ITEM 1. BUSINESS
GENERAL
CCAIR, Inc. (the "Company") is a Charlotte, North Carolina based regional air carrier providing regularly scheduled passenger service to 25 cities in Alabama, Georgia, Kentucky, Maryland, Ohio, North Carolina, South Carolina, Virginia, and West Virginia, primarily from a hub at the Charlotte/Douglas International Airport. The Company currently operates a fleet of 27 turboprop passenger aircraft with 1,409 weekly departures scheduled over a route system covering approximately 242,400 miles. The Company was incorporated under Delaware law in July 1984 under the name Sunbird Airlines 1984, Inc. for the purpose of purchasing substantially all of the assets of Sunbird Airlines, Inc. The Company changed its name to CCAIR, Inc. in January 1986.
The Company's business has involved providing service for business travelers from small- and medium-sized communities in its market area to connecting flights of major carriers, principally USAir, Inc. ("USAir"), at the hub operations of USAir at the Charlotte/Douglas International Airport. In addition, the Company operates a small number of flights into USAir's Baltimore hub and Raleigh, North Carolina. In order to market the Company's services, the Company has an agreement with USAir that permits the Company to operate under the name "USAir Express" and to charge their joint passengers on a combined basis with USAir. (See discussion under "Business Agreement with USAir" below). The Company believes that its use of USAir's "US" flight designator code continues to be the most significant factor contributing to its ability to compete for passengers and to its historical growth.
On March 16, 1992, the U. S. Bankruptcy Court for the Western District of North Carolina issued a final decree closing the Chapter 11 proceeding which the Company initiated in July 1990. The Company's Plan of Reorganization established annual payment obligations to its creditors to be made on August 31 of the years 1992 through 1999. The Company has fulfilled its obligations with respect to eleven of the fourteen classes of creditors and has paid total claims of $2,437,000. The Company has restructured the payments to two of the remaining classes of creditors and has three annual payments of $166,000 due to the other remaining class of creditors.
Unless otherwise indicated, references in this Annual Report to years mean the Company's July 1 to June 30 fiscal years and "fiscal 1996" means the fiscal year that began on July 1, 1995 and ended on June 30, 1996.
BUSINESS AGREEMENT WITH USAIR
Over 80% of the Company's passenger revenue is generated by passengers who are connecting with USAir flights and is determined under an agreement for the sharing of joint passenger fares and division of revenue with USAir (the "Agreement"). The Agreement expires on October 31, 1998. The Agreement provides that it may be terminated upon 180 days prior written notice for any reason by either USAir or the Company or upon ten (10) days prior written notice by USAir under certain conditions, including if: (i) the Company fails to maintain at least a minimum required operating schedule; (ii) during any one month the Company's flight completion percentage is less than 96% due to cancellations attributable to maintenance or operational deficiencies within the Company's control; (iii) the Company fails to comply with the trademark licensing provisions of the Agreement; (iv) the Company becomes insolvent; or (v) there is a change of control or ownership of 51% or more of the Company's common stock without the consent of USAir.
The Agreement provides for coordinating schedules and reservations, joint fares and advertising. In addition, the Agreement provides that USAir or its affiliates will provide to the Company check-in, ticketing, baggage handling and security services at twelve (12) airports including Charlotte/Douglas International Airport in Charlotte, North Carolina. As of February 1, 1994, the Company assumed from USAir total responsibility for ground operations at Concourse D of the Charlotte/Douglas International Airport pursuant to an agreement that requires USAir to pay a monthly handling fee to the Company. The fee is currently approximately $354,000 per month.
BUSINESS AGREEMENT WITH USAIR, CONTINUED
The Agreement also authorizes the Company to operate as "USAir Express", to use the USAir "US" flight designator code to identify its flights and fares for purposes of computer reservations, printed schedules, and tickets, and to display the USAir colors and "USAir Express" logo on its fleet of aircraft. The Company does not have the exclusive rights to the "USAir Express" name or other attributes described above. USAir has two subsidiaries serving the Charlotte/Douglas International Airport, Piedmont Airlines ("Piedmont") and PSA Airlines, Inc.; additionally, USAir affiliate, FloridaGulf Airlines, a division of Mesa Airlines, Inc. serves the Charlotte/Douglas International Airport. These regional airlines operate to destinations not served by the Company but also utilize the "USAir Express" name and other USAir attributes. The Company pays USAir fees based on the number of passengers it boards and for reservations services.
The Agreement is a significant factor in the Company's operation and termination of the Agreement would have a material adverse effect on the Company's business. Additionally, the Company's business could also be adversely affected by events that adversely affect USAir. Although USAir has recently demonstrated significantly improved financial performance, USAir believes that it must continue to lower its costs in order to compete effectively in a low fare environment. For the six months ended June 30, 1996 and the year ended December 31, 1995, USAir Group, Inc. reported net income applicable to common stockholders of $124 million and $34 million, respectively. USAir Group reported a net loss applicable to common shareholders of $763 million for the year ended December 31, 1994.
OPERATING STRATEGY AND SEASONAL NATURE OF BUSINESS
The Company's operating strategy is designed to attract interline passengers from small- and medium-sized communities in its market area who wish to connect with flights on major carriers, principally USAir, at Charlotte/Douglas International Airport. In addition, the Company seeks to attract passengers for its local flights between destinations serviced by the Company. The Company particularly emphasizes providing reliable and conveniently scheduled service for business travelers.
The Company's passenger traffic is influenced by seasonal travel. Increases in passenger traffic generally occur in the months of March through October and decreases in November through February. The Company's operations also are influenced by the weather, principally in the winter months.
ROUTES
The Company operates a "hub and spoke" route system with Charlotte as its hub. The Company's operations are a component of the "hub and spoke" route system strategy employed by USAir at Charlotte. The Company's route system currently includes service between Charlotte/Douglas International Airport and twenty (20) other airports as well as service between Raleigh/Durham, North Carolina and Asheville, North Carolina, Charleston and Greenville/Spartanburg, South Carolina and Norfolk, Virginia.
The following table sets forth selected information about the Company's route system and scheduling as of September 20, 1996.
The Company continually reviews and analyzes its route structure for the purpose of proposing adjustments in flight schedules. Such adjustments are implemented after the Company receives the consent of USAir to the adjustments.
FARES
The Company derives its passenger revenues from joint fares involving travel on the route system of both the Company and USAir and from local fares. Approximately 80% of the Company's passenger revenues are derived from joint fares, that is, fares which are shared with USAir. Local fares, which are fares for flights provided by the Company within its route system, account for the balance of the Company's passenger revenues.
The Company's revenues from joint fares are dependent on pricing decisions made by USAir and the Company has little ability to influence such pricing decisions. The Company prices its local fares to be comparable with fares charged by major carriers in similar markets. The Company seeks to maximize its passenger yields by restricting the number of discount fares for passengers on flights with high passenger demand.
The Company realized improved average passenger fares of $82.25 in fiscal 1996. This compared favorably with fares in fiscal 1995 and fiscal 1994, when the average fare was $72.01 and $69.06, respectively. The depressed fares in 1994 and the first half of 1995 were a result of the initiation of service to Greensboro, North Carolina and Greenville/Spartanburg, South Carolina by Continental Lite, a low-fare division of Continental Airlines. USAir reduced fares, including the joint fares shared with the Company, to avoid losing market share and to stimulate traffic. Continental eliminated the Continental Lite concept in the third quarter of fiscal 1995, which allowed USAir to alter its pricing strategy and thus resulted in increased yields for the Company based upon higher joint fares. The Company currently projects fares to remain at levels achieved in fiscal 1996 throughout 1997. However, many factors, including, but not limited to, competition, actions by USAir, fuel costs, regulation, and general economic conditions can impact fares charged by the Company.
WORKING CAPITAL
The Company's air traffic receivables are settled through the Airlines Clearing House and collected monthly, one month in arrears. To reduce the cash flow problems caused by the payment of receivables one month in arrears, the Company has obtained a line of credit in the amount of $3.0 million from British Aerospace Asset Management Turboprops ("AMT") an affiliate of British Aerospace, Inc. ("BAI").
WORKING CAPITAL, CONTINUED
Under the line of credit, the air traffic receivables, after set-off of amounts due USAir and other airlines, are transferred from the Airlines Clearing House to a pledge account with a bank. From that account, in accordance with irrevocable instructions, funds are transferred to AMT to pay for any sums due under the line of credit and then to Jet Acceptance Corporation ("JACO"), an affiliate of BAI, for payments due under lease obligations. The balance in the pledge account is then paid to the Company.
Due to the timing of the Airlines Clearing House settlement in June, the Company held the net Clearing House funds in its Clearing House bank account on June 30, 1996. Therefore, the Company's balance sheet at June 30, 1996 reflects the net Clearing House settlement of $5,023,000 as cash. The obligations to the BAI affiliates described above were reflected as current liabilities on the June 30, 1996 balance sheet and paid on July 1, 1996.
