U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year-Ended June 30, 1997
Commission File Number 1-7991
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the transition period from to
Big Sky Transportation Co.
(Exact name of small business issuer in its charter)
Montana 81-0387503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
1601 Aviation Place, Billings, Montana 59105
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (406) 245-9449
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value Pacific Exchange, Inc.
(Title of Class) (Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12 (g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months
(or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days: (X)
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will 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-KSB or any amendment to this
Form 10-KSB: (X)
State issuer's revenues for its most recent fiscal year: $4,870,835
State the aggregate market value of voting stock held by
nonaffiliates computed by reference to the price at which the stock
was sold, or the average of the bid and asked prices of such stock,
as of a specified date within the past 60 days: $578,357 (514,095
shares public float @ $1.125 per share, based on latest sale
September 9, 1997).
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Exchange Act after
distribution of securities under a plan confirmed by a court: Yes X No
The number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: 1996 Series Common
Stock 1,054,900 (June 30, 1997)
<PAGE>
Index
Form 10KSB
Page(s)
PART I: Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II: Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management Discussion & Analysis of Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III: Item 9. Directors, Executive Officers, Promoters & Control
Persons, and Compliance with Section 16(a) of
the Exchange Act
Item 10. Executive & Board Compensation
Item 11. Security Ownership of Certain Beneficial Owners &
Management
Item 12. Certain Relationships and Related Transactions
PART IV: Item 13. Exhibits and Reports on Form 8-K
Financial Statements
(appended)
Independent Auditors' Reports
Balance Sheets
Operations
Stockholders' Equity
Cash Flows
Notes to Financial Statements
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction: Big Sky Transportation Co. dba Big Sky Airlines (the
Company) operates as a regional air carrier, providing scheduled
passenger, freight, express package and charter services. It operates
under Part 121 of the Federal Aviation Regulations and holds a Section
401 PC&N Certificate issued by the U.S. Department of Transportation.
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. It reorganized as a Montana public
corporation 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 successfully completed a Chapter 11 Reorganization
beginning in March 1989. Its Plan was confirmed in July 1991 and the
case closed in June 1992.
Since 1995, the Company's Board and management have placed
considerable added emphasis on business growth and diversification.
In addition to creating a more stable economic base for its operations
and enhancing profitability, a major objective is to reduce the
Company's reliance on the government Essential Air Service contract.
The Company is striving to enhance stockholder value.
Routes & Services: The Company's present route system is designed
around the small 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 and date service was
inaugurated:
City/State Service Inaugurated
Billings, Montana ... Sep 1978
Glasgow, Glendive, Havre,
Lewistown, Miles City,
Sidney & Wolf Point, Montana ... Jul 1980
Great Falls, Montana ... May 1995
Between June 1985 and mid-1990, the Company operated as a Northwest
Airlink feeder carrier under a joint marketing/code-sharing agreement
with Northwest Airlines, Inc.. 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; however,
with Continental's system realignment in July 1994 and ultimately its
departure from Billings, the relationship was terminated. In
September 1994, the Company entered a joint marketing/code-sharing
agreement with Frontier Airlines, Inc., a new Denver-based jet
carrier. Frontier terminated its Montana routes in September 1995,
which resulted in termination of this agreement. Since that time, the
Company has marketed its services under its own trade name and
two-letter code.
In October 1989, as part of 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. In May 1993, services at the
latter two cities were terminated (see Subsidized Routes, below). In
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. All points currently
served by the Company are located in Central/Eastern Montana.
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"). Under the Federal
Airport and Airways Improvement Act of 1987, the government became
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.
In October 1996, the Rural Air Service Survival Act was approved by
Congress, which extended the Program indefinitely and provided a
permanent funding source for EAS starting in October 1997. Total
annual funding available under the new program is estimated at $50
million, which has provided opportunities to restore and enhance
services.
Development Plans: While the Company plans to operate EAS services as
long as they fit the overall business plan and are financially
productive, it has been vigorously pursuing a growth and diversification
strategy. Change in the business is expected to include expansion of the
current airline, as well as the addition of other aviation-related
enterprises. Significantly, at this particular time, opportunities to
provide scheduled service within the Montana region are arising because of
the fleet changes of larger regional carriers, which have committed
themselves to small jets and larger turboprop aircraft and no longer will
operate any aircraft of less than the 30-plus passenger size. As a result,
these carriers find themselves unwilling or unable to serve certain markets,
creating growth opportunities. In October 1997, the Company will inaugurate
new services in two such markets -- Helena-Billings and Missoula-Billings,
previously served by Horizon Air. Based on these services and expansion of
EAS operations under the new EAS funding program, the Company's scheduled
seat capacity will expand over 40 percent. See further discussion of
development plans at Item 6, hereto.
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.
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.
Employees: At June 30, 1997, the Company employed 73 total personnel,
a portion of which are part-time. The Company's pilots are
represented by the Big Sky Pilots' Association (BSPA)and its mechanics
by the International Association of Machinists & Aerospace Workers
Union (IAM).
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 & Seasonal Conditions: Due to the basic nature of all
services provided and the relatively high proportion of business
traffic, 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) and summer
(quarter-ended September). Due to lower traffic and weather-related
delays and cancellations, the winter period (quarter-ended March)
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. Principal competition in
freight and small package sector are the national franchise services
provided in the region by contract operators. The services
represented include United Parcel Service, Federal Express and
Airborne. The bulk of 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).
DOT Regulation: The federal government has 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, and most recently to the FAA.
FAA Regulation: The Company is subject to numerous
phases of FAA regulation. including 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.
ITEM 2. DESCRIPTION OF PROPERTY
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.
During October 1997, the Company's fleet will change to five
"low-time" 16,000 pound gross takeoff weight Metro III's, in order to
provide service to the new and expanded route system. The Cessna 402C
was sold in July. Two Metro II's are being returned to their lessors in late
September and a third later this year, at which time a sixth Metro III will
be added, resulting in a fully-standardized fleet. See discussion at Item 6,
hereto.
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. The Company maintains its own
hangar/office facility at the Billings airport and 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 & 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.
General Offices: The Company's hangar and principal offices, are
located at 1601 Aviation Place, Billings Logan International Airport.
An adjacent modular building is used to accommodate certain
administrative and training needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a claim related to an employee. Upon
advice of counsel, the Company believes it has meritorious defenses
against the claim. While protecting all rights of the employee, the
Company intends to vigorously defend this matter. The Company is
unable to determine the possible impact of financial position or
results of operations of an unfavorable outcome, if any.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year-ended June 30, 1997, there were no special meetings or
votes of the stockholders. The Proxy Statement for the July 1996
Annual Meeting of Stockholders is incorporated by reference.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 1980, the Company's common stock has been listed on the
Pacific Exchange, Inc.(PSE). The stock trading symbol is "BSA.P".
