<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO_______.
COMMISSION FILE NUMBER 0-22526
TOWER AIR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2621046
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
HANGAR NO. 17
J.F.K. INTERNATIONAL AIRPORT
JAMAICA, N.Y. 11430
(Address of principal executive offices) (Zip Code)
(718) 553-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of October 31, 1996, there were 15,290,006 shares of Common Stock, par
value $.01 per share, outstanding.
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Page 1 of 15 pages
<PAGE>
TOWER AIR, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1996
and December 31, 1995........................................... 3
Statements of Operations for the three months and nine months
ended September 30, 1996 and 1995............................... 4
Statements of Cash Flows for the nine months ended September 30,
1996 and 1995................................................... 5
Notes to Financial Statements.................................... 6
Selected Operating Data.......................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9
PART II. OTHER INFORMATION................................................14
SIGNATURES....................................................................15
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOWER AIR, INC.
BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
1996 1995
(Unaudited)
------------- ------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 5,637 $ 3,521
Certificates of deposit, at cost,
which approximates market 625 700
Trade receivables, net 28,811 27,931
Insurance proceeds receivable -- 25,000
Prepaid expenses and other current assets 7,794 4,861
------------- ------------
Total current assets 42,867 62,013
Property and Equipment, at cost:
Flight equipment 311,554 216,756
Ground property and equipment 31,929 29,504
------------- ------------
343,483 246,260
Less accumulated depreciation and
amortization 127,950 99,058
------------- ------------
215,533 147,202
Other Assets 2,149 1,332
------------- ------------
$ 260,549 $ 210,547
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable $ 35,990 $ 23,006
Accrued liabilities 29,893 33,503
Air traffic liability 19,058 19,878
Current maturities of long-term debt (Note 2) 19,197 14,370
------------- ------------
Total current liabilities 104,138 90,757
Long-Term Debt (Note 2) 71,708 23,594
Deferred Income Taxes 15,594 18,654
Deferred Rent 1,717 1,508
Stockholders' Equity (Note 3):
Preferred stock, $.01 par value;
5,000,000 shares authorized; none issued -- --
Common stock, $.01 par value;
35,000,000 shares authorized;
15,500,006 issued 155 155
Additional paid-in capital 43,885 43,885
Retained earnings 24,863 33,505
Less treasury stock, at cost (210,000 shares) 1,511 1,511
------------- ------------
Total stockholders' equity 67,392 76,034
------------- ------------
$ 260,549 $ 210,547
============= ============
See accompanying notes to financial statements.
3
<PAGE>
TOWER AIR, INC.
STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1996 1995 1996 1995
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Scheduled Passenger Service $ 91,600 $ 98,717 $ 203,176 $ 206,581
Commercial Charter Service 31,796 30,487 77,897 83,904
Military Charter Service 19,527 32,834 50,839 67,250
Cargo Service 3,513 5,318 10,654 15,444
Other 2,422 2,146 6,026 5,971
----------- ---------- ----------- -----------
Total operating revenues 148,858 169,502 348,592 379,150
OPERATING EXPENSES:
Fuel 31,021 30,792 66,842 69,089
Flight equipment rentals and 5,912 8,175 16,186 21,117
insurance
Maintenance 19,494 17,816 41,033 43,309
Crew costs and other 6,658 7,898 21,165 21,558
Aircraft and traffic servicing 27,782 28,378 67,184 62,858
Passenger servicing 19,366 16,750 45,421 37,407
Promotion, sales and commissions 18,719 24,232 50,085 61,474
General and administrative 5,453 5,493 16,019 15,189
Depreciation and amortization 10,974 8,882 29,171 23,874
----------- ---------- ----------- -----------
Total operating expenses 145,379 148,416 353,106 355,875
----------- ---------- ----------- -----------
OPERATING INCOME (LOSS) 3,479 21,086 (4,514) 23,275
OTHER EXPENSES (INCOME):
Interest and other income 3 (58) 18 (801)
Interest expense 2,362 912 5,935 3,006
----------- ---------- ----------- -----------
Total other expenses 2,365 854 5,953 2,205
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 1,114 20,232 (10,467) 21,070
Income Tax Provision (Benefit) 2,710 9,091 (3,660) 9,500
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ (1,596) $ 11,141 $ (6,807) $ 11,570
=========== ========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (0.10) $ 0.73 $ (0.45) $ 0.76
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 15,290 15,310 15,290 15,305
=========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
TOWER AIR, INC.
STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended September 30,
-------------------------------
1996 1995
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (6,807) $ 11,570
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 29,171 23,874
Provision for doubtful accounts (589) 803
Deferred income taxes (3,060) (240)
Deferred liabilities 209 242
Gain on disposal of property and equipment (152) (356)
Changes in operating assets and liabilities:
Trade receivables (291) (10,529)
Insurance proceeds receivable 25,000 -
Prepaid expenses and other assets (3,044) (2,520)
Accounts payable and accrued liabilities 13,383 14,050
Air traffic liability (820) 508
--------- ---------
Net cash provided by operating activities 53,000 37,402
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of flight equipment (41,240) (40,441)
Purchase of ground property and equipment (2,433) (9,942)
Proceeds from sale of property and equipment 191 525
Decrease in certificates of deposit 75 200
--------- ---------
Net cash used in investing activities (43,407) (49,658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 22,626 15,618
Principal payments on borrowings (27,285) (8,297)
Payment of cash dividends (1,835) (1,835)
Other (983) (144)
--------- ---------
Net cash provided by (used in)
financing activities (7,477) 5,342
--------- ---------
Net increase (decrease) in cash and
cash equivalents 2,116 (6,914)
Cash and cash equivalents at beginning of period 3,521 14,824
--------- ---------
Cash and cash equivalents at end of period $ 5,637 $ 7,910
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 5,866 $ 3,011
Cash (refunded) paid during the
period for income taxes, net $ (1,208) $ 3,040
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of flight equipment
accrued but not paid $ 1,595 $ 1,800
Purchase of flight equipment
financed through debt $ 57,600 $ -
Purchase of ground property and equipment
accrued but not paid $ - $ 1,300
See accompanying notes to financial statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by Tower Air,
Inc. (the Company) in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position, results of
operations and cash flows for the periods indicated. These interim financial
statements and related notes should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. The results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the full year.
2. LONG-TERM DEBT
In January 1996, the Company prepaid the entire $7.1 million outstanding balance
of one of its 10.4% Notes and converted $7.1 million aggregate principal amount
of the other 10.4% Note to a floating interest rate of LIBOR plus 1.75% with
the option to fix the interest rate for one, three or nine-month periods.
In February 1996, the Company purchased three Boeing 747 aircraft for an
aggregate purchase price of $10.0 million. In connection with this purchase,
the Company paid $2.0 million and issued an $8.0 million promissory note to the
seller, a financial institution. This loan bears interest at prime plus 1% and
requires monthly principal installments of approximately $0.3 million through
October 1996 and a balloon payment of $5.4 million in October 1996. In October,
the Company sold, in a sale and leaseback transaction, the three Boeing 747
aircraft for $10.0 million, $6.0 million in cash and the balance receivable over
the next six months. No gain or loss resulted from the transaction. The $6.0
million was used to pay the outstanding balance of the promissory note. The
lease agreement is for three years. The Company has the right to exercise
certain purchase options during the term of the lease.
In February 1996, the Company also purchased four engines for an aggregate
purchase price of $9.1 million (including $0.3 million of imputed interest). In
connection with this purchase, the Company paid $0.5 million and issued an $8.6
million promissory note to the seller. The $4.5 million remaining outstanding
at September 30, 1996 will be paid in monthly installments of $0.5 million plus
interest through June 1997.
In January 1996, the Company purchased two Boeing 747 aircraft for an aggregate
purchase price of $24.5 million. In connection with this purchase, the Company
issued a $20.0 million promissory note to a commercial finance company. This
loan bears interest at 9.39% and requires monthly installments of principal and
interest of approximately $0.4 million through January 2001.
6
<PAGE>
In March 1996, the Company refinanced the outstanding balance of certain notes
bearing interest at prime plus 2% due in monthly installments through October
1996, notes bearing interest at prime plus 2.25% due in monthly installments
through August 1996, and notes bearing interest at prime plus 2.0% due in
February 1997, in addition to the $20.0 million note issued in January 1996,
with the same financial institution. In addition, the Company borrowed an
additional $17.0 million which is secured by the two Boeing 747 aircraft
purchased in January 1996. The new loan balance, which aggregates $50.2
million, bears interest at 10.12% and requires monthly installments of principal
and interest of approximately $1.1 million through March 2001. In September
1996, the lender agreed to defer the principal portion of the monthly payment
for a period of nine months, reducing the monthly payment during the period by
approximately $0.6 million. Accordingly, the maturity date of the loan has been
extended to December 2001.
