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, 1998
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:
1996 Series 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: $7,911,590
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: $1,917,070
(958,535 shares held by all shareholders excluding officers and
directors identified in Item 11, below, @ $2.00 per share, based
on latest sale September 17, 1998).
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 1,127,637 (June 30, 1998)
<PAGE>
Index
Form 10KSB
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 or 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 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
(edgar submission as exhibit type 99 at end of this filing)
Independent Auditors' Report
Balance Sheets as of June 30, 1998 and 1997
Statements of Earnings for the years-ended June 30, 1998 and 1997
Statements of Cash Flows for the years-ended June 30, 1998 and 1997
Statements of Stockholders' Equity for the years-ended June 30, 1998 and 1997
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 was successful in a Chapter 11 Reorganization filed in
March 1989. Its Plan was confirmed in July 1991 and the case
closed in June 1992, and is in full compliance.
Routes & Services: The Company's present route system is designed
around an air service hub in 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 communities in Central/Eastern Montana are performed under
contract with the U.S. Department of Transportation's (DOT)
Essential Air Service (EAS) program. The EAS program subsidizes air
carriers to provide air service to designated rural communities
throughout the country that could not otherwise economically
justify that service on the basis of its passenger traffic.
Approximately fifty-eight percent of the Company's current revenues
are derived from the EAS markets and their public subsidy. In
addition, the Company provides non-subsidized service between
Billings, MT and Helena, MT, Great Falls, MT, Kalispell, MT,
Missoula, MT, and Spokane, WA. The Company operates daily
scheduled flights, which provide well-timed interline and online
connecting services, as well as convenient local market services.
The Company markets its services under its own two-letter code, GQ,
and its flights are displayed in all of the major computerized
reservations systems (CRS) utilized by travel agents and airlines.
Approximately sixty percent of the Company's passengers are
ticketed through travel agencies.
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
Helena & Missoula, Montana... Oct 1997
Kalispell, Montana... May 1998
Spokane, Washington... Jun 1998
Fleet Transition: Early in fiscal 1998 a business plan was
developed to capitalize on opportunities to serve Helena and
Missoula MT from Billings, after Horizon Air announced that it was
terminating service in those markets. The plan centered on the
return of three older model fifteen-passenger Metro II aircraft to
their lessors, the sale of the last of the Company's owned
nine-passenger Cessna 402 aircraft, and replacing them with six
newer model nineteen-passenger Metro III aircraft. The transition
to the Metro III fleet was completed during the first quarter, and
the Metro II lease returns were accomplished in the second quarter.
The fleet transition formed the foundation for the growth that
occurred during the year.
Government Services: Since mid-1980, the Company has been a
continuous contract-holder under the DOT's 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 was obligated to maintain
essential air services to designated communities, including those
presently served by the Company, through 1998. In October 1996, the
Rural Air Service Survival Act was approved by Congress, which
extended the Program indefinitely and provided the first permanent
funding source for EAS commencing October 1997. Total annual
funding available under the new program is $50 million.
See further discussion in item 6.
FY 1998 Market Expansion: In October 1997, the Company began
service to Helena and Missoula, MT with three daily round trips
operating on a Billings-Helena-Missoula routing. The service began
after Horizon Air terminated its services in those markets. In May
1998, the Company began service to Kalispell MT with two daily
round trips from Billings, operated via Helena. At the same time
two daily non-stop round trips were initiated between Billings and
Missoula MT, replacing two daily one-stop round trips. In June
1998, the Company began service to Spokane, WA with two daily round
trips operating on a Billings-Great Falls-Spokane routing. This
service began after Horizon Air terminated service in those city
pairs. All markets currently served by the Company do not have any
competitive scheduled air service.
Development Plans: The Company's current EAS contract extends
through November 30, 1998. On September 14, 1998 the DOT issued an
order finding that the Company has been tentatively reselected to
provide EAS service to the seven Montana communities for the
two-year period beginning December 1, 1998 at an annual subsidy
rate of $4.7 million. The order provides for a 20-day period for
interested parties to show cause why the DOT's tentative order
should not be made final. The order further provides that any
carrier interested in filing a competing proposal should do so
within the 20-day period set for objections. As of this date the
Company is not aware of any objections or competing proposals
having been filed with the DOT. The order also provides for a
change in services whereby one daily Sidney MT-Billings round trip
could be replaced with one Sidney-Bismarck, ND round trip, at the
Company's discretion. Should the tentative selection order become
final, the Company intends to begin the Bismarck service on
December 1, 1998. It's near-term business plan, as well as its Plan
of Reorganization include continued operation as an EAS contract
carrier. However, the Company is pursuing a growth and
diversification strategy, as demonstrated by the initiation of
non-subsidized services to Helena, MT, Kalispell, MT, Missoula, MT,
and Spokane, WA, over the past year. In October 1998, the Company
intends to begin once daily round trip service on a
Missoula-Kalispell-Spokane routing. The Company's revenues derived
from non-subsidized services is currently 42%, compared to 26% for
all of fiscal 1998, and 10% in fiscal 1997. The Company is also in
the process of acquiring a seventh Metro III aircraft to provide
the new service and to improve service patterns to Western MT. See
further discussion in Item 6.
Fuel: The availability of adequate jet fuel 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 103 total
personnel, some of whom are part-time. The Company's pilots are
represented by the United Transport Union, (UTU), which merged with
the Big Sky Pilots' Association (BSPA). The transfer of
certification to the UTU was ordered in a finding issued by the
National Mediation Board on June 24, 1998. The Company's mechanics
are represented by the International Association of Machinists &
Aerospace Workers Union (IAM).
Insurance: The Company maintains insurance coverage customary in
the airline industry, with policy limits that it believes to be
adequate. Coverage includes public liability, passenger liability,
aircraft equipment loss or damage, baggage and cargo liability and
workers' compensation.
Competition: The Company provides service to seven communities in
Eastern and Central MT under the EAS contract. The Company also
serves four points in Western Montana and Spokane WA that generate
significantly greater passenger traffic than the EAS markets. Most
of the new services described above were initiated after the
termination of service by Horizon Air in those markets. The
principal competition in all of the Company's markets is surface
transportation, primarily the automobile. The principal competition
for freight and small package service are the national franchise
services provided in the region by United Parcel Service, Federal
Express and Airborne. U.S. Postal Service products in the region
are primarily contracted to 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 six Fairchild Metroliner III (-11UA) turboprop aircraft.
Five of the six aircraft incorporate a 16,000 pound gross take-off
weight (HGW) modification and one aircraft has the standard 14,500
pound gross take-off weight. All of the aircraft were acquired
through operating leases. The aircraft operated are appropriate for
market demands on the Company's route system.
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-night 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. At Helena, Kalispell, Missoula
and Spokane, it contracts ground services from Horizon Air.
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
There are no legal proceedings currently outstanding in which the
Company is involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year-ended June 30, 1998, there were no special meetings
or votes of the stockholders. The Proxy Statement for the January
1998 Annual Meeting of Stockholders, filed on December 2, 1997 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 and low sales
prices of the Company's common stock by quarter during fiscal years
1997 and 1998. Bid prices represent quotations between dealers and
do not include retail markups, markdowns or commissions, and may
not represent actual transactions. Data for fiscal years 1997 and
1998 reflect effect of the 5:1 reverse stock split effective in August 1996:
Fiscal Year 1997
Quarter-Ended High ($) Low ($)
09/30/96 1.2500 Aug. -
12/31/96 1.3125 Dec. 1.0625 Oct.
03/31/97 1.1250 Feb/Mar. 1.1250 Feb/Mar.
06/30/97 1.1562 Apr/May/Jun. 1.1259 Apr/May
Fiscal Year 1998
Quarter-Ended High ($) Low ($)
09/30/97 1.1562 Aug. 1.1250 Aug/Sep.
12/31/97 1.1875 Dec. 1.1250 Oct/Nov.
03/31/98 1.5000 Mar. 1.2500 Feb.
06/30/98 2.1875 Jun. 1.6250 Apr.
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 1,117
holders-of-record of its 1996 Series Common Stock as of June 30,
1998. The Company's Chapter 11 Plan of Reorganization places a
restriction on payment of dividends. No dividends were issued in
either FY 1997 or FY 1998. Payment of cash dividends on the
Company's common stock is not anticipated in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
During the first quarter of fiscal year 1998, ended September
30,1997, the Company operations consisted of services to its EAS
markets under a contract that was negotiated at reduced service
levels that were ordered by the DOT in November 1995, and
non-subsidized service between Billings and Great Falls. Operations
were conducted with three 15-passenger Metro II aircraft. The
Company sold the last of its owned Cessna 402 aircraft in July 1997.
Due to the funding changes to the EAS program provided for in the
Rural Air Services Survival Act, the Company renegotiated the terms
of its EAS contract effective October 1, 1997. The new contract
restored service levels to those provided prior to November 1995,
and provided for an upgrade of equipment to the later model
19-passenger Metro III aircraft. On October 11, 1997 the Company
initiated non-subsidized service between Billings and Helena and
Missoula, after the termination of service in those markets by
Horizon Air. Further expansion into Western MT occurred in May 1998
with the addition of service to Kalispell twice daily via Helena.
There was no direct air service between Billings and Kalispell
prior to this service. At the same time, two of the
Billings-Missoula one-stop trips were upgraded to non-stop service.