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 1996 and
1997. Bid prices represent quotations between dealers and do not
include retail markups, markdowns or commissions, and may not
represent actual transactions. Data for fiscal year 1997 reflect
effect of the 5:1 reverse stock split effective in August 1996:
Fiscal Year 1996 (pre-recap.):
Quarter-Ended High ($) Low ($)
09/30/951 .2500 Jul./Sep. .1875 Jul./Sep.
12/31/951 .2500 Nov./Dec. .1875 Nov./Dec.
03/31/961 .2188 Jan./Feb. .1875 Jan./Feb.
06/30/96 .2188 Apr./May/Jun. .1875 Apr./May/Jun.
Fiscal Year 1997 (post-recap):
Quarter-Ended High ($) Low ($)
09/30/962 1.2500 Aug. -- 3
12/31/962 1.3125 Dec. 1.0625 Oct.
03/31/972 1.1250 Feb./Mar. 1.1250 Feb/Mar.
06/30/972 1.1562 Apr./May/Jun. 1.1250 Apr./May
1 No trading reported in Feb., Aug., Oct. 1995, and Mar. 1996.
2 Prices reflect 5:1 reverse stock split effective August 1996.
3 Low for 9/30/96 quarter was $.2500 (pre-recapitalization).
According to records maintained by the Company's transfer agent,
Continental Stock Transfer & Trust Co., the Company had 1,166
holders-of-record of its 1996 Series Common Stock as of June 30, 1997.
The Company's Chapter 11 Plan of Reorganization places a restriction
on payment of dividends. No dividends were issued in either FY 1996
or FY 1997. Payment of cash dividends on the Company's common stock
is not anticipated in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
As part of its growth plan, in July the Company announced plans to
commence new scheduled services linking Billings with Helena and
Missoula, MT, effective October 12, 1997. Earlier, Horizon Air
announced discontinuation of all local service in these markets--the
two largest intra-state markets--as of October 11, 1997.
To accommodate the new western Montana service, in addition to meeting
the needs for improves EAS effective October 1, Big Sky has committed
to replace its fleet of three Fairchild Metro II aircraft with six
newer and fully-refurbished Fairchild Metro III aircraft.
Lease/purchase agreements for five of the six aircraft have been
completed and the sixth is underway. The Metro III aircraft provide
seating for 19 passengers (versus 15 for the Metro II), fixed seating
on all flights more or less regardless of weather or load variances
and a more comfortable and quiet ride. The Metro III cruises at 300
miles per hour. The relative newness of the Company's newly-obtained
Metro III aircraft is expected to contribute to operational
reliability and safety, while lowering maintenance costs.
Review and analysis of growth opportunities for the Company is
continuing. Possibilities are being considered both in the scheduled
air passenger business and beyond into affiliated aviation businesses.
In connection with its current plans, the Company has established a
line of credit through First Interstate Bank of Billings. The credit
line is related to projected temporary cash flow needs through
mid-1998 and is capped at $600,000. The Company also secured a
$150,000 advance on subsidy payments to supplement cash flow during
start-up of enhanced EAS services.
The following table sets forth certain statistics relating to the
operations of the Company during the recent two years:
Year-Ended 6/30
1997 1996
Passengers 25,075 28,070
Revenue Passenger Miles--RPMs (000) 4,934 5,523
Available Seat Miles--ASMs (000) 15,107 17,190
ASMs including Charter (000) 15,119 17,190
Average Passenger Load Factor (%) 32.6 32.1
Aircraft Miles (000) 1,030 1,171
Average Yield per Passenger Mile (cents) 31.83 30.68
Operating Cost Per ASM (cents) 32.24 29.14
Freight Pounds 81,054 96,704
Operating Breakeven, including Subsidy (%) 30.0 31.8
Fleet:
Metroliner II 1/ 3 3
Cessna 402C 1 1
Total 4 4
Cities Served 9 9
1/ One Metro aircraft was returned to its lessor April 1996 following
the Department of Transportation's reduction order of November 1995,
reducing the fleet to three Metro II's, with a Cessna 402C for backup.
For approximately nine months of FY 1996, the fleet included four
Metro aircraft.
1997 Compared to 1996: Fiscal year 1997 results improved dramatically
over fiscal year 1996. With operating income of $387,150 compared to
$33,798. Operating revenue decreased $185,072 or 3.7% along with
operating expense decreases of $538,424 or 10.7%. All operating
expense categories have seen decreases.
Operating Revenues $:
Year-Ended Increase(Decrease)
6/30/97 6/30/96 Dollars Percent
Passenger 1,580,581 1,704,430 (123,849) (7.3)
Cargo 100,057 104,217 (4,160) (4.0)
Public Svc. 3,122,861 3,206,258 (83,397) (2.6)
Other 67,336 41,002 26,334 64.2
Total 4,870,835 5,055,907 (185,072) (3.7)
The reduction in passenger revenues in FY 1997 primarily is the result
of 2,995 fewer passengers carried and reinstatement of the 10% federal
transportation excise tax in FY 1997. The Public Service (EAS)
subsidy contract was renewed at a lower rate. The increase in "Other"
revenues is due to a hangar sublease agreement entered into in June
1996.
Operating Expenses $:
Year-Ended Increase (Decrease)
6/30/97 6/30/96 Dollars Percent
Flying Operations 1,579,716 1,825,277 (245,561) (13.5)
Maintenance 1,073,832 1,214,150 (140,318) (11.6)
Traffic 1,239,305 1,313,170 (73,865) (5.6)
Marketing 32,400 49,111 (16,711) (34.0)
General & Admin. 558,432 620,401 (61,969) (10.0)
Total 4,483,685 5,022,109 (538,424) (10.7)
The flight operation decrease over fiscal year 1996 is associated with
the reduction in aircraft fleet. In April 1996 a Metro II was returned
due to a reduction in service to the EAS communities. Aircraft
insurance and lease expense make up the mass of the $245,561 reduction.
Maintenance costs decreased primarily in two areas. The largest
decrease was in outside repairs and purchases of approximately $95,000.
This is partially due to one fewer aircraft and closer monitoring of
inventory levels. Also over the past fiscal year, the hot section
inspection liability accrual had been mistakenly overstated and was
trued-up during the annual audit.
Traffic expense experienced the lowest reduction of $73,865 or 5.6%. In
general these costs are fairly fixed. The two categories that saw the
largest change were liability insurance and traffic commissions. The
latter consists of travel agency commission and ticket-related handling
fees. This is attributable to two factors, fewer passengers carried in
FY 1997 and the implementation of a "ticket-by-phone" program.