In March 1996, the Company also received from the Port Authority of New York and
New Jersey the remaining $0.6 million balance of the $5.5 million five-year
financing for the terminal facility expansion project at John F. Kennedy
International Airport, which had been completed in 1995 at a total cost of
approximately $10.0 million. This loan bears interest at a fixed rate of 8.5%.
In May 1996, the Company purchased one Boeing 747 aircraft for an aggregate
purchase price of $21.0 million. In connection with this purchase, the Company
issued a $21.0 million note to a commercial finance company. This loan bears
interest at a rate of 10.27% and requires monthly installments of principal and
interest of approximately $0.4 million through May 2001. In September 1996,
the lender agreed to defer the principal portion of the monthly payment for a
period of nine months, reducing the monthly payment during the period by
approximately $0.2 million. Accordingly, the maturity date of the loan has been
extended to February 2002.
In February 1996, the Company borrowed $5.0 million under an unsecured line of
credit with a domestic commercial bank. Interest was at prime rate and the loan
was repaid in July 1996. No borrowings were outstanding under this line at
September 30, 1996. Under this line of credit facility, at September 30, 1996,
the Company was contingently liable for approximately $4.2 million of letters of
credit, of which $0.3 million were collateralized by certificates of deposit.
The letters of credit are currently outstanding. The unsecured line of credit
has been terminated while the letters of credit must be replaced in the event
that alternative financing is secured (as discussed below).
In November 1996, the Company signed a letter of intent with a financial
institution that would establish a secured revolving line of credit of up to
$15.0 million (including up to $4.5 million in letters of credit) which bears
interest at prime rate plus 1.75%. This line of credit is subject to due
diligence and definitive documentation and is expected to be successfully
concluded. Failure to obtain this or similar financing could have a material
adverse effect on the business and financial condition of the Company.
3. STOCKHOLDERS' EQUITY
The Company paid a cash dividend of four cents per share of Common Stock for the
third quarter of 1996 on September 16, 1996.
7
<PAGE>
TOWER AIR, INC.
SELECTED OPERATING DATA
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
1996 1995 1996 1995
--------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Scheduled Passenger Service:
Revenue passengers carried
(in thousands) 406 415 984 884
Revenue passenger miles
(in thousands) (RPMs) (1) 1,169,585 1,260,393 2,735,669 2,699,489
Available seat miles
(in thousands) (ASMs) (2) 1,600,696 1,590,310 3,780,019 3,579,301
Passenger load factor (3) 73.07% 79.25% 72.37% 75.42%
Yield per RPM (4) $ .0783 $ .0783 $ .0743 $ .0765
Block hours flown (5) 7,617 7,257 17,992 16,362
Operating expense per ASM (6) $ .0517 $ .0459 $ .0518 $ .0466
Total operating expense per
ASM (10) $ .0591 $ .0571 $ .0596 $ .0579
Revenue per block hour (8) $ 12,026 $ 13,603 $ 11,293 $ 12,626
Variable expense per block hour (7) $ 9,853 $ 10,427 $ 9,807 $ 10,238
Commercial Charter Service:
Block hours flown (5) 2,861 2,758 9,635 9,646
Revenue per block hour (8) $ 11,114 $ 11,054 $ 8,085 $ 8,698
Variable expense per block hour (7) $ 8,965 $ 8,753 $ 5,530 $ 6,645
Military Charter Service:
Block hours flown (5) 1,540 2,847 4,409 6,166
Revenue per block hour (8) $ 12,680 $ 11,533 $ 11,531 $ 10,907
Variable expense per block hour (7) $ 8,533 $ 7,195 $ 8,324 $ 7,248
Cargo Service:
Block hours flown (5) 889 1,221 2,536 3,425
Revenue per block hour (8) $ 3,952 $ 4,355 $ 4,201 $ 4,509
Variable expense per block hour (7) $ 2,400 $ 1,995 $ 2,168 $ 2,391
Total:
Block hours flown (5) 12,907 14,083 34,572 35,599
Revenue per block hour (8) $ 11,345 $ 11,884 $ 9,909 $ 10,483
Variable expense per block hour (7) $ 8,985 $ 8,715 $ 7,865 $ 7,992
Average hours of daily utilization (9) 9.7 9.2 8.9 9.1
Employees (at period-end) 1,748 1,668 1,748 1,668
Number of aircraft in service
(at period-end) 17 18 17 18
</TABLE>
(1) "Revenue passenger miles" or "RPMs" represent the number of miles flown by
revenue passengers.