The Billings-Missoula market is the largest local passenger market
in Montana. On June 14, 1998 the Company initiated twice daily
service between Billings and Spokane WA via Great Falls, following
the termination of service in those markets by Horizon Air. The
Kalispell and Spokane services were added to the route system
without any additional aircraft, which increased the fleet
utilization substantially. Passenger traffic and revenues in all of
the new markets meet or exceed the levels that were forecast. The
financial impact of the Kalispell and Spokane services in fiscal
year 1998 is minimal however due to the start up occurring late in the year.
The Company is in the process of negotiating the purchase of its
seventh Metro III aircraft. The aircraft is undergoing modification
to the 16,000 pound gross take-off weight. The Company is also in
the process of negotiating a loan for 100% of the purchase price of
the aircraft. This aircraft will be used to provide early morning
service on a Kalispell-Great Falls- Billings routing and to
initiate once daily round-trip service on a Missoula-Kalispell-Spokane
routing. The aircraft will also be available as an operational spare
during key times of the day.
The Company has established a line of credit for $600,000 through
First Interstate Bank of Billings. As of this date the Company has
not made any draws against the line of credit. The Company secured
a $150,000 advance on subsidy payments to supplement cash flow
during start-up of enhanced EAS services. As of this date $125,000
of the advance has been repaid.
The following table sets forth certain statistics relating to the
operations of the Company during the recent two years:
Year-Ended 6/30
1998 1997
Passengers 43,145 25,075
Revenue Passenger Miles--RPMs (000) 9,163 4,934
Available Seat Miles--ASMs (000) 29,637 15,107
ASMs including Charter (000) 29,651 15,119
Average Passenger Load Factor (%) 30.9 32.6
Aircraft Miles (000) 1,620 1,030
Average Yield per Passenger Mile (cents) 37.02 31.83
Operating Cost Per ASM (cents) 26.11 32.24
Freight Pounds 181,592 81,054
Operating Breakeven,including Subsidy (%) 30.2 30.0
Fleet:
Metro III 6 0
Metro II 0 3
Cessna 402C 0 1
Total 6 4
Cities Served 13 9
1998 Compared to 1997: Fiscal year 1998 was a year of transition
for the Company, which had an impact on its financial performance.
Operating income was $173,866 compared to $387,150 in fiscal 1997.
Three major non-recurring events were the primary reason for the
decline in operating results. First, the cost of transitioning the
fleet from Metro II to Metro III aircraft increased operating
expense by approximately $120,000. This additional cost related to
the lease returns of the Metro II aircraft to their lessors, and
flight crew differences training. Second, start up expenses
associated with the expansion of services in Western Montana and
Spokane throughout the year increased expense by approximately
$110,000. The start-up expense was primarily related to the hiring
and training of additional flight crews. The Company believes that
these investments were crucial to establishing a sound operating
base for the growth that occurred late in the fiscal year, and is
planned for in the near term. The third item related to awards made
to three members of a business development management team under
the Team Incentive Compensation Plan approved by the stockholders
in July 1996. An expense of $106,875 was paid and recorded during
the year in recognition of the attainment of specific performance
targets. The targets were met as a result of the expansion into
Western Montana in October 1997. Net Income for fiscal year 1998
was $182,864, or $.17 per share, compared to $197,548, or $.19 per
share in fiscal 1997.
Operating Revenues $:
Year-Ended Increase (Decrease)
6/30/98 6/30/97 Dollars Percent
Passenger 3,393,039 1,580,581 1,812,458 114.7
Cargo 130,617 100,057 30,560 30.5
Public Svc. 4,324,091 3,122,861 1,201,230 38.5
Other 63,843 67,336 (3,493) (5.2)
Total 7,911,590 4,870,835 3,040,755 62.4
The increase in passenger and cargo revenue is primarily related to
the expansion into Helena and Missoula in October 1997. To a much
lesser extent, increases in passengers related to the enhanced EAS
services and the late-in-the-year addition of service to Kalispell
and Spokane also contributed to the increase. The increase in
public service revenue is attributable to the enhanced EAS contract
that became effective on October 1, 1997.
Operating Expenses $:
Year-Ended Increase(Decrease)
6/30/98 6/30/97 Dollars Percent
Flying Operations 3,157,151 1,579,716 1,577,435 99.9
Maintenance 1,610,696 1,073,832 536,864 50.0
Traffic 2,027,439 1,239,305 788,134 63.5
Marketing 85,412 32,400 53,012 163.6
General & Administrative 857,026 558,432 298,594 53.4
Total 7,737,724 4,483,685 3,254,039 72.6
The increase in flying operations expense is attributed to the
increased ownership related costs associated with the new and
expanded fleet of Metro III aircraft, increases in flight crews and
fuel expense associated with the expanded services, and the
start-up and fleet transition costs mentioned above. The ownership
costs, which include lease expense, insurance, and property tax
represent the majority of the increase.
Maintenance cost increases resulted from the expanded operations
and fleet, and to a much lesser extent, the costs related to
meeting the return provisions of the Metro II fleet alluded to
above. The expanded services produced a 57% increase in aircraft miles flown.
Traffic expense increases were directly attributable to the 72%
increase in passenger boardings, and the new services initiated in
Western MT. The major elements that contributed to the increase
were liability insurance, traffic commissions, ground handling,
security, and landing fees in the new markets, and reservations.
The increase in marketing expense is fully attributable to
advertising expenses related to the new Western MT services and the
enhanced EAS service.
General and administrative expenses increased due to salaries and
wages expense and legal, professional and related expense. Salaries
and wages were impacted by the Team Incentive payment alluded to
above, a contract termination payment made to a former officer,
temporary duplication of executive wages during the transition
period to a new President & CEO, and additional accounting staff
related to expansion. Legal and professional fees and related costs
increased due to aircraft lease and lease returns associated with
the fleet transition, mediated settlement costs associated with the
Company's release from a claim related to an employee, and a
general increase in Company business matters.
Interest expense increased by 2.7% due to a new 3-year loan
obtained to finance the purchase of a spare aircraft engine.
Interest income declined by 3.3%. The year ended with a net profit
of $182,864. Fiscal year 1998 results include $115,000 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, 1997 892,616 1.9:1
Year-Ended June 30, 1998 1,063,523 1.8:1
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, 1997 539,144 1,071,604
Year-Ended June 30, 1998 486,488 1,457,880
The Company's balance sheet reflects cash and cash equivalents of
$512,670 at June 30, 1998. Total current assets, including cash,
were $2,475,655 compared to total current liabilities of $1,412,132,
resulting in working capital of $1,063,523 and current ratioof 1.8:1.
Cash provided by operating activities for the fiscal year ended
June 30, 1998 was $68,949, compared to $352,476 at fiscal year-end
1996. The decrease is attributed to the reduction in operating
income, and receivables growing at a faster rate than payables due
to the increase in revenues derived from non-subsidized services.
Cash used by investing activities for the fiscal 1998 was $100,553,
due to the acquisition of a spare engine and rotable spare parts
required to support the expanded fleet. Cash used by financing
activities for the fiscal 1997 was $432. Payments on long-term debt
and capital lease obligations were offset by the loan proceeds
obtained to acquire the spare engine. Proceeds received from stock
options exercised during the period, were nearly offset by proceeds
used to purchase treasury stock on the open market.
Operating leases include station office facilities, land, and six
Metroliner III aircraft. Non-cancelable operating lease
commitments in excess of one year totaled $5,404,993 at June 30,1998.
Stockholders' equity was $1,457,880 at June 30, 1998, compared to
$1,071,604 at June 30, 1997. The increase in equity from June 30,
1997 to June 30, 1998 is the result of profitable operations,
including the tax benefit from pre-Fresh Start deferred tax assets,
and stock bonuses issued as part of the Team Incentive Plan. Total
long-term debt (including current installments) at June 30, 1998
was $674,488 (including capital lease obligations) compared to
$683,457 at June 30, 1997. At June 30, 1998, the long-term
financial commitments of the Company were: 1) debt of $147,001 with
the FAA (Federal Aviation Administration) for the pre-reorganization
purchase of a Metroliner II aircraft; 2) debt of $48,485 to the
unsecured creditors electing the cash option; 3) bank debt of $68,278
for pre-reorganization working capital/engine overhaul loans;
4) bank debt of $135,344 used for the purchase of a Metro III spare engine;
and 5 ) capital lease obligation of $267,216 for a general office/maintenance
hangar facility.
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 $50 million annually,
which provided the opportunity to restore the lost services,
effective October 1997. Big Sky is currently providing essential
air service under a DOT contract pursuant to Order 98-8-14, at an
annual rate of $4.8 million for the period October 1997 through
November 1998. Big Sky has recently been tentatively selected to
provide the EAS service for another two-year period commencing
December 1, 1998, at an annual rate of $4.7 million. The final
selection is currently pending a mandatory 20-day public comment
period. 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. The
majority of commuter and regional air carriers operate under
code-sharing affiliations with one or more major air carriers.
Given the high percentage of local traffic carried in its route
system and lack of competitive air service in the markets currently
served, the Company believes that the absence of such an agreement
is not of major significance. The principal competition to the
services provided is 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.
Year 2000 Disclosure: The Company is working to resolve the
potential impact of the year 2000 on the ability of the Company's
computerized information systems to accurately process information
that may be date sensitive. The Company's entire internal
computerized systems are in the process of being replaced. All of
the new hardware was acquired and installed in the last sixty days.