The decrease in marketing expense of $16,711 or 34% was the largest
variation in fiscal year 1997. This was due primarily to elimination of
a manager position, which was part of a larger emergency cost reduction
program caused by reduced EAS funding commencing November 1995.
General and administrative expense also decreased in fiscal year 1997.
Despite an increase in professional and technical fees overall, due to
heavy business development activity, other accounts experienced
decreases. Legal expense showed the largest reduction of $26,000,
followed by director-related expenses and personnel-related costs.
Interest expense decreased $10,336 or 12.8%, while interest income
increased $5,799 or 18.7%. This is directly related to the increase in
cash during the year. The year ended with a net profit of $197,548.
Fiscal year 1997 results include $117,000 of charges in lieu of tax.
These charges are from "Fresh Start" accounting adopted in October 1991.
The notes to financial statements section located after this Form 10-KSB
provides further detail of "Fresh Start" reporting.
Liquidity and Capital Resources: A review of current liquidity for the
last two fiscal years is presented in the following chart:
Working Capital Current Ratio
Year-Ended June 30, 1996 661,13O 1.8:1
Year-Ended June 30, 1997 892,616 1.9:1
A review of the capital resources for the last two fiscal years is
presented below:
Long Term Debt
(excluding Stockholders'
current portion) Equity
Year-Ended June 30, 1996 684,132 775,401
Year-Ended June 30, 1997 539,144 1,071,604
The Company's balance sheet reflects cash and cash equivalents of
$544,706 at June 30, 1997. Total current assets, including cash, were
$1,845,331 compared to total current liabilities of $952,715,
resulting in working capital of $892,616 and current ratio of 1.9:1.
Cash provided by operating activities for the fiscal year ended June
30, 1997 was $352,476, compared to $62,907 at fiscal year-end 1996.
The DOT's reduction order effective November 27, 1995, as discussed
previously, detrimentally impacted the Company's cash position during
the period. The Company filed a claim in the amount of $149,504,
reflecting its estimate of the compensation shortfall through June 30,
1996. The claim was dismissed. Cash used by investing activities for
the fiscal 1997 was $18,167, consisting mainly the write-down to
market value of an asset held for sale. By comparison, fiscal 1996
investing provided cash of $36,624 from the sale of a spare engine.
Cash used by financing activities for the fiscal 1997 was $150,271 for
payments on long-term debt and capital lease obligations along with
$11,504 for payments to retire stock.
Operating leases include station office facilities, land and three
Metroliner II aircraft. Noncancelable operating lease commitments in
excess of one year totaled $958,741 at June 30, 1997.
Stockholders' equity was $1,071,604 at June 30, 1997, compared to
$775,401 at June 30, 1996. The increased equity from June 30, 1996 to
June 30, 1997 is the result of profitable operations. Total long-term
debt (including current installments) at June 30, 1997 was $683,457
(including capital lease obligations) compared to $822,224 at June 30,
1996. At June 30, 1997, the long-term financial commitments of the
Company were: 1) debt of $184,997 with the FAA (Federal Aviation
Administration) for the pre-reorganization purchase of a Metroliner II
aircraft; 2) debt of $69,475 to the unsecured creditors electing the
cash option; 3) bank debt of $141,967 for pre-reorganization working
capital/engine overhaul loans; 4) capital lease obligation of
$287,018 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.
In late October 1995, the House/Senate Conference Committee limited
funding of the Essential Air program. The DOT required reductions
program-wide, subject to certain recommendations including that all
points continue to be served despite the overall 30% reduction in
funding. Big Sky reduced the frequency of service to the EAS points
from 12 to 10 roundtrip flights per week. Then in October 1996, the
FAA Re-authorization Bill was approved, including a provision of
permanent fund of EAS starting in October 1998. Total funding
available under the new program is estimated at $50 million annually,
which has provided opportunities to restore the lost services,
effective October 1997. Big Sky is currently providing essential air
service under a DOT contract pursuant to Order 97-6-13, at an annual
rate of $3.2 million for the period December 1996 through September
1997 and $3.1 million for the period October 1997 through November
1998. This agreement subsequently was amended by Order 97-8-14
providing an annual rate of $4.8 million for enhanced services, for
the period October 1997 through November 1998. Big Sky has held the
Montana EAS contract continuously since mid-1980, has excellent
performance and safety records and enjoys strong community and state
support.
Big Sky's services are marketed via its own two letter code, both
online and interline as a part of multi-carrier travel. A code-share
affiliation would be ideal, however given the "noncompetitive" nature
of the market currently served, the absences of such agreement is not
believed to be of major significance. The principal competition is
primarily the automobile.
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.
ITEM 7. FINANCIAL STATEMENTS
The Company's complete audited financial statements for fiscal 1997
are appended to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCCOUNTANTS AND ACCOUNTING
DISCLOSURE
At its February 1997 regular meeting, the Board of Directors adopted
the recommendation of the Audit Committee to appoint Charles Bailly &
Company, P.L.L.P. (Charles Bailly) as the Company's certifying
accountants for the period-ended June 30, 1997. Charles Bailly is a
reputable public accounting firm, which is fully-capable of meeting
the Company's requirements.
Disclosure of the change in auditors was timely-filed on Form 8K and
fully discussed in the Proxy Statement preceding the April 16, 1997
Annual Meeting of Stockholders. At the Annual Meeting, the selection
of Charles Bailly was ratified.
Charles Bailly replaced KPMG Peat Marwick, LLP (Peat Marwick), which
had served as the Company's auditors since 1980. The dismissal of
Peat Marwick was not the result of any disagreement between the
Registrant and Peat Marwick or dissatisfaction with that firm's
services.
No disagreements exist between the Company and Charles Bailly &
Company with regard to financial disclosures for the current reporting
period.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Directors & Executive Officers: Directors of the Corporation are
elected annually by the stockholders. Executive officers are elected
annually by the Board and serve at its discretion. 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 director or to any other executive officer of the Corporation.
