<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 11-262104
(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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, par value $.01 per share NASDAQ National Market
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
--- --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendments to this Form 10-K. [_]
The aggregate market value of Common Stock, par value $.01 per share,
held by non-affiliates (based upon the closing sale price on the NASDAQ National
Market) on February 28, 1997 was approximately $11,337,938. As of February
28, 1997, there were 15,290,006 shares of Common Stock, par value $.01 per
share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement in connection with the registrant's
1997 Annual Meeting of Stockholders to be filed within 120 days of the close of
registrant's fiscal year are incorporated by reference into Part III.
<PAGE>
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements contained herein under the captions Business, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the Reform Act). Such
statements incorporate assumptions that entail uncertainties and unknown risks.
A variety of factors may cause the actual results and performance of the Company
or industry to differ materially from any future results or performance
expressed or implied by such forward-looking statements. These factors include,
among others, the following: general economic conditions affecting the industry
and the Company; competition within the industry; changes in consumer
preferences; regulatory changes; and political, social and economic conditions
in key markets.
ITEM 1. BUSINESS.
OVERVIEW
Tower Air, Inc. (Tower or the Company) was incorporated under the laws of the
State of Delaware in August 1982 and obtained an operating certificate from the
Civil Aeronautics Board effective October 1983. The Company's executive offices
are located at Hangar No. 17, John F. Kennedy International Airport (JFK),
Jamaica, New York 11430, and its telephone number is (718) 553-4300.
Tower provides primarily long-haul scheduled and charter passenger air service
in diverse international and domestic markets that the Company believes can be
profitably served by its fleet that consists exclusively of Boeing 747 (B747)
aircraft. Scheduled international passenger routes include service between New
York and Tel Aviv, Israel; New York and Paris, France; and New York/Miami and
Sao Paulo, Brazil. Scheduled domestic passenger routes include service between
New York and Los Angeles, Miami, Oakland and San Juan, Puerto Rico. The Company
provides charter air service for several major United States and foreign tour
operators, primarily serving Greece, Italy and Brazil, and is a major passenger
charter service provider to the United States military, the United Nations and
the International Organization For Migration (IOM). Tower also operates all-
cargo service primarily between Miami and destinations in South America. In
addition, Tower provides ad hoc third party maintenance service at its JFK
facility.
2
<PAGE>
As of December 31, 1996, Tower operated a fleet of fifteen passenger aircraft
(six B747-100s and nine B747-200s) and two cargo aircraft (B747-100s). The
Company maintains offices and ground personnel in New York City, Miami, Los
Angeles, San Juan, Tel Aviv, Paris and Sao Paulo.
BUSINESS STRATEGY
The Company's principal business strategy is to provide long-haul, low-fare
airline service in niche markets where the Company's low operating costs and
flexible operating structure permit profitable operations. Tower implements this
strategy by appealing to ethnic and family travelers in markets characterized by
normally stable demand (as demonstrated by the Company's scheduled services
between New York and Tel Aviv) or in markets in which seasonal fluctuations in
demand justify adjusting flight frequencies (as demonstrated by the Company's
expanded service between New York and Paris in the summer). Responding to
predictable variations in demand, the Company also seeks to take advantage of
counter-seasonal opportunities, for instance, by participating in the Hadj, a
seasonal religious pilgrimage to the Middle East, and by providing year-round
cargo service. The Company believes it benefits from several competitive
advantages, including the following:
. LOW COST STRUCTURE. Tower's operating costs in most markets are lower than
those of its competitors. The Company maintains its low cost structure
principally by tightly controlling its variable costs while also minimizing
certain fixed costs by subcontracting ground handling and heavy maintenance
work. The Company achieves low labor costs through effective utilization of a
mix of part-time and full-time workers. The Company also achieves savings by
operating a fleet consisting exclusively of B747 aircraft, which permits
efficiencies in crew training, maintenance and spares inventory. The Company's
low cost structure enables it to seek to increase market penetration by, among
other things, offering travel agents higher commissions and to operate in price
sensitive markets by utilizing its cost-efficient aircraft. Tower's low cost
structure is demonstrated by its operating expense per scheduled service
Available Seat Mile (ASM) statistics in recent years: 1996-$.0538; 1995-$.0477;
1994-$.0463; 1993-$.0531; 1992-$.0512.
. CUSTOMER APPEAL. Tower appeals to travelers primarily by offering low fares
with no restrictions (no minimum stay or advance purchase requirements, fully
refundable tickets and no penalty/change fee) on its domestic and European
scheduled service markets, and by tailoring its service to the requirements of
each market. This market-focused philosophy was pioneered in the Israel market,
for which Tower provides Israel-based flight attendants and Kosher meals. In
the commercial charter market, Tower appeals to tour operators by providing a
low per-seat cost. Tower appeals
3
<PAGE>
to its military customers by responding quickly to varying logistical demands.
The Company emphasizes competitive prices and comfortable aircraft with service
comparable to that offered by carriers with higher fares. On most scheduled
international flights, the Company provides a business class section offering
approximately 46 wide, leather covered seats and upgraded inflight services, for
a fare that is generally less than business class fares charged by other
carriers.
. OPERATING FLEXIBILITY. The Company has achieved a high degree of operating
flexibility due to minimal capital investment requirements and a highly flexible
cost structure. Tower's fixed overhead expenses in 1996 were approximately
$114.8 million, or 27.5% of revenues. The Company's flexible cost structure has
been achieved through, among other measures, the efficient use of a part-time
workforce, the development of flexible work rules, the outsourcing of most
ground services and the ability to adjust flight routes and schedules to demand.
The Company's operating flexibility has allowed it to respond over its 14-year
operating history to rising fuel costs, increasingly price-conscious consumers
and the significant variability in demand experienced in certain markets such as
the military charter business.
SALES AND MARKETING
Tower's marketing strategy focuses on specific profitability goals in each
market. The Company's streamlined marketing structure encourages focused and
timely decision-making with respect to pricing, scheduling, distribution,
advertising, public relations and sales. This orientation allows Tower to
pursue market opportunities which may not be apparent to, or manageable by,
larger competitors, and permits Tower to adjust promptly to market conditions.
Tower's services are marketed through direct sales efforts and travel
intermediaries, including agents, tour operators, religious and other
organizations, and interline agreements with other airlines. This strategy
permits the Company to reach a broad customer base while focusing its marketing
resources in a cost effective manner. The Company maintains contacts with retail
and wholesale travel agencies in the United States, Israel, Brazil and France.
The Company's annual advertising plan includes direct advertising through radio
and print media to promote its product. A brand new campaign which focuses on
the Company's vast experience, its fleet and low fares is geared to promote the
value of the service that the Company provides.
SERVICES OFFERED
The Company's business mix includes scheduled passenger service, commercial
charters, military charters, cargo service, and other
4
<PAGE>
operations. The following table sets forth the Company's total revenues for each
major service category:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
(IN MILLIONS)
Scheduled passenger service $ 247.2 $ 270.3 $ 206.6
Commercial charter service 84.4 100.8 53.2
Military charter service 64.4 87.5 66.8
Cargo service 14.1 24.0 36.2
Other 7.7 7.9 5.2
------------------------------
Total operating revenues $ 417.8 $ 490.5 $ 368.0
==============================
</TABLE>
SCHEDULED PASSENGER SERVICE
As illustrated in the above table, scheduled passenger service represents the
largest portion of the Company's business and accounted for 59.2% of the
Company's total revenues for the year ended December 31, 1996. The following
table sets forth, for the periods indicated, the Company's scheduled passenger
service in dollars and as a percentage of total operating revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NY/Tel Aviv $ 94.2 22.6% $ 99.2 20.2% $ 87.2 23.7%
NY/Paris 23.7 5.7 26.7 5.5 16.8 4.6
NY and/or Miami/Sao Paulo/Rio de
Janeiro (1) 17.7 4.2 10.9 2.2 4.0 1.1
NY/Amsterdam/Bombay (2) 6.0 1.4 25.6 5.2 2.3 0.6
NY/Amsterdam/Delhi (3) - - 13.2 2.7 19.4 5.3
Miami/Los Angeles (4) - - 1.0 0.2 6.3 1.7
NY/San Juan 21.2 5.1 17.7 3.6 12.4 3.4
NY/Miami 21.5 5.1 27.2 5.6 16.2 4.4
NY/Los Angeles 39.5 9.5 34.8 7.1 27.7 7.5
NY/San Francisco (5) 19.6 4.7 11.5 2.3 9.2 2.5
Miami/San Juan 3.3 0.8 - - - -
Other (6) 0.5 0.1 2.5 0.5 5.1 1.4
-------- ---- ------- ---- -------- ----
$ 247.2 59.2% $ 270.3 55.1% $ 206.6 56.2%
======== ==== ======= ==== ======== ====
</TABLE>
(1) Service expanded in December 1995 with continuation to Rio de Janeiro.
Service to Rio de Janeiro discontinued August 10,
1996. Tower's route authority to Brazil expires on March
31, 1997. The Department of Transportation has tentatively
decided not to renew the Brazil route authority. Tower
has discontinued all service to Brazil effective March 13,
(2) Service commenced in December 1994 and discontinued in March 1996.
(3) Service commenced in April 1994 and discontinued in September 1995.
(4) Service discontinued in January 1995.
(5) Service to San Francisco discontinued April 1, 1996 and will resume again on
April 1, 1997; service to Oakland commenced April 5, 1996, and will be
discontinued on March 31, 1997.
(6) Includes revenues generated by certain discontinued routes.
INTERNATIONAL MARKET - Tower operated 57.3% of its scheduled passenger service,
measured in 1996 revenues, between New York and various international
destinations, and between Miami and Brazil. The frequency of Tower's flights
varies between the peak summer season and the off-season based on traffic
demand.
The Israel market, Tower's largest scheduled passenger service revenue source,
is composed primarily of individuals and groups who travel for religious
reasons, vacations or business. This market historically has been characterized
by a relatively stable travel pattern. From time to time, security concerns in
Israel have resulted, and may continue to result, in temporary declines in
demand.
5
<PAGE>
In 1996, the Company discontinued its service to Rio de Janeiro and India
because of marketing and operational difficulties that rendered such service
unprofitable. Tower's route authority to Brazil expires on March 31, 1997.
The Department of Transportation (DOT) has tentatively decided not to renew
this authority. The Company has discontinued all service to Brazil effective
March 13, 1997.
Tower has applied to the DOT for authority to operate scheduled service to
Athens, Greece and beyond to Tel Aviv, Israel. The Company received this
authority in March 1997, and its plans to commence service on this route
following the receipt of foreign government approvals.
DOMESTIC MARKET - Tower operated 42.7% of its scheduled passenger services,
measured in 1996 revenues, within domestic markets.
Three major domestic routes (New York/San Juan, New York/Los Angeles and New
York/Oakland) had higher traffic in 1996 relative to 1995.
The Company believes that by increasing its sales and marketing efforts,
including participation in additional global distribution systems (e.g. Sabre,
Amadeus, Galileo and Galileo International), it will be able to expand its
overall presence in price sensitive domestic markets.
COMMERCIAL CHARTER SERVICE
The Company provides charter service to and from a number of European
destinations, including Greece and Italy as well as Brazil. For the year ended
December 31, 1996, the charter market represented approximately 20.2% of the
Company's total revenues. Charters provided to tour operators constitute a
seasonal market, with the majority of passengers traveling during each country's
respective summer period. Tower also supplies charter passenger service to the
United Nations and to the IOM.
The majority of the Company's commercial charter agreements are fixed-price-per-
flight agreements, negotiated and contracted in advance. The Company establishes
its pricing in such agreements based on the number of block hours required to
complete a flight.
Tower's charter operations represent a potential springboard for future
scheduled service operations. For example, Tower's scheduled service to Tel
Aviv, Paris and Sao Paulo each developed from strong charter operations to those
destinations.
Charter agreements provide for the transport of religious pilgrims on the Hadj
pilgrimage to the Middle East that occurs once a year. From April through June
1996, the Company operated eight aircraft for this purpose. The Company is
operating and expects to continue operating, under charter agreements with two
airlines, nine aircraft from March through May 1997.
6
<PAGE>
MILITARY CHARTER SERVICE
As an operator of charters for the United States military, the Company
transports armed forces, reserve personnel and cargo domestically and
internationally. The destinations of certain military charters are war risk
zones. This service is organized for the United States military by various
agencies of the Department of Defense (DOD), which contracts with private sector
airlines for the transportation of military personnel and their dependents, and
cargo service. The Company provides charter air travel service to the DOD
through the Air Mobility Command (AMC) and the Military Traffic Management
Command (MTMC), which organize international and domestic transportation
services for United States military personnel.
Between 1995 and 1996, the number of military passengers transported by the
Company for AMC and MTMC declined 14.1% from approximately 205,000 to
approximately 176,000 as a result of weaker demand for military charters. For
the year ended December 31, 1996, the AMC and MTMC markets represented
approximately 15.4% of the Company's total revenues.
