<PAGE>
[LOGO OF TOWER AIR]
1997 ANNUAL REPORT
<PAGE>
FINANCIAL AND OPERATING HIGHLIGHTS
Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues.......................... $ 461,502 $ 417,819 $ 490,472 $ 367,984 $ 341,835
Operating expenses.......................... $ 454,050 $ 441,345 $ 476,956 $ 363,192 $ 317,357
Operating income (loss)..................... $ 7,452 $ (23,526) $ 13,516 $ 4,792 $ 24,478
Net income (loss)........................... $ (3,895) $ (20,883) $ 10,689 $ 568 $ 9,933
Net income (loss) per share................. $ (0.25) $ (1.37) $ 0.70 $ 0.04 $ 0.78
Property and equipment, net................. $ 266,395 $ 218,058 $ 147,202 $ 133,741 $ 120,266
Total assets................................ $ 310,120 $ 263,255 $ 210,547 $ 177,877 $ 191,644
Long-term debt.............................. $ 63,321 $ 67,716 $ 23,594 $ 21,065 $ 30,656
Stockholders' equity........................ $ 49,421 $ 53,316 $ 76,034 $ 67,792 $ 71,190
<CAPTION>
OPERATING DATA FOR SCHEDULED PASSENGER SERVICES
<S> <C> <C> <C> <C> <C>
Revenue passengers carried (000s)........... 1,308 1,194 1,194 925 594
Revenue passenger miles (RPMs) (000s)....... 3,578,714 3,332,477 3,601,323 2,758,753 1,867,827
Available seat miles (ASMs) (000s).......... 4,685,022 4,626,478 4,810,710 3,715,993 2,345,204
Passenger load factor....................... 76% 72% 75% 74% 80%
Yield per RPM............................... $ 0.0747 $ 0.0742 $ 0.0751 $ 0.0749 $ 0.0820
Block hours flown........................... 21,949 21,991 22,094 17,172 10,916
Employees (at year-end)..................... 1,969 1,681 1,842 1,367 1,176
Number of aircraft in service (at year-end). 17* 17* 17 16 15
</TABLE>
* "Number of aircraft in service" for 1997 and 1996 includes a cargo aircraft
which is temporarily out of service to satisfy a certain Airworthiness
Directive requirement.
- ----------------------------------
A DESCRIPTION OF OUR COMPANY
Tower Air, Inc. provides scheduled and charter passenger airline service and
cargo service in diverse international and domestic markets. Tower's principal
business strategy is to provide long-haul, unrestricted low-fare air service
tailored primarily to ethnic and family travelers. The company concentrates its
scheduled service both in markets which support consistent year-round travel
patterns and those with heavy seasonal travel activity.
Tower provides charter air service for domestic and foreign tour operators, the
United States military, the United Nations and others. The Company also operates
all-cargo service on certain routes and provides third party maintenance service
at its John F. Kennedy facility. Tower's fleet consists exclusively of Boeing
747 jetliners and presently includes 15 passenger and 2 cargo aircraft.
<PAGE>
[LOGO OF TOWER AIR]
CHAIRMAN'S LETTER
Dear Shareholder:
Having overcome the extraordinary challenges of 1996, Tower Air focused its
undivided efforts in 1997 on realizing additional efficiencies in order to
improve operating income and to position the airline for a return to
profitability. Tower Air's $30.98 million improvement in operating income
indicates that these cost efficiencies have produced the first tier of results;
but with a net loss of $3.89 million, these results alone are not enough.
We look forward to continuing 1997's increase in revenue per available seat mile
into 1998 through improved yield management, the addition of new markets, and
increased frequencies in the markets we presently serve. In particular, we have
recently received the government approvals necessary to initiate scheduled
passenger service between Paris, France and Tel Aviv, Israel. Our persistent
efforts in this regard which have taken over nine years will, for example, allow
Tower customers to combine a visit to Europe with a trip to Israel as well as
allow the airline to participate in the substantial travel market between France
and Israel.
Revenues from Tower Air's market-customized scheduled service were enhanced in
1997 by additional passenger aircraft wet leases and cargo service revenues.
Although cargo revenues continue to be impacted by the prolonged grounding of
one of our B747-100 aircraft for which we are still awaiting FAA approval of the
necessary modifications in order to return the aircraft to service, we believe
that the new cargo aircraft wet lease provides for improved utilization of the
airline's other B747-100 freighter and the recently converted B747-200
freighter. We further believe that Tower's fifteen year operating experience
and low overall cost structure will allow us to compete in the cargo aircraft
wet lease market. Either through the conversion of existing aircraft or of
additional B747-200s, this market segment constitutes a growing business
opportunity for Tower.
Tower Air's ability to manage cash flow in 1997 continued to be affected by a
significant number of heavy maintenance "C" and "D" checks on aircraft and the
upgrade and overhaul of several engines. With the heavy maintenance work
substantially behind us, Tower Air should realize the operational and fiscal
benefits of this investment in 1998 and beyond.
The momentum achieved during 1997 is carried into 1998 by a management team
directed on a day-to-day basis by Tower's new President and Executive Vice
President Operations, Terry Hallcom. Terry's many years of management
experience as an airline executive and a pilot is anticipated to further improve
Tower Air's service and low-cost
<PAGE>
structure. Having achieved outstanding success in the competitive shuttle market
between New York and Washington and New York and Boston, Terry Hallcom has a
first-hand appreciation for safe, reliable, and cost-efficient operations.
As we look back on 1997 and forward into 1998, we are confident that Tower Air's
basic strategy is on course and the company is positioned for profitable growth.
Sincerely,
/s/ Morris K. Nachtomi
Morris K. Nachtomi
Chairman and Chief Executive Officer
<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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____TO____.
COMMISSION FILE NUMBER 0-22526
TOWER AIR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2621046
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
HANGAR NO. 17
J.F.K. INTERNATIONAL AIRPORT
JAMAICA, N.Y.
(Address of principal executive offices) 11430
(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 the voting Common Stock, par value $.01 per
share, held by non-affiliates (based upon the closing sale price on the NASDAQ
National Market) on February 27, 1998 was approximately $21,904,188. As of
February 27, 1998, there were 15,319,700 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 1998
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 entirely of Boeing 747 (B747)
aircraft. Scheduled international passenger routes include service between New
York and Tel Aviv, Israel; New York and Athens, Greece; New York and Paris,
France; and from New York to and between Athens and Tel Aviv. Scheduled domestic
passenger routes include service between New York and Las Vegas, Los Angeles,
Miami, San Francisco, and San Juan, Puerto Rico. The Company provides charter
air service for several major United States and foreign tour operators, and is a
major passenger charter service provider to the United States military and the
International Organization For Migration (IOM). During 1997, Tower also
operated all-cargo service primarily between New York and Hong Kong. For 1998,
Tower has entered into an agreement for the lease of two Tower Air cargo
aircraft with crew for a period of one year with a South American cargo airline,
extendible by mutual agreement. In addition, Tower provides ad hoc third party
maintenance service at its JFK facility.
2
<PAGE>
As of December 31, 1997, 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, Las
Vegas, Los Angeles, San Francisco, San Juan, Athens, Tel Aviv and Paris.
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 Hajj, 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 sub-contracting 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 entirely 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 using its aircraft cost-efficiently. Tower's low cost
structure is demonstrated by its operating expense per scheduled service
Available Seat Mile (ASM) statistics in recent years: 1997-$.0527; 1996-$.0538;
1995-$.0477; 1994-$.0463; 1993-$.0531.
* CUSTOMER APPEAL. Tower appeals to travelers primarily by offering low fares
with few or no restrictions (e.g. minimum stay or advance purchase requirements)
in its 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 to its military customers by
responding quickly to varying
3
<PAGE>
logistical demands. The Company emphasizes competitive prices and comfortable
aircraft with service comparable to that offered by carriers with higher fares.
On scheduled 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 1997 were approximately
$120.3 million, or 26.1% 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 meet
demand. The Company's operating flexibility has allowed it to respond over its
15-year operating history to fluctuating fuel costs, increasingly price-
conscious consumers and the significant variability in demand experienced in
certain markets such as in its 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, Puerto Rico, Israel, Greece
and France.
