SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year-Ended June 30, 1996
Commission File Number 0-9267
Big Sky Transportation Co.
(Exact name of registrant as specified in its charter)
MONTANA 81-038-7503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 Aviation Place
Billings, MT 59105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (406)245-9449
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value Pacific Stock Exchange
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12 (g) of the Act:
Title of Each Class
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Aggregate market value (based on average of bid and ask price) of voting
stock held by nonaffiliates of registrant at August 23,1996 was $589,295.
The number of shares of each class of Common stock outstanding on
June 30, 1996 (prior to recapitalization) was:
Common Stock 5,307,314 (one class)
<PAGE>
Big Sky Transportation Co.
Form 10-K Index
Page
PART I
Item 1.Business
Item 2.Properties
Item 3.Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5.Market for Registrants Common Equity and Related Stockholder
Matters
Item 6.Selected Financial Data
Item 7.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8.Financial Statements and Supplementary Data
Item 9.Disagreements on Accounting and Financial Disclosure
PART III
Item 10.Directors and Executive Officers of the Registrant
Item 11.Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management
Item 13.Certain Relationships and Related Transactions
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statement Index
Independent Auditors' Report
Balance Sheets as of June 30, 1996, 1995 and 1994
Statements of Earnings for the years ended
June 30, 1996, 1995 and 1994
Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994
Statements of Stockholders Equity for the years ended
June 30, 1996, 1995 and 1994
Notes to Financial Statements
<PAGE>
PART I/ITEM 1. BUSINESS
Introduction: Big Sky Transportation Co. dba Big Sky Airlines (the Company)
operates as a regional/ commuter air carrier, providing scheduled passenger,
freight, express package and charter services. At fiscal year-end, scheduled
air service was provided to nine communities.
The Company is the successor to another corporation of the same name,
incorporated in the State of Montana in 1978 and commenced flying operations
in September 1978. The Company accumulated net losses of approximately $1.11
million through July 31, 1979. It reorganized as a public company in August
1979, selling 600,000 shares of its Class A common stock. At that time, it
became a subsidiary of Great Plains Transportation Co. (predecessor operating
Company), through the issuance of 1,000,000 shares of its Class A common
stock to Great Plains Transportation Co., in exchange for substantially all
of the assets and certain liabilities of the predecessor operating Company.
A second public offering of 700,000 shares of Class A common stock was
completed in September 1981. Subsequently, all shares of common stock were
merged into a single class. A private placement of 500,000 shares of
preferred stock was completed in February 1988 (later converted to common).
The Company filed a voluntary petition for Reorganization in March 1989. Its
Plan was confirmed in July 1991 and the case closed in June 1992. To date,
the Company believes that it has met all requirements of the Plan.
The Company's present route system is designed around the regional air
service hub of Billings, MT. Passengers and freight are transported within
the Company's route system and in conjunction with other carriers. Services
between the hub and seven isolated communities in Central/Eastern Montana are
performed under contract with the U.S. Department of Transportation's
Essential Air Service (EAS) program. In addition, the Company provides
non-subsidized service between Billings, MT and Great Falls, MT. The Company
operates daily scheduled flights, which provide well-timed interline
connecting services, as well as convenient local market services.
The table below lists the cities served by the Company as of June 30, 1996
and the month in which service was inaugurated:
City/State Service Inaugurated
Billings, Montana Sep. 1978
Glasgow, Montana Jul. 1980
Glendive, Montana Jul. 1980
Havre, Montana Jul. 1980
Lewistown, Montana Jul. 1980
Miles City, Montana Jul. 1980
Sidney, Montana Jul. 1980
Wolf Point, Montana Jul. 1980
Great Falls, Montana May 1995
In June 1985, the Company and Northwest Airlines, Inc. signed joint marketing
agreement, under which the Company became a Northwest Airlink code-sharing
affiliate. The Airlink agreement expired in mid-July 1990 and was not
renewed. In 1990, the Company resumed operation of services under its own
trade name and two-letter designator code, as it did prior to 1985,
emphasizing relatively equal interline relationships with the six other
carriers serving the immediate region, including Northwest, United, Delta,
Continental, SkyWest (Delta Connection) and Horizon Air (affiliated with
Alaska and Northwest).
In July 1993 the Company joined Continental Airlines' OnePass frequent flyer
bonus program, under which Big Sky's passengers were eligible to earn 500
miles credit toward future transportation on Continental, Continental
Express, Big Sky or any one of twelve other carriers throughout the world.
This change added value to the Company's product and encouraged patronage;
however, with Continental's system realignment, effective July 15, 1994,
and ultimately its departure from Billings, the relationship was terminated.
Effective September 1994, the Company entered a similar agreement which also
included code-sharing with Frontier Airlines Inc., a Denver-based carrier.
Frontier terminated its Montana routes effective September 25, 1995, which
resulted in termination of this agreement. Presently, the Company markets
its services under its own code.
Capacity and Routes: In October 1989, consistent with its Plan of
Reorganization, the Company terminated all scheduled services in several
competitive Western Montana/Spokane markets. Its route system was reduced to
eight essential air service communities and their two designated hubs,
including Williston and Bismarck, ND. Effective May 10, 1993, services at
the latter two cities were terminated (see Subsidized Routes, below). As a
result, all points currently served by the Company are located in Central
/Eastern Montana, including Great Falls.
Effective May 1995, the Company extended service to Great Falls, MT with two
daily flights, service levels were increased in October 1995 when Frontier
Airlines terminated its services. This new service has met performance goals
and is contributing incremental profits.
Subsidized Routes and Plans: Since mid-1980, the Company has been a
continuous contract-holder under the U.S. Department of Transportation's
(DOT's) essential air service (EAS) Program, which was established under the
Airline Deregulation Act of 1978 (the "Deregulation Act"). This Act provided
for gradual decontrol of routes and fares and the complete elimination of the
Civil Aeronautics Board (CAB) by 1986, with the transfer of its remaining
authority to other federal departments and agencies. Responsibility for
administration of the EAS Program was transferred to the Department of
Transportation (DOT) in early 1985.
The Deregulation Act generally enabled carriers to discontinue serving
communities on 90-days notice, if such action would not deprive such city of
service defined as "essential" air transportation. If service is determined
to be "essential," a carrier seeking to discontinue service may be required
to continue service until the DOT finds a replacement to provide the
"essential" air transportation. The DOT may pay a subsidy to the replacement
carrier, if necessary, to induce the replacement carrier to serve an
essential air service market. If an airline desiring to terminate its
service to an essential point is required to remain in the market, the DOT is
required to compensate that carrier for losses incurred after the 90-day
notice period.
Under the essential air service provisions (Section 419) of the Airline
Deregulation Act of 1978 and DOT administrative policy, carriers providing
acceptable service are entitled to continue providing service throughout
their contract period. Big Sky has a record of providing acceptable service
to the communities in its region for over fifteen years. Events which could
prompt contract cancellation or non-selection include if the carrier is not
re-selected due to selection of a competitor or if the carrier goes out of
business.
As a result of the Federal Airport and Airways Improvement Act of 1987, the
government became further obligated to maintain essential air services to
numerous smaller communities around the Nation, including those presently
served by the Company. The original EAS Program was scheduled to terminate
in October 1988; however, the above-cited Act extended it through 1998.
Supplemental EAS program funding to support enhanced services began in 1992,
including certain services in Central/Eastern Montana and Western North
Dakota. The annual rate was $3.6 million, upon commencement of "all-Metro"
(15-passenger, pressurized Metroliner turboprop aircraft) service, through
February 28, 1993. The rate was scheduled to increase to $3.69 million for
the year-ended February 28, 1994.
Order 92-9-49 provided a comment period for interested persons having
objections or alternative proposals with respect to the selection of Big Sky
Airlines to serve the eight Montana and North Dakota communities under the
terms and conditions set forth in the Order. Subsequently another carrier was
selected to serve the North Dakota locations. Big Sky ceased services in this
market on May 10, 1993. The Company's compensation for continued service to
the seven (7) Montana cities and Billings, MT, was set at $3.49 million
through November 30, 1994 (Orders 93-3-40 and 93-4-49).
In August 1994, the Company finalized negotiations for a new annual subsidy
rate of $3.5 million for the period December 1, 1994 through
November 30, 1996. Subsequently a competitive proposal for all seven EAS
Montana communities was filed by another carrier, the same airline that filed
a competitive proposal in October 1992 for services to Williston and Bismark.
Ultimately, the competitor withdrew its proposal and the terms of Order
94-10-4, selected Big Sky to provide services through November 30, 1996.
The Company's current EAS contract extends through November 30, 1996, however
in late October 1995, the House/Senate Conference Committee limited funding
of the program in FY 1996 to $22.6 million, subject to certain
recommendations including that all points continue to be served despite the
overall 30% reduction in funding. The resulting deficit caused the DOT to
require certain reductions program-wide. Big Sky was forced to reduce
services in late November 1995 and again in April 1996. Despite service
adjustments permitted simultaneously, the impact was a significant reduction
in essential air service revenues and profitability commencing in late
November 1995 (refer also to "1996 Compared to 1995" at page 12).
The company's current contract expires November 30, 1996. The company has
submitted its proposal for a new contract for the period December 1, 1996
through September 30, 1998. Funding of $25.9 million in FY 1997, $3 million
higher than in FY 1996, has been approved. Also in October 1996 the FAA
Re-authorization Bill was approved, including a provision for permanent
funding of EAS starting in October 1998. Total funding available under the
new program is estimated at $50 million annually, which may provide
opportunities to restore lost services.
The Company's near-term business plan, as well as its Plan of Reorganization
are based primarily on continued operation as an EAS contract carrier.
However, it is examining various growth and diversification strategies, as
well as several specific opportunities. The Board maintains a Future
Planning Committee, which meets monthly, to foster and supplement management
planning efforts. In mid-1995, the Company hired a special assistant of new
business development to spearhead acquisition and merger efforts as part of a
management business development committee. In December 1995 this position
was converted to full-time.
Rates: The Company's basic rates are established on the basis of its cost
structure, the level of federal subsidy support provided and competition.
The Company offers discounted fares in certain local markets, designed to
stimulate new traffic. It also participates in joint rate arrangements with
other carriers. It maintains attractive joint fares in conjunction with these
carriers, offering savings, as well as convenience, to connecting passengers.
Currently the revenues from all joint fares are divided on the standard
straight-rate prorate basis.
The Company's average system yield per passenger mile for FY 1996 was 30.68
cents compared with 31.5 cents in 1995, 31.7 cents in 1994, 34.9 cents in
1993, 36.2 cents in 1992, 42.6 cents in 1991 and 36.5 cents in 1990. The
higher average yield in 1990 and 1991 primarily was due to the Company's
substantial down-sizing and increased reliance on EAS markets. The yield
changes in recent years primarily are attributable to fare prorates, demand
factors and industry discounting.
Fuel: The availability of adequate jet fuel and aviation gasoline has not
been a constraining factor on the Company's past operations; however, it
cannot be assured of adequate supply nor that current prices will prevail.
In the event of a widespread shortage, suppliers likely would allocate among
their customers and provide less than minimum contract volumes. Although the
Company believes its present suppliers will continue to provide sufficient
fuel in the near term, and that the price generally will be stable, it is
unable to make any accurate long-range assessment as to fuel availability or
price. In the longer term, it is expected that fuel price changes will be
appropriately reflected in fare levels and EAS subsidy compensation. No
supply problems have been experienced, nor are anticipated. However,
uncertainty regarding future fuel availability and price remain. Current
prices reflect increases due to Gulf Area instability. Generally, EAS
subsidy rates are "fixed" and do not contain an automatic adjustment
provision for fuel cost changes. Currently, the EAS rate is being rebid for
effectiveness December 1, 1996.
Employees: At June 30, 1996, the Company employed 70 total personnel;
including 9 general and departmental management, 18 line pilots, 28 customer
service managers and agents, 1 reservation agent, 7 mechanics and 7 clerical
and support personnel. Approximately 15 of the customer service personnel
are employed on a part-time basis.
The Company's pilots are represented by the Big Sky Pilots' Association
(BSPA), which is formally recognized by the National Mediation Board as the
group's exclusive bargaining agent. Since 1982, the Company and the
Association have finalized several labor agreements. The most recent
agreement, scheduled to expire in June 1997, has been extended indefinitely.