New, year 2000 compliant, accounting software has been installed
and is in the implementation phase. The Company has acquired, under
a 99-year license, comprehensive airline management system software
that is year 2000 compliant. That software is installed and is in
the implementation phase. All systems are run in a network
environment that is year 2000 compliant. It is anticipated that all
of the new systems will be fully operational no later than December
31, 1998. The total cost for the entire conversion, including
training, is estimated to be $150,000. The Company also relies on
the computer systems of certain key vendors in its daily
operations. The Company contracts with a major computerized
reservation system (CRS) company to accept passenger reservations
from travel agencies and other airlines. That vendor has provided
assurance that it is or will be year 2000 compliant in those areas
that the Company relies on. As a contingency, the Company's newly
acquired airline management system contains a fully functional
passenger reservation system that is installed on the network. The
current intent is to use part of the features of that system for
internal purposes only, however, the system can be used to replace
the contract CRS vendor if necessary. The Company relies on the
various computer systems used by the FAA and other commonly used
industry vendors in order to conduct its daily flight operations.
The Company continues to monitor the state of preparedness of these
suppliers, which is a frequent subject in industry publications and
the industry trade association the Company belongs to. However, if
the Company and third parties upon which it relies are unable to
address this issue in a timely manner, it could result in a
material financial risk to the Company.
ITEM 7. FINANCIAL STATEMENTS
The Company's complete audited financial statements for fiscal 1998
are appended to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCCOUNTANTS ON
ACCOUNTING AND FINANCIAL 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.
On May 1, 1998 Charles Bailly merged with Eide Helmeke PLLP, to
form Eide Bailly LLP. This change has not had any effect on the Company.
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, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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--52; Stock-61,084 (c), % Class-5.2% (i).
Jack K. Daniels, director & executive officer:
BigSky--Vice-Chairman of the Board & Assistant Secretary,
April 1995 to-February 1998; Outside Director since 1990;
Interim CEO August 1997 to January 1998.
Principal Business--Owner/President, SerVair Accessories, Inc.
(fixe 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--73; Stock--22,620 (d), % Class--1.9% (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--58; Stock-22,620 (e), % Class--1.9% (i).
Stephen D. Huntington, director & executive officer:
BigSky-Assistant Secretary February 1998 to date; Secretary
1996 - February 1998; 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--42; Stock--9,267 (f); % Class 0.8% (i).
Craig Denney, director & executive officer:
BigSky--Executive Vice President, Division Manager & COO,
December 1995 to-date; Secretary and Assistant Treasurer,
February 1998 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 & Former 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--45; Stock-43,568 (g), % Class 3.7% (i).
Kim B. Champney, director & executive officer:
Big Sky--President & CEO, January 1998 to date; Interim CFO,
March 1998 to date; Director, February 1998 to date
Previous Employment-Vice President Business Development,
Merlin Express, San Antonio TX, 1993-1997, Director Airline
Planning, DHL Airways, Cincinnati OH, 1990-1993; Director
Financial Analysis, Braniff Inc,, Orlando FL, 1989-1990; Director
Corporate Planning, Piedmont Airlines, Winston-Salem NC, 1986-1989;
Treasurer, 1985-1986, Controller 1981-1985, Empire Airlines Inc.,
Utica/Rome NY Manager General Accounting, The Black Clawson Co.,
Fulton NY, 1976-1981.
Education--B.S. Accounting, Rochester Institute of Technology,
Rochester NY,
Age--44; Stock--0, % Class-0.0% (i).
Terry Marshall, officer
Big Sky- Consultant, January 1998-June 1998; President, July
1997-December 1997; 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, 1970-1972; Ford Motor Company, Industrial Division,
Birmingham, MI, 1969-1970
Education-BS Economics & Business, Montana State University;
MS Economics, Oregon State University
Age-53; Stock-60,910(h), % Class 5.2%(i)
(a) The above-listed directors were duly elected at the 1998
Annual Meeting of Stockholders. The Corporation's present executive
officers and Board leadership were elected in February 1998.
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.
(b) Shares shown reflect outstanding shares of 1996 Series Common
Stock beneficially owned, both directly and indirectly, as of June
30, 1998, 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. 1997-98 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) 59,084 shares owned. Options exercisable at 6/30/98 on 2,000
shares. (2,000 share option exercised 7/98)
(d) 20,620 shares owned. Options exercisable at 6/30/98 on 2,000
shares.
(e) 14,620 shares owned. Options exercisable at 6/30/98on 8,000
shares.
(f) 3,600 shares owned. Options exercisable at 6/30/98 on 5,667
shares.
(g) 20,118 shares owned. Options exercisable at 6/30/98 on 23,450
shares. (1,000 share option exercised 9/98)
(h) 31,160 shares owned. Options exercisable at 6/30/98 on 29,750
shares. (6,000 share option exercised 9/98)
(i) Includes shares owned and eligible options, as a percent of
total outstanding shares and eligible options, shown to nearest
tenth.
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 COMPENSATION
Executive Compensation: Below is set forth compensation
information for the President/CEO (Mr. Champney) in fiscal 1998,
the sole "named executive" of the Corporation, for which such
reporting is required. Also set forth is compensation information
for the President/CEO (Mr. Marshall) in Fiscal Year 1997. During
Fiscal Year 1998 Mr. Marshall was President of the Company until
January 1998:
Long-Term Other
Annual Compensation $ Compensation- Compensation--
Champney Salary (1) Bonus (2) Stock Options # (3) Non-Cash $ (4)
Fiscal Year
1998 38,230 0 0 0
1997 0 0 0 0
Marshall
Fiscal Year
1998 110,052 10,000 20,000 30,850
1997 74,196 0 0 7,200
(1) Base compensation.
(2) Team Incentive Plan cash bonus payment.
(3) Stock options shown are post-recapitalization.
(4) Includes payment for insurance programs at $600 per month, and in 1998
includes stock bonus received under the 1996 Team Incentive Plan.
Board Compensation: At June 30, 1998, the Corporation had six
directors--four "outside" (non-employee) directors and two
"inside" (employee) directors. 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 $500 per month. The Vice Chairman was paid a fixed compensation
of $500 per month during his tenure as interim CEO in 1998.
Payments for outside directors' services during fiscal 1997 were
$55,654, as follows:
Item Payments $
Mtgs., Conf. & Special Projects (1) 41,813
Expense Reimbursement (2) 13,841
Total (3) 55,654
(1) Annual base compensation, individual meeting compensation and
monthly base compensation (applicable for Chairman and Vice
Chairman during his tenure as interim CEO).
(2) Includes travel and per diem.
(3) Individual totals as follows: Marchi--$20,425,
Nicholson--$3,850, Huntington-- $6,138 and Daniels--$11,400.
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 at $1.125 per share. Options to purchase an additional 8,000
shares were granted under the Plan in February 1998 at $1.3875 per
share. (Note: above share price and share amounts are post-recapitalization)
Executive Employment Contracts: During FY 1998 the Company had
executive employment agreements with Mr. Marshall who served as
President through December 31, 1997, and Mr. Champney who was
employed as President/CEO on January 21, 1998. Under the terms of
Mr. Marshall's Agreement he was paid a base salary of $6,183 per
month plus insurance benefits of $600 per month. In addition Mr.
Marshall was entitled to certain incentive bonuses under the
Company's Team Incentive Plan. Mr. Marshall received cash and
stock bonuses and stock options under this Plan, as described
above. Mr. Marshall's agreement provided for 4.5 months of
severance pay upon termination of his employment. Mr. Marshall's
employment with the Company was concluded on June 30, 1998 and he
received severance pay plus certain accrued benefits totaling
$47,063 in accordance with his Employment Agreement. Mr.
Champney's Employment Agreement provides for a base salary of
$7,500 per month for the first 90 days and $7,917 per month
thereafter. In addition Mr. Champney is entitled to certain
incentive stock options and cash bonuses under a schedule based
upon performance and objectives, as awarded by the Board of
Directors. Mr. Champney's agreement expires on June 30, 2002. The
agreement provides for severance pay to be awarded based upon the
event leading to termination. Severance pay ranges from no
severance pay in the event of termination for misconduct to twelve
months compensation if the Agreement is terminated because of a
sale of the Company's business or assets.
In January 1996, the Board implemented the Team Incentive Plan
placing 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. Based upon the
results measured in December 1997 as set forth in the plan, the
"Team" was awarded and paid the maximum pool available.
Compensation & Management Development: During FY 1998, the Board's
Committee on Compensation and Management Development was comprised
of Messrs. Marchi and Huntington. 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.
Officer and Director Stock Options. 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 1998 (post-recapitalization basis):
Stock Options
Officer/Director Grant Outstanding-- Option
& Option Plan Date Shares # Price $
Craig Denney:
1986 QSOP 1/95 1,200 .9375
1996 Team Inc. 3/98 20,000 1.09375
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
1995 DSOP 2/98 2,000 1.3875
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
1995 DSOP 2/98 2,000 1.3875
Jack K. Daniels:
1995 DSOP 2/98 2,000 1.3875
Terry Marshall:
1986 QSOP 1/95 3,750 .9375
1996 Team Inc. 3/98 20,000 1.09375
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 contingent on the attainment of
specific objectives and/or further Board approvals, (1) Team
Incentive Plan--60,000 shares @ $1.09375; earned and issued in 1998
and (2) 1995 Special Stock Option Plan--6,000 shares @ $.6250,
earned and issued in 1998 & 4,000 shares @ $.7500, not awarded.