AMC business is awarded to carriers who participate in the Civil Reserve Air
Fleet (CRAF) program. Aircraft enlisted in CRAF are the only aircraft allowed
to provide service to AMC. The AMC contract requires that in case of a national
emergency, the enlisted aircraft be made available to the United States
government upon demand. Although many carriers consider CRAF availability
requirements an impediment to providing normal, scheduled service, Tower's
operating flexibility ensures the Company's ability to deliver CRAF aircraft
readily, thus creating a business opportunity.
AMC contract awards are of two types: (i) fixed award business, which is
scheduled in advance, and (ii) expansion business, the demand for which arises
upon shorter notice. Fixed business is awarded on the basis of "mobilization
points," the award of which is based on the number and type of aircraft
available from each airline.
MTMC purchases domestic air travel on a lowest bid basis from a broad group of
charter and scheduled service carriers. In general, this market is smaller and
more competitive than the AMC market. While Tower's low cost structure enables
the Company to compete for MTMC business, a significant portion of such business
is not suitable for the Company because the number of passengers to be carried
on given routes is too small to be served efficiently by B747 aircraft.
Military and other government flight activity has recently been, and is expected
to remain, a significant part of the Company's business. Due to an agreement
with United Airlines, Inc. (UAL),
7
<PAGE>
under which Tower acquired UAL's military entitlement for the contract years
commencing October 1, 1995, 1996 and 1997. Tower's share of the military charter
business continues to have the potential to increase substantially. However, the
market for military charter services will be influenced by numerous factors,
including changes in the overall level of defense spending.
CARGO SERVICE
Tower operates all-cargo service primarily between Miami and South America. For
the year ended December 31, 1996, the cargo service market represented
approximately 3.4% of the Company's total revenues. The Company's cargo aircraft
fleet enables Tower to participate in the military cargo charter market.
One of the Company's two cargo aircraft is temporarily out of service to satisfy
a certain Airworthiness Directive requirement. In order to satisfy this
requirement, the Company is awaiting FAA-approved technical specifications and
anticipates that the aircraft will return to service by the end of 1997.
OTHER
The Company sells available cargo space on its passenger aircraft (belly cargo)
to other carriers and freight forwarders. The Company also derives revenues
from in-flight sales, including sales of duty-free merchandise. In addition,
since 1993, the Company has provided maintenance service to other carriers on an
ad hoc basis. For the year ended December 31, 1996, belly cargo and other
services contributed 1.8% of the Company's total revenues.
COMPETITION
The airline industry is highly competitive and is currently characterized by
excess capacity and the entry of additional low-cost service providers.
Therefore, carriers compete primarily on the basis of price, routes and service.
Tower's principal competitors on scheduled passenger routes include major
airlines in the United States and abroad, many of whom have greater financial
resources, larger fleets and wider name recognition than the Company. Tower
believes that it competes by providing a product designed to satisfy the
requirements of its target customer groups and by maintaining a low-cost
structure.
SCHEDULED SERVICES - Scheduled carriers compete for customers by adopting
strategies that can lead to significantly lower fares for passengers. Such
strategies include wholesaling discounted seats on scheduled flights to tour
operators; promoting prepackaged tours to travel agents for sale to retail
customers; selling discounted, excursion airfare-only products to the public;
and
8
<PAGE>
offering frequent flyer programs as incentives for flying on certain airlines.
As a result, the Company is sometimes required to compete for customers against
the lowest priced seats of other scheduled airlines.
The degree of competitiveness among international airlines is restricted by
limits placed on traffic capacity under bilateral agreements. Bilateral
agreements are negotiated by governments on behalf of their nations' air
carriers. In certain markets, bilateral agreements set guidelines which
determine the number of airlines and flights that are permitted to be operated,
as well as departure and arrival points and pricing constraints within which
airlines must operate. Airlines and flights permitted by such agreements are
also limited by the scarcity of available landing slots, particularly at JFK and
at certain European airports. The lack of available landing slots may be an
impediment to the Company's international expansion.
In the New York/Tel Aviv market, customized services such as Israel-based flight
attendants and Kosher meals have contributed to position Tower as a market
leader. The Company believes it is one of the largest providers of direct
scheduled passenger service between New York and Tel Aviv. The Company intends
to continue offering services tailored to its different markets.
COMMERCIAL CHARTERS - Tower competes with a number of United States and
international carriers in the commercial charter market. Several large scheduled
airlines have increased the number of discounted seats available on regularly
scheduled flights to tour operators, thereby increasing competition in markets
served by Tower's scheduled passenger and charter operations. Tower's charter
service competes with other operators in this market based on reliability,
quality of service and price.
MILITARY CHARTERS - In the market for military charter services, Tower competes
with a number of domestic air carriers, each of which is eligible to provide air
travel service to the AMC and MTMC. With regard to AMC business, the majority
of these participants are grouped into team arrangements, each of which bids as
a unit for AMC business. The Company entered into a team arrangement with three
other air carriers to bid for the government contract years covering October 1,
1995 through September 30, 1997. The Company believes that its present capacity
for AMC business in conjunction with its historic operating record enables it to
compete effectively in this market.
REGULATORY ENVIRONMENT
REGULATION - The Company is an air carrier subject to the jurisdiction of, and
regulation by, the Department of Transportation (DOT) and the Federal Aviation
Administration (FAA) pursuant to Title 49 of the United States Code, Sections
40101 et
9
<PAGE>
seq. (the Aviation Statute) (formerly the Federal Aviation Act of 1958, as
amended (the Aviation Act)). The DOT is primarily responsible for regulating
economic issues affecting air service, including, among other things, air
carrier certification and fitness, insurance, leasing arrangements, allocation
of route rights and authorization of proposed scheduled and charter operations,
tariffs, consumer protection, unfair methods of competition, unjust
discrimination and deceptive practices. In 1983, the Company was granted a
certificate of public convenience and necessity under Section 401 of the
Aviation Act (now Section 41102 of the Aviation Statute), authorizing it to
engage in scheduled air transportation.
International air services are generally governed by a network of bilateral
civil air transport agreements in which traffic rights are exchanged between
governments which then select and designate air carriers authorized to exercise
such rights. In the absence of a bilateral agreement, such international air
services are governed by principles of comity and reciprocity. The provisions
of such agreements pertaining to charter services vary considerably depending on
the country. Scheduled international service is also subject to the provisions
of bilateral agreements, which may specify the city-pair markets that may be
served, restrict the number of carriers that may be designated, provide for
prior approval by one or both governments of the prices the carrier proposes to
charge, limit the amount of capacity to be offered in the market, and in various
other ways impose limitations on the operations of air carriers, such as the
Company. Most bilateral agreements to which the United States is a party permit
either country to terminate the agreement upon one year's notification to the
other party.
The DOT is responsible for evaluating airport security arrangements at U.S.
airports and at foreign airports served by U.S. carriers, such as the Company.
The DOT may prohibit service by carriers serving the U.S. to or from those
airports found not to administer safe and effective security measures. At
present, no airport regularly served by the Company is so affected.
As part of its consumer protection function, the DOT administers a number of
specific consumer protection regulations with which the Company is required to
comply and compiles and publishes statistics of consumer complaints received
regarding U.S. air carriers. During calendar year 1996, a period during which
the Company transported in excess of 1.7 million total passengers, the DOT
recorded a total of 118 consumer complaints concerning the Company, resulting in
a complaint rate of 6.82 per 100,000 passengers transported. This rate compares
with an average consumer complaint rate of 0.74 per 100,000 passengers for all
major airlines. Since December 1995, the Company has hired a consulting firm to
assist in the development of customer-oriented service procedures for its
station and inflight services. As
10
<PAGE>
these procedures take full effect, the Company believes that it will reduce
consumer complaints on a going-forward basis.
The Company is also subject to the jurisdiction of the FAA with respect to its
aircraft maintenance and operations. The Company currently holds an FAA
certificate and Operations Specifications under Part 121 of the Federal Aviation
Regulations with respect to the airports and aircraft used and routes flown by
the Company. The FAA has the authority to suspend temporarily or revoke
permanently the authority of the Company or its licensed personnel for failure
to comply with regulations promulgated by the FAA and to assess civil penalties
for such failures.
The FAA has issued a series of Airworthiness Directives (ADs) under its "Aging
Aircraft" program which are applicable to the Company's aircraft, including the
previously discussed AD on the cargo aircraft. These ADs call for extensive
aircraft inspections and structural modifications to address the problems of
corrosion and structural fatigue. Additional ADs applicable to the Company's
aircraft could be issued in the future, generating compliance costs that cannot
be estimated at this point.
The Company believes it is in compliance with all requirements necessary to
maintain in good standing its operating authority granted by the DOT and its air
carrier operating certificate issued by the FAA.
Several aspects of airline operations are subject to regulation or oversight by
Federal agencies other than the DOT and FAA. The antitrust laws are enforced by
the United States Department of Justice. The United States Postal Service has
jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company's cargo services. Labor relations in the air
transportation industry are generally regulated under the Railway Labor Act,
which vests in the National Mediation Board certain regulatory powers with
respect to disputes between airlines and labor unions arising under collective
bargaining agreements.
ENVIRONMENTAL REGULATION - Under the Airport Noise and Capacity Act of 1990 and
related FAA regulations, the Company's aircraft fleet must comply with certain
Stage III noise restrictions by certain specified deadlines. Presently, the
Company is in compliance with all FAA noise regulations.
In addition to the aircraft noise regulations administered by the FAA, the
Environmental Protection Agency (EPA) regulates operations, including air
carrier operations, which affect the quality of air in the United States. The
Company has made all necessary modifications to its operating fleet to meet fuel
venting requirements and smoke-emissions standards issued by the EPA.
11
<PAGE>
At its aircraft line maintenance facility, the Company uses materials which are
regulated as hazardous under federal, state and local law. The Company is
required to maintain programs to protect the safety of its employees who use
these materials and to manage and dispose of any waste generated by the use of
these materials in compliance with all such laws. The Company is also subject
to federal, state and local regulations relating to protection of the
environment and discharge of materials into the environment.
EMPLOYEES
As of December 31, 1996, the Company had 1,681 employees, 1,301 of which were
full time and 380 of which were part time. The Company considers its relations
with its employees to be good.
In May 1989, Tower's U.S.-based cabin attendants voted to join the Association
of Flight Attendants (AFA). The Company negotiated a three-year contract with
the AFA in September 1993. On March 5, 1997, the Company reached a tentative
agreement, subject to membership ratification, to extend the contract with its
U.S.-based flight attendants represented by the AFA by up to two years until
September 14, 1998. The tentative agreement provides for no change in the
current rates of pay received by Tower flight attendants.
The Company's pilots and flight engineers are members of an in-house union,
Tower Air Cockpit Crewmember Association, Inc. (TACCA). In August 1996,
negotiations commenced with TACCA for a contract to replace the existing
agreement dated September 1, 1993. Negotiations are expected to continue well
into 1997.
All Company full time employees are covered by comprehensive health and life
insurance plans and substantially all Company full time employees are eligible
to participate in a 401(k) program. For part-time employees, the Company
partially subsidizes the cost of an optional comprehensive health benefit plan.
ITEM 2. PROPERTIES.
AIRCRAFT
As of February 28, 1997, the Company operated a fleet of seventeen B747 aircraft
(fifteen passenger aircraft and two cargo aircraft). The wide body B747 is the
workhorse of many of the world's flag carriers, and provides operators with high
levels of passenger comfort at low seat-mile costs. The B747 is well suited for
Tower's long-haul, high capacity routes and the cargo markets it serves. In
addition, because the Company's fleet consists
12
<PAGE>
exclusively of B747 aircraft, the Company benefits from efficiencies with regard
to maintenance and crew training costs and spares inventories. Tower's fleet
presently consists of ten owned and seven leased aircraft. One of the lease
agreements converts to fixed monthly rental in April through September and then
reverts to "power by the hour" where the basic monthly rent is determined by
multiplying the airframe hours flown during the month by specified rates, as
defined in the agreement. Under the terms of two of the lease agreements,
monthly rentals are at fixed rates, and one aircraft is being leased at fixed
monthly rental plus additional rent based on flight hours flown during the month
in excess of minimum monthly requirements, as defined in the agreement. In
addition, three aircraft are being leased under a "sale leaseback transaction"
where the monthly rentals are at fixed rates. For the year ended December 31,
1996, the Company's average daily utilization for its aircraft was 10.0 hours
per operating day, with an average flight duration of 6.3 hours.
The following table summarizes relevant data regarding the ownership, dates
aircraft were placed on certificate and dates of manufacture of the aircraft
operated by the Company.