The International Association of Machinists & Aerospace Workers Union (IAM)
represents the Company's mechanics. Since 1982, several labor agreements
have been finalized. The most recent agreement became effective May 2 , 1994
and expires on May 21, 1997.
Insurance: The Company maintains insurance coverage customary in the airline
industry, with policy limits which it believes to be adequate. Coverage
includes public liability, passenger liability, aircraft equipment loss or
damage, baggage and cargo liability and workers' compensation.
The Company offers group health and life insurance coverage for its
employees. A portion of the premium cost for group health insurance is paid
by the Company. A nominal group life insurance policy for all full-time
employees is provided.
Economic and Seasonal Conditions: The regional economy has strengthened over
recent months. Traffic is up at most points served by the Company,
facilitated by improved service, increased capacity, and lower fares.
Due to the basic nature of all services provided and the relatively high
proportion of business traffic, aggregate loads on Big Sky's system are not
highly seasonal. Traffic by quarter of the year typically does not vary
substantially. The strongest periods are spring (quarter-ended June 30) and
summer (quarter-ended September 30). Due to lower traffic and
weather-related delays and cancellations, the winter period (quarter-ended
March 31) generally is the weakest.
Competition: Since 1990, the Company's routes have been restricted primarily
to those served under the essential air service (EAS) contract. The
principal competition over these routes is surface transportation, primarily
the automobile.
As of September 25, 1995, the Company no longer was affiliated through a
code-share marketing relationship with a larger carrier. As of this date,
Big Sky's services again were marketed via its own two letter code -- both
online and interline, as a part of multi-carrier travel. Given the
"non-competitive" nature of markets currently served, the impact of this
change is not believed to be of major significance. Such agreement likely
would be critical to service expansion plans in the region.
Under current regulations, other airlines are free to enter and exit markets,
including those served by the Company, without significant regulatory
restrictions. Surface transportation, primarily via the automobile,
continues to be the major source of competition for passenger traffic at the
EAS cities now served by the Company, particularly because some of these points
are within moderate (by local standards) driving distance of regional hub
airports (less than 150 miles). Special discount fares periodically offered
at the hubs (such as the Billings, Great Falls, Bismarck and Minot) by major
airlines, increases the motivation for the public to drive to and/or from the
hub, rather than use local air service. The Company combats this problem by
maintaining restricted capacity, "add-on" fares in conjunction with the major
carriers. Nonetheless, major carrier discounting generally results in
decreased traffic and revenues for Big Sky and cannot be controlled.
The principal competition in freight and small package business are the
national franchise services provided in the region by contract operators.
The name-brands represented include United Parcel Service, Federal Express
and Airborne. Most U.S. Postal Service mail in the region is carried under
contract by other private operators.
Regulation: All certificated airlines, including the Company, are subject to
regulation by the DOT and the Federal Aviation Administration (FAA) under the
Federal Aviation Act (the Act). Under the Act, the DOT has the authority with
respect to granting the right to serve international markets, providing
subsidy payment for service to small communities and enforcing minimum
standards of customer service and rules concerning control and ownership of
airlines. The FAA's jurisdiction extends primarily to the air safety
provisions and environmental statutes applicable to air transportation
activities.
DOT Regulation: The Deregulation Act affected significant changes in
airline regulations and provided freedom for carriers to enter and exit
markets. DOT authority over market entry and exit terminated
December 31, 1981. In essential air service markets, it retained
authority to insure minimum levels of service. Although under the Act
certain functions previously performed by the CAB were transferred to
other government agencies, the legislation eliminated most economic
regulation of the industry. The federal government currently retains
jurisdiction to review certain merger and acquisition transactions
involving carriers, persons controlling carriers, and persons
substantially engaged in the business of aeronautics. Responsibility for
administration of the Essential Air Service Program was shifted to the DOT
in 1985, under the CAB sunset provisions of the Deregulation Act.
FAA Regulation: As a FAR Part 135 carrier, the Company is subject to
numerous phases of FAA regulation. Included are the certification and
regulation of flight equipment; qualifications and licensing for personnel
who engage in flight, maintenance and operational activities; approval of
flight training activities; and enforcement of air safety standards and
airport access rules. The Company has a strong compliance attitude, a
good compliance record and successfully passed several NASIP (National
Aviation Safety Inspection Program) inspections, the latest in 1995. The
Company strives to maintain a good working relationship with the FAA and
believes that its operations are in compliance with established standards
and regulations. Under recent dictates the FAA's requirements have been
increased effective February 1997, to meet those of larger carriers under
FAR Pact 121.
None of the airports served by the Company are "slot-restricted".
Although its connecting services with major carriers at Billings, MT may
be indirectly affected by such restrictions, the impact is not significant
or unduly limiting at present.
FAA airworthiness directives required installation of the TCAS (traffic
collision avoidance system) in the Company's Metro aircraft by
January 1, 1996, at a cost of approximately $60,000 per aircraft.
PART I/ITEM 2. PROPERTIES
Flight Equipment: At fiscal year-end, the Company had a scheduled fleet of
three Fairchild Metroliner II (-10UA) turboprop aircraft and one Cessna 402C
Utiliner backup aircraft. The Metroliners are leased and the Cessna is
owned. The Cessna is not scheduled to be operated in daily scheduled
passenger flights, but is used as backup and for charter services.
The aircraft operated generally are appropriate for market demands on the
Company's route system. The Metro II has 16 passenger seats and the Cessna
has 8 seats. The Metro II is pressurized. Both aircraft types offer fast
cruising speeds, necessary due to the flight stage lengths operated. In 1996
Metroliner and Cessna average utilization per aircraft per month was 106 and
26 block hours, respectively.
Aircraft Maintenance: The Company employs certified A&P (Airframe & Power
Plant) mechanics, who perform all routine maintenance and periodic
inspections on its aircraft and engines. Major engine overhauls and avionics
work are performed by the manufacturers or qualified outside contractors.
Until August 1994, the Company leased approximately 10,000 square feet of
space located at Billings Logan International Airport Industrial Park, which
included limited office space for maintenance and flight management, as well
as hangar space for aircraft storage and all maintenance functions, including
aircraft parts inventory. In July 1994, the Company moved into a new
custom-built hangar/office facility at the Billings airport. The Company
maintains annual operating leases (see Note 8 to the financial statements) for
hangar space at locations outside Billings for over-nighting aircraft on a
seasonal, as needed basis.
The Company holds an FAA-certified repair station certificate, allowing it to
perform maintenance on Garrett TPE -331 series engines. This certificate
also allows the Company to perform maintenance for outside customers;
however, to date, work and revenues generated by outside customers have been
minimal.
Airport and Terminal Facilities: The Company leases space and provides its
own ground services and customer services at eight cities currently served.
At Great Falls, it contracts ground services from Northwest Airlines. A
significant portion of the Company's passenger and freight business involves
interline connections with other carriers serving Billings, MT; therefore,
the Company maintains agreements for interline ticketing and baggage
handling, as well as joint fares, with all carriers serving those points.
The Company is a subscriber to the WorldSpan computerized reservations
system, which provides direct multi-lateral links to the national
reservations systems of all major carriers, as well as access by travel
agencies.
General Offices: The Company's general offices, are located at 1601 Aviation
Place, just east of the terminal at Billings Logan International Airport. An
adjacent modular building is leased to accommodate administrative and
training needs.
PART I/ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a claim related to an employee. Management
believes it has meritorious defenses against the claim and intends to
vigorously defend the matter. Due to the preliminary stages of the
complaint, however, management is unable to determine the possible impact of
financial position or results of operations of an unfavorable outcome, if any.
Under the Plan the Company may not pay any cash dividend unless all claims
under the Plan, including secured claims, are satisfied in full under the
terms of the Plan. The Plan provides for payments to claimants through 2001.
PART I/ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year-ended June 30, 1996, there were no special meetings or votes
of the stockholders. The annual meeting for fiscal 1996 was held late (in
July 1996) due to the complexity of matters in the proxy statement and
awaiting regulatory approvals. Contained in the proxy statement were the
following business items, each properly approved by the stockholders: 1)
election of directors, 2) ratification of independent auditors, 3)
ratification of open market repurchase plan, 4) approval of 1996 stock option
plan, 5) ratification of special stock option plan, 6) approval of 1996 stock
bonus plan, 7) approval of organizational restructure plan and 8) approval of
plan of recapitalization.
A detailed description of these items may be found in the company's notice of
annual meeting and proxy statement, dated June 14, 1996, which was filed with
and approved by the Securities and Exchange Commission.
PART II/ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since August 1980, the Company's common stock has been continuously listed on
the Pacific Stock Exchange (PSE). The stock trading symbol is "BSAP".
The following table, based on total monthly report statistics as received
from the PSE, sets forth the range of high (high of monthly high averages)
and low (low of monthly low averages) sales prices of the Company's common
stock by quarter during fiscal years 1994, 1995 and 1996. All shown data is
pre-recapitalization, bid prices represent quotations between dealers and do
not include retail markups, markdowns or commissions, and may not represent
actual transactions.
Quarter-Ended High ($) Low ($)
Fiscal Year 1994:
09/30/93 .2500 Aug./Sep. .1875 Aug.
12/31/93 .2500 Oct./Nov./Dec. .1562 Dec.
03/31/94 1/ .3437 Jan. .1562 Jan.
06/30/94 1/ .2500 Apr./Jun. .1562 Apr.
Fiscal Year 1995:
09/30/94 .2500 Jul./Sep. .1563 Jul./Sep
12/31/94 .2500 Nov. .1563 Nov.
03/31/95 1/ .2500 Mar. .2188 Mar.
06/30/95 1/ .2500 Apr./May/Jun. .1875 Jun.
Fiscal Year 1996:
09/30/95 1/ .2500 Jul./Sep. .1875 Jul./Sep.
12/31/95 1/ .2500 Nov./Dec. .1875 Nov./Dec.
03/31/96 1/ .2188 Jan./Feb. .1875 Jan./Feb.
06/30/96 .2188 Apr./May/Jun. .1875 Apr./May/Jun.
1 No Trading reported in Feb., May, Aug., Oct. 1994, Feb., Aug.,
Oct. 1995, and Mar. 1996.
According to records maintained by the Company's transfer agent, Continental
Stock Transfer & Trust Co., the Company had 1,378 holders-of-record of common
stock as of June 30, 1996.
Except for stock dividends paid through December 1988 under the 1988
Preferred Stock Sale Agreement, the Company has paid no cash or stock
dividends. The Company anticipates no payment of cash dividends on its
common stock in the foreseeable future.
In connection with the Company's Reorganization, on November 19, 1990, the
PSE temporarily suspended trading of the Company's common stock. The Plan
was confirmed July 16, 1991 and trading was re-instated effective
November 11, 1991. Trading has continued without interruption since
November 11, 1991.
In late 1994, the Company was notified along with all other companies listed
on the PSE that new listing rules were being implemented in January 1995,
which would alter certain quantitative requirements for securing new listings
and maintaining existing listings. At that time, the Company was alerted
that it was deficient in one area, that being price per share. Immediately,
the Company opened a dialogue with the PSE and others to determine what could
be done to prevent possible delisting of its stock and to insure continued
listing and trading status. In May 1995, the PSE expressed concern that a
second parameter, that being market valuation (market value of shares held by
non-affiliates/insiders based on bid price), also had become deficient.
During the summer, following extended consultations, the Company presented to
the PSE staff and equity listings committee a recapitalization plan designed
to ultimately correct both deficiencies. The recapitalization plan was
implemented in August 1996. Resolution of the foregoing deficiencies, it
should be noted, also would be aided by successes in the priority area of new
business development. There can be no assurance that the measures
implemented by the Company will have the desired and necessary effects.
PART II/ITEM 6. SELECTED FINANCIAL DATA
Selected financial data on the next page have been taken from the audited
financial statements of the Company. The information set forth below should
be read in conjunction with "Management Discussion and Analysis of Financial
Condition and Results of Operations" under item 7 and the financial
statements and related notes included under Item 8.