(shares and prices are post-recapitalization)
Current market bid/asked prices are $2.00/$2.00 per share.
QSOP = Qualified Stock Option Plan, DSOP = Director Stock Option
Plan, Team Inc = Team Incentive Plan
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT
The following table provides information, as of June 30, 1998, 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) 347,520 29.5
H. V. Holeman, Las Vegas, NV (b) 108,780 9.2
Jon Marchi 61,084 5.2
Terry Marshall 60,910 5.2
All Other Officers & Directors (c) 98,075 8.3
(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 by all officers and
directors as a group that were not beneficial holders of more than
5% of the shares outstanding, plus options exercisable within 60
days. At the end of fiscal 1998, there were five individuals in
this group.
(d) Percent stock owned and options are of total 1996 Series
Common Stock outstanding, plus options exercisable within 60 days.
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, 1998 and 1997 were $42,000 and $42,331, 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 Show Cause Order 98-9-12, Issued September 14, 1998,
providing for tentative carrier selection of essential air
service at the seven Montana points to the hub at Billings and one
daily trip between Sidney and Bismarck from December 1, 1998
through November 30, 2000 at an annual subsidy rate of $4,697,222.
(b) 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 (filed as Exhibit 10(a) September 25,1997 and
incorporated herein by reference)
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 continued as
President through December 31, 1997. Mr. Daniels served as interim
CEO, until January 21,1998
On January 14, 1998, a report on form 8-K was filed (item #5),
advising the appointment of Kim B. Champney as the Company's
President & CEO.
<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/ Kim B. Champney
Kim B. Champney
Director, President & CEO September 25, 1998
Interim CFO
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, 1998
/s/ Craig Denney
Craig Denney
Director, Executive VP,
& C.O.O, Secretary,
Assistant Treasurer
(Chief Operating Officer) September 25, 1998
/s/ Stephen D. Huntington
Stephen D. Huntington
Director & Assistant Secretary September 25, 1998
/s/ Alan D. Nicholson
Alan D. Nicholson
Director September 25, 1998
/s/ Jack K. Daniels
Jack K. Daniels
Director, Vice Chairman September 25, 1998
Order 98-9-12
UNITED STATES OF AMERICA
DEPARTMENT OF TRANSPORTATION
OFFICE OF THE SECRETARY
WASHINGTON, D.C.
Issued by the Department of Transportation
On the 14th day of September, 1998
Essential air service at
GLASGOW, MONTANA
GLENDIVE, MONTANA
HAVRE, MONTANA Served: September 18, 1998
LEWISTOWN, MONTANA
MILES CITY, MONTANA
WOLF POINT, MONTANA Docket OST-1 997-2605
under 49 U.S.C. 41731 et seq.
ORDER TENTATIVELY RESELECTING CARRIER
AND ESTABLISHING SUBSIDY RATE
Summary
By this order, the Department is tentatively reselecting Big Sky
Transportation Co., d/b/a Big Sky Airlines, to provide essential air service
at the seven Montana communities named above for the two-year period
beginning December 1, 1998, at an annual subsidy rate of $4,697,222, and
providing for objections or competing proposals from other interested
carriers.
Background
By Order 97-6-13, June 13, 1997, the Department authorized Big Sky
to provide subsidized service at the seven Montana communities named above
by operating 17 round trips a week from Sidney to Billings and 12 round
trips a week from the other six communities to Billings
with 19-seat Fairchild Metro III aircraft at an annual subsidy rate
of $4,793,361 through November 30, 1998. 1/
Under normal procedures when nearing the end of a subsidy rate term, we
contact the incumbent carrier to determine whether it is interested in
continuing service and whether it will continue to require subsidy.
We usually negotiate a new subsidy rate with the carrier, issue an
order tentatively reselecting it for a new rate term at the agreed
rate, and direct other parties to show cause why we should not finalize our
tentative decision. Other carriers wishing to submit competing proposals are
invited to do so in response to the show-cause order; if any such proposals
are filed, we process them as a competitive case. Consistent with this
practice, we invited Big Sky to submit a proposal for the continuation of
its essential air service at the seven communities beginning December 1, 1998.
1/ See Appendix A for a map.
<PAGE>
Carrier Proposal
Big Sky submitted a proposal in response to our request and, as a
result of discussions with Department staff, has agreed to continue
service the communities at an annual subsidy rate of $4,697,222
for the two-year period beginning December 1, 1998. 2/ Big Sky's
service patterns would largely remain unchanged. However, the
carrier does propose replacing Sidney's two-stop round trip to
Billings on weekdays with a nonstop round trip to Bismarck. 3/
Community Comments
By letter dated September 1, 1998, the Montana Governor's Essential
Air Service Task Force states that it strongly supports Big Sky's
proposed modification in Sidney's service, but requests that Big
Sky be permitted to return to the former service pattern if the
proposed pattern does not prove to be economically viable.
Decision
After a thorough review of Big Sky's proposal and its recent
service history, we have tentatively decided to reselect Big Sky to serve
the seven Montana communities for the two-year period beginning
December 1, 1998, as proposed. The rate appears reasonable for the service
to be provided, and Big Sky's performance continues to be satisfactory.
At the same time, we will authorize Big Sky's implementation of its
proposed change in Sidney's service, which is supported by the
community and reduces the carrier's subsidy requirement. Big Sky
will retain the flexibility to revert to the former service pattern
at its own discretion if the new service pattern does not meet
expectations.
Carrier Fitness
49 U.S.C. 41737(b) and 41738 require that we find an air carrier
fit, willing and able to provide reliable service before we compensate it
for providing essential air service. We last found Big Sky fit by
Order 9612-34, December 26, 1996, in connection with its essential air
service at the same communities at issue here. Since then, the Department has
routinely monitored the carrier's continuing fitness, and no
information has come to our attention that would lead us to
question its ability to operate in a reliable manner. Based on our
review of its
2/ Appendix B contains details of Big Sky's compenseation requirement.
3/ At present, Sidney receives two nonstop and one two-stop (via Glendive and
Miles City) round trip to Billings each weekday, and one nonstop and one two-
stop round trips to Billings each weekend. Under Big Sky's proposal, Sidney
would receive two nonstop round trips to Billings and one nonstop round trip
to Bismarck each weekday; Sidney's weekend service would be unaffected. Big
Sky projects that the additional revenue generated by the proposed change in
Sidney's service will exceed the additional cost, and thus reduce its
subsidy requirement by about $25,000 a year.
<PAGE>
most recent submissions, we find that Big Sky continues to have
available adequate financial and managerial resources to provide
quality service at the communities at issue here, and that it
continues to possess a favorable compliance disposition. The
Federal Aviation Administration has advised us that the carrier is
conducting its operations in accordance with 14 CFR Part 121, and
knows of no reasons why we should not find that Big Sky remains fit.
Responses to Tentative Decision
We will give interested persons 20 days from the date of this order
to show cause why we should not make final our tentative decision to
reselect Big Sky to provide essential air service at the seven Montana
communities at the subsidy rate discussed above. We expect persons objecting
to our tentative decision to support their objections with relevant
and material facts. We will not entertain general, vague or
unsupported objections.
Carriers interested in filing competing proposals, with or without
subsidy requests, should file them within the 2O-day period set for
objections. At the end of that period, our staff will docket any
competing proposals, thereby making them public, and direct each
carrier to serve a copy of its proposal on the civic parties and
other applicants. We will give full consideration to all proposals
that are timely filed. As a general matter, we request proposals
that would provide at least two round trips a day from the
communities to a suitable hub with twin-engine aircraft operated by
two pilots.
Service History and Traffic Data
Big Sky has operated subsidized service at the seven communities
since 1980, when it replaced Frontier Airlines, Inc. In November
1995, the Department reduced the level of service that it could
support at the communities from 12 round trips (17 at Sidney) to 10
a week as a result of Congressional reductions in funding for the
essential air service program. 4/ These reductions affected traffic;
between calendar years 1995 and 1997, total traffic at the seven
communities declined by 20 percent, from 33.8 to 27.1 enplanements
per service day. 5/ In October 1997, increased program funding
allowed the Department to resume subsidizing the earlier,
pre-reduction service levels. At the same time, the Department
authorized the replacement of Big Sky's older 15-seat Metro II
aircraft with 19-seat Metro IIIs. 6/ During the year ended June 30,
1998, the most recent 12-month period for which data are available,
the communities averaged a total of 29.4 enplanements a day, an
increase of 11.4 percent over the previous 12-month period. 7/
Individually, Glasgow averaged 5.3 enplanements a day, Glendive
2.5, Havre 4.2, Lewistown 2.9, Miles City 3, 1, Sidney 7.2 and Wolf
Point 4.2.
4/ See Orders 95-11-28, November 27, 1995 and 96-2-1, February 2, 1996.
5/ See Appendix C for historical traffic data. Enplanements represent one-
half of total origin-and-destination traffic, and averages are based on 313
service days (weekdays and weekends) each year.
6/ See Order 96-12-34
7/ The most recent three quarters provide a clearer traffic picture since the
resumption of pre-reduction service levels and the change in aircraft. From
October 1997 through June 1998, total traffic at the seven communities
averaged 31.0 enplanements a day, 19.8 percent above the corresponding three
quarters a year earlier by not yet as high as before the November 1995
service reductions.