MARKETING
The Company's services are promoted primarily through listings in computer reservation systems and the Official Airline Guide and through direct contact with travel agencies and corporate travel departments. The Company and USAir have agreed to coordinate advertising and public relations for the USAir Express program.
In addition, the Company's services are advertised in newspapers and on radio, television and outdoor billboards. Advertising is done on a cooperative basis with USAir. The Company, from time to time, has offered promotional fares to introduce new service and to stimulate traffic on special occasions and holidays. The Company also has ticket arrangements with major United States and foreign air carriers that allow these carriers to write interline tickets on the Company's flights.
COMPETITION
The principal competition for the Company is the air service provided by major and other regional air carriers operating from hub airports in Atlanta and Raleigh/Durham. From these hub airports, Delta Air Lines ("Delta") and Midway Airlines ("Midway") offer service to some destinations also served by USAir through its hub operations at the Charlotte/Douglas International Airport. The Company competes with Delta and Midway and with regional air carriers that have joint marketing agreements with them for passengers traveling to destinations served through hub airports. The principal customers for these services are business travelers and competition is based upon scheduling and flight connections, reliability and, to a lesser extent, pricing. The Company constantly reviews its scheduling and the frequency of its flights to reduce the layover time experienced in connecting with a USAir flight, in order to minimize the length of the combined trip and to compete with similar service offered by Delta and Midway. To a lesser extent, the Company competes with air service by United Airlines and its regional airline at Washington, D.C. (Dulles) and various forms of ground transportation, primarily private automobiles, which are used to travel to a hub airport or other airport offering direct air service. The Company believes that the principal factors affecting the Company's competitive position are scheduling and flight connections, reliability, pricing, customer service and type of aircraft.
EMPLOYEES
As of June 30, 1996, the Company had 639 employees. These employees included 186 pilots and copilots, 49 flight attendants, 278 customer service personnel, 73 maintenance personnel and 53 other management, administrative, accounting and marketing personnel.
FUEL
Fuel costs constitute 9% to 10% of the Company's total operating expenses. The Company obtains substantially all of its fuel under a consortium agreement with other airlines. Such arrangement, however, does not assure the Company access to any specified quantity of fuel and prices thereunder reflect market prices for fuel. To date, such arrangement has provided adequate supplies of fuel for the Company. The Company became obligated to pay the 4.3(cent) per gallon Federal Excise Tax on transportation fuels on October 1, 1995. Airlines had a three-year exemption from this tax, which became law during 1992. Since the airline exemption expired, various attempts have been made to either rescind this tax or reinstate the airline exemption. These efforts have been unsuccessful to date. The Company cannot predict the ultimate outcome of future attempts to either rescind the tax or reinstate the airline exemption. The Company estimates that this tax will result in additional operating expenses of approximately $370,000 for fiscal 1997 based on its current projected aviation fuel consumption. The Company recognized expense of approximately $275,000 as a result of this tax during fiscal 1996.
Fuel prices have experienced significant increases due to market fluctuations, resulting in increased costs per gallon for the Company. However, the Company is currently in negotiations with other providers of fuel in an effort to achieve a more favorable unit price. As fuel expense is currently only 9.6% of operating expenses, the Company does not believe it is cost effective to attempt to manage fuel price risk. As such, no derivatives or other off-balance sheet instruments are used to hedge fuel prices.
GOVERNMENTAL REGULATION
The Company is subject to the Federal Aviation Act of 1958, as amended (the "Federal Aviation Act"), under which the Department of Transportation (the "DOT") and the Federal Aviation Administration (the "FAA") exercise regulatory authority over air carriers. The FAA regulates air safety and flight operations as well as aircraft noise emissions. The DOT regulates the economic and consumer-related aspects of the airline industry. The FAA reviews operations of all carriers, including the Company, on an on-going basis to determine compliance with FAA regulations and operating authorizations.
The Company applied for a Certificate of Public Convenience and Necessity under Section 401(d)(1) of the Federal Aviation Act (the "401 Certificate") in order to facilitate aircraft financing. The 401 Certificate was granted on September 10, 1992.
The Company has complied with all equipment requirements currently mandated by the FAA. The installation of aircraft collision avoidance systems ("TCAS") on the Jetstream 31 aircraft in December, 1995 concluded a three-year project of installing the TCAS and ground proximity warning systems in the entire fleet. This project cost approximately $1,400,000, of which approximately $375,000 was expended in fiscal 1996.
Although the Company cannot offer assurances in this regard, it believes it is in compliance with all requirements necessary to maintain, in good standing, its operating authorities granted by the DOT and the FAA, and that its aircraft comply with all applicable Federal and local laws and regulations pertaining to aircraft noise.
The Company is subject to various Federal and local laws and regulations pertaining to other issues of environmental protection. The Company believes it is in compliance with all governmentally imposed environmental protection standards.
The Federal Communications Commission ("FCC") has jurisdiction over the use of radio facilities by air carriers. Airlines, and in some cases their personnel, operating transmitters and receivers must obtain licenses from the FCC, which may be revoked for cause. The Company believes that it and its personnel hold all required FCC licenses.
THE ESSENTIAL AIR SERVICE PROGRAM
Pursuant to the Airline Deregulation Act of 1978, certain communities in the United States are guaranteed specified levels of essential air service (the "EAS Program"). The EAS Program provides for the payment of compensation to carriers which volunteer to provide subsidized essential air service and are selected by the DOT to provide such service. The Company has received subsidy payments under the EAS Program for Danville and Shenandoah Valley, Virginia. DOT subsidy payments accounted for approximately 0.5% percent of the Company's revenues in fiscal 1996. Under provisions in the EAS Program, the Company ceased service to Danville in October, 1995 and ceased to receive subsidized compensation in Shenandoah Valley effective July, 1996 and thus anticipates no EAS revenue during fiscal 1997.
EXECUTIVE OFFICERS OF THE COMPANY
ITEM 2.
ITEM 2. PROPERTIES
GROUND FACILITIES
The Company presently occupies approximately 10,325 square feet of office space in the Charlotte/Douglas International Airport's old terminal building, in Charlotte, North Carolina and 15,000 square feet of hangar space and 10,000 square feet of space for operations use also at the Charlotte/Douglas International Airport. The office space is used for the Company's principal executive and administrative offices and the hangar facility contains the Company's maintenance operations for its aircraft, as well as maintenance support and inventory. The office space and hangar facility are leased under commercial use permits with the City of Charlotte, North Carolina. The permits are a month-to-month tenancy with an annual rental of $163,000 and are cancelable upon thirty (30) days notice by either party.
The Company's counter, baggage, gate and ramp spaces at the airports served by the Company are provided by USAir except at thirteen (13) airports where the space is leased from the airport authorities. With respect to the ground operations at Concourse D of the Charlotte/Douglas International Airport, the Company provides those services under contract with USAir. USAir reimburses the Company for its costs in providing the services.
PASSENGER AIRCRAFT
The Company presently services its passenger route system with a fleet of 27 leased turboprop aircraft. The following table sets forth certain information with respect to the Company's passenger aircraft as of September 1996:
The Company operates its Shorts aircraft primarily on its higher density and shorter-haul markets and its Jetstream aircraft for lower density and longer-haul segments. The Dash 8 aircraft were leased to operate in certain longer-haul and high density markets. All of the aircraft are leased, with terms for the Shorts extending a maximum of eight years and the Jetstreams extending for a maximum of six years. The renegotiated Dash 8 leases extend to 2007.
With respect to the Company's renegotiation of its aircraft lease payments in fiscal 1995 (discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations), the lease reductions would cease in the event of a merger, consolidation, acquisition or other significant change in the ownership of the Company.
MAINTENANCE OF AIRCRAFT
The engines on all of the Company's Jetstream 31 aircraft are maintained under a continuous airworthiness maintenance program. Overhauls are performed on these engines as needed to meet performance standards recommended by the manufacturer. The engines on the Shorts 360 aircraft undergo overhaul after every 8,000 hours of operation. This interval is based on the manufacturers' approved sampling program which allows for escalation at 500- hour intervals after the completion of a satisfactory engine overhaul. The engines on the Company's Jetstream 31 aircraft undergo disassembly inspection and repair after every 3,500 hours of operation. This interval is also based on the manufacturers' recommendation. The engines on the Dash 8 aircraft undergo overhaul after every 12,000 hours of operation. This interval is also based on the manufacturers' recommendation. The engines on the Shorts 360 and Dash 8 aircraft are maintained under a continuous airworthiness maintenance program which includes computerized engine analysis.
