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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, 2000
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1601 Aviation Place, Billings, Montana 59105
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (406) 247-3910
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
1996 Series Common Stock, No Par Value Pacific Exchange, Inc.
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(Title of Class) (Name of Each Exchange on which Registered)
</TABLE>
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: $21,925,902.
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:
$1,230,059 (1,093,386 shares held by all shareholders excluding officers and
directors identified in Item 11, below, @ $1.125 per share, based on latest sale
September 7, 2000).
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 1,248,102
(June 30, 2000)
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INDEX
FORM 10KSB
<TABLE>
<CAPTION>
PART I:
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<S> <C> <C>
Item 1 Description of Business 4-6
Item 2 Description of Property 6-8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II:
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Item 5 Market for Common Equity and Related Stockholder Matters 8-9
Item 6 Management Discussion & Analysis or Plan of Operation 9-12
Item 7 Financial Statements 12
Item 8 Changes in and Disagreements with Accountants on Accounting 12
and Financial Disclosure
PART III:
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Item 9 Directors, Executive Officers, Promoters & Control Persons, 12-14
and Compliance with Section 16(a) of the Exchange Act
Item 10 Executive Compensation 14-16
Item 11 Security Ownership of Certain Beneficial Owners & Management 16-17
Item 12 Certain Relationships and Related Transactions 17
PART IV:
--------
Item 13 Exhibits and Reports on Form 8-K 18-20
</TABLE>
2
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FINANCIAL STATEMENTS
(appended)
<TABLE>
<S> <C>
Independent Auditors' Report 1
Balance Sheets as of June 30, 2000 and 1999 2
Statements of Operations for the years-ended June 30, 2000 and 1999 3
Statements of Stockholders' Equity for the years-ended June 30, 2000 and 1999 4
Statements of Cash Flows for the years-ended June 30, 2000 and 1999 5-6
Notes to Financial Statements 7-18
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT:
Big Sky Transportation Co., dba Big Sky Airlines, is a regional airline.
Big Sky Transportation Co. (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 primarily to small cities, towns and markets not otherwise
served by other air carriers, and in so doing enhance aircraft utilization,
earnings, and shareholder equity. In the summer of 1996, Big Sky had four
aircraft that provided service to northern and eastern Montana via its
Billings, Montana hub. As of June 30, 2000, Big Sky provides service to
fifteen cities in Montana, Washington and North Dakota and to nine cities
in the south central United States via its Dallas, Texas hub. In February
2000, Big Sky connected its two hub systems by providing service from
Bozeman, Montana to Dallas via Denver, Colorado. Big Sky plans further
expansion of its system by establishing service (scheduled for late October
2000) from Carlsbad, Roswell and Hobbs, New Mexico to both Denver and
Dallas. Big Sky's operating revenues have increased from $5,055,907 in 1996
to $21,925,902 in 2000.
(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 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 1991 and 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 ten
Fairchild Metro III aircraft and four Fairchild Metro 23 aircraft between
cities and towns in nine states: Arkansas, Colorado, Montana, Missouri, New
Mexico (beginning October 2000), North Dakota, Oklahoma, Texas, and
Washington.
(1) Principal Products, Services, and Markets: Big Sky's present route
system is designed around its two air service hubs in Billings and Dallas
with connections between the two hubs via service to Denver. The cities
served via Billings and Dallas are known as Big Sky's "northern" and
"southern" routes, respectively. Big Sky provides service between its
Billings hub and seven communities in Central/Eastern Montana and between
its Dallas hub and eight communities in Texas, Arkansas, and Oklahoma under
contracts 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 49 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 and Bozeman, MT (to be
discontinued in November 2000), Denver, CO, Helena, MT, Great Falls, MT,
Kalispell, MT, Missoula, MT, Bismarck, ND, 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
utilized by travel agents and airlines. Effective June 2, 1999, Big Sky's
services in the Billings region carry both the GQ and the NW code
designators under a code-sharing agreement with Northwest Airlines.
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The table below lists the cities served and their inaugural date of
service:
<TABLE>
<CAPTION>
CITY/STATE SERVICE INAUGURATED
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<S> <C>
Billings, MT September 1978
Glasgow, Glendive, Havre,
Lewistown, Miles City
Sidney & Wolf Point, MT July 1980
Great Falls, MT May 1995
Helena & Missoula, MT October 1997
Kalispell, MT May 1998
Spokane, WA June 1998
Dallas & Brownwood, TX November 1998
Hot Springs, Mountain Home,
Jonesboro, Harrison
& El Dorado, AR November 1998
Enid & Ponca City, OK November 1998
St. Louis, MO November 1998
Bismarck, ND December 1998
Bozeman, MT February 2000
Denver, CO February 2000
Roswell, Hobbs & Carlsbad, NM October 2000 (scheduled)
</TABLE>
(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. Big Sky participates in four major computer reservation
systems used by travel agents to make airline reservations. Big Sky also
maintains a reservations center in Billings utilizing the Worldspan computerized
reservation system. Travel agents currently receive a 5 percent commission for
ticket sales and sell approximately 60 percent of Big Sky's tickets. Big Sky
administers a ticket by mail program and a bulk ticketing program that targets
sales of ten or more tickets to corporations and government agencies at the
lowest advance purchase fares. Tickets are also sold at each of Big Sky's
stations.
In order to gain connecting traffic from other carriers, Big Sky has negotiated
interline agreements with the major and regional airlines serving cities on Big
Sky's route system. Generally, these agreements have joint ticketing and baggage
services designed to expedite the connecting process. To enhance connecting
traffic, Big Sky entered into a code sharing agreement with Northwest Airlines
on June 2, 1999 covering markets in Montana, Washington and North Dakota. The
agreement provides one stop check-in for connecting passengers and baggage and
provides Northwest frequent flyer members mileage on Big Sky flights.
The DOT pays EAS subsidy for each departure in a covered market. The DOT bids
the EAS contracts biannually with the rates per departure subject to negotiation
with the DOT.
(3) Status of any Publicly Announced New Service: In December 1999, Big Sky
announced new service, effective February 2000, between its northern and
southern routes via Denver. Additionally, in September 1998, Big Sky announced
increased service, effective November 1998, between points in central and
western Montana and Spokane, Washington. These new services began as announced
and have met all projections of revenues and earnings production. In October
1998, Big Sky announced new service between points in Texas, Oklahoma, Arkansas,
and Missouri to be phased in between November 1998 and February of 1999. Most of
the new service began as announced, however delays in obtaining suitable
aircraft resulted in significant additional expense and created operational
problems.