(2) "Available seat miles" or "ASMs" represent the number of seats available for
passengers multiplied by the number of miles those seats are flown.
(3) "Passenger load factor" represents revenue passenger miles divided by
available seat miles.
(4) "Yield per RPM" represents total revenue from scheduled passenger service
divided by revenue passenger miles.
(5) "Block hours" represent the period of time between the aircraft's departure
from the place where it is parked to its arrival at its destination.
(6) "Operating expense per ASM" represents certain direct variable costs for
scheduled passenger service, which include passenger liability insurance,
catering, crew costs, fuel, landing and handling fees, maintenance,
navigation fees, "power by the hour" rent, plus marketing and reservations,
and an allocation of other fixed costs based on block hours, divided by
total scheduled passenger service ASMs.
(7) "Variable expense per block hour" represents total direct variable costs,
which include passenger liability insurance, catering, crew costs,
commissions, fuel, landing and handling fees, maintenance, navigation fees
and insurance and "power by the hour" rent, divided by block hours.
(8) "Revenue per block hour" represents total revenue from scheduled passenger
service, commercial charter service, military charter service and cargo
service divided by total block hours flown.
(9) "Average hours of daily utilization" represents the actual number of block
hours per aircraft per operating day.
(10)"Total operating expense per ASM" represents operating expense per ASM
plus commission expense.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
For the three-month period ended September 30, 1996 (the 1996 Third Quarter),
the Company recorded a net loss of $1.6 million compared with net income of
$11.1 million for the three-month period ended September 30, 1995 (the 1995
Third Quarter). The $12.7 million decrease in net income was principally due to
a decrease in ad hoc military business, the grounding of a cargo aircraft to
comply with newly restrictive Airworthiness Directive requirements, a weak Tel
Aviv market due to increased competition and political unrest, and lower
domestic traffic. On the expense side, there was a significant increase in fuel
prices. In addition, passenger servicing, maintenance costs and interest
expense were higher in the 1996 Third Quarter.
Net loss for the nine-month period ended September 30, 1996 (the 1996 Nine-Month
Period) was $6.8 million compared with net income of $11.6 million for the nine-
month period ended September 30, 1995 (the 1995 Nine-Month Period). The 1996
Nine-Month Period results were affected by costs associated with the cessation
of scheduled service to India in the first quarter of 1996 and extreme weather
conditions in the Northeast which resulted in significant de-icing costs and re-
scheduling related expenses, as well as the factors affecting the 1996 Third
Quarter.
OPERATING REVENUES. The Company's operating revenues for the 1996 Third Quarter
decreased $20.6 million, or 12.2%, to $148.9 million from $169.5 million for the
1995 Third Quarter. Operating revenues for the 1996 Nine-Month Period decreased
$30.6 million, or 8.1%, to $348.6 million from $379.2 million for the 1995 Nine-
Month Period.
Scheduled passenger service revenues for the 1996 Third Quarter decreased $7.1
million, or 7.2%, to $91.6 million from $98.7 million for the 1995 Third
Quarter. Scheduled passenger service revenue for the 1996 Nine-Month Period
decreased $3.4 million, or 1.6%, to $203.2 million from $206.6 million for the
1995 Nine-Month Period. The decrease in scheduled passenger service revenues for
the 1996 Third Quarter was attributable to the cessation of service to India in
the first quarter of 1996, lower yield in the Tel Aviv market and lower
passenger traffic in the domestic market. Scheduled passenger traffic (as
measured in revenue passenger miles), for the 1996 Third Quarter, decreased by
7.2% on similar capacity, resulting in a load factor of 73% compared to 79% for
the same period in 1995. The decrease in scheduled passenger service revenues
for the 1996 Nine-Month Period was attributable to the factors affecting the
1996 Third Quarter noted above and a 1.3% increase in passenger traffic on
increased capacity of 6%.