<PAGE>
Procedures for Filing Competitive Proposals
For interested carriers unfamiliar with our procedures and recommended form
for supplying the necessary information, we have prepared two explanatory
documents that we will make available upon request. The first
describes the process for handling carrier replacement cases under
49 U.S.C. 41734(f), and discusses in detail the process of
requesting proposals, conducting reviews of applicants, and
selecting a replacement carrier. The second is an evidence request
containing an explanatory statement, a copy of Part 204 of our
regulations (14 CFR 204), and schedules setting forth our
recommended form for submitting data required for calculating
compensation and determining the financial and operational ability
of applicants to provide reliable essential air service. (Section
204.4 describes the fitness information required of all applicants
for authority to provide essential air service.) Applicant carriers
that have already submitted this information in another case need
only resubmit it if a substantial change has occurred. However, if
there are more recent data or if there have been any changes to the
information on file, carriers should provide updates of those
information elements. Interested carriers that need to obtain
copies of these documents may contact the Office of Aviation
Analysis at (202) 366-1053.
Other Carrier Requirements
The Department is responsible for implementing various Federal
statutes governing lobbying activities, drug-free workplaces, and
nondiscrimination. 8/ Consequently, all carriers receiving Federal
subsidy for essential air service must certify that they are in
compliance with Department regulations regarding drug-free
workplaces and nondiscrimination, and those carriers whose
subsidies exceed $100,000 over the life of the rate term must also
certify that they are in compliance with the regulations governing
lobbying activities. All carriers that plan to submit proposals
involving subsidy should submit the required certifications along
with their proposals. Interested carriers requiring more detailed
information regarding these requirements as well as copies of the
certifications should contact the Office of Aviation Analysis at
(202) 366-1053. The Department is prohibited from paying subsidy to
carriers that do not submit these documents.
Community and State Comments
If we receive competing proposals, the communities and state are
welcome to submit comments on the proposals at any time. Early in
the proceeding, comments on the proposals'
8/ The regulations applicable to each of these three areas are (1) 49 CFR
Part 20, New Restrictions on Lobbying, implementing title 31, United States
Code, section 1352, entitled "Limitation on use of appropriated funds to
influence certain Federal contracting and finanical transactions"; (2) 49 CFR
Part 29, Subpart F, Drug-Free Workplace Requirements (Grants), implementing
the Drug-Free Workplace Act of 1988; and (3) 49 CFR Part 21, Nondiscrimination
in Federally-Assisted Programs of the Department of Transportation --
Effectuation of Title VI of the Civil Rights Act of 1964; 49 CFR Part 27,
Nondiscrimination on the Basis of Handicap in Programs and Activities
Receiving or Benefiting from Federal Financial Assistance; and 14 CFR Part 382
Nondiscrimination on the basis of handicap in Air Travel.
<PAGE>
strengths and weaknesses would be particularly helpful, and the
civic parties may also express a preference for a particular
carrier, if they choose. In any event, after conducting rate
conferences with all applicants, we will provide a summary of the
conference results to the civic parties and ask them to file their
final comments. 9/
This order is issued under authority delegated in 49 CFR 1.56(i).
ACCORDINGLY,
1. We tentatively reselect Big Sky Transportation Co., d/b/a Big
Sky Airlines, to provide essential air service at Glasgow, Glendive, Havre,
Lewistown, Miles City, Sidney and Wolf Point, Montana, as described in
Appendix D, for the period from December 1, 1998, through November 30, 2000;
2. We tentatively set the final rate of compensation for Big Sky
Transportation Co., d/b/a Big Sky Airlines, for the provision of essential
air service at Glasgow, Glendive, Havre, Lewistown, Miles City, Sidney and
Wolf Point, Montana, as described in Appendix D, for the period from December
1, 1998, through November 30, 2000, payable as follows: for each month during
which essential air service is provided, the amount of compensation shall
be subject to the weekly ceiling set forth in Appendix D, and shall
be determined by multiplying the subsidy-eligible arrivals and
departures completed during the month by $526.89; 10/
3. We direct Big Sky Transportation Co., d/b/a Big Sky Airlines, to
retain all books, records, and other source and summary
documentation to support claims for payment, and to preserve and
maintain such documentation in a manner that readily permits its
audit and examination by representatives of the Department. Such
documentation shall be retained for seven years or until the
Department indicates that the records may be destroyed. Copies of
flight logs for aircraft sold or disposed of must be retained. The
carrier may forfeit its compensation for any claim that is not
supported under the terms of this order;
4. We find that Big Sky Transportation Co., d/b/a Big Sky Airlines,
continues to be fit, willing and able to operate as a commuter air
carrier and capable of providing reliable essential air service at
Glasgow, Glendive, Havre, Lewistown, Miles City, Sidney and Wolf
Point, Montana;
5. We direct Big Sky Transportation Co., d/b/a Big Sky Airlines,
and any other interested persons having objections to the selection
of Big Sky to provide essential air service as described in
ordering paragraph 1 above, at the rate set forth in ordering
paragraph 2 above, to file such objections or competing service proposals
no later than 20 days from the date of service of this order; 11/
9/ In cases where a carrier porposes to provide essential air service without
subsidy and we determine that service can be reliably provided without such
compensation, we do not normally hold rate conferences. Instead, we rely on
the carrier's subsidy-free service as proposed.
10/ See Appendix D for the calculation of this rate, which assumes the use
of the aircraft designated. If the carrier reports a sugnificant number of
aircraft substitutions, revision of this rate may be required.
<PAGE>
6. If we receive objections or competing proposals within the
20-day period, Big Sky will be compensated at the subsidy rate set
forth in ordering paragraph 2 above as a final rate until all
objections are resolved;
7. We will afford full consideration to the matters and issues
raised in any timely and properly filed objections and service
proposals before we take further action. 12/ If no objections or
competing service proposals are filed, all further procedural steps
will be deemed waived and this order shall become effective on the
twenty-first day after its service date;
8. This docket will remain open until further order of the
Department; and
9. We will serve copies of this order on the Mayors and airport
managers of Glasgow, Glendive, Havre, Lewistown, Miles City, Sidney
and Wolf Point, Montana; Big Sky Transportation Co., d/b/a Big Sky
Airlines; and the persons listed in Appendix E.
By:
CHARLES A. HUNNICUTT
Assistant Secretary for Aviation
and International Affairs
(SEAL)
11/ Objections should be filed with the Documentary Services Division, SVC-
124, Room PL-401, Department of Transportation, 400 7th Stree S.W.,
Washington DC 20590. Proposals to provide essential air service should be
filed with the Chief, EAS & Domestic Analysis Division, X-53, Office of
Aviation Analysis, Room 6417I, Department of Transportation, as the same
address. Questions regarding filings in response to this order may be
directed to Dennis J. DeVany at (202) 366-1061.
12/ Since we are providing for the filing of objections to this order, we will
not entertain petitions for reconsideration.
<PAGE>
Appendix A
GLASGOW, GLENDIVE, HAVRE, LEWISTOWN,
MILES CITY, SIDNEY AND WOLF POINT, MONTANA,
AND THE SURROUNDING REGION.
Map of Montana and North Dakota showing the EAS points along with
Billings and Bismarck hubs. (Unable to scan map into Edgar)
<PAGE>
Appendix B
page 1 of 4
Big Sky Transportation Co., d/b/a Big Sky Airlines
Provision of Essential Air Service at Seven Eastern Montana Points
Annual Subsidy Requirement
December 1, 1998, through November 30, 2000
Block Hours
Revenue Block Hours (App. B, p.2) 6,038
Non-revenue Block Hours 229
Total 6,267
Operating Revenue
Total Passenger Revenue (App. B, p.3) $1,374,833
Freight Revenue $49,778
Total Operating Revenue $1,424,611
Direct Operating Expenses
Flying Operations $118.00 Per BH $739,577
Fuel & Oil $87.84 Per BH $550,532
Maintenance $139.72 Per BH $875,666
Maintenance Burden $319,754
Aircraft Lease $138.78 Per BH $869,824
Hull Insurance $23.12 Per BH $144,929
Aircraft Property Tax $201,617
Total Direct Expenses $3,701,899
Indirect Operating Expenses
Advertising 1/ $35,000
Departure Related Costs $994,765
Traffic Related Costs $432,413
Capacity Related Costs $634,349
Total Indirect Expenses $2,096,527
Total Operating Expenses $5,798,426
Operating Loss $4,373,815
Profit Element (at 5% of TOE) $289,921
Interest $33,486
Compensation Requirement $4,697,222
1/ Seven communities at $5,000 per community.