(4) Competitive Conditions: Big Sky generally serves markets that are
under-served by other major or regional airlines either through EAS contracts or
unsubsidized service. As a result, Big Sky's principal competition is surface
transportation, primarily the automobile, whereby customers elect to drive
instead of fly. Big Sky's 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.
(5) Source and Availability of Raw Materials: Big Sky's operations are
dependent upon the availability of adequate jet fuel at affordable prices.
During the past year fuel prices have been higher 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 purchases fuel from numerous suppliers at airports throughout its system.
Big Sky attempts to schedule
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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 2000 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, Denver, Kalispell,
Missoula, and Spokane. EAS subsidy revenue in 2000 and 1999 was 49% of total
revenues.
In October 1996, Congress passed the Rural Air Service Survival Act, which
extended the EAS program indefinitely and provided the first permanent funding
source commencing October 1997. Total annual funding available under the new
program is $50 million. Big Sky's current EAS contracts for its Montana and
south central United States services extend through November 30, 2000 and 2001,
respectively. Big Sky's EAS revenues are dependent upon the extension or renewal
of these contracts.
(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 and extend 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 is a party to
two collective bargaining agreements covering certain of its employees. Big
Sky's mechanics are covered under an agreement with the International
Association of Machinists & Aerospace Workers (IAM) that expires on May 1, 2003.
Big Sky's pilots and dispatchers are covered 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 DOT.
DOT Regulation: The U.S. 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.
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. Big Sky's
Board of Directors also devotes substantial time to business development 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, 2000, Big Sky employed a total of 243
personnel, approximately 70 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 the Dallas/Forth Worth Airport in Dallas, Texas.
Big Sky has airport counter, baggage, and ramp space for ground services and
customer services at 17 cities currently served. Big Sky contracts for ground
handling services from other airlines or service providers at 9 of the airports
it serves. Big Sky rents hangar space at locations outside Billings for
over-night aircraft on a seasonal or as needed basis. Big Sky routinely
maintains its real properties, keeping them in excellent condition.
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At year-end, Big Sky had a fleet of ten Fairchild Metro III (-11UA), and four
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 modification while three Metro III aircraft have a
standard 14,500 pound gross take-off weight modification. 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. Thirteen aircraft are leased under
long term operating leases. Six of these leases contain purchase options. Big
Sky purchased one aircraft financed with 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. Manufacturers or qualified outside
contractors perform a portion of Big Sky's major engine overhaul and avionics
work while in-house mechanics perform some of Big Sky's major engine
maintenance. All aircraft are maintained in excellent condition. Big Sky's
certificate also allows company employees to perform maintenance for outside
customers. Work and revenues generated by outside customers, however, 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 purchase
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.
(1) General Information About Properties. Big Sky's main facilities in
Billings, Montana consist of an 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. A
new two-story office building adjacent to the hangar houses 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 February 2014 (with an
option to renew for an additional six years), at the rate of $5,694 per month,
subject to certain adjustments. Big Sky has options to purchase the buildings
from the lessor 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. Other air carriers and
providers of air transportation services seek the properties that Big Sky leases
and rents for its operations. Local conditions influence the terms and
conditions of these leases and rental agreements. Airport authorities establish
the terms and conditions of the rental rates at most of the airport locations
where Big Sky conducts operations. 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
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operations and property, with policy limits that it believes to be adequate.
Coverage includes public liability, passenger liability, aircraft equipment loss
or damage, lessor-required real property hazard and casualty coverage, baggage
and cargo liability and workers' compensation.
(7) Leasing of Properties by Big Sky. Big Sky does not lease any of its
properties. Big Sky occasionally enters into subleases of its facilities with
other aviation operators.
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
Big Sky's Annual Meeting of Stockholders was held on February 29, 2000. A total
of 862,040 shares were represented at the meeting constituting 68.2% of the
total shares outstanding. Three proposals were submitted for approval to the
Stockholders:
1. Directors to serve for the next twelve-month period were elected: Jon
Marchi (815,260 shares for, 0 shares against, 46,780 shares withheld),
Kim B. Champney (815,500 shares for, 0 shares against, 46,540 shares
withheld), Jack K. Daniels (861,340 shares for, 0 shares against, 700
shares withheld), Alan D. Nicholson (861,270 shares for, 0 shares
against, 780 shares withheld), Stephen D. Huntington (861,440 shares
for, 0 shares against, 600 shares withheld), and Craig Denney (815,440
shares for, 0 shares against, 46,600 shares withheld).
2. By a vote of 861,380 shares for, 480 shares against, 180 shares
abstaining, the selection of Eide Bailly & Co., P.L.L.P., as
independent auditors was ratified and approved.
3. By a vote of 654,717 shares for, 49,300 shares against, 7,500 shares
abstaining shares, 150,523 shares not voting, the Big Sky
Transportation Co. 1999 Long-Term Incentive and Stock Option Plan was
approved.
During the twelve-month period ending June 30, 2000, there were no special
meetings of the stockholders or votes of stockholders at special meetings.
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 1999 and 2000. Bid prices represent quotations between
dealers and do not include retail markups, markdowns or commissions, and may not
represent actual transactions. Data for 1999 and 2000 reflect the effect of the
5:1 reverse stock split effective in August 1996:
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<TABLE>
<CAPTION>
1999
QUARTER ENDED HIGH ($) LOW ($)
<S> <C> <C>
09/30/98 2.2500 1.8750
12/31/98 1.9375 1.6875
03/31/99 2.0625 1.6875
06/30/99 1.7500 1.4375
</TABLE>
<TABLE>
<CAPTION>
2000
QUARTER ENDED HIGH ($) LOW ($)
<S> <C> <C>
09/30/99 1.3750 1.3750
12/31/00 1.4375 1.2500
03/31/00 1.1250 0.8750
06/30/00 1.1250 1.0000
</TABLE>
(B) HOLDERS.
According to records maintained by Big Sky's transfer agent, Continental Stock
Transfer & Trust Co., Big Sky had 296 holders-of-record of its 1996 Series
Common Stock as of June 30, 2000.
(C) DIVIDENDS
Big Sky did not pay dividends on its common stock during the year ended June 30,
2000 and has not paid dividends in the past. Big Sky reinvests its earnings in
order to provide operational growth, acquired operational assets, and increase
shareholder equity. Management does not anticipate payment of cash dividends in
the foreseeable future.
