U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
for the transition period ______ to _________
Commission file number 1-7991
BIG SKY TRANSPORTATION CO.
--------------------------
(exact name of small business issuer as specified in its charter)
MONTANA 81-0387503
------- ----------
(state of other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1601 AVIATION PLACE
BILLINGS LOGAN INTERNATIONAL AIRPORT
BILLINGS, MT 59105
(406) 247-3910
--------------
(address of registrant's principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
CLASS: 1996 Series Common Stock, no par value
SHARES OUTSTANDING: At September 30, 2002: 1,252,112
BIG SKY TRANSPORTATION CO.
FORM 10-Q
For the Period Ended September 30, 2002
CONTENTS
Part I Financial Information
Item 1. Financial Statements:
Balance Sheets
September 30, 2002 and
June 30, 2002 .................................................................3
Income Statements
Three months ended
September 30, 2002 and 2001....................................................4
Cash Flow Statements
Three months ended September 30, 2002 and 2001.................................5
Notes to Financial Statements.........................................................6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................................8-11
Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................12
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.......................................................13
Exhibit 99.1 ..........................................................................................16
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIG SKY TRANSPORTATION CO.
Balance Sheets
September 30, 2002 June 30, 2002
(unaudited) (audited)
------------------ -------------
Assets
Current Assets
Restricted Cash $ 283,672 $ 282,500
Accounts Receivable, net 1,903,399 2,194,088
Expendable parts & supplies, at cost 1,021,813 1,061,884
Prepaid expenses 194,202 274,932
Deferred income taxes & other 30,000 30,000
----------- -----------
Total Current Assets 3,433,086 3,843,404
Property and Equipment, net 2,879,957 3,001,488
Deferred Income Taxes & Other 952,663 751,711
Total Assets $ 7,265,706 $ 7,596,603
=========== ===========
Liabilities & Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 313,785 $ 311,216
Notes payable 1,081,116 1,207,436
Accounts payable 2,522,756 2,252,176
Accrued expenses 864,888 806,382
Traffic balances & unused tickets 990,007 1,127,015
Income taxes payable -- 1,391
----------- -----------
Total Current Liabilities 5,772,552 5,705,616
Long-Term Debt, Excluding Current Installments 1,685,448 1,763,833
Stockholders' Equity
Common stock of no par value;
(20,000,000 shares authorized 1,252,112 shares issued &
outstanding) 819,125 819,125
Additional paid-in capital 242,034 242,034
Accumulated deficit (1,229,600) (910,152)
Less treasury stock (20,000 shares, at cost) (23,853) (23,853)
----------- -----------
Stockholders' Equity (Deficit) (192,294) 127,154
----------- -----------
Total Liabilities & Stockholders' Equity $ 7,265,706 $ 7,596,603
=========== ===========
3
BIG SKY TRANSPORTATION CO.
Income Statements
(unaudited)
Three Months Ended
September 30,
2002 2001
------------- --------------
Operating Revenues:
Passenger $ 3,040,962 $ 3,203,744
Cargo 24,790 38,413
Public service 3,290,076 2,961,394
Other 27,204 137,488
----------- -----------
Total 6,383,032 6,341,039
Operating Expenses:
Flying 2,864,514 2,777,924
Maintenance 1,520,428 1,541,102
Traffic 1,613,784 1,524,065
Marketing 318,608 461,327
General/Administrative 343,098 322,470
Depreciation 161,963 115,645
----------- -----------
Total 6,822,395 6,742,533
Operating income (loss) (439,363) (401,494)
Other Income (Expense)
Federal Air Stabilization
Act Assistance 253,253
Interest, net (63,692) (73,383)
Capital gain (1,147) (983)
----------- -----------
Total (64,839) 178,887
Income (loss) before taxes (504,202) (222,607)
Income tax provision (benefit) (184,754) (66,529)
----------- -----------
Net income (loss) ($ 319,448) ($ 156,078)
=========== ===========
Per share data:
Basic earnings (loss) per common
share ($ .26) ($ .12)
=========== ===========
Diluted earnings (loss) per common
share ($ .26) ($ .12)
=========== ===========
4
BIG SKY TRANSPORTATION CO.