Commercial charter service revenues for the 1996 Third Quarter increased $1.3
million, or 4.3%, to $31.8 million from $30.5 million for the 1995 Third
Quarter. Commercial charter service revenues for the 1996 Nine-Month Period
decreased $6.0 million, or 7.2%, to $77.9 million from $83.9 million for the
1995 Nine-Month Period. The increase in commercial charter service revenues
for the 1996 Third Quarter was primarily attributable to the 3.7% increase in
charter block hours flown. Lower revenues for the 1996 Nine-Month Period were
attributable primarily to certain of the Hadj contracts wherein fuel costs were
the responsibility of the contracting operators rather than Tower Air, resulting
in both lower revenues and costs per block hour than for the 1995 Hadj.
9
<PAGE>
Military charter service revenues for the 1996 Third Quarter decreased $13.3
million, or 40.5%, to $19.5 million from $32.8 million for the 1995 Third
Quarter. Military charter service revenues for the 1996 Nine-Month Period
decreased $16.4 million, or 24.4%, to $50.8 million from $67.3 million for the
1995 Nine-Month Period. The decline in revenues for the 1996 Third Quarter and
the 1996 Nine-Month Period reflected 45.9% and 28.5% decreases in block hours
flown, respectively. Because the military charter business depends, in large
part, upon the deployment or repatriation of troops, revenues from this market
segment are subject to significant fluctuation.
Cargo service revenues for the 1996 Third Quarter decreased $1.8 million, or
33.9%, to $3.5 million from $5.3 million for the 1995 Third Quarter. Cargo
service revenues for the 1996 Nine-Month Period decreased $4.8 million, or
31.0%, to $10.7 million from $15.4 million for the 1995 Nine-Month Period. The
decrease in cargo service revenues was primarily due to the grounding of a cargo
aircraft beginning in February 1996 to comply with newly restrictive
Airworthiness Directive requirements. The Company expects the aircraft to
undergo modifications necessary for its return to service in the first half of
1997.
OPERATING EXPENSES. The Company's operating expenses for the 1996 Third Quarter
decreased $3.0 million, or 2.0%, to $145.4 million from $148.4 million for the
1995 Third Quarter. Operating expenses for the 1996 Nine-Month Period decreased
$2.8 million, or 0.8%, to $353.1 million from $355.9 million for the 1995 Nine-
Month Period. Operating expenses reflect decreases in block hours flown of 8.4%
and 2.9% during the 1996 Third Quarter and 1996 Nine-Month Period, respectively.
Aircraft fuel expenses for the 1996 Third Quarter increased $0.2 million, or
0.7%, to $31.0 million from $30.8 million for the 1995 Third Quarter. Aircraft
fuel expenses for the 1996 Nine-Month Period decreased $2.2 million, or 3.3%, to
$66.8 million from $69.1 million for the 1995 Nine-Month Period. The variances
resulted primarily from 11.0% and 11.9% decreases in volume of gallons consumed,
offset by the 13.1% and 9.8% increases in the average cost per gallon in the
1996 Third Quarter and 1996 Nine-Month Period, respectively. The fuel
consumption decreases for the 1996 periods were relatively lower than the change
in block hours flown since 1996 block hours included more Hadj wet leases in
which the lessee pays all fuel costs.
Flight equipment rentals and insurance expenses for the 1996 Third Quarter
decreased $2.3 million, or 27.7%, to $5.9 million from $8.2 million for the 1995
Third Quarter. Flight equipment rentals and insurance expenses for the 1996
Nine-Month Period decreased $4.9 million, or 23.4%, to $16.2 million from $21.1
million for the 1995 Nine-Month Period. The decreases for both periods were
attributable to a substantial decrease in aircraft rental due to the purchase of
six Boeing 747 aircraft in the first half of 1996 partially offset by charges
associated with the rental of additional engines to support the Company's fleet.
Maintenance costs for the 1996 Third Quarter increased $1.7 million, or 9.4%, to
$19.5 million from $17.8 million for the 1995 Third Quarter. Maintenance costs
for the 1996 Nine-Month Period decreased $2.3 million, or 5.3%, to $41.0 million
from $43.3 million for the 1995 Nine-Month Period. For the 1996 Third Quarter,
the increase is due to an increase in the volume of component repairs, higher
level of parts loan and exchanges, an increase in the repair costs of these
components, and an increase in maintenance reserves associated with engine
rentals required to support the Company's fleet which was partially offset by
lower maintenance reserves associated with leased aircraft due to the purchase
of six Boeing 747 aircraft in the first half of 1996. For the 1996 Nine-Month
Period, the decrease in maintenance costs were primarily attributable to factors
affecting the 1996 Third Quarter noted above whereby the decreases in
maintenance reserves were more dramatic in the first half of 1996. Recent
actions have been taken to address higher maintenance costs which include the
announced
10
<PAGE>
engine maintenance agreement with General Electric Aircraft Engine Service, Ltd.
and other measures with respect to component repairs.