<TABLE>
<CAPTION>
Date
Aircraft was
Owned Placed on Date of
Aircraft/Series Leased Certificate Manufacture
- -------------------- ------ ------------ -----------
<S> <C> <C> <C>
Passenger Aircraft
B747-100 Owned 5/84 7/70
B747-100 Owned 12/85 3/70
B747-100 Owned 10/88 5/70
B747-100 Owned 3/91 3/72
B747-100 Owned 6/92 7/71
B747-100 Leased 3/92 4/70
B747-200 Leased 4/93 2/72
B747-200 Leased 5/93 5/72
B747-200 Owned 3/96 6/77
B747-200 Owned 3/96 3/76
B747-200 Leased 10/92 9/77
B747-200 Leased 3/93 10/71
B747-200 Owned 1/95 5/80
B747-200 Leased 2/95 6/79
B747-200 Leased 3/95 2/80
Cargo Aircraft
B747-100* Owned 8/93 2/70
B747-100 Owned 8/95 3/70
</TABLE>
* Temporarily out of service to satisfy a certain AD requirement.
For information concerning aircraft subject to liens, see Note 2 to the
Financial Statements.
13
<PAGE>
AIRCRAFT MAINTENANCE - The Company's maintenance and engineering facility is
located at its headquarters at Hangar 17. The building can accommodate two B747
aircraft simultaneously, permitting the Company to meet its own maintenance
needs and provide contracted support services to third parties on an ad hoc
basis. The Company believes that its location at JFK places it in a unique
position to service the ad hoc maintenance needs of many other airlines serving
the airport. In addition to its in-house maintenance capabilities, the Company
out-sources certain services it is not equipped to perform or can obtain more
cost effectively from other parties. The Company uses FAA certified facilities
and repair stations of other major airlines for its heavy maintenance
requirements.
GROUND FACILITIES AND SERVICES
The Company's principal facility is its headquarters at Hangar 17 at JFK in New
York. The Company rents this facility from the Port Authority of New York and
New Jersey under a lease which expires in 2003. This facility is being used for
executive offices and maintenance operations. The Company also entered into a
lease with the Port Authority for Terminal 213 at JFK, which is adjacent to
Hangar 17, and began utilization of such Terminal in November 1993. The terminal
facility lease expires in 2003. The Company also leases separate sales offices
in New York City, Miami, Los Angeles, Tel Aviv, Paris and Sao Paulo.
ITEM 3. LEGAL PROCEEDINGS.
On October 31, 1995, the Company entered, subject to court approval, into a
settlement (the "Settlement") of consolidated class actions filed in March and
June 1994 entitled In re Tower Air, Inc. Securities Litigation (the "Securities
-------------------------------------------
Litigation") in the United States District Court for the Eastern District of New
York. The Securities Litigation arose out of the November 1993 initial public
offering of shares of the Company's common stock. The Settlement was approved
by the district court on February 9, 1996.
In September 1994, William Branch ("Branch") commenced a separate action
containing related allegations in the United States District Court for the
Southern District of New York entitled Branch v. Tower Air, Inc. (the "Branch
-------------------------
Action"). The Branch Action was dismissed with prejudice by Order dated
December 10, 1996, from which no appeal was taken.
Branch objected to the settlement of the Securities Litigation and appealed from
the order of the district court approving the Settlement. On November 13, 1996,
the United States Court of
14
<PAGE>
Appeals for the Second Circuit affirmed the order and judgment of the district
court approving the Settlement.
On February 11, 1997, Branch filed a Petition for Writ of Certiorari with the
Supreme Court of the United States, seeking a review of the Second Circuit's
affirmance of the district court's approval of the Settlement. On March 14,
1997, the Company filed a brief opposing Branch's Petition. No decision yet has
been rendered by the Supreme Court.
On or about March 20, 1997, the Company received a copy of a Verified Complaint
filed in the Supreme Court of the State of New York, County of Nassau. The
Complaint, entitled Hart to Hart Aircraft Detailing, Inc. v. Tower Air. Inc.
--------------------------------------------------------
alleges that the Company improperly terminated a contract (the "Contract") with
the plaintiff and failed to pay certain charges for aircraft cleaning allegedly
performed by the plaintiff. The Complaint also alleges that agents of the
Company defamed the plaintiff and divulged certain confidential information
regarding the terms of the Contract. Finally, the Complaint alleges that the
termination of the Contract resulted from certain complaints by the plaintiff.
The Company believes it has good defenses to each and every allegation in the
Complaint and has counterclaims against the plaintiff in amounts equal to or
exceeding the amounts sought in the Complaint. The Company intends to
vigorously defend itself and pursue its counterclaims.
On or about December 13, 1996, the Company received a letter from attorneys for
UNC, Inc. ("UNC"), a vendor from whom the Company had purchased certain
component aircraft parts in 1994 and 1995. In addition to such purchases,
certain component parts owned by the Company had been repaired by UNC and/or
certain of its subsidiaries during the same period. The December 13, 1996
letter, among other things, demanded payments totaling approximately $900,000 in
respect of goods and services allegedly provided by UNC to the Company. The
Company is also investigating whether it has viable claims against UNC for
improper billing practices and defective goods and services provided to the
Company.
The Company is the defendant in a Tennessee state court action filed August
1994, Federal Express Corporation v. Tower Air, Inc., in which plaintiff seeks
-----------------------------------------------
$7,646,216.47 in damages alleging breach of contract, breach of duty of good
faith and fair dealing, interference with contracted and business relations,
procurement of breach of contract and fraud. Treble and punitive damages are
also sought. The claims relate to military charter flights awarded to the
Company by the MAC which plaintiff contends it was entitled to operate by virtue
of its position in a joint venture in which the Company was involved. The
Company moved for a more definite statement of plaintiff's claims and that
motion was granted. Plaintiff, however, has not amended its complaint to date .
This litigation arises from the same basic circumstances involved in the United
States District Court for the Eastern District of New York action filed December
1994, Tower Air, Inc. v. Federal Express Corporation, in which contract and
-----------------------------------------------
antitrust violations are alleged by the Company. That court, in October 1996,
denied Federal Express Corporation's motion to dismiss.
During a snowstorm at JFK Airport on December 20, 1995, a Tower Air aircraft
bound for Miami slid off the runway during an aborted take-off attempt.
Approximately 35 passengers were taken to hospitals and discharged the same day.
One was kept overnight. The remaining approximately 415 passengers were not
injured. All claims and lawsuits are being handled by the Company's insurance
carrier. The Company believes that all claims resulting from this event remain
fully covered under the Company's insurance policies.
The Company is the defendant in a Texas state court action filed May 1996, Dee
---
Howard Company v. Tower Air, Inc., in which
- ---------------------------------
15
<PAGE>
plaintiff contends the Company did not pay it sufficient amounts for
maintenance, repair and modification work performed on a Company aircraft. The
amount claimed is $839,001.97. The case is still in the discovery stage.
The Company is the defendant in a New York state court action filed October
1995, Hudson General Corporation v. Tower Air, Inc., in which plaintiff contends
----------------------------------------------
it is entitled to damages of $2,200,000.00 for snowclearing, deicing, cleaning,
building maintenance and baggage handling contracts which had been terminated by
the Company because of substandard service. Most of the amount claimed is for
services never performed. The case is still in the discovery state.
The Company is the defendant in a New York state court action filed September
1995, Pacific Harbor Capital, Inc. v. Tower Air, Inc., in which plaintiff
------------------------------------------------
contends that one engine of an aircraft leased from it by the Company was not
returned in the condition required by the lease agreement. The dispute is over
which party, under the terms of the Lease, is responsible for the damage.
Plaintiffs claim approximately $1.8 million of which over $300,000 is for an
engine rented during repair of the damaged engine. The case is still in the
discovery stage.
The Company is a third-party defendant in a New York state court action filed
September 1995, Gal-Nur v. Hudson General Corp. v. Tower Air, Inc., in which
---------------------------------------------------
plaintiff, a Tower Air employee, has sued Hudson General Corporation in
connection with an injury he claims to have sustained on steps from the plane.
Hudson General filed a Third Party Complaint against Tower Air in November 1996.
The plaintiff is seeking $10,000,000 in damages. An answer to the complaint has
been filed by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ National Market under the
trading symbol TOWR. The approximate number of holders of record of the
Company's Common Stock at February 28, 1997 was 90. The quarterly price range
of the Company's Common Stock is shown in the following schedule:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------
QUARTER ENDED High Low High Low
--------------------------------------------
<S> <C> <C> <C> <C>
March 31 $ 7 5/8 $ 5 1/2 $ 8 3/8 $ 7 3/8
June 30 8 1/8 5 9 1/8 6 1/4
September 30 5 3/8 4 3/8 9 1/8 7 3/8
December 31 4 5/8 2 1/2 8 1/8 6 1/2
</TABLE>
The Company paid quarterly cash dividends in 1996 aggregating $.12 per share.
No dividend was declared or paid for the fourth quarter of 1996 in order to
conserve cash. The Company paid quarterly dividends for 1995 and 1994
aggregating $.16 per share for each year.
ITEM 6. SELECTED FINANCIAL DATA.
The financial data presented on the following page should be read in conjunction
with the financial statements and notes thereto included elsewhere in this Form
10-K. The summary financial data for each of the five years in the period ended
December 31, 1996 are derived from the financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors.
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
FINANCIAL DATA: 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Operating revenues $ 417,819 $ 490,472 $ 367,984 $ 341,835 $ 247,175
Operating expenses 441,345 476,956 363,192 317,357 238,142
---------- ---------- ---------- ---------- ----------
Operating income (loss) (23,526) 13,516 4,792 24,478 9,033
---------- ---------- ---------- ---------- ----------
Other (income) expenses 8,863 (5,903) 3,169 5,528 6,539
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (32,389) 19,419 1,623 18,950 2,494
Income tax provision (benefit) (11,506) 8,730 1,055 9,017 1,290
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (20,883) $ 10,689 $ 568 $ 9,933 $ 1,204
========== ========== ========== ========== ==========
Net income (loss) per share $ (1.37) $ 0.70 $ 0.04 $ 0.78 $ 0.10
At Period-end
Cash and cash equivalents $ 2,968 $ 3,521 $ 14,824 $ 44,310 $ 11,484
Working capital (deficiency) $ (84,196) $ (28,744) $ (30,585) $ (2,625) $ (29,705)
Property and equipment, net $ 218,058 $ 147,202 $ 133,741 $ 120,266 $ 112,896
Total assets $ 263,255 $ 210,547 $ 177,877 $ 191,644 $ 144,099
Long-term debt $ 67,716 $ 23,594 $ 21,065 $ 30,656 $ 53,599
Stockholders' equity $ 53,316 $ 76,034 $ 67,792 $ 71,190 $ 17,338
OPERATING DATA:
Total:
Block hours flown 41,336 47,186 34,221 30,736 22,352
Revenue per block hour (1) $ 9,922 $ 10,227 $ 10,601 $ 11,017 $ 10,945
Variable expense per block hour (2) $ 8,014 $ 7,964 $ 8,411 $ 8,418 $ 8,547
Scheduled Passenger Services:
Revenue passengers carried(000s) 1,194 1,194 925 594 455
Revenue passenger miles (RPMs)(000s) 3,332,477 3,601,323 2,758,753 1,867,827 1,572,712
Available seat miles(ASMs)(000s) 4,626,478 4,810,710 3,715,993 2,345,204 2,078,771
Passenger load factor 72% 75% 74% 80% 76%
Yield per RPM $ .0742 $ 0.0751 $ 0.0749 $ 0.0820 $ 0.0810
Block hours flown 21,991 22,094 17,172 10,916 9,514
Operating revenue per ASM $ .0534 $ 0.0562 $ 0.0556 $ 0.0653 $ 0.0613
Operating expense per ASM (3) $ .0538 $ 0.0477 $ 0.0463 $ 0.0531 $ 0.0512
Total expense per ASM (4) $ .0615 $ .0581 $ .0570 $ .0636 $ .0607
Employees (at period-end) 1,681 1,842 1,367 1,176 850
Number of aircraft in service (at period-end) 17* 17 16 15 12
* "Number of aircraft in service (at period-end)" for the year ended December 31, 1996 includes a cargo aircraft
which is temporarily out of service to satisfy a certain AD requirement.
- -----------------------------------------------------------------------------------------------------------------
(1) "Revenue per block hour" represents total revenue from scheduled passenger service, charter service,
military charter service and cargo service divided by total block hours.
(2) "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.
(3) "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.
(4) "Total operating expense per ASM" represents operating expense per ASM plus commission expense.
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
RESULTS OF OPERATIONS
For the year ended December 31, 1996 the Company recorded a net loss of $20.9
million compared with net income of $10.7 million for the year ended December
31, 1995. The $31.6 million decrease in net income was principally due to a
decrease in military business, the grounding of a cargo aircraft to comply with
newly restrictive Airworthiness Directive requirements, a weak Tel Aviv market
due to security concerns, and lower domestic traffic. In addition, the 1996
results were affected by a sharp increase in fuel prices, the cost associated
with the cessation of scheduled services to India in the first quarter of 1996
and extreme winter conditions in the Northeast which resulted in significant
de-icing costs and rescheduling related expenses as well as higher passenger
servicing, maintenance cost and interest expense.