Substantially all of the maintenance, service and inspection of aircraft, except major engine and component overhaul, is performed by Company personnel. Major engine repair is performed by the engine manufacturer or its authorized overhaul agencies. Component overhaul is performed by the applicable manufacturer or an appropriate contractor.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None reportable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None reportable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock was first sold to the public in July of 1989, when the Company completed an initial public offering of 1,904,518 shares of common stock, of which 1,283,872 shares were sold by the Company and the balance was sold by existing Company stockholders. The Company's common stock is traded in the over-the-counter market, called the Small-Cap Stock Market of NASDAQ. The common stock is quoted under the symbol "CCAR". The following table sets forth the high and low bid quotations for the Company's common stock in the over-the-counter market as reported by NASDAQ for the quarters of the last two (2) fiscal years. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
FISCAL 1995 HIGH LOW
First Quarter 2 3/8 1 1/2 Second Quarter 2 1/4 7/8 Third Quarter 2 9/16 1 1/8 Fourth Quarter 3 11/16 1 3/4
FISCAL 1996 HIGH LOW
First Quarter 3 15/16 2 1/4 Second Quarter 2 5/8 1 7/8 Third Quarter 2 3/8 1 1/2 Fourth Quarter 2 3/8 1 5/8
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS, continued
At September 20, 1996 there were approximately 430 stockholders of record.
The transfer agent for the Company's common stock is First Union National Bank of North Carolina, Charlotte, North Carolina.
During its 1995 and 1996 fiscal years, the Company did not pay cash dividends on its common stock. Based upon its forecast for fiscal 1997, the Company does not plan to pay cash dividends in fiscal 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT INCOME PER SHARE)
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT INCOME PER SHARE), CONTINUED
(1) See Note 5 to financial statements regarding certain capital lease obligations which are included in long-term debt in this schedule.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth selected operating data relating to the Company's passenger service for fiscal years 1996, 1995 and 1994.
(1) One revenue passenger transported one mile. (2) The product of the number of aircraft miles and the number of available seats on each stage, representing the total passenger capacity offered. (3) The ratio of revenue passenger miles to available seat miles, representing the percentage of seats occupied by revenue passengers. (4) The passenger revenue per revenue passenger mile.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS, CONTINUED
The following table sets forth selected operating data relating to the Company's passenger service for each quarter of fiscal year 1996 (see Note 12):
Fourth quarter results include adjustments for third quarter estimates. These estimates related to maintenance expenses, USAir service fee expenses and property tax recoveries. After expenses based on third quarter estimates were finalized in the fourth quarter, third quarter maintenance expenses were understated by $420,000 and USAir service fees were understated by $150,000. In addition, after final negotiations with taxing authorities were concluded in the fourth quarter, the savings realized from property tax reevaluations originally anticipated in the third quarter were reduced by $90,000.
FISCAL 1996
The operating results for fiscal 1996 continued the positive trend from fiscal 1995. Passenger revenues increased 6.0%, attributable to the improved yield per revenue passenger mile of 44.5(cent) in fiscal 1996 from 42.7(cent) in fiscal 1995. The result of these overall improvements is a current year operating income of $886,000 and a net income of $96,000 versus operating income of $553,000 and a net loss of $362,000 in fiscal 1995. Operating expense increases of 4.6% partially offset the revenue improvement.
Annual revenues for the 1996 and 1995 fiscal years were $66,234,000 and $63,039,000, respectively. The 5.1% increase over the prior year was due to the absence of low-fare competitors in the Company's markets and to continued industrywide fare growth. Additionally, in February, 1996 the Company implemented local market fares for travel between Company-controlled destinations, thus stimulating travel and increasing revenues. Revenues were significantly hampered, however, by inclement weather in the Company's operating area during the third quarter of 1996. Severe winter storms caused the cancellation of approximately 1,200 flights during this quarter. As a result, the Company estimates that operating revenues were adversely impacted by approximately $1,100,000. Harsh weather in the northeast section of the United States caused further revenue losses as connecting passengers with reservations on the Company's flights were unable to initiate their trips. The Company experienced yield erosion in the months of May and June, 1996. The yield declined from 44.4(cent) in April to 42.5(cent) in May and 41.7(cent) in June. While some slippage in yield is normal, the presence of low-cost/low fare competitors in the Company's service area exacerbated the negative effects. While these pressures have subsided in the first quarter of fiscal 1997, yield fluctuations can be volatile and as such cannot be predicted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1996, CONTINUED
Available seat miles increased 2.2% over fiscal 1995. The growth is primarily due to increased daily service to longer-haul markets, including Columbus, Georgia, Lexington, Kentucky and Lynchburg, Virginia, increasing total weekday departures to 216 from 213 in fiscal 1995. The Company, while able to implement changes in its flight schedule after receiving the consent of USAir, has limited control over the cities it serves as a USAir Express carrier. The Company is not aware of schedule changes being contemplated that would have a significant impact on operations.
While the number of revenue passengers carried decreased by 7.2%, revenue passenger miles increased 1.6% as compared to fiscal 1995 as a result of changes to the Company's service schedule. Because the low-fare competition of Continental Lite in 1995 was not present in 1996 to depress fares, the Company was able to maintain higher average ticket prices of $82.25 in fiscal 1996 versus $72.01 in fiscal 1995, thus increasing yield per revenue passenger mile to 44.5(cent), an increase of 4.2% over 1995.
Operating costs per available seat mile increased from 20.5(cent) to 20.9(cent) for fiscal 1995 to 1996. Contributing factors include increases in fuel costs, pilot training expenses, USAir fees and engine overhaul expenses. A portion of these increases were offset by cost reductions recognized in the Company's aircraft hull insurance, professional fees and property tax expenses.
Flight operations expense increased 4.8% to $23,490,000 in 1996, compared to $22,416,000 in fiscal 1995. In fiscal 1995 reductions in aircraft lease rates were achieved through negotiations with lessors, which the Company continued receiving the benefit of in fiscal 1996. Additionally, more favorable hull insurance rates and reductions in the insured value of the Company's aircraft yielded a decrease in hull insurance expense of 12.9% or $228,000 as compared to 1995. Several factors impacted the pilot salaries, resulting in escalations from $7,428,000 in fiscal 1995 to $8,512,000 in 1996, a 14.6% increase. Pilot turnover in the fourth quarter was exceptionally high due to recruiting and hiring by the major airlines. Because the internal pilot reserve was depleted, the Company incurred significant training costs in order to maintain necessary crew levels. Additionally, during the period of crew shortages, flight lines were being covered by existing pilot crews at the higher pay rates due to overtime. The effect of these factors in the fourth quarter of 1996 as compared to the same period of 1995 is an increase in salaries and training costs of $480,000, or 30.2%. Furthermore, the final two increases under the pilot salary reduction plan were phased in during October, 1995 and February, 1996. Under the plan negotiated with the Air Line Pilots Association ("ALPA"), pilot salaries were initially reduced by 16% in October, 1994, with 4% of the original concession being reinstated after each subsequent four-month period. Flight attendant salaries increased 6.3% or $62,000 over the previous fiscal year due to scheduled service increases.
Crew travel expenses, encompassing meal allowances and accommodations, remained relatively unchanged at $1,280,000 and $1,366,000 from fiscal year end 1995 to 1996, respectively. In April, 1996 four new crew bases were established in Lynchburg, Virginia, Cincinnati, Ohio, Lexington, Kentucky and Kinston, North Carolina, placing a total of 14 crews at these locations. While crew bases are designed to reduce crew travel expenses, the savings were not evident for the fiscal year ended June 30, 1996 because of expenses associated with moving the crews. The Company estimates that it will recognize a savings of approximately $250,000 in fiscal 1997 related to the establishment of additional crew bases.
Fuel and oil expenses are sensitive to market fluctuations in price and ASMs flown. As previously discussed, ASMs grew by only 2.2% over the prior year. However, the escalation of market prices of fuel significantly affected the current year's fuel expense. Fuel expenditures totaled $5,406,000 in fiscal 1995, representing an increase of 15.8% to $6,262,000 in 1996, when the average price per gallon of fuel increased from 67.1(cent) to 75.8(cent). Total fuel consumption was 8.3 million gallons versus 8.1 million gallons in fiscal years 1996 and 1995, respectively. The increase between years was directly related to the increased service schedule. Fuel expense for 1996 includes the 4.3(cent) per gallon federal excise tax on transportation fuels which the Company became obligated to pay on October 1, 1995. As fuel expense is only 9.6% of total operating expenses, the Company does not believe it is cost effective to attempt to manage fuel price risk, thus no derivatives or other off-balance sheet instruments are used for hedging purposes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations, continued
FISCAL 1996, CONTINUED
Maintenance materials, repairs and overhead experienced an 8.2% increase over the previous year, from $11,619,000 to $12,566,000 in fiscal 1996. The escalation was due exclusively to the increase in annual amortization of engine and gear overhauls from $3,496,000 in 1995 to $4,393,000 in 1996. From March, 1995 through the end of fiscal 1996, expenditures related to overhauls of Dash 8 airframe and engine components were $1,509,000, with amortization lives ranging from 11 to 48 months. Amortization of these overhaul additions was the principal factor in the increase in overhaul expense for the fiscal year ended 1996.