<PAGE>
Appendix B
page 2 of 4
ANNUAL SCHEDULED BLOCK HOURS
HAVRE AND LEWISTOWN
Havre-Lewistown-Billings
4 flts x (36 + 36 min)/60 x 313 service days x .96 = 1,442
GLASGOW AND WOLF POINT
Glasgow-Wolf Point-Billings
2 flts x (22 + 60 min)/60 x 365 days x .96 = 958
Billings-Glasgow-Wolf Point-Billings
1 flt x (54 + 22 + 60.min)/60 x 261 weekdays x .96= 568
Total 1,526
SIDNEY, GLENDIVE AND MILES CITY
Sidney-Billings
4 flts x 65 min/60 x 261 weekdays x .96 = 1,086
2 flts x 65 min/60 x 52 weekends x .96 = 108
Sidney-Bismarck
2 flts x 50 min/60 x 261 weekdays x .96 = 417
Glendive-Miles City-Billings
4 flts x (28 + 43 min)/60 x 261 weekdays x .96 = 1,186
2 flts x (28 + 43 min)/60 x 52 weekends x .96 = 118
Sidney-Glendive-Miles City-Billings
2 flts x (22 + 43 + 28 min)/60 x 52 weekends x .96 = 155
Total 3,070
TOTAL SCHEDULED BLOCK HOURS 6,038
<PAGE>
Appendix B
page 3 of 4
ANNUAL PASSENGERS AND PASSENGER REVENUE
COMMUNITIES PASSENGERS AVG. FARE REVENUE
HAVRE AND LEWISTOWN
Havre 2,811 $64.00 $179,923
Lewistown 1,771 38.00 67,299
4,582 $247,222
GLASGOW AND WOLF POINT
Glasgow 3,164 $77.00 $243,611
Wolf Point 2,742 80.00 219,401
5,906 $463,012
SIDNEY, GLENDIVE AND MILES CITY
Sidney-Billings 4,703 $70.00 $329,188
Sidney-Bismarck 2,036 65.00 132,328
Glendive 1,780 58.00 103,218
Miles City 2,080 48.00 99,865
10,599 $664,599
TOTALS 21,087 $65.20 $1,374,833
<PAGE>
Appendix B
page 4 of 4
ANNUAL SCHEDULED DEPARTURES
HAVRE AND LEWISTOWN
Havre-Lewistown-Billings
8 dpts x 313 service days x .96 2,404
GLASGOW AND WOLF POINT
Glasgow-Wolf Point-Billings
4 dpts x 365 days x .96 = 1,402
Billings-Glasgow-Wolf Point-Billings
3 dpts x 261 weekdays x .96 = 752
2, 154
SIDNEY, GLENDIVE AND MILES CITY
Sidney-Billings
4 dpts x 261 weekdays x .96 = 1,002
2 dpts x 52 weekends x .96 = 100
Sidney- Bismarck
2 dpts x 261 weekdays x .96 = 501
Glendive-Miles City-Billings
8 dpts x 261 weekdays x .96 = 2,004
4 dpts x 52 weekends x .96 = 200
Sidney-Glendive-Miles City-Billings
6 dpts x 52 weekends x .96 = 300
4,107
TOTAL SCHEDULED DEPARTURES 8,665
<PAGE>
Appendix c
page 1 of 2
HISTORICAL ENPLANEMENTS AT GLASGOW, GLENDIVE, HAVRE
LEWISTOWN, MILES CITY, SIDNEY AND WOLF POINT, MONTANA
GLASGOW GLENDIVE HAVRE LEWISTOWN
NO. AVG. NO. AVG. NO. AVG. NO. AVG.
1990 1,361 4.3 641 2.0 768 2.5 325 1.0
1991 1,606 5.1 582 1.9 1,034 3.3 858 2.7
1992 2,101 6.7 695 2.2 1,176 3.8 815 2.6
1993 2,048 6.5 919 2.9 1,320 4.2 1,098 3.5
1994 1,975 6.3 844 2.7 1,535 4.9 1,165 3.7
1995 2,056 6.6 871 2.8 1,468 4.7 1,230 3.9
1996 1,756 5.6 720 2.3 1,284 4.1 963 3.1
1997 1,565 5.0 634 2.0 1,200 3.8 832 2.7
Year ended
6/30/1997 1,595 5.1 604 1.9 1,180 3.8 872 2.8
Year ended
6/30/1998 1,650 5.3 786 2.5 1,316 4.2 901 2.9
1996 3rd qtr 463 154 312 244
4th qtr 446 183 337 275
1997 1st qtr 361 128 279 172
2nd qtr 325 141 253 182
3rd qtr 417 131 254 176
4th qtr 462 235 415 302
1998 1st qtr 397 194 337 222
2nd qtr 374 257 311 203
<PAGE>
Appendix C
page 2 of 2
MILES CITY SIDNEY WOLF POINT TOTAL
NO. AVG. NO. AVG. NO. AVG. NO. AVG.
1990 516 1.6 2,031 6.5 1,111 3.5 6,753 21.6
1991 720 2.3 1,973 6.3 1,361 4.3 8,134 26.0
1992 913 2.9 2,193 7.0 1,679 5.4 9,572 30.6
1993 937 3.0 2,054 6.6 1,756 5.6 10,132 32.4
1994 1,008 3.2 2,410 7.7 1,541 4.9 10,477 33.5
1995 928 3.0 2,344 7.5 1,670 5.3 10,566 33.8
1996 831 2.7 1,750 5.6 1,469 4.7 8,771 28.0
1997 819 2.6 2,085 6.7 1,361 4.3 8,494 27.1
Year ended
6/30/97 776 2.5 1,818 5.8 1,417 4.5 8,262 26.4
Year ended
6/30/98 970 3.1 2,254 7.2 1,330 4.2 9,207 29.4
1996 3rd qtr 217 441 344 2,175
4th qtr 218 436 382 2,277
1997 1st qtr 201 377 326 1,844
2nd qtr 142 565 365 1,973
3rd qtr 156 462 318 1,914
4th qtr 321 682 352 2,769
1998 1st qtr 226 527 304 2,207
2nd qtr 268 584 357 2,324
SOURCE: BTS Form 298-C, Schedule T-1. Enplanements represent
one-half of total origin-and-destination traffic, and average
enplanement per day are based on 313 service days (weekdays and
weekends) each year. The total figures for all seven communities
include a very small amount of traffic between the communities that
is double-counted.
<PAGE>
Appendix D
page 1 of 2
BIG SKY TRANSPORTION CO., d/b/a BIG SKY AIRLINES
ESSENTIAL AIR SERVICE AT GLASGOW, GLENDIVE, HAVRE, LEWISTOWN,
MILES CITY, SIDNEY AND WOLF POINT, MONTANA
EFFECTIVE PERIOD December 1, 1998, through November 30, 2000
SERVICE
Havre 12 nonstop or one-stop round trips to
Billings each week
Lewistown 12 nonstop round trips to Billings each week
Glasgow / Wolf Point 12 nonstop or one-stop round trips to
Billings each week
Glendive / Miles City 12 nonstop or one-stop round trips to Billings
each week
Sidney 12 nonstop round trips to Billings and 5 nonstop
round trips to Bismarck each week. At its own
discretion, the carrier may revert to operating 5
round trips to Billings with no more than two
intermediate stops in lieu of any service to
Bismarck.
AIRCRAFT TYPE Fairchild Metro III(19 seats)
TIMING OF FLIGHTS Flights must be well-timed and well-spaced to ensure
full compensation
SUBSIDY RATE PER
ARRIVAL/DEPARTURE $526.89 1/
COMPENSATION CEILING
EACH WEEK $93,786 2/
1/ Annual compensation of $4,697,222 divided by 8,915 annual arrivals and
departures at a 96 percent completion factor. For payout purposes, the
Billings-Glasgow-WolfPoint-Billings round-robin flight each weekday is counted
as two Glasgow-WolfPoint-Billings linear round trips involving four
departures rather than three as shown in Appendix B, p.4.
2/ Subsidy rate per arrival/departure of $526.89 multiplied by 178 subsidy-
eligible arrivals and departures each week.
<PAGE>
Appendix D
page 2 of 2
NOTE
The carrier understands that it may forfeit its compensation for
any flights that it does not operate in conformance with the terms
and stipulations of the rate order, including the service plan
outlined in the order and any other significant elements of the
required service, without prior approval. The carrier understands
that an aircraft takeoff and landing at its scheduled destination
constitutes a completed flight; absent an explanation supporting
subsidy eligibility for a flight that has not been completed, such
as certain weather cancellations, only completed flights are
considered eligible for subsidy. In addition, if the carrier does
not schedule or operate its flights in full conformance with the
order for a significant period, it may jeopardize its entire
subsidy claim for the period in question. If the carrier
contemplates any such changes beyond the scope of the order during
the applicable period of these rates, it must first notify the
Office of Aviation Analysis in writing and receive written approval
from the Department to be assured of full compensation. Should
circumstances warrant, the Department may locate and select a
replacement carrier to provide service on these routes. The carrier
must complete all flights that can be safely operated; flights that
overfly points for lack of traffic will not be compensated. In
determining whether subsidy payment for a deviating flight should
be adjusted or disallowed, the Department will consider the extent
to which the goals of the program are met and the extent of access
to the national air transportation system provided to the
community.
If the Department unilaterally, either partially or completely,
terminates or reduces payments for service or changes service
requirements at a specific location provided for under this order,
then, at the end of the period for which the Department does make
payments in the agreed amounts or at the agreed service levels, the
carrier may cease to provide service to that specific location
without regard to any requirement for notice of such cessation.
Those adjustments in the levels of subsidy and/or service that are
mutually agreed to in writing by the parties to this order do not
constitute a total or partial reduction or cessation of payment.
Subsidy contracts are subject to, and incorporate by reference,
relevant statutes and Department regulations, as they may be
amended from time to time. However, any such statutes, regulations,
or amendments thereto shall not operate to controvert the foregoing
paragraph.
<PAGE>
Appendix E
SERVICE LIST FOR THE STATE OF MONTANA
Air Wisconsin, Inc.