Overall operating margins decreased from 2.8% in 1995 to (5.6%) in 1996.
OPERATING REVENUES. The Company's operating revenues for the year ended
December 31, 1996 decreased $72.7 million, or 14.8%, to $417.8 million from
$490.5 for the year ended December 31, 1995.
Scheduled passenger service revenues for the year ended December 31, 1996
decreased $23.1 million, or 8.5%, to $247.2 million from $270.3 million for the
year ended December 31, 1995. Scheduled passenger traffic (as measured in
revenue passenger miles) for 1996, decreased by 7.5% on capacity, resulting in a
load factor of 72% compared to 75% for the year ended December 31, 1995. Lower
operating revenues for 1996 were attributable to lower revenues in the Tel Aviv
market and the withdrawal from the India market in early 1996.
Commercial charter service revenues for 1996 decreased $16.4 million, or 16.3%,
to $84.4 million from $100.8 million for 1995. Lower revenues 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 and reduced
United Nations charter business.
19
<PAGE>
Military charter service revenues for the year ended December 31, 1996 decreased
$ 23.1 million, or 26.4%, to $64.4 million from $87.5 million in 1995. The
military charter business depends in large part upon the deployment or
repatriation of troops and revenues from this market segment are subject to
significant fluctuation . The decrease for the year is the result of a 34.3%
decrease in block hours flown on military charters.
Cargo service revenue for the year ended December 31, 1996 decreased $9.9
million, or 41.2%, to $14.1 million from $23.9 million in 1995. The decrease in
cargo service revenue 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 modification
necessary for its return to service by year end 1997.
OPERATING EXPENSES. The Company's operating expenses for the year ended
December 31, 1996 decreased $35.6 million, or 7.5%, to $441.3 million from
$477.0 million for the year ended December 31, 1995. The decline in operating
expenses was primarily the result of a decrease in block hours flown of 12.4%
during the year ended December 31, 1996.
Aircraft fuel expenses for the year ended December 31, 1996 decreased $7.0
million, or 7.9%, to $82.6 million from $89.6 million for the year ended
December 31, 1995. The variances resulted primarily from a 17.4% decrease in
volume of gallons consumed, offset by an 11.5% increase in the average cost per
gallon in 1996. The fuel consumption decreases in 1996 resulted primarily from
a decrease in block hours of 12.4%.
Flight equipment rentals and insurance expenses for the year ended December 31,
1996 decreased $8.7 million, or 30.7%, to $19.7 million from $28.4 million for
the year ended December 31, 1995. The decrease was attributable to a
substantial decrease in aircraft rental resulting from the purchase of six B747
aircraft in the first half of 1996, partially offset by cost associated with the
rental of additional engines to support the Company's fleet.
Maintenance costs for the year ended December 31, 1996 decreased $7.8 million,
or 12.8%, to $53.0 million from $60.7 million for the year ended December 31,
1995. Lower maintenance reserves associated with leased aircraft due to the
purchase of six B747 aircraft in the first half of 1996, were partially offset
by an increase in the volume of component repairs, an increase in the repair
costs of these components, higher level of parts loan and
20
<PAGE>
exchanges, and an increase in maintenance reserves associated with engine
rentals required to support the Company's fleet. Recent actions taken to address
maintenance costs include the announced engine maintenance agreement with
General Electric Aircraft Engine Service, Ltd. In addition, contracts were
signed in early 1997 with various parts repair vendors with respect to component
repairs and other maintenance support services.
Crew costs and other expenses for the year ended December 31, 1996 decreased
$2.4 million, or 8.4%, to $26.0 million from $28.4 million for the year ended
December 31, 1995. The decreases were primarily due to the 12.4% decrease in
block hours flown offset partly by pay rate increases.
Aircraft and traffic servicing expenses for the year ended December 31, 1996
increased $0.1 million, or 0.1%, to $83.7 million from $83.6 million for the
year ended December 31, 1995. The increase was attributable to the change in
business mix offset by the decrease in the number of departures of 10%. This
change included higher handling costs incurred in connection with scheduled
services activity versus military charter activity coupled with expenses
resulting from severe winter weather conditions in the Northeast.
Passenger servicing expenses for the year ended December 31, 1996 increased $2.4
million, or 4.6% to $55.6 million from $53.2 million for the year ended December
31, 1995. 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 is expected to result in reduced
catering costs.
Promotion, sales and commission expenses for the year ended December 31, 1996
decreased $15.6 million, or 20.4%, to $60.7 million from $76.3 million for the
year ended December 31, 1995. The decreases in promotion, sales and commission
expenses were the result of lower revenues and the elimination of higher
commission expenses on the New Delhi and Bombay routes which were discontinued
in September 1995 and March 1996, respectively.
General and administrative expenses for the year ended December 31, 1996
decreased $1.2 million, or 5.2%, to $21.2 million from $22.3 million for the
year ended December 31, 1995. As a percentage of operating revenue, general and
administrative expenses for 1996 were 5.1% compared with 4.6% for 1995.
21
<PAGE>
Depreciation and amortization expense for the year ended December 31, 1996
increased $4.5 million, or 13.2%, to $38.9 million from $34.3 million for the
year ended December 31, 1995. The increase was principally due to the purchase
of six B747 aircraft and related spare inventory in the first half of 1996.
Unit operating expense (per available seat mile) rose by 12.8% in 1996 versus
1995 driven by a 3.8% decline in seat miles and the factors discussed above.
The Company has embarked upon an aggressive restructuring of costs and upgrade
of financial controls. Significant cost reductions are anticipated.
OTHER EXPENSES AND INCOME. Interest expense for the year ended December 31,
1996 increased $4.1 million, or 103.4%, to $8.1 million from $4.0 million for
the year ended December 31, 1995. The increase in interest expense reflects a
higher average outstanding debt balance in 1996 resulting from the financing of
aircraft acquisitions. Other income for the year ended December 31, 1996
decreased $10.6 million, or 107.6%, to $0.7 million of expense from $9.9 million
of income in 1995. The decrease in other income reflects the gain resulting from
the excess of insurance proceeds over the net book value of certain flight
equipment related to the loss of an owned aircraft.
INCOME TAX PROVISION. The income tax benefit for the year ended December 31,
1996 was $11.5 million as compared to the income tax provision of $8.7 million
for the year ended December 31, 1995. The decrease was based on Tower's pretax
loss for 1996, partially offset by the decrease in its annual effective rate to
35.5% in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
RESULTS OF OPERATIONS
For the year ended December 31, 1995, the Company recorded net income of $10.7
million compared with net income of $0.6 million for the year ended December 31,
1994. The $10.1 million increase in net income was principally due to the
increase in scheduled passenger services, the increase in charter service for
seasonal religious pilgrims during the second quarter of 1995 and the
non-operating gain of $5.5 million after tax resulting from an excess of
insurance proceeds over the net book value of certain flight equipment
related to the loss of an owned aircraft.
Overall operating margins increased from 1.3% in 1994 to 2.8% in 1995, due to a
shift in business mix, including increased
22
<PAGE>
scheduled passenger services and wet lease operations (aircraft subleased to
other carriers for their own operations). Profitability was negatively impacted
by losses incurred in connection with operations to India (which the Company has
discontinued) and to the development of operations in the Brazil market.
Operating expenses, which increased primarily due to the rise in total block
hours flown, were offset in part by the operation of substantial commercial
passenger and cargo wet lease charters during the second quarter of 1995
relating to the passenger operation and during 1995 relating to the cargo
operation.
OPERATING REVENUES. The Company's operating revenues for the year ended
December 31, 1995 increased $122.5 million, or 33.3%, to $490.5 million from
$368.0 million for the year ended December 31, 1994. Higher operating revenues
for 1995 were attributable to the growth achieved in scheduled passenger
services and the significant participation in the religious pilgrimage to Mecca
during the second quarter of 1995. Scheduled passenger service capacity (as
measured in available seat miles) in 1995 increased by 45% in the international
markets and 9% in the domestic markets.
Scheduled passenger service revenues for the year ended December 31, 1995
increased $63.6 million, or 30.8%, to $270.3 million from $206.6 million for the
year ended December 31, 1994. This revenue increase is attributable primarily to
a 30.5% increase in passenger traffic (as measured in revenue passenger miles)
in 1995. The increase in passenger traffic was generated by increased
frequencies on existing routes which outperformed 1994 except for the India
market, discontinued in March 1996, and the Brazil market, enhanced in December
1995, with a Rio de Janeiro section. Commercial charter service revenues for
1995 increased $47.7 million, or 89.8%, to $100.8 million from $53.1 million for
1994. Higher revenues for the year 1995 were attributable primarily to the
Company's operation of seven aircraft during the second quarter of 1995 under
charter agreements to transport seasonal religious pilgrims compared to the
Company's limited operation of such charters in 1994.
Military charter service revenues for the year ended December 31, 1995 increased
$20.7 million, or 31.0%, to $87.5 million from $66.8 million in 1994. 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. The increase for the year reflects a 32.7% net increase
in block hours flown on military charters.
Cargo service revenues for the year ended December 31, 1995 decreased $12.2
million, or 33.8%, to $23.9 million from $36.2 million in 1994. Lower revenues
in 1995 reflect the Company's strategy implemented in the summer of 1994 to
replace scheduled
23
<PAGE>
cargo business with "wet lease" and charter cargo business of other airlines
electing to outsource certain of their air cargo requirements. Under a typical
wet lease, revenues and costs per block hour are much lower than on comparable
scheduled cargo business since the lessee pays all fuel costs and aircraft and
traffic servicing expenses.
OPERATING EXPENSES. The Company's operating expenses for the year ended
December 31, 1995 increased $113.8 million, or 31.3%, to $477.0 million from
$363.2 million for the year ended December 31, 1994. The increase in operating
expenses reflects a 37.9% increase in block hours during 1995. Operating
expenses were favorably impacted by the substantial percentage of wet lease
activity whereby the lessee bears certain operating costs.
Aircraft fuel expenses for the year ended December 31, 1995 increased $16.5
million, or 22.6%, to $89.6 million from $73.1 million for the year ended
December 31, 1994. The increase resulted primarily from a 19.5% increase in the
volume of gallons consumed, coupled with a 2.6% increase in the average cost per
gallon in 1995, which includes the impact of the $.043 per gallon excise tax on
domestic fuel purchases which went into effect October 1, 1995. The fuel
consumption increase for 1995 was relatively lower than the increase in total
block hours flown since 1995 included more operations under wet leases whereby
the lessee pays all fuel costs.
Flight equipment rentals and insurance expenses for the year ended December 31,
1995 increased $9.6 million, or 51.3%, to $28.4 million from $18.8 million in
1994. The increase was primarily due to the overall increased utilization of
leased aircraft due to the increase in overall block hours flown of 37.9%, in
addition to charges associated with the rental of additional engines to support
the Company's increased fleet size (including the replacement of engines
off-wing for repair or overhaul during 1995).
Maintenance costs for the year ended December 31, 1995 increased by $20.7
million, or 51.5%, to $60.7 million from $40.1 million for the year ended
December 31, 1994. The increase was primarily due to the increase in flight
activity, the increase in fleet size and maintenance reserves associated with
engine rentals required to support the Company's increased fleet size (including
the replacement of engines off-wing for repair or overhaul during 1995).
Crew costs and other expenses for the year ended December 31, 1995 increased
$7.9 million, or 38.2%, to $28.4 million from $20.6 million in 1994. The
increase primarily reflects an increase in overall block hours flown of 37.9%.
24
<PAGE>
Aircraft and traffic servicing expenses for the year ended December 31, 1995
increased $13.3 million, or 18.9%, to $83.6 million from $70.3 million in 1994.
The increase was primarily volume driven, partially offset by the relatively
lower handling costs incurred in connection with increased military charter
activity and the increase in wet lease activity in the second quarter of 1995,
whereby the lessee pays all aircraft and traffic servicing costs.
Passenger servicing expenses for the year ended December 31, 1995 increased
$13.3 million, or 33.5%, to $53.2 million from $39.9 million in 1994. The
increase was primarily due to the increase in flight activity and to the
business mix, which included substantial military activity at ad hoc locations
and increased international scheduled services, offset in part by the
significant wet lease component of the business mix.
Promotion, sales and commission expenses for the year ended December 31, 1995
increased $21.5 million, or 39.3%, to $76.3 million from $54.7 million in 1994.
The increase was primarily attributable to expanded scheduled passenger
services, charter commissions associated with the Company's participation in
seasonal religious pilgrimage charters during the second quarter of 1995 and an
increase in the usage of global distribution systems which has helped to
increase traffic both domestically and internationally.
