-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LzzbPP8lsizlkW59+yfdH5VZUU+5P+bi4B382WxAY/FHM0L+DI6GBtfRkxTLiAHq PAmI0zEB+QR2Rh0B3We8OQ== 0000950168-99-001381.txt : 19990504 0000950168-99-001381.hdr.sgml : 19990504 ACCESSION NUMBER: 0000950168-99-001381 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19990503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CCAIR INC CENTRAL INDEX KEY: 0000850922 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 561428192 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-17846 FILM NUMBER: 99609016 BUSINESS ADDRESS: STREET 1: P O BOX 19929 CITY: CHARLOTTE STATE: NC ZIP: 28219-0929 BUSINESS PHONE: 7043598990 MAIL ADDRESS: STREET 1: 4700 YORKMONT ROAD SECOND FLOOR CITY: CHARLOTTE STATE: NC ZIP: 28208 10-K/A 1 CC AIR 10-K/A FORM 10-K/A AMENDMENT #2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For Fiscal Year Ended DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 0-17846 CCAIR, INC. DELAWARE NO. 56-1428192 State or other jurisdiction of I.R.S. Employer ID incorporation or organization P. O. BOX 19929, CHARLOTTE, NC 28219-0929 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 704/359-8990 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229,405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates (based upon the closing price for the Common Stock on the small-cap stock market of the National Association of Securities Dealers Automated Quotation System) on March 16, 1999 was approximately $29,138,509. As of March 16, 1999, there were 8,965,695 shares of $0.01 par value Common Stock outstanding. Documents Incorporated by Reference Portions of the Registrant's Definitive Proxy Statement, to be filed with the Commission not later than 120 days after the end of the Registrant's fiscal year ended December 31, 1998, are incorporated by reference in Part III hereof, as specified. - ----------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- GENERAL - RESTRUCTURING PLAN ---------------------------- In the six months ended December 31, 1997, the Company initiated its plan to restructure the aircraft fleet. This plan consisted of eliminating nine Shorts and fourteen Jetstream 31 aircraft operated by the Company, and replacing them with six Dash 8 and fourteen Jetstream Super 31 aircraft. The Company estimated total annual expense reductions in excess of $4 million per year, commencing in 1998 arising from consummation of this plan. As a result of the plan, the Company recognized a $9,881,000 restructuring charge in the six-month period ended December 31, 1997. These charges related to aircraft lease termination, return condition requirements, writedown of spare parts and other assets to net resale value, transition rents, consulting fees and pilot requalifications. At December 31, 1998, the replacement of aircraft has been completed and the only unexpended accruals related to the restructuring are the note payable issued to Lynrise Leasing in conjunction with the aircraft lease terminations (see Note 9 to the financial statements) and an accrual of $515,000, which represents the difference between the note payable issued to a related-party partnership subsequent to December 31, 1998 to terminate an engine sale leaseback transaction and the estimated proceeds to the Company from the sale of the engines acquired from the partnership upon the issuance of the note payable. Please see discussion under the heading "Restructuring" below under Liquidity and Capital Resources and Note 8 to the financial statements for further description of the restructuring charges. RESULTS OF OPERATIONS - --------------------- The following table sets forth selected operating data relating to the Company's passenger service for the fiscal year 1998 and the comparative twelve months in 1997, transition period ended December 31, 1997 and the comparative six months in 1996, and fiscal years 1997 and 1996.
YEAR ENDED SIX-MONTH PERIOD ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30, ------------ ------------ ---- -------------- 1998 1997 1997 1996 1997 1996 ---- ---- ---- ---- ---- ----- (Unaudited) (Unaudited) Operating revenue (000) $71,325 $67,330 $32,836 $33,993 $68,487 $66,234 Operating expense, net of restructuring and other nonrecurring charges (000) $66,969 $67,543 $33,659 $33,208 $67,092 $65,347 Revenue passengers carried 865,173 779,450 396,799 411,362 794,013 783,997 Revenue passenger miles (000) (1) 167,445 142,916 72,417 76,068 146,567 144,695 Available seat miles (000) (2) 292,458 279,527 134,831 160,390 305,086 311,967 Passenger load factor (3) 57.3% 51.1% 53.7% 47.4% 48.0% 46.4% Passenger breakeven load factor (4) 54.6% 52.0% 56.1% 46.9% 47.6% 46.3% Yield per revenue passenger mile (5) 42.0(cent)46.0(cent)44.5(cent)44.0(cent)45.7(cent) 44.5(cent) Passenger revenue per available seat mile 24.1(cent)22.5(cent)23.9(cent)20.9(cent)22.0(cent) 20.7(cent) Operating cost per available seat mile (6) 22.9(cent)24.2(cent)25.0(cent)20.7(cent)22.0(cent) 20.9(cent) Average passenger trip (miles) 193.5 183.4 182.5 184.9 184.6 183.9 Average passenger fare $81.38 $84.36 $81.18 $81.39 $84.41 $82.25 Completion factor 96.9% 96.3% 96.4% 96.3% 95.9% 95.1%
(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 percentage of available seat miles which must be flown by revenue passengers for the airline to breakeven after operating expenses, excluding restructuring and other nonrecurring charges, changes in accounting principle and taxes. (5) The passenger revenue per revenue passenger mile. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (6) Total operating expenses, excluding restructuring and other nonrecurring charges, interest expense, changes in accounting principle and taxes, divided by available seat miles. The following table sets forth selected operating data relating to the Company's passenger service for each quarter of fiscal year 1998 (see Note 16 of the financial statements):
1998 QUARTERLY DATA ------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Operating revenue (000) $14,563 $18,083 $18,068 $20,601 Operating income (loss) (000) 733 2,422 1,313 ( 112) Net income (loss) (000) 549 2,103 1,098 ( 370) Earnings (loss) per share .06 .23 .12 ( .04) Passengers carried 162,795 218,415 239,404 244,559 Revenue passenger miles (000) 29,416 39,488 45,646 52,895 Available seat miles (000) 54,368 64,973 79,744 93,373 Passenger load factor 54.1% 60.8% 57.2% 56.6% Passenger breakeven load factor 52.0% 53.6% 53.7% 57.6% Yield per revenue passenger mile 48.7(cent) 45.2(cent) 39.1(cent) 38.5(cent) Average passenger trip (miles) 180.7 180.8 190.7 216.3 Average passenger fare $ 88.05 $ 81.71 $ 74.57 $ 83.31 Operating cost per available seat mile 25.4(cent) 24.1(cent) 21.0(cent) 22.2(cent)
FISCAL 1998 - ----------- The Company recognized $3,380,000 in net income in 1998 versus a loss of $24,300,000 in the same period in 1997. Operating revenues increased 5.9% from $67,330,000 to $71,325,000, and operating expenses decreased from $77,424,000 to $66,969,000, a 13.5% reduction. Operating expenses in 1997 included fleet restructuring and other nonrecurring charges of $9,881,000. Diluted income per share was $.36 in 1998 versus a loss of $3.10 in 1997. OPERATING REVENUES ------------------ Operating revenues increased $3,995,000 (5.9%) for the year ended December 31, 1998 compared to the year ended December 31, 1997. This increase was primarily attributable to the additional capacity flown by the Company in 1998, as Available Seat Miles (ASMs) increased 4.6% in 1998 over the prior year. The capacity increase was the result of the Company's expansion into the state of Florida: four round trip flights from Charlotte, North Carolina to Gainesville were added in August, 1998, four round trip flights from Charlotte to Tallahassee were added in October, 1998 and four round trip flights from Tallahassee to Miami were also instituted in October, 1998. Passenger traffic, measured by Revenue Passenger Miles (RPMs), increased by 17.1% in fiscal 1998, as the load factor (percentage of seats occupied) increased from 51.1% to 57.3%, a 12.1% increase. Yield (passenger revenue per RPM) decreased to 42.0(cent) in 1998 from 46.0(cent) in the same period in 1997. The airline industry has a history of fare and traffic volatility. Even though the yield decreased by 8.7%, the revenue per ASM increased from 22.5(cent) for the twelve months ended December 31, 1997 to 24.1(cent) for 1998 as the reduction in yield was more than offset by the increase in load factor. The average passenger trip increased from 183.4 miles in 1997 to 193.5 miles in 1998 due to the addition of the longer stage length Florida service in 1998. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- OPERATING EXPENSES ------------------