(D) UNREGISTERED EQUITY SECURITIES SOLD DURING PERIOD.
There were no sales of unregistered equity securities sold during the 12 month
period ended June 30, 2000.
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: In 2000, Big Sky recorded an
operating loss of $845,151 on revenues of $21,925,902 compared to an operating
loss of $110,345 on revenues of $15,914,998 during 1999. Net losses were
$724,179 and $178,780 for 2000 and 1999, respectively.
During the past two years management has sought opportunities to increase
traffic growth in both subsidized and non-subsidized markets. Most
significantly, Big Sky contracted with the DOT to provide essential air service
to eight communities in the south central United States. This action effectively
doubled Big Sky's scope of operations. At the request of the DOT, Big Sky began
serving these communities on an expedited basis in November 1998. Other
significant service expansions over the past two years include increased service
(effective November 1998) between points in western Montana and Spokane and new
service to Denver (effective February 2000) from Big Sky's northern and southern
route systems.
These service expansions have produced mixed results. As stated above, Big Sky
began its southern EAS operations on an expedited basis that resulted in
significant problems in acquiring suitable aircraft to meet the scheduled
service demands. Moreover, reliability problems associated with these new
aircraft led to an unusually high number of flight cancellations. These aircraft
shortage and reliability problems together with general start-up expenses led to
significant losses, incurred primarily in 1999. In contrast, Big Sky's expanded
service to Spokane via cities in western Montana and new service to Denver from
its northern and southern systems have met or exceeded management's
expectations.
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In 2000, a number of unusual events resulted in significant operating losses,
primarily in the first nine months. Specifically, Big Sky incurred seven
non-scheduled engine removals that resulted in higher than expected engine
maintenance. Big Sky also experienced excessive pilot turnover. Management
believes that this pilot turnover is primarily attributable to a
reinterpretation of flight and duty times by the FAA that led to a migration of
pilots to the major airlines at the expense of smaller, regional airlines,
including Big Sky. A secondary impact of these events was that Big Sky had to
cancel a significant number of flights that reduced the amount of subsidy
revenue to be earned under the EAS contract. Rising fuel costs also negatively
impacted Big Sky throughout 2000. The average cost of jet fuel has increased by
approximately 35% in 2000. By the fourth quarter of 2000 Big Sky had taken steps
to better manage its maintenance and pilot turnover expenses. Despite other
unusual events that created operational problems, Big Sky posted an operating
profit of $279,713 on revenues of $6,255,103 in the fourth quarter of 2000.
The following table sets forth certain statistics relating to the operations of
Big Sky during the past two years:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
2000 1999
<S> <C> <C>
PASSENGERS 130,232 93,157
REVENUE PASSENGER MILES--RPMS (000) 36,402 24,053
AVAILABLE SEAT MILES--ASMS (000) 104,577 72,245
ASMS INCLUDING CHARTER (000) 104,577 72,245
AVERAGE PASSENGER LOAD FACTOR (%) 34.8 33.3
AIRCRAFT MILES (000) 5,503 3,802
AVERAGE YIELD PER RPM (CENTS) 29.76 32.58
OPERATING COST PER ASM (CENTS) 21.77 22.18
FREIGHT POUNDS 313,035 273,400
OPERATING BREAKEVEN, INCLUDING SUBSIDY (%) 36.1 33.5
FLEET:
METRO III 10 9
METRO 23 4 3
TOTAL 14 12
CITIES SERVED 26 24
</TABLE>
The following table shows a comparison of revenues for the years ended June
30.
<TABLE>
<CAPTION>
INCREASE
2000 1999 (DECREASE) %
<S> <C> <C> <C> <C>
PASSENGER 10,832,880 7,822,443 3,010,437 38
CARGO 235,356 218,091 17,265 8
PUBLIC SERVICE. 10,739,560 7,749,560 2,990,000 39
OTHER 118,106 124,904 (6,798) (5)
TOTAL 21,925,902 15,914,998 6,010,904 38
</TABLE>
The increase in passenger and cargo revenue is primarily related to the
continued growth in Big Sky's western Montana routes, new service to Denver and
to a lesser extent growth in passenger traffic on EAS routes. The increase in
public service revenue is due to a full year of southern EAS revenue reflected
in 2000 compared to nine months in 1999.
<TABLE>
<CAPTION>
2000 1999 INCREASE %
<S> <C> <C> <C> <C>
FLYING OPERATIONS 9,032,129 6,670,044 2,362,085 35
MAINTENANCE 5,725,122 3,310,380 2,414,742 73
TRAFFIC 4,747,369 3,538,311 1,209,058 34
MARKETING 1,680,853 1,200,767 480,086 40
GENERAL AND ADMIN. 1,255,285 1,097,489 157,796 14
DEPRECIATION 330,295 208,352 121,943 59
TOTAL OPERATING EXPENSE 22,771,053 16,025,343 6,745,710 42
</TABLE>
10
<PAGE> 11
The increase in flying operations expense is due primarily to a full year of
southern EAS-related expenses (e.g., pilot compensation, aircraft rentals and
insurance, property taxes) reflected in 2000 compared to nine months in 1999.
Also contributing to the increase is pilot training and fuel expenses.
Management estimates that the excessive pilot turnover had a total economic loss
of approximately $600,000.
The increase in maintenance expenses is attributable to expanded fleet and
aircraft utilization that resulted in a 46% increase in aircraft hours flown. As
discussed above, Big Sky experienced significant unscheduled engine maintenance
attributable to bird ingestions and other unusual events resulting in seven
unscheduled engine removals. Management estimates that the cost of these events
approximated $500,000 during the past year.
The increase in traffic servicing is primarily related to a full year of
expenses in the southern EAS region in 2000 compared to nine months in 2000 and
is proportional to the increased passenger traffic. To a lesser extent, new
service to Denver from the northern and southern regions also contributed to the
increase.
The increase in marketing expense is primarily related to expenses associated
with higher passenger volume resulting in higher credit card commissions,
customer reservation system charges, communications expenses and reservation
staffing.
General and administrative cost increases in 2000 over 1999 were the result of
additional administrative support related to the addition of the southern EAS
operation and the large increase in passengers carried. An increase in employee
benefits related to increased staffing in all functions also contributed to the
increase.