Ground operations expense increased 6.1% over 1995, as expenses went from $7,386,000 to $7,839,000. The principal factor in the higher expenses is the increase in USAir handling fees that the Company pays as a result of USAir handling the Company's passengers in certain markets. These handling fees have increased as follows: March, 1994 $5.70 per passenger, March, 1995 $6.20 per passenger, July, 1995 $6.50 per passenger and January, 1996 $7.75 per passenger. The increase in handling fees has been mitigated by the schedule changes which enable the Company to handle more of its own traffic and the Company's reimbursement rate for operating Concourse D which increased to $354,000 in January, 1996. The Company cannot predict the timing or extent of any future passenger handling fee adjustments. Inclement weather in the winter months caused an additional $200,000 in aircraft servicing charges in fiscal 1996 as compared to 1995, as deicing fluid purchases drastically increased.
Advertising, promotion and commissions expense decreased from 14.8% of passenger revenue in fiscal 1995 to 14.1% of passenger revenue in 1996. The reason for this decrease was the revised rate structure for commissions paid to travel agencies, which went into effect during March, 1995. Commissions paid on travel agency-generated tickets decreased from an average of 10.0% in 1995 to 8.9% in 1996. As approximately 80% of tickets collected by the Company are written by travel agencies, the 1996 savings from this structure change was approximately $575,000. Partially offsetting this reduction was an increase in reservations fees charged by USAir. On January 1, 1996, the reservations fee charged changed to a new fee structure resulting in an additional $360,000 in expense ($.90 per passenger) during the last two quarters of the 1996 fiscal year over fees which would have been paid under the old structure. The Company cannot predict the timing or extent of any future reservations fee adjustments.
Total general and administrative expenses decreased 11.0% or $529,000 from 1995 to 1996. Contributing to this decrease were reductions in professional fees incurred and property tax assessment adjustments. Professional fees were lower due to the absence of extensive lease and union negotiations that were present during prior years. Property tax assessments have been reduced as of the tax year beginning January 1, 1996, going forward through the revaluation of the aircraft fleet to market value as of the date of filing (January 1, 1996) in the Company's most significant ad valorem taxing district, North Carolina. This revaluation and other property tax adjustments resulted in savings in calendar 1996 of $200,000. The Company intends to refile personal property returns for the years available under local statutes (1991-1995), and anticipates refunds of $200,000 related to property reclassifications. Such refunds will be recorded as a reduction of general and administrative expense in the period in which they are received.
Depreciation and amortization decreased slightly from $1,845,000 in fiscal 1995 to $1,814,000 in 1996, as asset additions for rotable flight equipment, ground equipment and leasehold improvements were minimal in the current year, and thus little depreciation was generated on current-year property additions.
In fiscal 1996, recognition of net operating loss carryforwards offset income tax expense at the statutory rate, but the Company's effective federal income tax rate was 15.9%, which reflects the impact of the alternative minimum tax on operations. Income tax expense was thus $18,100 versus $0 in 1995. At June 30, 1996 the Company had approximately $7,777,000 of United States Federal regular tax operating loss carryforwards available to offset future taxable income. These carryforwards begin expiring on June 30, 2005.
The estimates of future results included above are based upon present information regarding operations and future trends. While the Company believes that the estimates constitute its best judgment on future results, the actual results may differ materially from the estimates.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
FISCAL 1995
The operating results for fiscal 1995 reflect significant improvement over fiscal year 1994. The cost reduction plan initiated by the Company was the principal reason for the improvement. This plan reduced operating costs by 5.3%, even though capacity, as measured by available seat miles, increased 5.5%. The operating expense reductions, while encompassing all functional areas within the Company, were focused on the following areas: aircraft leases, pilot pay and passenger handling. Operating results also benefitted from the improved yield per revenue passenger mile, which increased from 40.3(cent) in fiscal 1994 to 42.7(cent) in fiscal 1995. The result of these improvements was operating income of $553,000 and a net loss of $362,000, as compared to an operating loss of $3,877,000 and net loss of $4,756,000 in fiscal 1994.
Revenues for the years ended June 30, 1995 and 1994 were $63,039,000 and $62,092,000, respectively. The 6.0% increase in yield in fiscal 1995 was the result of industrywide fare increases implemented in the third quarter of fiscal 1995 and the elimination of the low-fare division of Continental, Continental Lite, in the same period. Continental Lite was a direct competitor of USAir and the Company in its service area, and USAir reduced fares, including the joint fares shared with the Company, to avoid losing market share and to stimulate traffic in the winter of 1993. The Continental Lite pricing and service strategy was eliminated by Continental Airlines in the third quarter of fiscal 1995, which allowed USAir to alter its pricing strategy and thus resulted in increased yields for the Company based upon higher joint fares.
The number of available seat miles (ASMs) increased 5.5% in fiscal 1995 over fiscal 1994, primarily as a result of changes in the Company's service schedule. In conjunction with USAir's strategy of eliminating jet service to short haul markets and turning this flying over to USAir Express commuter operators, the Company initiated all turbo prop service to Augusta, Georgia in February, 1995 and Jacksonville, North Carolina and Lynchburg, Virginia in May 1995. Also during 1995, the Company ceased service to several cities it had previously served on a shared basis with USAir from Charlotte, North Carolina. These cities were Wilmington, North Carolina, Asheville, North Carolina, Tri-Cities, Tennessee, Columbia, South Carolina, Huntsville, Alabama and Knoxville, Tennessee. The net effect of this schedule change was an increase in ASMs, as fourth quarter capacity increased by 5.5% over the third quarter and 6.9% over the same quarter in fiscal 1994.
The number of revenue passengers carried decreased by 2.9% and revenue passenger miles (RPMs) decreased by 4.3% in fiscal 1995 as compared to fiscal 1994. The primary reason for the reduced passengers and RPMs is the elimination of the low-fare, traffic stimulation environment which existed in the Company's service area until the cessation of Continental Lite as previously addressed.
Operating costs per available seat mile in fiscal 1995 declined 10.1% from 22.8(cent) to 20.5(cent), as compared to the previous fiscal year. The increases in fuel, maintenance, advertising, general and administrative and depreciation were more than offset by decreases in flight operations and ground operations.
Flight operations expense decreased by 12.4% in fiscal 1995 to $22,416,000 compared to $25,586,000 in fiscal 1994. The principal reason for this reduction was a 19.1% decrease in aircraft lease expense. See discussion below under Liquidity and Capital Resources. In addition, pilots' salaries and related costs decreased 4.7% in fiscal 1995 as a result of the implementation of a salary reduction plan negotiated with the Air Line Pilots Association (ALPA). The reduced pay levels began in October 1994 and will be phased back in over sixteen months. The plan entailed an initial 16% pay reduction in October 1994. After each subsequent four-month period, an additional 4% of the initial reduction was reinstated until February 1996, at which time the salaries reverted to the levels prior to October 1, 1994. The Company has previously estimated that the ALPA agreement would result in savings of approximately $850,000 from October 1, 1994 through January 31, 1996 at present staffing levels, of which $638,000 would be realized in fiscal 1995. The actual savings were $318,000, which differed from the projection due to the increased block hours flown due to the service schedule increase in the fiscal 1995 fourth quarter.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations, continued
FISCAL 1995, CONTINUED
Crew travel expenses were reduced by 9.7%, or $137,000, in fiscal 1995 as a crew base was established in Augusta, Georgia, to decrease crew per diem and lodging expenses. A Jacksonville, North Carolina crew base was established in August, 1995. Efficient utilization of pilots allowed the Company to operate the increased capacity without adding new pilots, thus pilot training costs consisted only of recurrent training. This efficiency enabled the Company to reduce crew training costs by $160,000, or 34.0%. Flight attendant salaries and related costs increased $77,000 or 7.3%, due to scheduled service increases, and hull insurance expense increased 11.4%, or $182,000, due to rate increases.
Fuel and oil expense increased to $5,406,000 in fiscal 1995 from $5,202,000 in fiscal 1994. The average cost per gallon of fuel into plane decreased to 67.1(cent) in 1995 from 68.3(cent) in 1994, reflecting the continued savings to the Company from the purchase of fuel through a USAir subsidiary. Total fuel consumption was 8.1 million gallons in fiscal 1995 versus 7.7 million gallons in fiscal 1994. The increase from year to year was a direct result of increased levels of operations.
Maintenance materials, repairs and overhead increased from $11,270,000 in fiscal 1994 to $11,619,000 in fiscal 1995. The higher costs were attributable to an increase in the number of flight hours flown, however, the cost of maintenance repairs and materials per ASM in fiscal 1995 was 3.8(cent) compared to 3.9(cent) per ASM in fiscal 1994.
