ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
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, 1999
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: $15,914,998
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: $1,465,064 (1,065,501 shares held by all
shareholders excluding officers and directors identified in Item 11, below,
@ $1.375 per share, based on latest sale September 14, 1999).
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 1,255,982 (June 30, 1999)
<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
<PAGE>
Financial Statements
(appended)
Independent Auditors' Report
Balance Sheets as of June 30, 1999 and 1998
Statements of Earnings for the years-ended June 30, 1999 and 1998
Statements of Cash Flows for the years-ended June 30, 1999 and 1998
Statements of Stockholders' Equity for the years-ended June 30,
1999 and 1998
Notes to Financial Statements
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development:
Big Sky Transportation Co., dba Big Sky Airlines, is a regional airline. In
this report, Big Sky Transportation Co. is referred to as "Big Sky". Big Sky
Transportation Co., dba Big Sky Airlines, and hereafter referred to as Big
Sky has actively pursued a plan of expansion and service diversification.
Its objectives have been to provide safe, efficient, and economical
scheduled airline service to small cities and towns not otherwise served by
air carriers, and in so doing enhance aircraft utilization, earnings, and
shareholder equity. Since the summer of 1996, Big Sky has increased its
operations from three aircraft providing service in northern and eastern
Montana to thirteen aircraft providing service in two regions of the United
States: (1) throughout Montana, with connections to Spokane, Washington and
to Bismarck, North Dakota, and (2) between points in the south central United
States in Texas, Oklahoma, Arkansas, and Missouri. Big Sky's operating
revenues during the past three years have increased from $4,870,835 to
$15,914,998.
(1)Form and Year of Organization: Big Sky is the successor to another
corporation of the same name, incorporated in the State of Montana in 1978.
Big Sky 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). In February 1999 Big Sky concluded
a private sale of 134,372 shares of its 1996 Series Common Stock. Big Sky
continues to be organized and existing under the Montana Business Corporation
Act.
(2)Bankruptcy Proceedings: Big Sky was successful in a Chapter 11
Reorganization filed in March 1989. Its Plan of Reorganization was confirmed
in July 1991and the case closed in June 1992. Big Sky is in full compliance
with the Plan and completed its payments to unsecured creditors in September
of 1998, one year ahead of schedule.
(3)Reclassification, Merger, Consolidation, or Disposition of Assets
Not in Ordinary Course of Business: None.
(b) Business of Issuer:
Big Sky operates as a regional air carrier, providing scheduled passenger,
freight, express package and charter services. Big Sky operates nine
Fairchild Metro III aircraft and four Fairchild Metro 23 aircraft between
cities and towns in seven states: Arkansas, Montana, Missouri, North Dakota,
Oklahoma, Texas, and Washington.
(1)Principal Products, Services, and Markets: Big Sky's present route
system is designed around two air service hubs: Billings, MT and Dallas, TX.
Passengers and freight are transported within Big Sky's route system and in
conjunction with other carriers. Services between the Billings hub and seven
communities in Central/Eastern Montana and between the Dallas hub and eight
communities in Texas, Arkansas, and Oklahoma with connection to St.Louis, MO,
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 seventy percent of Big Sky's
current revenues are derived from the EAS markets and their public
subsidy. In addition, Big Sky provides non-subsidized service between
Billings, MT and Helena, MT, Great Falls, MT, Kalispell, MT, Missoula, MT,
and Spokane, WA. Big Sky operates daily scheduled flights, which provide
well-timed interline and online connecting services, as well as convenient
local market services. Big Sky 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. Effective
June 2, 1999 Big Sky's services in the Billings region are also marketed
under a code-sharing agreement with Northwest Airlines whereby those
flights carry both the GQ and the NW code designator code.
The table below lists the cities served and date service was inaugurated:
City/State Service Inaugurated
Billings, Montana Sept 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
Dallas & Brownwood, Texas Nov 1998
Hot Springs, Mountain Home,
Jonesboro, Harrison,
& El Dorado, Arkansas Nov 1998
Enid & Ponca City, Oklahoma Nov 1998
St. Louis, Missouri Nov 1998
(2) Distribution Methods of Products and Service: Big Sky derives its
revenues from passenger ticket sales, freight and express package service,
and DOT subsidy payments. We participate in the four major computer
reservation systems used by travel agents to make airline reservations. We
also maintain a reservations center in Billings operated by our own employees
utilizing the Worldspan computerized reservation system. Travel agents are
currently paid an eight- percent commission for ticket sales and currently
sell approximately sixty-five percent of our tickets. Internally we
administer a ticket by mail program and a bulk ticketing program that
targets sales of ten or more tickets to corporations and government agencies
at our lowest advance purchase fares. Tickets are also sold at each of our
stations.
In order to gain connecting traffic from other carriers we have negotiated
interline agreements with the major and regional airlines serving cities on
our route system. Generally these agreements have joint ticketing and baggage
services designed to expedite the connecting process. To enhance our
connecting traffic we entered into a code sharing agreement with Northwest
Airlines on June 2, 1999 covering our markets in Montana, Washington and
North Dakota. The agreement provides one stop check-in for connecting
passengers and baggage and provides Northwest frequent flyer mileage for our
flights for those passengers.
EAS subsidy from the DOT is paid for each departure in a covered market. The
EAS contracts are bid biannually and the rates per departure are established
through negotiation with the DOT.
(3) Status of any Publicly Announced New Service:
During the fiscal year ending June 30, 1999 Big Sky announced new scheduled
airline service in both its northern and southern operations. Increased
service between points in central and western Montana and Spokane, Washington
was announced in September of 1998 to be effective in November of 1998. This
service was commenced as announced and has met all projections of revenues
and earnings production. Service between points in Texas, Oklahoma, Arkansas,
and Missouri was announced in October 1998 to be phased in between November
1998 and February of 1999. A majority of the service was instituted as
announced, however delays in obtaining suitable aircraft to provide the
service resulted in significant additional expense and created operational
problems through the end of the year. Revenues have been less than projected
in the region and losses have been far greater than were anticipated in the
start up period.
(4) Competitive Conditions: Big Sky provides service to seven
communities in eastern and central MT and to eight communities in the south
central United States under the EAS contracts. Big Sky also serves four
points in western Montana and Spokane, WA that are not subject to EAS
contracts. The principal competition in all of Big Sky'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. The markets currently served by Big Sky
generally do not have competitive scheduled air service.
(5) Source and Availability of Raw Materials: Big Sky's operations
are dependent upon the availability of adequate jet fuel at affordable
prices. Generally during the past fiscal year fuel prices have been lower
than Big Sky has historically experienced. Fuel availability has not been a
constraining factor on Big Sky's past operations. However, Big Sky
cannot be assured of adequate supply nor that current prices will prevail.
Big Sky is not dependent upon any major suppliers, but is able to purchase
fuel from numerous suppliers at airports throughout its system. Big Sky
attempts to schedule its fuel purchases to result in the best possible prices
for fuel and maximum utilization of aircraft.
(6) Dependence on Major Customers: Since mid-1980, Big Sky 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"). Big Sky
obtained 49% of its total revenues in fiscal year 1999 from the EAS program.
During the past three years, Big Sky has pursued a growth and diversification
strategy such as the initiation of non-subsidized services to Helena,
MT, Kalispell, MT, Missoula, MT, and Spokane, WA. EAS subsidy revenue in the
previous two years was 55% and 64% of total revenues.
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 Big Sky, 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. Big Sky's current EAS contract for Montana service
extends through November 30, 2000. Big Sky's current EAS contracts for
service in the south central United States expire on November 30, 1999.
(7) Patents, Trademarks, Licenses, Franchises, Concessions, Royalty
Agreements, or Labor Contracts. Big Sky's name and trade name, Big Sky
Airlines, are registered with the Montana Secretary of State. The duration
of the registrations are through February 8, 2004. Big Sky's name is also
registered in the states of Arkansas, Missouri, New York, North Dakota,
Oklahoma, Texas and Washington. Big Sky trade name is also registered in
Arkansas and Oklahoma. Big Sky is a party to two collective bargaining
agreements covering certain of its employees. Big Sky's mechanics are
employed in under an agreement with the International Association of
Machinists & Aerospace Workers (IAM) that expires on May 2, 2000. Big Sky's
pilots are employed under an agreement with the United Transportation Union
(UTU) that expires on January 1, 2001.
(8) Government Approval of Products and Service: The Federal Aviation
Administration (FAA) inspects and evaluates Big Sky's operational and
administrative systems, as more fully described below for compliance with the
Federal Aviation Regulations (FAR's). Big Sky endeavors to attain full
compliance with all FAR's.
(9) Effect of Existing or Probable Government Regulations on Business:
All certificated airlines, including Big Sky, are subject to regulation by
the DOT and the FAA under the Federal Aviation Act. Big Sky operates under
Part 121 of the FAR's and holds a Section 401 PC&N Certificate issued by the
U.S. Department of Transportation.
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: Big Sky 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.
(10) Estimate of Time Spent on Research and Development During Last
Two Fiscal Years. Big Sky is not involved in business activities that
entail basic or applied scientific research. Big Sky devotes approximately
four hundred executive hours per year to market and service analysis and
planning.
(11) Cost and Effects of Complying With Environmental Laws:
Environmental laws directly impact Big Sky in regulating its disposal of
waste fuel and lubricants. The cost of environmental compliance is less than
$10,000 per year. Because Big Sky does not operate jet aircraft it is not
presently impacted by noise abatement requirements.
(12) Employees: At June 30, 1999, Big Sky employed a total of 222
personnel, approximately 56 of whom are part-time.
ITEM 2. DESCRIPTION OF PROPERTY
(a) Location and Condition of Principal Business Properties:
Big Sky's main hangar and principal offices are located at 1601 Aviation
Place, Billings Logan International Airport, Billings, Montana. Big Sky's
southern region office is located at Dallas/Forth Worth Airport, Texas.
Big Sky has airport counter, baggage, and ramp space for ground services and
customer services at sixteen cities currently served. At eight of the
airports that Big Sky serves it contracts ground handling services from other
airlines or service providers. Big Sky rents hangar space at locations
outside Billings for over-night aircraft on a seasonal, as needed, basis, and
rents hangar space at Hot Springs, AR for aircraft maintenance to support the
south central operations. Big Sky routinely maintains it real properties,
keeping them in excellent condition.