Crew costs and other expenses for the 1996 Third Quarter decreased $1.2 million,
or 15.7%, to $6.7 million from $7.9 million for the 1995 Third Quarter. Crew
costs and other expenses for the 1996 Nine-Month Period decreased $0.4 million,
or 1.8%, to $21.2 million from $21.6 million for the 1995 Nine-Month Period.
For the 1996 Third Quarter, the decreases were primarily due to the 8.4% and
2.9% decreases in block hours flown, respectively.
Aircraft and traffic servicing expenses for the 1996 Third Quarter decreased
$0.6 million, or 2.1%, to $27.8 million from $28.4 million for the 1995 Third
Quarter. Aircraft and traffic servicing expenses for the 1996 Nine-Month Period
increased $4.3 million, or 6.9%, to $67.2 million from $62.9 million for the
1995 Nine-Month Period. For the 1996 Third Quarter, the decrease is
attributable to the decrease in the number of departures of 6.7% offset in part
by the business mix, which included higher handling costs incurred in connection
with scheduled services activity versus military charter activity. For the 1996
Nine-Month Period, the increase is attributable to the increases in the number
of departures of 2.1% coupled with the expenses resulting from severe weather
conditions in addition to the factors affecting the 1996 Third Quarter noted
above.
Passenger servicing expenses for the 1996 Third Quarter increased $2.6 million,
or 15.6%, to $19.4 million from $16.8 million for the 1995 Third Quarter.
Passenger servicing expenses for the 1996 Nine-Month Period increased $8.0
million, or 21.4%, to $45.4 million from $37.4 million for the 1995 Nine-Month
Period. Increases in passenger servicing expenses for both periods primarily
relate to increased catering costs due to improvements in the service product.
The Company has embarked on a rationalization of its domestic food service due
to anticipated flight schedule changes which would result in reduced catering
costs.
Promotion, sales and commission expenses for the 1996 Third Quarter decreased
$5.5 million, or 22.8%, to $18.7 million from $24.2 million for the 1995 Third
Quarter. Promotion, sales and commission expenses for the 1996 Nine-Month
Period decreased $11.4 million, or 18.5%, to $50.1 million from $61.5 million
for the 1995 Nine-Month Period. The decreases in promotion, sales and
commission expense were primarily due to higher commission expenses in the 1995
Third Quarter relating to the New Delhi and Bombay routes which were
discontinued in September 1995 and March 1996, respectively.
General and administrative expenses for the 1996 Third Quarter decreased 0.7% to
$5.5 million. General and administrative expenses for the 1996 Nine-Month
Period increased $0.8 million, or 5.5%, to $16.0 million from $15.2 million for
the 1995 Nine-Month Period.
Depreciation and amortization expenses for the 1996 Third Quarter increased $2.1
million, or 23.6%, to $11.0 million from $8.9 million for the 1995 Third
Quarter. Depreciation and amortization expenses for the 1996 Nine-Month Period
increased $5.3 million, or 22.2%, to $29.2 million from $23.9 million for the
1995 Nine-Month Period. The increases for both periods were principally due to
the purchase of six Boeing 747 aircraft in the first half of 1996 in addition to
additional rotable parts to support the expanded fleet.
OTHER EXPENSES AND INCOME. Interest expense for the 1996 Third Quarter
increased $1.5 million, or 159.0%, to $2.4 million from $0.9 million for the
1995 Third Quarter. Interest expense for the 1996 Nine-Month Period increased
$2.9 million, or 97.4%, to $5.9 million from $3.0 million for the 1995 Nine-
Month Period. The increase in interest expense reflects a higher average
outstanding debt balance in 1996, resulting from the financing of aircraft
acquisitions offset by reduced aircraft rental costs.