On July 16, 1991 the Company emerged from bankruptcy. As described in Note 1
to the financial statements included elsewhere herein, the Company accounted
for the Reorganization as of September 30, 1991 and adopted "Fresh Start"
reporting. As such, the selected financial data for periods prior to
October 1, 1991 are not comparable to subsequent periods since they represent
the financial position of the reorganized entity on a differing basis of
accounting.
Statement of Operations Data:
Year-Ended
6/30/96 6/30/95 6/30/94 6/30/93 6/30/92
Operating revenues $5,055,907 $5,149,127 $4,971,152 $5,330,284 $4,752,123
Operating expenses $5,022,109 $5,027,135 $4,790,253 $5,101,233 $4,469,845
Operating Income $ 33,798 $ 121,992 $ 180,899 $ 229,051 $ 282,278
Income before
extraordinary item $ 3,497 $ 36,825 $ 76,303 $ 106,622 $ 169,537
Extraordinary item-debt
extinguishment $ --- $ 16,280 $ --- $ --- $ 953,469
Net income $ 3,497 $ 53,105 $ 76,303 $ 106,622 $1,123,006
Earnings per common
and common equivalent
share: Income before
extraordinary item $ --- $ .04 $ .07 $ .10 $ .*
Extraordinary item $ --- $ .01 $ --- $ --- $ ---
Net Income $ --- $ .05 $ .07 $ .10 $ .*
Weighted average
number of common and
common equivalent
shares outstanding ** 1,044,100 1,043,772 1,043,772 1,043,772 1,043,772
* Earnings per share information for year-ended 6/30/92 is not presented as
it is not considered comparable.
** Shares outstanding are shown post-recapitalization.
Balance Sheet Data:
JUNE 30,
1996 1995 1994 1993 1992
Current assets $1,512,962 $1,482,331 $1,770,530 $1,841,626 $1,603,832
Current
liabilities $ 851,832 $ 824,446 $1,032,585 $1,002,071 $ 865,817
Total assets $2,311,365 $2,414,558 $2,711,770 $2,443,728 $2,429,712
Total long-term
debt, net of
current
maturities $ 684,132 $ 821,958 $ 964,136 $ 802,911 $1,031,771
Stockholders'
equity $ 775,401 $ 768,154 $ 715,049 $ 638,746 $ 532,124
PART II/ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth certain statistics relating to the operations
of the Company during the periods indicated.
Operating Data for the Year-Ended June 30
1996 1/ 1995 2/ 1994 3/
Passengers carried 28,070 21,251 20,767
Revenue passenger miles (000's) 5,523 4,299 4,262
Available seat miles (ASMs)(000's) 17,190 16,679 16,808
ASMs including charters (000's) 17,190 17,344 16,808
Average passenger load factor (%) 32.13 25.8 25.4
Aircraft miles (000's) 1,171 1,124 1,145
Average yield per passenger mile 30.68 31.52 31.69
(cents)
Operating cost per ASM (cents) 29.14 30.87 28.50
Freight pounds enplaned 96,704 68,999 80,338
Operating break-even load factor
(% including subsidy) 31.78 25.23 24.43
Size of fleet:
Metroliner 3 3 4
Cessna 402C 1 1 1
Total Fleet Size 4 4 5
Communities served 9 9 8
1 One Metroliner was returned to its lessor April 1996 following the
Department of Transportation's reduction order of November 1995.
2 Service to Great Falls inaugurated May 15, 1995.
3 The Company discontinued service to Williston and Bismarck, North Dakota
effective May 10, 1993.
1996 Compared to 1995: Operating revenues decreased $93,220 or 1.8%.
Operating results in FY 1996 were detrimentally impacted by the DOT's
reduction order, effective November 27, 1995, which cut compensation for EAS
services by approximately $500,000 annually. Passenger revenues increased
$212,351 or 14.2% to total $1,704,430. The passenger load factor increased
to 32.13% in FY 1996 compared to 25.8% in FY 1995. Yield per revenue
passenger mile changed from 31.52 cents in FY 1995 to 30.68 cents in FY 1996.
Freight revenues increased $11,041 or 11.8%. Public service revenues totaled
$3.2 million in FY 1996, a decrease of $347,322 or 9.8%. Capacity (available
seat miles) increased .03% between FY 1995 and FY 1996.
Operating expenses decreased $5,026 or .1% as follows:
Year-Ended Increase(Decrease)
6/30/96 6/30/95 Dollars Percent
Operating Expense Category
Flying Operations $ 1,825,277 $ 1,882,287 $ (57,010) ( 3.1)
Maintenance 1,214,150 1,361,733 (147,583) (10.8)
Traffic 1,313,170 1,169,182 143,988 12.3
Marketing 49,111 44,662 4,449 10.0
General & Administrative 620,401 569,271 51,130 8.9
TOTAL $ 5,022,109 $ 5,027,135 $( 5,026) .1
The decrease in flight expenses is attributable to costs associated with
providing charter services during FY 1995. The additional aircraft obtained
to perform charters was returned to its lessor in March 1995. The decrease
experienced was despite an increase in fuel costs by $95,104 in FY 1996. Fuel
consumption for the quarters ended June 30, 1996 and 1995 averaged 82.9 and
83.36 gallons per block hour for the metro aircraft.
Maintenance costs decreased substantially in FY 1996. Primarily in the areas
of maintenance materials and metro engine repairs. These accounts decreased
$151,873 from the previous fiscal year. These costs may be impacted in
FY 1997 due to up-coming scheduled aircraft engine hot section inspections.
Traffic expenses increased 12.3% FY 1996 over FY 1995. Increases were seen
in traffic commissions and CRS (passenger reservation) charges along with the
largest increase in traffic liability insurance of 75% to $175,560. The
company does not expect the same dramatic increase in liability insurance
during the next fiscal year.
Marketing increased $4,449 or 10% from FY 1995 to FY 1996. Increases were
seen in personnel and memberships & subscriptions, while the charter related
accounts, such as catering and advertising decreased with the reduction of
charter activity.
General and administrative increases in legal fees, personnel and directors
fees were some what offset by reductions in amortization and depreciation
expenses.
Interest expense decreased $1,101 or 1.4%. This is mostly attributable to
the reduction of interest on the engine loan that was paid in full in
February, 1996. The decrease in interest income of $4,486 or 12.7%, is
directly related to the reduction of cash associated with the loss incurred
during the third quarter of $61,921.
The year-ended June 30, 1996 generated an operating profit of $33,798 and a
net profit of $3,497. FY 1996 results include $3,267 charges in lieu of
taxes applied to the excess reorganizational value. The charges in lieu of
taxes are a result of "Fresh Start" accounting and reduce excess
reorganizational value as pre-confirmation net operating tax loss
carryforwards are realized. Operating results in FY 1996 were detrimentally
impacted by the DOT's reduction order, effective November 27, 1995, which
unilaterally and on short notice breached the company's contract and cut
compensation for EAS services by approximately $500,000 annually. The
company's current contract expires November 30, 1996 and a proposal for
renewal has been submitted. Also the company has filed a claim with the DOT
for supplemental compensation due to the subsidy shortfall caused by the
reduction order, in the amount of $149,054. To the extent there are proceeds
from this claim, they will be booked in FY 1997.
1995 Compared 1994: Operating revenues increased $177,975 or 3.5%.
Passenger revenues increased $122,393 or 8.2% to total $1,492,079. The
passenger load factor remained basically unchanged at 25.8% in FY 1995.
Yield per revenue passenger mile changed little from 31.69 cents in FY 1994
to 31.52 cents in FY 1995. Freight revenues decreased $3,325 or 3.5%.
Public service revenues totaled $3.55 million in FY 1995, an increased of
$70,250 or 2%. Capacity (available seat miles) increased 3.1% between FY
1994 and FY 1995. The increase mostly was attributable to the charters
performed during FY 1995.
Operating expenses increased $236,882 or 4.7% as follows:
Year-Ended Increase(Decrease)
6/30/95 6/30/94 Dollars Percent
Operating Expense Category
Flying Operations $ 1,882,287 $ 1,751,240 $ 131,047 7.0
Maintenance 1,361,733 1,168,186 193,547 14.2
Traffic 1,169,182 1,142,128 27,054 2.3
Marketing 44,662 71,927 (27,265) (37.9)
General & Administrative 569,271 656,772 (87,501) (13.3)
TOTAL $ 5,027,135 $ 4,790,253 $ 236,882 4.7
The increase in flight expenses is attributable to costs associated with
providing charter services. The additional aircraft obtained to perform
charters was returned to its lessor in March 1995.
Maintenance increases were primarily for Metro engine repairs, totaling
$158,830 for FY 1995.
Traffic expenses rose due to costs involved with the start-up of Great Falls
service and a substantial increase in liability insurance of $27,594 (38%)
over FY 1994. The Company expects these trends to continue in FY 1996.
Marketing expenses decreased $27,265 or 37.9%. Decreases were experienced
in memberships and subscriptions. Costs associated with the Company's
participation in the Continental Airline OnePass frequent flyer program were
not incurred in FY 1995.
General and administrative expenses decreases were experienced due to the
one-time cost of a settlement on an aircraft lease dispute in FY 1994 and
a change in allocating employee insurance benefits in FY 1995.
Interest expense increased $7,317 or 8.9%. This is mostly attributable to
the interest on the hangar facility loan. Interest income increased $5,544
or 15.6%, due to interest received on certificates of deposits required by
aircraft and hangar lease agreements.
The year-ended June 30, 1995 generated an operating profit of $121,992 and a
net profit of $53,105. FY 1995 results include charges in lieu of taxes of
$25,300 from continuing operations and $8,400 applied to the extraordinary
item. The charges in lieu of taxes are a result of "Fresh Start" accounting
and reduce excess reorganizational value as pre-confirmation net operating
tax loss carryforwards are realized. Net profit, without the $33,705 charges
in lieu of taxes for "Fresh-Start" reporting, would have been $86,805.
The year-ended June 30, 1994 generated an operating profit of $180,899 and a
net profit of $76,303. FY 1994 results include a current tax expense of
$20,755 and a $47,500 charge in lieu of taxes. Net profit, without the
$47,500 charge in lieu of taxes for "Fresh-Start" reporting, would have been
$123,803.
Impact of Inflation and Changing Prices: In addition to its local fares and
joint fares with other carriers, the Company offers special promotional
fares. These fares, which may include special travel and/or ticketing
restrictions, offer substantial discounts. They are designed to stimulate
new traffic, while not diluting revenues from traffic traveling on regular
fares.
The cost of jet fuel and aviation gasoline used by the Company could
fluctuate within a wide range in the foreseeable future due to instability
in the OPEC region. While no supply shortages presently exist, long-term
availability of supply and future fuel costs cannot be predicted. Shortages
and/or increased costs could adversely affect the Company and the airline
industry generally.
The regional airline industry is capital intensive. While it is forecast
that the existing cash balance should be sufficient to meet near-term future
obligations, it is possible that additional borrowing with related
debt-service requirements may be required. The magnitude and timing of such
requirements will depend upon the Company's ability to continue to generate
profits from operations.
Liquidity: A review of current liquidity for the last three fiscal years is
presented in the following chart:
Working Capital Current Ratio
June 30, 1994 $ 737,945 1.7:1
June 30, 1995 $ 657,885 1.8:1
June 30, 1996 $ 661,130 1.8:1
Capital Resources: A review of the capital resources for the last three
fiscal years is presented below:
Long-term Debt
(excluding Stockholders'
current portion) Equity
June 30, 1994 $ 964,136 $ 715,049
June 30, 1995 $ 821,958 $ 768,154
June 30, 1996 $ 684,132 $ 775,401
Liquidity and Capital Resources: The Company's balance sheet reflects cash
and cash equivalents of $360,668 at June 30, 1996. Total current assets,
including cash, were $1,512,962 compared to total current liabilities of
$851,832, resulting in working capital of $661,130 and current ratio of 1.8:1.
Cash provided by operating activities for the fiscal year ended June 30, 1996
was $62,907. The DOT's reduction order effective November 27, 1995, a
discussed above, detrimentally impacted the company's cash position during
the period. The company has filed a claim in the amount of $149,504,
reflecting the compensation shortfall through June 30, 1996. This is
attributed primarily to the gain on disposed equipment and inventory held
for sale. Cash provided by investing activities for the fiscal year ended
June 30, 1996 was $36,624, consisting mainly of proceeds received on the
sale of an aircraft engine. Cash used by financing activities for the fiscal
year ended June 30, 1996 was $147,320 for payments on long- term debt and
capital lease obligations.