At fiscal year-end, Big Sky had a fleet of nine Fairchild Metro III (-11UA),
and three Fairchild Metro 23 (-12) turboprop aircraft configured for
nineteen-seat passenger service. Six of the Metro III aircraft incorporate a
16,000 pound gross take-off weight (HGW) modification and three aircraft have
the standard 14,500 pound gross take-off weight. The Metro 23's have a
gross take-off weight of 16,500 pounds. The aircraft operated are appropriate
for market demands on Big Sky's route system. Eleven aircraft are leased
under long term operating leases and six. of these leases contain purchase
options. The other aircraft was purchased through a long-term loan. Big Sky
employs 25 certified A&P (Airframe & Power Plant) mechanics, who perform all
routine maintenance and periodic inspections on its aircraft and engines. Big
Sky holds an FAA-certified repair station certificate, allowing it to perform
maintenance on Garrett TPE -331 series engines. Major engine overhauls and
avionics work are performed by the manufacturers or qualified outside
contractors. All aircraft are maintained in excellent condition.
Big Sky's certificate also allows it to perform maintenance for outside
customers; however, to date, work and revenues generated by outside customers
have been minimal.
(b) Investment Policies:
Big Sky has no restrictions or limitations in its governing documents
regarding investments. It has been Big Sky's policy to limit investment to
operating assets and to maximize the utilization and income on these assets.
Big Sky does not acquire property for capital gain purposes.
(1) Investment in Real Estate or Interests in Real Estate. Big Sky does not
own any real estate. It leases office and hangar facilities. It has
purchases options on its Billings facilities.
(2) Investment in Real Estate Mortgages. None.
(3) Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities. None.
(c) Description of Real Estate and Operating Data:
Big Sky owns no real estate, the book value of which amounts to 10% or more
of the total assets of Big Sky.
(1) General Information About Properties. Big Sky's main facilities in
Billings, Montana consist of a 11,520 square foot building built to its
specifications consisting of a large hangar that can hold three Metro
aircraft for maintenance, a parts warehouse, back shop area, and two floors
of offices. An adjacent modular building is used to accommodate certain
administrative and training needs. A new two-story office building is under
construction on land next to the modular building, and upon completion will
house Big Sky's executive and business offices. These buildings are situated
on 83,176 square feet of land owned by the City of Billings and leased to Big
Sky on long-term ground leases.
Big Sky's remaining real property interests consist of leases and rental
agreements for counter space, baggage handling facilities, hangar space, and
other operational facilities with airports or airlines of short-term duration.
Big Sky has no options to purchase these facilities.
(2)Title to Real Property. Big Sky does not have ownership title to any
real property.
(3)Terms of Major Real Property Leases and Options. Big Sky leases the
buildings that it occupies in Billings, MT, with options to purchase. These
buildings are leased under a long-term lease expiring in 2014, at the rate of
$3,500 per month, subject to certain adjustments. Big Sky has options to
purchase the buildings from the lessor at various times during the lease in
accordance with a formula that takes into account the fair market value of
the buildings, appreciation in value of the buildings, and payments made by
Big Sky that have created equity in the buildings. (See Note 8 to financial
statements for terms and conditions of these leases and options.)
(4)Property Renovation, Improvement and Development Programs. Big Sky
maintains the properties that it leases on a current basis as required in the
leases. Big Sky has no present plans for improvements or developments of
these properties.
(5)Competitive Conditions Effecting Properties. The properties that Big
Sky leases and rents for its operations are sought by other air carriers and
providers of air transportation services. The terms and conditions of these
leases and rental agreements are based upon local conditions. At most of the
airport locations where that Big Sky operates, rental rates and other
terms and conditions are established by airport authorities. From time to
time, Big Sky experiences situations at airports in which counter and gate
facilities are in high demand, resulting in a bidding situation.
(6)Insurance Coverage. Big Sky maintains insurance coverage customary in
the airline industry covering its operations and property, with policy limits
that it believes to be adequate. Coverage includes public liability,
passenger liability, aircraft equipment loss or damage, real property hazard
and casualty coverage as required by lessors, baggage and cargo liability and
workers' compensation.
(7)Leasing of Properties by Big Sky. Big Sky does not have any leases of
its properties. Big Sky enters into subleases of its facilities from time to
time to other aviation operators. The only sublease that exceeded $10,000
per year was an agreement with Ameriflight in Billings, Montana for the use
of hangar space at the rate of $3,250, per month. This sublease expired
during the past year, but Ameriflight continues to occupy space on a month to
month basis generally under the same terms and conditions.
ITEM 3. LEGAL PROCEEDINGS
Big Sky is not involved in any legal proceedings nor are its properties the
subject of any pending legal proceedings, except for routine litigation
incidental to the business that is not material to Big Sky's financial
condition. There are no legal proceedings in which any director, officer or
affiliate of Big Sky, or any owner of record or beneficially of more than 5%
of Big Sky's common stock is a party that involves Big Sky. There are no
legal proceedings against Big Sky by any holder of Big Sky common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the year-ended June 30, 1999, there were no special meetings or votes
of the stockholders. The Proxy Statement for the February 1999 Annual
Meeting of Stockholders, filed on January 8, 1999 is incorporated by reference.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information.
(1) Principal Trading Market and Trading Information. Since August 1980, Big
Sky's common stock has been listed on the Pacific Exchange, Inc. (PSE). The
stock trading symbol is "BSA.P".
The following table, based on total monthly report statistics as received
from the PSE, sets forth the range of high and low sales prices of Big Sky's
common stock by quarter during fiscal years 1998 and 1999. Bid prices
represent quotations between dealers and do not include retail markups,
markdowns or commissions, and may not represent actual transactions.
Data for fiscal years 1998 and 1999 reflect effect of the 5:1 reverse stock
split effective in August 1996:
Fiscal Year 1998
Quarter-Ended High ($) Low ($)
09/30/97 1.1562 Aug 1.1250 Aug/Sep
12/31/97 1.1875 Dec 1.1250 Oct/Nov
03/31/98 1.5000 Mar 1.2500 Feb
06/30/98 2.1875 Jun 1.6250 Apr
Fiscal Year 1999
Quarter-Ended High ($) Low ($)
09/30/98 2.2500 Jul 1.8750 Sep
12/31/98 1.9375 Dec 1.6875 Dec
03/31/99 2.0625 Jan 1.6875 Mar
06/30/99 1.7500 May 1.4375 Jun
(b) Holders.
According to records maintained by Big Sky's transfer agent, Continental
Stock Transfer & Trust Co., Big Sky had 287 holders-of-record of its 1996
Series Common Stock as of June 30, 1999.
(c) Dividends.
Big Sky did not pay dividends on its common stock during the fiscal year June
30, 1999 and has not paid dividends in the past. Big Sky reinvests its
earnings in order to provide operational growth, acquired operational assets,
and increase stockholder equity. Payment of cash dividends is not anticipated
in the foreseeable future. Big Sky's Chapter 11 Plan of Reorganization placed
restrictions on the payment of dividends. However, as all unsecured claims
under the Chapter 11 Plan have been paid in full, such restrictions are no
longer effective.
(d) Unregistered Equity Securities Sold During Period.
On February 19, 1999, Big Sky completed the sale of 134,372 shares of 1996
Series Common Stock at the price of $1.75 per share in a private placement to
Northern Rockies Venture Fund, Ltd. and affiliates, as follows: Northern
Rockies Venture Fund, Ltd. -- 114,286 shares, Boulder Partners, LLC --
14,286 shares, Doug McCormick -- 2,900 shares, Richard Stone -- 2,900
shares. The total offering price of the securities was $235,151.00, and was
paid in cash. Big Sky claimed exemption from registration under SEC
Regulation D, Rule 506, on the grounds that there were less than 35 investors
involved in the private placement, all investors were accredited,
there was no general solicitation for the sale of the securities, and
restrictions were placed on the resale of the securities. There were no
underwriters or promoters involved in the transaction. There were no
underwriters' discounts and no commissions, finder's fees, expenses paid to
or for underwriters in connection with the transaction. Purchasers' expenses
and attorney fees not to exceed $7,500 were reimbursed. Big Sky's legal fees
associated with the transaction totaled $12,000. Big Sky filed an SEC Form D
on February 25, 1999, to report this transaction.
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
(a) Plan of Operation.
Not applicable.
(b) Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operation and Financial Condition: Big Sky experienced rapid
growth in revenues during fiscal year 1999, generating $15.9 million as
compared to $7.9 million in fiscal year 1998. Operations in the Montana
region were conducted profitably throughout the year. Operations in the
southern region were conducted at a loss primarily due to larger than
anticipated startup expenses and unanticipated flight equipment problems.
Big Sky experienced an operating loss from all of its operations of $110,345
in fiscal year 1999.
Traffic in the Kalispell and Spokane markets that were initiated in May and
June of 1998 respectively, exceeded expectations. Traffic growth also
occurred in the Helena and Missoula markets in the first full year of serving
those cities. In the Montana EAS markets, passenger boardings were seventeen
percent greater than the previous fiscal year, and we commenced service under
a new two-year contract with the DOT for the seven Montana communities on
December 1, 1998.
In October 1998 we added a seventh Metro III HGW aircraft to the fleet to
continue expansion into non-subsidized markets in western Montana and Spokane
WA. New service was added between Missoula and Kalispell MT to Spokane and
early morning service was instituted between Great Falls and Billings. The
aircraft was purchased with the proceeds of a loan from Bombardier Capital
for ninety percent of the value of the aircraft. In addition to the new
services the aircraft is used as an operational spare during certain times of
the day.
In late September 1998, the DOT issued an emergency air carrier solicitation
order to provide EAS service to eight communities in Arkansas, Oklahoma, and
Texas that were being served by Aspen Mountain Air ("AMA"). AMA is in a
Chapter 11 bankruptcy proceeding and had advised DOT that it intended to
discontinue its operations to these communities. The two EAS contracts
that cover this service provide a maximum annual subsidy of $6.3 million
together with passenger revenues that historically approached $3.0 million.
Big Sky's proposal to the DOT was to assume the contracts held by AMA through
the remainder of their terms and phase in service over a thirty to ninety day
period as aircraft became available. The DOT selected our proposal over
competitive bids by three other airlines on October 7, 1998, through the
expiration of the contracts on November 30, 1999.
Due to the rapidly deteriorating situation at AMA, Big Sky agreed to the
DOT's request to assume full responsibility for the services on November 15,
1998. In order to commence a majority of the service on this expedited basis,
we were required to contract service for two aircraft under a wet-lease
agreement with another airline and provide two aircraft of our own.