Depreciation expense increased due to a full year of expenses in the southern
EAS region in 2000 compared to nine months in 2000.
An increase in net interest expense is attributable to Big Sky's increased use
of its line of credit and payments under a capital lease for Big Sky's new
general offices.
LIQUIDITY AND CAPITAL RESOURCES: A review of current liquidity for the last two
years is presented in the following chart:
<TABLE>
<CAPTION>
WORKING CAPITAL CURRENT RATIO
<S> <C> <C>
YEAR ENDED JUNE 30, 1999 (159,873) .95:1
YEAR ENDED JUNE 30, 2000 (1,090,551) .76:1
</TABLE>
A review of the capital resources for the last two years is presented below:
<TABLE>
<CAPTION>
LONG TERM DEBT
(EXCL CURRENT PORTION) SHAREHOLDERS' EQUITY
<S> <C> <C>
YEAR ENDED JUNE 30, 1999 1,192,981 1,526,728
YEAR ENDED JUNE 30, 2000 1,553,080 803,699
</TABLE>
Big Sky has established a line of credit for $1,500,000 through First Interstate
Bank of Billings. The actual line availability is based upon a borrowing formula
covering accounts receivable, inventories and accounts payable. Big Sky uses the
line primarily to supplement timing differences in cash flow. During the 12
month period ended June 30, 2000, Big Sky's draws against the line of credit
ranged from a low of $51,302 to a high of $1,495,766.
The decrease in working capital is the result of Big Sky's use of its line of
credit and from unprofitable operations resulting from the factors described
above. Payment patterns related to the EAS contracts result in the 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. A second major cash flow component comes from the Airline Clearinghouse
(ACH). This central clearinghouse administers payments for tickets sold and
services rendered among airline participants. ACH remits payment approximately
twenty-eight days after the month for tickets sold by other airlines but
accepted by Big Sky.
Cash used for operating activities for the year ended June 30, 2000 was $213,359
compared to cash used of $148,787 in the prior year. The decrease is attributed
to the operating loss and increases in inventories and deposits related to the
expanded fleet. Cash used for investing activities in 2000 was $331,962. In
comparison, 1999's investing activities totaling $2,020,001 included the
acquisition of a seventh Metro III aircraft, additional aircraft rotable spare
parts, ground
11
<PAGE> 12
service equipment required to support the expanded fleet and operations, and new
computer hardware and software. Cash from financing activities for 2000 was
$325,027 compared to $1,876,412 in 1999.
ITEM 7. FINANCIAL STATEMENTS
Big Sky's complete audited financial statements for 2000 are appended to this
report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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.
The Board elects Executive officers annually and serves 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--54; Stock--66,556 (c), % Class--5.3% (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. (fixed base aviation operator), Williston, ND, 1950
-1994 (retired);
Other--Former Chairman, North Dakota Aeronautics Commission (retired);
Former Treasurer, National Committee of Cities & States for Airline
Service--NCCSAS (retired);
Age--75; Stock--22,620 (d), % Class--1.8% (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; VP, Corporate Development & Finance, MSE, Inc., Butte, MT;
Other--Director, MSE-HKM, Inc., Director, MSE Technology Applications,
Inc., Director, Safe Shop Tools, Inc., 1997;
12
<PAGE> 13
Previous Employment--State of Montana, 1982-1990.
Education--B.A. Political Science and Graduate Studies, Law & Public
Administration, University of Montana;
Age--44; Stock--15,600 (e); % Class 1.2% (i)
BARBARA H. NEMECEK, DIRECTOR & EXECUTIVE OFFICER:
BigSky--Outside Director since 2000; Principal Business--Dean, Montana
State University-Billings College of Business, 1997 to-date; Associate
Professor, University of Nebraska-Kearney Management & Marketing
Department, Kearney, NB, 1993 - 1997, Interim Chair, Family & Consumer
Sciences Department, 1995 - 1997, Coordinator-Continuing Education &
Extension, University of Minnesota Marketing & Logistics Management
Department, 1988 - 1992.
Education--B.S.General Home Economics, University of Wisconsin-Stout,
M.S. Clothing, Textiles and Related Arts, Ph.D. Business
Administration, University of Minnesota
Age--61; Stock--5,000 (f); % Class .4% (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--47; Stock--41,420 (g), % Class 3.3% (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--46; Stock--25,300 (h) Class--2.0% (i)
JAMES R. TEVLIN, EXECUTIVE OFFICER:
Big Sky--Controller & Treasurer, February 2000 to date Previous
Employment--Manager-Domestic Corporate Accounting, Federal Express,
Memphis, TN, 1997-1998, Senior Financial Reporting Accountant, Federal
Express, Memphis, TN, 1991-1997; Financial Reporting Accountant,
Federal Express, Memphis, TN, 1989-1990; Auditor, Arthur Andersen & Co,
1987-1989;
Education--B.S. Corporate Finance, University of Alabama, Tuscaloosa,
AL, M.B.A-(accounting concentration) University of South Alabama,
Mobile, AL. Certified Public Accountant (inactive)-Tennessee.
Age--39
(a) The above-listed directors were duly elected at the 2000 Annual Meeting of
Stockholders. The Corporation's present executive officers and Board leadership
were elected in February 2000. 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, 2000, 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
13
<PAGE> 14
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 6/30/2000 on 4,000 shares.
(d) 16,620 shares owned. Options exercisable at 6/30/2000 on 6,000 shares.
(e) 5,600 shares owned. Options exercisable at 6/30/2000 on 10,000 shares.
(f) 5,000 shares owned. No options exercisable at 6/30/2000.
(g) 21,420 shares owned. Options exercisable at 6/30/2000 on 20,000 shares.
(h) 5,300 shares owned. Options exercisable at 6/30/2000 on 20,000 shares.
(i) Includes shares owned and eligible options, as a percent of total
outstanding shares, shown to nearest tenth.
On April 27, 2000, Alan D. Nicholson resigned from Big Sky's Board of Directors.
Additionally, on September 1, 2000, the Board voted to elect Ed Wetherbee and
Ken L. Thuerbach to Big Sky's Board of Directors.
(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 2000.
ITEM 10. EXECUTIVE COMPENSATION
(A) EXECUTIVE COMPENSATION.
In the table below is set forth compensation information for the President/CEO
(Mr. Champney) in 1998, 1999 and 2000, the sole "named executive" of the
Corporation, for which such reporting is required.