The Company changed its banking relationship in June 1993. All local bank
accounts, except for one escrow account used to deposit funds from the sale
of excess inventory related to Chapter 11 reorganization, were relocated to
First Interstate Bank. This action was taken in an effort to develop an
improved banking relationship. The Company's previous bank was unwilling to
provide any additional capital since the Chapter 11 filing (March 1989),
primarily as a result of the settlements with creditors as part of the
Chapter 11 Reorganization. All of the Company's unencumbered assets are held
as collateral to support the bank debt.
Operating leases include station office facilities, land and three
Metroliner II aircraft. Non-cancelable operating lease commitments in excess
of one year totaled $673,450 at June 30, 1996.
Stockholders' equity was $775,401 at June 30, 1996, compared to $768,154 at
June 30, 1995 and $715,049 at June 30, 1994. The increased equity from
June 30, 1994 to June 30, 1996 is the result of profitable operations. Total
long-term debt (including current installments) at June 30, 1996 was $822,224
(including capital lease obligations) compared to $973,294 at June 30, 1995
and $1,090,547 at June 30, 1994. At June 30, 1996, the long-term financial
commitments of the Company were: 1) debt of $219,923 with the FAA (Federal
Aviation Administration) for the pre-reorganization purchase of a
Metroliner II aircraft; 2) debt of $88,556 to the unsecured creditors
electing the cash option; 3) bank debt of $210,688 for pre-reorganization
working capital/engine overhaul loans; 4) capital lease obligation of
$287,022 for a general office/ maintenance hangar facility and the x-ray
equipment for passenger security screening located at the Billings airport.
Pursuant to the Plan of Reorganization, total payments to the unsecured
creditors were scheduled to be $37,500 each September through 1999 (a total
of eight annual payments). In September 1994, the Company offered all
unsecured creditors a discounted prepayment option whereby each creditor
could elect to receive two annual payments to fully satisfy any unsecured
claims against Big Sky Transportation Company under the Chapter 11 Plan. As
a result, future annual payments have been reduced to $27,937, distributed on
a pro-rata calculation. The Plan of Reorganization allowed payments of
interest only on certain debt (the FAA and the bank), for a period of twelve
and twenty-four months following Plan confirmation, respectively.
Principal/interest payments were resumed on the FAA debt and bank debt
August 1, 1992 and August 1, 1993 respectively. Per Court stipulation, the
bank receives 75% of proceeds from excess inventory sales (for parts and
furnishings that were considered excess inventory at Plan confirmation) on
collateral supporting their debt. At June 30, 1995, all Jetstream parts
related to this provision had been liquidated.
Big Sky is currently providing essential air service under a DOT contract
pursuant to Order 94-10-4 as amended by Order 95-11-28, at an annual rate of
$3.2 million. This contract expires November 30, 1996, however, a proposal
to renew the contract has been filed with the DOT. Big Sky has held this
contract continuously since mid-1980, has excellent performance and safety
records and enjoys strong community and state support; therefore, it is
optimistic about securing a new contract.
The EAS program funding for FY 1997 has been fixed at $25.9 million, up
$3 million from FY 1996. Furthermore, a new permanent funding source (a tax
on foreign commercial carrier overflights) to support rural air service was
approved by the 1996 Congress (the Rural Air Service Act), and will become
effective October 1997. It is estimated the funding for this revitalized
program will be up to $50 million annually for rural air service with any
surplus to go to rural safety programs. The Act eliminated the previous 1998
sunset for the EAS program. Also the Act provides that any excess in
collections above $70 million in FY 1997 will be available to supplement
regular appropriations. These developments increase the stability of
essential air services, both from the perspective of the communities and the
carrier, and should offer the potential for service enhancement. Despite
these positive developments, the company will continue its investigation of
new business opportunities in order to broaden its base and reduce future
dependency on the EAS program.
The Company is based at a maintenance hangar/general office facility located
at Billings Logan International Airport. The Company is leasing this facility
and land from a member of the Board of Directors. The hangar is treated as a
capital lease. In addition, the Company leases a modular office from a third
party. The loan interest rate on the capital lease is 8.5 percent with
principal due on a 20 year amortization with a five year balloon payment. It
is the intent of the building owner and Big Sky to refinance the debt after
five years, hopefully on similar terms. The Company has purchase options at
5, 10, 15 and 20 years and a right of first refusal upon approval by the
owner of sale of his interests to a third party. At June 30, 1995, the
Company had paid $156,185 as equity in the building. The land sublease has
a 20 year term.
By December 31, 1995, all of the Companys leased Metroliner aircraft were
required to be equipped with a traffic collision avoidance system (TCAS).
The cost of retrofitting the aircraft was approximately $60,000 per aircraft.
In 1996, the FAA finalized modifications to Part 135 of the Federal Aviation
Regulations ("FAA Regulations") under which the Company is presently
operating. These modifications impose additional duties on the Company with
respect to operations similar to the requirements of Part 121 of the FAA
Regulations, which generally have governed carriers operating larger
aircraft. The modifications are proposed to become effective in March 1997.
The financial impact on the Statement of Operations is estimated to be
$134,671 in FY 1997.
Seasonality: The Company experiences lower passenger load factors during the
months of January through April. This seasonality can be attributed
primarily to relatively difficult winter weather operating conditions in the
Companys principal area of operations, resulting in fewer vacation and other
discretionary trips and reduced business travel during those months. These
seasonal factors have generally resulted in reduced revenues, profitability
and cash flow for the Company during those months.
PART II/ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements commencing at F-1.
PART II/ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III/ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors/Executive Officers: Executive officers of the Corporation are
elected by and serve at the discretion of the Board of Directors. No
arrangement exists between any executive officer and any other person or
persons pursuant to which any officer was or is to be selected as an
executive officer. None of the executive officers has any family
relationship to any nominee for director or to any other executive officer of
the Corporation.
Name: Executive Office(s) held with
Big Sky Transportation Co.
Principal Occupation, Outside Director Stock % of
Directorships & Education (a) Age Since Owned(b) Class(i)
Jack K. Daniels
Vice Chairman & Assistant Secretary
of Big Sky TransCo since April 1995.
Former Owner and President Servair
Accessories, Inc., fixed-base aviation
operator, Williston, ND; Chairman,
North Dakota State Aeronautics
Commission; Treasurer, National
Committee of Cities and States for
Airline Service. 71 1990 73,350(c) 1.4
Craig Denney
Executive Vice President and Division
Manager, December 1995 to date; Vice
President of Service & Operations,
Chief Operations Officer of Big Sky
TransCo 1989 to December 1995;
Secretary, April 1995 to date.
Station Manager, Director of Customer
Service, Director of Ground Services
& Vice President of Ground Services
with Big Sky TransCo (1978-1988);
Transportation Agent with Northwest
Airlines, Inc. in Great Falls and
Butte, MT. (1974-1978). Chairman,
Air Carrier Advisory Committee,
Billings Logan International Airport
(1990-1996); Member Aviation Program
Advisory Council, Rocky Mountain College
(1995-1996). A.A. Aviation
Administration, Anoka Ramsey Jr. College
(Minnesota). 43 1995 32,102(d) 0.6
Stephen D. Huntington
Principal, Mountain West Management
and Northern Rockies Venture Fund,
Helena, MT. Manager, Corporate
Development & Finance, MSE Inc.,
Butte, MT.; Director, Montana Private
Capital Network; Director, Environmental
Reclamation Northwest, LLC; Director,
MSE-HKM Engineers, Inc.; Director, MSE
Technology Applications, Inc. B.A.
Political Science; Graduate Studies in
Law & Public Administration, University
of Montana. 40 1995 8,333(e) 0.2
Jon Marchi
Chairman of the Board & Treasurer of
Big Sky TransCo since April 1995,
Secretary 1991-1995. President, Marchi
Angus Ranches, Polson, MT; Director/
Chairman Glacier Venture Fund, Montana
Small Business Investment Corporation;
Director/Chairman Development
Corporation of Montana; Director/
President Montana Private Capital
Network; Director, Montana Community
Finance Corporation; Director,
Montana Business Connections; Director
College of Business Advisory Board- MSU
Billings; Director, Montana SBA
Advisory Council; Elected Trustee
school District #35, Lake County,
Montana. B.S. Business & M.S. Finance,
University of Montana. 50 1979 227,644(f) 4.3
Terry D. Marshall
President & CEO Big Sky TransCo since
1980; Chairman (1991-March 1995), Vice
President Planning (1979-1980) and
Director Market Planning (1979).
Employed by Hughes AirCorp d/b/a
Hughes AirWest (1972-1978), TAP, Inc.
Economic & Aviation Consultants (1970-
1972) and Ford Motor Corporation (1969-
1970). Past Board member and officer,
Regional Airline Association; past
member, Montana Board of Aeronautics.
B.S. Economics & Business, Montana
State University; M.S. Economics,
Oregon State University. 51 1980 124,843(g) 2.4
Alan D. Nicholson
Owner & President Nicholson, Inc.,
commercial real estate development,
Helena, MT; President-elect, Helena
Area Chamber of Commerce; Member,
Montana State University Foundation
Board; Member, President's Council,
Carroll College; First Vice President,
Montana Ambassadors. B.S. Mathematics
& Physics, Montana State University;
M.A. Mathematics, Northwestern
University. 56 1994 63,350(h) 1.2
(a) The Corporation's present officers and Board leadership were elected in
August 1996. Except as indicated above each of the nominees and directors
held the outside positions shown above, or other executive positions with the
same business for the past five years. All were elected as directors by the
Stockholders at the last Annual Meeting.
(b) Shares shown represent only outstanding shares of Common Stock
beneficially owned, both directly and indirectly, as of October 1, 1996, as
well as options exercisable, per notes below. Percent of class is shown to
the nearest tenth of a percent. Beneficial ownership shown represents sole
voting and investment power. Stock is shown as pre-recapitalization.
(c) 53,350 shares beneficially owned, plus options to purchase 20,000 shares
exercisable or exercisable within 60 days of above-stated date. Includes
director stock option award for service 1995-96.
(d) 852 shares beneficially-owned, plus options to purchase 31,250 shares
exercisable or exercisable within 60 days of above-stated date.
(e) 8,333 shares exercisable or exercisable within 60 days of above-stated
date. Includes director stock option award for service 1995-96.
(f) 207,644 shares beneficially-owned, plus options to purchase 20,000 shares
exercised but certificates issued. No shares exercisable or exercisable
within 60 days of above-stated date. Includes director stock option award
for service 1995-96.
(g) 56,093 shares beneficially-owned, plus options to purchase 68,750 shares
exercisable or exercisable within 60 days of above-stated date.
(h) 53,350 shares beneficially-owned, plus options to purchase 10,000 shares
exercisable or exercisable within 60 days of above-stated date.
(i) Percent stock owned, plus options are of total common shares outstanding.
Note that all options may not be exercised.
Section 16(a) Compliance: Section 16(a) of the Securities Exchange Act of
1934 requires the Company's executive officers and directors, and persons
who own more than ten percent of the Company's common stock, to file with
the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors and greater that ten percent
shareholders ("Insiders") are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company, during the fiscal year ended June 30, 1996,
all Section 16(a) filing requirements applicable to Insiders were complied
with.
PART III/ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table: As required by regulation, the table below sets
forth in detail compensation of the President/CEO and compensation for any
other officer(s) having total annual gross income of $100,000 or greater, of
which there were none.
Long-Term
Compensation
Name/Principal Annual Compensation Stock Options All Other
Position Year salary/bonus/other (#Shares)(1) Compensation(2)
Terry D.Marshall 1996 $74,267/$3,815/none none $9,000
President/CEO 1995 $77,469/$5,676/none 25,000 $10,800
(Chairman
9/91-4/95) 1994 $74,200/$9,396/none none $10,800
(1) Shares shown as pre-recapitalization.
(2) Effective 9/1/91-12/31/95 includes compensation to recognize added board
duties and responsibilities and includes an amount to fund Board-required
insurance program.