The directors and executive officers are listed below, along with the
following information: Name, Executive Offices Held With Big Sky
Transportation Co., Principal Occupation, Previous Employment, Outside
Directorships, Education & Stock Owned (including exercisable
options): (a), (b)
Jon Marchi, director & executive officer:
BigSky--Chairman of the Board & Treasurer, April 1996 to-date; Secretary
1991-1995; Outside Director since 1979;
Principal Business--Owner & President, Marchi Angus Ranches, Polson, MT,
1985 to-date; Director & Chairman, Glacier Venture Fund, The Montana
Small Business Investment Capital Company; Director & Chairman,
Development Corporation of Montana; Director & President, Montana
Private Capital Network; Director, Montana Community Finance
Corporation; Director, Montana Small Business Connections;
Previous Employment--D.A. Davidson & Co., Great Falls, MT (regional
investment company & securities dealer), 1972-1985;
Other--Director, College of Business Advisory Board, Montana State
University-Billings; Director, Montana Small Business Administration
Advisory Council; Director, Montana Ambassadors;
Education--B.S. Business & M.S. Finance, University of Montana;
Age--51; Stock--50,619 (c), % Class--4.8% (i).
Jack K. Daniels, director & executive officer:
BigSky--Vice-Chairman of the Board & Assistant Secretary, April 1995
to-date; Outside Director since 1990; Interim CEO since August 1997.
Principal Business--Owner/President, SerVair Accessories, Inc. (fixed
base aviation operator), Williston, ND, 1950 -1994 (retired);
Other--Former Chairman, North Dakota Aeronautics Commission (retired);
Former Treasurer, National Committee of Cities & States for Airline
Service--NCCSAS (retired);
Age--72; Stock--16,443 (d), % Class--1.6% (i).
Alan D. Nicholson, director:
BigSky--Outside Director since 1994;
Principal Business--Owner/President, Nicholson, Inc. (commercial real
estate development), Helena, MT;
Other--Member, Helena Area Chamber of Commerce; Member, Montana State
University Foundation Board; Member, President's Council, Carroll
College (Helena, MT), President, Montana Ambassadors;
Education--B.S. Mathematics & Physics, Montana State University; M.A.
Mathematics, Northwestern University;
Age--57; Stock--14,430 (e), % Class--1.4% (i).
Stephen D. Huntington, director & executive officer:
BigSky--Secretary 1996 to-date; Outside Director since 1994;
Principal Business--Principal, Northern Rockies Venture Fund, Butte, MT,
1990 to-date; Manager, Corporate Development & Finance, MSE, Inc.,
Butte, MT;
Other--Director, MSE-HKM, Inc., Director, MSE Technology Applications,
Inc., Director, Safe Shop Tools, Inc., 1997;
Previous Employment--State of Montana, 1982-1990.
Education--B.A. Political Science and Graduate Studies, Law & Public
Administration, University of Montana;
Age--41; Stock--3,667 (f); % Class 0.3% (i).
Craig Denney, director & executive officer:
BigSky--Executive Vice President, Division Manager & COO, December 1995
to-date; Vice President/Operations & COO, 1989-1995; Vice President/
Ground Services, Director/Ground Services, Director/Customer Service &
Station Manager, various periods 1978-1989. Director since 1995;
Previous Employment--Transportation Agent, Northwest Airlines, Inc.,
Great Falls & Butte, MT, 1974-1978;
Other--Member & Chairman, Air Carrier Advisory Committee, Billings Logan
International Airport; Member, Aviation Council, Department of Aviation,
Rocky Mountain College;
Education--A.A. Aviation Administration, Anoka Ramsey J. C., Coon
Rapids, MN;
Age--44; Stock--3,668 (g), % Class 0.3% (i).
Terry Marshall, executive officer:
BigSky--President, July 1997 to-date; President/CEO, 1980-June 1997;
Vice President/Planning, 1979-1980; Director/Market Planning, 1979;
Director, 1980-June 1997;
Previous Employment--Hughes AirCorp dba Hughes Airwest, San Francisco, CA
1972-1978; TAP, Inc. Economic & Aviation Consultants, Bozeman, MT,
1970-72; Ford Motor Company, Industrial Division, Birmingham, MI,
1969-1970;
Other--Past Board Member & Officer, Regional Airline Association; Past
Board Member, Montana Aeronautics Division;
Education--B.S. Economics & Business, Montana State University; M.S.
Economics, Oregon State University;
Age--52; Stock--17,974 (h), % Class--1.7% (i).
(a) The above-listed directors were duly elected at the 1997 Annual
Meeting of Stockholders. The Corporation's present executive officers
and Board leadership were elected in April and October 1996. Except
as indicated above, each director has held the outside positions shown
above, or other executive positions with the same business for the
past five years. Mr. Marshall resigned from the Board in June 1997.
He continues to serve as President of the Corporation.
(b) Shares shown reflect outstanding shares of 1996 Series Common
Stock beneficially owned, both directly and indirectly, as of June 30,
1997, as well as options exercisable within 60 days thereof, and any
options known to be exercised as of the report date.
Beneficial ownership shown represents sole voting and investment
power. 1996-97 service-related stock option awards are included for
outside directors, whether exercised or not. Note that options
exercisable may or may not be exercised.
(c) 50,619 shares owned. All options exercised.
(d) 10,433 shares owned. All options exercised.
(e) 10,443 shares owned. Options exercisable on 4,000 shares.
(f) No shares owned. Options exercisable on 3,667 shares.
(g) 118 shares owned. Options exercisable on 3,550 shares.
(h) 10,974 shares owned. Options exercisable on 7,000 shares.
(i) Includes shares owned and eligible options, as a percent of total
outstanding shares, shown to nearest tenth.
In addition to Messrs. Marshall and Denney, listed above, the Vice
President of Business Development (Mr. Johnson) also is considered to
be a "significant employee", expected to make a significant
contribution to the business.
The Corporation is continuing its search for qualified directors. The
Board may appoint one or more additional directors prior to the next
meeting of Stockholders.
ITEM 10. EXECUTIVE & BOARD COMPENSATION
Executive Compensation: Below is set forth compensation information for
the President/CEO (Mr. Marshall) in fiscal 1997, the sole "named
executive" of the Corporation, for which such reporting is required:
Long-Term Other
Annual Compensation $ Compensation-- Compensation--
Fiscal Year Salary (1) Bonus (2) Stock Options # (3) Non-Cash $ (4)
1997 74,196 0 0 7,200
1996 74,267 3,815 0 9,000
(1) Base compensation.
(2) Profit-based compensation program terminated December 1996. No
"other" compensation was paid.
(3) Stock options shown are post-recapitalization.
(4) Includes payment for insurance program @ $600 per month. Payment,
net of payroll and withholding taxes, funds disability insurance and
life insurance premiums. FY 1996 included minor compensation due to
additional duties as Chairman.
Board Compensation: At June 30, 1997, the Corporation had five
directors--four being "outside" (non-employee) directors and one being
an "inside" (employee) director. The Corporation is authorized to pay
each of its outside directors base compensation of $1,000 per year,
plus $300 for each regularly scheduled in-person Board meeting
attended and $150 for each tele-conference meeting attended.