The wet-lease situation continued through February 1999 due to our inability
to acquire suitable aircraft to replace the operator. The sufficient number
of aircraft required for the service were not acquired until July 1999,
which led to continued operational reliability problems. The shortage of
aircraft, the additional cost of the wet-lease contract and the poor
reliability of the operator, together with the general start-up expense
associated with commencing an operation of this scope have led to a
significant financial loss in this region.
Big Sky has established a line of credit for $1,000,000 through First
Interstate Bank of Billings. The actual line availability is based upon a
borrowing formula covering accounts receivable, inventories and accounts
payable. The line is used primarily to supplement timing differences in
cash flow. As of this date Big Sky has made draws against the line of credit
up to the maximum amount available.
The following table sets forth certain statistics relating to the operations
of Big Sky during the recent two years:
Year-Ended 6/30
1999 1998
Passengers 93,157 43,145
Revenue Passenger Miles--RPMs (000) 24,053 9,163
Available Seat Miles--ASMs (000) 72,245 29,637
ASMs including Charter (000) 72,245 29,651
Average Passenger Load Factor (%) 33.3 30.9
Aircraft Miles (000) 3,802 1,620
Average Yield per Passenger Mile (cents) 32.58 37.02
Operating Cost Per ASM (cents) 26.11 26.11
Freight Pounds 273,400 181,592
Operating Breakeven, including Subsidy (%) 33.5 30.2
Fleet:
Metro III 9 6
Metro 23 3 0
Total 12 6
Cities Served 24 13
1999 Compared to 1998: Fiscal year 1999 was a year of unprecedented growth
for Big Sky driven by our continued expansion in Western Montana in late
fiscal 1998 and the assumption of the EAS services in the south central U.S.
in November. Profitable operations in Montana were more than offset by losses
in the south central region for reasons described above and further
enumerated in the following discussion. The operating loss of $110,345 during
1999 compares to an operating profit of $173,866 in fiscal 1998. The net
loss of $178,780 this year compares to net income of $182,864 in the prior
year. Despite the loss in the south central region we believe that we have
solved the major problems that led to those results, and that this
segment of the business can contribute to profitability in the future.
Operating Revenues $:
Year-Ended Increase (Decrease)
6/30/99 6/30/98 Dollars Percent
Passenger 7,835,642 3,393,039 4,442,603 130.9
Cargo 218,594 130,617 87,977 67.4
Public Service 7,749,057 4,324,091 3,424,966 79.2
Other 111,704 63,843 47,861 75.0
Total 15,914,988 7,911,590 8,003,398 101.2
The increase in passenger and cargo revenue is primarily related to the
continued expansion into Kalispell and Spokane WA, the impact of the full
year of revenues in Helena and Missoula versus nine months in fiscal 1998,
and the addition of the south central EAS markets. The increase of passenger
traffic in the Montana EAS operation also contributed to the increase to
a smaller extent. The increase in public service (subsidy) revenues is
primarily due to the addition of the south central EAS routes, and to a much
lesser degree the new Montana EAS contract rates compared to the prior period.
Operating Expenses $:
Year-Ended Increase (Decrease)
6/30/98 6/30/97 Dollars Percent
Flying Operations 6,752,957 3,157,151 3,595,806 113.9
Maintenance 3,351,946 1,610,696 1,741,250 108.1
Traffic 4,419,368 2,027,439 2,391,929 118.0
Marketing 336,915 85,412 251,503 294.5
General and Administrative 1,164,157 857,026 307,131 35.8
Total 16,025,343 7,737,724 8,287,619 107.1
The increase in flying operations expense was related to the significant
increase in the route expansion during the year. All cost categories were
impacted. The aircraft shortage situation and wet-lease contract in the south
central operation resulted in more than $900,000 in charter and substitute
aircraft service expense, which was over $500,000 more than was spent in the
prior year. We discontinued the use of charter aircraft for substitute
service in June 1999 Pilot attrition also occurred at higher rates than we
have historically experienced which has required increased pilot training
expenses. An increase of approximately $150,000 in related expenses was
incurred in 1999 versus 1998, the bulk of which was realized in the last
fiscal quarter. The pilot attrition situation has continued into the first
quarter of the new fiscal year.
Maintenance cost increases resulted from the expanded operations and fleet.
The new and expanded services produced a 135% increase in aircraft miles
flown. We also experienced a larger than historical number of major
non-scheduled engine repairs during the last half of the fiscal year which
impacted the year over year comparisons by nearly $100,000. While these
events are not predictable they have occurred during winter weather
operations and the bird migration periods this year.
Traffic expense increases were directly attributable to a 115.9% increase
in passenger boardings, and the new services initiated in Western MT and
south central EAS. All expense categories contributed to the increase. Due to
space limitations at DFW and St. Louis, ground service costs on a per
departure basis are disproportionately higher than we have experienced in the
Montana region, which has impacted the comparative results.
The increase in marketing expense is primarily for increased advertising and
other promotional expenses related to the new Western MT services and the
south central EAS service.
General and administrative cost increases in 1999 over 1998 were the result
of additional administrative support related to the addition of the south
central EAS operation and the large increase in passengers carried. Legal
expenses also increased due to the additional fleet and general corporate
activity associated with the expansion. To a smaller extent professional
service expenses were incurred during the year for support in the conversion
of all of our internal hardware and software to accommodate year 2000
requirements. Approximately ten percent of the increase was for new Directors
and Officers Liability, and Employer Practices Liability insurance coverage.
Net interest expense increased by 240% due to two factors. The larger portion
of the increase related to the purchase of our seventh Metro III aircraft
with long-term debt The remainder of the increase was related to use of the
line of credit. We recognized a loss on disposal of inventory of $20,000
during the current year versus a gain on equipment sales of $166,000 in
the prior year. The prior year gain was for the sale of the last Cessna
aircraft owned by Big Sky, and this years loss was the result of the sale of
the Cessna inventory made obsolete by the aircraft sale.
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, 1998 1,063,523 1.75:1
Year-Ended June 30, 1999 (159,873) .95:1
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, 1998 486,488 1,457,880
Year-Ended June 30, 1999 1,192,981 1,526,728
Big Sky's balance sheet reflects cash and cash equivalents of $220,294 at
June 30, 1999. Total current assets, including cash, were $2,746,952
compared to total current liabilities of $2,906,825 resulting in negative
working capital of $159,873 and current ratio of .95:1. The deterioration in
working capital is the result of the use of our line of credit,
reclassification of long term debt to short term relating to the balloon
payment on our facility lease, and unprofitable operations. The payment
patterns related to the EAS contracts result in our need to fund operations
for periods ranging from fifteen to forty-five days which account for a major
part of the timing differences that require the use of the line of credit.
The second major component of our cash flow comes from the Airline Clearing
House that settles twenty-eight days after the month in which tickets are
accepted by us but were sold by other airlines. This results in another
timing issue. We are finalizing refinancing of the balloon payment associated
with the facility lease due in October 1999 that will result in a shift of
the debt to a long-term classification.
Cash used for operating activities for the fiscal year ended June 30, 1999
was $148,787, compared to cash provided of $68,949 at fiscal year-end 1998.
The decrease is attributed to the operating loss and increases in inventories
and deposits related to the expanded fleet. Cash used for investing
activities for the fiscal 1999 was $2,020,001, due to the purchase of our
seventh Metro III aircraft, additional aircraft rotable spare parts, ground
service equipment required to support the expanded fleet and operations, and
new computer hardware and software. Cash from financing activities for the
fiscal 1999 was $1,876,412. Additions to long-term debt related to
a loan for the proceeds of ninety percent of the purchase price of the
seventh aircraft and a loan related to hardware and software acquisition.
Line of credit proceeds comprised the second largest component of the
increase. We also raised approximately $235,000 from the private sale
of our 1996 series Common Stock. The expiration of the exchange period for
the 1996 Plan of Recapitalization also occurred during the year which
resulted in the recognition of the repurchase and retirement of all
non-exchanged "old shares" of $.10 par value Common Stock.
Operating leases include station office facilities, land, and eight Metro III
and three Metro 23 aircraft. Non-cancelable operating lease commitments in
excess of one year totaled $8,594,642 at June 30, 1998.
Stockholders' equity was $1,526,728 at June 30, 1999, compared to $1,457,880
at June 30, 1998. The proceeds from the private sale of Common Stock was
nearly offset by the net loss in the period. Total long-term debt (including
current installments) at June 30, 1999 was $1,650,366 (including capital
lease obligations) compared to $674,488 at June 30, 1998. At June 30, 1999,
the long-term financial commitments of Big Sky were: 1) debt of $1,089,276
for the purchase of the Metro III this year, 2) debt of $ 105,234 with the
FAA (Federal Aviation Administration) for the pre-reorganization purchase of
a Metro II aircraft; 3) bank debt of $100,000 for the purchase of computer
hardware and software; 4) bank debt of $88,640 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 scheduled to be
made each September through 1999 (a total of eight annual payments), were
fully paid one year early in September 1998.
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 98-9-12, at an annual rate of $4.7 million for the period
December 1, 1998 through November 30, 2000. Big Sky is also providing EAS
service under DOT order 98-10-9 in Arkansas, Oklahoma and Texas for the
period commencing November 15, 1998 through November 30, 1999, at an annual
rate of $6.3 million. Big Sky has held the Montana EAS contract continuously
since mid-1980, and is in the process of re-bidding for the contract
for Arkansas, Oklahoma and Texas.
Big Sky is based at a maintenance hangar/general office facility located at
Billings Logan International Airport. Big Sky is leasing this facility and
land from a member of the Board of Directors. The hangar is treated as a
capital lease. In addition, Big Sky 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 due
October 1999. The building owner and Big Sky have negotiated to refinance
the debt on similar terms, at rates to be determined at closing. Big Sky
intends to finalize purchase options at 5, 10, and 15 years and a right of
first refusal upon approval by the owner of sale of his interests to a third
party.
