 1999 from $573 per hour in
the same period of 1998, or 9%. This increase in cost was 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 $4.6 million in
the first quarter of 1999 from $1.7 million in the same period 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 third and fourth quarters of
1998. Interest expense increased to $24.9 million in the first
quarter of 1999 from $14.8 million in the same period of 1998, or
approximately 68%. This increase resulted from the financing
associated with the purchase of five additional aircraft in the
second half of 1998 and the issuance of $175 million 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 taxes
at the rate of 37.5% during the first quarter of 1999 and 37.0%
during the first quarter 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 March 31, 1999, we had cash and cash equivalents of
approximately $325.9 million, short-term investments of
approximately $22.1 million and working capital of approximately
$264.9 million. During the first quarter of 1999, cash and cash
equivalents decreased approximately $123.7 million, primarily
reflecting the purchase of flight and other equipment of $85.8
million, principal reductions of indebtedness of $114.5 million
and debt issuance costs of $0.5 million; partially offset by cash
provided from operations of $26.0 million, proceeds from
equipment financings of $36.5 million, net proceeds from the
maturity and purchase of short-term investments of $0.1 million,
net proceeds from the issuance of common stock of $14.4 million
and net proceeds from the issuance of treasury stock of $0.1
million.
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 the four 747-400 freighter aircraft that were
delivered in July, August, October and December 1998 and debt
financing for an additional aircraft delivered in December 1998.
In April 1999, we arranged financing (to be obtained through
leveraged leases or secured debt financings) for the remaining
five aircraft, four of which are scheduled for delivery in 1999
and one in 2000. See discussions of EETCs 1998-1 and EETCs 1999-
1 below. In February 1999, we exercised options for two
additional 747-400 freighter aircraft, which are scheduled for
delivery in 2000. We have not yet arranged financing for these
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 $129.6 million of pre-delivery deposits outstanding
at March 31, 1999 which were included in flight equipment. We
expect to pay an additional $21.9 million in 1999 in pre-delivery
deposits in accordance with the firm order pre-delivery deposits
schedule for seven aircraft, including the two option aircraft.
Upon each delivery, Boeing refunds to 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 March 31,
1999, there was $219.4 million of deferred aircraft obligations
included in other liabilities, and the combined interest rate was
approximately 7.08%.
In February 1998, we completed an offering of $538.9 million
of Enhanced Equipment Trust Certificates ("EETCs 1998-1"). The
EETCs 1998-1 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 EETCs 1998-1 have been used to finance (through four
leveraged leases and one secured debt financing) the acquisition
of the first five new 747-400 freighter aircraft from Boeing
which were delivered to us during the period July 1998 through
December 1998. In connection with the secured debt financing, we
took ownership of the aircraft and executed equipment notes in
the aggregate amount of $107.9 million with a weighted average
interest rate of 7.6%.
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 ("EETCs 1999-1"), which
represented a substantial portion of the $650 million Shelf
Registration. The EETCs 1999-1 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 EETCs 1999-1 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 remaining
seven 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.
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 loss 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 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, the Company
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 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 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 result in 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 of the GE engines. These two
aircraft are expected to be re-delivered to us, one each in the
second and third quarters of 1999. On a prospective basis, and
as a result of this re-engineing, we also expect to incur lower
maintenance costs related to these two aircraft compared to the
costs we have experienced to date.
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, we are subject to extensive aircraft examinations and
will be required to undertake structural modifications to our
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 our 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. We estimate that the modification costs per 747-
200 aircraft will range between $2 million and $3 million.
Twelve aircraft in our 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 us 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 our 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.
From time to time we engage in discussions with third
parties regarding possible acquisitions of aircraft that could
expand our operations. We are currently in discussions with
third-parties for the possible acquisition of additional aircraft
for delivery in 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 EETCs 1999-
1 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 the first phase of this project, which included 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 have broad customer bases
and available software upgrades. A limited number of systems
remain to be reviewed for compliance, but are not of material
significance. Initial review of our 747-200 and 747-400 aircraft
computer systems indicate that most all of the systems are
compliant, and those not that are not compliant are being
addressed by Boeing sub-contractors. A limited number of non-
critical systems need further analysis.
We have begun an ongoing program to review 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 business partner compliance
to some extent. We plan to have all company-controllable systems
Y2K tested and compliant by mid-1999. We anticipate that third-
party and supplier/business partner systems will be fully
addressed by mid-1999 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. The Company expects 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 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 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 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 Profit Sharing Plan
violates the Railway Labor Act, and seeking restoration of profit
sharing pay and punitive damages. 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
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 13, 1998 By: /s/ Stephen C. Nevin
Stephen C. Nevin
Vice President and
Chief Financial Officer
Principal Accounting Officer
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