Additionally, outside directors receive $75 per hour, up to a maximum
of $300 per day, for work on special projects. Board members are
reimbursed for out-of-pocket expenses required in the performance of
their duties and to attend Board meetings and committee meetings. The
Chairman also is paid fixed compensation of $1,000 per month.
Payments for outside directors' services during fiscal 1997 were
$59,036, as follows:
Item Payments $
Mtgs., Conf. & Special Projects (1) 39,070
Expense Reimbursement (2) 19,996
Total (3) 59,036
(1) Annual base compensation, individual meeting compensation and
monthly base compensation (applicable for Chairman only).
(2) Includes travel and per diem.
(3) Individual totals as follows: Marchi--$24,420, Nicholson--$5,675,
Huntington-- $5,425 and Daniels--$3,550. Expenses shown are exclusive
of legal, professional & other fees related to board matters.
The Corporation has an Outside Directors Stock Option Plan, granting
outside directors the option to purchase 2,000 shares of stock annually
at the conclusion of each year's service, at the market price on that
date. The option term is five years. Under this Plan, prior to 1997,
options had been granted to purchase 10,000 shares at $.9375 per share.
Options to purchase an additional 8,000 shares were granted under this
Plan in February 1997. (Note: above share price and share amounts are
post-recapitalization)
Compensation & Management Development: During FY 1997, the Board's
Committee on Compensation and Management Development was comprised of
Messrs. Marchi and Nicholson. The Committee is responsible to provide
an annual review of the President/CEO, recommend compensation and
incentive changes with regard to the President/CEO and generally to
offer guidance to the Board with regard to senior management
organization, performance incentives and development.
Base Salary: The President/CEO's base compensation in FY
1997 was unchanged from the prior two years.
Performance Bonus: Through December 1995, a performance
bonus program was maintained for the President/CEO, which
was based on financial performance (net system
profitability) and general Company performance (achievements
in seven specific goal areas). A similar program was
in-place for the Vice President of Operations & Service.
All profit-based performance systems for senior management
were eliminated in December 1995.
Stock Options--President/CEO: No options were granted to
the President/CEO in FY 1996 or FY 1997.
Team Incentive: In January 1996, the Board implemented a
Plan placing total bonus emphasis on achievement of new
business development objectives, specifically tied to the
increase in system revenues. The Plan was described in the
proxy statement for the April 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-recapitalization stock options.
Results will be measured on the basis of annualized system
revenues (based on December 1997 results multiplied by
twelve), compared with actual system revenues in CY 1996.
Other Stock Options: In June 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 $.3125 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. In May
1993, the 1983 Plan expired.
In September 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 per share, the closing
market price on that date. The 1986 Plan terminated May 1996.
At the 1995 Annual Meeting of Stockholders, a compensation plan was
approved which provided each outside (non-employee) director with
options to purchase 10,000 shares (2,000 shares post-recapitalization)
for each year of service completed. In February 1995, 1996 and 1997
awards were made to the four outside directors under this Plan.
The table below summarizes options to purchase shares, which have been
issued to existing board members and executive officers under its
stock option plans and were outstanding and exercisable, but not
exercised as of September 1997 (post-recapitalization basis):
Stock Options
Officer/Director Grant Outstanding-- Option
& Option Plan Date Shares # Price $
Craig Denney:
1986 QSOP 9/93 2,250 1.2500
1986 QSOP 1/95 1,200 .9375
Terry Marshall:
1986 QSOP 9/93 6,000 1.2500
1986 QSOP 1/95 5,000 .9375
Alan D. Nicholson:
1995 DSOP 6/95 2,000 .6250
1995 DSOP 2/96 2,000 .9375
1995 DSOP 2/97 2,000 1.2500
Stephen D. Huntington:
1995 DSOP 6/95 1,667 .6250
1995 DSOP 2/96 2,000 .9375
1995 DSOP 2/97 2,000 1.2500
Notes: No other uncontingent options are outstanding to
officers and directors. In 1995 and 1996, the Board
reserved additional stock options solely for new business
development incentive purposes for principal management;
however, issuance is contingent on attainment of specific
objectives and/or further Board approvals, pursuant to the
following approved plans: (1) Team Incentive Plan--60,000
shares @ $1.0875 and (2) 1995 Special Stock Option
Plan--6,000 shares @ $.6250 & 4,000 shares @ $.7500 (shares
and prices are post-recapitalization)
Current market bid/asked prices are $1.125/$1.25 per share.
QSOP = Qualified Stock Option Plan, DSOP = Director Stock
Option Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
& MANAGEMENT
The following table provides information, as of June 30, 1997, 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:
Beneficial Owner Shares # % Class
Derby West Corp., LLC, Sheridan, WY (a) 326,978 31.0
H. V. Holeman, Las Vegas, NV (b) 107,026 10.1
All Officers & Directors (c) 106,801 10.1
(a) In February 1988 (pre-recap.), the Corporation sold 500,000
shares of 10% convertible preferred stock for $1.00 per share to Derby
West Corporation, a Delaware corporation, having Peter M. Kennedy as
its only stockholder. Prior to reorganization, an additional 43,348
shares of preferred stock were issued to Derby West in lieu of
required quarterly cash dividends. Pursuant to the preferred stock
agreement, each share of preferred stock was convertible into three
shares of. Upon Plan confirmation, all preferred stock held by Derby
West was converted to at the ratio of one share preferred stock for
three shares of common stock. As a result, Derby West received
1,662,645 (pre-recap) shares of common stock in exchange for its
preferred stock. Following this conversion, no shares of the
Corporation's preferred stock were outstanding. During the 1996
Recapitalization (5:1 reverse stock split), Derby West's holdings were
converted to 326,978 shares of 1996 Series Common Stock.
(b) H. V. Holeman is a retired director of the Corporation. Prior to
dissolution of Great Plains Transportation Company in January of 1995
(pre-recap), Mr. Holeman owned 51% of the stock of that company and
was a director of that company.
(c) Represents 1996 Series Common Stock owned, as well as options
exercisable, by all officers and directors as a group. At the end of
fiscal 1997, there were six individuals who were serving either as
officers or directors, or both.
(d) Percent stock owned and options are of total 1996 Series Common
Stock outstanding. Note that all options granted may not be
exercised.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 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 six year
option to extend and provides the Company four separate purchase
options. Total payments under these leases, for the years-ended June
30, 1997 and 1996 were $42,331 and $41,840, respectively.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
13(a) Exhibits: (referenced by type)
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 order 97-6-13 authorizes essential air service to the seven
Montana points through September 1998 at an annual rate of $3,247,000
for the period December 1996 through September 1997 and $3,085,000 for
the period October 1997 through November 1998. Order 97-8-14 amended
Order 97-6-13, authorizing an increase to 12 roundtrip flights weekly
per city, operated with newer Metro III aircraft during the period
October 1997 through November 1998 at the rate $4,793,361.