General and administrative expenses for the year ended December 31, 1995
increased by $4.2 million, or 23.3%, to $22.3 million from $18.1 in 1994. The
increase in general and administrative expenses for 1995 was the result of the
growth in the Company's operating revenues of 33.3%. As a percentage of
operating revenues, general and administrative expenses for 1995 were 4.6%
compared with 4.9% for 1994.
Depreciation and amortization expense for the year ended December 31, 1995 year
increased $6.7 million, or 24.4%, to $34.3 million from $27.6 million in 1994.
The increase in depreciation and amortization for 1995 related to the increase
in flight activity and increase in fleet size, offset in part by the increase in
engines off-wing for repair or overhaul during 1995.
OTHER EXPENSES AND INCOME. Interest and other income for the year ended
December 31, 1995 increased $9.2 million, to $9.9 million from $0.7 million in
1994. The increase reflects the gain resulting from the excess of insurance
proceeds over the net book value of certain flight equipment related to the loss
of an owned aircraft operated by the Company (See Note 10 in the Notes to
Financial Statements). Interest expense for the year ended December 31, 1995
increased $0.1 million, or 2.2%, to $4.0 million from $3.9 million in 1994. The
increase in interest expense reflects the increase in interest rates on certain
loans based on the prime rate offset by lower average outstanding debt balances.
25
<PAGE>
INCOME TAX PROVISION. The income tax provision for the year ended December 31,
1995 increased $7.7 million, or 727.5%, to $8.7 million from $1.1 million in
1994. The increase was based on Tower's substantially higher pretax income for
1995, partially offset by the decrease in its annual effective tax rate for
1995. The lower effective tax rate for 1995 was primarily due to a lower level
of nondeductible items relative to pre-tax income.
QUARTERLY RESULTS (UNAUDITED)
The Company's business is significantly affected by seasonal factors.
Typically, the Company has experienced reduced demand for scheduled passenger
and charter services from November to March.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
1996
Operating revenue $ 85,824 $113,910 $148,858 $ 69,227 $417,819
Operating income (loss) $(13,139) $ 5,146 $ 3,479 $ (19,012) $(23,526)
Net income (loss) $ (8,134) $ 2,923 $ (1,596) $ (14,076) $(20,883)
Block hours 9,016 12,649 12,907 6,764 41,336
1995
Operating revenue $ 82,093 $127,555 $169,502 $ 111,322 $490,472
Operating income (loss) $ (6,649) $ 8,838 $ 21,086 $ (9,759) $ 13,516
Net income (loss) $ (3,581) $ 4,010 $ 11,141 $ (881)(1) $ 10,689
Block hours 8,293 13,223 14,083 11,587 47,186
1994
Operating revenue $ 57,156 $ 83,677 $129,557 $ 97,594 $367,984
Operating income (loss) $ (6,084) $ (488) $ 13,049 $ (1,685) $ 4,792
Net income (loss) $ (3,578) $ (658) $ 6,356 $ (1,552) $ 568
Block hours 5,590 7,790 11,089 9,752 34,221
</TABLE>
(1) Includes $5,520 after tax non-operating gain resulting from an excess of
insurance proceeds over the net book value of certain flight equipment related
to the loss of an owned aircraft.
26
<PAGE>
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 December 31,
1996, December 31, 1995 and December 31, 1994 were $3.2 million, $4.2 million
and $15.7 million, respectively. The Company generated cash from operations for
1996, 1995 and 1994 of $29.6 million, $46.9 million and $40.0 million,
respectively.
Net cash used in investing activities was $20.9 million for 1996, $61.2 million
for 1995 and $40.6 million for 1994. The Company's expenditures for flight
equipment were $49.7 million 1996, $50.4 million for 1995 and $38.2 million for
1994. Expenditures for flight equipment in 1996 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 December 31, 1996, the Company had negative working capital of $84.2
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 established a new $12.5 million secured line of credit with a
financial institution in December 1996. The interest rate on this borrowing
line is the base rate, as defined, plus 1%. The line was further increased to
$18.0 million in January 1997 and then to $20.0 million in March 1997. The
credit line is secured by trade receivables and inventory and the agreement
expires in June 1997. The Company is negotiating an extension of this line
beyond June 1997. This financing, in conjunction with cash generated from
operations, is expected to 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.
27
<PAGE>
The existing line covers $1.25 million of letters of credit that expired in
January 1997. The Company is also contingently liable for an additional $3.7
million of letters of credit which expire later in 1997 of which $275,000 were
collateralized by certificates of deposit.
In addition to the establishment of the $20.0 million line, the Company also
increased its borrowing with an existing lender by $2.0 million in December 1996
and $2.0 million in January 1997. These borrowings are secured by the flight
equipment collateral already pledged to this financial institution.
The Company is currently in the process of purchasing up to 8 additional JT9
engines to support its fleet during the upcoming Hadj and the following summer
operations. A major portion of the purchase will be financed by a 24 month
borrowing.
The Company paid cash dividends aggregating twelve cents per share on its Common
Stock for the year ended December 31, 1996. No dividend was declared for the
fourth quarter of 1996 to conserve cash.
INCOME TAXES
At December 31, 1996, for federal and state tax reporting purposes, the Company
had approximately $6,400,000 of alternative minimum tax credit carryforwards and
approximately $35,171,000 of net operating loss carryforwards available to
offset future federal tax liabilities.
INFLATION
Inflation has not had a significant impact on the Company's operations, and the
Company does not expect any significant near-term inflationary impact.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See financial statements and schedules beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following sets forth the names, ages, present positions and business
experience of all the directors and executive officers of the Company. Officers
are appointed to serve until the meeting of the Board of Directors following the
next Annual Meeting of Stockholders and until their successors have been elected
and have been qualified.
At December 31, 1996, the directors, officers and key employees of the Company
were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Morris K. Nachtomi...................... 60 President, Chief Executive
Officer and Chairman of the Board
Stephen L. Gelband...................... 65 Director and Secretary
Stephen A. Osborn....................... 46 Director
Henry P. Baer........................... 61 Director
Stanley S. Shuman....................... 61 Director
Ramesh Punwani.......................... 54 Chief Financial Officer/Vice
President-Finance
Guy A. Nachtomi......................... 24 Vice President-Operations
Mark T. Hayes*.......................... 61 Vice President-Aircraft Scheduling and
Military Contracts
Cho T. Tsang**.......................... 45 Vice President-Maintenance
*Mr. Hayes retired effective February 15, 1997 and will not be replaced. His
responsibilities have been assumed by the Aircraft Scheduling Department.
**Mr. Tsang resigned effective January 31, 1997 and was replaced by Mr. Vincent
Vitale, age 58, on February 7, 1997.
</TABLE>
Mr. Morris Nachtomi co-founded the Company in 1982 of which he became a Director
and has been President of the Company since 1986 and Chief Executive Officer and
Chairman of the Board since 1989. After a thirty-year career at El Al Israel
Airlines, Mr. Nachtomi became Executive Vice President of Tower Travel
Corporation, and helped establish M.Z.M. Aviation Inc. and Metro International
Airways, G.S.A. Before 1982, Mr. Nachtomi served as President of M.Z.M.
Aviation Inc. and Metro International Airways, G.S.A.
Mr. Gelband has been a Director and Secretary of the Company since December 1985
and February 1988 respectively. He has been General Counsel for the Company
since 1988. Mr. Gelband is a founder and Director of the Washington Airports
Task Force, a coalition of local and state governments and private businesses
promoting service to Washington National Airport and Dulles International
29
<PAGE>
Airport. He is also a founder and Director of the Air and Space Heritage
Council which promotes the expansion of the National Air and Space Museum at
Washington Dulles International Airport. Mr. Gelband served as Trial Attorney
at the Civil Aeronautics Board from 1957 to 1960, and has been in private
practice of law since 1960. Mr. Gelband is a Vice President of the law firm of
Hewes, Gelband, Lambert & Dann, P.C., Washington, D.C., and provides legal
services to the Company, principally in the area of corporate and federal
aviation law. Mr. Gelband holds degrees from Yale College and Harvard Law
School.
Mr. Osborn has been a Director of the Company from September 1988 until December
1992, and from May 1993 until present. Mr. Osborn is a Managing Director in the
Private Securities Division of CIGNA Investments, Inc., the investment
management affiliate of CIGNA Corporation, a position he has held for more than
five years. Prior to 1990, Mr. Osborn managed the investment activities of CIGNA
Venture Capital, Inc. He holds a B.A. degree from Trinity College and an M.B.A.
degree from the Johnson School of Management at Cornell University.
Mr. Baer has been a Director of the Company since January 1993. Since 1990, Mr.
Baer has been of counsel to the law firm of Skadden, Arps, Slate, Meagher & Flom
LLP. From January 1978 through June 1990, Mr. Baer was a partner in Skadden,
Arps, Slate, Meagher & Flom, where he headed the firm's labor and employment law
practice between 1982 and 1990. Mr. Baer served as an adjunct professor of law
at Fordham University School of Law in New York City from 1990 to 1994. He
holds a B.A. degree from Brown University and a J.D. degree from Harvard Law
School.
Mr. Shuman has been a Director of the Company since December 1993. For more than
five years he has been a Managing Director and Executive Vice President of Allen
& Company Incorporated, a New York investment banking firm. Mr. Shuman is also
a Director of Bayou Steel Corporation, Hudson General Corporation and News
Corporation Limited. He holds degrees from Harvard College, Harvard Law School
and Harvard Business School.
Mr. Punwani has been Chief Financial Officer and Vice President-Finance since
September 1996. From 1993 to 1996, he was Senior Vice President and Chief
Financial Officer of Empire Blue Cross Blue Shield. Prior to that, he held
senior finance and planning positions at PanAm and Trans World Airlines for over
27 years. His last airline position was Senior Vice President and Chief
Financial Officer of PanAm. Mr. Punwani holds an M.B.A. degree from New York
University and a Masters in Industrial Engineering and Operation Research from
Cornell University.
Mr. Guy Nachtomi has been Vice President of Operations since he rejoined the
Company in November 1995. From 1994 to 1995, Mr. Guy
30
<PAGE>
Nachtomi worked in International Film Marketing and Distribution at Twentieth
Century Fox. From June 1993 to April 1994, he served as Vice President of the
Company. Mr. Guy Nachtomi has a B.A. degree from Williams College. Mr. Guy
Nachtomi is the son of Mr. Morris Nachtomi.
Mr. Hayes has been Vice President-Aircraft Scheduling and Military Contracts
since May 1993. From 1983 to 1993, Mr. Hayes held positions with the Company
first as a Manager of Aircraft Scheduling, and then as a Director of Aircraft
Scheduling. From 1980 until 1983 he was a Scheduling Manager with Flying Tigers
D.B.A. Metro International. Mr. Hayes held various positions with Seaboard
World Airlines from 1953 until 1983. Mr. Hayes retired from Tower, effective
February 15, 1997.
Mr. Tsang has been Vice President-Maintenance of the Company since May 1996.
From December 1995 to May 1996, Mr. Tsang was Deputy Vice President-Maintenance
of the Company. From October 1990 to December 1995, Mr. Tsang was a Director of
Quality Assurance for US Air Shuttle. From October 1989 to October 1990 he was
a Manager of Quality Assurance for North American Airlines. Prior to October
1989, Mr. Tsang held various positions with an FAA Certified Repair Station, AAR
Technical Services Center and People Express Airlines and was responsible for
maintenance technical planning. He is a graduate of Embry-Riddle Aeronautical
University and holds a B.S. degree. Mr. Tsang resigned from Tower, effective
January 31, 1997.
Mr. Vincent Vitale has been Vice President-Maintenance since February 1997. From
1968 to 1991, Mr. Vitale held positions of increasing responsibility in aircraft
and engine maintenance at PanAm. His last position was System Director of
station maintenance. Mr. Vitale was Vice President of Maintenance for PanAm
Express until 1992, Vice President of Customer Support for Jetstream Aircraft
from 1992 to 1995 and Vice President of Maintenance for Airtran Airways from
1995 to 1996. He holds an FAA Airframe and Powerplant License. He attended the
State University of New York, Farmingdale and majored in Business Administration
and also graduated from the Manhattan High School of Aviation Trades.
Additional information is contained in the Registrant's 1997 Proxy Statement,
pursuant to Regulation 14A, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required under this Item is contained in the Registrant's 1997 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
31
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required under this Item is contained in the Registrant's 1997 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required under this Item is contained in the Registrant's 1997 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS
ON FORM 8-K.
Item 14(a)1 and 2. Financial Statements and Schedules. See "Index to Financial
Statements and Financial Statement Schedules" on p. F-1.