14
<PAGE> 15
<TABLE>
<CAPTION>
LONG-TERM OTHER
COMPENSATION COMPENSATION--
SALARY (1) BONUS (2) STOCK OPTIONS # (3) NON-CASH (4)
<S> <C> <C> <C> <C>
2000 95,000 0 0 0
1999 95,000 7,791 20,000 25,435
1998 38,230 0 0 0
</TABLE>
(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, 2000, 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 2000 were
$37,597 as follows:
<TABLE>
<CAPTION>
ITEM PAYMENTS
<S> <C>
MTGS., CONF. & SPECIAL PROJECTS (1) $34,163
EXPENSE REIMBURSEMENT (2) 3,434
TOTAL (3) $37,597
</TABLE>
(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-$22,255, Nicholson-$3,700, Huntington-
$6,261, Daniels-$4,781 and Nemecek-$600. 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.
Options to purchase an additional 8,000 shares were granted under the Plan in
February 2000 at $.9375 per share. (Note: above share price and share amounts
are post-recapitalization)
(C) COMPENSATION & MANAGEMENT DEVELOPMENT.
During 2000, the Board's Committee on Compensation and Management Development
was comprised of Messrs. Marchi and Huntington. The Committee is responsible to
provide an annual review of the President/CEO, recommend compensation and
incentive changes with regard to the President/CEO and generally to offer
guidance to the Board with regard to senior management organization, performance
incentives and development.
(D) OFFICER AND DIRECTOR STOCK OPTIONS.
The table below summarizes options to purchase shares, which have been issued to
existing board members and executive officers under its stock option plans and
were outstanding and exercisable, but not exercised as of June 30, 2000
(post-recapitalization basis):
15
<PAGE> 16
<TABLE>
<CAPTION>
OFFICE/DIRECTOR GRANT STOCK OPTIONS
& OPTION PLAN DATE OUTSTANDING (SHARES) OPTIONS PRICE ($)
<S> <C> <C> <C>
CRAIG DENNEY:
1996 Team Inc. 3/98 20,000 1.09375
STEPHEN D. HUNTINGTON:
1995 DSOP 2/96 2,000 .93750
1995 DSOP 2/97 2,000 1.25000
1995 DSOP 2/98 2,000 1.38750
1995 DSOP 3/99 2,000 1.93750
1995 DSOP 3/00 2,000 .93750
JACK K. DANIELS:
1995 DSOP 2/98 2,000 1.38750
1995 DSOP 3/99 2,000 1.93750
1995 DSOP 3/00 2,000 .93750
JON MARCHI:
1995 DSOP 3/99 2,000 1.93750
1995 DSOP 3/00 2,000 .93750
KIM CHAMPNEY:
1996 QSOP 3/99 20,000 1.18750
</TABLE>
Notes: No other 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 $1.125/$1.125 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.
Big Sky has an executive employment agreement with Mr. Champney that provides
for a base compensation of $7,917 per month and 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, 2000, with respect to
each person known to Big Sky to own beneficially more than five percent (5%) of
the outstanding Common Stock:
<TABLE>
<CAPTION>
BENEFICIAL OWNER SHARES # %CLASS
<S> <C> <C>
Derby West Corp., LLC, Sheridan, 347,520 27.8
WY (a)
H. V. Holeman, Las Vegas, NV (b) 108,780 8.6
Jon Marchi 66,556 5.3
Northern Rockies Venture Fund (c) 114,286 9.2
</TABLE>
16
<PAGE> 17
(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 common stock. 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, 2000 with respect to
Common Stock beneficially owned by officers and directors of Big Sky:
<TABLE>
<CAPTION>
OFFICER OR DIRECTOR SHARES # % CLASS
<S> <C> <C>
JON MARCHI 66,556 5.3
JACK DANIELS 22,620 1.8
STEVE HUNTINGTON 15,600 1.2
CRAIG DENNEY 41,420 3.3
KIM CHAMPNEY 25,300 2.0
TOTAL MANAGEMENT OWNERSHIP 171,496 13.7
</TABLE>
(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, a hangar and office facility from Jon
Marchi, a director, officer and shareholder. On December 1, 1999 this lease was
renewed and combined with another lease for a new general office building.
Management believes that the terms of the leases were as favorable as those that
could have been obtained from independent third parties. The lease extends for
15 years and contains a six-year option to extend and provides Big Sky four
separate purchase options. Total payments under these leases were $46,023 and
$42,000 in 2000 and 1999, respectively.
(B) TRANSACTIONS WITH PROMOTERS.
Big Sky has had no transactions with promoters during the past five years.
17
<PAGE> 18
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.
(9) VOTING TRUST AGREEMENTS - Big Sky has no voting trust agreements.
(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-KSB filed September
25, 1998, incorporated herein by reference.
(b) DOT Order 99-12-28, issued December 29,1999, provided for selection of Big
Sky as Essential Air Service carrier for eight points in Arkansas, Oklahoma, and
Texas, with hub at Dallas, Texas, through November 30, 2001. See Exhibit 10 (c)
to Company's report on Form 10-QSB filed February 14, 2000, 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 was filed with Big Sky's Form 10-KSB dated
September 28, 1999, and is incorporated by reference.
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS - See attached financial
statements, note 1.
(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.
18
<PAGE> 19
(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 - No reports were filed on Form 8-K during the 12 month
period ended June 30, 2000.
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 September 27, 2000
Director, President & CEO
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 27, 2000
/s/ Craig Denney
----------------
Craig Denney
Director, Executive VP,
& COO., Secretary,
Assistant Treasurer
(Chief Operating Officer) September 27, 2000
/s/ Stephen D. Huntington
-------------------------
Stephen D. Huntington
Director & Assistant Secretary September 27, 2000
/s/ Barbara H. Nemecek
----------------------
Barbara H. Nemecek
Director September 27, 2000
/s/ Jack K. Daniels
-------------------
Jack K. Daniels
Director, Vice Chairman September 27, 2000
19
<PAGE> 20
/s/ James R. Tevlin
-------------------
James R. Tevlin
Controller, Treasurer September 27, 2000
20
<PAGE> 21
BIG SKY TRANSPORTATION CO.
FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
<PAGE> 22
BIG SKY TRANSPORTATION CO.
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2
Operations 3
Stockholders' Equity 4
Cash Flows 5-6
Notes to Financial Statements 7-18
</TABLE>
<PAGE> 23
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, 2000 and 1999 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, 2000 and 1999 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, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Eide Bailly LLP
Billings, Montana
August 25, 2000
1
<PAGE> 24
BIG SKY TRANSPORTATION CO.