Alpine Aviation, Inc.
Amerijet International, Inc.
Barken International, Inc.
Big Sky Transportation Co.
Blue Ridge Airlines
Delta Connection
Empire Airlines, Inc.
Mesa Airlines, Inc.
Mesaba Aviation, Inc.
Metroflight, Inc.
Midway Airlines, Inc.
Midwest Express Airlines, Inc.
Northern Tier Airlines, Inc.
Northwest Airlink
Pacific Air West, Inc.
Renown Aviation, Inc.
West Isle Air, Inc.
Ken Bannon
E.B. Freeman
Ben Harrison
A. Edward Jenner
Keith Kahle
Bob Kams
John McFarlane
John Rahenberg
Richard A. Raymer
Tracy Schoenrock
Kevin Thomas
Dan Traitor
Gary L. White
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 664,170
<SECURITIES> 0
<RECEIVABLES> 1,376,854
<ALLOWANCES> 1,200
<INVENTORY> 329,262
<CURRENT-ASSETS> 2,475,655
<PP&E> 1,338,762
<DEPRECIATION> 465,175
<TOTAL-ASSETS> 3,356,500
<CURRENT-LIABILITIES> 1,412,132
<BONDS> 486,488
0
0
<COMMON> 579,722
<OTHER-SE> 902,011
<TOTAL-LIABILITY-AND-EQUITY> 1,457,880
<SALES> 0
<TOTAL-REVENUES> 7,911,590
<CGS> 0
<TOTAL-COSTS> 7,737,724
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,541
<INCOME-PRETAX> 302,864
<INCOME-TAX> 120,000
<INCOME-CONTINUING> 182,864
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 182,864
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
BIG SKY TRANSPORTATION CO.
Table of Contents
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Balance Sheets
Operations
Stockholders' Equity
Cash Flows
Notes to Financial Statements
<PAGE>
Eide Bailly LLP
Consultants. Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Big Sky Transportation Co.
Billings, Montana
We have audited the accompanying balance sheets of Big Sky
Transportation Co. as of June 30, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for
the years 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 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 audits
provide a reasonable basis for our opinion.
As discussed in Note 7 to the financial statements, a significant
portion of the Company's revenues for the years ended June 30, 1998
and 1997 were 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. as of June 30, 1998 and 1997, and the results of
its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Eide Bailly LLP
Billings, Montana
August 20, 1998
<PAGE>
BIG SKY TRANSPORTATION CO.
BALANCE SHEETS
JUNE 30, 1998 AND 1997
1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 512,670 $ 544,706
Restricted cash 151,500 600,151
Accounts receivable, less allowance
for doubtful receivables of
$1,200 in 1998 and 1997 1,375,654 416,192
Income tax refund receivable 22,816 -
Expendable parts and supplies 329,262 254,282
Inventory held for sale 30,000 30,000
Prepaid expenses 53,753 -
Total current assets 2,475,655 1,845,331
OTHER ASSETS
Deposits 7,258 17,258
PROPERTY AND EQUIPMENT
Flight equipment 680,491 612,108
Facility under capital lease 456,185 456,185
Other property and equipment 202,086 187,497
1,338,762 1,255,790
Less accumulated depreciation
and amortization (465,175) (554,916)
873,587 700,874
$ 3,356,500 $ 2,563,463
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 179,836 $ 132,674
Current maturities of capital
lease obligations 8,164 11,639
Accounts payable 575,056 64,213
Accrued expenses 459,307 676,084
Traffic balances payable and
unused tickets 189,769 43,155
Income taxes - 24,950
Total current liabilities 1,412,132 952,715
LONG-TERM DEBT, less current maturities 219,272 263,765
CAPITAL LEASE OBLIGATIONS,
less current maturities 267,216 275,379
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized, 20,000,000 shares
Issued and outstanding,
1,127,637 shares 1998
and 1,054,900 shares 1997 579,722 471,207
Additional paid-in capital 228,909 110,159
Retained earnings 673,102 490,238
1,481,733 1,071,604
Less treasury stock at cost
(20,000 shares in 1998;
-0- shares in 1997) (23,853) -
1,457,880 1,071,604
$ 3,356,500 $ 2,563,463
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
OPERATING REVENUE
Passenger $ 3,393,039 $ 1,580,581
Cargo 130,617 100,057
Public service 4,324,091 3,122,861
Other 63,843 67,336
Total operating revenue 7,911,590 4,870,835
OPERATING EXPENSES
Flying operations 3,157,151 1,579,716
Maintenance 1,610,696 1,073,832
Traffic 2,027,439 1,239,305
Marketing 85,412 32,400
General and administrative 857,026 558,432
Total operating expenses 7,737,724 4,483,685
INCOME FROM OPERATIONS 173,866 387,150
OTHER INCOME (EXPENSE)
Interest expense (72,082) (70,627)
Interest income 35,541 36,770
Gain (loss) on equipment disposal
and writedown of inventory 165,539 (13,745)
INCOME BEFORE INCOME TAXES 302,864 339,548
INCOME TAXES 120,000 142,000
NET INCOME $ 182,864 $ 197,548
BASIC EARNINGS PER COMMON SHARE $ .17 $ .19
DILUTED EARNINGS PER COMMON SHARE $ .16 $ .18
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
Additional
Common Stock Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
BALANCE,
JUNE 30, 1996
1,065,460 $ 482,711 $ - $ - $ 292,690 $ 775,401
Retirement of
common stock
(10,560) (11,504) - - - (11,504)
Tax benefit from
pre-Fresh Start
deferred tax assets
- - 110,159 - - 110,159
Net income - - - - 197,548 197,548
BALANCE,
JUNE 30, 1997
1,054,900 471,207 110,159 - 490,238 1,071,604
Retirement of
common stock
(1,263) (860) - - - (860)
Common stock
acquired for treasury
(20,000) - - (23,853) - (23,853)
Stock options issued
pursuant to employee
incentive plans
- - 8,625 - - 8,625
Common stock options
exercised
34,000 38,125 (4,875) - - 33,250
Common stock issued
pursuant to employee
incentive plans
60,000 71,250 - - - 71,250
Tax benefit from
pre-Fresh Start
deferred tax assets
- - 115,000 - - 115,000
Net income - - - - 182,864 182,864
BALANCE,
JUNE 30, 1998
1,127,637 $ 579,722 $ 228,909 $ (23,853) $673,102 $ 1,457,880
See notes to financial statements. F4
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
OPERATING ACTIVITIES
Net income $ 182,864 $ 197,548
Charges and credits to net income
not affecting cash
Depreciation and amortization 93,379 89,456
(Gain) loss on disposal of equipment (165,539) 2,141
Excess reorganization value charges
in lieu of taxes - 6,841
Pre-Fresh Start deferred tax benefits 115,000 110,159
Compensation from employee incentive plans 79,875 -
Changes in assets and liabilities
Restricted cash 448,651 (173,382)
Receivables (982,278) 31,601
Expendable parts and supplies (74,980) (18,154)
Inventory held for sale - 11,604
Prepaid expense (53,753) -
Deposits 10,000 -
Accounts payable 510,843 (57,474)
Accrued expenses (216,777) 124,126
Traffic balances payable & unused tickets 146,614 3,060
Income taxes (24,950) 24,950
NET CASH FROM OPERATING ACTIVITIES 68,949 352,476
INVESTING ACTIVITIES
Proceeds from sale of equipment 260,551 4,359
Property and equipment purchases (361,104) (22,526)
NET CASH USED FOR INVESTING ACTIVITIES (100,553) (18,167)
FINANCING ACTIVITIES
Proceeds from long-term debt borrowings 150,000 -
Payments on long-term debt (147,330) (122,728)
Payments on capital lease obligations (11,639) (16,039)
Payments to retire common stock (860) (11,504)
Proceeds from stock options exercised 33,250 -
Payments to acquire treasury stock (23,853) -
NET CASH USED FOR FINANCING ACTIVITIES (432) (150,271)
NET CHANGE IN CASH AND CASH EQUIVALENTS (32,036) 184,038
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR
544,706 360,668
CASH & CASH EQUIVALENTS AT END OF YEAR $ 512,670 $ 544,706
(continued on next page)
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year
Interest $ 73,589 $ 72,861
Income taxes 52,766 -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Common stock issued as compensation
pursuant to employee incentive plans
$ 71,250 $ -
Stock options granted as compensation
pursuant to employee incentive plans 8,625 -
<PAGE>
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 1 - BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Company operates as a regional commuter air carrier, primarily
providing scheduled passenger, freight, express package and charter
services. At June 30, 1998, scheduled air service was provided to
thirteen communities in Montana and in eastern Washington. The
Company's present route system is designed around a 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. 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 excess reorganization value.
The excess reorganization value has since been reduced to zero from
realization of pre-Fresh Start deferred tax assets.
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, 1998, the total balance at one of these
institutions was in excess of federal insurance limits by
approximately $700,000.
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.
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.
Earnings Per Share
A new method for computing earnings per share has been established
by SFAS No. 128 "Earnings per Share." The new standard simplifies
the standards for computing earnings per share and requires
presentation of two new amounts, basic and diluted earnings per
share. This standard has been applied retroactively to the year
ended June 30, 1997.
Following is a reconciliation of the numerators and the
denominators of the basic and diluted earnings per share.