The Company's annual advertising plan includes direct advertising through
television, radio and print media to promote its product. The campaign focuses
on the Company's vast experience, its fleet and low fares, and promotes 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 operations. The following
table sets forth the Company's total revenues for each major service category:
4
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Scheduled passenger service $ 267.3 $ 247.2 $ 270.3
Commercial charter service 103.4 84.4 100.8
Military charter service 67.9 64.4 87.5
Cargo service 13.8 14.1 24.0
Other 9.1 7.7 7.9
-------------- ------------- ---------------
Total operating revenues $ 461.5 $ 417.8 $ 490.5
============== ============= ===============
</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 57.9% of the
Company's total revenues for the year ended December 31, 1997. 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,
-------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NY/Tel Aviv $ 112.8 24.4% $ 94.2 22.6% $ 99.2 20.2%
NY/Paris 24.7 5.3 23.7 5.7 26.7 5.5
NY and/or Miami/Sao Paulo/Rio de
Janeiro (1) 4.2 0.9 17.7 4.2 10.9 2.2
NY/Amsterdam/Bombay (2) -- -- 6.0 1.4 25.6 5.2
NY/Amsterdam/Delhi (3) -- -- -- -- 13.2 2.7
Miami/Los Angeles (4) -- -- -- -- 1.0 0.2
NY/Athens 8.2 1.8 -- -- -- --
NY/San Juan 30.7 6.7 21.2 5.1 17.7 3.6
NY/Miami 27.4 5.9 21.5 5.1 27.2 5.6
NY/Los Angeles 32.4 7.0 39.5 9.5 34.8 7.1
NY/Las Vegas 2.1 0.5 -- -- -- --
NY/San Francisco (5) 24.4 5.3 19.6 4.7 11.5 2.3
Miami/San Juan(6) 0.4 0.1 3.3 0.8 -- --
Other (7) -- -- 0.5 0.1 2.5 0.5
-------------------------------------------------------------------------
$ 267.3 57.9% $ 247.2 59.2% $ 270.3 55.1%
=========================================================================
</TABLE>
1) Service expanded in December 1995 with continuation to Rio de Janeiro.
Service to Rio de Janeiro discontinued August 1996. Tower's route authority
to Brazil expired in March 1997; Tower discontinued scheduled passenger
service to Brazil in March 1997.
2) Service commenced in December 1994 and discontinued in March 1996.
5
<PAGE>
3) Service commenced in April 1994 and discontinued in September 1995.
4) Service discontinued in January 1995.
5) Service to San Francisco discontinued April 1996 and was resumed in
April 1997; service to Oakland commenced April 1996 and was discontinued in
March 1997.
6) Service commenced in June 1996 and discontinued in February 1997.
7) Includes revenues generated by certain discontinued routes.
INTERNATIONAL MARKET - Tower operated 56.1% of its scheduled passenger service,
measured in 1997 revenues, between New York and various international
destinations, and between Athens and Tel Aviv. The frequency of Tower's flights
varies between the peak summer season and the off-season based on traffic
demand.
The Israel passenger 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 variations in
demand.
The Department of Transportation (DOT) decided not to renew Tower's route
authority to Brazil and it expired on March 31, 1997. The Company discontinued
all scheduled passenger service to Brazil effective March 13, 1997.
Tower was granted authority to operate scheduled service to and between Athens,
Greece and Tel Aviv, Israel. The Company received this authority in March 1997,
and commenced service on this route following receipt of foreign government
approvals.
Tower was granted an exemption to serve New York to Cairo on July 31, 1997, a
route permitted under the current US-Egypt bilateral. Tower has not yet
implemented this authority.
Tower was granted an exemption to serve New York to Kiev on September 20, 1997,
a route permitted under the current US-Ukraine bilateral. Tower has not yet
implemented this authority.
DOMESTIC MARKET - Tower operated 43.9% of its scheduled passenger services,
measured in 1997 revenues, within domestic markets.
Three major domestic routes (New York/San Juan, New York/Miami and New York/San
Francisco) had higher traffic in 1997 relative to 1996.
The Company resumed non-stop flights between New York and San Francisco in April
1997.
6
<PAGE>
The Company believes that by increasing its sales and marketing efforts,
including continued 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 and South
American destinations. For the year ended December 31, 1997, the charter market
represented approximately 22.4% 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 IOM.
The majority of the Company's commercial charter agreements are fixed-price-per-
flight agreements, negotiated and contracted in advance. The Company generally
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 Athens each developed from strong charter operations to those
destinations.
Charter agreements also provide for the transport of religious pilgrims on the
Hajj pilgrimage to the Middle East that occurs once a year. From March through
May 1997, the Company operated nine aircraft for this purpose. The Company is
operating and expects to continue operating under charter agreements with two
airlines, seven aircraft from March through May 1998.
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 1996 and 1997, the number of military passengers transported by the
Company for AMC and MTMC decreased 9.1% from approximately 176,000 to
approximately 160,000 as a result of
7
<PAGE>
weaker demand for military charters. For the year ended December 31, 1997, the
AMC and MTMC markets represented approximately 14.7% 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), under which Tower acquired UAL's military
entitlement for one year periods 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
In 1997, Tower operated all-cargo service primarily between New York and Hong
Kong. For the year ended December 31, 1997, the cargo service market
represented approximately 3.0% of the Company's total revenues. For 1998, Tower
has entered into an agreement for the lease of two Tower Air cargo aircraft with
crew for a period of one year with a South American cargo airline, extendible by
mutual agreement. The Company's cargo aircraft fleet also enables Tower to
participate in the military cargo charter market.
8
<PAGE>
As of February 28, 1998, 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 still awaiting FAA-approved
technical specifications.
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 at
JFK on an ad hoc basis. For the year ended December 31, 1997, belly cargo and
other services contributed 2.0% of the Company's total revenues.
COMPETITION
The airline industry is highly competitive, 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 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 government agreements. Such agreements
are negotiated by governments on behalf of their nations' air carriers. In
certain markets, these 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.
9
<PAGE>
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 offer discounted seats 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 U.S. 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, 1998. 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 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
10
<PAGE>
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. Some
of the Company's 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 1997, a period during which
the Company transported in excess of 1.93 million total passengers, the DOT
recorded a total of 143 consumer complaints concerning the Company, resulting in
a complaint rate of 7.42 per 100,000 passengers transported. This rate compares
with an average consumer complaint rate of .94 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 these procedures take full effect, the
Company believes that it will continue to 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 also has issued a series of Airworthiness Directives (ADs) under its
"Aging Aircraft" program which are applicable to the Company's aircraft. These
ADs call for extensive aircraft
11
<PAGE>
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.
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.
12
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had 1,969 employees (including foreign
stations), 1,470 of which were full time and 499 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 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 1993 rates of pay received by
Tower flight attendants. The agreement became effective on April 11, 1997.
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. Direct negotiations with TACCA continued
until July 1997. The Association then applied for Federal mediation during the
same month. Mediation is expected to continue well into 1998, however, the
Company expects mediation to conclude sometime during 1998.
All Company full time employees are covered by comprehensive health and life
insurance plans and all Company 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, 1998, the Company operated a fleet of seventeen B747 aircraft
(fifteen passenger aircraft and two cargo aircraft). The Company is going to
operate a fleet of nineteen B747 aircraft (sixteen passenger aircraft and three
cargo aircraft) during or beyond March 1998. 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 entirely 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 is now under "power by the
hour" where the basic monthly rent is determined by multiplying the airframe
hours flown during the
13
<PAGE>
month by specified rates, as defined in the agreement, and this lease will be
converted to fixed monthly rental in November 1998. Under the terms of two of
the lease agreements, monthly rentals are at fixed rates, and one of these two
aircraft also requires an additional rent based on flight hours flown during the
month in excess of minimum monthly requirements, as defined in the agreement.
Under the terms of one lease agreement which required a fixed rent rate to a
rate per hour alternatively every six months until 1999 is now being converted
to a freighter and the lease term is amended to fifteen years with monthly
rental at a fixed rate commencing upon completion of the cargo conversion
which has occurred in March 1998. In addition, three aircraft are being leased
under a "sale leaseback transaction" where the monthly rentals are at fixed
rates.
In November and December 1997, respectively, the Company entered into two new
lease agreements with respect to two B747-200 passenger aircraft. Under the
terms of these new lease agreements, monthly rentals are at fixed rates.
For the year ended December 31, 1997, the Company's average daily utilization
for its aircraft was 9.6 hours per operating day, with an average flight
duration of 8.6 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 3/95 2/80
B747-200* Leased -- 11/80
B747-200* Leased -- 10/81
B747-200** Leased 2/95 6/79
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cargo Aircraft
B747-100*** Owned 8/93 2/70
B747-100 Owned 8/95 3/70
</TABLE>
* Newly acquired leased aircraft to be placed on certificate
March 1998 and beyond.
** Converted to cargo aircraft, previously operated as
passenger aircraft
***Temporarily out of service to satisfy a certain AD requirement.
For information concerning aircraft subject to liens, see Note 2 to the
Financial Statements.
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 the 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
and engine overhaul 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, Las Vegas, Tel Aviv, Paris and Athens.
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.
15
<PAGE>
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 Appeals for the Second Circuit affirmed the order and
judgment of the district court approving the Settlement.
On April 14, 1997, the Supreme Court of the United States denied Branch's
Petition for Writ of Certiorari, which sought review of that affirmance.