Year 2000 Disclosure: Big Sky is working to resolve the potential impact of
the year 2000 on the ability of Big Sky's computerized information systems
to accurately process information that may be date sensitive. Big Sky's
entire internal computerized systems have been replaced. New, year 2000
compliant, accounting software has been installed and is operational. Big Sky
has acquired, under a 99-year license, comprehensive airline management
system software that is year 2000 compliant. That software is installed and
all systems, except aircraft records, are tested and functional. Year 2000
compliant system upgrade software for aircraft records has been purchased,
installed, and is in the final testing stage. Completion is targeted for
mid-October 1998. The total cost for the entire conversion, including
training, was approximately $200,000. Big Sky also relies on the computer
systems of certain key vendors in its daily operations. Big Sky contracts
with a major computerized reservation system (CRS) company to accept
passenger reservations from travel agencies and other airlines. We have
successfully tested the systems ability to accept our passenger reservations
and display our flights after January 1, 2000 Big Sky relies on the various
computer systems used by the FAA and other commonly used industry
vendors in order to conduct its daily flight operations. Big Sky continues
to monitor the state of preparedness of these suppliers through direct
contact, our industry trade association, and industry publications. However,
if Big Sky 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 Big Sky.
ITEM 7. FINANCIAL STATEMENTS
Big Sky's complete audited financial statements for fiscal 1999 are appended
to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements exist between Big Sky and its accountant/auditors, Eide
Bailly & Company, with regard to accounting or 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
(a) Identity of Directors and 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.
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--53; Stock 64,556 (c), % Class 5.1% (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--74; Stock--24,620 (d), % Class 2.0% (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--59; Stock 24,620 (e), % Class 2.0% (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--43; Stock--11,267 (f); % Class 0.9% (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- 40,118 (g), % Class 3.2% (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--45; Stock-25,300 (h) Class-2.0% (i).
(a) The above-listed directors were duly elected at the 1999 Annual Meeting
of Stockholders. The Corporation's present executive officers and Board
leadership were elected in March 1999. 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, 1999, 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. 1998-99 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) 62,556 shares owned. Options exercisable at 6/30/99 on 2,000 shares.
(d) 20,620 shares owned. Options exercisable at 6/30/99 on 4,000 shares.
(e) 14,620 shares owned. Options exercisable at 6/30/99on 10,000 shares.
(f) 3,600 shares owned. Options exercisable at 6/30/99 on 7,667 shares.
(a) 20,118 shares owned. Options exercisable at 6/30/99 on 20,000 shares.
(h) 5,300 shares owned. Options exercisable at 6/30/99 on 20,000 shares.
(i) Includes shares owned and eligible options, as a percent of total
outstanding shares, 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.
(b) Identity of Significant Employees.
Big Sky does not expect significant contributions by any employees other than
the executive officers of Big Sky
(c) Family Relationships.
None of Big Sky's executive officers have any family relationship to any of
Big Sky's directors or to any other executive officers of Big Sky.
(d) Involvement in Certain Legal Proceedings.
None of Big Sky's directors or executive officers, during the past five years:
(1) have filed a bankruptcy petition or had a bankruptcy petition
filed against them or any business in which they are or were a general
partner or executive officer;
(2) have been convicted in any criminal proceeding or are subject to
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) have been subject to any order, judgment or decree of any court of
competent jurisdiction permanently or temporarily enjoining, barring,
suspending, or otherwise limiting such person's involvement in any type of
business, securities or banking activities;
(4) have been found by court of competent jurisdiction, the SEC, or the
commodity futures trading commission who have violated a federal or state
securities or commodities law.
(e) Compliance with Section 16(a) of the Exchange Act.
Based upon its review of SEC Forms 3, 4, and 5 and amendments thereto
furnished to Big Sky under Rule 16a-3(e), Big Sky has not found any late or
delinquent reports by any person who was a director, officer, or beneficial
owner of more than 10% of any class of Big Sky's equity securities during
fiscal year 1999.
ITEM 10. EXECUTIVE COMPENSATION
(a) Executive Compensation.
In the table below is set forth compensation information for the
President/CEO (Mr. Champney) in fiscal years 1997, 1998 and 1999, the sole
"named executive" of the Corporation, for which such reporting is required.
Long-Term Other
Annual Compensation $ Compensation- Compensation--
Champney Salary (1) Bonus (2) Stock Options # (3) Non-Cash $ (4)
Fiscal Year
1999 95,000 7,791 20,000 25,435
1998 38,230 0 0 0
1997 0 0 0 0
(1) Base compensation.
(2) Cash Bonus.
(3) Stock options shown are post-recapitalization.
(4) Includes stock bonus of 5,300 shares and compensation recognized for the
difference between the fair market price and the stock option price at the
date of the stock option award, pursuant to employment agreement
(b) Board Compensation.
At June 30, 1999, 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. Payments for outside
directors' services during fiscal 1999 were $27,967, as follows:
Item Payments $
Mtgs., Conf. & Special Projects (1) 21,250
Expense Reimbursement (2) 6,717
Total (3) 27,967
(1) Annual base compensation, individual meeting compensation, and monthly
base compensation (applicable for Chairman).
(2) Includes travel and per diem.
(3) Individual totals as follows: Marchi--$17,073, Nicholson--$3,207,
Huntington-- $4,158 and Daniels--$3,529. 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. Options to purchase
an additional 8,000 shares were granted under the Plan in February 1999 at
$1.9375 per share. (Note: above share price and share amounts are
post-recapitalization)
(c) Compensation & Management Development.
During Fiscal Year 1999, 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.
(d) 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 1999
(post-recapitalization basis):
Stock Options
Officer/Director Grant Outstanding-- Option
& Option Plan Date Shares # Price $
Craig Denney:
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
1995 DSOP 3/99 2,000 1.9375
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
1995 DSOP 3/99 2,000 1.9375
Jack K. Daniels:
1995 DSOP 2/98 2,000 1.3875
1995 DSOP 3/99 2,000 1.9375
Jon Marchi
1995 DSOP 3/99 2,000 1.9375
Kim Champney:
1996 QSOP 3/99 20,000 1.1875
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
(e) Employment Contracts and Termination of Employment and Change-in Control
Arrangements.
During Fiscal Year 1999 Big Sky had an executive employment agreement with
Mr. Champney who was employed as President/CEO on January 21, 1998.
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 Big Sky's business or assets.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS & MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners.
The following table provides information, as of June 30, 1999, with respect
to each person known to Big Sky to own beneficially more than five percent
(5%) of the outstanding Common Stock:
Beneficial Owner Shares # %Class
Derby West Corp.,LLC, Sheridan, WY (a) 347,520 27.7
H. V. Holeman, Las Vegas, NV (b) 108,780 8.7
Jon Marchi 64,556 5.1
Northern Rockies Venture Fund (c) 114,286 9.1
(a) In February 1988 (pre-recap.), the Corporation sold 500,000 shares of
10% convertible preferred stock for $1.00 per share to Derby West Corporation,
a Delaware corporation, having Peter M. Kennedy as its only stockholder.
Prior to reorganization, an additional 43,348 shares of preferred stock were
issued to Derby West in lieu of required quarterly cash dividends.
Pursuant to the preferred stock agreement, each share of preferred stock was
convertible into three shares of. Upon Plan confirmation, all preferred
stock held by Derby West was converted to at the ratio of one share preferred
stock for three shares of common stock. As a result, Derby West received
1,662,645 (pre-recap) shares of common stock in exchange for its preferred
stock. Following this conversion, no shares of the Corporation's preferred
stock were outstanding. During the 1996 Recapitalization (5:1 reverse stock
split), Derby West's holdings were converted to 326,978 shares of 1996 Series
Common Stock.
(b) H. V. Holeman is a retired director of the Corporation. Prior to
dissolution of Great Plains Transportation Company in January of 1995
(pre-recap), Mr. Holeman owned 51% of the stock of that company and was a
director of that company.
(c) Represents 1996 Series Common Stock acquired through the private
placement in February 1999. Stephen Huntington, a Director of Big Sky is a
principal in Northern Rockies Venture Fund.
(b)Security Ownership of Management.
The following table provides information as of June 30, 1999 with respect to
Common Stock beneficially owned by officers and directors of Big Sky:
Officer or Director Shares # % Class
Jon Marchi 64,556 5.6
Jack Daniels 24,620 2.0
Alan Nicholson 24,620 2.0
Steve Huntington 11,267 0.9
Craig Denney 40,118 3.2
Kim Champney 25,300 2.0
Total Management Ownership 190,481 15.2
(c)Changes in Control.
There are no arrangements known to Big Sky that may result in a change of
control of Big Sky.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Insiders.
In March 1994, Big Sky leased land and a hangar and office facility from Jon
Marchi, a director, officer and shareholder. Big Sky 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 Big Sky four separate
purchase options. Total payments under these leases, for each of the years
ended June 30, 1999 and 1998 was $42,000.
(b) Transactions with Promoters.
Big Sky has had no transactions with promoters during the past five years.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: (referenced by type)
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
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) Articles of Incorporation and Bylaws.
(i) Big Sky Transportation Co.'s Articles of Incorporation Incorporating
Amendments were filed as Exhibits 2.1 to Big Sky's Form 8-A registration
filed August 23, 1997, and incorporated herein by reference.
(ii) Big Sky Transportation Co.'s Restated Bylaws were filed as Exhibit
2.2 to Big Sky's Form 8-A registration filed August 23, 1997, and
incorporated herein by reference.
(4) Instruments Defining the Rights of Holders.
(i) Specimen certificate for shares of the Common Stock of Big Sky
Transportation Co. 1996 Series Common Stock was filed as Exhibit 1.1 to Big
Sky's Form 8-A registration filed August 23, 1997, and incorporated herein by
reference.
(ii) Big Sky agrees to furnish the Commission on request copies of
instruments with respect to long-term debt , the amount of which debt does
not exceed 10% of the total assets of Big Sky.
(iii) Big Sky has no indentures qualified under the Trust Indenture Act of
1939.
(10) Material Contracts.
(i) Substantial Business Contracts.
(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 See Exhibit 10(a) to Big Sky's report on Form 10-K filed
September 25, 1998, incorporated herein by reference.
(b) DOT Order 98-10-9, issued October 7, 1998, provided for selection of
Company as Essential Air Service carrier for eight points in Arkansas,
Oklahoma, and Texas, with hub at Dallas, Texas, through November 30, 1999.
See Exhibit 28 to Company's report on Form 10-QSB filed November 16, 1998,
incorporated herein by reference.
(ii) Management Contracts and Compensatory Plans.
(a) Big Sky's 1995 Directors Composition, Meeting, and Compensation Plan
specifies compensation for directors based upon their attendance at meetings
and authorizes incentive stock options for up to 2,000 shares of 1996 Series
Common Stock per year. See Big Sky's S-8 Registration No. 333-22775, dated
March 4, 1997, incorporated herein by reference.
(b) The Employment Agreement between Big Sky and its President/CEO, Kim B.