Cash Flow Statements
(unaudited)
Three Months Ended
September 30,
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (319,448) $ (156,078)
Charges and credits not affecting cash
Depreciation and Amortization 161,963 115,645
(Gain) Loss on sale of equipment 674 -
Deferred income taxes (184,754) (66,529)
Changes in assets and liabilities
Receivables 290,689 1,171,365
Expendable parts and supplies 40,071 (19,104)
Restricted cash (1,172) -
Prepaid expense 80,730 (143,694)
Deposits and other assets (18,980) (51,521)
Accounts payable and accrued expense 329,086 (378,947)
Traffic balances payable (137,008) 70,634
Income taxes 1,391 -
----------- -----------
NET CASH FROM OPERATING ACTIVITIES 243,242 541,771
----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of equipment 400 -
Property and equipment purchases (41,506) (53,443)
----------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (41,106) (53,443)
----------- -----------
FINANCING ACTIVITIES
Net borrowing on short-term note (126,320) (427,410)
Proceeds from long-term debt - -
Payments on long-term debt and capital leases (75,816) (60,918)
----------- -----------
CASH USED IN FINANCING ACTIVITIES (202,136) (488,328)
----------- -----------
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ - $ -
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 65,906 $ 76,685
Income taxes - -
5
Notes to Financial Statements
Note A - Financial Statements
The financial statements included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
These financial statements reflect all adjustments which, in the opinion of
management are necessary to present fairly the results of operations for the
interim periods presented. All adjustments are of a normal recurring nature. We
suggest that these financial statements be read in conjunction with the
financial statements and the notes thereto included in our Annual Report on Form
10-KSB for the year ended June 30, 2002. The results of operations for the three
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2003.
Note B - 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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note C - Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. Cash equivalents exclude restricted cash.
Note D - Maintenance
The cost of rebuilding rotable parts is charged to maintenance as incurred. An
allowance for depreciation is provided for rotable parts to allocate the cost of
these assets, less estimated residual value, over the useful life of the related
aircraft and engines.
Ordinary maintenance and repairs are charged to operations as incurred. The
Company accrues for the cost of overhauls and engine hot-end inspections based
upon contractual hourly rates or the estimated cost of an overhaul.
Note E - Revenue Recognition
Revenue is recognized when transportation has been provided.
6
Note F - Income Taxes
Deferred income taxes are provided for at the statutory rates on the difference
between the financial statement basis and the income tax basis of assets and
liabilities. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. Net
deferred tax assets or liabilities are classified in the balance sheet as
current or non-current consistent with the assets and liabilities which give
rise to such deferred income taxes. At September 30, 2002, the Company recorded
a change in the non-current deferred tax asset of $184,754.
Note G - Earnings per Share
Following is the calculation of the weighted average number of common shares
outstanding:
Three Months Ended
September 30,
---------------------
2002 2001
---- ----
Weighted average number of common
shares outstanding 1,252,112 1,252,112
Effect of dilutive securities options 375 4,424
--------- ---------
Weighted average number of shares for
diluted earnings per share 1,252,487 1,256,536
7
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Summary of Airline Operating Statistics:
Three Months Ended
September 30,
2002 2001
---------------- ----------------
Passengers carried 33,732 35,610
Average passenger trip (miles) 272 294
Revenue passenger miles 9,176,964 10,463,611
Available seat miles 26,827,449 30,107,761
Passenger load factor (%) 34.21 34.75
Aircraft miles 1,438,133 1,584,619
Yield per revenue passenger mile (cents) 33.14 30.62
Freight pounds enplaned 37,612 39,194
Operating cost per available seat mile (cents) 25.43 22.39
Operating break-even load factor (%) 36.56 36.95
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
September 30, 2002 and 2001:
Overview
The Company dba Big Sky Airlines (Big Sky) is a regional airline currently
offering scheduled passenger service to 23 communities in six states utilizing a
fleet of fifteen Fairchild Metro III and Metro 23 turboprop aircraft. Big Sky
markets its services under its own two letter code, GQ. The majority of Big Sky
flights also are operated under the airline code of one or more of Big Sky's
code-sharing partners Northwest Airlines, America West Airlines and Alaska
Airlines. Big Sky services to eight communities are provided under contracts
with the U.S. Department of Transportation (DOT) Essential Air Service (EAS)
program. Total operating revenues and passengers carried have grown more than
fivefold from 1997 through 2002.
Big Sky has been a continuous contract holder under the DOT's EAS program since
1980. In addition to the current EAS services, Big Sky provided EAS service to
an additional eight communities in Arkansas, Oklahoma, and Texas from November
1998 through September 2002. Big Sky was significantly underbid by another air
carrier at the expiration of the EAS contract covering these states, and
terminated those services in phases throughout the month of September 2002. Big
Sky's code-sharing relationships with Northwest, America West and Alaska
commenced in June 1999, April 2001, and July 2001, respectively. Each of these
agreements provide for market specific flight connections between Big Sky and
the code-share partner with one stop check-in, baggage transfer and frequent
flyer member mileage for the Big Sky flights. These agreements also provide for
a sharing of the ticket revenue from each passenger making a code-share
connection, on a prorated basis. Approximately 15% of Big Sky's passengers flew
under these agreements during the current quarter.