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 Complaint seeks damages in excess of $2.3 million for the breach of contract
claim, approximately $1.5 million on various tort theories and an unspecified
amount of punitive damages. On April 16, 1997, pursuant to a stipulation, the
plaintiff voluntarily withdrew a cause of action that alleged that the
termination of the Contract resulted from certain complaints by the plaintiff.
Such stipulation was entered into by the Company in connection with settlement
negotiations which ceased in June 1997. On July 1, 1997, the Company filed its
Answer to the Complaint along with Counterclaims against the plaintiff in
amounts equal to or exceeding the amount sought in the complaint. The Company
believes it has good defenses to each and every allegation in the Complaint and
has asserted counterclaims against the plaintiff in amounts equal to or
exceeding the amounts sought in the Complaint.
On or about August 8, 1997, the Company was served with a lawsuit filed in the
Superior Court for the State of Delaware in and for New Castle County, entitled
UNC Camco Incorporated, et. al. v. Tower Air, Inc. This action seeks damages of
- --------------------------------------------------
approximately $906,000 for the value of various repair and maintenance services
16
<PAGE>
allegedly performed by UNC Camco and certain of its affiliates (the "UNC
Plaintiffs") over a period of several years. The Company answered the Complaint
on October 14, 1997 and asserted counterclaims against the UNC Plaintiffs for,
among other things, failure to repair and/or overhaul certain component parts in
accordance with the manufacturer's specifications and using substandard parts.
No formal discovery has yet been conducted in this matter. The Court held a
preliminary scheduling conference on November 24, 1997 and set a tentative trial
date of February 8, 1999. Based on the Company's investigation to date, the
damages incurred by the Company as asserted in the counterclaims are equal to or
exceed the damages sought in the Complaint.
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 Military Airlift Command (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. A tentative settlement of both of these cases was reached on
February 9, 1998.
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 was a Defendant in a Texas State Court action filed in May 1996,
entitled Dee Howard Company v. Tower Air, Inc., in which the plaintiff contended
--------------------------------------
that the Company did not pay it sufficient amounts for maintenance, repair and
modification work performed on the Company Aircraft. The amount claimed was
approximately $1,000,000. The case went to arbitration and a settlement was
entered into on August 1, 1997. The case has been dismissed with prejudice.
17
<PAGE>
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 stage. This case
is being vigorously contested by the Company.
The Company was a defendant in a New York State Court action filed in September
1995, entitled Pacific Harbor Capital, Inc. v. Tower Air, Inc., in which the
------------------------------------------------
plaintiff contended 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
was over which party, under the terms of the Lease, was responsible for the
damage. Plaintiff's claim, including requested attorneys' fees, was
approximately $2,300,000. The case went to trial in November 1997 and a verdict
was rendered by the Court in favor of the Company on December 2, 1997. As a
result, no monies have been paid or are due to Pacific Harbor Capital for its
claims. No appeal has been taken.
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 former 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. Since plaintiff already receives workmen's
compensation for the same injury, the Company's insurance carrier will be
handling the defense.
The Company is the defendant in a U.S. Federal Court action filed in the Eastern
District of New York on or about March 20, 1997, Solar Travel v. Tower Air, Inc.
-------------------------------
in which plaintiff contends that the Company unlawfully cancelled its contract
as General Sales Agent for India when the Company ceased flying scheduled
service to India. Damages of $20 million are sought. The Company has
counterclaimed in the amount of $25 million for damages resulting from
plaintiff's failure to perform its duties under the agreement. The case is
still in the discovery stage.
The Company is the defendant in a U.S. Federal Court action filed in the Eastern
District of New York on or about January 8, 1998, Leticia Parra, individually
---------------------------
and on behalf of all persons similarly situated v. Tower Air, Inc., in which
- -------------------------------------------------------------------
plaintiff alleges she was denied boarding and seeks designation as
representative of a similarly situated class of over 1,000 persons. Claim is
made for $1,000,000 for each class member. The Company has filed a Motion
18
<PAGE>
to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim
upon which Relief can be Granted. In response thereto, plaintiff has conceded
lack of federal jurisdiction and dismissal papers will be filed shortly. The
Company has been informed by plaintiff's counsel that the matter will be pursued
in state court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
<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 27, 1998 was 100. The quarterly price range
of the Company's Common Stock is shown in the following schedule:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ---------------------------------
QUARTER ENDED High Low High Low
------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
March 31 $ 4 3/16 $ 2 1/2 $ 7 5/8 $ 5 1/2
June 30 3 15/16 2 1/2 8 1/8 5
September 30 4 1/2 2 7/8 5 3/8 4 3/8
December 31 6 5/16 4 4 5/8 2 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 or during 1997
in order to conserve cash. The Company paid quarterly dividends for 1995 and
1994 aggregating $.16 per share for each year.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
None.
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, 1997 are derived from the financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors.
The earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128 Earnings Per
Share. For further discussion of earnings per share and the impact of Statement
No. 128, see the notes to the consolidated financial statements beginning on
page F-7.
20
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
FINANCIAL DATA: 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Operating revenues $ 461,502 $ 417,819 $ 490,472 $ 367,984 $ 341,835
Operating expenses 454,050 441,345 476,956 363,192 317,357
---------- ---------- ---------- ---------- ----------
Operating income (loss) 7,452 (23,526) 13,516 4,792 24,478
Other (income) expenses 12,342 8,863 (5,903) 3,169 5,528
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (4,890) (32,389) 19,419 1,623 18,950
Income tax provision (benefit) (995) (11,506) 8,730 1,055 9,017
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (3,895) $ (20,833) $ 10,689 $ 568 $ 9,933
========== ========== ========== ========== ==========
Net income (loss) per share $ (0.25) $ (1.37) $ 0.70 $ 0.04 $ 0.78
At Period-end
Cash and cash equivalents $ 3,922 $ 2,968 $ 3,521 $ 14,824 $ 44,310
Working capital (deficiency) $ (139,979) $ (84,196) $ (28,744) $ (30,585) $ (2,625)
Property and equipment, net $ 266,395 $ 218,058 $ 147,202 $ 133,741 $ 120,266
Total assets $ 310,120 $ 263,255 $ 210,547 $ 177,877 $ 191,644
Long-term debt $ 63,321 $ 67,716 $ 23,594 $ 21,065 $ 30,656
Stockholders' equity $ 49,421 $ 53,316 $ 76,034 $ 67,792 $ 71,190
OPERATING DATA:
Total:
Block hours flown 43,092 41,336 47,186 34,221 30,736
Revenue per block hour (1) $ 10,499 $ 9,922 $ 10,227 $ 10,601 $ 11,017
Variable expense per block hour (2) $ 6,643 $ 8,014 $ 7,964 $ 8,411 $ 8,418
Scheduled Passenger Services:
Revenue passengers carried(000s) 1,308 1,194 1,194 925 594
Revenue passenger miles (RPMs)(000s) 3,578,714 3,332,477 3,601,323 2,758,753 1,867,827
Available seat miles(ASMs)(000s) 4,685,022 4,626,478 4,810,710 3,715,993 2,345,204
Passenger load factor 76% 72% 75% 74% 80%
Yield per RPM $ 0.0747 $ 0.0742 $ 0.0751 $ 0.0749 $ .0820
Block hours flown 21,949 21,991 22,094 17,172 10,916
Operating revenue per ASM $ 0.0571 $ 0.0534 $ 0.0562 $ 0.0556 $ 0.0653
Operating expense per ASM (3) $ 0.0527 $ 0.0538 $ 0.0477 $ 0.0463 $ 0.0531
Total expense per ASM (4) $ 0.0606 $ 0.0615 $ 0.0581 $ 0.0570 $ 0.0636
Employees (at period-end) 1,969 1,681 1,842 1,367 1,176
Number of aircraft in service
(at period-end) 17* 17* 17 16 15
</TABLE>
* "Number of aircraft in service (at period-end)" for the year ended December
31, 1997 and 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.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
YEAR 2000
The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company has also
initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the
extent to which its operations are vulnerable should those organizations fail
to remediate properly their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff. The team's activities are designed to ensure that there
is no adverse effect on the Company's core business operation and that
transactions with customers, suppliers, and financial institutions are fully
supported. The Company is well under way with these efforts, which are
scheduled to be completed in early 1999. While the Company believes its
planning efforts are adequate to address its Year 2000 concerns, there can be
no guarantee that the systems of other companies on which the Company's
systems and operations rely will be converted on a timely basis and will not
have a material effect on the Company. The cost of the Year 2000 initiatives
is not expected to be material to the Company's results of operations or
financial position.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Company recorded a net loss of $3.9
million compared with a net loss of $20.9 million for the year ended December
31, 1996. The $17 million decrease in net loss was principally due to the
increase in revenue resulted from a strong Tel Aviv market, higher domestic
traffic and increased activities in commercial and military charters. In
addition, the 1997 loss was decreased due to renegotiated service contracts
which resulted in lower maintenance, passenger, and aircraft services costs,
partially offset by increased cost of flight equipment and engine rental to
support the Company's fleet in 1997. Overall operating margins increased from
(5.6%) in 1996 to 1.6% in 1997.