Board Compensation: At June 30, 1996, the Company had six officers and
directors. The Company was authorized to pay to its non-employee directors
$1,000 per year, plus $300 for each regularly scheduled Board meeting
attended. Board members are reimbursed for reasonable out-of-pocket expenses
required to perform their duties and to attend Board meetings and committee
meetings. As a group, officers and directors were paid a total of $70,190
during fiscal year 1996.
Compensation & Management Development Committee: The Compensation and
Management Development Committee was comprised of Messrs. Marchi and
Nicholson. The Committee met five times during the year. The Committee's
primary purposes are to: establish annual base compensation and performance
bonus compensation for the President/CEO; administer the Company's Stock
Option Award Plans; provide counsel and guidance to the President/CEO
regarding establishment of compensation for the other officers and principal
management; and, provide general input regarding employee compensation,
benefit programs and other personnel matters. The Company's officer
compensation policy is designed to attract and retain quality executives and
to meaningfully relate a portion of their compensation to specific goals and
annual performance parameters. The performance bonus program provides short-
term incentives for successful operations, while the Stock Option program
provides long-term incentives. It is believed that this system provides a
balance between short-term and long-term incentives, which ultimately, will
be in the best interests of stockholders.
a. Base Salary: In fiscal 1996, the Board of Directors approved the
Committee's and the President's mutual recommendation to maintain the prior
year's base salary without increase, for the President/CEO. His total
compensation includes $600 per month to fund a Board-required insurance
program.
b. Bonuses: For effectiveness through December 1995, the Board of Directors
approved a performance bonus program for the President/CEO, based on
financial performance (net profitability) and general Company performance
(seven specific goals). At year-end the Committee met and evaluated
performance with respect to these goals. A follow-up meeting was held with
the President/CEO to discuss performance and to provide recommendations.
A similar program was maintained by the President/CEO for the Executive
Vice-President, with the general performance parameters tailored to his
areas of responsibility. The profit based bonus system was terminated
December 31, 1995, being replaced by a "TEAMincentive" Program,
emphasizing new business development achievement.
c. President/CEO Stock Options: In FY 1995, the President/CEO was granted
25,000 shares in stock options with an exercise price of $0.1875 per share:
The options will expire on February 8, 2000. On September 15, 1993, as part
of the bonus performance package for the President/CEO, stock options were
granted for 30,000 shares from the 1986 Plan. The option price is 25 cents
per share, the closing market price on that date. The options will
terminate five years from the grant date. The options can be exercised in
increments of 25% at each anniversary of the grant date. No options were
granted to the President/CEO in FY 1996.
Individual Stock Option Grants
Year-Ended June 30, 1996
% of total Potential realizable
stock value at assumed
Number options annual rates of stock
of granted to Exercise price appreciation
stock employees price 5 year option term
options in fiscal per Expiration
Name granted year share date 0% 5% 10%
1/ 1/
Terry D.
Marshall -- -- -- -- -- -- --
Aggregated Stock Option Exercises and Stock Option Values
Year-Ended June 30, 1996
Number
of shares Value of
aquired on Value Unexercised Options Unexercised options 2/
Name exercise realized exerciesed/unexercised exerciseable/unexercisable
1/ 1/
Terry D.
Marshall -- -- 61,250 33,750 $0 $0
1/ Number of stock options granted and Exercise price per share are pre-
recapitalization.
2/ Closing price ($0.1875) of the Company's stock on June 30, 1996 was less
than or equal to the various option exercise prices.
d. "TEAMincentives":
Effective January 1, 1996, the board of directors finalized the new
"TEAMincentive" Program, designed to place emphasis on achievement of goals
with respect to new business development. The Program was fully described
in the proxy statement for the July 1996 annual meeting and was ratified by
the stockholders.
The Program award "pool" includes incentives for principal management in the
form of cash, stock and stock options. The maximum award to all
participants, assuming full achievement of goals, is capped at $30,000 in
cash, 60,000 in post-recapitalization stock shares and 60,000 in post-
ecapitalization stock options.
On June 2, 1992, under the provisions of the 1983 Plan, five-year options for
a total of 197,375 shares were granted by the Board to 49 "key" employees of
the Company, at an option price of 31.25 cents per share, the closing market
price on that date. Recipients included management, supervisors and
line-employees, who were employed on March 14, 1989 (date of the Company's
petition for Reorganization under Chapter 11) and who remained employed on
the issue date. At May 25, 1993, the 1983 Plan expired.
On September 15, 1993 and under the provisions of the 1986 Plan, five-year
options for a total of 100,000 shares were granted to eight "key" management
personnel at an option price of 25 cents per share, the closing market price
on that date. The 1986 Plan terminated May 28, 1996.
At the 1995 Annual Meeting of Stockholders, a compensation plan was approved
which provided each non-management director with the options to purchase
10,000 shares for each year of service completed. On February 1, 1995,
Directors Daniels and Marchi each were awarded options for 10,000 shares.
For 1996, Directors Daniels, Marchi and Nicholson each were awarded options
for 10,000 shares.
The table below summarizes options to purchase shares, which have been issued
to Corporate Officers under its Qualified Stock Option Plans and were
outstanding at June 30, 1996:
SHARES GRANTED OPTION PRICE
1983 Plan 60,000 $.3125
1986 Plan 82,000 $.1875 - $.2500
Under the above plans, employees are 25% vested each year on a cumulative
basis. Unexercised options expire five years after the grant date. No
stock options have been exercised to-date by corporate officers. All other
stock option data is shown pre-recapitalization.
PART III/ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS & MANAGEMENT
The following table provides information, as of June 30, 1996, with respect
to each person known to the Company to own beneficially more than five
percent (5%) of the outstanding Common Stock and the number of shares owned
by all officers and directors of the Company as a group:
Name and Address Amount and nature of Percent of
of beneficial Owner beneficial ownership class
(a) Derby West, LLC 1,662,645 shares 31.3%
P.O. Drawer E common stock
Sheridan, WY 82801
(b) H. V. Holeman 544,170 shares 10.3%
7979 Harbour Towne Ave. common stock
Las Vegas, NV 89113
(c) All officers 367,809 shares 6.9%
and directors common stock
(a) On February 29, 1988, the Company sold 500,000 shares of 10%
convertible preferred stock for $1 per share to Derby West Corporation, a
Delaware corporation, having Peter M. Kennedy as its only shareholder.
Prior to reorganization, an additional 43,348 shares of preferred stock were
issued to Derby West in lieu of required quarterly cash dividends. Per
the preferred stock agreement, each share of preferred stock was convertible
into three shares of common stock. Upon Plan confirmation, all preferred
stock held by Derby West was converted to common stock at the ratio of one
share preferred for three shares common. Consequently, Derby West received
1,662,645 shares of common stock in exchange for its preferred stock.
Following conversion, no shares of preferred stock remain outstanding.
(b) H.V. Holeman is a retired director of the Company. Prior to
dissolution in January, 1995, Mr. Holeman owned 51% of the stock of the
Great Plains Transportation Co., and was a director of that Corporation. At
October, 1993, Messrs. Marchi and Marshall also became stockholders of Great
Plains. Their respective equity interests were as follows: Mr. Marchi, 14.5%
and Mr. Marshall, 4.5%. Great Plains dissolved in January 1995.
(c) Represents total stock held by all officers and directors as a group.
There were a total of six officers and directors at fiscal year end 1995.
In June, 1995, 114,200 shares of common stock owned by George H. Selover,
a former member of the Board of Directors, was sold as follows:
53,500 shares to Jack K. Daniels; 53,500 shares to Alan D. Nicholson;
and, 7,200 shares to Terry D. Marshall.
All information shown in Part III/Item 12. Security ownership of certain
beneficial owners & management are pre-recapitalization.
PART III/ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
In April, 1994, the Company entered into an agreement with Jon Marchi,
director, officer and shareholder, whereby, for a period of 18 months, the
Company could borrow up to $100,000. If advanced, the borrowing would bear
interest at 8.5% and be repayable in monthly principal and interest payments
over a five-year period beginning on the date of the first advance. Any
borrowing was to be secured by the Company's Cessna aircraft. This agreement
expired October 21, 1995.
Also, as of March 1994, the Company leased land and a hangar and office
facility from Jon Marchi, a director, officer and shareholder. The Company
believes that the terms of the leases were at least as favorable as those
that could have been obtained from independent third parties. The lease
extends for 20 years and contains a 6 year option to extend and provides the
Company four separate purchase options. Total payments under these leases,
for the years ended June 30, 1996 and 1995 were $41,840 and $31,185,
respectively.
PART IV/ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) See Index to Financial Statements on page 2.
All schedules are omitted since the information is not required or because
such information is included in the financial statements and notes hereto.
(c) Exhibits
2. The Debtor's Supplement to Disclosure Statement and Third Plan of
Reorganization (filed August 30, 1991 on Company's Form 8-K report and
incorporated herein by reference).
3. Amendment to Company's Articles of Incorporation so that Directors of the
Corporation shall not be liable for money damages to the Corporation or its
shareholder except in specified instances. ((filed as Exhibit 3(a) to
Company's report under Form 10-K for the year-ended June 30, 1993 and
incorporated herein by reference).
4. (a) Specimen certificate for shares of the Common Stock of the Company
(filed as Exhibit 4(b) to Company's Report on Form 10-K for the year-ended
June 30, 1985 and incorporated herein by reference).
(b) The Company agrees to furnish the Commission on request copies of
instruments with respect to long-term debt not being registered hereunder,
the amount of which debt does not exceed 10% of the total assets of the
Company.
10. (a) DOT Show Cause Order 94-10-4, issued October 13, 1994 provided for
tentative carrier selection of essential air service at the seven Montana
points to the hub of Billings, MT from December 1, 1994 through
November 30, 1996 at an annual subsidy rate of $3,543,040.
(b) DOT Order 93-4-49, issued April 29, 1993, which denies Big Sky's
petition of reconsideration and motion for stay of DOT Order 93-3-40.
Provides for essential air service of the seven Montana points to
Billings, MT through November 1994 at an annual rate of $3,498,735.
(filed as Exhibit 10(a) to the Company's report under Form 10-K for
year-ended June 30, 1993 and incorporated herein by reference.)
(c) DOT Order 93-4-40, issued March 29, 1993, provides for essential
air service at the seven Montana points to the hub of Billings, MT through
February 1994 at an annual subsidy rate of $3,498,735. (Filed as Exhibit
10(b) to Company's report under Form 10-K for the year-ended June 30, 1993
and incorporated herein by reference.)
(d) DOT Order 92-9-49, issued September 30, 1992, provides for service
upgrade by replacing Cessna service with Metroliner aircraft, at an annual
rate of $3,602,321 (once all-Metro service has been implemented, until
February 29, 1993), and then a rate of $3,697,955 through February 28, 1994.
Also addresses rate prior to all-Metro service (filed as Exhibit 10(a) to
Company's report under Form 10-K for year-ended June 30, 1992 and
incorporated herein by reference).
(e) DOT Order 91-9-64, issued October 4, 1991, for enhanced EAS at
Glasgow, Wolf Point and Sidney, MT, and Williston, ND, at an annual rate of
$2,779,265 (filed as Exhibit 10(b) to Company's report under Form 10-K for
year-ended June 30, 1992 and incorporated herein by reference).
(f) Debtor's Supplement to Disclosure Statement and Third Plan of
Reorganization, which were filed with the U.S. Bankruptcy Court May 29, 1991
and eventually confirmed by the U.S. Bankruptcy Court July 16, 1991
(filed as Exhibit 10(c) to Company's report under Form 10-K for year-ended
June 30, 1992 and incorporated herein by reference).
(g) DOT Service Reduction Order 95-11-28, the Department of
Transportation issued an emergency order reducing compensation paid to
essential air service carriers, along with decreases in service requirements
effective November 27, 1995. Big Sky's annual compensation through
November 30, 1996 was reduced from approximately $3.5 million
to $3.0 million. Big Sky's appeal was denied.
On June 19, 1995, a report on Form 8-K was filed.
SIGNATURES: Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf of the undersigned, thereunto duly authorized.
BIG SKY TRANSPORTATION CO.
dba BIG SKY AIRLINES
by /s/ Terry D. Marshall
Terry D. Marshall
President & C.E.O.
Dated: October 18, 1996
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities, and on the dates indicated.