BALANCE SHEETS
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 220,294
Restricted cash 137,500 137,500
Accounts receivable, less allowance for doubtful receivables of
$7,200 in 2000 and $1,200 in 1999 2,295,134 1,698,313
Income tax refund receivable 32,439 35,603
Expendable parts and supplies 507,875 444,882
Inventory held for sale 108,765 30,000
Prepaid expenses 240,694 111,360
Deferred income taxes 69,000 69,000
------------- --------------
Total current assets 3,391,407 2,746,952
------------- --------------
OTHER ASSETS
Deferred income taxes 365,000 -
Deposits and other assets 79,954 176,991
------------- --------------
444,954 176,991
------------- --------------
PROPERTY AND EQUIPMENT 3,002,376 2,702,591
------------- --------------
$ 6,838,737 $ 5,626,534
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 1,225,638 $ 700,000
Current maturities of long-term debt 209,769 457,385
Accounts payable 1,301,677 856,073
Accrued expenses 825,887 596,437
Traffic balances payable and unused tickets 918,987 296,930
------------- --------------
Total current liabilities 4,481,958 2,906,825
------------- --------------
LONG-TERM DEBT, less current maturities 1,553,080 1,192,981
------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized, 20,000,000 shares
Issued and outstanding, 1,248,102 shares in 2000
and 1,245,302 in 1999 815,375 814,225
Additional paid-in capital 242,034 242,034
Retained earnings (deficit) (229,857) 494,322
------------- --------------
827,552 1,550,581
Less treasury stock at cost (20,000 shares in 2000 and 1999) (23,853) (23,853)
------------- --------------
803,699 1,526,728
------------- --------------
$ 6,838,737 $ 5,626,534
============= ==============
</TABLE>
See notes to financial statements. 2
<PAGE> 25
BIG SKY TRANSPORTATION CO.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
OPERATING REVENUE
Passenger $ 10,832,880 $ 7,822,443
Public service 10,739,560 7,749,560
Cargo 235,356 218,091
Other 118,106 124,904
------------ ------------
Total operating revenue 21,925,902 15,914,998
------------ ------------
OPERATING EXPENSES
Flying operations 9,032,129 6,670,044
Maintenance 5,725,122 3,310,380
Traffic 4,747,369 3,538,311
Depreciation and amortization 330,295 208,352
Marketing 1,680,853 1,200,767
General and administrative 1,255,285 1,097,489
------------ ------------
Total operating expenses 22,771,053 16,025,343
------------ ------------
LOSS FROM OPERATIONS (845,151) (110,345)
OTHER INCOME (EXPENSE)
Interest expense (262,602) (155,021)
Interest income 14,424 30,711
Gain (loss) on inventory and equipment disposal 150 (20,356)
Other -- (12,769)
------------ ------------
LOSS BEFORE INCOME TAXES (1,093,179) (267,780)
INCOME TAX BENEFIT (369,000) (89,000)
------------ ------------
NET LOSS $ (724,179) $ (178,780)
============ ============
BASIC LOSS PER COMMON SHARE $ (.58) $ (.15)
============ ============
DILUTED LOSS PER COMMON SHARE $ (.55) $ (.14)
============ ============
</TABLE>
See notes to financial statements. 3
<PAGE> 26
BIG SKY TRANSPORTATION CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN TREASURY EARNINGS
SHARES AMOUNT CAPITAL STOCK (DEFICIT) TOTAL
----------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
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
Common stock issued 2,900 1,250 - - - 1,250
Retirement of common
stock (100) (100) - - - (100)
Net loss - - - - (724,179) (724,179)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
JUNE 30, 2000 1,248,102 $ 815,375 $ 242,034 $ (23,853) $ (229,857) $ 803,699
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements. 4
<PAGE> 27
BIG SKY TRANSPORTATION CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (724,179) $ (178,780)
Charges and credits to net loss not affecting cash
Depreciation and amortization 330,295 208,352
(Gain) loss on disposal of inventory and equipment (150) 20,356
Deferred income taxes (365,000) (69,000)
Compensation from employee incentive plans - 47,094
Changes in assets and liabilities
Restricted cash - 14,000
Receivables (596,821) (322,659)
Expendable parts and supplies (62,993) (153,331)
Inventory held for sale (62,489) -
Prepaid expense (129,334) (57,607)
Deposits and other assets 97,037 (169,733)
Accounts payable and accrued expenses 675,054 418,147
Traffic balances payable and unused tickets 622,057 107,161
Income taxes 3,164 (12,787)
------------- --------------
NET CASH USED FOR OPERATING ACTIVITIES (213,359) (148,787)
------------- -------------
INVESTING ACTIVITIES
Proceeds from sale of inventory and equipment 267 24,600
Property and equipment purchases (332,229) (2,044,601)
------------- --------------
NET CASH USED FOR INVESTING ACTIVITIES (331,962) (2,020,001)
------------- --------------
FINANCING ACTIVITIES
Net borrowings on short-term note agreement 525,638 700,000
Proceeds from long-term debt borrowings - 1,225,000
Payments on long-term debt, including capital lease obligations (201,761) (249,122)
Payments to retire common stock (100) (71,507)
Proceeds from stock options exercised - 36,890
Proceeds from issuance of common stock 1,250 235,151
------------- --------------
NET CASH FROM FINANCING ACTIVITIES 325,027 1,876,412
------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (220,294) (292,376)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 220,294 512,670
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ 220,294
============= ==============
</TABLE>
(continued on next page) 5
<PAGE> 28
BIG SKY TRANSPORTATION CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year
Interest $ 264,214 $ 160,562
Income taxes (refunds) 1,500 (7,213)
============= ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Capital lease obligation incurred for use of building $ 314,247 $ -
Equipment transferred to inventory held for sale 16,276 -
Common stock issued as compensation pursuant to
employee incentive plans - $ 32,094
Stock options granted as compensation pursuant to
employee incentive plans - 15,000
============= ==============
</TABLE>
See notes to financial statements. 6
<PAGE> 29
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 1 - BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Big Sky Transportation Co. (Company) operates as a regional air carrier,
primarily providing scheduled passenger, freight, express package and charter
services. At June 30, 2000, scheduled air service was provided to fifteen
communities in Montana, western North Dakota and in eastern Washington. The
Company's 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
and continues 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 and parts 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, 2000, 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.