22
<PAGE>
OPERATING REVENUES. The Company's operating revenues for the year ended
December 31, 1997 increased $43.7 million, or 10.5%, to $461.5 million from
$417.8 for the year ended December 31, 1996.
Scheduled passenger service revenues for the year ended December 31, 1997
increased $20.1 million, or 8.1%, to $267.3 million from $247.2 million for
the year ended December 31, 1996. Scheduled passenger traffic (as measured in
revenue passenger miles) for 1997, increased by 7.4% on capacity, resulting
in a load factor of 76% compared to 72% for the year ended December 31, 1997.
Higher operating revenues for 1997 were attributable to increased frequencies
on existing routes which outperformed 1996 results. Tel Aviv market increased
demand contributed $18.6 million or 19.7% in revenue for 1997 over 1996. The
domestic markets such as Miami, San Juan and San Francisco also increased
during 1997 which resulted in an increase of $20.2 million or 32.4% in
revenue over 1996. The enhanced activities in these markets were partially
offset by discontinued Brazil scheduled service.
Commercial charter service revenues for 1997 increased $19 million, or 22.5%,
to $103.4 million from $84.4 million in 1996. Higher revenues for 1997 were
attributable to the Company's operation of nine aircraft, compared to eight
aircraft in 1996, while flying under charter agreements to transport seasonal
religious pilgrims to the Middle East.
Military charter service revenues for the year ended December 31, 1997
increased $3.4 million, or 5.3%, to $67.9 million from $64.5 million in 1996.
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 increase for the year is the result of an 8.1%
increase in AMC block hours partially offset by a decrease in MTMC block
hours flown on military charters.
Cargo service revenue for the year ended December 31, 1997 decreased $.3
million, or 1.8%, to $13.8 million from $14.1 million in 1996. The decrease
in cargo service revenue was primarily due to the grounding of one of the
Company's two B747-100 cargo aircraft to comply with restrictive
Airworthiness Directive (AD) requirements. In addition to the Company's
one B747-100 cargo aircraft, nine other cargo aircraft operated by other
carriers are also grounded and subject to the same AD. The return of the
grounded aircraft to full service is awaiting FAA approval of a repair
program and the production and installation of the necessary modifications.
OPERATING EXPENSES. The Company's operating expenses for the year ended
December 31, 1997 increased $12.7 million, or 2.9%, to $454.1 million from
$441.3 million for the year ended December 31, 1996. The increase in
operating expenses was primarily the result of an increase in block hours
flown of 4.2% during the
23
<PAGE>
year ended December 31, 19976. Operating expenses, excluding fuel and
depreciation, decreased by 1.3% in 1997. The decrease in operating expenses was
primarily due to the Company's improved financial controls, renegotiated service
contracts, fixed cost reductions and operational enhancements.
Aircraft fuel expenses for the year ended December 31, 1997 increased $3.2
million, or 3.9%, to $85.8 million from $82.6 million for the year ended
December 31, 1996. The variances resulted primarily from an 8.1% increase in
volume of gallons consumed, offset by a 4.0% decrease in the average cost per
gallon in 1997. The fuel consumption increase in 1997 resulted primarily
from a 4.2% increase in block hours.
Flight equipment rentals and insurance expenses for the year ended December
31, 1997 increased $5.1 million, or 25.6%, to $24.8 million from $19.7
million for the year ended December 31, 1996. The increases primarily
resulted from aircraft rentals associated with the sale and leaseback of
three Boeing 747 aircraft in October 1996 and charges associated with the
rental of additional spare engines to support the Company's fleet in 1997.
Maintenance costs for the year ended December 31, 1997 decreased $4.5
million, or 8.6%, to $48.5 million from $53.0 million for the year ended
December 31, 1996. The decrease was attributable to lower level of expenses
associated with parts repairs, loans, and exchanges due to renegotiated
contracts signed by the Company with various maintenance vendors in an effort
to control costs, partially offset by higher maintenance reserves associated
with engine rentals required to support the Company's fleet.
Crew costs and other expenses for the year ended December 31, 1997 increased
$2.6 million, or 10%, to $28.6 million from $26.0 million for the year ended
December 31, 1996. The increase was primarily due to the increase in overall
block hours flown and increases in pay rates as a result of longevity with
the Company.
Aircraft and traffic servicing expenses for the year ended December 31, 1997
decreased $6.9 million, or 8.3%, to $76.8 million from $83.7 million for the
year ended December 31, 1996. The decrease was attributable to
renegotiated ground handling and servicing contracts.
Passenger servicing expenses for the year ended December 31, 1997 decreased
$5.3 million, or 9.5% to $50.4 million from $55.6 million for the year ended
December 31, 1996. Decreases in passenger servicing expenses were the result
of the Company's cost control efforts which included a rationalization of its
domestic food service resulting in reduced catering costs and improved
catering inventory controls.
24
<PAGE>
Promotion, sales and commission expenses for the year ended December 31, 1997
increased $5.5 million, or 9.1%, to $66.2 million from $60.7 million for the
year ended December 31, 1996. The increases in promotion, sales and
commission expenses were the result of higher commission expenses due to
higher scheduled passenger service revenues and commercial charter service
Hajj revenues.
General and administrative expenses for the year ended December 31, 1997
decreased $.5 million, or 2.5%, to $20.7 million from $21.2 million for the
year ended December 31, 1996. As a percentage of operating revenue, general
and administrative expenses for 1997 were 4.5% compared with 5.1% for 1996.
Depreciation and amortization expense for the year ended December 31, 1997
increased $13.6 million, or 34.9%, to $52.4 million from $38.9 million for
the year ended December 31, 1996. The increase was principally due to the
purchase of ten spare engines, capitalized engine overhauls and heavy
airframe maintenance.
OTHER EXPENSES AND INCOME. Interest expense for the year ended December 31,
1997 increased $4.2 million, or 51.3%, to $12.3 million from $8.1 million for
the year ended December 31, 1996. The increase in interest expense reflects a
higher average outstanding debt balance in 1997 resulting from the use of
the line of credit established in December 1996 and additional borrowings
during 1997. Other income for the year ended December 31, 1997 decreased
$0.7 million, or 90.8%, to $0.7 million of expense in 1996.
INCOME TAX BENEFIT. The income tax benefit for the year ended December 31,
1997 was $1 million as compared to the income tax benefit of $11.5 million
for the year ended December 31, 1996. The decrease in tax benefit is
principally attributable to the decreased loss in 1997.
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-
25
<PAGE>
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 Hajj 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
Hajj and reduced United Nations charter business.
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.
26
<PAGE>
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 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
27
<PAGE>
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.
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.
28
<PAGE>
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
---------- ---------- ---------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1997
Operating revenue $ 78,010 $112,576 $162,260 $ 108,656 $461,502
Operating income (loss) $( 7,074) $ 9,512 $ 17,627 $ (12,613) $ 7,452
Net income (loss) $ (5,425) $ 3,583 $ 8,495 $ (10,548) $ (3,895)
Block hours 7,776 12,088 13,104 10,124 43,092
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
</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.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its working capital and capital
expenditure requirements with cash flows generated from operations and through
lease, debt and equity financing.
The Company's cash, cash equivalents and short-term investments at December 31,
1997, December 31, 1996 and December 31, 1995 were $6.3 million, $3.2 million
and $4.2 million, respectively. The Company generated cash from operations for
1997, 1996 and 1995 of $67.2 million, $29.6 million and $46.9 million,
respectively.
Net cash used in investing activities was $76.3 million for 1997, $20.9 million
for 1996 and $61.2 million for 1995. The Company's expenditures for flight
equipment were $72.7 million for 1997, $49.7 million for 1996 and $50.4 million
for 1995. Expenditures for flight equipment in 1997 included the purchase of ten
spare engines, capitalized engine overhauls and heavy airframe maintenance (See
Note 2 of Financial Statements for additional information regarding the
financing of certain flight equipment expenditures).
As of December 31, 1997, the Company had negative working capital of $140.0
million compared to negative working capital of $84.2 million as of December 31,
1996. 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 line was increased to $18.0 million
in January 1997 and then to $20.0 million in March 1997. In September 1997, the
Company extended the line of credit to $25.0 million with the same commercial
financial institution. The line of credit is secured by trade receivables and
inventory, and the interest rate is prime plus 0.75% (9.25% at December 31,
1997). Under this line, $1.96 million in letters of credit have been issued to
various suppliers and insurance companies. As of December 31, 1997, the Company
has borrowed $21.0 million for the line of credit in addition to letters of
credit.