Ground operations expense decreased from $9,026,000 in fiscal 1994 to $7,391,000 in fiscal 1995. In July of 1993, USAir increased handling fees that the Company pays for its passengers. At this time the Company was paying $8.24 per passenger handled by USAir. In March of 1994, the Company assumed responsibility for ground operations at Concourse D at the Charlotte/Douglas International Airport in conjunction with the implementation of cost cutting measures by USAir. The Company assumed the responsibility for the salaries and benefits of the Concourse D employees, and in return received $296,900 per month from USAir and a reduction in passenger handling fees to $5.70 per passenger. In January of 1995, the Company's reimbursement rate for operating Concourse D increased to $340,000 per month. In March, 1995, the per-passenger handling fee charged by USAir increased to $6.20 and increased to $6.50 in July, 1995. The Company cannot predict the timing or extent of future passenger handling fee adjustments. The reduction in ground operations expenses, while primarily due to the Concourse D realignment, was also due to operational efficiencies experienced at other stations operated by the Company.
Advertising, promotion and commissions expense increased from $8,921,000 in fiscal 1994 to $9,007,000 in fiscal 1995, a 1.0% increase. This increase is directly related to the passenger revenue increase, as these expenses as a percentage of passenger revenue remained constant, 14.8% of revenue in fiscal 1995 and 14.9% of revenue in fiscal 1994.
General and administrative expense increased to $4,802,000 in fiscal 1995 as compared to $4,369,000 in fiscal 1994. This increase was primarily attributable to passenger liability and property insurance increases of $230,000, or 19%. Passenger liability rate increases more than offset the reduction in passengers and the resultant decrease in RPMs.
Depreciation and amortization increased from $1,595,000 in fiscal 1994 to $1,845,000 in 1995, primarily as a result of increased depreciation on rotable flight equipment reclassified from inventory in fiscal 1994.
FISCAL 1994
The financial results for fiscal 1994 reflected the difficult environment facing the Company. The Company was able to limit the increase in operating expenses to 1.1%, but operating revenue decreased by 1.7%. The decrease in operating revenue was directly related to lower ticket prices caused by increased fare competition and cancellation of flights due to weather in the third quarter. The result was an operating loss of $3,877,000 and a net loss of $4,756,000. These results compare to an operating loss of $2,054,000 and net loss of $2,783,000 in fiscal 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations, continued
FISCAL 1994, continued
For fiscal 1994 as in fiscal 1993, the depressed yield per revenue passenger mile led to net operating losses. The yield per revenue passenger showed a steady increase to 44.2(cent) in the three-month period ended March 31, 1994, but at the end of that period, the yield decreased due to USAir's fare reductions as part of its strategy to avoid losing market share. The number of revenue passengers carried decreased by 3% in fiscal 1994 as compared to fiscal 1993; however, the number of revenue passenger miles increased by 8% over the same periods. In fiscal 1994, the Company's passengers on average took longer flights as evidenced by the 12% increase in the length of average passenger trip over fiscal 1993. The number of revenue passengers carried was affected by a reduction in opportunities to connect traffic over the Charlotte hub and weather-related cancellations in January and February of 1994.
The number of available seat miles increased 1.8% in fiscal 1994 over fiscal 1993, as a result primarily of changes in the Company's service schedule. In the first three-month period, ASMs were in excess of 78 million, but that level was not obtained in the remaining three quarters of fiscal 1994. During the last three quarters of fiscal 1994, the Company reduced and terminated service to Columbus, Georgia and Panama City, Florida, that represented two of the longer stage lengths in the Company's system. For fiscal year 1994, the Company did not have full deployment of its fleet due to capital improvements and overhauls.
Operating costs per ASM in fiscal 1994 declined slightly from 22.9(cent) to 22.8(cent), as compared to the prior fiscal year. The increases in the expense categories of flight operations, ground operations and general and administrative expenses were offset to a degree by decreases in the categories of fuel, maintenance and advertising, promotion and commissions. Flight operations expense had an increase of approximately $375,000 due to the addition of fifteen pilots for anticipated new flying. Those pilots were furloughed in the three-month period ended June 30, 1994. Per-passenger fees charged by USAir for passenger handling and reservations service increased on July 1, 1993, resulting in an aggregate cost increase of approximately $188,000 per month. Those per-passenger fees were reduced on March 1, 1994 resulting in an aggregate cost reduction based on the number of revenue passengers in that period of approximately $234,000 per month. Other efficiencies created by the Company taking over the handling of Concourse D in Charlotte also contributed to the cost reductions. A 40.5% increase in insurance expense affected both flight operations and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs result from continuing operations including capital expenditures necessary to the operation of its aircraft, and the payment of creditors in accordance with the schedule set forth in its Plan of Reorganization as modified by subsequent agreements. During fiscal 1996 the Company satisfied its cash requirements through internally generated funds and borrowings under a revolving line of credit agreement with an affiliate of an aircraft manufacturer, secured by all of the Company's accounts receivable. The Company also utilized short-term loans from certain directors and officers secured by owned flight equipment, and through the deferral of certain scheduled lease payments pursuant to note agreements to satisfy its cash needs.
In September, 1995 the Company and Jet Acceptance Corporation ("JACO") restructured the entire remaining amount due to JACO under the bankruptcy plan, including the August 31, 1995 installment of $327,000. The amount due was approximately $1,232,000, net of $402,000 discount at 15% as of June 30, 1995. Under this agreement, the Company issued a promissory note to JACO in the principal amount of $676,000, payable in forty-eight equal monthly installments of $17,727, consisting of principal and interest, beginning on January 30, 1996. Additionally, the remaining balance due under the bankruptcy plan of $690,000 was satisfied in December, 1995 with the issuance of 325,000 shares of the Company's common stock to JACO. The stock must be held by JACO, with certain exceptions, for a minimum of one year from issue date before it can be transferred. In conjunction with this agreement, the Company agreed to accept delivery of four used Jetstream 31 aircraft prior to June 30, 1996. Two Jetstream 31 aircraft were delivered in fiscal 1996. This agreement was modified in September, 1996, and any further commitment for future additional aircraft beyond the two already accepted was eliminated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES,CONTINUED
RESTRUCTURING
In September, 1996, the Company made the bankruptcy payment of $166,000 due to the unsecured creditors. After the bankruptcy installments due in September, 1996, the Company has payments to unsecured creditors of $166,000 due annually each August until 1999. The Company intends to make these payments when due.
During fiscal 1996 the Company had available a line of credit (the "Line") in an amount not to exceed $2,500,000 from British Aerospace Asset Management Turboprops ("AMT"). AMT is an affiliate of JACO and British Aerospace Holdings, Inc., the company that had previously collateralized the Company's bank Line through a loan purchase agreement. The Line of Credit permits the Company to borrow up to 50% of a borrowing base, which consists of the Company's transportation and nontransportation charges to Airlines Clearing House, Inc. ("ACH") or such greater amount as AMT shall determine, but in no event more than $2,500,000. The Line of Credit is secured by all of the Company's accounts receivable, bears interest at prime + 2% and terminates on December 31, 1996, but must extended by AMT for successive one year periods until December 31, 2001. Subsequent to June 30, 1996, AMT committed to increase the maximum credit available to $3,000,000.
OTHER FINANCING
During fiscal 1996, the Company obtained several short-term loans from certain directors and officers. Amounts borrowed under these loans ranged from $50,000 to $400,000, and earned interest at the rate of ten percent. The aggregate maximum and average amounts outstanding under these loans were $810,000 and $119,000, respectively. In connection with these loans, the Company issued to the lending parties options or warrants to purchase 69,625 shares of the Company's common stock.
CAPITAL EXPENDITURES
Capital expenditures consist of major component overhauls and fixed asset replacement. Capital expenditures in fiscal 1996 were $6,169,000 as compared to $5,437,000 in fiscal 1995. The increase is primarily due to increased expenditures for engine overhauls on the Dash 8 aircraft. The Company projects fiscal 1997 capital expenditures to be approximately $5,900,000. The components of the 1997 capital budget are $5,200,000 of engine overhauls, $500,000 of airframe and landing gear overhauls on the Company's aircraft and $200,000 for other capital items.
OPERATING CASH FLOW
The Company receives payments for airline tickets under interline agreements through the Airlines Clearing House one month in arrears. Historically, this payment in arrears has caused significant cash flow problems in the last half of each month. The Company has a line of credit with AMT to provide a steady cash flow between ACH settlements. The Company believes that the restructuring stated above and improved revenue environment will provide sufficient cash flows to provide for continuing operations, capital expenditures and scheduled debt and bankruptcy payments absent adverse changes in current market conditions. If operating cash flows and the Line of Credit are insufficient to meet obligations, the Company has these financing sources available: issuance of stock, short-term loans from officers and directors, extending terms with trade creditors and restructuring aircraft lease payments.