Year Ended June 30, 1998
Per-Share
Income Shares Amount
Basic earnings per share
Net income $ 182,864 1,082,602 $ .17
Effect of dilutive
securities options - 48,753
Diluted earnings per share
Net income $ 182,864 1,131,355 $ .16
Year Ended June 30, 1997
Per-Share
Income Shares Amount
Basic earnings per share
Net income $ 197,548 1,060,180 $ .19
Effect of dilutive
securities options - 28,545
Diluted earnings per share
Net income $ 197,548 1,088,725 $ .18
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 deferred tax assets will be
recognized as a reduction of current tax expense when realized.
Utilization of pre-Fresh Start deferred tax assets in the reporting
period are reflected as a "charge in lieu of taxes" (See Note 6).
Fair Value of Financial Instruments
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 Compensation7
A new method of accounting for stock-based compensation
arrangements with employees has been 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. The Company has not adopted
the fair value based method of accounting and continues to use the
intrinsic value based method contained in Opinion 25.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred
$64,134 and $8,894 for advertising costs in 1998 and 1997,
respectively.
NOTE 2 - RESTRICTED CASH
At June 30, 1998 and 1997, restricted cash includes $87,500 and
$30,000, respectively, 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.
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, 1998 and 1997, restricted cash included
undistributed liquidation proceeds of $14,000 and $13,620,
respectively.
At June 30, 1997, 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 at June 30, 1997. Beginning July 1,
1997 the Company recorded payments to the lessor as a reduction of
the overhaul accrual.
NOTE 3 - ACCRUED EXPENSES
1998 1997
Leased engine overhauls $ 41,816 $ 390,700
Engine hot-end inspections 9,115 110,000
Vacation 100,605 86,111
Payroll and payroll taxes 149,334 40,631
Property taxes 151,284 39,982
Interest 7,153 8,660
$ 459,307 $ 676,084
NOTE 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.
NOTE 5 - LONG-TERM DEBT
1998 1997
9.5% installment note, due in monthly
payments of $4,495, including interest,
through August 2001, secured by accounts
receivable $ 147,001 $ 184,997
9.75% installment note, due in monthly
payments of $4,821, including interest,
through February 2001, secured by equipment
135,344 -
7% installment note, due in 72 equal monthly
payments of $6,775, including interest,
through July 1999, secured by inventory,
accounts receivable and equipment 68,278 141,967
Reorganization claims discounted at 10%,
due in annual payments of $27,937, including
interest, through September 1999 48,485 69,475
399,108 396,439
Less current maturities (179,836) (132,674)
$ 219,272 $ 263,765
The Company has obtained a $600,000 line of credit which matures
November 1, 1998, and is secured by inventories and accounts
receivable. Advances bear interest at prime plus 1.5%. There were
no borrowings outstanding on the line of credit as of June 30, 1998.
Long-term debt maturities are as follows:
Years Ending June 30, Amount
1999 $ 179,836
2000 122,759
2001 87,659
2002 8,854
$ 399,108
NOTE 6 - INCOME TAXES
Income tax expense from operations consists of the following:
1998 1997
Current
Federal $ - $ -
State 5,000 25,000
5,000 25,000
Deferred
Federal - charge in lieu of taxes 115,000 117,000
State - -
115,000 117,000
$ 120,000 $ 142,000
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 as follows:
1998 1997
Computed "expected" tax expense $ 103,000 $ 106,800
State income taxes
(net of Federal income tax effect) 5,000 25,000
Other non-deductible expenses 12,000 10,200
$ 120,000 $ 142,000
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:
1998 1997
Deferred tax assets
Accounts receivable, due to allowance
for doubtful accounts $ 500 $ 463
Inventory held for sale, due to basis
adjustment 4,000 -
Property and equipment, due to differences
in depreciation 5,900 13,643
Accrued overhauls and hot-end inspections 90,500 193,370
Compensated absences 39,000 33,256
Net operating loss carryforwards 475,000 496,335
Investment tax credit carryforwards 29,500 35,200
AMT credit carryforwards 1,000 7,427
Total gross deferred tax assets 645,400 779,694
Less valuation allowance (643,500) (766,586)
Net deferred tax assets 1,900 13,108
Deferred tax liabilities
Property and equipment, due to
Fresh-Start adjustments (1,900) (13,108)
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:
Year Expiring NOL ITC
1999 $ - $ 7,900
2000 - 1,200
2001 - 20,400
2003 - -
2004 1,075,000 -
2005 148,000 -
2006 58,000 -
2009 111,000 -
2011 6,000 -
$ 1,398,000 $ 29,500
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,
1998 which are subsequently realized would be allocated as follows:
Excess reorganization value $ -
Additional paid-in capital 635,769
$ 635,769
NOTE 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,
1998 and 1997 was $4,324,091 and $3,122,861, respectively (See Note
11). These subsidy amounts represent 55% and 64% of all revenues
for fiscal years ended June 30, 1998 and 1997, respectively.
The Company's current EAS contract expires in November 1998. The
Company has reached agreement with the DOT on a new EAS contract
which begins on December 1, 1998 and expires November 30, 2000.
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 future EAS subsidies.
The financial statements do not reflect any adjustments that may
result from an unfavorable resolution of any future contracts.
NOTE 8 - LEASES
Operating Leases
As of June 30, 1998, the Company leased office facilities, land and
six Metroliner III 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, 1998:
Years Ending June 30,
1999 $ 1,256,722
2000 1,256,903
2001 1,239,587
2002 1,227,274
2003 281,022
Thereafter 143,485
$ 5,404,993
Rental expense under operating leases charged to operations was
$1,374,242 and $598,115 for the years ended June 30, 1998 and 1997,
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 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, 1998 are as follows:
Years Ending June 30,
1999 $ 31,260
2000 274,778
Total minimum lease payments 306,038
Less interest (30,658)
Present value of minimum lease payments 275,380
Less current maturities (8,164)
Obligations under capital leases,
excluding current maturities $ 267,216
Minimum lease payments have not been reduced by future annual
minimum sublease rentals of $33,550 under noncancelable subleases.
The carrying value of the facility under capital leases net of
accumulated amortization was $368,434 and $391,834 at June 30, 1998
and 1997, respectively.
NOTE 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 each of the years
ended June 30, 1998 and 1997 were approximately $42,000.
NOTE 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 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 stock
options up to 2,000 shares per year per director may be awarded 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 has expired.
In fiscal 1996, the Company granted performance based stock options
to one employee ("Special Stock Option Plan"). Under the Plan,
options are to be 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 are also to be
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. In fiscal 1998, the 6,000 shares were
granted to the employee and compensation expense of $3,000 was
recognized to the extent the current market value of the underlying
shares exceeded the exercise price at the date the grants are
vested with the employee.
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. 46,000 of the
options under the 1996 plan have been granted as of June 30, 1998.
In July 1996, the stockholders also approved the 1996 Stock Bonus
Plan ("Bonus Plan") under which shares of the Corporation's common
stock may be awarded to employees and directors. The total number
of shares which may be issued under the plan shall not exceed
180,000 and no more than 60,000 shares in any fiscal year. In
fiscal 1998, 60,000 shares of common stock have been issued as
discussed in the following paragraph.
In July 1996, the stockholders also approved the Team Incentive
Compensation Plan ("Incentive 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 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. All of the components of the Incentive
Plan have been paid and granted as of June 30, 1998 and,
accordingly, there was expense recorded of $106,875 during the year
ended June 30, 1998.
Changes in stock options issued under these fixed stock option
plans are as follows:
1998 1997
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
Outstanding, beginning of
fiscal year 38,212 $ 1.04 50,043 $ 1.25
Granted 74,000 1.88 9,667 1.13
Exercised (34,000) .98 - -
Canceled (1,250) - (21,498) 1.56
Outstanding, end of
fiscal year 76,962 $ 1.11 38,212 $ 1.04
Range of exercise prices $.63 to 1.39 $.63 to 1.25
Options exercisable,
end of fiscal year 75,762 31,126
Summarized information about fixed stock options at June 30, 1998
is as follows:
Options Outstanding Options Exercisable
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Exercise Outstanding at Contractual Average Exercisable at Average
Prices 6/30/98 Life Exercise Price 6/30/98 Exercise Price
$ .63 4,000 1.5 years $ .63 4,000 $ .63
.94 5,750 1.0 .94 5,750 .94
1.09 42,400 2.4 1.09 41,200 1.09
1.13 5,667 3.5 1.13 5,667 1.13
1.25 11,145 .2 1.25 11,145 1.25
1.39 8,000 4.5 1.39 8,000 1.39
$.63 to 1.39 76,962 2.2 years $ 1.11 75,762 $ 1.11
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, compensation cost of $8,625
and $-0- has been recognized for the options granted in 1998 and
1997, respectively. 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
$22,000 and $4,000 in 1998 and 1997, respectively. Accordingly,
the Company's 1998 net income and earnings per share would have
been reduced to proforma amounts of $169,489 and $.16, respectively
and 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 10%, risk free interest rate of 6%, expected
lives of 4.5 years and no expected dividends.
NOTE 11 - BUSINESS AND CREDIT CONCENTRATIONS
At June 30, 1998, principally all of the Company's scheduled air
service communities are located in Montana and seven 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 became 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 $329,277 and $268,895, or 23%
and 25% of total stockholders' equity at June 30, 1998 and 1997,
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.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
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.
NOTE 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.