1998 1997 EXPENSE COST % OF EXPENSE COST % OF (000) PER ASM REVENUES (000) PER ASM REVENUES =============================================================================================== Flight operations $21,569 7.47(cent) 30.2% $22,389 8.0(cent) 34.1% ================================= --------- -------- ----------- --------- -------- =========== Fuel $5,016 1.7(cent) 7.0% $6,125 2.2(cent) 9.3% ================================= --------- -------- ----------- --------- -------- =========== Maintenance $14,386 4.9(cent) 20.2% $14,192 5.1(cent) 21.6% ================================= --------- -------- ----------- --------- -------- =========== Ground operations $10,548 3.6(cent) 14.8% $8,640 3.1(cent) 13.1% ================================= --------- -------- ----------- --------- -------- =========== Advertising and commissions $9,939 3.4(cent) 13.9% $9,875 3.5(cent) 15.0% ================================= --------- -------- ----------- --------- -------- =========== General and administrative $4,577 1.6(cent) 6.4% $4,804 1.7(cent) 7.3% ================================= --------- -------- ----------- --------- -------- =========== Depreciation and amortization $ 934 0.3(cent) 1.3% $1,518 0.6(cent) 2.3% ================================= ========= ======== =========== ========= ======== =========== TOTAL $66,969 22.9(cent) 93.8% $67,543 24.2(cent)102.7% ================================= ========= ======== =========== ========= ======== ===========
Operating costs excluding fleet restructuring and other nonrecurring charges decreased $574,000 in 1998 over the twelve months ended December 31, 1997. The cost per ASM excluding fleet restructuring and other nonrecurring charges decreased 5.4% over the same period, as the Company realized cost reductions in flight operations expenses, fuel, and depreciation. These decreases were partially offset by increased ground operation expense. Flight operations expenses decreased by $820,000, or 3.6% in 1998 compared to the same period in 1997. The cost per ASM of flight operations decreased 7.5%. The Company benefited from reductions in hull insurance rates, and as a result hull insurance expense decreased $221,000 in 1998 compared to 1997. The reduced lease rates associated with the Jetstream Super 31 aircraft compared with the predecessor Jetstream 31 aircraft resulted in a $1,648,000 reduction in aircraft rent expense. Flight attendant expenses decreased by $167,000, as the Company operated a maximum of 10 aircraft necessitating cabin service in 1998 versus 13 in 1997. These expense reductions were offset by increased pilot expenses of $798,000, which resulted from increased flying and new pay rates which took effect in October, 1998 pursuant to the pilot contract ratified in November, 1998. This contract is amendable in 2002. Fuel expenditures declined $1,109,000, or 18.1% compared to 1997 as the cost of fuel per gallon decreased from $.820 in 1997 to $.628 in 1998, a 23.4% decline. Fuel consumption increased from 7.5 million gallons to 8.0 million gallons, or 6.7%. More fuel was consumed as a result of the increased flying in 1998. In 1998, fuel expense was 7.5% of operating costs; as such, 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 utilized for hedging purposes. Maintenance material, repairs and overhead increased $194,000 in 1998, although the cost per ASM decreased 3.9% in 1998 when compared to 1997. The power by the hour program on the Jetstream Super 31 aircraft resulted in reduced maintenance expense related to these aircraft in 1998 compared with 1997. This savings was offset by the increased costs associated with the six new Dash 8 aircraft added under operating leases in 1998. The Company incurred increased maintenance expense in the fourth quarter of 1998 as extra maintenance expenditures necessary to standardize this equipment to the same specifications of the four Dash 8 aircraft already operated by the Company. Ground operations expenses increased $1,908,000, from $8,640,000 in 1997 to $10,548,000 in 1998. Continuing with US Airways' commitment in 1997 to increase its performance in the areas of on-time performance and completed flights, the Company increased its staffing levels at the Charlotte station (Concourse D) to enhance customer satisfaction and improve operations. As such, the Charlotte station had payroll increases of $520,000 in 1998 compared to 1997. Contract handling charges increased by $332,000 in 1998, principally due to higher numbers of passengers being handled by others on behalf of the Company in 1998. These charges represent handling fees charged by other airlines, principally US Airways, at stations where the Company does not have employees and thus contracts the handling of its passengers. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Ground operations at the new Florida stations cost the Company $449,000 in 1998. More inclement weather, higher passenger counts and increased training due to the conversion to a new reservations system in 1998 by US Airways, and consequently the Company, accounted for the rest of the increase in ground operations expenses in 1998 as compared to 1997. Advertising, promotion and commissions expense remained flat, increasing 0.6% in 1998 as compared to 1997. Reservations expense remained flat in 1998 as compared to 1997, as increased expenses related to higher passenger counts were offset by reductions in fees charged by US Airways based upon the Company's large percentage of traffic connecting to US Airways flights. Travel agency commissions were also relatively flat, as commission increases based upon higher revenues were offset by lower commission percentages paid in 1998 compared to 1997. General and administrative expenses decreased by $227,000, from $4,804,000 in 1997 to $4,577,000 in 1998. Passenger liability insurance decreased by $467,000 as reduced insurance rates more than offset traffic increases. These insurance reductions more than offset the increases in legal fees incurred by the Company in 1998. Negotiation of pilot and mechanic labor contracts in 1998 necessitated the utilization of significantly more legal services in 1998 than had been incurred in 1997. Depreciation and amortization expense decreased $584,000, or 38.5% in 1998 versus the same period in 1997 as a result of the write-off and reclassification of all assets related to the terminated leases for the Shorts and Jetstream 31 aircraft. The Company had no income tax expense in 1998, as net operating loss carryforwards were available to offset income tax expense at the statutory rate for financial statement purposes. In 1997, the Company's effective federal income tax rate was 21.3%, which reflected the impact of the alternative minimum tax on operations. At December 31, 1998, the Company had approximately $20.9 million of U.S. Federal tax operating loss carryforwards available to offset future U.S. Federal taxable income. 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. 