/s/ Terry D. Marshall October 18, 1996
Terry D. Marshall
Director, President & Chief Executive Officer
/s/ Craig R. Denney October 18, 1996
Craig R. Denney
Director, Executive Vice-President & General Manager, Secretary,
Chief Operations Manager & Principal Officer in charge of Accounting
/s/ Karie Kane October 18, 1996
Karie Kane
Accounting Manager & Assistant Treasurer
/s/ Jack K. Daniels October 18, 1996
Jack K. Daniels
Director, Vice Chair & Assistant Secretary
/s/ Stephen D. Huntington October 18, 1996
Stephen D. Huntington
Director
/s/ Jon Marchi October 18, 1996
Jon Marchi
Director, Chair & Treasurer
/s/ Alan D. Nicholson October 18, 1996
Alan D. Nicholson
Director
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 787,437
<SECURITIES> 0
<RECEIVABLES> 448,993
<ALLOWANCES> 1,200
<INVENTORY> 236,128
<CURRENT-ASSETS> 1,512,962
<PP&E> 1,240,317
<DEPRECIATION> 466,103
<TOTAL-ASSETS> 2,311,365
<CURRENT-LIABILITIES> 1,535,964
<BONDS> 0
0
0
<COMMON> 1,047,705
<OTHER-SE> 292,690
<TOTAL-LIABILITY-AND-EQUITY> 2,311,365
<SALES> 0
<TOTAL-REVENUES> 5,055,907
<CGS> 0
<TOTAL-COSTS> 5,022,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,992
<INCOME-PRETAX> 5,697
<INCOME-TAX> 2,200
<INCOME-CONTINUING> 3,497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,497
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
BIG SKY TRANSPORTATION CO.
(d/b/a Big Sky Airlines)
Financial Statements
Years ended June 30, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Big Sky Transportation Co.:
We have audited the accompanying balance sheets of Big Sky Transportation Co.
as of June 30, 1996, 1995 and 1994 and the related statements of earnings,
stockholders' equity and cash flows for each of the years in the three-year
period ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
Substantially all of the Company's revenues are derived from routes which are
subsidized by the federal Essential Air Service (EAS) program. As discussed
in note 7 to the financial statements, the Company's current EAS contract
expires in November 1996 and a proposal to continue these services through
September 30, 1998 is under review by the Department of Transportation.
Failure to renew this contract at a sufficient funding level could have a
material adverse effect on the Company.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Big Sky Transportation Co. at
June 30, 1996, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1996 in
conformity with generally accepted accounting principles.
Billings, Montana
August 23, 1996, except as to the second
paragraph of note 7 and the first paragraph
of note 11 which are as of October 9, 1996
<PAGE>
BIG SKY TRANSPORTATION CO.
Balance Sheets
June 30,
Assets 1996 1995 1994
Current assets:
Cash and cash equivalents $ 360,668 $ 408,457 $ 570,030
Restricted cash (note 2) 426,769 369,009 513,532
Accounts receivable,
less allowance for doubtful
receivables of $1,200 in 1996,
$1,200 in 1995
and $10,523 in 1994 447,793 457,936 422,794
Expendable parts and supplies,
at cost 236,128 241,944 258,403
Inventory held for sale 41,604 ----- -----
Prepaid expenses ----- 4,985 5,771
Total current assets 1,512,962 1,482,331 1,770,530
Property and equipment, at cost:
Flight equipment 609,022 601,867 533,663
Facility under capital lease
(note 8) 456,185 456,185 408,417
Other property and equipment 175,110 176,725 140,828
Total property & equipment 1,240,317 1,234,777 1,082,908
Accumulated depreciation
and amortization (466,013) (339,416) (235,175)
Net property and equipment 774,304 895,361 847,733
Excess reorganization value, net of
accumulated amortization of $29,692,
$29,692 and $28,354 and pre-
confirmation tax benefits utilized
of $181,467, $178,200 and $144,500
at June 30, 1996, 1995 and 1994,
respectively 6,841 10,108 45,146
Deposits 17,258 26,758 48,361
Total assets $2,311,365 $2,414,558 $ 2,711,770
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term
obligations (note 5) $122,057 $136,930 $121,881
Current installments of capital
lease obligations (note 8) 16,035 14,406 4,530
Accounts payable 121,687 80,247 88,272
Accrued expenses (note 3) 551,958 562,483 792,527
Traffic balances payable and
unused tickets 40,095 30,380 25,375
Total current liabilities 851,832 824,446 1,032,585
Long-term obligations,
excluding current installments
(note 5) 397,110 518,901 668,666
Capital lease obligations (note 8) 287,022 303,057 295,470
Total liabilities 1,535,964 1,646,404 1,996,721
Commitments and contingencies
(notes 2, 4, 7, 8, 9, 11 and 12)
Stockholders' equity (note 10 and 15):
Common stock of no par value;
authorized 2,000,000 shares;
shares issued and outstanding:
1996 - 1,047,705, 1995 and
1994 - 1,043,772 482,711 530,731 530,731
Paid-in capital less than par
value (note 1) ---- (51,770) (51,770)
Retained earnings 292,690 289,193 236,088
Stockholders' equity 775,401 768,154 715,049
Total liabilities and
stockholders' equity 2,311,365 $ 2,414,558 $2,711,770
See accompanying notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
Statements of Earnings
Year Ended June 30,
1996 1995 1994
Operating revenue:
Passenger $1,704,430 $ 1,492,079 $ 1,369,686
Cargo 104,217 93,176 98,485
Public service (note 7) 3,206,258 3,553,580 3,483,326
Other 41,002 10,292 19,655
5,055,907 5,149,127 4,971,152
Operating expenses:
Flying operations 1,825,277 1,882,287 1,751,240
Maintenance 1,214,150 1,361,733 1,168,186
Traffic 1,313,170 1,169,182 1,142,128
Marketing 49,111 44,662 71,927
General and administrative 620,401 569,271 656,772
5,022,109 5,027,135 4,790,253
Operating income 33,798 121,992 180,899
Other income (expense):
Interest expense (80,963) (82,064) (74,747)
Interest income 30,971 35,457 29,913
Gain (loss) on equipment disposal 21,891 (7,660) (707)
(28,101) (54,267) (45,541)
Earnings before income taxes and
extraordinary item 5,697 67,7251 35,358
Income tax expense:
Current (1,067) (3,500) 20,755
Deferred ---- 9,100 (9,200)
Charge in lieu of taxes (note 6) 3,267 25,300 47,500
Income tax expense 2,200 30,900 59,055
Income before
extraordinary item 3,497 36,825 76,303
Extraordinary item
- - debt extinguishment (net of
current income taxes and charges
in lieu of taxes of $1,900
and $8,400, respectively) (note 5) ---- 16,280 -----
Net income $ 3,497 $ 53,105 $ 76,303
Earnings per common share:
Income before extraordinary item $ ----- $ .04 $ .07
Extraordinary item, net ----- .01 -----
Earnings per common share ----- .05 .07
Weighted average number of
common and common equivalent
shares (note 15) 1,044,100 1,043,772 1,043,772
See accompanying notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
Statements of Cash Flows
Year Ended June 30,
1996 1995 1994
Cash flows from operating
activities:
Net income $ 3,497 $ 53,105 $ 76,303
Adjustment to reconcile net
income to net cash provided
by operating activities:
Depreciation 106,324 127,788 104,596
Gain on debt extinguishment ----- (26,580) -----
Loss (gain) on equipment disposal (21,891) 7,660 707
Excess reorganization value
amortization and charges
in lieu of taxes 3,267 35,038 53,324
Changes in operating assets and
liabilities:
Restricted cash (57,760) 144,523 (136,262)
Accounts receivable 10,143 (35,142) (3,482)
Expendable parts and supplies 5,816 ----- -----
Inventory held for sale (41,604) ----- -----
Prepaid expenses 4,985 786 57,379
Deposits 9,500 21,603 30,848
Accounts payable 41,440 (8,025) 36,192
Accrued expenses (10,525) (230,044) 76,154
Traffic balances payable
and unused tickets 9,715 5,005 (13,687)
Net cash provided by operating
activities 62,907 112,176 292,228
Cash flows from investing
activities:Proceeds from
equipment disposals 61,121 4,114 6,578
Additions to property and
equipment (24,497) (53,372) (126,774)
Expenditures on fFacility under
capital lease expenditures ---- (47,768) (108,417)
Net cash (used) provided by
investing activities 36,624 (97,026) (228,613)
Cash flows from financing
activities:
Proceeds from exercise of
stock options sale of common
stock 3,750 ----- -----
Payments on long-term debt
obligations (136,664) (168,186) (206,920)
Payments on capital lease
obligations (14,406) (8,537) -----
Net cash used by financing
activities (147,320) (176,723) (206,920)
Net decrease in cash and cash
equivalents (47,789) (161,573) (143,305)
Cash and cash equivalents at
beginning of period 408,457 570,030 713,335
Cash and cash equivalents at
end of period 360,668 $ 408,457 $ 570,030
See accompanying notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
Statements of Stockholders' Equity
Common Stock
Paid-in
Issued and capital Total
outstanding Par less than Retained stockholders'
shares value par earnings equity
Balance at
June 30, 1993 5,307,314 530,731 $(51,770) $ 159,785 $ 638,746
Net income ------ ----- ------ 76,303 76,303
Balance at
June 30, 1994 5,307,314 530,731 (51,770) 236,088 715,049
Net income ----- ----- ------ 53,105 53,105
Balance at
June 30, 1995 5,307,314 530,731 (51,770) 289,193 768,154
Net income ----- ----- ----- 3,497 3,497
Exercise of stock
option 20,000 2,000 1,750 ------ 3,750
Balance prior
to effect of
plan of
recapitalization 5,327,314 532,731 (50,020) 292,690 775,401
Effect of reverse stock
split and stock
dividend (note 15) (4,279,609) (50,020) 50,020 ----- -----
Balance at
June 30, 1996 1,047,705 482,711 ----- 292,690 775,401
See accompanying notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Organization. Big Sky Transportation Co., d/b/a
Big Sky Airlines (the Company) operates as a small regional commuter air
carrier, primarily providing scheduled passenger, freight, express package and
charter services. At June 30, 1996, scheduled air service was provided to
nine communities in Montana. The Company's present route system is designed
around a small regional air service hub in Billings, Montana. Services
between the hub and seven isolated communities in central/eastern Montana are
performed under contract with the U.S. Department of Transportation's
Essential Air Service (EAS) program. In May 1995, service between Billings
and Great Falls, Montana was implemented and provides the Company's only
non-EAS route. The Company operates daily scheduled flights intended to
provide well-timed interline connecting service as well as convenient local
market service.
Fresh Start Reporting. The accompanying financial statements have been
prepared on the basis that a new reporting entity was created on October 1,
1991, which is the date when all material conditions precedent to the
Company's July 16, 1991 bankruptcy reorganization plan (Reorganization Plan)
were resolved to the Company's satisfaction. At that date, assets and
liabilities were restated to their estimated fair values, resulting in
restated net assets of $478,961. This net asset amount was less than the par
value of issued and outstanding shares at October 1, 1991 and accordingly, the
Company recorded the difference as paid-in-capital less than par value.
Expendable Parts and Supplies. Expendable parts are stated at the lower of
cost or market. Cost is determined using a moving weighted average method.
The Company does not provide an allowance for obsolescence on expendable parts
due to the universal nature of the parts.
Inventory Held for Sale. Inventory held for sale is stated at the lower of
cost or market. Inventory held for sale consists of flight equipment no
longer needed for air service operations.
Depreciation, Amortization and Maintenance Policies. The Company provides
depreciation and amortization of property and equipment, less an estimated
salvage value, over estimated useful lives ranging from 2 to 20 years using
straight-line and accelerated methods. Upon disposition and retirement of
property and equipment, the accounts are relieved of the cost and related
accumulated depreciation or amortization and any gain or loss is reflected in
operations.
The cost of rebuilding rotable parts is charged to maintenance as incurred.
An allowance for depreciation is provided for rotable parts to allocate the
cost of these assets, less estimated residual value, over the useful life of
the related aircraft and engines.