11
<PAGE>
INCOME TAX PROVISION. The income tax provision for the 1996 Third Quarter
decreased $6.4 million, or 70.2%, to $2.7 million from $9.1 million for the 1995
Third Quarter. The income tax benefit for the 1996 Nine-Month Period was $3.7
million compared to the income tax provision of $9.5 million for the 1995 Nine-
Month Period. The 1996 Third Quarter income tax provision reflects a $2.3
million tax provision to adjust the cumulative nine-month effective tax rate to
the rate now expected for the full year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital and capital
expenditure requirements with cash flow generated from operations and through
lease, debt and equity financing.
The Company's cash, cash equivalents and short-term investments at September 30,
1996 and December 31, 1995 were $6.3 million and $4.2 million, respectively.
The Company generated cash from operations for the 1996 Nine-Month Period and
1995 Nine-Month Period of $53.0 million and $37.4 million, respectively.
Net cash used in investing activities was $43.4 million for the 1996 Nine-Month
Period compared with $49.7 million for the 1995 Nine-Month Period. The
Company's expenditures for flight equipment were $41.2 million for the 1996
Nine-Month Period compared with $40.4 million for the 1995 Nine-Month Period.
Expenditures for flight equipment in the 1996 Nine-Month Period included the
purchase of six Boeing 747 aircraft, six spare engines, capitalized engine
overhauls and the purchase of rotable spare parts (See Note 2 of Financial
Statements for additional information regarding the financing of certain flight
equipment expenditures).
As of September 30, 1996, the Company had negative working capital of $61.3
million compared to negative working capital of $28.7 million as of December 31,
1995. Historically, the Company has operated with a working capital deficit.
The Company believes that additional debt financing will be required in the
fourth quarter and will be successfully concluded. This financing, in
conjunction with cash generated from operations, will be sufficient to fund the
Company's working capital needs for its existing business, as well as for
planned capital expenditures and expected debt repayments in the foreseeable
future. Failure to obtain such financing could have a material adverse effect on
the business and condition of the Company.
In February 1996, the Company borrowed $5.0 million under an unsecured line of
credit with a domestic commercial bank. Interest was at prime rate and the loan
was repaid in July 1996. No borrowings were outstanding under this line at
September 30, 1996. Under this line of credit facility, at September 30, 1996,
the Company was contingently liable for approximately $4.2 million of letters of
credit, of which $0.3 million were collateralized by certificates of deposit.
The letters of credit are currently outstanding. The unsecured line of credit
has been terminated while the letters of credit must be replaced in the event
that alternative financing is secured (as discussed below).
12
<PAGE>
In November 1996, the Company signed a letter of intent with a financial
institution that would establish a secured revolving line of credit of up to
$15.0 million (including up to $4.5 million in letters of credit) which bears
interest at prime rate plus 1.75%. This line of credit is subject to due
diligence and definitive documentation and is expected to be successfully
concluded. Failure to obtain this or similar financing could have a material
adverse effect on the business and financial condition of the Company.
The Company paid a cash dividend of four cents per share of Common Stock for the
first, second and third quarters of 1996 on March 15, 1996, June 17, 1996 and
September 16, 1996, respectively.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no changes in legal proceedings as disclosed in
the Company's Form 10-K for the year ended December 31, 1995.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) None.
(b) None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tower Air, Inc.
(Registrant)
Date: November 14, 1996 /s/ Morris K. Nachtomi
-------------------------------------------------
Morris K. Nachtomi
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 14 , 1996 /s/ Ramesh Punwani
----------------------------------------------
Ramesh Punwani
Chief Financial Officer and
Vice President-Finance (Principal
Financial and Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's quarterly report on Form 10-Q for the period ended September 30,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,637,000
<SECURITIES> 625,000
<RECEIVABLES> 28,811,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,867,000
<PP&E> 343,483,000
<DEPRECIATION> 127,950,000
<TOTAL-ASSETS> 260,549,000
<CURRENT-LIABILITIES> 104,138,000
<BONDS> 71,708,000
0
0
<COMMON> 155,000
<OTHER-SE> 67,237,000
<TOTAL-LIABILITY-AND-EQUITY> 260,549,000
<SALES> 0
<TOTAL-REVENUES> 348,592,000
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<OTHER-EXPENSES> 5,953,000
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<INTEREST-EXPENSE> 5,935,000
<INCOME-PRETAX> (10,467,000)
<INCOME-TAX> (3,660,000)
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<NET-INCOME> (6,807,000)
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