Champney, dated April 3, 1998, establishes a base salary of $7,500 per month
with increases, and provides for certain performance based stock options. A
copy of said Employment Agreement is filed with this report.
(13) Annual or Quarterly Reports -- Not Applicable.
(16) Letter on Change in Certifying Accountant -- Not Applicable.
(18) Letter on Change in Accounting Principles -- Not Applicable.
(21) Subsidiaries of the Registrant -- Not Applicable.
(22) Published Report Regarding Matters Submitted to Vote -- Not Applicable.
(23) Consent of Experts and Counsel -- Not Applicable.
(24) Power of Attorney -- Not Applicable.
(27) Financial Data Schedule -- Filed herewith.
(b) Reports on Form 8-K
On May 20, 1999, a report on Form 8-K was filed (item #5), advising that Big
Sky entered into a code-share agreement with Northwest Airlines effective
June 2, 1999.
On January 12, 1999, a report on Form 8-K was filed (item #5), advising that
Big Sky had entered into a letter of understanding with Northern Rockies
Venture Fund for a private placement investment of between $125,000 and
$225,000.
On October 13, 1998, a report on Form 8-K was filed (item #5), advising that
Big Sky had been selected by the Department of Transportation to provide
Essential Air Service in the south-central United States.
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
Interim CFO September 28, 1999
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 28, 1999
/s/ Craig Denney
Craig Denney
Director, Executive VP,
& C.O.O, Secretary,
Assistant Treasurer
(Chief Operating Officer) September 28, 1999
/s/ Stephen D. Huntington
Stephen D. Huntington
Director & Assistant Secretary September 28, 1999
/s/ Alan D. Nicholson
Alan D. Nicholson
Director September 28, 1999
/s/ Jack K. Daniels
Jack K. Daniels
Director, Vice Chairman September 28, 1999
THIS CONTRACT IS SUBJECT TO ARBITRATION PURSUANT TO
CHAPTER 5, TITLE 27 OF THE MONTANA CODE ANNOTATED
EMPLOYMENT AGREEMENT
This Agreement is entered into this 3rd day of April, 1998, by and between
BIG SKY TRANSPORTATION CO., a Montana corporation, (the "Employer"), and
KIM B. CHAMPNEY (the "Employee").
1. Employment. The Employer agrees to employ Employee and Employee
agrees to be so employed in the capacity of President and Chief Executive
Officer of Employer for the term beginning January 21, 1998, and terminating
June 30, 2001. The term of this Agreement may be extended by mutual
agreement of Employer and Employee in writing, but unless so extended in
writing shall terminate on June 30, 2001. Neither Employer nor Employee
shall have any obligation to extend this Agreement. Except as set forth
herein, neither Employer nor Employee has any expectation of Employee's
continued employment for Employer.
2. Compensation. For all services rendered by the Employee, the
Employer shall pay the Employee as follows:
(a) A base salary of $7,500.00 per month for the first ninety (90) days
of Employee's employment, and thereafter increasing to $7,917.00 per
month, payable in installments twice a month, in accordance with the
Employer's customary payroll practices;
(b) An incentive stock option bonus as described in Exhibit A and an
incentive cash bonus as described in Exhibit B, as may be awarded and
approved by Employer's Board of Directors. Both of said Exhibits are
attached hereto.
(c) The general employee benefits provided to all employees of Employer
in accordance with Employer's standard personnel policy and practices,
currently including group term life insurance in the amount of $10,000,
additional term life insurance policy in the amount of $5,000 (for health
insurance policy participants), and Company's current monthly
contribution of $55 toward group dental and medical insurance; and,
(d) Salary payments shall be subject to all applicable withholding and
employment taxes.
3. Performance Review. Employee's performance shall be subject to
review after ninety (90) days of employment under this Agreement, and on an
annual basis thereafter during July of each year by the Compensation &
Management Development Committee of Employer's Board of Directors or more
often or at such other dates as the Committee may determine.
4. Duties. Employee agrees to serve the Employer faithfully and to
the best of his ability, to devote his entire time, energy and skill during
regular business hours to such employment, and to use his best efforts, skill
and ability to promote its interests. Subject to the control of the Board,
Employee's areas of responsibility shall be those of the President and Chief
Executive Officer as set forth in Employer's Bylaws and as required and
directed by the Board of Directors. Employee shall report to and be subject
to the supervision of Employer's Chairman of the Board. Employee shall have
all such executive powers and authority as shall reasonably be required to
enable him to discharge such duties in an efficient manner.
5. Working Facilities. Employee shall have a private office,
secretarial help, and such other facilities and services as are suitable to
his position and appropriate for the performance of his duties.
6. Expenses. Employee may incur reasonable expenses directly related
to the purpose of promoting Employer's business, including expenses for
entertainment, travel, and similar items. Employer will reimburse Employee
for all such expenses upon Employee's periodic presentation of an itemized
account of such expenditures and approval as being reasonable and
appropriate.
In order to facilitate Employee's relocation to Billings, Montana,
from San Antonio, Texas, locate suitable housing, and assume his employment
duties for Employer without obtaining a permanent residence in Billings,
Employer shall (a) reimburse Employee for his rental of a temporary apartment
together with utilities in Billings through June 30, 1998; (b)
reimburse Employee for his travel costs or those of his wife for one trip per
month between San Antonio and Billings through June 30, 1998; (c) pay
Employee's actual costs incurred in closing the purchase of a residence in
Billings, not to exceed $3,500; and (d) pay all of Employee's reasonable
costs for moving Employee's household goods and one vehicle from San Antonio
to Billings.
7. Vacation and Sick Leave. Employee shall be entitled each year to
vacation time in accordance with Employer's standard personnel policy and
practices, based on his seniority, as well as any supplemental awards by the
Board. Employee will be entitled to one week of paid vacation prior to
January 31, 1999. Employer encourages use of vacation in blocks of time
rather than in small increments.
Employee shall be entitled each year to sick leave and bereavement
leave in accordance with Employer's standard personnel policy and practices.
Provided that Employee gives prior notice to Employer, Employer will permit
reasonable absences in the event of illness in the family or emergency
matters.
8. Disability. If the Employee is unable to perform his services by
reason of illness or incapacity, he may first use his available sick leave
before removal from normal active payroll status. Upon removal from normal
active payroll status, Employee shall be paid his accrued vacation pay and
any disability insurance benefits to which he is entitled. If disability
insurance benefits are not paid, and until such time as benefits are paid,
Employer shall pay to Employee during the continued period of such illness or
incapacity 50% of regular base salary, in accordance with Employer's
customary payroll practices. Employee's full compensation shall be
reinstated upon his return to full employment and resumption of his full
duties.
Notwithstanding anything to the contrary, the parties agree that if Employee
must be absent from his employment for disability for a continuous period of
more than three months or more than six months in total during the term of
this Agreement, the Employer will suffer a substantial and material impact
upon its business operations requiring it to replace Employee or make other
staffing arrangements. Accordingly, Employer may terminate this Agreement
at any time after the Employee shall be absent from his employment for
disability for a continuous period of more than three months or more than six
months in total during the term of this Agreement, and all obligations of
Employer shall thereupon terminate, with the exception of severance pay to be
paid in accordance with paragraph 9 below.
9. Termination Without Cause. Employer may terminate this Agreement
at any time, without cause, upon ninety days written notice to Employee. In
such event, Employee, if requested by Employer, shall continue to render his
services, and be paid his regular compensation and benefits up to the date of
termination. In addition, there shall be paid to Employee on the date of
termination, a severance allowance of six months base salary. In the
event that Employer terminates this Agreement without cause but does not
provide at least ninety days written notice, Employer shall pay Employee an
additional month of base salary as severance allowance.
Employee may terminate this Agreement without cause upon ninety
(90) days written notice to the Employer. In such event, Employee shall
continue to render his services and shall be paid his regular compensation up
to the date of termination, but no severance allowance shall be paid to him.
Payments made in accordance with this paragraph shall constitute
full and final settlement of all claims arising out of Employee's employment.
10. Termination Upon Expiration. Employer shall give Employee sixty-
days written notice of its intent to allow this Agreement to expire without
renewal, resulting in a termination of Employee. In the event of such notice
to Employee and expiration of this Agreement, Employer shall pay Employee all
compensation and benefits due through the date of expiration, but shall have
no obligation to pay any severance allowance to Employee. Employee shall
give Employer sixty-days written notice of his intent to allow this Agreement
to expire without renewal, resulting in its termination. In the event of
such notice to Employer and expiration of this Agreement, Employer shall pay
Employee one week's base salary on the date of termination as severance
allowance in addition to all compensation and benefits due through the date of
expiration. In the event that Employer allows this Agreement to expire without
giving or having received such sixty days notice, Employer shall pay Employee
one month's base salary on the date of termination as severance allowance in
addition to all compensation and benefits due through the date of expiration.
In the event that Employee allows this Agreement to expire without giving or
having received such sixty-days notice, Employer shall have no obligation to
pay Employee any severance allowance.
Payments made in accordance with this paragraph shall constitute
full and final settlement of all claims arising out of Employee's employment.
11. Termination for Unsatisfactory Performance. Employer may terminate
this Agreement for cause, upon ten (10) days notice to Employee, if
Employer's Board of Directors determines that Employee's performance has been
unsatisfactory. Unsatisfactory performance includes, but is not limited to,
inefficiency, unsatisfactory conduct, failure to perform well as a result of
inability or incapacity, inadvertent or negligent errors or omissions, or
good faith errors in judgment or discretion. In the event of such
termination, Employer shall pay Employee all compensation and benefits due
through the date of termination, plus severance allowance of one month's
base salary. Said severance allowance shall be paid in two equal monthly
installments, commencing immediately upon termination. Said payments shall
constitute a full and final settlement of all claims arising out of
Employee's employment.
12. Termination for Misconduct. Employer may terminate this Agreement
for cause, upon three (3) days written notice to the Employee, if Employer
determines that Employee has engaged in misconduct. Misconduct includes, but
is not limited to, willful or wanton disregard of Employer's rights, title or
interests or of the standards of behavior that Employer has a right
to expect of Employee; conduct, whether or not in the course and scope of
Employee's employment that brings discredit or disrepute to Employee or
Employer; carelessness or negligence that causes or would likely cause
serious bodily harm to other employees; or carelessness or negligence of such
a degree or recurrence to show an intentional or substantial
disregard of the Employer's interest. Misconduct shall also include, but not
be limited to the following: insubordination, showing a deliberate, willful
or purposeful refusal to follow reasonable directions or instructions of the
Board of Directors, dishonesty, falsification of company records, theft,
deliberate deception or lying, repeated and inexcusable absences,
deliberate illegal acts, violation of company rules, violations of law while
acting within the scope of employment, gross negligence, or bad faith errors
in judgment or discretion. In the event of such termination, Employee shall
be paid all accrued wages and benefits to the date of termination, but shall
be entitled to no severance allowance. Said payment shall constitute full
and final settlement of all claims arising out of Employee's employment.