In January 1998, the Company entered into an agreement secured by twelve JT9D
engines with a commercial financial institution for $15.0 million of which $11.7
million was paid towards the balance remaining on two previous agreements with
the same commercial financial institution and $1.4 million is going to be paid
towards engines currently under repair.
In February and March 1998, the Company borrowed $6,000,000 from Funding
Enterprises, LLC, a limited liability company in which the Chairman and
President are members. The $6,000,000 is payable on July 1, 1998 with interest
at 12% per annum. In
30
<PAGE>
connection with the borrowing, warrants for the purchase of 1,200,000 shares of
common stock were issued with an exercise price of $5. The warrants expire in
February 2008.
The Company believes that cash generated from operations as well as from the
line of credit is sufficient to finance working capital needs, capital
expenditures and debt repayments. Discussions are currently in progress with
financial institutions to restructure borrowings secured by owned assets.
The Company has been negotiating revised payment terms with vendors and other
creditors for settlement of current obligations, some of which are secured.
Payment arrangements have been made with major vendors and with several other
vendors.
In an effort to conserve cash, the Company did not pay cash dividends on its
Common Stock for the year ended December 31, 1997.
INCOME TAXES
At December 31, 1997, for federal and state tax reporting purposes, the Company
had approximately $2,600,000 of alternative minimum tax credit carryforwards and
approximately $73,400,000 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
None.
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.
31
<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, 1997, the directors, officers and key employees of the Company
were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Morris K. Nachtomi*...................... 61 President, Chief Executive
Officer and Chairman of the Board
Stephen L. Gelband....................... 66 Director and Secretary
Stephen A. Osborn........................ 47 Director
Henry P. Baer............................ 62 Director
Leo-Arthur Kelmenson..................... 71 Director
Ramesh Punwani**......................... 55 Chief Financial Officer/Vice
President-Finance
Guy A. Nachtomi*......................... 25 Vice President-Operations
John J. Ruzich***........................ 51 Vice President-Marketing & Sales
Vincent J. Vitale........................ 59 Vice President-Maintenance
</TABLE>
*On January 12, 1998 Mr. M. Nachtomi and Mr. G. Nachtomi relinquished the
positions of President and Vice President-Operations, respectively and Mr. Terry
V. Hallcom became President and Executive Vice President-Operations.
**Mr. Punwani's employment with Tower Air ended on January 13, 1998.
***Mr. Ruzich's employment with Tower Air ended on March 4, 1998.
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. In January, 1998 he
relinquished the title of President.
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
32
<PAGE>
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 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. Kelmenson has been a Director of the Company since May 1997. Mr. Kelmenson
is currently the Chairman of the Board of Directors of Bozell, Jacobs, Kenyon &
Eckhardt, Inc. ("BJK&E"). Since 1968, he has served as an executive officer of
Kenyon & Eckhardt, the predecessor firm of BJK&E, first as the Chief Executive
Officer, and later as the President, Chairman and Chief Executive Officer. He is
a graduate of Columbia University, the Career Diplomate School of the University
of Geneva (Switzerland) and the University of Mexico. Mr. Kelmenson was
appointed to replace Mr. Stanley S. Shuman who resigned on May 20, 1997.
Mr. Punwani was Chief Financial Officer and Vice President-Finance from
September 1996 until January 1998. 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. His last airline position was Senior Vice President and Chief
Financial Officer of PanAm. Mr. Punwani holds an M.B.A. degree from New
33
<PAGE>
York University and a Masters in Industrial Engineering and Operation Research
from Cornell University. Mr. Punwani's employment with Tower Air ended on
January 13, 1998.
Mr. Guy Nachtomi has been Vice President of Operations since he rejoined the
Company in November 1995. From 1994 to 1995, Mr. Guy 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. Effective January 12, 1998,
Mr. Guy Nachtomi relinquished the title of Vice President-Operations and assumed
the position of Vice President-Office of the Chairman. Mr. Guy Nachtomi is the
son of Mr. Morris Nachtomi.
Mr. John J. Ruzich was Vice President-Marketing & Sales from June 1997 until
March 1998. From 1968 to 1996, Mr. Ruzich held various sales and marketing
positions with Eastern Airlines, Inc. (1968-1984); British Caledonian Airways
(1984-1988); Pan American World Airways, Inc. (1988-1992); United Marketing
Enterprises, Inc.(1992-1993); Regency Cruise Lines Inc. (1993-1996); and Go
America Tours, Inc./LTU International Airways (1996-1997). Queen Elizabeth
conferred on him the OBE (Officer of the British Empire) award in 1994. He
attended St. Petersburg Jr. College and Middlesex County College. Mr. Ruzich's
employment with Tower Air ended on March 4, 1998.
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.
Mr. Terry V. Hallcom has been President and Executive Vice President-Operations
since January 12, 1998. Mr. Hallcom, prior to joining Tower Air, was President
and CEO of the U.S. Airways Shuttle. From 1991 to April 1992, Mr. Hallcom was
President and COO of the Trump Shuttle. From 1989 to 1991, Mr. Hallcom, as well
as playing a senior role in creating the Trump Shuttle certificate, served in
various senior management positions including Vice President of Operations prior
to becoming the President and COO. Prior to forming the Trump Shuttle, from
1968 to 1989, Mr. Hallcom served in various management positions in Flight
Operations at Eastern Airlines. Prior to Eastern Airlines, from 1960 to 1968,
Mr. Hallcom served as a Naval Carrier Pilot and
34
<PAGE>
an Engineering Test Pilot. Mr. Hallcom graduated from Rose Polytechnic
University with a BS in Mechanical Engineering.
Additional information is contained in the Registrant's 1998 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 1998 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Information required under this Item is contained in the Registrant's 1998 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 1998 Proxy
Statement, pursuant to Regulation 14A, which is incorporated herein by
reference.
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)* 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)* Heller Financial Inc.- Loan and Security Agreement, Dated December
1, 1996
10(6)* Heller Financial Inc.- First Amendment to Loan and Security
Agreement, Dated January 31, 1997
35
<PAGE>
10(7)* Heller Financial Inc.- Second Amendment to Loan and
Security Agreement, Dated March 13, 1997
10(8)* Sanwa Business Credit Corp.- Trust Agreement and
Supplement, Dated October 1, 1996
10(9)* First Security Bank, National Association - Aircraft
and Airframe Purchase and Sale Agreement,
Dated October 1, 1996
10(10)* Finova Capital Corporation - Consolidated Aircraft
and Engine Loan and Security Agreement,
Dated March 25, 1996
10(11)* Finova Capital Corporation - $20,000,000 Loan
Secured by Two B747 Aircraft and Eight Engines,
Dated January 30, 1996
10(12)* Finova Capital Corporation- First Amendment to
Consolidated Aircraft and Engine Loan and Security
Agreement, Dated May 8, 1996
10(13)* Heller Financial Inc. - Third Amendment to Loan and
Security Agreement, Dated June 16, 1997
10(14)* Transamerica Business Credit Corporation - Loan and
Security Agreement, Dated August 16, 1997
10(15)* Heller Financial, Inc. - Amended & Restated Loan &
Security Agreement, Dated September 1, 1997
10(16) Finova Capital Corporation- Fourth Amendment to
Consolidated Aircraft and Engine Loan and Security
Agreement, Dated January 17, 1997
10(17) Finova Capital Corporation- Fifth Amendment to
Consolidated Aircraft and Engine Loan and Security
Agreement, Dated December 24, 1997
10(18) Protective Asset Management Loan and Security
Agreement, Dated November 21, 1997
10(19) Transamerica Business Credit Corporation - Security
Agreement, Dated January 9, 1998
10(20) Transamerica Business Credit Corporation - First
Amendment to Security Agreement, Dated
January 11, 1998
10(21) Funding Enterprises, LLC Loan Agreement, Dated
February 6, 1998
10(22) Employment Agreement between the Company and Terry
V. Hallcom
23 Consent of Ernst & Young LLP, Independent Auditors
36
<PAGE>
27 Financial Data Schedule for the year ended
December 31, 1997
______________________
*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 Form 8-K during the last quarter of the period
covered by this report.