The Company received with the June Airlines Clearing House ("ACH") payment on the scheduled settlement date of June 28, 1996. However, because the first business day subsequent to receipt of funds was July 1, 1996, the Company maintained possession of the full settlement amount of $5,023,000 as of June 30, 1996. Ordinarily, AMT accesses the settlement on the first business day subsequent to the transfer utilizing amounts necessary to satisfy the Line of Credit balance ($2,500,000 plus interest of $20,000 at June 30, 1996) and accrued aircraft lease payments due to JACO ($351,000) returning the remaining cash funds to the Company's account. Other short-term liabilities not settled from the residual funds on July 1, 1996 included outstanding loans from Company Directors and Officers in the amount of $810,000. Because of the timing of the ACH settlement, the Company also delayed its June 28, 1996 employee payroll to July 1, 1996. Also, accounts payable reflect an increase of $1,488,000 over June 30, 1995 from $4,058,000 to $5,546,000 as of June 30, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Liquidity and Capital Resources, continued
OPERATING CASH FLOW, continued
Accounts receivable increased to $5,937,000 in fiscal 1996 from $5,517,000 in fiscal 1995. The increase is attributable to greater passenger revenue in June, 1996 versus June, 1995 resulting from increased passenger traffic plus an increase in subcontracted handling fees billed to USAir.
Related party receivables went from $1,000,000 in fiscal 1995 to $0 in 1996 as the receivable amount of $1,000,000 recorded in June, 1995 related to the sale and leaseback of certain aircraft engines was received in July, 1995. This sale and leaseback transaction was with a partnership consisting of various members of the Company's Board of Directors.
Other noncurrent assets increased from $35,000 in fiscal 1995 to $632,000 in 1996 as prepayments for engine overhauls expected to be completed in a time period greater than the next twelve months increased by $595,000 over the respective balance sheet dates.
Accounts payable increased to $5,546,000 in fiscal 1996 as compared to $4,058,000 in fiscal 1995 due to the extension of terms with trade creditors and the timing of payments. Notes payable, including current maturities, decreased from $3,338,000 in fiscal 1995 to $2,226,000 in 1996 due to the issuance of stock to satisfy $691,000 in long-term debt and scheduled debt payments.
INFLATION
Inflation has not had a material impact on the Company's operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is submitted beginning on Page of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
PART III
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Items 10 through 13 are incorporated by reference to the Company's definitive proxy statement as filed with the Securities and Exchange Commission.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. & 2. The financial statements and schedule required by this Item can be found as indexed on Page.
3. Exhibits shown by index beginning on page E-1.
(b) Reports on Form 8-K.
None.
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.
CCAIR, INC.
DATE: September 27, 1995 BY: /s/ Kenneth W. Gann --------------------- Kenneth W. Gann, President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
CCAIR, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE NO.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS:
Balance Sheets as of June 30, 1996 and 1995
Statements of Operations for the Years ended June 30, 1996, 1995 and 1994
Statements of Changes in Shareholders' Equity for the Years ended June 30, 1996, 1995 and 1994
Statements of Cash Flows for the Years ended June 30, 1996, 1995 and 1994
Notes to Financial Statements -F-16
FINANCIAL STATEMENT SCHEDULE:
II Valuation and Qualifying Accounts for the Years ended June 30, 1996, 1995 and 1994 S-1
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable, not required or the information presented has been furnished elsewhere.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO CCAIR, INC.:
We have audited the accompanying balance sheets of CCAIR, Inc. (a Delaware corporation) as of June 30, 1996 and 1995, and the related statements of operations and changes in shareholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CCAIR, Inc. as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Charlotte, North Carolina, ARTHUR ANDERSEN LLP September 27, 1996.
CCAIR, INC.
BALANCE SHEETS JUNE 30, 1996 AND 1995 -------------------------
The accompanying notes to financial statements are an integral part of these balance sheets.
CCAIR, INC.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 ------------------------
The accompanying notes to financial statements are an integral part of these statements.
CCAIR, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 -------------------------
The accompanying notes to financial statements are an integral part of these statements.
CCAIR, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 ------------------------
The accompanying notes to financial statements are an integral part of these financial statements.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS --------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of these financial statements follows:
NATURE OF OPERATIONS AND BASIS OF PRESENTATION - CCAIR, Inc. is an independent regional airline providing scheduled passenger service as USAir Express in the southeast United States. CCAIR, Inc. operates within one industry (air transportation) and, accordingly, no segment information is provided.
REVENUE RECOGNITION - Passenger revenue is recognized when service is rendered. Public service revenue represents Federal subsidies received for providing Essential Air Service to certain communities which produce insufficient air traffic to profitably support such service. Rates for such transportation services are determined under the Federal Aviation Act by the Department of Transportation. Revenue is recognized when service is rendered.
FREQUENT TRAVELER AWARDS - The Company does not sponsor its own frequent traveler program. It does honor the USAir program but limits the available program seats. The Company's share of future travel awards to be incurred, if any, is not determinable but incremental costs of providing such awards are believed by management to be immaterial.
CASH AND CASH EQUIVALENTS - Cash equivalents include all investments with an original maturity of three months or less. Cash and cash equivalents are principally held by one bank.
RECEIVABLES - The Company's air traffic receivables are settled through the Airlines Clearing House and collected monthly, one month in arrears.
INVENTORIES - Inventories consist principally of expendable spare parts and operating supplies and are valued at the lower of cost or market, determined on an average cost basis. Expendable parts are recorded as inventory when purchased and charged to operations as used. At June 30, 1996 and 1995, inventories included approximately $357,000 and $380,000, respectively, of parts held for resale, net of a $158,000 reserve for obsolescence.
PREPAID EXPENSES - Prepaid expenses include prepaid insurance and prepaid maintenance (see "Maintenance" section of Note 1 for additional discussion).
DEPRECIATION AND AMORTIZATION - Property and equipment are depreciated to estimated residual values on the straight-line method over their economic useful service lives, ranging as follows:
Flight equipment, excluding spare engines and major overhauls 10 years Ground and other property and equipment 3-10 years
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DEPRECIATION AND AMORTIZATION, CONTINUED
Spare engines are depreciated based on actual hours of usage, with a total estimated flying time of 60,000 hours. Major overhauls of flight equipment are capitalized and depreciated over the period to the next overhaul. See "Maintenance" section of Note 1 for additional discussion.
Leasehold improvements and flight equipment held under capital leases are amortized using the straight-line method over the estimated useful service lives of the related assets, not exceeding the lease term. Cost and accumulated depreciation of property retired or otherwise disposed of are removed from the accounts, and the related gain or loss is included in other income.
MAINTENANCE - Maintenance and repairs are expensed as incurred except for major overhauls. The costs of major overhauls are capitalized when incurred and amortized over the period to the next overhaul (generally 1-4 years). The Company has entered into two maintenance agreements under which the Company prepays for certain engine overhauls based on hours flown. At the time of overhaul, the Company transfers related prepaid amounts to property and equipment, and begins amortization over the period to the next overhaul (generally 1-4 years). At June 30, 1996 and 1995, approximately $1,132,000 and $553,000, respectively, has been prepaid under the agreements, of which approximately $537,000 and $553,000 is included in prepaid expenses on the accompanying 1996 and 1995 balance sheets. The remaining $595,000 is included in other noncurrent assets in the accompanying 1996 balance sheet as it relates to overhauls that management expects not to occur within the next twelve months.
DEFERRED CREDITS - As incentives for the Company to integrate new aircraft into its fleet, certain aircraft manufacturers have provided the Company with cash, spare parts and other credits. These deferred credits are amortized on a straight-line basis over the terms of the related operating leases as reductions in rent expense. In addition, beginning in fiscal 1995, deferred credits also include lease expense in excess of lease payments (see Note 5).
INCOME TAXES - The Company accounts for income taxes according to the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109") which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse (see Note 9).
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of the Company's financial instruments approximates fair value at June 30, 1996 and 1995.
INCOME (LOSS) PER COMMON SHARE - Income (loss) per common share is based on the weighted average number of common shares outstanding after consideration of the effect of common stock equivalents.
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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain amounts included in prior years' financial statements have been reclassified to conform with 1996 presentation.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
2. PETITION FOR RELIEF UNDER CHAPTER 11
THE FILING - As a result of cash flow difficulties and the need for protection based upon its defaults under certain leasing and financing arrangements, the Company filed for Chapter 11 bankruptcy on July 5, 1990.
THE PLAN OF REORGANIZATION (THE "PLAN")
Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petition for relief under the Federal Bankruptcy laws are stayed while the Debtor continues business operations as Debtor-in-Possession. Additional claims arose subsequent to the filing date through September 3, 1991, the Plan's effective date. Such claims resulted from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by the parties-in-interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets ("Secured Claims") also are stayed, although holders of such claims have the right to seek relief from the stay. Secured claims are collateralized primarily by liens on the Company's property and equipment.