With the loss of the above mentioned EAS contract, Big Sky has opened up service
to non-subsidized markets that are geographically closer, and provide daily
aircraft flow through the Billings base of operations. Service between Idaho
Falls, ID and Denver commenced September 16, 2002, Casper and Gillette WY
service to Billings commenced on October 21, and service between Olympia WA and
Spokane WA commenced on November 13. This market shift has significantly reduced
reliance on the EAS program and increased the importance of the code-sharing
relationships.
On September 26, 2002 Big Sky announced a merger agreement including tender
offer, subject to contingencies with Mesaba Holdings Inc. (Holdings) and Ranger
Acquisition Corporation (Ranger). The Merger Agreement and Press Release
describing the Merger Agreement was filed with Form 8-K on September 27, 2002.
On October 29, 2002 Holdings and Ranger commenced the Tender Offer for the
acquisition of all of the outstanding shares of Big Sky's 1996 series common
stock for $2.60 per share, the only series of securities that is outstanding.
Also on October 29, Big Sky filed Schedule 14D-9 recommending that the
shareholders of the Company accept the Offer and tender their
9
shares. Under the terms of the agreement, if two-thirds of the outstanding stock
is tendered under the Offer by midnight on November 27, 2002, then Holdings and
Ranger are obligated to complete the acquisition and Big Sky would become a
privately held wholly owned subsidiary of Holdings.
For the Three Months Ended September 30, 2002 and 2001
2002 2001
(unaudited) (unaudited) Change %
------------------ ------------------- ---------------- -------
Operating Revenues:
Passenger $3,040,962 $3,203,744 ($162,782) (5)
Cargo 24,790 38,413 (13,623) (35)
Public service 3,290,076 2,961,394 328,682 11
Other 27,204 137,488 (110,284) (80)
------------------ ------------------- ----------------
Total 6,383,032 6,341,039 $41,993 1
================== =================== ================
The reduction in passenger revenues is a direct result of the 5.6% decrease in
passenger traffic from the prior period due to the lingering effects of the
terrorist events of September 11, 2001 ("9/11") and their impact on the economy.
Similarly, the events of 9/11 caused the Federal Aviation Administration to
place severe limitations on the carriage of cargo, resulting in the decreased
revenue from that product. The increase in public service revenues is due to a
program-wide increase in subsidy rates for all EAS contracts provided for under
the Air Transportation Safety and Stabilization Act that was passed by Congress
in response to 9/11. The decrease in other revenues is due to termination of
service to Lea County (Hobbs), New Mexico where the county was providing an
operating subsidy approximating $35,000 per month to offset losses incurred
while attempting to develop that market.
Three Months Ended
September 30
2002 2001
(unaudited) (unaudited) Change %
------------------ ----------------- ------------------- -------
Operating Expenses:
Flying $2,864,514 $2,777,924 $86,590 3
Maintenance 1,520,428 1,541,102 (20,674) (1)
Traffic 1,613,784 1,524,065 89,719 6
Marketing 318,608 461,327 (142,719) (31)
General/Admin. 343,098 322,470 20,628 6
Depreciation 161,963 115,645 46,318 40
------------------ ----------------- -------------------
Total $6,822,395 $6,742,533 $ 79,862 1
================== ================= ===================
The increase in flying operations expense is attributable increased aircraft
hull insurance premiums that were imposed as a result of 9/11. Workers
Compensation insurance premium increases also contributed to the additional
expense.
10
Maintenance expense was nearly equivalent to the prior period.
The increase in traffic servicing expense is due a significant increase in
passenger liability and war risk insurance premiums, offset in part by the
closing of stations in Mountain Home AR and St. Louis MO. on October 1, 2001.
The decline in marketing expense resulted from the elimination of travel agency
commissions in June 2002, reduced advertising and promotion, and a reduction in
telephone rates that benefits reservations costs.
The increase in general and administrative expense is a result of increased
insurance premiums for director & officers liability, employer practices
liability, workers compensation and general business and auto coverage. In
addition, certain salary increases that were deferred from July 2001 were
instituted in July 2002.
The increase in depreciation is entirely attributable to the write-off of
leasehold improvements made at the Dallas/Fort Worth airport, due to the
termination of service in September 2002 with the loss of the EAS contract in
that region.