Ordinary maintenance and repairs are charged to operations as incurred. The
cost of renewals and betterments including owned engine overhauls are
capitalized. These overhaul costs are amortized based on actual utilization
over the expected service life. For leased engines, the Company accrues for
the cost of an overhaul based upon contractual hourly rates or the estimated
cost of an overhaul.
Revenue Recognition. Revenue is recognized when transportation has been
provided.
Intangibles. Excess reorganization value represents the estimated value of
the Company at the inception of Fresh Start reporting in excess of amounts
assigned to specific tangible and intangible assets and is being amortized to
expense over 15 years. The provisions of Fresh Start reporting require any
benefits realized from pre-Fresh Start unrecorded tax benefits be reflected
first as a reduction of excess reorganization value and thereafter as a direct
addition to paid-in capital.
Statement of Cash Flows. In the statement of cash flows, the Company
considers all highly liquid debt instruments with a maturity of three months
or less to be cash equivalents. Cash equivalents excludes restricted cash.
Earnings Per Share. Earnings per share is based on the weighted average
number of common shares outstanding during the period, including dilutive
common equivalent shares of stock options.
Income Taxes. Deferred income taxes are provided for at statutory rates on
the difference between the financial statement basis and income tax basis of
assets and liabilities. Net deferred tax assets or liabilities are
classified in the balance sheet as current or non-current consistent with the
assets and liabilities which give rise to such deferred income taxes. The
effect on deferred taxes of a change in tax rates is recognized in tax
expense in the period that includes the enactment date.
Utilization of post-Fresh Start net operating losses, if any, will be
recognized as a reduction of current tax expense when realized. Utilization
of pre-Fresh Start net operating losses in the reporting period are reflected
as a "charge in lieu of taxes" in the statement of earnings.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," effective June 30, 1996. The Company's
financial instruments consist primarily of cash, accounts receivable, accounts
payable and long-term debt of which carrying amounts do not significantly
differ from fair value.
(2)RESTRICTED CASH
Lease agreement provisions on certain aircraft require that the Company
accumulate funds to provide for engine overhauls. These funds, which include
funds held by lessors or in escrow accounts, were $331,170, $282,365 and
$486,398 at June 30, 1996, 1995 and 1994, respectively. At June 30, 1994,
these funds include $184,566, respectively, for the benefit of BSE Aircraft
Equipment Corporation, a related party. During 1995, the aircraft leased from
BSE Aircraft Equipment Corporation was sold to an unrelated party. The
Company's lease of the aircraft has continued with the new lessor.
The Reorganization Plan provides that approximately 75% of the liquidation
proceeds of excess parts and furnishings (for those parts and furnishings
considered excess inventory at the Reorganization Plan confirmation date) be
applied to the 7% note payable. At June 30, 1996, 1995 and 1994, restricted
cash includedthe Company had undistributed liquidation proceeds of $13,252,
$5,462 and $962, respectively.
At June 30, 1996 and 1995, restricted cash also includes $30,000 of
certificates of deposit pledged toward letters of credit provided to lessors
as security on aircraft leases and a $50,000 certificate of deposit as
security on the leased hangar facility for the benefit of a related party.
At June 30, 1994, restricted cash includes $25,000 of certificates of deposit
pledged on letters of credit provided to lessors as security on aircraft
leases.
(3)ACCRUED EXPENSES
The following is a summary
of accrued expenses:
June 30,
1996 1995 1994
Engine hot-end inspections $144,880 $107,495 $37,826
Leased engine overhauls 214,814 283,740 490,306
Payroll and payroll taxes 48,449 58,957 124,762
Vacation 96,068 89,726 97,500
Property taxes 37,033 22,554 20,061
Interest 10,714 12,893 16,354
Income taxes --- (12,882) 718
Other --- --- 5,000
$ 551,958 $562,483 $792,527
(4)REGULATION
In 1996, the Federal Aviation Administration (FAA) finalized rules
requiring operators of turbine aircraft having more than 10 seats to operate
under the more stringent Part 121 of the FAA Regulations. Previously, only
operators of large aircraft were required to operate under Part 121. The
planning process to phase-in the new rules, being completed in conjunction
with the local FAA staff, has been underway since mid-year. Final
implementation is slated for the third quarter of 1997. It is currently
estimated that full implementation of the new regulations will add
approximately $11,000 per month in expenses.
(5)LONG-TERM OBLIGATIONS
The following is a summary of
long-term obligations: June 30,
1996 1995 1994
9.5% installment note,
remaining balance due
in monthly payments of
$4,495, including interest,
through August 2001; secured
by accounts receivable $219,923 $251,008 $279,614
7% installment note due in
72 equal monthly payments,
including interest; commencing
August 1993, secured by inventory,
accounts receivable and equipment 210,688 274,733 343,754
Reorganization claims discounted
at 10%, due in annual payments of
$27,937, including interest,
through September 1999 88,556 105,903 163,323
5% reorganization claim repaid
in 1995 --- --- 3,856
Installment note paid in 1996 24,187
Total long term-obligations 519,167 655,831 790,547
Less current installments 122,057 136,930 121,881
$397,110 $518,901 $668,666
The Company has a $95,000 line of credit maturing May 1997 secured by
aircraft. Advances bear interest at prime plus 2%. There were no amounts
outstanding on the line of credit as of June 30, 1996.
As part of the Reorganization Plan, claimants of unsecured claims of
$1,088,761 elected to receive a non-interest bearing cash settlement
aggregating $300,000, to be paid in eight annual installments. In
September 1994, the Company offered these claimants an early payment but at a
discounted amount. The amount of the resulting buyout discounts is reported
as an extraordinary item for the year ended June 30, 1995.
The aggregate maturities of long-term obligations for the five years
subsequent to June 30, 1996 are as follows:
Year ending June 30, Amount
1997 $122,057
1998 133,204
1999 133,133
2000 71,339
2001 50,579
Thereafter 8,855
$519,167
(6)INCOME TAXES
Income tax expense from operations before extraordinary item consists of the
following:
Year Ended June 30,
1996 1995 1994
Current:
Federal $--- $--- $---
State (1067) (3,500) 20,755
Sub-Total (1067) (3,500) 20,755
Deferred:
Federal 2,867 25,300 47,500
State 400 9,100 (9,200)
Sub-Total 3,267 34,400 38,300
Total $ 2,200 $30,900 $59,055
Actual tax expense differed from the expected tax expense computed by
applying the U.S. Federal corporate tax rate of 34% to earnings before income
taxes and extraordinary item as follows:
Year Ended June 30,
1996 1995 1994
Computed "expected" tax expense $1,937 $23,027 $46,022
State income taxes (net of
Federal income tax effect) (440) 3,696 7,626
Excess reorganization cost
amortization 455 1,980
Other non-deductible expenses 703 3,722 3,427
$2,200 $30,900 $59,055
The tax effects of temporary differences (i.e. amounts that will result in
taxable or deductible amounts in future years) that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
June 30,
1996 1995 1994
Deferred tax assets:
Accounts receivable, due to
allowance for doubtful accounts $463 $463 $4,064
Property and equipment, due to
differences in depreciation 35,085 38,789 28,696
Inventory, due to valuation
reserve --- --- 15,497
Accrued overhauls and hot-end
inspections 138,914 151,095 213,148
Compensated absences 37,101 34,652 37,655
Other accrued expenses --- --- 1,931
Net operating loss carryforwards 629,923 629,923 604,289
Investment tax credit
carryforwards 43,200 161,500 183,600
AMT credit carryforwards 7,427 7,427 7,427
Total gross deferred tax assets 892,113 1,023,849 1,096,307
Less valuation allowance (867,769) (988,269) (1,048,609)
Net deferred tax assets 24,344 35,580 47,698
Deferred tax liabilities:
Property and equipment,
due to Fresh Start
adjustments (24,344) (35,580) (47,698)
Net deferred tax liability/asset $--- $--- $---
In assessing the necessity for a valuation reserve for deferred tax assets,
management considers whether it is "more likely than not" that some portion
or all of these future deductible amounts will be realized as a refund or
reduction in current taxes payable. Management has not recorded the full
benefit of these deferred tax assets due to the uncertainty related to these
future deductible amounts. The ultimate realization of deferred tax assets
is dependent upon the existence of, or generation of, taxable income in the
periods which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment.
The net operating loss (NOL) and investment tax credit (ITC) carryforwards,
which comprise a majority of the Company's unrecognized net deferred tax
asset, expire approximately as follows:
Carryforwards
Year expiring NOL ITC
1997 $ --- $ 8,000
1998 --- 5,700
1999 --- 7,900
2000 --- 1,200
2001 53,000 20,400
2003 149,000 ---
2004 1,423,000 ---
2005 148,000 ---
2006 58,000 ---
2009 21,000 ---
$1,852,000 $43,200
The realization of these NOL carryforwards is dependent upon generating
taxable income prior to the related year of NOL expiration. Additionally,
the NOL carryforwards must be fully utilized before the ITC carryforwards
can be utilized. The amount of NOL carryforward that may be utilized in any
future tax year may also be subject to certain limitations, including
limitations as a result of certain stockshareholder ownership changes which
may be beyond the control of the Company.
The provisions of Fresh Start reporting require any benefits realized from
the pre-Fresh Start deferred tax assets be recorded first as a reduction of
excess reorganization value and thereafter as a direct addition to paid-in
capital. Any tax benefits relating to the valuation allowance for deferred
tax assets as of June 30, 1996 which are subsequently realized would be
allocated as follows:
Statement of earnings
Excess reorganization value $6,841
Additional paid-in capital 860,928
$ 867,769
(7)ROUTES AND SUBSIDIES
The Department of Transportation (DOT) subsidizes substantially all routes
flown by the Company under the federal EAS programdesignated as essential air
service. The DOT issues an order which specifies an annual subsidy rate
covering a specified contract period. This annual rate is based on
subsidy-eligible miles flown and as such, the actual subsidy received is
subject to actual flights completed within specified limits. EAS subsidy
revenue received for the fiscal years ended June 30, 1996, 1995 and 1994 was
$3,206,258, $3,553,580 and $3,483,326, respectively (see also note 12).
These subsidy amounts represent 63%, 69% and 70% of all revenues for fiscal
years ended June 30, 1996, 1995 and 1994, respectively.
Funding for the EAS program for the next Federal fiscal year 1997 (October
1996-September 1997) has been approved by Congress at an annual funding level
of $25.9 million, a $3.3 million increase over the current Federal fiscal
year's funding amount. The transportation appropiations bill which includes
the EAS funding was signed October 1996 (see also note 11).
The Company's current EAS contract expires in November 1996. The Company has
submitted a proposal to continue these services through September 30, 1998.
The proposal includes the estimated costs of complying with the more
stringent Part 121 FAA refulation. This proposal is currently under review by
the Department of Transportation. Management believes that is is reasonable
to conclude that its contract will be renewed and that satisfactory levels
will be approved, however, there can be no assurance that such renewal at a
sufficient funding rate will occur. The Company has been the EAS carrier for
these communities for the past 16 consecutive years. During that same period,
the Company has been successful in retaining the majority of the EAS routes
under the contract even when the contract has been subject to a carrier
selection bid process. The Company has not received any indication to date
that the propsed contract will be subject to such a reselection process.
Implementation of such a reselection process could delay commencement of the
new contract.
Failure to secure renewal of the EAS contract at the requested funding level
could have a material adverse affect on the Company. The Company is
exploring various growth and diversification strategies, as well as several
specific opportunities, to reduce the reliance on revenues from EAS
subsidies. There can be no assurance, however, that such strategies or
specific opportunities can or will be implemented. The financial statements
do not reflect any adjustments that may result from an unfavorable resolution
of any of these uncertainties.
(8)LEASES
Operating Leases. Currently the Company leases office facilities, land and
three Metroliner II (fifteen passenger) aircraft. In March 1996, the
Company returned one aircraft to the lessor. The three remaining aircraft
leases contain early termination provisions in the event the EAS contract
(see note 7) is not fully funded or renewed.
The following is a schedule of future minimum rental payments for the
operating leases which have initial or remaining non-cancelable lease terms
in excess of one year as of June 30, 1996:
Year ending June 30:
1997 $374,478
1998 66,872
1999 11,688
2000 12,016
2001 12,256
Thereafter 196,140
$673,450
Rental expense under operating leases charged to operations was $705,890,
$795,584 and $775,466 for the years ended June 30, 1996, 1995 and 1994,
respectively.