All decisions and determinations made by the Board of Directors with
respect to termination of Employee for cause whether for unsatisfactory
performance or misconduct, shall be final.
13. Termination Upon Sale of Business. Employer may terminate this
Agreement upon ten (10) days written notice to Employee upon the happening of
any of the following events:
(a) The sale by Employer of substantially all of its assets to a single
purchaser or to a group of associated purchasers;
(b) The sale, exchange, or other disposition, in one transaction, of at
least two-thirds of the outstanding shares of common stock of Employer;
or
(c) The merger or consolidation of Employer in a transaction in which
the shareholders of Employer receive less than 50% of the outstanding
voting shares of any new or continued corporation.
If this Agreement is terminated as a result of the above described
events, Employer shall pay Employee, all compensation and benefits under this
Agreement through the date of termination plus six months base salary, as
severance allowance if said sale occurs prior to January 21, 1999, nine
months base salary if said sale occurs between January 22, 1999 and
January 21, 2000, and twelve months base salary if said sale occurs between
January 22, 2000 and June 30, 2001, as follows: fifty percent (50%) in a
lump sum immediately on termination and fifty percent (50%) in two equal
monthly payments, commencing on the first day of the month following
termination.
Payment made in accordance with this paragraph shall constitute
full and final settlement of all claims arising out of Employee's employment.
14. Termination Upon Discontinuance of Business. Employer may
terminate this Agreement, upon ten (10) days written notice to Employee, upon
decision by Employer to terminate its business and liquidate its assets. If
this Agreement is terminated as a result of discontinuance of business,
Employer shall pay Employee all compensation and benefits due under this
Agreement through the date of termination plus, as severance allowance two
months base salary in the form of a lump sum payment immediately on
termination. Such payment shall constitute full and final settlement of all
claims arising out of Employee's employment.
15. Renegotiation of Termination Provisions. In the event of a
material change in the outside board membership on Employer's Board of
Directors during the term of this Agreement, meaning a change in at least
three of the four outside Directors, Employee shall have the option
to require Employer to renegotiate the termination provisions of paragraphs
11 and 12, above.
If Employer refuses to renegotiate paragraphs 11 and 12, Employee may
terminate this Agreement without cause in accordance with paragraph 9, above.
16. Limitation of Severance Allowance. Under no circumstances shall
Employee be entitled to receive severance allowance or pay under paragraphs
9, 11, 12, 13, or 14, in excess of the compensation due under this Agreement
as if it expired on June 30, 2001, under its own terms without an act of
termination.
17. Benefits on Termination. In the event of termination of employment
and/or termination of this Agreement, Employee shall receive all severance
allowance and any and all bonuses or stock options earned or awarded through
the date of termination, as set forth above. Nothing herein shall in any way
limit Employee's benefits under COBRA or ERISA or other federal or state law
or regulation providing post-termination insurance and retirement benefits.
Nothing herein shall in any way affect, limit or modify any of Employee's
rights or entitlements under any contractual Employee benefit plans which are
separate from this Agreement, such as pension and profit sharing plans,
401(k) plans, deferred compensation plans, life insurance contracts or stock
option plans.
18. Death During Employment. If Employee dies during the term of
employment, Employer shall pay to the estate of the Employee the compensation
which would otherwise be payable to Employee up to the end of the month in
which his death occurred plus accrued vacation in accordance with Employer's
standard personnel policy and practices. In addition, Employer shall pay an
amount equal to two months salary, within sixty days after the death of
the Employee, to the widow of the Employee, or if he is not then survived by
his widow, to the Employee's surviving children in equal shares, or if there
are no such surviving children, to the Employee's estate. Such payment shall
constitute full and final settlement of all claims arising out of Employee's
employment.
19. Non Disclosure of Information. Employer and Employee acknowledge
that certain confidential information has been and will be disclosed to
Employee. Said confidential information includes, but is not limited to,
Employer's financial and proprietary information, customer and supply base,
concepts, documents, materials, trade secrets, business contacts,
information and knowledge about Employer and its business methods, forms,
names and addresses of participants, vendors, business or service techniques,
product service providers, clients and customers, sales and marketing
concepts or techniques, and ideas about current and future services which
Employer regards as confidential ("confidential information"). Employee
agrees that all such confidential information disclosed to him is reserved
by the Employer and Employee will not use said confidential information to
benefit himself or others. Employee will not disclose such confidential
information to third parties or other employees of Employer unless and until
expressly authorized in writing to do so by Employer.
Employee agrees that all confidential information disclosed to him
shall remain the property of Employer and that such confidential information
shall not be copied or reproduced without express written permission of
Employer. All confidential information which is reproduced shall be returned
to Employer on termination of this Agreement or upon sooner written demand.
Employee agrees to keep in strict confidence, not to use for his own benefit,
or the benefit of others, and to prevent the disclosure to any person, firm
or corporation outside Employer's organization or to any authorized person or
persons within the organization all confidential information received from
Employer as a result of his employment. Employer shall not, however, be
liable for disclosure or use of information if the information: (a) was in the
public domain at the time it was disclosed or falls within the public domain
prior to the time of otherwise impermissible disclosure; (b) was known to the
receiving person or corporation at the time of disclosure; (c) was disclosed
after receipt of written approval from Employer; or (d) becomes known from a
source other than Employer without breach of this confidentiality covenant.
Employee's obligation of nondisclosure shall be in full force and
effect during the term of this Agreement, its renewal or extension, and shall
survive the termination of this Agreement and Employee's services to Employer.
However, the obligation of nondisclosure shall not be applicable or
enforceable in the event that this contract is terminated due to a
discontinuance of Employer's business in accordance with paragraph 13 above.
20. Restrictive Covenant. Employer and Employee acknowledge that
Employer's airline transportation business is unique and subject to
intensive regional competition. In his capacity as President and Chief
Executive Officer, Employee is privy to and involved in generation and
implementation of highly confidential business planning and marketing
information and strategies. The parties acknowledge that because of the
nature of Employer's regional business and as partial consideration for
entering into this contract, a restrictivecovenant covering the entire region
served by Employer is appropriate and necessary.
During the term of this Agreement and for a period of two years
after the termination or expiration of this Agreement, Employee will not,
within the present geographical region (State of Montana) which Employer
serves, directly own, manage, operate, control, be employed by, participate
in, or be connected in any manner with the ownership, management,
operation, or control of any business serving the geographical region served
by Employer and competitive with the type of business conducted by Employer
at the time of the termination of this Agreement. In the event of Employee's
actual or threatened breach of the provisions of this paragraph, Employer
shall be entitled to an injunction restraining Employee therefrom. Nothing
herein shall be construed as prohibiting Employer from pursuing any other
available remedies for such breach or a threatened breach, including recovery
of damages from the Employee.
Employee's restrictive covenant shall be in full force and effect
during the term of this Agreement, its renewal or extension, and shall
survive the termination of this Agreement and Employee's services to Employer.
This restrictive covenant shall not be applicable or enforceable in the event
that this contract is terminated due to a sale or discontinuance of
Employer's business in accordance with paragraphs 13 and 14 above.
21. Settlement of All Employment Claims. It is the intention of the
parties hereto that this Agreement and the payments called for herein shall
and do constitute a complete and comprehensive understanding of all of the
obligations between the Employer and the Employee and of all claims that
Employee may have against Employer arising out of the employment
relationship or otherwise. In the event that Employee's services are
terminated for any reason and the Employer honors the terms and conditions of
this Agreement by making the payments to Employee as set forth herein, then
such payments shall be deemed as full, complete and final payment for and
settlement of any and all claims of Employee against Employer arising out
ofthe employment relationship or otherwise, including but not limited to any
and all claims for wrongful discharge of employment.
22. Arbitration. Any controversy or claim arising out of or relating
to this Agreement, or any breach thereof, including, but not limited to,
claims of wrongful discharge and claims relating to the breach of implied
covenant and fair dealing shall be settled by final and binding arbitration
in accordance with the contract arbitration rules of the American
Arbitration Association, and judgment upon the award rendered by the
Arbitrator may be entered in any court having jurisdiction thereof. This
Agreement to arbitrate shall be specifically enforceable under the Montana
Uniform Arbitration Act. Notice for the demand for arbitration shall be
filed in writing with the other party to this Agreement and with the American
Arbitration Association. The demand for arbitration shall be made within
thirty (30) days after the controversy or claim has arisen, and in no event
shall it be made when institution of legal or equitable proceedings based
upon such controversy or claim would be barred by the applicable
statute of limitations. All claims which are related to or dependant upon
each other shall be heard by the same arbitrator or arbitrators. Payment of
the arbitrator's expenses and fees together with other expenses incurred in
the conduct of the arbitration shall be paid one half by the Employer and one
half of the Employee. Arbitration shall be held in Yellowstone County,
Montana.
23. Attorneys' Fees. In the event a breach of this Agreement the party
at fault shall pay to the other party all costs, reasonable attorneys' fees,
and other expenses which may be incurred by such other party in enforcing its
rights under this Agreement.
24. Notices. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing sent by certified mail to the
addresses set forth below:
Employer: Chairman
Big Sky Transportation Co.
1601 Aviation Place
Billings MT 59105
Employee: Kim B. Champney
1601 Aviation Place
Billings MT 59105
25. Waiver of Breach. Waiver by the Employer of any breach of any
provision of this Agreement by Employee shall not operate or be construed as
a waiver of any subsequent breach by Employee. No waiver shall be valid
unless in writing and signed by an authorized officer of Employer.
26. Assignment. Employee acknowledges that the services to be rendered
by him are unique and personal. Accordingly, Employee may not assign any of
his rights or delegate any of his duties or obligations under this Agreement.
Employer shall have the right to assign this Agreement. The rights and
obligations of Employer under this Agreement shall inure to the benefit of
and shall be binding upon the successors and assigns of the Employer.
27. Severability. If any provision of this Agreement is determined to
be invalid or unenforceable in any arbitration or judicial proceeding, it
shall be considered severed from this Agreement, and the remainder of this
Agreement shall be binding and enforceable.