(b) 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.
(c) 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.
13(b): Reports on Form 8-K
On June 27, 1997, a report on Form 8-K was filed (item #5), advising
that Mr. Marshall had resigned from the Board for personal reasons. He
also asked to step down as President & CEO prior to June 30, 1998, and
sooner if possible. Mr. Marshall will continue as President through
December 31, 1997. Mr. Daniels will serve as interim CEO, until the
search for a new CEO is completed.
<PAGE>
Signatures:
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
BIG SKY TRANSPORTATION CO
dba BIG SKY AIRLINES
/s/ Jack K. Daniels
Jack K. Daniels
Director, Vice Chairman
& Assistant Secretary
(interim chief executive officer) September 25, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf by the registrant and in the
capacities and on the dates indicated:
/s/ Jon Marchi
Jon Marchi
Director, Chairman
& Treasurer September 25, 1997
/s/ Craig Denney
Craig Denney
Director, Executive VP,
Division Manager & C.O.O.
(chief operating officer) September 25, 1997
/s/ Stephen D. Huntington
Stephen D. Huntington
Director & Secretary September 25, 1997
/s/ Alan D. Nicholson
Alan D. Nicholson
Director September 25, 1997
/s/ Terry Marshall
Terry Marshall
President September 25, 1997
<PAGE>
BIG SKY TRANSPORTATION CO.
Financial Statements
June 30, 1997 and 1996
<PAGE>
Charles Bailly & Company, P.L.L.P.
Certified Public Accountants- Consultants
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Big Sky Transportation Co.
Billings, Montana
We have audited the accompanying balance sheet of Big Sky Transportation
Co. as of June 30, 1997 and the related statements of operations,
stockholders' equity and cash flows for the year then ended. 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 audit. The financial statements of Big Sky
Transportation Co. for the year ended June 30, 1996 were audited by
other auditors whose report, dated August 23, 1996, on those financial
statements included an explanatory paragraph that described the
Company's Essential Air Services (EAS) contract discussed in Note 7 to
the financial statements.
We conducted our audit 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 misstatement. 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 audit provides a reasonable basis for our opinion.
Substantially all of the Company's revenues for the year ended June 30,
1997 were 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 on
November 30, 1998.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Big Sky
Transportation Co. as of June 30, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Charles Bailly & Company
Billings, Montana
August 20, 1997
<PAGE>
KPMG Peat Marwick LLP
Certified Public Accountants
Telefax (406) 245-9738
P.O.BOX 7108
401 N 31st Ste 1000
Billings Montana 59103
Independent Auditors' Report
The Board of Directors and Stockholders
Big Sky Transportation Co.
We have audited the accompanying balance sheet of Big Sky Transportation Co.
as of June 30, 1996, and the related statements of earnings, stockholders'
equity and cash flows for the year then ended. 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 resonable 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.
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, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
s/s Peat Marwick LLP
Billings Montana
August 23, 1996
<PAGE>
BIG SKY TRANSPORTATION CO.
BALANCE SHEETS
JUNE 30, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS
Cash and cash equivalents $544,706 $360,668
Restricted cash - Note 2 600,151 426,769
Accounts receivable, less allowance
for doubtful receivables of $1,200
in 1997 and 1996 416,192 447,793
Expendable parts and supplies 254,282 236,128
Inventory held for sale 30,000 41,604
Total current assets 1,845,331 1,512,962
OTHER ASSETS
Excess reorganization value, net of
accumulated amortization of
$29,692 and $29,692 and
pre-confirmation tax benefits
utilized of $188,308 and $181,467
at June 30, 1997 and 1996,
respectively - 6,841
Deposits 17,258 17,258
Subtotal 17,258 24,099
PROPERTY AND EQUIPMENT
Flight equipment 612,108 609,022
Facility under capital lease - Note 8 456,185 456,185
Other property and equipment 187,497 175,110
1,255,790 1,240,317
Less accumulated depreciation and
amortization (554,916) (466,013)
700,874 774,304
$ 2,563,463 2,311,365
See notes to financial statements.
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES
Current maturities of long-term debt - Note 5 $132,674 $122,057
Current maturities of capital lease obligations
Note 8 11,639 16,035
Accounts payable 64,213 121,687
Accrued expenses - Note 3 676,084 551,958
Traffic balances payable and unused tickets 43,155 40,095
Income taxes 24,950 -
Total current liabilities 952,715 851,832
LONG-TERM DEBT, less current maturities -Note 5 263,765 397,110
CAPITAL LEASE OBLIGATIONS - Note 8 275,379 287,022
COMMITMENTS AND CONTINGENCIES -
Notes 2, 7, 8, 11 and 12
STOCKHOLDERS' EQUITY - Notes 10 and 13
Common stock, no par value
Authorized, 20,000,000 shares
Issued and outstanding, 1,054,900 shares
1997 and 1,065,460 shares 1996 471,207 482,711
Additional paid-in capital 110,159 -
Retained earnings 490,238 292,690
1,071,604 775,401
$ 2,563,463 2,311,365
See notes to financial statments
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
OPERATING REVENUE
Passenger $1,580,581 $1,704,430
Cargo 100,057 104,217
Public service - Note 7 3,122,861 3,206,258
Other 67,336 41,002
Total operating revenue 4,870,835 5,055,907
OPERATING EXPENSES
Flying operations 1,579,716 1,825,277
Maintenance 1,073,832 1,214,150
Traffic 1,239,305 1,313,170
Marketing 32,400 49,111
General and administrative 558,432 620,401
Total operating expenses 4,483,685 5,022,109
INCOME FROM OPERATIONS 387,150 33,798
OTHER INCOME (EXPENSE)
Interest expense (70,627) (80,963)
Interest income 36,770 30,971
Gain (loss) on equipment disposal
and writedown of inventory (13,745) 21,891
INCOME BEFORE INCOME TAXES 339,548 5,697
INCOME TAXES - Note 6 142,000 2,200
NET INCOME $ 197,548 $ 3,497
EARNINGS PER COMMON SHARE $ .19 $ .00
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES - Note 13 1,060,180 1,061,796
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997 AND 1996
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings Total
BALANCE, 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
Effect of reverse stock
split and stock
dividend - Note 13 (4,261,854) (50,020) 50,020 - -
BALANCE, JUNE 30, 1996 1,065,460 482,711 - 292,690 775,401
Net income - - - 197,548 197,548
Retirement of common stock(10,560) (11,504) - - (11,504)
Tax benefit from pre-Fresh
Start deferred tax assets - - 110,159 - 110,159
BALANCE, JUNE 30, 1997 1,054,900 $471,207 $110,159 $490,238 $1,071,604
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997 AND 1996
1997 1996
OPERATING ACTIVITIES
Net income $197,548 $ 3,497
Charges and credits to net income not affecting cash
Depreciation and amortization 89,456 106,324
(Gain) loss on disposal of equipment 2,141 (21,891)
Excess reorganization value charges in lieu of taxes 6,841 3,267
Pre-Fresh Start deferred tax benefits 110,159 -