Liquidity and Capital Resources:
A review of current liquidity and capital resources are as follows:
Working Capital Current Ratio
--------------- -------------
Year-end June 30, 2002 $ (1,862,212) 0.67:1
Period-ending September 30, 2002 $ (2,339,466) 0.59:1
Long-term Debt Stockholder's
(excluding current portion) Equity (Deficit)
--------------------------- ----------------
Year-end June 30, 2002 $1,763,833 $127,154
Period-ending September 30, 2002 $1,685,448 ($192,294)
Cash provided by operations for the three months ended September 30, 2002 was
$243,242. Cash used in investing and financing activities was $41,106 and
$202,136 respectively during the period.
Big Sky has established a line of credit through First Interstate Bank and Trust
Co. of Billings for an amount of up to $1,400,000. Big Sky uses the line to
supplement timing differences in cash flows. The maximum amount drawn on the
line of credit during the quarter was $1,400,000 compared to a low of $604,506.
The continuing losses sustained after the events of 9/11 coupled with those over
the previous two years have resulted in the need to secure a sufficient amount
of capital to assure the continued viability of Big Sky. The pending acquisition
by Mesaba Holdings, Inc. and their commitment to Big Sky's future would provide
that required capital. The acquisition also provides the opportunity for
significant cost savings that would have an immediate impact on operating
results and liquidity.
11
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
Aircraft Fuel
In the past Big Sky has not experienced difficulties with fuel availability and
expects to be able to obtain fuel at prevailing prices in quantities sufficient
to meet its future needs. Big Sky is directly affected by fuel price volatility
and does not currently have a fuel price hedging plan in place. Based upon the
current fleet of aircraft (fifteen Fairchild Metro aircraft) at their current
utilization rates (approximately 2000 hours each, annually), a ten cent per
gallon increase in the price of fuel would add approximately $270,000 in annual
fuel expense.
Interest Rates
Big Sky's earnings are affected by changes in interest rates due to the term of
its revolving line of credit agreement that contains a variable interest rate.
The rate is subject to change based on the Prime Rate published in the Wall
Street Journal. The current interest rate of 6.75% per annum is calculated by
the sum of the Prime Rate (4.75%), plus 2 percentage points. For illustrative
purposes, it is estimated that the current average daily loan balance
outstanding under the line of credit is $1.1 million. Assuming that the same
balance were to exist for an entire year, then a one percentage point increase
in the Prime Rate over that same period would result in additional annual
interest expense of $11,000 ($1,100,000 x .01). Two of Big Sky's long-term debt
agreements also contain variable interest rates that are tied to the Prime Rate.
The combined outstanding principle balance of those loans at September 30, 2002
is approximately $140,000, with the balances declining as payments are made.
Using the same hypothetical increase of one percentage point in the Prime Rate
would result in additional annual interest expense of less than $1,400 due to
the continual decline in the principle balance. All other long term debt
agreements contain fixed interest rates.
12
PART II. OTHER INFORMATION
BIG SKY TRANSPORTATION CO.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Material Contracts
DOT Order 2002-8-3 issued August 7, 2002 establishing final subsidy
rate for Big Sky as Essential Air Service carrier at seven Montana
points. This order amends DOT Order 2000-11-11 by revising subsidy
rates for the period October 1, 2001 through November 30,2002 and is
incorporated herein by reference.
DOT Order 2002-8-1 issued August 2,2002 establishing final subsidy rate
for Big Sky as Essential Air Service carrier for Moses Lake/Ephrata,
Washington. This order amends DOT Order 2001-6-22 by revising subsidy
rates for the period October 1, 2001 through July 31, 2003 and is
incorporated herein by reference.
Merger Agreement - Agreement and Plan of Merger with Mesaba Holdings,
Inc. and Ranger Acquisition Corporation entered into on September 26,
2002 filed with report on Form 8-K on September 27, 2002 and
incorporated herein by reference.
B) Reports of Form 8-K
On September 27, 2002 Big Sky filed a report on Form 8-K incorporating
a joint press release with Mesaba Holdings that announced the Merger
Agreement (subject to contingencies) between Big Sky and Mesaba
Holdings, including a planned tender offer to Big Sky's shareholders.
That report on form 8-K and exhibits thereto are incorporated herein by
reference.
Exhibit 99.1 Certification of Chief Executive Officer and Interim Chief
Financial Officer
13
BIG SKY TRANSPORTATION CO.
Signature
The Registrant, by the undersigned, has signed this report in accordance with
the requirements of the Securities Exchange Act of 1934.
BIG SKY TRANSPORTATION CO.
Registrant
By: /s/ Kim B. Champney
-----------------------
President & CEO
November 14, 2002
14
CERTIFICATIONS
I, Kim B. Champney Chief Executive Officer and Interim Chief Financial Officer
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Big Sky Transportation
Co.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 14, 2002
/s/ Kim B. Champney
Chief Executive Officer and Interim Chief Financial Officer