28. Entire Agreement. This Agreement contains the entire understanding
of the parties. It may not be changed orally, but only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification, extension, or discharge is sought.
WHEREFORE, IN WITNESS HEREOF, the parties have executed this Agreement
on the date first set forth above.
BIG SKY TRANSPORTATION CO., EMPLOYER
By: /s/John Marchi
Jon Marchi, Chairman of the Board of Directors
EMPLOYEE:
/s/Kim B. Champney
Kim B. Champney
Exhibit A
STOCK OPTION BONUS PLAN
Note:Big Sky Transportation Co. must earn at least $1.00 in net profit each
prospective year for the Plan to be implemented. For purposes of this Plan,
the year is considered to be ended on December 31.
1999 STOCK OPTION BONUS AWARD SCHEDULE
Exercise price is $1.1875, set at the actual market price of $1.1875 on
January 21, 1998. Option will be awarded at the January, 1999 Board Meeting.
The option is granted for a period of five years.
If December 1998 annualized gross revenues are $ 10 million or more the
following award schedule applies:
December 1998 Annualized Revenue Stock Option Award # of Shares
$10,000,000 to $10,499,999 4,000
$10,500,000 to $10,999,999 7,500
$11,000,000 to $11,499,999 11,000
$11,500,000 to $11,999,999 14,500
$12,000,000 to $12,499,999 18,000
$12,500,000 to $12,999,999 21,500
$13,000,000 or More 25,000
2000 STOCK OPTION BONUS AWARD SCHEDULE
Option will be awarded once exercise price is set at the January, 2000 Board
Meeting and will be the current market price that day. The option is granted
for a period of five years.
If December 1999 annualized gross revenues are $14 million or more, the
following award schedule applies:
December 1999 Stock Option
Annualized Revenue Award # of Shares
$14,000,000 to $14,499,999 4,000
$14,500,000 to $14,999,999 6,625
$15,000,000 to $15,499,999 9,250
$15,499,999 to $15,999,999 11,875
$16,000,000 to $16,499,999 14,500
$16,500,000 to $16,999,999 17,125
$17,000,000 to $17,499,999 19,750
$17,500,000 to $17,999,999 22,375
$18,000,000 or more 25,000
2001 STOCK OPTION BONUS AWARD SCHEDULE
Option will be awarded once exercise price is set at the January, 2001 Board
Meeting, and will be the current market price that day. The option is granted
for a period of five years.
If the December 2000 annualized gross revenues are $19 million or more, the
following award schedule applies:
December 2000 Stock Option
Annualized Revenue Award
# of Shares
$19,000,000 to $19,999,999 4,000
$20,000,000 to $20,999,999 7,500
$21,000,000 to $21,999,999 11,000
$22,000,000 to $22,999,999 14,500
$23,000,000 to $23,999,999 18,000
$24,000,000 to $24,999,999 21,500
$25,000,000 or More 25,000
Exhibit B
INCENTIVE CASH BONUS PLAN
Based on fiscal year ending June 30 for years ending June 30, 1998, 1999,
2000, and 2001, cash bonus is based on the Auditor's Final Report for the
fiscal year on a Reported Earnings Per Share basis. Such earnings per share
will be adjusted if any stock dividend or stock splits occur between January
21, 1998 through June 30, 2001. Fifty Percent of such bonus will be paid
upon completion of the Final Auditor's Report. The remaining 50% will be paid
not later than December 31 of the same fiscal year.
FISCAL YEAR ENDING JUNE 30,1998 BONUS AWARD SCHEDULE
Earnings Per Share Cash Bonus
Award
$0.21 to $0.24 $1,250
$0.25 to $0.28 $2,500
$0.29 to $0.32 $3,750
$0.33 or More $5,000
FISCAL YEAR ENDING JUNE 30,1999 BONUS AWARD SCHEDULE
Earnings Per Share Cash Bonus
Award
$0.41 to $0.51 $ 3,750
$0.52 to $0.60 $ 7,500
$0.61 to $0.69 $11,250
$0.70 to $0.79 $15,000
$0.80 to $0.89 $20,000
$0.90 to $0.99 $25,000
$1.00 or More $30,000
FISCAL YEAR ENDING JUNE 30,2000 BONUS AWARD SCHEDULE
Earnings Per Share Cash Bonus
Award
$0.80 to $0.84 $ 5,000
$0.85 to $0.89 $10,000
$0.90 to $0.94 $15,000
$0.95 to $0.99 $20,000
$1.00 to $1.09 $25,000
$1.10 to $1.19 $30,000
$1.20 to $1.29 $35,000
$1.30 or More $40,000
FISCAL YEAR ENDING JUNE 30,2001 BONUS AWARD SCHEDULE
Earnings Per Share Cash Bonus
Award
$1.10 to $1.14 $ 6,250
$1.15 to $1.19 $12,500
$1.20 to $1.24 $18,750
$1.25 to $1.34 $25,000
$1.35 to $1.44 $30,000
$1.45 to $1.54 $35,000
$1.55 or More $40,000
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 220,294
<SECURITIES> 0
<RECEIVABLES> 1,699,513
<ALLOWANCES> 1,200
<INVENTORY> 474,882
<CURRENT-ASSETS> 2,746,952
<PP&E> 3,294,948
<DEPRECIATION> 592,357
<TOTAL-ASSETS> 5,626,534
<CURRENT-LIABILITIES> 2,906,825
<BONDS> 1,157,385
0
0
<COMMON> 814,225
<OTHER-SE> 736,356
<TOTAL-LIABILITY-AND-EQUITY> 5,626,534
<SALES> 0
<TOTAL-REVENUES> 15,914,998
<CGS> 0
<TOTAL-COSTS> 16,025,343
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (124,310)
<INCOME-PRETAX> (267,780)
<INCOME-TAX> (89,000)
<INCOME-CONTINUING> (178,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (178,780)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.14)
</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>
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, 1999 and 1998 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, 1999 and 1998 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, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Billings, Montana
August 25, 1999
<PAGE>
BIG SKY TRANSPORTATION CO.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 220,294 $ 512,670
Restricted cash 137,500 151,500
Accounts receivable,
less allowance for doubtful
receivables of
$1,200 in 1999 and 1998 1,698,313 1,375,654
Income tax refund receivable 35,603 22,816
Expendable parts and supplies 444,882 329,262
Inventory held for sale 30,000 30,000
Prepaid expenses 111,360 53,753
Deferred income taxes 69,000 -
Total current assets 2,746,952 2,475,655
OTHER ASSETS
Deposits 176,991 7,258
PROPERTY AND EQUIPMENT 2,702,591 873,587
$ 5,626,534 $ 3,356,500
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 700,000 $ -
Current maturities
of long-term debt 190,169 179,836
Current maturities
of capital lease obligations 267,216 8,164
Accounts payable 856,073 575,056
Accrued expenses 596,437 459,307
Traffic balances payable
and unused tickets 296,930 189,769
Total current liabilities 2,906,825 1,412,132
LONG-TERM DEBT,
less current maturities 1,192,981 486,488
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized, 20,000,000 shares
Issued and outstanding,
1,245,302 shares 1999
and 1,127,637 shares 1998 814,225 579,722
Additional paid-in capital 242,034 228,909
Retained earnings 494,322 673,102
1,550,581 1,481,733
Less treasury stock at cost
(20,000 shares
in 1999 and 1998) (23,853) (23,853)
1,526,728 1,457,880
$ 5,626,534 $ 3,356,500
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
OPERATING REVENUE
Passenger $ 7,835,643 $ 3,393,039
Public service 7,749,057 4,324,091
Cargo 218,594 130,617
Other 111,704 63,843
Total operating revenue 15,914,998 7,911,590
OPERATING EXPENSES
Flying operations 6,752,957 3,157,151
Maintenance 3,351,946 1,610,696
Traffic 4,419,368 2,027,439
Marketing 336,915 85,412
General and administrative 1,164,157 857,026
Total operating expenses 16,025,343 7,737,724
INCOME (LOSS) FROM OPERATIONS (110,345) 173,866
OTHER INCOME (EXPENSE)
Interest expense (155,021) (72,082)
Interest income 30,711 35,541
Gain (loss) on inventory
and equipment disposal (20,356) 165,539
Other (12,769) -
INCOME (LOSS) BEFORE INCOME TAXES(267,780) 302,864
INCOME TAX PROVISION (BENEFIT) (89,000) 120,000
NET INCOME (LOSS) $ (178,780) $ 182,864
BASIC EARNINGS PER COMMON SHARE $ (.15) $ .17
DILUTED EARNINGS PER COMMON SHARE$ (.14) $ .16
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1999 AND 1998
Additional
Common Stock Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
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
Common stock
issued 134,372 235,151 - - - 235,151
Retirement of
common Stock (64,857) (71,507) - - - (71,507)
Stock options
issued pursuant
to employee
incentive plans - - 15,000 - - 15,000
Common stock
options
exercised 32,750 38,765 (1,875) - - 36,890
Common stock
issued pursuant
to employee
incentive plans 15,400 32,094 - - - 32,094
Net loss - - - - (178,780) (178,780)
BALANCE,
JUNE 30, 1999 1,245,302 814,225 242,034 (23,853) 494,322 1,526,728
See notes to financial statements.