37
<PAGE>
<TABLE>
<CAPTION>
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:
<S> <C>
Report of Independent Auditors.............................................................................. F-2
Balance Sheets as of December 31, 1997 and 1996............................................................. F-3
Statements of Operations for the years ended December 31, 1997, 1996
and 1995................................................................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995.............................................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995................................................................................................... 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-20
</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, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, 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 16, 1998, except for
the ninth paragraph of Note 2,
as to which the date is March 9, 1998
F-2
<PAGE>
TOWER AIR, INC.TOWER AIR, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS December 31,
- ------ ------------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,922 $ 2,968
Certificates of deposit, at cost, which
approximates market 2,407 275
Receivables, net of allowance for doubtful
accounts of $1,474 and $1,201, respectively 28,151 27,912
Income tax receivable 3,850 6,397
Prepaid expenses and other current assets 880 5,102
------------ ------------
Total current assets 39,210 42,654
Property and Equipment, at cost:
Flight equipment 419,851 321,240
Ground property and equipment 33,489 32,285
------------ ------------
453,340 353,525
Less accumulated depreciation and amortization 186,945 135,467
------------ ------------
266,395 218,058
Other assets 4,515 2,543
------------ ------------
$ 310,120 $ 263,255
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Note payable $ 21,038 $ 4,545
Accounts payable 55,313 46,958
Accrued liabilities 40,698 40,043
Air traffic liability 18,867 18,010
Current maturities of long-term debt 43,273 17,294
----------- ------------
Total current liabilities 179,189 126,850
Long-Term debt 63,321 67,716
Deferred income taxes 16,399 13,545
Deferred rent 1,790 1,828
Commitments and Contingencies
Stockholders' Equity:
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 6,892 10,787
Less treasury stock, at cost (210,000 shares) (1,511) (1,511)
----------- ------------
Total stockholders' equity 49,421 53,316
----------- ------------
$ 310,120 $ 263,255
=========== ============
</TABLE>
See 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,
----------------------------------------------------
1997 1996 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES:
Scheduled Passenger Service $ 267,326 $ 247,190 $ 270,282
Commercial Charter Service 103,358 84,389 100,827
Military Charter Service 67,896 64,460 87,534
Cargo Service 13,826 14,085 23,939
Other 9,096 7,695 7,890
--------------- ----------- -----------
Total operating revenues 461,502 417,819 490,472
OPERATING EXPENSES:
Fuel 85,803 82,561 89,620
Flight equipment rentals and
insurance 24,770 19,721 28,441
Maintenance 48,450 52,981 60,735
Crew costs and other 28,646 26,031 28,413
Aircraft and traffic servicing 76,772 83,704 83,580
Passenger servicing 50,370 55,645 53,222
Promotion, sales and commissions 66,167 60,669 76,262
General and administrative 20,658 21,178 22,344
Depreciation and amortization 52,414 38,855 34,339
--------------- ----------- -----------
Total operating expenses 454,050 441,345 476,956
--------------- ----------- -----------
OPERATING INCOME (LOSS) 7,452 (23,526) 13,516
OTHER (INCOME) EXPENSES:
Other (income) expense 69 749 (9,893)
Interest expense 12,273 8,114 3,990
--------------- ----------- -----------
Total other (income) expenses 12,342 8,863 (5,903)
--------------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (4,890) (32,389) 19,419
Income Tax Provision (Benefit) (995) (11,506) 8,730
--------------- ----------- -----------
NET INCOME (LOSS) $ (3,895) $ (20,883) $ 10,689
=============== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ (.25) $ (1.37) $ .70
=============== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
ASSUMING DILUTION $ (.25) $ (1.37) $ .70
=============== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 15,290 15,290 15,305
=============== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
TOWER AIR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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, 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
Net loss - 1997 -- -- -- (3,895) -- -- (3,895)
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 15,500 $ 155 $ 43,885 $ 6,892 (210) $ (1,511) $ 49,421
===========================================================================================
</TABLE>
See notes to financial statements.
F-5
<PAGE>
TOWER AIR, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,895) $ (20,883) $ 10,689
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 52,414 38,855 34,339
Provision for doubtful accounts 775 1,009 1,634
Deferred income taxes 2,854 (5,109) 4,824
Deferred rent (38) 320 328
(Gain) loss on disposal of
property and equipment 153 403 (9,571)
Changes in certain assets and liabilities:
Receivables (1,014) 3,135 (6,864)
Income tax receivable 2,547 (6,397) --
Prepaid expenses and other assets 2,235 (449) (292)
Accounts payable and accrued liabilities 10,284 20,584 11,238
Air traffic liability 857 (1,868) 598
----------- ----------- -----------
Net cash provided by operating activities 67,172 29,600 46,923
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of flight equipment (72,696) (49,735) (50,387)
Purchases of ground property and equipment (1,572) (2,850) (11,662)
Proceeds from sale of flight equipment -- 6,191 --
Proceeds from sale of ground property and equipment 100 47 657
Proceeds from insurance company -- 25,000 --
Decrease (increase) in certificates of deposit (2,132) 425 200
----------- ----------- -----------
Net cash used in investing activities (76,300) (20,922) (61,192)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 464,260 41,875 16,899
Principal payments on borrowings (453,372) (47,884) (11,205)
Payment of cash dividends -- (1,835) (2,447)
Other (806) (1,387) (281)
----------- ----------- -----------
Net cash provided by (used in) financing activities 10,082 (9,231) 2,966
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents 954 (553) (11,303)
Cash and cash equivalents at beginning of year 2,968 3,521 14,824
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,922 $ 2,968 $ 3,521
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 11,221 $ 8,022 $ 3,993
Cash paid during the period for income taxes $ 52 $ 442 $ 6,721
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchase of flight equipment accrued but not paid $ 14,238 $ 15,512 $ 5,604
Purchase of flight equipment financed through debt $ 27,189 $ 57,600 $ --
</TABLE>
See 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 twenty years; other flight and
ground property and equipment - two to ten 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".
STOCK OPTIONS
Financial Accounting Standards No. 123, "Accounting for Stock-Based-
Compensation" 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 Principals 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-7
<PAGE>
EARNINGS PER SHARE
In 1997, The Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate restated, to conform to
the Statement 128 requirements.
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, 1997, 1996 or 1995.
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, 1997 and 1996 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. Statement No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances form
nonowner sources. Statement No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company will adopt this statement for 1998 and
such adoption is not expected to have a material effect on the financial
statements.
In July 1997, the Financial Accountant Standards Board issued Statement No. 131,
Disclosures About segments of an Enterprise and Related Information. Statement
No. 131 requires certain financial and supplementary information to be disclosed
on an annual and interim basis for each reportable segment of an enterprise.
Statement No. 131 is effective for fiscal years beginning after December 31,
1997. Unless impracticable, companies would be required to restate prior period
information upon adoption. The Company will adopt this statement for 1998 and
such adoption is not expected to have a material effect on the financial
statements.
F-8
<PAGE>
2. LONG-TERM DEBT AND NOTE PAYABLE
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
8.5% - 9.45% Loans Payable, due in monthly
installments through September 2013 $ 7,750 $ 8,988
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 42,851 46,963
10.27% Note, due in monthly installments
through February 2002 18,238 19,893
10.27% Note, due in monthly installments
through December 1997 --- 2,000
10.27% Note, due in monthly installments
through September 1998 4,032 ---
Prime plus 2.5% Note, due in monthly installments
through November 2000 9,520 ---
Prime plus 2.75% Notes, due in monthly installments
through February 1999 11,257 ---
Prime plus 2.0% Notes, due in monthly installments
through May 1999 12,946 ---
------------------- -------------------
106,594 85,010
Less current maturities 43,273 17,294
------------------- -------------------
$ 63,321 $ 67,716
=================== ===================
</TABLE>
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, 1997 and 1996, there was approximately
$42,851,000 and $46,963,000 outstanding, respectively.
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, 1997 and 1996, $7,750,000 and
$8,988,000, respectively, was outstanding.
F-9
<PAGE>
In November 1997, the Company prepaid the entire $1,450,000 outstanding balance
of the LIBOR plus 1.75% Note.
In November 1996, the Company borrowed $2,000,000 from a commercial finance
institution. The note bears interest at 10.27% and was due December 1997. In
January 1997, the Company borrowed an additional $2,000,000 from the same
commercial finance institution. In December 1997, the loan agreement was
amended and restated whereas the financial institution made an additional loan
of approximately $3,365,000. The amended note bears interest at a rate of 10.27%
per annum and is due in September 1998. Monthly principal and interest payments
required under the amended note approximate $650,000. At December 31, 1997, the
amount outstanding was approximately $4,032,000.
In February 1997, the Company purchased six engines for an aggregate purchase
price of $11,900,000. In connection with this purchase, the Company agreed to
exchange engines with an aggregate value of $1,800,000 and issue to the seller
$1,100,000 of credits toward the purchase of aircraft and engine parts. In
addition, the Company issued a $9,000,000 promissory note to the seller which
bears an interest rate of prime plus 2.75% and is payable over a term of twenty-
four months. However, in May 1997, the Company amended this contract to
purchase only four engines for an aggregate price of $7,700,000 and to exchange
engines with an aggregate value of $1,200,000, and issued to the seller $633,333
of credits towards its purchase of aircraft and engine parts. In connection
with this amended agreement, the amount of the promissory note was reduced to
$5,867,000 of which $3,757,000 was outstanding as of December 31, 1997. The
amount relating to the exchanged engines was paid by the Company in lieu of
exchanging engines. However, the amount for purchase credits of aircraft and
engine parts remains unpaid.