The Company received approval from the Bankruptcy Court (the "Court") to pay or otherwise honor certain of its prepetition obligations, including employee wages, insurance, and payables to USAir in the normal course of business. The Company determined that there was insufficient collateral to cover the interest portion of scheduled payments on its prepetition debt obligations and discontinued accruing interest on these obligations. Contractual interest on those prepetition obligations was approximately $847,000, which was $739,000 in excess of reported interest expense in 1991. Chapter 11 provides for reorganization of the Company's debt and equity structure and allows the business to continue operations. Subsequent to filing Chapter 11, the Company engaged in negotiations with its creditors and other parties-in-interest toward achieving a plan of reorganization and a settlement of outstanding claims against the Company. As a result of these negotiations, the Company filed a Plan of Reorganization on April 10, 1991, a Revised Plan of Reorganization on May 3, 1991 and a Revised and Amended Plan of Reorganization on June 12, 1991 (the "Plan") with the Court. On July 19, 1991, the creditors and the Court confirmed the Plan effective September 3, 1991.
In the process of developing the Plan intended to return the Company to profitable operations, management evaluated its aircraft fleet, route system, and relationship with USAir, Inc. Under the Bankruptcy Code, the Company elected to assume or reject certain aircraft leases, real and personal property leases, service contracts and other executory prepetition contracts subject to the Court's review. During 1991, the Company returned three (3) owned aircraft and twelve (12) leased aircraft, although subsequently the Company accepted and took back four (4) of the leased aircraft.
DISTRIBUTION TO CREDITORS UNDER THE PLAN - The provisions of the Plan divide claims and interests into fourteen (14) classes and contain various repayment provisions and compromises of allowed claims. The principal Plan provisions vary depending on the class of claims and are as follows:
1. Payment of ten (10) to twenty (20) percent of allowed claims at the time of the Plan's effective date, with the remainder of such claims paid in equal annual installments over up to eight (8) years;
2. Return of aircraft, parts or equipment in satisfaction of allowed claims or in accordance with settlement agreements;
3. Release of certain liens on aircraft parts and equipment;
4. Issuance of common shares in payment of allowed claims;
5. Compromise of claims for prepetition and postpetition accrued aircraft lease payments; assumption of certain aircraft leases, payment of accrued prepetition and postpetition lease payments on rejected aircraft leases and settlement payments at the effective date as well as in future equal annual installments over up to eight (8) years (see Note 7).
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
3. USAir AGREEMENT
The Company and USAir Group, Inc. ("USAir"), an unaffiliated company, have entered into an agreement (the "Agreement") expiring on October 31, 1998, whereby the Company provides regional air service on air routes of USAir. The majority of passenger revenue is generated from the Agreement through joint passenger fares and division of revenue with USAir. The Company receives use of various USAir service marks including use of the designator code and USAir logo and color patterns. Under the contract, the Company is obligated to pay USAir for reservation services and various ground support services (exclusive of aircraft fueling).
The Company is required to maintain certain flight completion factors and to meet other conditions as specified in the Agreement. Should an event of default occur, the Agreement provides that USAir has the right to terminate the Agreement upon ten (10) days' written notice. The Agreement also provides that it may be terminated by either party upon 180 days' notice.
A summary of other transactions and year-end account balances with USAir and subsidiaries is as follows:
Due to the Company's revenue-sharing arrangement and operational ties with USAir, the Company is, to an extent, currently economically dependent upon USAir. For the six (6) months ended June 30, 1996 and the years ended December 31, 1995 and 1994, USAir reported net income (losses) applicable to common stockholders of approximately $124,000,000, $34,000,000 and ($763,000,000), respectively.
4. ACCRUED EXPENSES
Accrued expenses by major classification are as follows:
5. LEASE TRANSACTIONS
The Company operates using significant amounts of leased property, including aircraft, equipment and facilities. Leases generally are on a long-term, net rent basis whereby taxes, insurance and maintenance are paid by the Company. Rental expenses incurred under all operating leases totaled approximately $11,200,000, $10,934,000, and $13,800,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Monthly rentals under one operating lease are required to be paid in full each month at the time receivables are collected from the Airlines Clearing House. Flight and ground equipment with a capitalized cost of approximately $4,498,000 is included in property and equipment, less accumulated amortization at June 30, 1996 and 1995 of approximately $2,485,000 and $2,031,000, respectively.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
5. LEASE TRANSACTIONS, CONTINUED
The Company leases aircraft and certain equipment from three different lessors. In fiscal 1994, the Company failed to meet certain lease payment obligations totaling approximately $585,000 under aircraft lease agreements with Mellon Financial Services Corporation #3 ("Mellon"), resulting in cancellation of the related agreements. The Company operated the aircraft under interim leases with Mellon through November, 1994. In November, 1994, CIT Leasing Corporation ("CIT"), acquired the four Dash 8 aircraft from Mellon. The Company subsequently signed new lease agreements with CIT, which expire in June, 2007, resulting in an annual reduction of approximately $516,000 in aircraft rental payments. As a result, during the second quarter of fiscal 1995, the Company reversed the $585,000 of accrued rental payments previously due to Mellon as a reduction of flight operations expense.
In July, 1995, the Company did not make a lease payment due Shorts amounting to $306,000. The Company and Shorts are currently negotiating the settlement of this liability. While the terms are indefinite, the Company has recorded the lease payment as a current liability.
The Company entered into a revised aircraft lease agreement with Shorts, effective October 1, 1994, for the Company's nine Shorts 360 aircraft. This revised agreement provided for reductions in lease payments aggregating approximately $94,000 per month for the remainder of the lease term. In addition, the Company entered into a revised aircraft agreement with Jet Acceptance Corporation ("JACO"), effective September 1, 1994, for the Company's twelve Jetstream 31 aircraft. This revised agreement provided for reductions in lease payments aggregating approximately $98,000 per month through December 31, 1995. In September, 1995, JACO agreed to extend the lease reductions for the remainder of the lease term. The JACO lease reductions would cease in the event of a change in control of the Company. Additionally, the Company has agreed to lease replacement Jetstream 31 aircraft, at further reduced rates through December, 2001, upon the expiration of seven of the current leases with JACO during calendar years 1997, 1998 and 1999. The Company also committed to lease two additional Jetstream 31 aircraft during 1995, which were leased by the Company in June and December, 1995. The lease terms for the additional aircraft expire in December, 2001. The Company has accounted for the modifications to the JACO lease agreements as they have occurred. As a result, the Company recorded a deferred credit of approximately $906,000, representing the excess of rent expense recorded on a straight line basis over actual payments made from September, 1994 through September, 1995. This amount will reduce lease expense over the remaining term of the leases. At June 30, 1996 $717,000 (net of amortization of $189,000) of such excess rent expense is included in deferred credits on the accompanying balance sheets.
Future minimum lease payments required under capital and noncancelable operating leases with terms of greater than one year, under these new lease agreements, are as follows:
6. SHORT-TERM BORROWINGS
In February, 1995, the Company obtained a line of credit (the "Line of Credit") in an amount not to exceed $2,500,000 from British Aerospace Asset Management Turboprops ("AMT"), formerly JSX Capital Corporation. AMT is an affiliate of Jet Acceptance Corporation, the leasing company for the Company's fleet of Jetstream 31 aircraft, and British Aerospace Holdings, Inc., the company that had previously collateralized the Company's line of credit from NationsBank, N.A. through a loan purchase agreement.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
6. SHORT-TERM BORROWINGS, CONTINUED
The Line of Credit permits the Company to borrow up to 50% of a borrowing base, consisting of the Company's transportation and nontransportation charges to Airlines Clearing House, Inc. or such greater amount as AMT shall determine, but in no event more than $2.5 million. Subsequent to June 30, 1996, AMT agreed to increase the maximum credit available to $3 million. The Line of Credit is secured by all of the Company's accounts receivable, bears interest at prime + 2% and terminates on December 31, 1996, but must be extended by AMT pursuant to the BAI term sheet agreement entered into during the bankruptcy period. Under this agreement, the Line of Credit may not be terminated until the termination date of the last remaining aircraft sublease assumed or entered into pursuant to the bankruptcy Reorganization Plan. This date is December 31, 2001. While the minimum commitment under this agreement is $1,500,000, the Company anticipates the Line of Credit will be extended at $3,000,000. Under the provisions of the Line of Credit, the Company must comply with certain restrictive operational covenants. Average amounts outstanding under the credit line were approximately $1,825,000 and $1,715,000 during 1996 and 1995, respectively. There was $2,500,000 and $-0- outstanding under the Line of Credit at June 30, 1996 and 1995, respectively.