<PAGE>
BIG SKY TRANSPORTATION CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1999 AND 1998
1999 1998
OPERATING ACTIVITIES
Net income (loss) $ (178,780) $ 182,864
Charges and credits
to net income (loss)
not affecting cash
Depreciation and amortization 208,352 93,379
(Gain) loss on disposal
of equipment 20,356 (165,539)
Deferred income taxes (69,000) -
Pre-Fresh Start deferred
tax benefits - 115,000
Compensation from employee
incentive plans 47,094 79,875
Changes in assets and liabilities
Restricted cash 14,000 448,651
Receivables (322,659) (982,278)
Expendable parts and supplies (153,331) (74,980)
Prepaid expense (57,607) (53,753)
Deposits (169,733) 10,000
Accounts payable 281,017 510,843
Accrued expenses 137,130 (216,777)
Traffic balances payable
and unused tickets 107,161 146,614
Income taxes (12,787) (24,950)
NET CASH FROM (USED FOR)
OPERATING ACTIVITIES (148,787) 68,949
INVESTING ACTIVITIES
Proceeds from sale of
inventory and equipment 24,600 260,551
Property and equipment purchases(2,044,601) (361,104)
NET CASH USED FOR
INVESTING ACTIVITIES (2,020,001) (100,553)
FINANCING ACTIVITIES
Net borrowings on short-term
note agreement 700,000 -
Proceeds from long-term
debt borrowings 1,225,000 150,000
Payments on long-term debt (240,958) (147,330)
Payments on capital lease
obligations (8,164) (11,639)
Payments to retire common stock (71,507) (860)
Proceeds from stock options
exercised 36,890 33,250
Proceeds from issuance of
common stock 235,151 -
Payments to acquire treasury stock - (23,853)
NET CASH FROM (USED FOR)
FINANCING ACTIVITIES 1,876,412 (432)
NET CHANGE IN CASH AND
CASH EQUIVALENTS (292,376) (32,036)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 512,670 544,706
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 220,294 $ 512,670
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION
Cash paid during the year
Interest $ 160,562 $ 73,589
Income taxes (refunds) (7,213) 52,766
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock issued as
compensation pursuant to
employee incentive plans 32,094 71,250
Stock options granted as
compensation pursuant to
employee incentive plans 15,000 8,625
<PAGE>
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
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, 1999, scheduled air service was provided to fourteen communities in
Montana, western North Dakota and in eastern Washington. The Company's
present route system in this area 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. In October 1998, the Company was selected as an emergency
replacement air carrier to provide EAS to eight points in Arkansas,
Oklahoma, and Texas by the Department of Transportation. 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 accounts receivable consist principally of amounts due from the
Department of Transportation under the EAS program and from the airline
clearinghouse for passenger revenue earned. Receivables are generally due in
30 days and do not have collateral requirements.
The Company's cash balances are maintained at various financial institutions.
At June 30, 1999, the total balance at any of the institutions was not in
excess of federal insurance limits.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment and amortization of capitalized lease assets 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
Following is a reconciliation of the numerators and the denominators of the
basic and diluted earnings per share.
Year Ended June 30, 1999
Per-Share
Amount Shares Income (Loss)
Basic earnings per share
Net income (loss) $ (178,780) 1,169,433 $(.15)
Effect of dilutive
securities options - 62,067
Diluted earnings per share
Net income (loss) $ (178,780) 1,231,500 $(.14)
Year Ended June 30, 1998
Per-Share
Amount Shares Income
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
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 Compensation
A new method of accounting for stock-based compensation arrangements with
employees has been set forth in SFAS No. 123 "Accounting for Stock-Based
Compensation." The 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 $271,050
and $64,134 for advertising costs in 1999 and 1998, respectively.
NOTE 2 - RESTRICTED CASH
At June 30, 1999 and 1998, restricted cash includes $87,500 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 provided 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, restricted cash included
undistributed liquidation proceeds of $14,000. During the year ended
June 30, 1999, the 7% note payable was paid off.
NOTE 3 - PROPERTY AND EQUIPMENT
1999 1998
Flight equipment $ 2,329,732 $ 680,491
Facility under capital lease 456,185 456,185
Other property and equipment 509,031 202,086
3,294,948 1,338,762
Less accumulated depreciation
and amortization (592,357) (465,175)
$ 2,702,591 $ 873,587
NOTE 4 - ACCRUED EXPENSES
1999 1998
Leased engine overhauls $ - $ 41,816
Engine hot-end inspections 119,086 9,115
Vacation 127,419 100,605
Payroll and payroll taxes 214,593 149,334
Property taxes 67,536 151,284
Interest 1,612 7,153
Other 66,191 -
$ 596,437 $ 459,307
NOTE 5 - NOTE PAYABLE AND LONG-TERM DEBT
The Company's note payable consists of a $1,000,000 line of credit which
matures November 1, 1999, and is secured by inventories and equipment.
Advances bear interest at prime plus 1.5%. There were borrowings outstanding
of $700,000 on the line of credit as of June 30, 1999.
Long-term debt consists of:
1999 1998
8.74% installment note, due in monthly
payments of $14,049, including interest,
through December 2005, secured by
flight equipment $ 1,089,276 $ -
9.5% installment note, due in monthly
payments of $4,495, including interest,
through August 2001, secured by accounts
receivable 105,234 147,001
Prime + 1.5% installment note, due in
monthly payments of $2,088, including
interest through June 2004, secured by
equipment 100,000 -
9.75% installment note, due in monthly
payments of $4,821, including interest,
through February 2001, secured by equipment 88,640 135,344
7% installment note - 68,278
Reorganization claims discounted at 10% - 48,485
1,383,150 399,108
Less current maturities (190,169) (179,836)
$ 1,192,981 $ 219,272
Long-term debt maturities are as follows:
Years Ending June 30, Amount
2000 $ 190,169
2001 189,085
2002 119,590
2003 120,960
2004 132,130
Thereafter 631,216
$ 1,383,150
NOTE 6 - INCOME TAXES
Income tax provision (benefit) from operations consists of the following:
1999 1998
Current
Federal $ - $ -
State (20,000) 5,000
(20,000) 5,000
Deferred
Charge in lieu of taxes - 115,000
Current benefit (69,000) -
(69,000) 115,000
$ (89,000) $ 120,000
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:
1999 1998
Computed "expected" tax expense (benefit) (91,000) 103,000
State income taxes (net of Federal
income tax effect) (14,000) 5,000
Other non-deductible expenses 16,000 12,000
$ (89,000) $ 120,000
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:
1999 1998
Deferred tax assets
Accounts receivable, due to allowance
for doubtful accounts $ 500 $ 500
Inventory held for sale, due to
basis adjustment 4,000 4,000
Property and equipment, due to
differences in depreciation - 5,900
Accrued overhauls and hot-end
inspections 46,000 90,500
Compensated absences 49,000 39,000
Net operating loss carryforwards 655,000 475,000
Investment tax credit carryforwards 21,600 29,500
AMT credit carryforwards 1,000 1,000
Total gross deferred tax assets 777,100 645,400
Less valuation allowance (688,600) (643,500)
Net deferred tax assets 88,500 1,900
Deferred tax liabilities
Property and equipment, due to
differences in depreciation (19,500) -
Property and equipment, due to
Fresh-Start adjustments - (1,900)
Net deferred tax asset $ 69,000 $ -
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
2000 $ - $ 1,200
2001 - 20,400
2003 - -
2004 1,075,000 -
2005 148,000 -
2006 58,000 -
2009 111,000 -
2011 6,000 -
2019 528,000 -
$ 1,926,000 $ 21,600
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, 1999 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,
1999 and 1998 was $7,749,057 and $4,324,091, respectively (See Note 11).
These subsidy amounts represent 49% and 55% of all revenues for fiscal years
ended June 30, 1999 and 1998, respectively.
The Company's current EAS contract in the southern states expires November
30, 1999. The Company's agreement in the northern states 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, 1999, the Company leased office facilities, land and eleven
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, 1999:
Years Ending June 30,
2000 $ 2,234,460
2001 2,217,144
2002 2,204,836
2003 1,229,042
2004 577,985
Thereafter 131,175
$ 8,594,642
Rental expense under operating leases charged to operations was $2,942,783
and $1,374,242 for the years ended June 30, 1999 and 1998, 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.
Future minimum lease payments under the capital leases and the present value
of future minimum capital lease payments as of June 30, 1999 are as follows:
Year Ending June 30, 2000 $ 274,778
Less interest (7,562)
Present value of minimum lease payments 267,216
Less current maturities (267,216)
Obligations under capital leases,
excluding current maturities $ -
The carrying value of the facility under capital leases net of accumulated
amortization was $345,033 and $368,434 at June 30, 1999 and 1998,
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, 1999 and 1998 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. 66,000 of the options under the 1996 plan have been granted as of
June 30, 1999.
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 fiscal 1999,
15,400 shares of common stock were issued under the Bonus Plan.
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:
1999 1998
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
Outstanding, beginning
of fiscal year 76,962 1.11 38,212 $ 1.04
Granted 28,000 1.40 74,000 1.88
Exercised (32,750) 0.98 (34,000) 0.98
Canceled (4,145) 1.13 (1,250) -
Outstanding, end of
fiscal year 68,067 $ 1.22 76,962 $1.11
Range of exercise prices $.63 to 1.94 $.63 to 1.39
Options exercisable,
end of fiscal year 47,467 75,762
Summarized information about fixed stock options at June 30, 1999 is as
follows:
Options Outstanding Options Exercisable
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Exercise Outstanding at Contractual Average Exercisable at Average
Prices June 30, 1999 Life Exercise PriceJune 30, 1999 Exercise Price
$ .63 4,000 0.5 years $.63 4,000 $.63
.94 2,000 1.5 .94 2,000 .94
1.09 22,400 1.5 1.09 21,800 1.09
1.13 5,667 2.5 1.13 5,667 1.13
1.19 20,000 4.5 1.19 - 1.19
1.39 6,000 3.5 1.39 6,000 1.39
1.94 8,000 4.5 1.94 8,000 1.94
$.63 to 1.94 68,067 2.9 years $ 1.22 47,467 $1.23
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, compensation cost of $15,000 and $8,625 has been
recognized for the options granted in 1999 and 1998, 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 $24,400 and $22,000 in 1999 and 1998, respectively.
Accordingly, the Company's 1999 net loss and earnings per share would have
been reduced to proforma amounts of $(188,180) and $(.16), respectively and
1998 net income and earnings per share would have been reduced to proforma
amounts of $169,489 and $.16, 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, 1999, principally all of the Company's scheduled air service
communities are located in Montana, Arkansas, Oklahoma and Texas and
fifteen 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 $863,947 and $329,277, or 53% and 23% of
total stockholders' equity at June 30, 1999 and 1998, respectively. The
majority of passengers carried by the Company are ticketed by other airlines
and travel agencies. Five airlines comprise the majority of passenger
related accounts receivable.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Reorganization Plan
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 claims under the
Reorganization Plan have been satisfied as of June 30, 1999, except for a
remaining secured obligation described in the Plan to the Federal
Aviation Administration. That obligation is set forth in separate secured
debt documents and amendments thereto that continue irrespective of the Plan.
Litigation
The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of
such proceedings and litigation currently pending will not materially affect
the Company's financial statements.
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. Approximately 300,000 of the old shares outstanding
(equivalent to approximately 60,000 new, currently outstanding shares) were
not delivered to the Company as required by the Plan, and accordingly, are
no longer included within the Company's issued and outstanding common stock
and may only be used for cash redemption should they be delivered to the
Company. The Company has established an escrow account to redeem the old
stock, should it be delivered.