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% per annum 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, 1997 and 1996, there was approximately $18,238,000 and
$19,893,000 outstanding, respectively.
In June 1997, the Company borrowed $1,000,000 from its Chairman and paid back
this amount with interest in August 1997.
In February and March 1998, the Company borrowed $3,000,000 and $1,000,000 from
its Chairman and President, respectively. Such amounts are payable on July 1,
1998 with interest per annum plus warrants for the purchase of 800,000 shares of
common stock were issued with an exercise price of $5. The warrants expire in
February 2008.
In August 1997, the Company borrowed $9,000,000 from a commercial finance
institution. To secure this loan, the Company used eight Pratt & Whitney
engines as collateral. Interest on this loan accrues at a rate of prime plus
2.75% and is due in monthly installments of approximately $500,000. At December
31, 1997, there was approximately $7,500,000 outstanding.
In November 1997, the Company acquired four leased engines for an aggregate
purchase price of $9,750,000. In connection with this transaction, the Company
issued a promissory note for the full purchase price. The interest rate
associated with the note accrues at a rate of prime plus 2.5% per annum and
requires monthly installments of principal and interest of approximately
$320,000
F-10
<PAGE>
through November 2000. Additionally, per the loan agreement, the
proceeds from the note shall be utilized for repair work performed on the non-
serviceable leased engines. If such repairs are not performed within six months
from the closing date, interest shall begin accruing at a rate of prime plus
4.5% on the unpaid principal balance. The balance outstanding as of December
31, 1997 was approximately $9,520,000.
The Company entered into a finance agreement in September 1997 involving the
conversion and refurbishment of four Pratt & Whitney JT9 engines. In connection
with this transaction, four promissory notes were issued, totalling $14,109,530.
The notes mature on various dates through May, 1999. Related interest accrues
at prime plus 2% per annum on the outstanding principal balance and required
monthly payments approximate $850,000. The aggregate balance outstanding on the
notes at December 31, 1997 was approximately $12,946,000.
At December 31, 1997, the aggregate annual maturities of long-term debt during
the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $43,273
1999 $23,455
2000 $20,684
2001 $17,151
2002 $ 957
</TABLE>
Certain debt is secured by aircraft having a net book value of approximately
$94,718,000 at December, 1997.
The Company has a $25,000,000 line of credit with a financial institution which
may be used for short term borrowings or letters of credit. The agreement, as
amended in September 1997, expires on September 30, 1999. Interest accrues on
the outstanding credit line at a "base rate" equal to the higher of the Federal
Reserve System prime loan rate or the Federal Funds effective rate (9.25% as of
December 31, 1997). As of December 31, 1997, the Company had borrowings of
approximately $21,000,000 and letters of credit of $1,962,000 outstanding. The
credit line is primarily secured by the Company's trade receivables and
inventory.
In January 1998, the Company entered into an agreement with a financial
institution to borrow $15,000,000. The note bears interest at prime plus 2.75%
and is due in January 2000. The note is secured by twelve JT9D engines.
3. Income Taxes
The (benefit) provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Current:
Federal $ (3,849) $ (6,397) $ 3,603
State and local -- -- 303
------------------- ------------------- -------------------
(3,849) (6,397) 3,906
------------------- ------------------- -------------------
Deferred:
Federal (3,086) 3,541 3,267
State and local (232) (1,568) 1,557
------------------- ------------------- -------------------
2,854 (5,109) 4,824
------------------- ------------------- -------------------
Provision (benefit) for income taxes $ (995) $ (11,506) $ 8,730
=================== =================== ===================
</TABLE>
F-11
<PAGE>
Deferred tax expense (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------ ---------
<S> <C> <C> <C>
Tax depreciation greater than
book depreciation $ 12,218 $ 4,056 $ 5,304
Utilization of net operating loss
carryforwards -- 533
Tax benefit of net operating loss
carryforwards (15,023) (13,792) --
Tax (benefit) utilization of
alternative minimum tax credit
carryforwards 3,867 3,572 (1,013)
Other 1,792 1,055 --
---------------- -------------- ----------
$ 2,854 $ (5,109) $ 4,824
================ ============== ==========
</TABLE>
The income tax provisions were at rates different from the U.S. federal
statutory rates for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- ------------
<S> <C> <C> <C>
Statutory rate (35.0) % (35.0) % 35.0 %
State and local income tax
(benefit), net of federal tax benefit (3.1) (3.0) 6.2
Nondeductible items 19.7 2.5 4.6
Other (1.9) -- (.8)
----------------- ---------------- -------------
Effective tax rate (20.3) % (35.5) % 45.0 %
================= ================ =============
</TABLE>
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
1997 1996
------------------------------------------
<S> <C> <C>
Deferred tax liabilities for taxable temporary differences:
Tax depreciation in excess of book depreciation $ 44,926 $ 32,708
Other 2,847 1,055*
------------------------------------------
Total deferred tax liabilities 47,773 33,763
Deferred tax assets:
Tax benefit of net operating loss carryforwards 28,815 13,792
Alternative minimum tax credit carryforwards 2,559 6,426
------------------------------------------
Total deferred tax assets 31,374 20,218
------------------------------------------
Net noncurrent liability $ 16,399 $ 13,545
==========================================
</TABLE>
* Reclassified
F-12
<PAGE>
At December 31, 1997, for federal reporting purposes, the Company had
approximately $73,433,000 of net operating loss carryforwards available to
offset future federal tax liabilities.
4. COMMITMENTS
At December 31, 1997, the Company had seven Boeing 747 aircraft under operating
leases. Three aircraft are under the terms of the same lease agreement which
provides rentals at fixed rates with provisions for increases based on the
performance of certain maintenance work, as defined. Under the terms of two of
the lease agreements, monthly rent is at a fixed rate. One aircraft is being
leased at fixed monthly rentals plus additional rent based on flight hours, as
defined. In addition, one aircraft is being leased at a power by the hour rate,
as defined.
In October 1997, the Company amended one of its leases that previously included
monthly rent which alternated from a fixed rate to a rate per hour every six
months until 1999. The aircraft is being converted to a freighter and the cost
of the conversion will be paid by the lessor up to $10 million. Any costs in
excess of $10 million will be paid by the Company. The amended lease term is
fifteen years with monthly rentals at a fixed rate commencing upon completion of
the cargo conversion. The cargo conversion is expected to be completed during
the first quarter of 1998.
In October 1997, the Company amended one lease with a rental based on a fixed
rate per hour plus additional rent based on flight hours to a fixed rate per
hour rental. In December 1997, the lease was amended again to a fixed monthly
rentals commencing January 1, 1998 through January 31, 2001.
In December 1997, the Company amended one of the fixed rate per hour leases to a
power by the hour rate lease commencing November 1, 1997 through October 31,
1998. Starting November 1, 1998, this lease will be converted to a fixed
monthly rate.
In November 1997, the Company entered into a ten year lease for a 747 aircraft
which will commence upon delivery of the aircraft expected in March 1998.
Monthly rentals will be at a fixed rate.
In December 1997, the Company entered into a six year lease for a 747 aircraft
which will commence upon delivery of the aircraft expected in March 1998.
Monthly rentals will be at a fixed rate.
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.
At December 31, 1997, 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>
1998 $ 24,811 4,916 29,727
1999 22,286 5,107 27,393
2000 20,307 5,066 25,373
2001 15,180 5,066 20,246
2002 15,180 5,066 20,246
Thereafter 30,950 2,103 33,053
-----------------------------------
$128,714 $27,324 $156,038
===================================
</TABLE>
F-13
<PAGE>
Rent expense amounted to approximately $28,500,000, $22,600,000 and $31,300,000
for the years ended December 31, 1997, 1996 and 1995, respectively. These
amounts include flight equipment rental expense of $22,700,000, $17,100,000 and
$25,800,000 and ground property and equipment rentals of $5,800,000, $5,500,000
and $5,500,000 for the years ended December 31, 1997, 1996 and 1995,
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, 1997, the Company had 1,969 employees, 1,470 of which were
full time and 499 of which were part time. Of the full time employees, 561
belong to the Association of Flight Attendants (AFA) and 197 are members of an
in-house union, Tower Air Cockpit Crew Association, Inc. (TACCA).
Effective March 5, 1997, the Company reached a tentative agreement to extend the
contract with its flight attendants by the AFA up to two years until September
14, 1998. The tentative agreement provides for no wage increases. In August
1996, negotiations commenced with TACCA for a contract to replace the existing
agreement dated September 1, 1993. Negotiations with the TACCA continued until
July 1997 with no resolution and as a result the TACCA applied for Federal
mediation. Management expects mediation to conclude in 1998.