1997 TRANSITION PERIOD - ---------------------- The Company's operating results reflect the implementation of its fleet restructuring plan in the 1997 transition period. In October, 1997 the Company began returning its nine Shorts aircraft to the lessor to simplify its fleet structure and reduce its operating expenses. All Shorts aircraft were out of scheduled service by January 5, 1998. In addition, the Company contracted, in November, 1997, to replace its fourteen Jetstream 31 aircraft with twenty Jetstream Super 31 aircraft. In conjunction with these transactions, the Company recognized restructuring and other nonrecurring charges for the Shorts lease terminations, write-off and write-down of assets related to the terminated leases and estimated costs of compliance with return conditions in the terminated leases. Further discussion of the Company's restructuring is set forth below under "Liquidity and Capital Resources". Principally, as a result of recognizing restructuring and other nonrecurring charges of $9,881,000 and effecting a change in accounting method related to transitioning to the accrual method for major component overhauls which resulted in a charge of $12,982,000 to income, the Company recognized a $24,300,000 net loss in the 1997 transition period. In the 1997 transition period, operating revenues decreased $1,157,000 versus the same period in 1996, and operating expenses increased $452,000 in the 1997 transition period, exclusive of the restructuring and nonrecurring charges. Revenues for the six-month periods ended December 31, 1997 and 1996 were $32,836,000 and $33,993,000, respectively, which represents a 3.4% decline in the 1997 transition period. Passenger revenues decreased 3.8%, as revenue passenger miles (RPMs) decreased 4.8% and yield per passenger mile increased 1.1%. The phase-out of the Shorts aircraft resulted in a 15.9% reduction in available seat miles (ASMs) in the 1997 transition period as compared to the same period in the previous year. As a result of the fleet contraction, the Company ceased service between Charlotte and Shenandoah Valley, Virginia in July, 1997, suspended service between Charlotte and Montgomery, Alabama in September, 1997 and reduced the frequency of service to several other markets. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- The Company's revised schedule was effective in reducing low load factor flights. The 15.9% reduction in capacity only resulted in a 4.8% decrease in RPMs and a 3.5% reduction in passengers. The Company's load factor increased from 47.4% to 53.7%. The average passenger trip decreased from 184.9 miles to 182.5 miles as a result of the cessation of service from Charlotte to Montgomery, a long-haul market. The average fare remained relatively unchanged at $81 per passenger for the six months ended December 31, 1997 and 1996. The Company's revenue per ASM increased from 20.9(cent) in the six-month period ended December 31, 1996 to 23.9(cent) for the 1997 transition period, a positive reflection on the Company's efforts at revenue maximization. The Company's yield increased 1.1%, from 44.0(cent) per RPM in the six-month period ended December 31, 1996 to 44.5(cent) for the comparable period in 1997. However, the yield increase achieved in the 1997 transition period was partially offset by the decrease in the average passenger trip. Low fare competitors remained absent from the markets served by the Company. Additionally, the Company constantly monitors fares in the local markets it serves, and adjusts them as competition, demand and market factors dictate. Comparative yield calculations are complicated by the expiration and reimplementation of the excise tax on airline tickets. The tax expired on December 31, 1995 and was reinstated in late August, 1996. The Company believes its passenger revenues were stimulated during the periods the tax was not in effect, as the absence of the tax effectively reduced the cost of air travel. The Company is not able to determine the extent to which operating results were impacted by the absence of the tax, although it does believe that the six-month period ended December 31, 1996 was favorably impacted by the absence of the tax for a portion of the period, whereby the tax was collected for the entirety of the six-month period ended December 31, 1997, with a resultant negative impact on revenue. Operating costs increased substantially in the 1997 transition period over the same period in 1996. The increase is primarily attributable to the aircraft fleet restructuring plan, which accounts for $9,881,000, or 22.7%, of the reported operating expenses. Operating costs per ASM, net of restructuring related expenses, were 25.0(cent) in the 1997 transition period as compared to 20.7(cent) in the same period of 1996. Contributing factors include increases in aircraft maintenance and repair expenses, spare parts rental, customer service wages, professional fees and property tax expense. These increases were partially offset by the rent reductions negotiated for the Shorts aircraft, continued savings realized in the premiums for the Company's aircraft hull insurance; the decline in aviation fuel prices and the elimination of certain operational expenses directly related to scheduled passenger service levels and ASMs. Flight operations expense decreased by more than $1.1 million, or 9.8%, in the 1997 transition period, to $10,523,000 from $11,673,000 in the same period of 1996. The Company continued to benefit from reductions in the insured value of the aircraft fleet, as well as declining hull insurance rates, culminating in a $279,000 decrease over premium expense recognized in the same period in 1996. Pursuant to the aircraft return agreement reached with Shorts for the nine Shorts aircraft, the Company received aircraft rent abatements, beginning with payments due in August, 1997, in the amount of $14,000 per aircraft per month until the aircraft were returned. The lease abatement and early return of the aircraft resulted in a $835,000 decrease in Shorts aircraft rental expense in the 1997 transition period versus the comparable period in 1996. Pilot and flight operations payroll-related expenses decreased by 1.5% as a result of attrition. The Company did not replace terminated pilots in the 1997 transition period due to the reduction in capacity during the period. The reduction in these expenses was partially offset by annual seniority wage increases and the enhancement of the training and crew scheduling departments. Aviation fuel expenditures declined $989,000, or 26%, as compared to 1996 as a result of per gallon decreases of $0.11 and the 15.9% decrease in ASMs flown in the 1997 transition period. The Company consumed 3.6 million gallons of fuel at a cost of $2.8 million in the 1997 transition period, as opposed to 4.3 million gallons at $3.8 million in the same period of 1996. ASMs and gallons of fuel used both decreased approximately 16%, while the price per gallon decreased 13%. The average price per gallon of fuel purchased in the 1997 transition period was 77.5(cent), as compared to 88.6(cent) in 1996. Fuel prices peaked from October 1996 through February 1997, with the most favorable prices occurring in September and December 1997. Maintenance material, repairs and overhead increased $1.8 million, or 31.1% in the 1997 transition period over the six-month period ended December 31, 1996. The increase in expenses reflects the higher costs incurred with operating the aging Shorts and Jetstream 31 aircraft, increased payroll-related expenses and higher spare parts rentals. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Outside repair and materials expense was up over $900,000 in the 1997 transition period versus the comparable prior-year period, as costs of maintaining the fleet escalated. Maintenance salaries expenses increased $347,000, primarily as a result of overtime hours and temporary labor necessary to maintain the fleet, and accomplish the aircraft returns. Rental expenses for spare aircraft parts, primarily engines, increased $386,000 in the 1997 transition period. In the six-month period ended December, 1996 the Company received $303,000 in rental concessions from a major vendor to compensate for engine performance issues raised by the Company. Ground operations expenses increased 6.3%, from $4,196,000 to $4,463,000 in the 1997 transition period as compared to the same period in 1996, primarily as a result of increases in US Airways' passenger handling fees. In markets where US Airways personnel provide customer service and handling, a fee is charged to the Company. This fee was $8.10 per passenger during the 1997 transition period as opposed to $7.75 in 1996. Fees per passenger have increased periodically as follows: July 1995, $6.50; January 1996, $7.75; February 1997, $8.10. Although passengers carried decreased 3%, passenger handling fees escalated 3.6%, or $66,000 in the 1997 transition period. In addition to increased passenger handling fees, the Company experienced increases in customer service salary- and payroll-related expenses. In 1997, US Airways increased its commitment to performance in the areas of on-time arrivals and departures, completed flights and enhanced passenger service. The Company took steps to mirror US Airways initiatives in these vital performance measures. While the Company and US Airways were successful, additional staffing levels were necessary to ensure meeting US Airways commitment to service enhancements. The Charlotte (Concourse D) station increased full-time equivalent employees from 169 at December 31, 1996 to 198 at December 31, 1997. To retain employees, the Company also implemented an average increase of 5% in the hourly wage scale, concentrated in the first five years' seniority. Because of Charlotte's relatively higher employee turnover rate, the effects of this adjustment were felt most acutely at that station. Customer service payroll expenses were partially mitigated (approximately $60,000) by the closure of Company-operated field stations in Shenandoah Valley, Virginia and Montgomery, Alabama in July, 1997, and September, 1997, respectively. Advertising, promotion and commissions expense remained stable at $4,847,000 in the 1997 transition period versus $4,839,000 in the prior comparative period. While passenger revenue decreased 3.8%, commissions and reservations expense remained flat due to increased program fees charged by US Airways. Total general and administrative expenses were $2,656,000 in the 1997 transition period as compared to $1,968,000 in 1996. Salaries and payroll-related expenses increased $104,000 as a result of additions to the executive management group. In December, 1996, the Company received refunds of property tax payments made in prior years totaling $118,000, reducing the expense recognized in the six months ended December 31, 1996. Audit, legal, corporate and other professional fees increased $180,000 and were accrued for in relation to the Company's decision to change its reporting year-end to December 31 of each year. Depreciation expense decreased 19.7%, or $181,000 in the 1997 transition period as compared to the same period in 1996, consequent to the write-off and reclassification of all assets related to the terminated aircraft leases for the Shorts and Jetstream 31 aircraft, including leasehold improvements and spare rotable parts. The effect of the write-off and reclassification of depreciation expense was minimized by depreciation being taken on all assets through November, 1997, the time at which the Company determined that all restructuring plans became irrevocable. The Company incurs interest expense principally as a result of its lines of credit; interest expense is also recorded as it relates to capital leases, long-term borrowings, and other short-term borrowings. The Company incurred interest expense of $641,000 in the 1997 transition period, as compared to $410,000 in the six months ended December 31, 1996. The increase was primarily due to the higher average borrowings outstanding on the Company's Line of credit, precipitated by the increase in the Line to $4 million from $3 million in July, 1997. As a result of the aircraft return plans, the Company reduced all related assets and leasehold improvements to net realizable value, or estimated resale value, as appropriate. Certain spare parts are interchangeable between the Jetstream 31 and Jetstream Super 31 aircraft; these parts were excluded from the net realizable value calculations. Losses due to impairment of assets aggregate to $3,007,000; $1,491,000 attributable to the Shorts aircraft, $472,000 to the Jetstream 31 aircraft, $344,000 in unusable interchangeable parts and supplies and a valuation reserve of $700,000 established in consideration of the unpredictability of the resale market. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- The Company recorded additional restructuring charges of $6,874,000 encompassing all other aspects of the aircraft retirements. These charges included: lease termination settlement ($6,115,000); return condition requirements ($1,805,000 to return the Shorts, $750,000 to return the Jetstream 31s and $691,000 to return leased spare engines); early termination of Jetstream 31 engine maintenance contract ($2,483,000); accrual for expenses related to pilot requalifications and transition rents ($478,000); reclassification of other costs related to retired aircraft until returned to lessor ($675,000), consulting fees for the execution of the lease termination transaction ($241,000), write-off of remaining deferred credits on terminated leases ($1,032,000 offset to charges) and the elimination of accrued expenses for future performance of component overhauls that are no longer required ($5,332,000 offset to charges). Effective July 1, 1997 the Company elected to change its method of accounting for engine, propeller and landing gear overhauls from the deferral method to the accrual method. Under the method previously utilized, the Company capitalized these expenditures and amortized them over the estimated service life of the overhaul. The change in accounting principle results in accrual for future expenditures for overhauls based on flight hours incurred each month, at a rate commensurate with the future expected cost of overhaul. Implementation of the change in principle necessitated the write-off of previously capitalized items, along with the related accumulated amortization, as of July 1, 1997. The aggregate time since last overhaul, as of July 1, 1997 was utilized to determine the beginning accrued overhaul expense as of the same date. This calculation was performed for each aircraft type. The aggregate effect of the change in accounting principle was $12,982,000. The Company believes the newly implemented accounting principle more closely emulates its lease agreements and contracts for repair and maintenance of these components. In the 1997 transition period, the Company reported operating losses for financial and tax purposes. The losses generated for tax purposes may be carried forward for use in future years. In the current period, the Company's effective federal tax rate is 0%, as there were no alternative minimum tax payments. At December 31, 1997, the Company had approximately $10,034,000 of United States Federal regular tax operating loss carryforwards available to offset future taxable income. These carryforwards begin expiring on December 31, 2004. Additionally, the Company had $109,000 in United States Federal alternative minimum tax credits available to offset future regular tax payments due; these credits do not expire. 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. FISCAL 1997 ----------- The Company achieved improved operating results in fiscal 1997, continuing the trend from fiscal 1996. Operating income and net income in fiscal 1997 were $1,395,000 and $520,000, respectively, compared to fiscal 1996 operating income of $886,000 and net income of $96,000. Passenger revenues increased by 3.9%, while operating expenses were held to a 2.7% increase. Yield per passenger mile continued to improve in 1997, resulting in 45.7(cent) per revenue passenger mile ("RPM") as compared to 44.5(cent) per RPM in fiscal 1996. Annual revenues increased in fiscal 1997 to $68,488,000 over fiscal 1996 revenues of $66,234,000. The 3.3% increase over prior year is attributable primarily to increased average fares related to continued industrywide fare growth. Low fare competitors remain absent from the markets served by the Company. Additionally, the Company maintained local market fares introduced in February 1996 to stimulate travel, resulting in enhanced revenues throughout fiscal 1997. Annual and quarterly yield comparisons are complicated by the expiration and reimplementation of the federal excise tax on airline tickets in fiscal 1996 and 1997. The tax lapsed on December 31, 1995 and was reinstated in late August, 1996. The tax again expired on December 31, 1996 and was resumed in early March, 1997. The Company believes that its passenger revenues were stimulated during the periods the tax was not in effect - the absence of the tax effectively reduced the cost of air travel. The Company is not able to determine the extent to which operating results in fiscal 1996 and 1997 benefited from the absence of the tax, although it does believe that it had a positive impact on its operating results. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Available seat miles ("ASMs") decreased 2.2% from fiscal 1996. The Company discontinued service between Shenandoah Valley, Virginia and Baltimore, Maryland in December, 1996. Pursuant to an economic analysis of Shorts aircraft utilization and profitability, the Company reduced the number of flights using these aircraft in December, 1996. As such, only seven of the nine Shorts aircraft were scheduled for the last seven months of fiscal 1997. While ASMs thus decreased 6.1% for the last seven months of fiscal 1997 when compared to 1996, the load factor increased from 47.8% for the seven months in fiscal 1996 to 49.0% for the comparable period in fiscal 1997. The Company, while able to implement changes in its flight schedule after receiving the consent of US Airways, has limited control over the cities it serves as a US Airways Express carrier. The Company did receive approval to discontinue service to Shenandoah Valley, Virginia and Montgomery, Alabama effective July 8, 1997 and September 4, 1997, respectively, based upon profitability and aircraft utilization studies. RPMs increased commensurately with revenue passengers, reflecting growth of 1.3% over fiscal 1996. Elevated RPMs, passengers carried and average fares are indicative of the overall health of the air transportation industry. The Company continued to maintain its upward trend in average fares for fiscal 1997. The fiscal 1997 average fare was $84.41, compared to $82.25 in fiscal 1996. Operating costs per ASM escalated from 20.9(cent) to 22.0(cent) from fiscal 1996 to fiscal 1997. Contributing factors include increases in maintenance outside repair expenses, fuel cost, flight operations and customer service wages and US Airways' fees for ticketing and passenger handling. These increases were partially mitigated by cost reductions realized in the Company's aircraft hull insurance, engine overhaul amortization expenses and savings realized under the first full year of reduced Jetstream 31 lease payments. Flight operations expense stabilized in fiscal 1997 at $23,539,000, as compared to $23,490,000 in fiscal 1996. Although the Company experienced significant increases in pilot and flight management salaries, the additional expenses were offset by reductions in hull insurance rates and aircraft lease payments. The Company continued to benefit from reductions in the insured value of the aircraft fleet and more favorable hull insurance rates resulting in annual savings of $393,000 in 1997. Additionally, renegotiated lease payments for the Jetstream 31 fleet finalized in 1996 resulted in further reductions to lease expenses as compared to fiscal 1996. Pilot salaries escalated 4.9%, or $336,000 over fiscal 1996 to $7,135,000 in fiscal 1997. 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. The final increase scheduled under this plan occurred in February, 1996. Accordingly, fiscal 1997 was the first complete year under the fully reinstated salary levels. Furthermore, annual seniority wage increases contributed to the increases in pilot salary expense. Flight operations management and support salary expenses also grew by $100,000 as compared to 1996; enhancement of the training and crew scheduling departments are the primary factors. Crew travel expenses, comprised of meal allowances and accommodations declined significantly, from $1,280,000 in fiscal 1996 to $1,078,000 in fiscal 1997. In April, 1996, 14 crews were placed in four newly established crew bases in Lynchburg, Virginia; Cincinnati, Ohio; Lexington, Kentucky and Kinston, North Carolina. Establishment and maintenance of these new crew bases resulted in savings of $202,000 in fiscal 1997. The Company is obligated pursuant to its contract with its pilots to match pilot contributions to the Company's 401(k) plan based upon an agreed-upon earnings formula. The Company recorded $138,000 of compensation expense related to its contractual obligation as flight operations expense in fiscal 1997. Market fluctuations and ASMs flown cause annual fuel and oil expenses to be volatile. Despite a 2.2% decline in ASMs flown, the Company experienced a 14% increase in fuel and oil expense, with expenditures of $7,117,000 in fiscal 1997 versus $6,262,000 in fiscal 1996. Fuel consumption was 8.2 million gallons at an average price per gallon of 87.4(cent) in fiscal 1997, as compared to 8.3 million gallons at 75.8(cent) per gallon in fiscal 1996. Fuel prices peaked from October, 1996 through February, 1997, averaging 93.8(cent) per gallon during this period. Maintenance materials, repairs and overhead decreased 1.5% from fiscal 1996, as expense was $12,381,000 in fiscal 1997 versus $12,566,000 in fiscal 1996. Maintenance expenses typically fluctuate based upon flight hours and takeoffs and landings. Maintenance expense per ASM remained relatively constant; 4.1(cent) in 1997 and 4.0(cent) in 1996. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Ground operations expenses increased 6.8% over prior year, resulting in fiscal 1997 expenditures of $8,373,000 versus $7,839,000 in fiscal 1996. US Airways passenger handling fees increased from the prior year. In markets where US Airways personnel provide customer service and handling, a fee is charged to the Company; this fee increased 35(cent) per passenger in February, 1997. While passengers carried increased by only 10,000, or 1.3%, passenger handling fees escalated 18%, or $555,000 in fiscal 1997. Ground operations expense is offset in Charlotte, North Carolina through the Company's reimbursement rate for operating Concourse D at the Charlotte/Douglas International Airport. The Company's reimbursement increased from $354,000 to $359,000 in August, 1996 and $372,000 in January, 1997. Customer Service salaries at Company-operated stations increased $149,000 due to the combination of general wage increases, service schedule alterations, and additional overtime. Advertising, promotion and commissions expense increased from 14.1% of passenger revenue in fiscal 1996 to 14.7% in fiscal 1997. On January 1, 1996, US Airways implemented a new reservations fee structure which resulted in an additional $.90 per passenger charge. Fiscal 1997 thus received an entire year, or an additional $370,000 of this expense as compared to 1996. Computer reservations system fees also increased on a per-passenger basis in fiscal 1997. Total general and administrative expenses in fiscal 1997 were $4,116,000 as compared to $4,273,000 in fiscal 1996, for a decrease of 3.7%. While salaries increased by $166,000, property taxes declined $303,000. The property tax decrease was due to refunds of $118,000 resulting from personal property reclassifications for tax purposes for the years allowed under local statute (1991-1995). Other general and administrative decreases resulted from $75,000 in refunded sales and use taxes related to off-road fuel taxes originally remitted in 1994 through 1996. Depreciation and amortization expense declined slightly from $1,814,000 in fiscal 1996 to $1,699,000 in fiscal 1997, 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 1997, recognition of net operating loss carryforwards offset income tax expense at the statutory rate; however, the Company's effective federal income tax rate was 21.3% which reflects the impact of the alternative minimum tax on operations. Income tax expense was $141,000 in fiscal 1997, as compared to $18,100 for fiscal 1996. At June 30, 1997 the Company had approximately $5,860,000 of United States Federal regular tax operating loss carryforwards available to offset future taxable income. These carryforwards begin expiring on June 30, 2005. 