Changes in assets and liabilities
Restricted cash (173,382) (57,760)
Accounts receivable 31,601 10,143
Expendable parts and supplies (18,154) 5,816
Inventory held for sale 11,604 (41,604)
Prepaid expenses - 4,985
Deposits - 9,500
Accounts payable (57,474) 41,440
Accrued expenses 124,126 (10,525)
Traffic balances payable and unused tickets 3,060 9,715
Income taxes 24,950 -
NET CASH FROM OPERATING ACTIVITIES 352,476 62,907
INVESTING ACTIVITIES
Proceeds from sale of equipment 4,359 61,121
Property and equipment purchases (22,526) (24,497)
NET CASH FROM (USED FOR) INVESTING
ACTIVITIES (18,167) 36,624
FINANCING ACTIVITIES
Proceeds from exercise of stock options - 3,750
Payments on long-term debt (122,728) (136,664)
Payments on capital lease obligations (16,039) (14,406)
Payments to retire common stock (11,504) -
NET CASH USED FOR FINANCING ACTIVITIES (150,271) (147,320)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 184,038 (47,789)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR 360,668 408,457
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 544,706 $ 360,668
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
1. BUSINESS ACTIVITY, SIGNIFICANT ACCOUNTING POLICIES AND USE OF
ESTIMATES
Business Activity
The Company operates as a small regional commuter air carrier,
primarily providing scheduled passenger, freight, express package
and charter services. At June 30, 1997, 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 Services (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.
Concentrations of Credit Risk
The Company's cash balances are maintained at various financial
institutions. At June 30, 1997, the total balance at one of
these institutions was in excess of federal insurance limits by
approximately $500,000.
Property and Equipment
Property and equipment is stated at cost. Depreciation and
amortization are computed using the straight-line and declining-
balance methods over estimated useful lives ranging from 2 to 20
years.
Maintenance Policies
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.
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.
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.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents. Cash
equivalents exclude restricted cash.
Statement of Cash Flows
The Company paid interest of $72,681 and $83,142 for the years
ended June 30, 1997 and 1996, respectively.
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. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled. 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.
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"
- Note 6.
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.
Stock-Based Compensation
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 has
not adopted the fair value based method of accounting.
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 $506,531 and $331,170 at June 30, 1997 and 1996,
respectively.
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, 1997 and 1996, restricted cash included
undistributed liquidation proceeds of $13,620 and $13,252,
respectively.
At June 30, 1997 and 1996, 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.
3. ACCRUED EXPENSES
1997 1996
Leased engine overhauls $390,700 $214,814
Engine hot-end inspections 110,000 144,880
Vacation 86,111 96,068
Payroll and payroll taxes 40,631 48,449
Property taxes 39,982 37,033
Interest 8,660 10,714
$ 676,084 $ 551,958
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 process to phase-in the
new rules, being completed in conjunction with the local FAA
staff, began in December 1996 and was completed in March 1997.
5. LONG-TERM DEBT
1997 1996
9.5% installment note, due in monthly
payments of $4,495, including interest,
through August 2001, secured by accounts
receivable $184,997 $219,923
7% installment note due in 72 equal
monthly payments of $6,775, including
interest, commencing August 1993 through
July 1999, secured by inventory, accounts
receivable and equipment 141,967 210,688
Reorganization claims discounted at
10%, due in annual payments of
$27,937, including interest,
through September 1999 69,475 88,556
396,439 519,167
Less current maturities (132,674) (122,057)
$ 263,765 $ 397,110
The Company had a $95,000 line of credit which matured May 1997,
secured by aircraft. There were no amounts outstanding on the
line of credit as of June 30, 1997 and 1996.
On August 11, 1997 the Company obtained a $600,000 line of
credit which matures April 1998, and is secured by inventories
and accounts receivable. Advances will bear interest at prime
plus 1.5%.
Long-term debt maturities are as follows:
Years Ending June 30, Amount
1998 $132,674
1999 133,133
2000 71,308
2001 50,469
2002 8,855
$ 396,439
6. INCOME TAXES
Income tax expense from operations consists of the following:
1997 1996
Current
Federal $ - $ -
State 25,000 (1,067)
25,000 (1,067)
Deferred
Federal - charge in lieu of taxes 117,000 2,867
State - 400
117,000 3,267
$ 142,000 $ 2,200
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:
1997 1996
Computed "expected" tax expense $ 106,800 $ 1,937
State income taxes
(net of Federal income tax effect) 25,000 (440)
Other non-deductible expenses 10,200 703
$ 142,000 $ 2,200
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:
1997 1996
Deferred tax assets
Accounts receivable, due to allowance for
doubtful accounts $ 463 $ 463
Property and equipment, due to differences in
depreciation 13,643 35,085
Accrued overhauls and hot-end inspections 193,370 138,914
Compensated absences 33,256 37,101
Net operating loss carryforwards 496,335 629,923
Investment tax credit carryforwards 35,200 43,200
AMT credit carryforwards 7,427 7,427
Total gross deferred tax assets 779,694 892,113
Less valuation allowance (766,586) (867,769)
Net deferred tax assets 13,108 24,344
Deferred tax liabilities
Property and equipment, due to
Fresh-Start adjustments (13,108) (24,344)
Net deferred tax liability/asset $ - $ -
In assessing the necessity for a valuation allowance 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
1998 $ - $ 5,700
1999 - 7,900
2000 - 1,200
2001 - 20,400
2003 - -
2004 1,137,000 -
2005 148,000 -
2006 58,000 -
2009 111,000 -
2011 6,000 -
$ 1,460,000 $ 35,200
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 stockholder 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, 1997 which are subsequently realized would
be allocated as follows:
Excess reorganization value $ -
Additional paid-in capital 754,213
$ 754,213
7. ROUTES AND SUBSIDIES
The Department of Transportation (DOT) subsidizes a majority of
routes flown by the Company under the federal EAS program. The
DOT issues an order which specifies an annual subsidy rate
covering a specified contract period. This annual rate is based
on seats available and departures flown and as such, the actual
subsidy received is subject to actual flights completed within
specified limits. EAS subsidy revenue for the fiscal years ended
June 30, 1997 and 1996 was $3,122,861 and $3,206,258,
respectively (See Note 11). These subsidy amounts represent 64%
and 63% of all revenues for fiscal years ended June 30, 1997 and
1996, respectively.