Capital Leases. On March 1, 1994 the Company entered into a lease agreement
("Lease") with a member of the Board of Directors ("Member"). The Lease is
comprised of two components. The first provides for an assumption of a lease
for airport land between the Member and the City of Billings. The term of
the airport land sublease is 20 years with an initial annual rate of $10,397.
The airport land lease also provides for an annual adjustment of the rental
amountbased on increases in the Consumer Price Index.
The second component of the Lease relates to a 11,520 square foot hangar and
office facility constructed on the airport land. These construction costs
were financed with $300,000 provided by the Member and approximately $150,000
provided by the Company. The facility is owned by the Member and leased to
the Company under the Lease agreement. The lease term is 20 years with an
option to extend for an additional six years. The monthly rent is equal to
the Member's principal and interest payments due a bank on a $300,000 loan
obtained by the Member to finance his portion of the construction costs
(the "Bank Debt"). The Bank Debt is a term loan at 8.5% with principal due
monthly based on a 20 year amortization schedule with a balloon payment
after five years (October 1999). The Member has indicated an intent, but is
not required, to extend the Bank Debt term or refinance the balloon payment
at the current maturity date. In addition, the Company is required to
maintain a $50,000 security deposit with the bank. All tax benefits of
ownership are retained by the Member. The Company expects to recover its
$150,000 original investment at the maturity of the Lease or earlier if the
facility is sold prior to maturity.
The Lease provides the Company the option to purchase the building on the
following dates: March 1, 1999, 2004, 2009 or 2014 and a right of first
refusal upon approval by Member of a sale of his interests to a third party.
The purchase price of the building to the Company is based on the facility's
fair market value. However, the purchase price under the Company's option to
purchase cannot be less than $450,000. The Company will be given credit for
$150,000 of its original investment and a graduated portion of any fair value
appreciation in excess of $450,000 in the event the Company exercises either
purchase option. In the event the hangar facility is sold to a third party,
the Company is entitled to any proceeds in excess of the Member's then
outstanding Bank Debt until the $150,000 investment is recouped.
The airport land lease component of the Lease is accounted for as an
operating lease and the minimum annual lease payments are included in the
Operating Leases section above. Because of the Company's "continuing
involvement" in the risks and rewards of ownership (including option to
purchase, specified return of its investment, payments corresponding to the
underlying debt structure, and sharing in any appreciation upon sale) and its
substantial investment in the facility, the facility lease component is
accounted for as a capital lease. The Company has also leased a modular
building to accommodate certain of its office needs which is currently located
on the airport leased land.
During December 1994, the Company acquired x-ray equipment for use in
screening inbound passengers at the Billings airport by entering into a
capital lease.
Future minimum lease payments under the capital leases and the present value
of future minimum capital lease payments as of June 30, 1996 are as follows:
Year ending June 30:
1997 $41,484
1998 35,520
1999 31,260
2000 274,778
Total minimum lease payments 383,042
Less amount representing interest (79,985)
Present value of minimum lease payments 303,057
Less current installments (16,035)
Obligations under capital leases,
excluding current installments $287,022
Minimum lease payments have not been reduced by minimum sublease rentals of
$70,150 due through June 1998 under noncancelable subleases.
The carrying value of the facilityassets under capital leases was $415,234,
$438,635 and $456,185 at June 30, 1996, 1995 and 1994, respectively.
(9)RELATED PARTY TRANSACTIONS
In March 1994, the Company leased land, hanger and an office facility from a
member of the Board of Directors (see note 8). The Company believes the
terms of the leases were at least as favorable as those that could have been
obtained from independent third parties. Total payments under these leases,
for the years ended June 30, 1996, 1995 and 1994 were $41,840, $31,185 and
$3,464, respectively.
During the years ended June 30, 1995 and 1994, the Company leased one
aircraft from the BSE Aircraft Equipment Corporation ("BSE") which is owned
by a major stockholder of the Company. Lease and rental payments to BSE were
$110,000 and $120,000 for the years ended June 30, 1995 and 1994,
respectively. This agreement terminated in May 1995 due to the sale of the
aircraft to an unrelated party.
(10)STOCK OPTIONS
The Company adopted a stock option plan in May 1983 for key employees under
which 40,000 shares are reserved for issuance at exercise prices which are
not less than market value at date of grant. Commencing one year from the
date of grant these options may be exercised to the extent of twenty-five
percent of the total shares subject to option. The balance becomes
exercisable in three cumulative annual installments of 25% of the optioned
shares until four years from the date of grant after which they shall be fully
exercisable. The Company adopted a stock option plan in May 1986 for key
employees under which an additional 40,000 shares are reserved for issuance.
The Company adopted a stock option plan in February 1995 for outside
directors under which an additional 100,000 shares are reserved for issuance
at prices which are not less than market value at date of grant
("Director Plan"). Options are exercisable immediately upon issuance.
The provisions of the 1986 plan are similar to those for the 1983 plan. The
options terminate five years from the date of grant.
Changes in stock options issued under these fixed stock option plans are as
follows:
1996 1995 1994
Outstanding at beginning of
fiscal year 55,434 53,756 36,618
Granted 8,400 13,000 20,000
Exercised (4,000) --- ---
Canceled (9,791) (11,322) (2,862)
Outstanding - end of fiscal year 50,043 55,434 53,756
Exercise price $.63 to 1.56 $.63 to 1.56 $1.25 to 1.56
Shares exercisable - end
of fiscal year 38,321 32,536 17,206
The ability to issue options for the remaining shares available under the May
1983 and May 1986 plans has expired. There are 90,000 shares available for
grant under the Director Plan at June 30, 1996.
In fiscal 1996, the Company granted performance based stock options to one
employee ("1996 Performance Plan"). Under the 1996 Performance Plan, options
were issued for 6,000 shares at an exercise price of $.63 per share upon
successful completion of performance goals established by the Board of
Directors in the areas of acquisitions, mergers, and/or business development.
Options were also issued for 4,000 shares at an exercise price of $.75 per
share upon the successful performance of his duties as determined within the
sole discretion of the Board. The options expire either 90 days after
approval of a merger/acquisition transaction or the termination of
employment. Compensation expense will be recognized to the extent the current
market value of the underlying shares exceeds the exercise price at the date
the grants are vested with the employee. There was no expense recorded for
the 1996 Performance Plan during the year ended June 30, 1996.
In July 1996, the stockholders also approved the 1996 Stock Bonus Plan
("Bonus Plan") to provide for awards for three members of a busniess
development managment team, under an incentive compensation plan
which is earned only if the Company meets specific performance targets.
The incentive compensation plan provides for a maximum indiviual award amount
based on one-third of a $30,000 performance award to be paid in cash,
one-third in the form of 60,000 shares of common stock of the Company and the
issuance of options to acquire 60,000 shares of common stock at an exercise
price of $1.09 per share. The Company accrues compensation expense based on
performance reflecting the value of cash, common stock and options which are
anticipated to be earned.
The Company's shareholders approved a stock option plan in July 1996 for key
employees under which 100,000 shares of stock are reserved for issuance at
exercise prices which are not less than fair market value at the date of
grant (limited to 20,000 shares granted per year). Options under the 1996
plan may be exercised in the second through fifth year from the grant date.
(11)BUSINESS AND CREDIT CONCENTRATIONS
At June 30, 1996, all of the Company's scheduled air service communities are
located in Montana and substantially all are covered by EAS subsidies. No
single customer accounted for more than five percent of the Company's
revenues in any year except for the EAS subsidy received from the DOT.
The EAS program funding for FY 1997 has been fixed at $25.9 million, up
$3 million from FY 1996. Furthermore, a new permanent funding source (a tax
on foreign commerical carrier overflights) to support rural air service was
approved by the 1996 Congress (the Rural Air Service Act or the "Act"),
and will become effective October 1997. It is estimated that the funding
source will generate up to $50 million annually to be used first for EAS
with any surplus to go to rural safety programs. The act also eliminated the
previous 1998 sunset for the EAS program. As discussed in Note (7), the EAS
program has recently been subject to modification which has resulted in
reduced subsidies for certain carriers.
Accounts receivable from the DOT was $284,031, $294,949 and $295,214, or
37%, 38% and 41% of total stockholders' equity at June 30, 1996, 1995 and
1994, respectively. The majority of passengers carried by the Company are
ticketed by other airlines and travel agencies. Four airlines comprise the
majority of passenger related accounts receivable.
(12)COMMITMENTS AND CONTINGENCIES
As a result of unilateral decisions by the DOT, EAS funding rates to the
Company under its current contract were substantially reduced. During the
year ended June 30, 1996 this reduction was approximately $347,322. The
Company believes that it is entitled to receive compensation from the DOT for
a portion of such reductions. The Company has filed a claim with the DOT for
appoximately $150,000 for such reductions and intends to vigorously pursue
the claim.
The Company is involved in an employment discrimination claim involving one
of its pilots. Management believes it has meritorious defenses against this
claim and intends to vigorously defend the matter. Due to the preliminary
stages of the complaint, however, management is unable to determine the
possible impact on financial position or results of operations of an
unfavorable outcome, if any.
Under the Reorganization Plan the Company may not pay any cash dividend
unless all claims under the Plan, including secured claims, are satisfied in
full under the terms of the Reorganization Plan. The Reorganization Plan
provides for payments to claimants through 2001.
(13)STATEMENT OF CASH FLOWS
The Company paid interest of $83,142, $85,525 and $90,342 for the years ended
June 30, 1996, 1995 and 1994, respectively.
Non-cash financing and investing activities consisted of financing equipment
with a cost of $86,050 during the year ended June 30, 1995 and of
transferring flight equipment available for sale with a net book value of
$32,158 to inventory during the year ended June 30, 1995.
(14)ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
On March 31, 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 provides that long-lived assets and identifiable
intangibles should be reviewed for impairment whenever events or
circumstances provide evidence that suggests the carrying amount of the asset
may not be recoverable. The determination of whether an asset is impaired is
based on undiscounted cash flows. An impairment, if any, is measured based
on the fair value of the asset, if readily determinable. Otherwise,
impairment would be measured based on the present value of the expected
future net cash flows calculated using either a market interest rate or the
entity's incremental borrowing rate.
SFAS No. 121 is effective for financial statements issued for fiscal years
beginning after December 15, 1995 although earlier application is encouraged.
The Company intends to adopt the provisions of SFAS No. 121 on July 1, 1996
and management expects adoption will not have a material effect on the
financial position or results of operations of the Company.
A new method of accounting for stock-based compensation arrangements with
employees is established by SFAS No. 123 "Accounting for Stock-Based
Compensation.". The new method is a fair value based method rather than the
intrinsic value based method that is contained in Accounting Principles Board
Opinion No. 25 ("Opinion 25"). However, under SFAS No. 123 entities are
allowed to continue to use the Opinion 25 method or to adopt the SFAS No. 123
fair value based method. The SFAS No. 123 fair value based method is
considered by the FASB to be preferable to the Opinion 25 method, and thus,
once the fair value based method is adopted, an entity cannot change back to
the Opinion 25 method. Also, the selected method applies to all of an
entity's compensation plans and transactions.
SFAS No. 123 is effective for financial statements issued for fiscal years
beginning after December 31, 1995. The Company will be required to adopt the
provisions of SFAS No. 123 on July 1, 1996. Management's current intention
is to not adopt the fair value based method of accounting.
(15)PLAN OF RECAPITALIZATION
On July 18, 1996, a the following Plan of Recapitalization was approved by
Company stockholders. The Plan of Recapitalization provides that effective
August 23, 1996 the Company will affect a 300 for 1 reverse split of the
Company's existing stock followed by a 1 for 59 stock dividend. New stock
with no par value will be issued in exchange for existing stock with a par
value of $.10 presently issued and outstanding. All applicable share and per
share data have been retroactively adjusted for the resulting approximate
one-for-five stock split.
The Company will not be able to ascertain precisely how many shares will no
longer be outstanding as a result of fractional share purchases until the
reverse split-stock dividend process of the Plan of Recapitalization has been
completed, however, the financial commitmentcommittment is not expected to be
significant.