During fiscal 1996 and 1995, the Company obtained short-term loans from certain directors and officers. Amounts borrowed under these loans ranged from $50,000 to $400,000 during fiscal 1996 and $30,000 to $400,000 during fiscal 1995. Interest at rates related to these loans were ten percent during fiscal 1996 and seven to ten percent during fiscal 1995. The aggregate maximum and average amounts outstanding under these loans were $810,000 and $119,000 during fiscal 1996 and $600,000 and $157,000 during fiscal 1995, respectively. At June 30, 1996 and 1995, $810,000 and $100,000, respectively, were outstanding under these loans. In connection with these loans, the Company issued to the lending officers and directors options and warrants to purchase 69,625 and 78,425 shares of the Company's common stock during fiscal 1996 and 1995, respectively (see Note 10).
7. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable as of June 30, are as follows:
Principal maturities of long-term debt and notes payable are $854,438 in 1997; $491,176 in 1998; $560,717 in 1999; $319,435 in 2000 and $-0- in 2001.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
7. LONG-TERM DEBT AND NOTES PAYABLE, CONTINUED
On August 31, 1994, the Company did not make a bankruptcy plan annual installment payment of $254,000 to Shorts. On March 21, 1995 the Company entered into a $573,000 note agreement with Shorts, whereby the Company agreed to repay the $254,000, along with $318,500 in missed lease payments (see Note 5), in three equal installments due June 1, July 1, and August 1, 1995, along with interest at 10%. At June 30, 1995, $378,500 remained due to Shorts under this note agreement. In September, 1995, the Company reached an agreement with Shorts to restructure the payment of their outstanding note payable and the payment of the entire remaining amount due to Shorts under the bankruptcy plan (approximately $466,000, net of $43,000 discount at 15% as of June 30, 1995). Under this agreement, in consideration of the past due note payable as well as the remaining bankruptcy payments, the Company issued a promissory note to Shorts in the principal amount of $892,067, payable in forty-eight equal monthly installments of $22,625, consisting of principal and interest, beginning on October 1, 1995. At June 30, 1996, $750,700 was outstanding on this note.
A bankruptcy plan annual installment payment of $242,000, originally due to JACO on August 31, 1994, was paid in four equal installments during fiscal 1995. The Company did not pay a bankruptcy plan annual payment of $327,000 to JACO, originally due August 31, 1995. In September, 1995, the Company reached an agreement with JACO to restructure the payment of the entire remaining amount due to JACO under the bankruptcy plan (approximately $1,232,000, net of $402,000 discount at 15% as of June 30, 1995). Under this agreement, the Company issued a promissory note to JACO in the principal amount of $676,000, payable in forty-eight equal monthly installments of $17,727, consisting of principal and interest, beginning on January 30, 1996. Interest at 10% per annum accrued beginning on September 1, 1995. At June 30, 1996, $564,570 was outstanding on this note. Additionally, the remaining balance due under the bankruptcy plan, subsequent to the issuance of the above promissory note, was satisfied with the issuance of 325,000 shares of the Company's common stock. The stock must be held by JACO, with certain exceptions, for a minimum of one year from issue date before it can be transferred.
8. RELATED-PARTY TRANSACTIONS
On June 30, 1995, the Company entered into a sale and leaseback transaction with Adallipa Partners ("the Partnership"), a North Carolina partnership acting through its agent, CLG, Inc., whereby the Company sold and simultaneously leased back certain aircraft engines. The Partnership was formed June 30, 1995, by certain members of the Company's Board of Directors, for the purpose of entering into the sale and leaseback transaction. CLG, Inc. is owned by a member of the Company's Board of Directors. The Company received $1,000,000 in consideration for the engines in July, 1995, which amount is included on the accompanying June 30, 1995, balance sheet as related party receivable. Initially, the Company recorded a deferred gain of $70,000, in connection with the sale and leaseback transaction, which is included in noncurrent rent and other liabilities in the accompanying June 30, 1996 and 1995 balance sheets. The unamortized deferred gain is approximately $47,000 at June 30, 1996. To induce the Partnership to enter into this transaction, the Company issued to the Partnership a warrant to purchase 250,000 shares of the Company's common stock (see Note 10).
The Company paid fees of $27,000, $62,000 and $90,000 in fiscal years 1996, 1995 and 1994, respectively, to a consulting firm which is fifty-percent owned by a member of the Board of Directors. Additionally, the Company paid consulting fees of $54,000 for the year ended June 30, 1994 to a member of the Board of Directors.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
9. INCOME TAXES
The Company's effective tax rate on income before income taxes differs from the U.S. statutory federal tax rate as follows:
Significant components of the Company's deferred income tax assets and liabilities at June 30, 1996 and 1995 are as follows:
At June 30, 1996, the Company had approximately $7,777,000 of U. S. Federal regular tax operating loss carryforwards available to offset future U. S. Federal taxable income, which begin expiring on June 30, 2005. A valuation allowance has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefit of the loss carryforwards. The Company has $60,000 of investment tax credit carryforwards that expire beginning June 30, 1999 and $18,100 of alternative minimum tax credit carryforwards which are available to reduce future federal regular income taxes over an indefinite period.
10. STOCK OPTIONS
The Company has adopted a stock option plan (the "Stock Option Plan") under which options may be granted to officers, employees and directors. Options granted under the Stock Option Plan are exercisable at the market value of the shares at the date of grant. The options are exercisable over a period not to exceed ten years. 84,200 shares are reserved for future grants as of June 30, 1996.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
10. STOCK OPTIONS, CONTINUED
Information with respect to the Stock Option Plan follows:
During fiscal 1995, the Company cancelled 533,000 outstanding options to purchase shares of the Company's common stock, which options had been previously granted under the Stock Option Plan. Simultaneously, the Company granted 533,000 additional options at an exercise price equal to the market price on the date of grant, subject to terms as defined in the Stock Option Plan.
During fiscal 1996 and 1995, in connection with the short-term loans from officers and directors discussed in Note 6, the Company issued to certain officers options to purchase 17,125 and 22,125 shares of the Company's common stock, at an exercise price equal to the market price on the date of grant. The options become exercisable six months from the date of grant, expire ten years from the date of grant and are subject to other provisions as defined in the Stock Option Plan. The Company also issued to certain directors warrants to purchase 52,500 and 56,250 shares of the Company's common stock, at an exercise price equal to market price on the date of grant during fiscal 1996 and fiscal 1995, respectively. The warrants expire ten years from the date of grant.
On June 30, 1995, in connection with the sale and leaseback transaction discussed in Note 8, the Company issued to the Partnership a warrant to purchase 250,000 shares of the Company's common stock, at an issue price equal to the fair market value of the Company's common stock on June 30, 1995. The warrant carries a three-year term for exercise.
11. COMMITMENTS AND CONTINGENCIES
The Company has been engaged with representatives of and counsel for Her Majesty the Queen in Right of Canada as Represented by the Ministry of Industry, Science and Technology (the "Ministry") in discussions and negotiations regarding the reimbursement obligation, if any, of the Company to the Ministry arising from the change in lessor for the four (4) de Havilland DHC-8-102 aircraft (the "Aircraft") leased by the Company. The Ministry has informed the Company that the new lessor, CIT Group/Capital Equipment Financing, Inc. ("CIT") made a claim under certain economic development insurance provided by the Ministry to the former lessor, Mellon Financial Services Corporation #3 ("Mellon"), when the Company entered into new lease agreements with CIT for the Aircraft in December of 1994. The Ministry asserts that it has a right to reimbursement in the amount of $16,996,995 but has proposed that the Company agree to pay $6,000,000 secured by a pledge of an undetermined number of shares of the Company's common stock.
The Company does not have an agreement with the Ministry regarding the economic development insurance and has not acknowledged any obligation to reimburse the Ministry for claims paid under the original leases at the same time that the Company entered into new leases with CIT. The Company has made certain proposals for future consideration to resolve the Ministry's claim. It is uncertain whether the Company and the Ministry will reach an agreement on future considerations. Based on information presently available to CCAIR, management believes that the ultimate outcome of this matter will not have a material impact on the financial condition or results of operations of the Company.
CCAIR, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED --------------------
11. COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company is subject to the regulatory authority of the Federal Aviation Administration and the Department of Transportation. These agencies require compliance with their standards and conduct safety and compliance audits. Violations, if any, of these regulations subject the Company to fines or sanctions. The Company is also subject to other claims arising in the ordinary course of business. In the opinion of management, the outcome of these matters would not have a material adverse impact on the Company's financial condition or results of operations.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows include interest paid of approximately $804,000, $627,000 and $443,000 in the years ended June 30, 1996, 1995 and 1994, respectively. Income taxes paid, net of refunds, totaled $1,500 in the years ended June 30, 1994.
12. SUPPLEMENTAL CASH FLOW INFORMATION, CONTINUED
Noncash transactions include:
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly unaudited financial data for the years ended June 30, 1996, 1995, and 1994:
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 --------------------
(1) Reclassification of reserve for repairable parts from property and equipment to inventories.
S-1
ITEM 16. EXHIBITS.
Note: For footnote references see page E-9.
E-8
Footnotes:
E-9