The Company's current EAS contract expires in November 1998.
Failure to secure renewal of future EAS contracts at the
requested funding level could have a material adverse affect on
the Company. The Company has implemented significant growth and
diversification strategies through the finalization of an
enhanced EAS contract and through service of new routes in
western Montana, to reduce the reliance on revenues from EAS
subsidies. There can be no assurance, however, that such
strategies or specific opportunities will substantially reduce
the reliance on EAS subsidies. The financial statements do not
reflect any adjustments that may result from an unfavorable
resolution of any future contracts.
8. LEASES
Operating Leases
As of June 30, 1997, the Company leased office facilities, land
and three Metroliner II (fifteen passenger) aircraft.
The following is a schedule of future minimum rental payments for
the operating leases which have initial or remaining
noncancelable lease terms in excess of one year as of June 30,
1997:
Years Ending June 30,
1998 $ 210,608
1999 140,424
2000 140,752
2001 141,092
2002 141,442
Thereafter 184,423
$ 958,741
Rental expense under operating leases charged to operations was
$598,115 and $705,890 for the years ended June 30, 1997 and 1996,
respectively.
In August 1997, the Company entered into agreements to lease six
Metroliner III aircraft beginning October 1, 1997. Future
minimum rental payments will be approximately $1,050,000 per year
through June 30, 1999 and $900,000 from 1999 to June 30, 2002.
The aircraft are to be used to provide service under the
Company's enhanced EAS contract and new routes in western
Montana.
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
amount based 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 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 with an original
capitalized cost of $456,185. 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, 1997 are as follows:
Years Ending June 30,
1998 $35,520
1999 31,260
2000 274,778
Total minimum lease payments 341,558
Less interest (54,540)
Present value of minimum lease payments 287,018
Less current maturities (11,639)
Obligations under capital leases,
excluding current maturities $ 275,379
Minimum lease payments have not been reduced by minimum sublease
rentals of $33,550 due to June 1998 under noncancelable
subleases.
The carrying value of the facility under capital leases net of
accumulated amortization was $391,834 and $415,234 at June 30,
1997 and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
In March 1994, the Company leased land, a hangar 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, 1997 and 1996 were $42,448 and
$41,840, respectively.
10. STOCK OPTIONS
The Company adopted a stock option plan in May 1983 for key
employees under which 8,000 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
8,000 shares are reserved for issuance. The provisions of the
1986 plan are similar to those for the 1983 plan. The Company
adopted a stock option plan in February 1995 for outside
directors under which an additional 20,000 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 1983, 1986 and Director Plan
options all terminate five years from the date of grant. The
ability to issue options for the remaining shares available
under the May 1983 and May 1986 plans has expired. There are
8,333 shares available for grant under the Director Plan at June
30, 1997.
Changes in stock options issued under these fixed stock option
plans are as follows:
1997 1996
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
Outstanding, beginning
of fiscal year 50,043 $ 1.25 55,434 $ 1.29
Granted 9,667 1.13 8,400 .98
Exercised - - (4,000) .78
Canceled (21,498) 1.56 (9,791) 1.45
Outstanding, end of
fiscal year 38,212 $ 1.04 50,043 $ 1.25
Range of exercise prices $.63 to 1.25 $.63 to 1.56
Options exercisable,
end of fiscal year 31,126 38,321
Summarized information about fixed stock options at June 30, 1997
is as follows:
Options Outstanding Options Exercisable
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Outstanding Contractual Average Exercisable Average
at 6/30/97 Life Exercise Price at 6/30/97 Exercise Price
Exercise Price
$ .63 6,000 2.7 years $ .63 6,000 $ .63
.94 9,000 3.0 .94 6,500 .94
1.09 2,400 3.5 1.09 600 1.09
1.13 9,667 4.5 1.13 9,667 1.13
1.25 11,145 1.2 1.25 8,359 1.25
$.63 to 1.25 38,212 2.8 years 1.04 31,126 1.02
The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost
has been recognized for the options granted in 1997. Had
compensation cost been determined consistent with the method of
FASB Statement No. 123, the fair value of the options estimated
on the date of grant would have been $4,000. Accordingly, the
Company's 1997 net income and earnings per share would have been
reduced to proforma amounts of $193,548 and $.18, respectively.
The fair value of the options on the date of grant is estimated
using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 25%, risk free interest
rate of 5.85%, expected lives of 4.5 years and no expected
dividends.
In fiscal 1996, the Company granted performance based stock
options to one employee ("Special Stock Option Plan"). Under
the Plan, options were issued for 6,000 shares at an exercise
price of $0.625 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 $0.75 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. None of the options under the Special Stock Option
Plan have been granted as of June 30, 1997 and, accordingly,
there was no expense recorded for the Special Stock Option Plan
during the years ended June 30, 1997 and 1996.
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. None of
the options under the 1996 plan have been granted as of June 30,
1997.
In July 1996, the stockholders also approved the 1996 Stock
Bonus Plan ("Bonus Plan") to provide for awards for three
members of a business development management 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 individual 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. None of
the components of the Bonus Plan have been paid or granted as
of June 30, 1997 and, accordingly, there was no expense recorded
for the Bonus Plan during the years ended June 30, 1997 and
1996.
11. BUSINESS AND CREDIT CONCENTRATIONS
At June 30, 1997, 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 fiscal year 1997 has been fixed at $25.9 million,
up $3 million from fiscal year 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 Survival 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.
Accounts receivable from the DOT was $268,895 and $284,031, or
25% and 37% of total stockholders' equity at June 30, 1997 and
1996, 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
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. PLAN OF RECAPITALIZATION
On July 18, 1996, a Plan of Recapitalization was approved by
Company stockholders. The Plan of Recapitalization provided
that effective August 23, 1996 the Company affected a 300-for-1
reverse split of the Company's existing stock followed by a 59-
for-1 stock dividend. New stock with no par value was issued
in exchange for existing stock with a par value of $.10 then
issued and outstanding. The Plan of Recapitalization has been
fully implemented. All applicable share and per share data have
been retroactively adjusted for the resulting approximately one-
for-five stock split.
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