Item 14(a)3. Exhibits
3(1)* Restated Certificate of Incorporation of the
Company
3(2)* By-Laws of the Company
10(1)* Employment Agreement between the Company and
Morris K. Nachtomi
10(2)P Employment Agreement between the Company and
Ramesh Punwani
10(3)* Tower Air 1993 Long-Term Incentive Plan
10(4)* Tower Air, Inc. Executive Annual Incentive Plan
10(5)P Heller Financial Inc. -- Loan and Security Agreement,
Dated December 1, 1996
10(6)P Heller Financial Inc. -- First Amendment Loan and Security
Agreement, Dated January , 1997
10(7)P Heller Financial Inc. -- Second Amendment to Loan and
Security Agreement, Dated March 13, 1997
10(8)P Sanwa Business Credit Corp. -- Trust Agreement
and Supplement, Dated October 1, 1996
10(9)P First Security Bank, National Association --
Aircraft and Airframe Purchase and Sale Agreement,
Dated October 1, 1996
10(10)P Finova Capital Corporation -- Consolidated Aircraft
and Engine Loan and Security Agreement,
Dated March 25, 1996
10(11)P Finova Capital Corporation -- $20,000,000 Loan
Secured by Two B747 Aircraft and Eight Engines,
Dated January 30, 1996
10(12)P Finova Capital Corporation -- First Amendment to Consolidated
Aircraft and Engine Loan and Security Agreement, Dated
May 8, 1996
33
<PAGE>
11 Computation of Net Income Per Share
27 Financial Data Schedule for the year ended December 31, 1996
- ------------------
*Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 33-69148) or amendments thereto and incorporated by
reference herein.
Item 14(b) Registrant filed no reports on Form 8-K during the last quarter of
the period covered by this report.
34
<PAGE>
ITEM 14(a) (1) AND (2)
TOWER AIR, INC.
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Tower Air, Inc. are included in Item 8:
<TABLE>
<CAPTION>
<S> <C>
Page
----
Report of Independent Auditors......................................... F-2
Balance Sheets as of December 31, 1996 and 1995........................ F-3
Statements of Operations for the years ended December 31, 1996,
1995 and 1994........................................................ F-4
Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994..................................... F-5
Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994........................................................ F-6
Notes to Financial Statements.......................................... F-7
The following financial statement schedule of Tower Air, Inc. is
included in Item 14(a):
Schedule II-Valuation and Qualifying Account.......................... F-19
</TABLE>
All other Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Tower Air, Inc.
We have audited the accompanying balance sheets of Tower Air, Inc. as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tower Air, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Melville, New York
February 17, 1997, except for
the last paragraph of Note 2,
as to which the date is March 13, 1997
F-2
<PAGE>
TOWER AIR, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS December 31,
- ------ --------------------
1996 1995
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,968 $ 3,521
Certificates of deposit, at cost,
which approximates market (Note 2) 275 700
Receivables, net of allowance for
doubtful accounts of $1,201 and
$1,488, respectively 27,912 27,931
Income tax receivable (Note 3) 6,397 --
Insurance proceeds receivable -- 25,000
Prepaid expenses and other current
assets 5,102 4,861
-------- --------
Total current assets 42,654 62,013
Property and Equipment, at cost
(Note 2):
Flight equipment 321,240 216,756
Ground property and equipment 32,285 29,504
-------- --------
353,525 246,260
Less accumulated depreciation and
amortization 135,467 99,058
-------- --------
218,058 147,202
Other Assets 2,543 1,332
-------- --------
$263,255 $210,547
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Note payable (Note 2) $ 4,545 $ --
Accounts payable 46,958 23,006
Accrued liabilities (Note 8) 40,043 33,503
Air traffic liability 18,010 19,878
Current maturities of long-term
debt (Note 2) 17,294 14,370
-------- --------
Total current liabilities 126,850 90,757
Long-Term Debt (Note 2) 67,716 23,594
Deferred Income Taxes (Note 3) 13,545 18,654
Deferred Rent 1,828 1,508
Commitments and Contingencies
(Notes 2, 4 and 9)
Stockholders' Equity (Notes 1 and 7):
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 10,787 33,505
Less treasury stock, at cost
(210,000 shares) 1,511 1,511
-------- --------
Total stockholders' equity 53,316 76,034
-------- --------
$263,255 $210,547
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
TOWER AIR, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES (NOTE 6):
Scheduled Passenger Service $247,190 $270,282 $206,641
Commercial Charter Service 84,389 100,827 53,118
Military Charter Service 64,460 87,534 66,837
Cargo Service 14,085 23,939 36,187
Other 7,695 7,890 5,201
-------- -------- --------
Total operating revenues 417,819 490,472 367,984
OPERATING EXPENSES:
Fuel 82,561 89,620 73,124
Flight equipment rentals and
insurance (Note 4) 19,721 28,441 18,797
Maintenance 52,981 60,735 40,081
Crew costs and other 26,031 28,413 20,557
Aircraft and traffic servicing 83,704 83,580 70,281
Passenger servicing 55,645 53,222 39,874
Promotion, sales and commissions 60,669 76,262 54,748
General and administrative 21,178 22,344 18,120
Depreciation and amortization 38,855 34,339 27,610
-------- -------- --------
Total operating expenses 441,345 476,956 363,192
-------- -------- --------
OPERATING INCOME (LOSS) (23,526) 13,516 4,792
OTHER (INCOME) EXPENSES:
Other (income) expense (Note 10) 749 (9,893) (735)
Interest expense (Note 2) 8,114 3,990 3,904
-------- -------- --------
Total other (income) expenses 8,863 (5,903) 3,169
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (32,389) 19,419 1,623
Income Tax Provision (Benefit)
(Note 3) (11,506) 8,730 1,055
-------- -------- --------
NET INCOME (LOSS) $(20,883) $ 10,689 $ 568
======== ======== ========
NET INCOME (LOSS) PER SHARE $ (1.37) $ .70 $ .04
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 15,290 15,305 15,396
======== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
TOWER AIR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(NOTE 1)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------------ Paid-In Retained -------------------- Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 15,500 $155 $43,885 $ 27,150 -- -- $ 71,190
Cash dividends paid ($.16 per
share) -- -- -- (2,455) -- -- (2,455)
Purchases of common stock for
treasury -- -- -- -- (210) $(1,511) (1,511)
Net income - 1994 -- -- -- 568 -- -- 568
---------------------------------------------------------------------------------------------
Balance at December 31, 1994 15,500 155 43,885 25,263 (210) (1,511) 67,792
Cash dividends paid
($.16 per share) -- -- -- (2,447) -- -- (2,447)
Net income - 1995 -- -- -- 10,689 -- -- 10,689
---------------------------------------------------------------------------------------------
Balance at December 31, 1995 15,500 155 43,885 33,505 (210) (1,511) 76,034
Cash dividends paid
($.12 per share) -- -- -- (1,835) -- -- (1,835)
Net (loss) - 1996 -- -- -- (20,883) -- -- (20,883)
---------------------------------------------------------------------------------------------
Balance at December 31, 1996 15,500 $ 155 $43,885 $ 10,787 (210) $(1,511) $ 53,316
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
TOWER AIR, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ (20,883) $ 10,689 $ 568
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation and amortization 38,855 34,339 27,610
Provision for doubtful accounts 1,009 1,634 800
Deferred income taxes (5,109) 4,824 (2,193)
Deferred rent 320 328 475
(Gain) loss on disposal of property
and equipment 403 (9,571) 37
Changes in certain assets and
liabilities:
Receivables 3,135 (6,864) (1,977)
Income tax receivable (6,397) -- --
Prepaid expenses and other assets (449) (292) (1,264)
Accounts payable and accrued
liabilities 20,584 11,238 8,052
Air traffic liability (1,868) 598 7,853
--------- --------- ---------
Net cash provided by operating
activities 29,600 46,923 39,961
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of flight equipment (49,735) (50,387) (38,162)
Purchases of ground property and
equipment (2,850) (11,662) (4,124)
Proceeds from sale of flight equipment 6,191 -- --
Proceeds from sale of ground property
and equipment 47 657 1,509
Proceeds from insurance company 25,000 -- --
Decrease in certificates of deposit 425 200 142
Other -- -- 9
--------- --------- ---------
Net cash used in investing activities (20,922) (61,192) (40,626)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 41,875 16,899 1,812
Principal payments on borrowings (47,884) (11,205) (26,667)
Purchase of treasury stock -- -- (1,511)
Payment of cash dividends (1,835) (2,447) (2,455)
Other (1,387) (281) --
--------- --------- ---------
Net cash provided by (used in)
financing activities (9,231) 2,966 (28,821)
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents (553) (11,303) (29,486)
Cash and cash equivalents at
beginning of period 3,521 14,824 44,310
--------- --------- ---------
Cash and cash equivalents at end of
period $ 2,968 $ 3,521 $ 14,824
========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest $ 8,022 $ 3,993 $ 3,912
Cash paid during the period for
income taxes $ 442 $ 6,721 $ 3,577
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING
AND FINANCING ACTIVITIES:
Purchase of flight equipment accrued
but not paid $ 15,512 $ 5,604 $ 3,858
Purchase of flight equipment financed
through debt $ 57,600 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Tower Air, Inc. (the Company) was organized in the State of Delaware on August
13, 1982 and was issued an operating certificate by the Civil Aeronautics Board
effective October 27, 1983. The Company provides long-haul scheduled and
charter passenger and cargo air service in diverse domestic and international
markets.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits with banks and highly
liquid financial instruments, including money market funds, having maturity
dates of three months or less when purchased.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is provided using the straight-line
method as follows: Boeing 747 aircraft-seven to 20 years; other flight and
ground property and equipment - two to 10 years. One of the Company's Boeing 747
aircraft has a salvage value of $8,000,000 and four of the Company's Boeing 747
aircraft each have a salvage value of $5,000,000. Leasehold improvements are
amortized over the lesser of their useful lives or the term of the related
lease.
AIRCRAFT AND ENGINE MAINTENANCE
The costs of major airframe and engine overhauls are capitalized and amortized
over the period benefited for both owned and leased aircraft. Other maintenance
costs are charged to operating expense as incurred.
REVENUE RECOGNITION
Revenue is recognized when the transportation is provided. Tickets sold but not
yet used are recorded as current liabilities in the "Air traffic liability"
account.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign station operations, which are immaterial, have
been translated at exchange rates in effect at the balance sheet dates, except
property and equipment which was translated at rates of exchange in effect at
the time of acquisition. Revenues and expenses were translated at average
monthly rates prevailing during the given period, except for depreciation which
was translated at the rate in effect at the time the related asset was acquired.
Foreign exchange gains and losses, which were immaterial, were included in
"Interest and other income".
NET INCOME PER SHARE
Net income per share has been computed based upon the weighted average number of
common and, in 1995 and 1994, common equivalent shares outstanding. Common
equivalent shares represent the dilutive effect of Common Stock purchase
warrants and options computed using the treasury stock method.
F-7
<PAGE>
CERTIFICATES OF DEPOSIT
The Company has determined that all of its certificates of deposit are
classified as "held to maturity securities". Held to maturity securities are
carried at amortized cost which approximates market value. All held to maturity
securities are due to mature within one year and there are no gross unrealized
gains or losses related to such securities at December 31, 1996, 1995 or 1994.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of short-term investments, which are classified as cash
equivalents and certificates of deposit, approximate fair value. The fair
values of the Company's debt, including current maturities, are estimated using
discounted cash flow analyses, based on the estimated current incremental
borrowing rates for similar types of borrowing arrangements. The carrying
amounts of the Company's debt at December 31, 1996 and 1995 approximate fair
value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company has adopted the provisions of the statement for the year ended December
31, 1996. Adoption of Statement 121 did not have any impact on the Company's
financial position.
STOCK BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"). The Statement encourages, but does not require,
companies to adopt a fair value method of accounting for stock-based
compensation, as opposed to the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company has elected to continue following the expense
recognition provisions of APB 25.
F-8
<PAGE>
2. LONG-TERM DEBT AND NOTE PAYABLE
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
----------------------
<S> <C> <C>
Prime plus 2.0% Notes, due in monthly
installments through October 1996 _ $ 1,477
Prime plus 2.25% Notes, due in monthly
installments _ 783
through August 1996
Prime plus 2.0% Notes, due in February
1997 _ 12,000
10.4% Notes, due in monthly installments
through March 1998 _ 14,225
8.5% - 9.45% Loans Payable, due in
monthly installments through September
2013 $ 8,988 9,479
LIBOR plus 1.75% Note, due in monthly
installments through March 1998 4,166 _
9.283% Note, due in monthly
installments through June 1997 3,000 _
10.12% Note, due in monthly installments
through December 2001 46,963 _
10.27% Note, due in monthly installments
through February 2002 19,893 _
10.27% Note, due in monthly installments
through December 1997 2,000 _
-------- --------
85,010 37,964
Less current maturities 17,294 14,370
-------- ---------
$ 67,716 $ 23,594
======== =========
</TABLE>
In February 1995, the Company borrowed $12,000,000 from a commercial finance
company to replenish cash used to purchase an aircraft in November 1994. This
loan bears interest at prime plus 2% and is due in February 1997. (See March
1996 paragraph below.)
