10-Q 1 c73086e10vq.txt FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT for the transition period ______ to _________ Commission file number 1-7991 BIG SKY TRANSPORTATION CO. -------------------------- (exact name of small business issuer as specified in its charter) MONTANA 81-0387503 ------- ---------- (state of other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1601 AVIATION PLACE BILLINGS LOGAN INTERNATIONAL AIRPORT BILLINGS, MT 59105 (406) 247-3910 -------------- (address of registrant's principal executive offices) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS: 1996 Series Common Stock, no par value SHARES OUTSTANDING: At September 30, 2002: 1,252,112 BIG SKY TRANSPORTATION CO. FORM 10-Q For the Period Ended September 30, 2002 CONTENTS Part I Financial Information Item 1. Financial Statements: Balance Sheets September 30, 2002 and June 30, 2002 .................................................................3 Income Statements Three months ended September 30, 2002 and 2001....................................................4 Cash Flow Statements Three months ended September 30, 2002 and 2001.................................5 Notes to Financial Statements.........................................................6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................................8-11 Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................12 Part II Other Information Item 6. Exhibits and Reports on Form 8-K.......................................................13 Exhibit 99.1 ..........................................................................................16

2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIG SKY TRANSPORTATION CO. Balance Sheets

3 BIG SKY TRANSPORTATION CO. Income Statements (unaudited)

4 BIG SKY TRANSPORTATION CO. Cash Flow Statements (unaudited)

5 Notes to Financial Statements Note A - Financial Statements The financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements reflect all adjustments which, in the opinion of management are necessary to present fairly the results of operations for the interim periods presented. All adjustments are of a normal recurring nature. We suggest that these financial statements be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-KSB for the year ended June 30, 2002. The results of operations for the three months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending June 30, 2003. Note B - Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note C - Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Cash equivalents exclude restricted cash. Note D - Maintenance The cost of rebuilding rotable parts is charged to maintenance as incurred. An allowance for depreciation is provided for rotable parts to allocate the cost of these assets, less estimated residual value, over the useful life of the related aircraft and engines. Ordinary maintenance and repairs are charged to operations as incurred. The Company accrues for the cost of overhauls and engine hot-end inspections based upon contractual hourly rates or the estimated cost of an overhaul. Note E - Revenue Recognition Revenue is recognized when transportation has been provided. 6 Note F - Income Taxes Deferred income taxes are provided for at the statutory rates on the difference between the financial statement basis and the income tax basis of assets and liabilities. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Net deferred tax assets or liabilities are classified in the balance sheet as current or non-current consistent with the assets and liabilities which give rise to such deferred income taxes. At September 30, 2002, the Company recorded a change in the non-current deferred tax asset of $184,754. Note G - Earnings per Share Following is the calculation of the weighted average number of common shares outstanding:

7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary of Airline Operating Statistics:

8 Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 2002 and 2001: Overview The Company dba Big Sky Airlines (Big Sky) is a regional airline currently offering scheduled passenger service to 23 communities in six states utilizing a fleet of fifteen Fairchild Metro III and Metro 23 turboprop aircraft. Big Sky markets its services under its own two letter code, GQ. The majority of Big Sky flights also are operated under the airline code of one or more of Big Sky's code-sharing partners Northwest Airlines, America West Airlines and Alaska Airlines. Big Sky services to eight communities are provided under contracts with the U.S. Department of Transportation (DOT) Essential Air Service (EAS) program. Total operating revenues and passengers carried have grown more than fivefold from 1997 through 2002. Big Sky has been a continuous contract holder under the DOT's EAS program since 1980. In addition to the current EAS services, Big Sky provided EAS service to an additional eight communities in Arkansas, Oklahoma, and Texas from November 1998 through September 2002. Big Sky was significantly underbid by another air carrier at the expiration of the EAS contract covering these states, and terminated those services in phases throughout the month of September 2002. Big Sky's code-sharing relationships with Northwest, America West and Alaska commenced in June 1999, April 2001, and July 2001, respectively. Each of these agreements provide for market specific flight connections between Big Sky and the code-share partner with one stop check-in, baggage transfer and frequent flyer member mileage for the Big Sky flights. These agreements also provide for a sharing of the ticket revenue from each passenger making a code-share connection, on a prorated basis. Approximately 15% of Big Sky's passengers flew under these agreements during the current quarter. With the loss of the above mentioned EAS contract, Big Sky has opened up service to non-subsidized markets that are geographically closer, and provide daily aircraft flow through the Billings base of operations. Service between Idaho Falls, ID and Denver commenced September 16, 2002, Casper and Gillette WY service to Billings commenced on October 21, and service between Olympia WA and Spokane WA commenced on November 13. This market shift has significantly reduced reliance on the EAS program and increased the importance of the code-sharing relationships. On September 26, 2002 Big Sky announced a merger agreement including tender offer, subject to contingencies with Mesaba Holdings Inc. (Holdings) and Ranger Acquisition Corporation (Ranger). The Merger Agreement and Press Release describing the Merger Agreement was filed with Form 8-K on September 27, 2002. On October 29, 2002 Holdings and Ranger commenced the Tender Offer for the acquisition of all of the outstanding shares of Big Sky's 1996 series common stock for $2.60 per share, the only series of securities that is outstanding. Also on October 29, Big Sky filed Schedule 14D-9 recommending that the shareholders of the Company accept the Offer and tender their 9 shares. Under the terms of the agreement, if two-thirds of the outstanding stock is tendered under the Offer by midnight on November 27, 2002, then Holdings and Ranger are obligated to complete the acquisition and Big Sky would become a privately held wholly owned subsidiary of Holdings. For the Three Months Ended September 30, 2002 and 2001

The reduction in passenger revenues is a direct result of the 5.6% decrease in passenger traffic from the prior period due to the lingering effects of the terrorist events of September 11, 2001 ("9/11") and their impact on the economy. Similarly, the events of 9/11 caused the Federal Aviation Administration to place severe limitations on the carriage of cargo, resulting in the decreased revenue from that product. The increase in public service revenues is due to a program-wide increase in subsidy rates for all EAS contracts provided for under the Air Transportation Safety and Stabilization Act that was passed by Congress in response to 9/11. The decrease in other revenues is due to termination of service to Lea County (Hobbs), New Mexico where the county was providing an operating subsidy approximating $35,000 per month to offset losses incurred while attempting to develop that market.

The increase in flying operations expense is attributable increased aircraft hull insurance premiums that were imposed as a result of 9/11. Workers Compensation insurance premium increases also contributed to the additional expense. 10 Maintenance expense was nearly equivalent to the prior period. The increase in traffic servicing expense is due a significant increase in passenger liability and war risk insurance premiums, offset in part by the closing of stations in Mountain Home AR and St. Louis MO. on October 1, 2001. The decline in marketing expense resulted from the elimination of travel agency commissions in June 2002, reduced advertising and promotion, and a reduction in telephone rates that benefits reservations costs. The increase in general and administrative expense is a result of increased insurance premiums for director & officers liability, employer practices liability, workers compensation and general business and auto coverage. In addition, certain salary increases that were deferred from July 2001 were instituted in July 2002. The increase in depreciation is entirely attributable to the write-off of leasehold improvements made at the Dallas/Fort Worth airport, due to the termination of service in September 2002 with the loss of the EAS contract in that region. Liquidity and Capital Resources: A review of current liquidity and capital resources are as follows:

Cash provided by operations for the three months ended September 30, 2002 was $243,242. Cash used in investing and financing activities was $41,106 and $202,136 respectively during the period. Big Sky has established a line of credit through First Interstate Bank and Trust Co. of Billings for an amount of up to $1,400,000. Big Sky uses the line to supplement timing differences in cash flows. The maximum amount drawn on the line of credit during the quarter was $1,400,000 compared to a low of $604,506. The continuing losses sustained after the events of 9/11 coupled with those over the previous two years have resulted in the need to secure a sufficient amount of capital to assure the continued viability of Big Sky. The pending acquisition by Mesaba Holdings, Inc. and their commitment to Big Sky's future would provide that required capital. The acquisition also provides the opportunity for significant cost savings that would have an immediate impact on operating results and liquidity. 11 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Aircraft Fuel In the past Big Sky has not experienced difficulties with fuel availability and expects to be able to obtain fuel at prevailing prices in quantities sufficient to meet its future needs. Big Sky is directly affected by fuel price volatility and does not currently have a fuel price hedging plan in place. Based upon the current fleet of aircraft (fifteen Fairchild Metro aircraft) at their current utilization rates (approximately 2000 hours each, annually), a ten cent per gallon increase in the price of fuel would add approximately $270,000 in annual fuel expense. Interest Rates Big Sky's earnings are affected by changes in interest rates due to the term of its revolving line of credit agreement that contains a variable interest rate. The rate is subject to change based on the Prime Rate published in the Wall Street Journal. The current interest rate of 6.75% per annum is calculated by the sum of the Prime Rate (4.75%), plus 2 percentage points. For illustrative purposes, it is estimated that the current average daily loan balance outstanding under the line of credit is $1.1 million. Assuming that the same balance were to exist for an entire year, then a one percentage point increase in the Prime Rate over that same period would result in additional annual interest expense of $11,000 ($1,100,000 x .01). Two of Big Sky's long-term debt agreements also contain variable interest rates that are tied to the Prime Rate. The combined outstanding principle balance of those loans at September 30, 2002 is approximately $140,000, with the balances declining as payments are made. Using the same hypothetical increase of one percentage point in the Prime Rate would result in additional annual interest expense of less than $1,400 due to the continual decline in the principle balance. All other long term debt agreements contain fixed interest rates. 12 PART II. OTHER INFORMATION BIG SKY TRANSPORTATION CO. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A) Material Contracts DOT Order 2002-8-3 issued August 7, 2002 establishing final subsidy rate for Big Sky as Essential Air Service carrier at seven Montana points. This order amends DOT Order 2000-11-11 by revising subsidy rates for the period October 1, 2001 through November 30,2002 and is incorporated herein by reference. DOT Order 2002-8-1 issued August 2,2002 establishing final subsidy rate for Big Sky as Essential Air Service carrier for Moses Lake/Ephrata, Washington. This order amends DOT Order 2001-6-22 by revising subsidy rates for the period October 1, 2001 through July 31, 2003 and is incorporated herein by reference. Merger Agreement - Agreement and Plan of Merger with Mesaba Holdings, Inc. and Ranger Acquisition Corporation entered into on September 26, 2002 filed with report on Form 8-K on September 27, 2002 and incorporated herein by reference. B) Reports of Form 8-K On September 27, 2002 Big Sky filed a report on Form 8-K incorporating a joint press release with Mesaba Holdings that announced the Merger Agreement (subject to contingencies) between Big Sky and Mesaba Holdings, including a planned tender offer to Big Sky's shareholders. That report on form 8-K and exhibits thereto are incorporated herein by reference. Exhibit 99.1 Certification of Chief Executive Officer and Interim Chief Financial Officer 13 BIG SKY TRANSPORTATION CO. Signature The Registrant, by the undersigned, has signed this report in accordance with the requirements of the Securities Exchange Act of 1934. BIG SKY TRANSPORTATION CO. Registrant By: /s/ Kim B. Champney ----------------------- President & CEO November 14, 2002 14 CERTIFICATIONS I, Kim B. Champney Chief Executive Officer and Interim Chief Financial Officer certify that: 1. I have reviewed this quarterly report on Form 10-Q of Big Sky Transportation Co.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2002 /s/ Kim B. Champney Chief Executive Officer and Interim Chief Financial Officer

BIG SKY TRANSPORTATION CO 10-Q