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 was 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. Available seat miles increased 2.2% over fiscal 1995. The growth was 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. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF 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. Passengers carried continued to decline due to the absence of low-fare, traffic-stimulating competition which existed in the Company's market until March, 1995. Additionally, the Company continued to recognize the effects of discontinued service to several markets in fiscal 1995. Because the low-fare competition 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, US Airways 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 escalation of market prices of fuel significantly affected fiscal 1996's fuel expense. Fuel expenditures totaled $5,406,000 in fiscal 1995, and increased 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. 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 US Airways handling fees that the Company pays as a result of US Airways handling the Company's passengers in certain markets. 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. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- 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 US Airways. 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. 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, as a result of 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. 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 fiscal 1996, and thus little depreciation was generated on 1996 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. 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 continuing payment of creditors in accordance with its Plan of Reorganization. The Plan of Reorganization was consummated in September, 1991 pursuant to bankruptcy proceedings initiated by the Company. During 1998 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 related parties and a line of credit with Centura Bank, both secured by owned flight and ground equipment. During 1998, management continued the implementation of its strategy to restructure the aircraft fleet, address short-term and long-term liquidity needs and improve the overall financial condition of the Company. The following changes were made during 1998: 1. Completed previously announced fleet restructuring plan: 20 Jetstream Super 31 aircraft placed into service in 1998, 14 leased through the end of 2004 and six through the end of 1998. At the end of 1998, four Jetstreams were returned to the lessor and two leased through the end of 1999. All 14 Jetstream 31 aircraft previously operated by the Company were removed from the fleet in 1998. 2. The addition of six Dash 8 aircraft to the fleet through short-term operating leases. Four of these leases expire in 2000, one in 2002 and one in 2005. 3. Instituted new service to Florida destinations. 4. Signed a letter of intent with Mesa Air Group, Inc. to be acquired as a wholly-owned subsidiary. A definitive purchase agreement was signed on January 28, 1999. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- 5. Enhanced labor stability by negotiating new pilots' and mechanics' contracts not amendable until 2002. 6. Refinanced $7,920,000 note payable classified as current on the balance sheet at December 31, 1997; this note is now long term. 7. Issued 500,000 shares of common stock in September, 1998, the proceeds of which were used to satisfy a short-term note of $1,675,000 to Lynrise Air Lease, Inc., the lessor of the Company's previously operated Shorts aircraft. 8. Obtained a $1,100,000 note to finance the Company's expansion in September, 1998; $850,000 of this note was obtained through the Company's local bank, the remaining $250,000 was received from a member of the Company's Board of Directors. RESTRUCTURING - ------------- On September 11, 1997 the Company entered into a transaction with Lynrise Air Lease, Inc. ("Lynrise") to return the Company's nine leased Shorts aircraft to Lynrise as lessor. The aircraft leases were scheduled to continue through September, 2004, at a monthly rate of $34,000 per aircraft. These aircraft did not meet US Airways criteria for cabin class service, as they are unpressurized and flew at slow speeds. In addition, the lease expense per block hour was high, and the operating expenses continued to escalate. The aircraft were returned between November, 1997 and January, 1998. In return for this early termination of the aircraft leases, the Company issued a promissory note in the amount of $9,720,000. The promissory note was issued in contemplation of the Company's obligations to the lessor: lease termination and aircraft remarketing provisions - $6.1 million, previously recorded liabilities in the form of accrued rent and notes payable - $1.8 million and return condition obligations - $1.8 million. In September, 1998, the Company exercised its option issued in conjunction with the note, whereby it paid Lynrise $1,675,000 in cash and $130,000 in aircraft parts. Proceeds from the sale of 500,000 shares of Company stock were used to pay the cash portion of the note. Upon the option's exercise, the remainder of the note, $8,335,000, including unpaid interest from January 1 to September 30, 1998 was converted to a subordinated note, which is convertible to common stock at $7.50 per share. This subordinated note is due in 2004, with interest and principal payments to begin in 1999. Principal payments may be paid in cash or stock, at the Company's option. Under an accord reached with an aircraft lessor in November, 1997 the Company agreed to replace its fourteen Jetstream 31 aircraft with twenty Jetstream Super 31 aircraft. In return for renegotiated lease rates, the Company agreed to lease fourteen of the Jetstream Super 31 aircraft for seven years, and the additional six Jetstream Super 31 aircraft until December 31, 1998. In December, 1998, the Company leased two of these Jetstreams for an additional year and returned the remaining four to the lessor. The Jetstream Super 31 aircraft are newer and faster than the predecessor Jetstreams, and can operate with fewer weight restrictions. The Jetstream 31 aircraft were returned to the lessor in 1998. The Company estimated the cost of returning these aircraft at $750,000, which was provided for as restructuring cost during the 1997 transition period. The actual cost of returning the aircraft was $1,034,000. The difference of $284,000 is recorded as additional general and administrative expense in 1998. As a result of the retirement of two aircraft types, the Company wrote down its spare parts inventory to net realizable value at December 31, 1997. The writedowns consisted of $1.2 million in Shorts parts; $100,000 in Jetstream parts; $100,000 in ancillary parts required to maintain both fleets; and a valuation reserve increase of $700,000 in contemplation of uncertainties in the resale market. The net book value of parts held for resale was $1,200,000 on December 31, 1997 and $945,000 on December 31, 1998. Additionally, the Company wrote off $680,000 in unamortized leasehold improvements related to these two aircraft types in the 1997 transition period. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- In June, 1995, the Company entered into a sale leaseback agreement with a related-party partnership for certain engines owned by the Company. This lease expired on June 30, 1998, and under provisions of the lease, the Company was required to return the engines to the partnership in freshly overhauled condition, or with a cash payment in lieu thereof based upon a stipulated calculation. The Company recorded a liability of $515,000 in the transition period ended December 31, 1997 as an estimate of its obligation to the partnership. On March 30, 1999, the Company settled its obligation by issuing a note payable to the partnership in the amount of $950,000 and receiving title to the engines. The previously accrued amount, $515,000, is expected to approximate the net settlement after sale of the engines. As a result of the restructuring plans undertaken to accomplish fleet simplification and cost reductions, the Company estimates total annual expense reductions in excess of $4 million per year, commencing in 1998. These savings will result principally from the reduction in aircraft rentals, maintenance expense, flight crew and other labor costs, and spare parts inventory levels. In addition, the fleet simplification has improved the Company's ability to achieve higher levels of reliability, resulting in fewer flight cancellations and delays and increased revenues. With the exception of the disposition of the remaining parts held for resale and the sale of the engines obtained in the settlement of the sale leaseback transaction referenced above, the restructuring is substantially complete. The Company's balance sheet reflects a deficit in working capital, defined as current assets less current liabilities, of approximately $5,125,000 on December 31, 1998 as compared to $16,705,000 on December 31, 1997. Working capital is affected by the short-term note issued to Lynrise leasing, as well as seasonality of operations and the timing of receipts from the ACH. March through October of each year are peak travel and thus are higher revenue months. The Company's accounts receivable for passenger service provided in December, 1998 are thus less than amounts recorded in the peak months. The ACH mechanism of collecting passenger revenue receivables has provided a predictable cash inflow stream; 99% of the Company's revenues are collected through the Clearing House. As such, the Company has traditionally been able to match payments to creditors to its cash receipts from the ACH, which are received at the end of each month, and to thus defer payments when necessary, or arrange for alternate financing. After recognition of the restructuring charges and the change in accounting principle, the Company has a shareholders' deficit of $11,016,000 at December 31, 1998. As previously mentioned, the results of the restructuring are expected to provide over $4 million in net cost savings going forward. In addition, many of the obligations arising from the restructuring can be satisfied by the issuance of stock, which will conserve cash and improve the Company's deficit position. The acquisition of the Company by Mesa is expected to positively impact the Company's liquidity when finalized. The Company's management and Board of Directors has had preliminary discussions related to a secondary public offering of common stock, although no definitive actions have been taken as yet pending the Mesa acquisition. The Company also has a solid infrastructure and has been able to exceed US Airways operating performance goals consistently during 1998. FLEET ----- In 1998, the Company assumed five Dash 8 aircraft leases from a former operator of the aircraft. These leases begin expiring in April, 2000 with the final lease ending in September, 2002, and are considered operating leases. The Company also consummated a lease agreement for an additional Dash 8 aircraft in 1998 that is covered by economic development insurance provided by Her Majesty the Queen in Right of Canada as Represented by the Ministry of Industry, Science and Technology (the "Ministry"). As a result of entering into this lease agreement, the Company has settled all claims by the Ministry, including a purported claim of $16,996,995, as long as the Company fulfills its obligations under the lease for the new aircraft. The lease expires in October, 2005. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- FINANCING --------- During fiscal 1998 the Company had available a line of credit (the "Line") in an amount not to exceed $4,000,000 from British Aerospace Asset Management ("BAAM"). BAAM 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 permits the Company to borrow up to 70% 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 BAAM shall determine, but in no event more than $4,000,000. The Line is secured by all of the Company's accounts receivable, bears interest at prime rate plus 2% and is scheduled to terminate on July 31, 1999, but must be extended by BAAM for successive one-year periods until December 31, 2001. In September, 1998, the Company obtained subordinated loans from its primary banking facility, Centura bank and a Board member for $1,100,000. Interest at 13.75% is due monthly. The loans mature in September, 2003, with principal payments beginning in October, 1999 at two levels. Principal payments in the amount of $30,000 a month are due in the months of May through October and principal payments of $15,000 a month in the months of November through April. In conjunction with this transaction, the Company issued 112,467 warrants to Centura that may be exercised at any time at $3.00 per share within ten years. For any year the Company does not repay the loan in accordance with the loan agreement, the Company must issue 12,497 additional warrants to the lenders at the same exercise price. In the event a key member of management leaves the Company and the lenders do not agree with his replacement, an additional 17,768 warrants must be issued to the lenders at an exercise price of $.01 per share. The warrant agreements contain a put feature that provides that the lenders may require the Company to purchase the warrants in cash at fair market value, less the exercise price, at any time. In November, 1996 the Company secured a supplemental line of credit (the "Centura Line") with Centura Bank. This is a revolving line of credit not to exceed $400,000. The outstanding balance on the Centura Line accrues interest at an annual rate of prime plus 2%, and terminates July 2, 1999. There was no outstanding balance at December 31, 1998. During 1998, the Company obtained several short-term loans from certain related parties. Individual amounts borrowed under these loans ranged from $150,000 to $350,000, and earned interest at the rate of ten percent. The aggregate maximum and average amounts outstanding under these loans were $500,000 and $209,000, respectively. In connection with these loans, the Company issued to the lending parties noncompensatory warrants to purchase 12,500 shares of the Company's common stock at the fair market value on the date of grant. CAPITAL EXPENDITURES -------------------- Capital expenditures generally consist of fixed asset replacement. Capital expenditures in 1998 were $1,712,000. These expenditures were principally for rotable parts and aircraft leasehold improvements. The Company projects 1999 capital expenditures to be approximately $1,000,000 for rotable parts, leasehold improvements and other capital items. Effective July 1, 1997, the Company began accounting for major component overhauls using the accrual method, as opposed to the deferral method practiced in prior years. Accordingly, expenditures for overhauls in the upcoming year are not included in the capital budget. OPERATING CASH FLOW ------------------- The Company receives payments for airline tickets under interline agreements through the ACH 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 BAAM to provide a steady cash flow between ACH settlements. The Company believes that the restructuring discussed 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 are insufficient to meet obligations, the Company may issue stock, secure short-term loans from Officers and Directors, or extend terms with trade creditors. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Accounts receivable increased from $5,048,000 as of December 31, 1997 to $6,346,000 as of December 31, 1998. The increase is principally due to higher passenger counts of 70,330 as compared to 60,759 in December, 1998 versus December, 1997. The year end receivable balance is comprised primarily of December traffic receivables. Inventories increased from $510,000 on December 31, 1997 to $968,000 on December 31, 1998, primarily as a result of the initial parts provisioning necessary to support the introduction of the Jetstream Super 31 aircraft into service in 1998. Accounts payable decreased from $8,129,000 to $5,540,000, primarily due to increased payments to vendors in 1998 of balances that existed on December 31, 1997. Accrued expenses increased from $5,983,000 at December 31, 1997 to $8,014,000 at the same date in 1998. The Company moved its payroll from the 29th of each month to the 1st of the subsequent month in December, 1998, thus accrued payroll increased $1,337,000 over the comparable periods. Accrued repair expenses increased $766,000 due to timing of component repairs in the relevant periods. The Company accepted delivery of six additional Dash 8 aircraft from June, 1998 through October, 1998. Certain costs were incurred to integrate the aircraft into the Company's operations. These expenditures are comprised primarily of rental payments on the aircraft prior to their entrance into scheduled flying, the retention and training of flight crews and initial airworthiness inspection. As permitted under Statement of Position (SOP) 88-1, "Accounting for Developmental and Preoperating Costs, Purchases and Exchanges of Take-off and Landing Slots, and Airframe Modifications", the Company capitalized $822,000 as preoperating costs in the December 31, 1998 balance sheet. As required by SOP 98-5, "Reporting on the Costs of Start-Up Activities", the capitalized amount less related amortization, $103,000 will be written off as of January 1, 1999. The Company is required to make payments of $166,000 to unsecured creditors in annual installments in the third quarter of each calendar year through 1999. The Company intends to make these payments when due. OTHER ----- The Financial Accounting Standards Board (FASB) has issued several statements that became effective for fiscal years beginning after December 15, 1997. These statements are SFAS No. 130, "Comprehensive Income"; SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information"; and SFAS No. 132, "Employers Disclosures about Pensions and Other Post Retirement Benefits". The Company will not be impacted by requirements or changes in reporting requirements prescribed by SFAS No. 130 or 131. The Company does anticipate broadened disclosures under SFAS No. 132 regarding the 401(k) plan it sponsors. The Company does not provide for any other post-retirement benefits. FASB also issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. The Company has not quantified the impact of SFAS No. 133 on its financial information. YEAR 2000 COMPLIANCE -------------------- Many currently installed computer systems, imbedded microchips and software products are coded to accept two-digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish years beginning with "20" from years beginning with "19". Any programs that have time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in the computer shutting down or performing incorrect computations. As a result, computer systems and software used by many companies will need to be upgraded to comply with such "Year 2000" requirements. Certain of the Company's systems, including information and computer systems and automated equipment, will be affected by the Year 2000 issue. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- The Company completed its comprehensive inventory of its core business applications to determine the adequacy of these systems to meet future business requirements. The Company has also been performing system upgrades, which are approximately 80% complete. After these upgrades and system evaluations are complete, the Company will begin testing the results of its compliance work. To date, the Company's Year 2000 remediation efforts have focused on its core business computer applications (i.e., those systems that the Company is dependent upon for the conduct of day-to-day business operations). Out of this effort, a number of systems have already been identified for upgrade. In no case has a system been replaced or contemplated to be replaced solely because of Year 2000 issues with the exception of the Company's voice mail system, which can be replaced for approximately $20,000. Additionally, while the Company may have incurred an opportunity cost for addressing the Year 2000 issue, it does not believe that any specific information technology projects have been deferred as a result of its Year 2000 efforts. The Company's reservation system is tied to its code-sharing partner, US Airways. The Company's representatives have met with US Airways to assess the Year 2000 progress of the reservations system providers. The Company has installed an upgraded version of its current accounting, revenue accounting, maintenance parts and payroll systems. Approximately 75% of these systems have been tested. The Company has had extensive discussions with the manufacturers of its various aircraft to discuss Year 2000 issues and identify the required avionics and flight systems upgrades which will be implemented during 1999. The aircraft manufacturers are also required to report the Year 2000 status of their aircraft to the FAA. The Company is currently assessing other potential Year 2000 issues, including noninformation technology systems. A broad-based Year 2000 Task Force has been formed and has begun meeting to identify areas of concern and develop action plans. The Company has also been meeting with similar task forces at US Airways and Mesa. The Company's relationships with vendors contractors, financial institutions and other third parties will be examined to determine the status of the Year 2000 issue efforts on the part of the other parties to material relationships. The Year 2000 Task Force will include both internal and Company-external representation. The Company expects to incur Year 2000-specific costs in the future but does not at present anticipate that these costs will be material. In the worst case scenario, the Company believes that relationships it has with third parties would cease as a result of either the Company or the third party not successfully completing their Year 2000 remediation efforts. If this were to occur, the Company would encounter disruptions to its business that could have a material adverse effect on its business, financial position and results of operations. The Company could be materially impacted by widespread economic or financial market disruption or by Year 2000 computer system failures. The Company has not at this time established a formal Year 2000 contingency plan but will consider and, if necessary, address doing so as part of its Year 2000 Task Force activities. The Company maintains and deploys contingency plans designed to address various other potential business interruptions. These plans may be applicable to address the interruption of support provided by third parties resulting from their failure to be Year 2000 ready. The Company has relationships with certain governmental entities such as the FAA upon which it is dependent to operate its aircraft. The FAA has represented on its web page that its systems are Year 2000 compliant. If, however, systems at the FAA fail, the Company's aircraft will not be able to operate, or will operate at a substantially reduced level. If this were to occur, the Company approximates that it would lose substantially all the revenue associated with these nonoperated flights. For each day that the Company is unable to operate flights as a result of Year 2000 failures, it anticipates a $225,000 loss of revenue and net loss of approximately $110,000. INFLATION - --------- Inflation has not had a material impact on the Company's operations. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment #2 to be signed on its behalf by the undersigned, thereunto duly authorized. CCAIR, INC. DATE: April 30, 1999 BY: /s/ Kenneth W. Gann ------------------ Kenneth W. Gann, President and Chief Executive Officer 27 -----END PRIVACY-ENHANCED MESSAGE-----