In 1993, the Port Authority of New York and New Jersey (Port Authority) financed
certain renovations of the terminal facility and terminal ramp. In connection
with this financing, the Company is required to pay principal and interest on
the terminal building renovation of approximately $111,000 per month through
September 1998, which bears interest at 8.93% per annum. In addition, the
Company is required to pay principal and interest on the terminal ramp
renovation financing of approximately $13,000 per month through September 2013,
which bears interest at 9.45% per annum. In 1995, the Company completed a
terminal facility expansion project at John F. Kennedy International Airport at
a cost of approximately $10,000,000. The Company had a commitment from the Port
Authority for $5,500,000 million of five-year financing at a fixed interest rate
of 8.5% for this project. As of December 31, 1996, the Company received the
entire amount. As of December 31, 1996 and 1995, $8,988,000 and $9,479,000,
respectively, was outstanding.
F-9
<PAGE>
In January 1996, the Company prepaid the entire $7,100,000 outstanding balance
of one of the 10.4% Notes plus a prepayment premium of $266,000. Also in January
1996, the Company converted the remaining 10.4% Note outstanding to a floating
interest rate of LIBOR plus 1.75% with the option to fix the interest rate for
one, three or six-month periods. As of December 31, 1996, the Company has not
exercised this option. The balance as of December 31, 1996 was approximately
$4,166.000.
Also in January 1996, the Company purchased two Boeing 747 aircraft for an
aggregate purchase price of $24,500,000. In connection with this purchase, the
Company issued a $20,000,000 promissory note to a commercial finance company.
This loan bears interest at 9.39% and requires monthly installments of principal
and interest of approximately $420,000 through January 2001. (See March 1996
paragraph below.)
In February 1996, the Company purchased three Boeing 747 aircraft for an
aggregate purchase price of $10,000,000. In connection with this purchase, the
Company paid $2,000,000 and issued an $8,000,000 promissory note to the seller,
a financial institution. This loan bears interest at prime plus 1% and requires
monthly principal installments of approximately $333,000 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 four years. The Company has the right to exercise certain purchase
options during the term of the lease.
Also in February 1996, the Company purchased four engines for an aggregate
purchase price of $9,100,000 (including $285,000 of imputed interest). In
connection with this purchase, the Company paid $500,000 and issued an
$8,600,000 promissory note to the seller. The Company is required to pay
principal and interest of $500,000 per month through June 1997. The balance
outstanding as of December 31, 1996 was approximately $3,000,000.
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 $20,000,000 note issued in January 1996, with
the same financial institution. In addition, the Company borrowed an additional
$17,000,000 which is secured by the two Boeing 747 aircraft purchased in January
1996. The new loan balance, which aggregates $50,200,000, bears interest at
10.12% and requires monthly installments of principal and interest of
approximately $1,050,000 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
$600,000. Accordingly, the maturity date of the loan has been extended to
December 2001. At December 31, 1996, there was approximately $46,963,000
outstanding.
In May 1996, the Company purchased one Boeing 747 aircraft for an aggregate
purchase price of $21,000,000. In connection with this purchase, the Company
issued a $21,000,000 note to a commercial finance company. This loan bears
interest at a rate of 10.27% and requires monthly payments of approximately
$400,000 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 $250,000. Accordingly,
the maturity date of the loan has been extended to February 2002. At December
31, 1996, there was approximately $19,893,000 outstanding.
F-10
<PAGE>
In November 1996, the Company borrowed an additional $2.0 million from a
commercial finance institution. The note bears interest at 10.27% and is due
December 1997. In January 1997, the Company borrowed an additional $2.0 million
from the same commercial finance institution also at the same interest rate of
10.27%. The notes require monthly interest payments of approximately $30,000
through June 1997. Commencing July 1997, the notes require monthly principal
and interest payments of approximately $700,000 through December 1997. At
December 31, 1996, there was approximately $2,000,000 outstanding.
In February 1997, the Company purchased six engines for an aggregate purchase
price of $11,900,000. In connection with this purchase, the Company will
exchange engines with an aggregate value of $1,800,000 and issued to the seller
$1,100,000 of credits toward to purchase of aircraft and engine parts. Any
unused portion of the credits will be paid to the seller by the Company on
August 31, 1997. In addition, the Company issued an $9,000,000 promissory note
to the seller. The promissory note bears interest at prime plus 2.75% and is
payable over a term of twenty-four months.
At December 31, 1996, the aggregate annual maturities of long-term debt during
the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $17,294
1998 $15,434
1999 $15,132
2000 $16,728
2001 $18,390
</TABLE>
Certain debt is secured by aircraft having a net book value of approximately
$103,500,000 at December 31, 1996.
In December 1995, the Company received a commitment to increase its $10,000,000
unsecured line of credit to $15,000,000, subject to the execution and delivery
of certain documentation and the negotiation of certain terms, with a domestic
commercial bank. In February 1996, the Company borrowed $5.0 million under
this line of credit agreement which bears interest at the prime rate. This loan
was repaid by the Company in July 1996. The agreement expired in June 1996 and
was not renewed; however, at December 31, 1996, the Company was contingently
liable for approximately $4,901,000 of letters of credit issued under that line
of credit and expiring through December 1997, of which $1,250,000 expried in
January 1997. In addition, $275,000 was collateralized by certificates of
deposit.
In December 1996, the Company entered into an agreement with a financial
institution to establish a revolving credit line up to $12.5 million. The
credit line bears interest equal to the Base Rate, as defined, plus 1% (9.25% at
December 31, 1996). At December 31, 1996, $4,545.000 was outstanding under this
line. In January 1997, the line was increased to $18 million. It was increased
again to $20 million in March 1997. As of February 17, 1997, there was $15.9
million outstanding. The credit line is primarily secured by trade receivables
and inventroy and the agreement expires in June 1997.
F-11
<PAGE>
3. INCOME TAXES
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (6,397) $ 3,603 $ 2,555
State and local _ 303 693
------------------------------------------------------------------------
(6,397) 3,906 3,248
========================================================================
Deferred:
Federal (3,541) 3,267 (1,262)
State and local (1,568) 1,557 (931)
------------------------------------------------------------------------
(5,109) 4,824 (2,193
------------------------------------------------------------------------
Provision (benefit) for income taxes $ (11,506) $ 8,730 $ 1,055
========================================================================
Deferred tax expense (benefit) consisted of the following (in thousands):
1996 1995 1994
------------------------------------------------------------------------
Tax depreciation greater than (less
than) book depreciation $ 5,111 $ 5,304 $(1,678)
Utilization of net operating loss
carryforwards _ 533 1,832
Tax benefit of net operating loss
carryforwards (13,792) _ _
Tax (benefit) utilization of
alternative minimum tax credit
carryforwards 3,572 (1,013) (2,347
------------------------------------------------------------------------
$(5,109) $ 4,824 $(2,193)
========================================================================
The income tax provisions were at rates different from the U.S. federal statutory rates for the following
reasons:
1996 1995 1994
------------------------------------------------------------------------
Statutory rate (35.0)% 35.0% 34.0%
State and local income tax
(benefit), net of federal tax benefit (3.0) 6.2 (9.7)
Nondeductible items 2.5 4.6 40.7
Other _ (.8) _
------------------------------------------------------------------------
Effective tax rate (35.5)% 45.0 % 65.0 %
========================================================================
</TABLE>
F-12
<PAGE>
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred income tax liability components are as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1996 1995
----------------------
<S> <C> <C>
Deferred tax liabilities for taxable
temporary differences:
Tax depreciation in excess of book
depreciation $ 33,763 $ 28,652
----------------------
Total deferred tax liabilities 33,763 28,652
Deferred tax assets:
Tax benefit of net operating loss
carryforwards 13,792 -
Alternative minimum tax credit
carryforwards 6,426 9,998
----------------------
Total deferred tax assets 20,218 9,998
----------------------
Net noncurrent liability $ 13,545 $ 18,654
======================
</TABLE>
At December 31, 1996, for federal reporting purposes, the Company had
approximately $35,171,000 of net operating loss carryforwards available to
offset future federal tax liabilities.
4. COMMITMENTS
At December 31, 1996, the Company had seven Boeing 747 aircraft under operating
leases. Under the terms of one of the lease agreements, beginning April 1996,
monthly rent alternates from a fixed rate to a power by the hour rate every six
months until April 1999, at which time it remains a fixed rate until the
agreement expires in February 2000. Under the terms of two of the lease
agreements, monthly rentals are at fixed rates. In addition, one aircraft is
being leased at fixed monthly rentals plus additional rent based on flight
hours, as defined.
In February 1996, the Company purchased three Boeing 747 aircraft which were
under operating leases as of December 31, 1995. For two of the aircraft the
basic monthly rent was determined based on airframe hours flown, and the other
was leased at a fixed monthly rental plus additional rent based on flight hours.
In October, the Company sold, in a sale and leaseback transaction, the three
Boeing 747 aircraft. (See Note 2). Under the terms of the lease agreement,
monthly rentals are at fixed rates with increase provisions based on the
performance of certain maintenance work, as defined in the agreement. In
addition, the Company must maintain certain financial covenants, as defined in
the agreement.
In February 1996, the Company amended one of the power by the hour leases to a
fixed rate lease commencing April 1, 1996. In January 1997, the Company
extended the lease of this aircraft to August 31, 1997.
In February 1996, the Company returned one Boeing 747 aircraft, leased at a
fixed rate, to its lessor.
In May 1996, the Company purchased one Boeing 747 aircraft, which it had been
leasing under a fixed rate plus additional rent based on flight hours.
In October 1996, the Company returned one Boeing 747 aircraft, leased at a power
by hour rate, to the lessor.
Substantially all of its aircraft leases require that the Company pay the lessor
for maintenance reserves based on the number of airframe and engine flight hours
accumulated at specified rates per hour, as defined in the agreements.
F-13
<PAGE>
At December 31, 1996, minimum annual rental commitments under noncancelable
operating leases were approximately as follows (in thousands):
<TABLE>
<CAPTION>
Flight Ground Property
Equipment and Equipment Total
--------- --------------- -------
<S> <C> <C> <C>
1997 $14,924 $ 4,527 $19,451
1998 10,564 4,897 15,461
1999 9,056 5,088 14,144
2000 4,951 5,047 9,998
2001 - 5,047 5,047
Thereafter - 7,149 7,149
------- ------- -------
$39,495 $31,755 $71,250
======= ======= =======
</TABLE>
Rent expense amounted to approximately $22,600,000, $31,300,000 and $21,800,000
for the years ended December 31, 1996, 1995 and 1994, respectively. These
amounts include flight equipment rental expense of $17,100,000, $25,800,000 and
$16,300,000 and ground property and equipment rentals of $5,500,000, $5,500,000
and $5,500,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
In September 1993, the Company entered into a five-year lease agreement with the
Port Authority for a terminal facility at John F. Kennedy International Airport.
Under the terms of the lease, the Company pays a base rent plus additional
rentals based on the number of arriving and departing passengers above an annual
exemption amount and percentages of additional terminal revenues, as defined in
the agreement. For the period from November 17, 1995 through November 16, 1998,
the Company will only be responsible for the base rent. In January 1995, the
Port Authority extended the lease term through April 30, 2003.
The Company has an employment agreement with an officer which has a term of five
years commencing in October 1993. Base salary is set at $1,000,000 per annum.
The contract is automatically extended for additional terms of one year unless
the officer or the Company elects that there shall be no such extension. In
addition, if a change in control (as defined in the agreement) occurs during the
five-year term of the agreement, such term shall automatically be extended to
include the five-year period commencing on the date on which the change in
control occurs. The agreement further provides that if, prior to a change in
control, the Company terminates the officer's employment, then the Company will
pay him his base salary through such termination date plus the product of the
sum of the officer's annual base salary and the average of the annual bonuses,
if any, actually paid to the officer with respect to the two years of his term
immediately preceding the year of the term in which the date of termination
occurs, and the number of years (including partial years) remaining in the term.
If, subsequent to a change in control, the Company terminates the officer or if
the officer resigns, then the Company will pay his base salary through such
termination date and an amount equal to the product of 2.99 and the officer's
base amount as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended.
As of December 31, 1996, the Company had 1,681 employees, 1,301 of which were
full time and 380 of which were part time. Of the full time employees, 428
belong to the Association of Flight Attendants (AFA) and 205 are members of an
in-house union, Tower Air Cockpit Crew Association, Inc. (TACCA).
5. SAVINGS AND RETIREMENT PLAN
The Company sponsors a number of defined contribution pension plans which are
available to substantially all full-time employees. For the years ended
December 31, 1996, 1995 and 1994, the Company's contributions, which are
principally based on a percentage of an employee's annual compensation, amounted
to approximately $309,000, $570,000 and $390,000, respectively. Effective
January 1995, the Company also has a nonqualified deferred compensation plan
which
F-14
<PAGE>
contains a Company match portion and permits highly compensated employees as
defined in the plan to annually elect to defer a portion of their compensation
until their retirement. Effective December 31, 1996, the Company terminated
this plan.