The Company utilized standby letters of credit to secure performance guarantees
in the normal course of business. The Company provides cash collateral for all
of these letters of credit. As of December 31, 1997 and 1996, cash collateral
amounted to $2,407,000 and $275,000. These amounts are included in Certificates
of Deposit in the accompanying balance sheets.
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, 1997, 1996 and 1995, the Company's contributions, which are
principally based on a percentage of an employee's annual compensation, amounted
to approximately $319,000, $309,000 and $570,000, respectively.
F-14
<PAGE>
Effective January 1995, the Company also had a nonqualified deferred
compensation plan which contained a Company match portion and permitted 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
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 69%, 70% and 77%
of total revenues for the years ended December 31, 1997, 1996 and 1995,
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, 1997 and 1996 accounts receivable from the U.S.
government and its agencies were approximately $2,500,000 and $1,300,000
respectively.
The Company utilizes software and related technologies throughout its business
that will be affected by the date change in the year 2000. System modifications
or replacements are underway or planned which should make all significant
computer systems at the Company compliant with the year 2000 requirement.
Anticipated spending for these modifications will be expensed as incurred and is
not expected to have a material effect on the Company's ongoing results of
operations.
7. STOCK OPTION PLANS
The Company has elected to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based-Compensation" ("Statement 123"),
requires the use of option valuation models that were not developed for use in
valuing stock options.
The Company has authorized 1,400,000 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.
F-15
<PAGE>
The following table summarizes the activity under these plans (shares in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- --------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ------- -------------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 733,850 $7.89 424,398 $10.13 271,312 $11.21
Granted 998,157 $2.83 448,067 $ 6.45 277,288 $ 8.14
Cancelled (625,871) $7.72 (138,615) $10.09 (124,202) $ 8.08
---------- ----- -------- ------ -------- ------
End of Year 1,106,136 $3.75 733,850 $ 7.89 424,398 $10.13
Options exercisable at
end of year 104,834 $8.99 169,302 $11.37 86,885 $12.84
</TABLE>
The following table summarizes information about these plans at December 31,
1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
----------------------------------------- ------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.69-$ 5.00 911,468 2.8 years $ 2.84 -- --
$ 5.01-$ 7.50 149,668 1.4 years $ 6.76 64,784 $ 6.81
$ 7.51-$ 10.00 15,000 .5 years $ 8.50 10,050 $ 8.50
$10.01- $ 12.50 -- -- -- -- --
$12.51- $ 14.50 30,000 0 $13.88 30,000 $13.88
------------ ------------
1,106,136 104,834
</TABLE>
The outstanding options expire at various times during the period from January
1999 through October 2006.
The weighted-average fair value at date of grant for options granted in 1997,
1996 and 1995 were $1.28, $2.36 and $3.60, respectively.
Pro forma information regarding net loss and net loss per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its stock options granted subsequent to January 1,
1995 under the fair value method of the Statement. The fair value for these
options was estimated using a Black-Scholes option pricing model with the
following weighted-average assumptions for the year ended December 31, 1997:
risk-free interest rate of 6%, volatility factor of .434, a weighted-average
expected life of the option of 3 years for employees and 10 years for officers
and no dividend yields.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The company's pro
forma information is as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Pro forma net loss $(4,451,467)
Pro forma net loss per share $ (.29)
</TABLE>
If the Company had elected to present the pro forma effects of applying
Statement 123 for the years ended December 31, 1996 and 1995, no material
difference in net loss or income, respectively, would have resulted.
The compensation expense and pro forma net income (loss) may not be indicative
of amounts to be included in future periods.
8. ACCRUED LIABILITIES
The components of accrued liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-----------------
<S> <C> <C>
Accrued maintenance $16,652 $22,975
Other accrued operating expenses 7,154 9,396
Accrued salaries 5,056 3,191
Accrued interest 1,161 109
Accrued rent 1,675 1,606
Other 9,000 2,766
----------------
$40,698 $40,043
================
</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. On March 14, 1997, the Company filed a brief
opposing Branch's Petition. On April 14, 1997, the Supreme Court of the United
States denied Branch's Petition for Writ of Certiorari, which sought review of
that affirmance.
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.
F-17
<PAGE>
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 1997 and 1996 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>
1997
----
Operating revenues $ 78,010 $112,576 $162,260 $108,656
=========================================================
Operating income (loss) $ (7,074) $ 9,512 $ 17,627 $(12,613)
=========================================================
Net income (loss) $ (5,425) $ 3,583 $ 8,495 $(10,548)
=========================================================
Net income (loss) per
common share $ (.35) $ .23 $ .56 $ (.69)
=========================================================
Net income (loss) per
common share assuming
dilution $ (.35) $ .23 $ .55 $ (.69)
=========================================================
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
common share $ (.53) $ .19 $ (.10) $ (.92)
=========================================================
Net income (loss) per
common share assuming
dilution $ (.53) $ .19 $ (.10) $ (.92)
=========================================================
</TABLE>
F-18
<PAGE>
12. RECEIVABLES
The components of receivables were as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1997 1996
-------------------------------------------
<S> <C> <C>
Trade receivables $ 28,985 $ 20,517
Maintenance receivables 640 8,596
-------------------------------------------
29,625 29,113
Less: Allowance for doubtful accounts (1,474) (1,201)
-------------------------------------------
$ 28,151 $ 27,912
===========================================
</TABLE>
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic earnings per share - (loss) income
available to common stockholders (3,895) (20,883) 10,689
Numerator for diluted earnings per share-(loss) income
available to common stockholders after assumed
conversions (3,895) (20,883) 10,689
Denominator:
Denominator for basic earnings per share-weighted
average shares 15,290 15,290 15,290
Effect of dilutive securities:
Employee stock options -- -- 15
------------------------------------------------------------------
Dilutive potential common shares -- -- 15
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 15,290 15,290 15,305
==================================================================
Basic earnings per share ($0.25) ($1.37) $ 0.70
==================================================================
Diluted earnings per share ($0.25) ($1.37) $ 0.70
==================================================================
</TABLE>
F-19
<PAGE>
SCHEDULE II
TOWER AIR, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1996 and 1997
(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, 1995 $ 397 $ 1,634 $ 543 $ 1,488
Year ended December 31, 1996 $ 1,488 $ 1,009 $ 1,296 $ 1,201
Year ended December 31, 1997 $ 1,201 $ 775 $ 502 $ 1,474
</TABLE>
(a) Uncollectible accounts written off, net of recoveries.
F-20
<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 30, 1998 TOWER AIR, INC.
By:/s/ MORRIS K. NACHTOMI
----------------------------
Morris K. Nachtomi
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 __, 1998 on behalf of the
Registrant and in the capacities indicated.
/s/ MORRIS K. NACHTOMI Chief Executive
- -----------------------------------
Morris K. Nachtomi Officer and Chairman of the
Board of Directors (Principal
Executive Officer)
/s/ TERRY V. HALLCOM President & Executive Vice
- -----------------------------------
Terry V. Hallcom President-Operations (Acting
Principal Financial 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/ LEO-ARTHUR KELMENSON Director
- -----------------------------------
Leo-Arthur Kelmenson
<PAGE>
STOCKHOLDER INFORMATION BOARD OF DIRECTORS
CORPORATE OFFICE Morris K. Nachtomi
Chairman
Tower Air, Inc.
Hangar 17 Stephen L. Gelband
JFK International Airport Hewes, Gelband, Lambert
Jamaica, New York 11430 & Dann PC
(718) 553-4300
Stephen A. Osborn
OUTSIDE COUNSEL Cigna Investments, Inc.
Skadden, Arps, Slate, Henry P. Baer
Meagher & Flom LLP Skadden, Arps, Slate,
New York, New York Meagher & Flom LLP
INDEPENDENT AUDITORS Leo-Arthur Kelmenson
Bozell, Jacobs, Kenyon &
Ernst & Young LLP Eckhardt, Inc.
Melville, New York
EXECUTIVE OFFICERS
STOCK TRADING
Morris K. Nachtomi
The Common Stock is traded Chief Executive Officer
on the NASDAQ National and Chairman of the
Market System under the symbol Board of Directors
"TOWR". As of February 27, 1998,
there were 100 stock-holders
of record. Terry V. Hallcom
President and Executive Vice
ANNUAL MEETING President-Operations
The Annual Meeting of Stockholders
will be held at the Tower Air Guy A. Nachtomi
Terminal, JFK International Airport, Vice President-Office of the
Jamaica, NY on May 19, 1998 Chairman
at 11:00 a.m.
REGISTRAR & TRANSFER AGENT Vincent J. Vitale
Vice President-Maintenance
American Stock Transfer
& Trust Company
40 Wall Street
New York, New York 10005
<PAGE>
[LOGO OF TOWER AIR]
Hanger 17
JFK International Airport
Jamaica, NY 11430
http://www.towerair.com