(continued on next page) 7
<PAGE> 30
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
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
Company accrues for the cost of overhauls and engine hot end inspections 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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 2000
-------------------------------------------------
PER-SHARE
AMOUNT SHARES LOSS
-------------- -------------- --------------
<S> <C> <C> <C>
BASIC LOSS PER SHARE
NET LOSS $ (724,179) 1,246,702 $ (.58)
==============
EFFECTIVE OF DILUTIVE SECURITIES OPTIONS - 70,067
-------------- --------------
DILUTED LOSS PER SHARE
NET LOSS $ (724,179) 1,316,769 $ (.55)
============== ============= ==============
</TABLE>
(continued on next page) 8
<PAGE> 31
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Year Ended June 30, 1999
------------------------------------------------
Per-Share
Amount Shares Loss
------------- ------------ -------------
<S> <C> <C> <C>
Basic loss per share
Net loss $ (178,780) 1,169,433 $ (.15)
=============
Effect of dilutive securities options - 62,067
------------- ------------
Diluted loss per share
Net loss $ (178,780) 1,231,500 $ (.14)
============== ============= ==============
</TABLE>
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
The 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 $268,943 and
$271,050 for advertising costs in 2000 and 1999, respectively.
(continued on next page) 9
<PAGE> 32
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 2 - RESTRICTED CASH
At June 30, 2000 and 1999, 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.
NOTE 3 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Flight equipment $ 2,494,691 $ 2,329,732
Facility under capital lease 656,541 456,185
Other property and equipment 566,976 509,031
------------- -------------
3,718,208 3,294,948
Less accumulated depreciation and amortization (715,832) (592,357)
------------- -------------
$ 3,002,376 $ 2,702,591
============= =============
</TABLE>
NOTE 4 - ACCRUED EXPENSES
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
Engine hot-end inspections $ 227,731 $ 119,086
Vacation 174,569 127,419
Payroll and payroll taxes 258,208 214,593
Property taxes 99,450 67,536
Interest - 1,612
Other 65,929 66,191
------------- --------------
$ 825,887 $ 596,437
============= ==============
</TABLE>
NOTE 5 - NOTE PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
2000 1999
------------- --------------
<S> <C> <C>
8.74% installment note, due in monthly payments of $14,049,
including interest, through December 2005, secured by
flight equipment $ 1,012,962 $ 1,089,276
Capitalized lease obligation, at imputed interest rate of 8.5%
secured by leased assets - Note 8 569,867 267,216
9.5% installment note, due in monthly payments of $4,495,
including interest, through August 2001, secured by
accounts receivable 59,323 105,234
</TABLE>
(continued on next page) 10
<PAGE> 33
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
(continued)
<TABLE>
<S> <C> <C>
Prime + 1.5% installment note, due in monthly payments of $2,088,
including interest, through June 2004, secured by
equipment 83,507 100,000
9.75% installment note, due in monthly payments of $4,821,
including interest, through February 2001, secured by
equipment 37,190 88,640
------------- ------------
1,762,849 1,650,366
Less current maturities (209,769) (457,385)
------------- ------------
$ 1,553,080 $ 1,192,981
============= ============
</TABLE>
The Company has obtained a $1,500,000 line of credit which matures November 1,
2000, and is secured by inventories and equipment. Advances bear interest at
prime plus 1.5%. There were borrowings outstanding of $1,225,638 and $700,000 on
the line of credit as of June 30, 2000 and 1999, respectively.
Long-term debt maturities are as follows:
<TABLE>
<CAPTION>
Years Ending June 30, Amount
--------------------- -------------
<S> <C>
2001 $ 209,769
2002 142,101
2003 145,460
2004 158,797
2005 593,766
Thereafter 512,956
-------------
$ 1,762,849
=============
</TABLE>
NOTE 6 - INCOME TAXES
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Current
Federal $ - $ -
State (4,000) (20,000)
-------------- ------------
(4,000) (20,000)
-------------- ------------
Deferred
Federal - current benefit $ (322,000) $ (69,000)
State - current benefit (43,000) -
-------------- ------------
(365,000) (69,000)
-------------- ------------
$ (369,000) $ (89,000)
============== ============
</TABLE>
(continued on next page) 11
<PAGE> 34
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
Actual tax benefit differed from the expected tax benefit computed by applying
the U.S. Federal corporate tax rate of 34% to earnings before income taxes as
follows:
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
Computed "expected" tax benefit $ (372,000) $ (91,000)
State income taxes (net of Federal income tax effect) (55,000) (14,000)
Other non-deductible expenses 58,000 16,000
------------- ------------
$ (369,000) $ (89,000)
============== ============
</TABLE>
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:
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
Deferred tax assets
Accounts receivable, due to allowance for doubtful accounts $ 2,800 $ 500
Inventory held for sale, due to basis adjustment 4,000 4,000
Accrued overhauls and hot-end inspections 88,000 46,000
Compensated absences 67,400 49,000
Net operating loss carryforwards 1,085,000 655,000
Investment tax credit carryforwards 20,400 21,600
AMT credit carryforwards 1,000 1,000
-------------- ------------
Total gross deferred tax assets 1,268,600 777,100
Less valuation allowance (583,600) (583,600)
-------------- ------------
Net deferred tax assets 685,000 193,500
-------------- ------------
Deferred tax liabilities
Property and equipment, due to differences in depreciation (251,000) (124,500)
-------------- ------------
Net deferred tax asset $ 434,000 $ 69,000
============== ============
</TABLE>
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.
(continued on next page) 12
<PAGE> 35
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
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:
<TABLE>
<CAPTION>
Year Expiring NOL ITC
------------- ------------- -------------
<S> <C> <C>
2001 $ - $ 20,400
2004 1,075,000 -
2005 148,000 -
2006 58,000 -
2009 111,000 -
2011 6,000 -
2019 528,000 -
2020 1,153,000 -
------------- -------------
$ 3,079,000 $ 20,400
============= =============
</TABLE>
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, 2000 which are subsequently realized would be allocated as follows:
<TABLE>
<S> <C>
Excess reorganization value $ -
Additional paid-in capital 635,769
-----------
$ 635,769
===========
</TABLE>
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, 2000 and 1999
was $10,739,560 and $7,749,560, respectively (See Note 11). These subsidy
amounts represent 49% of all revenues for each of the years ended June 30, 2000
and 1999, respectively.