6. BUSINESS SEGMENTS AND CONCENTRATION OF CREDIT RISK
Under Statement of Financial Accounting Standards No. 14, "Financial Reporting
of Business Segments", the Company operates in one business segment which is the
common carriage of passengers, freight and mail over various worldwide routes
authorized by the Civil Aeronautics Board.
The assets of the Company, principally flight equipment, support the entire
worldwide transportation system and are not readily identifiable by geographic
area. Total ground property and equipment situated in foreign locations is not
significant.
Sales with foreign destinations and/or arrivals accounted for 70%, 77% and 75%
of total revenues for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Israel market, Tower's largest scheduled passenger service revenue source,
is composed primarily of individuals and groups who travel for religious
reasons, vacations or business. This market historically has been characterized
by a relatively stable travel pattern. From time to time, security concerns in
Israel have resulted, and may continue to result, in oscillations in demand.
The U.S. Government and its agencies accounted for all revenue from military
charters. At December 31, 1996 and 1995 accounts receivable from the U.S.
government and its agencies were approximately $1,300,000 and $3,400,000
respectively.
7. STOCK OPTIONS AND AWARDS
The Company has authorized 1,200,000 shares of common stock for issuance of
awards under a Long-Term Incentive Plan (the "Plan"). Generally, options will
be granted with an exercise price not less than the fair market value, as
defined in the plan, on the date of grant.
As permitted by FASB 123, the Company elected to record compensation expense
related to stock options in accordance with the provisions of APB 25. If the
Company had elected to record compensation expense using a fair value method as
prescribed by FASB 123, no material difference in net loss would have resulted.
While the effects of applying FASB 123 for providing proforma information for
1996 and 1995 were not material, such may not be representative of the effects
on reported net income for future periods.
F-15
<PAGE>
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Outstanding Options Exercise Weighted
Price per Average
Option Exercise Price
-----------------------------------------------------
<S> <C> <C> <C>
At December 31, 1993 40,000 $13.88 to $14.25 $ 13.97
Granted 231,312 $ 7.00 to $14.50 $ 10.74
-----------------------------------------------------
At December 31, 1994 271,312 $ 7.00 to $14.50 $ 11.21
Granted 277,288 $ 7.50 to $ 8.25 $ 8.14
Cancelled (124,202) $ 7.00 to $14.50 $ 8.08
-----------------------------------------------------
At December 31, 1995 424,398 $ 7.00 to $14.50 $ 10.13
Granted 448,067 $ 4.50 to $ 7.00 $ 6.45
Cancelled (138,615) $ 7.00 to $14.50 $ 10.09
-----------------------------------------------------
At December 31, 1996 733,850 $ 4.50 to $14.50 $ 7.89
=====================================================
Exercisable at
December 31, 1994 13,333 $13.88 to $14.25 $ 13.97
=====================================================
Exercisable at
December 31, 1995 86,885 $ 8.00 to $14.50 $ 12.84
=====================================================
Exercisable at
December 31, 1996 169,302 $ 8.25 to $14.50 $ 11.37
=====================================================
</TABLE>
The outstanding options expire at various times during the period from November
2003 through October 2006.
8. ACCRUED LIABILITIES
The components of accrued liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------------- -------
<S> <C> <C>
Accrued maintenance $22,975 $ 8,977
Other accrued operating expenses 9,396 11,875
Other 7,672 12,651
-------------- -------
$40,043 $33,503
============== =======
</TABLE>
9. CONTINGENCIES
On October 31, 1995, the Company entered into a settlement (the "Settlement") of
an action entitled In Re Tower Air, Inc. Securities Litigation (the "Securities
-------------------------------------------
Litigation"), a consolidated class action filed in the U.S. District Court for
the Eastern District of New York. The Securities Litigation arose out of the
November 1993 initial public offering of shares of the Company's common stock.
The Settlement was approved by the District Court on February 9, 1996.
William Branch, the plaintiff in another action containing similar allegations,
which action was dismissed in conjunction with the Settlement of the Securities
Litigation, objected to the Settlement and appealed from the order of the
District Court approving it.
On November 13, 1996, the United States Court of Appeals for the Second Circuit
affirmed the judgment of the District Court approving the Settlement. On
February 11, 1997, Branch filed a Petition for a Writ of Certiorari with the
Supreme Court of the United States.
F-16
<PAGE>
A Tower Air aircraft slid off the runway on takeoff on December 20, 1995, and
came to a stop. Approximately 35 passengers were taken to hospitals and
discharged the same day. One was kept overnight. The remaining approximately
415 passengers were not injured. All claims and lawsuits are being handled by
the Company's insurance carrier. The Company believes that all claims resulting
from this event remain fully covered under the Company's insurance policies.
The Company is a party to various litigations which arise in the ordinary
conduct of its business. The Company believes that these actions will not have
a material adverse effect on the Company's financial position or results of
operations.
10. OTHER EXPENSES (INCOME)
Interest and other income includes a non-operating gain of $9,200,000
($5,520,000 net of tax expense), recorded in the fourth quarter of 1995,
resulting from an excess of insurance proceeds over the net book value of
certain flight equipment related to the loss of an owned aircraft operated by
the Company.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly financial data for 1996 and 1995 is as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1996
- ----
Operating revenues $ 85,824 $113,910 $148,858 $ 69,227
======== ======== ======== ========
Operating income (loss) $(13,139) $ 5,146 $ 3,479 $(19,012)
======== ======== ======== ========
Net income (loss) $ (8,134) $ 2,923 $ (1,596) $(14,076)
======== ======== ======== ========
Net income (loss) per share $ (.53) $ .19 $ (.10) $ (.92)
======== ======== ======== ========
1995
- ----
Operating revenues $ 82,093 $127,555 $169,502 $111,322
======== ======== ======== ========
Operating income (loss) $ (6,649) $ 8,838 $ 21,086 $ (9,759)
======== ======== ======== ========
Net income (loss) (a) $ (3,581) $ 4,010 $ 11,141 $ (881)
======== ======== ======== ========
Net income (loss) per share $ (.23) $ .26 $ .73 $ (.06)
======== ======== ======== ========
</TABLE>
(a) As referred to in Note 10, the fourth quarter of 1995 includes a non-
operating gain of $5,520,000, net of tax expense, resulting from an excess of
insurance proceeds over the net book value of certain flight equipment related
to the loss of an owned aircraft operated by the Company.
F-17
<PAGE>
12. RECEIVABLES
The components of receivables were as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1996 1995
-----------------------
<S> <C> <C>
Trade receivables $ 20,517 $ 28,694
Maintenance receivables 8,596 725
-----------------------
29,113 29,419
Less: Allowance for doubtful accounts (1,201) (1,488)
-----------------------
$ 27,912 $ 27,931
=======================
</TABLE>
F-18
<PAGE>
SCHEDULE II
TOWER AIR, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD EXPENSES DEDUCTIONS(A) END OF PERIOD
- --------------------------------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994 $ 201 $ 800 $ 604 $ 397
Year ended December 31, 1995 $ 397 $1,634 $ 543 $1,488
Year ended December 31, 1996 $1,488 $1,009 $1,296 $1,201
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
F-19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Dated: March 25, 1997 TOWER AIR, INC.
By:/s/ MORRIS K. NACHTOMI
----------------------------
Morris K. Nachtomi
President, Chief Executive
Officer and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on March 25, 1997 on behalf of the
Registrant and in the capacities indicated.
/s/ MORRIS K. NACHTOMI
- ------------------------------- President, Chief Executive
Morris K. Nachtomi Officer and Chairman of the
Board of Directors (Principal
Executive Officer)
/s/ RAMESH PUNWANI
- ------------------------------- Chief Financial Officer and
Ramesh Punwani Vice President-Finance
(Principal Financial and
Accounting Officer)
/s/ STEPHEN L. GELBAND
- ------------------------------- Director
Stephen L. Gelband
/s/ STEPHEN A. OSBORN
- ------------------------------- Director
Stephen A. Osborn
/s/ HENRY P. BAER
- ------------------------------- Director
Henry P. Baer
/s/ STANLEY S. SHUMAN
- ------------------------------- Director
Stanley S. Shuman
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
<S> <C>
3(1)* Restated Certificate of Incorporation of the
Company
3(2)* By-Laws of the Company
10(1)* Employment Agreement between the Company and
Morris K. Nachtomi
10(2)P Employment Agreement between the Company and
Ramesh Punwani
10(3)* Tower Air 1993 Long-Term Incentive Plan
10(4)* Tower Air, Inc. Executive Annual Incentive Plan
10(5)P Heller Financial Inc. -- Loan and Security Agreement,
Dated December 1, 1996
10(6)P Heller Financial Inc. -- First Amendment Loan and Security
Agreement, Dated January , 1997
10(7)P Heller Financial Inc. -- Second Amendment to Loan and
Security Agreement, Dated March 13, 1997
10(8)P Sanwa Business Credit Corp. -- Trust Agreement
and Supplement, Dated October 1, 1996
10(9)P First Security Bank, National Association --
Aircraft and Airframe Purchase and Sale Agreement,
Dated October 1, 1996
10(10)P Finova Capital Corporation -- Consolidated Aircraft
and Engine Loan and Security Agreement,
Dated March 25, 1996
10(11)P Finova Capital Corporation -- $20,000,000 Loan
Secured by Two B747 Aircraft and Eight Engines,
Dated January 30, 1996
10(12)P Finova Capital Corporation -- First Amendment to Consolidated
Aircraft and Engine Loan and Security Agreement, Dated
May 8, 1996
11 Computation of Net Income Per Share
27 Financial Data Schedule for the year ended December 31, 1996
</TABLE>
- ----------------
* Previously filed as an Exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 33-69148) or amendments thereto and incorporated by
reference herein.
<PAGE>
EXHIBIT 11
----------
TOWER AIR, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Net income (loss) $(20,883) $10,689 $ 568
======== ======= =======
Average common shares outstanding 15,290 15,290 15,376
Net shares to be issued upon exercise
of dilutive stock warrants and options
after applying treasury stock method 0 15 20
-------- ------- -------
Adjusted shares outstanding 15,290 15,305 15,396
======== ======= =======
Net income per share $ (1.37) $ .70 $ .04
======== ======= =======
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
Exhibit 27. Financial Data Schedule
<ARTICLE> 5
Tower Air, Inc.
Financial Data Schedule
Pursuant to Item 601(c) of Regulation S-K
This schedule contains summary financial information extracted from
the financial statements included in the Form 10-K for the
fiscal year ended December 31, 1996.
<CAPTION>
Item Number Item Description Amount
<S> <C> <C>
5-02(1) Cash and Cash Items $ 2,968,000
5-02(2) Marketable Securities 275,000
5-02(3)(a)(1) Notes and Accounts Receivable-Trade 29,113,000
5-02(4) Allowances for Doubtful Accounts 1,201,000
5-02(6) Inventory 0
5-02(9) Total Current Assets 42,654,000
5-02(13) Property, Plant and Equipment 353,525,000
5-02(14) Accumulated Depreciation 135,467,000
5-02(18) Total Assets 263,255,000
5-02(21) Total Current Liabilities 126,850,000
5-02(22) Bonds, Mortgages and Similar Debt 85,010,000
5-02(28) Preferred Stock-Mandatory Redemption 0
5-02(29) Preferred Stock-No Mandatory Redemption 0
5-02(30) Common Stock 155,000
5-02(31) Other Stockholder's Equity 56,183,00
5-02(32) Total Liabilities and Stockholders' Equity 263,255,000
5-03(b)1(a) Net Sales of Tangible Products 0
503(b)1 Total Revenues 417,819,000
5-03(b)2(a) Cost of Tangible Goods Sold 0
5-03(b)2 Total Costs and Expenses Applicable to
Sales and Revenues 441,345,000
5-03(b)3 Other Costs and Expenses 0
5-03(b)5 Provision for Doubtful Accounts and Notes 0
5-03(b)(8) Interest and Amortization of Debt Discount 8,114,000
5-03(b)(10) Income Before Taxes and Other Items (32,389,000)
5-03(b)(11) Income Tax Expense (11,506,000)
5-03(b)(14) Income/Loss Continuing Operations (20,883,000)
5-03(b)(15) Discontinued Operations 0
5-03(b)(17) Extraordinary Items 0
5-03(b)(18) Cumulative effect-Changes in Accounting
Principles 0
5-03-(b)(19) Net Income or Loss (20,883,000)
5-03-(b)(20) Earnings Per Share-Primary (1.37)
5-03(b)(20) Earnings Per Share-Fully Diluted (1.37)
</TABLE>