The Company's current EAS contract in the southern states expires November 30,
2001. 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, service to Denver, and 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.
(continued on next page) 13
<PAGE> 36
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 8 - LEASES
Operating Leases
As of June 30, 2000, the Company leased office facilities, land and Metroliner
23 and 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, 2000:
<TABLE>
<CAPTION>
Years Ending June 30, Amount
--------------------- --------------
<S> <C>
2001 $ 2,632,221
2002 2,619,925
2003 1,644,146
2004 993,106
2005 340,320
Thereafter 206,295
--------------
$ 8,436,013
==============
</TABLE>
Rental expense under operating leases charged to operations was $ 3,451,862 and
$2,942,783 and for the years ended June 30, 2000 and 1999, respectively.
Capital Leases
On March 1, 1994, the Company entered into a lease agreement ("Lease") with, Jon
Marchi, 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 26 years and provides for an annual adjustment of the rental amount
based on increases in the Consumer Price Index. The annual lease amount at June
30, 2000 was $11,974.
The second component of the Lease relates to an 11,520 square foot hangar
facility constructed on the airport land. The facility is owned by the Member
and was leased to the Company under the Lease agreement. As a result of
expansion in the business of the Company, in December 1999, the Member
constructed an office building and made improvements to the hangar facility. The
1994 lease agreement has been amended to include the hangar facility and the
newly constructed office building.
The lease term is 20 years (2014) 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 $578,000 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 (December 2004). 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.
(continued on next page) 14
<PAGE> 37
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
The Lease provides the Company the option to purchase the building on the
following dates: March 1, 2004, 2009, 2014 or 2019 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 $770,000. The Company will be given credit for its original
$150,000 investment and a graduated portion of any fair value appreciation in
excess of $770,000 in the event the Company exercises either purchase option. In
the event the hangar facility and office building are 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 a
capitalized cost of $656,541.
Future minimum lease payments under the capital leases and the present value of
future minimum capital lease payments as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Years Ending June 30, Amounts
--------------------- --------------
<S> <C>
2001 $ 68,328
2002 68,328
2003 68,328
2004 68,328
2005 495,466
--------------
Total minimum lease payments 768,778
Less interest (198,911)
--------------
Present value of minimum lease payments - Note 5 $ 569,867
==============
</TABLE>
The carrying value of the facility under capital leases net of accumulated
amortization was $637,714 and $345,033 at June 30, 2000 and 1999, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company leases 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
are at least as favorable as those that could have been obtained from
independent third parties. Total payments under these leases, for the years
ended June 30, 2000 and 1999 were approximately $62,000 and $42,000,
respectively.
(continued on next page) 15
<PAGE> 38
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
NOTE 10 - STOCK OPTIONS
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
Director Plan options all terminate five years from the date of grant.
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, 2000.
In July 1996, the stockholders also approved the 1996 Stock Bonus Plan ("Bonus
Plan") under which shares of the Company'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 and in
fiscal 1999, 15,400 shares of common stock were issued under the Bonus Plan.
In February 2000, the stockholders approved the 1999 Long-Term Incentive and
Stock Option Plan ("1999 Plan") under which stock options and stock appreciation
rights may be awarded to key employees and directors at a price not less than
market value at date of grant. The maximum number of shares subject to the plan
is 500,000 shares but may at no time exceed 12.5% of the current outstanding
common stock of the Company, on a fully diluted basis. There were no awards
under the 1999 Plan during the year ended June 30, 2000.
Changes in stock options issued under these fixed stock option plans are as
follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
SHARES EXERCISE PRICE Shares Exercise Price
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 68,067 $ 1.22 76,962 $ 1.11
Granted 8,000 0.94 28,000 1.40
Exercised (2,000) 0.63 (32,750) 0.98
Canceled (2,000) 0.63 (4,145) 1.13
------------- -------------- ------------- --------------
Outstanding, end of year 72,067 $ 1.22 68,067 $ 1.22
============= ============== ============= ==============
Range of exercise prices $.93 TO 1.94 $.63 to 1.94
Options exercisable, end of year 72,067 47,467
============= =============
</TABLE>
(continued on next page) 16
<PAGE> 39
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
Summarized information about fixed stock options at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------- ------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Exercise Outstanding at Contractual Average Exercisable at Average
Prices June 30, 2000 Life Exercise Price June 30, 2000 Exercise Price
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ .94 2,000 1.5 years $ .94 2,000 $ .94
.94 8,000 4.5 .94 8,000 .94
1.09 22,400 1.5 1.09 22,400 1.09
1.13 5,667 2.5 1.13 5,667 1.13
1.19 20,000 3.5 1.19 20,000 1.19
1.39 6,000 2.5 1.39 6,000 1.39
1.94 8,000 3.5 1.94 8,000 1.94
-------------- -------------- -------------- -------------- -------------- --------------
$.94 to 1.94 72,067 2.3 years $1.22 72,067 $ 1.22
============== ============== ============== ============== ============== ==============
</TABLE>
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, compensation cost of $-0- and $15,000 has been
recognized for the options granted in 2000 and 1999, 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 $2,000 and $24,400 in 2000 and 1999, respectively. Accordingly, the
Company's 2000 and 1999 net loss and earnings per share would have been
increased to proforma amounts of $(726,179) and $(.58) and $(188,180) 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, 2000, 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. In October 1996 Congress passed the Rural Air Service
Survival Act, which extended the EAS program indefinitely and provided total
annual funding of $50 million.
Accounts receivable from the DOT was $1,060,804 and $863,947, or 132% and 56% of
total stockholders' equity at June 30, 2000 and 1999, 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.
(continued on next page) 17
<PAGE> 40
BIG SKY TRANSPORTATION CO.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
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, 2000 and 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 generally involved in legal proceedings and litigation arising in
the ordinary course of business. In the opinion of management, the outcome of
any 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.
NOTE 14 - RETIREMENT PLAN
The Company has a 401(k) profit sharing plan covering substantially all of its
employees. The Company matches 30 percent of the eligible employee
contributions. The Company's contributions for the years ended June 30, 2000 and
1999 were $21,605 and $6,299, respectively.
NOTE 15 - RECLASSIFICATIONS
Reclassifications have been made to the 1999 financial statements to conform to
the format used in 2000. The reclassifications did not change the net loss or
stockholders' equity.
18
