FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended December 31, 1997 Commission File Number 0-11720 AIR TRANSPORTATION HOLDING COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware 52-1206400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Post Office Box 488, Denver, North Carolina 28037 (Address of principal executive offices) (704) 377-2109 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,650,653 Common Shares, par value of $.25 per share were outstanding as of February 5, 1998.
AIR TRANSPORTATION HOLDING COMPANY, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings for the three and nine-month periods ended December 31, 1997 and 1996 (Unaudited) 3 Consolidated Balance Sheets at December 31, 1997 (Unaudited) and March 31, 1997 4 Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 1997 and 1996 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12-14 Exhibit Index 15 Exhibits 16-27 2
<TABLE> AIR TRANSPORTATION HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) <CAPTION> Three Months Ended Nine Months Ended December 31, December 31, 1997 1996 1997 1996 <S> <C> <C> <C> <C> Operating Revenues: Cargo $ 4,852,046 4,763,349 13,880,202 13,604,185 Maintenance 3,634,535 2,519,679 10,146,148 8,514,370 Ground equipment sales 6,367,958 - 7,920,810 - Aircraft services and other 1,608,000 1,628,259 3,426,775 3,130,781 16,462,539 8,911,287 35,373,935 25,249,336 Operating Expenses: Flight operations 3,498,380 3,306,428 9,876,900 9,367,683 Maintenance 4,618,683 3,993,513 12,103,188 11,132,431 Cost of ground equipment sales 4,869,276 - 6,040,056 - General and administrative 1,931,954 1,102,440 4,328,167 3,172,792 Depreciation and amortization 162,030 95,681 384,037 317,043 Start-up & merger expense 8,766 9,000 188,521 219,000 15,089,089 8,507,062 32,920,869 24,208,949 Operating Income 1,373,450 404,225 2,453,066 1,040,387 Non-operating (Income) Expense: Investment income (51,234) (41,769) (208,687) (161,054) Deferred retirement obligation - - 418,000 - Loss (gain) on asset sale & other 12,501 - 20,833 (182,359) (38,733) (41,769) 230,146 (343,413) Earnings Before Income Taxes 1,412,183 445,994 2,222,920 1,383,800 Provision For Income Taxes 519,667 141,414 817,267 545,370 Net Earnings $ 892,516 304,580 1,405,653 838,430 Weighted Average Shares: Basic 2,650,653 2,611,100 2,649,246 2,620,322 Diluted 2,780,392 2,793,977 2,784,411 2,803,199 Net Earnings Per Common Share: Basic $ 0.34 0.12 0.53 0.32 Diluted $ 0.32 0.11 0.50 0.30 <FN> See notes to consolidated financial statements. 3 </TABLE>
<TABLE> AIR TRANSPORTATION HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <CAPTION> December 31, 1997 March 31, 1997 (Unaudited) <S> <C> <C> ASSETS Current Assets: Cash and equivalents $ 1,100,796 2,377,898 Short term investments 2,474,019 2,229,708 Accounts receivable, net 7,052,685 3,310,810 Inventory, parts and supplies 3,983,252 1,069,206 Deferred tax asset, net 424,980 344,980 Prepaid expense and other 7,853 119,828 Total Current Assets 15,043,585 9,452,430 Property and Equipment 4,190,451 3,398,636 Less accumulated depreciation (2,291,057) (1,943,020) 1,899,394 1,455,616 Intangible pension asset and other 562,606 210,365 Total Assets $ 17,505,585 11,118,411 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 3,465,800 809,245 Notes payable to bank 1,545,645 - Accrued liabilities 1,854,477 1,665,046 Income taxes 420,453 389,916 Customer deposits 155,000 - Total Current Liabilities 7,441,375 2,864,207 Deferred Retirement Obligation 718,000 - Stockholders' Equity: Preferred stock, $1 par value, authorized 10,000,000 shares, none issued - - Common stock, par value $.25; authorized 4,000,000 shares; 2,650,653 and 2,651,433 shares issued 661,991 662,858 Additional paid in capital 7,078,657 7,126,294 Retained earnings 1,605,562 465,052 9,346,210 8,254,204 Total Liabilities and Stockholders' Equity $ 17,505,585 11,118,411 <FN> See notes to consolidated financial statements. 4 </TABLE>
<TABLE> AIR TRANSPORTATION HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <CAPTION> Nine Months Ended December 30, 1997 1996 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,405,653 838,430 Adjustments to reconcile net earnings to net cash provided by (used in) operations: Depreciation and amortization 384,037 317,043 Change in deferred tax asset (80,000) 122,858 Change in retirement obligation 718,000 - Gain on sale of assets - (182,359) Charge in lieu of income taxes - 15,837 Asset and liability changes which provided (used) cash: Accounts receivable (4,719,768) 494,351 Parts and supplies (1,391,017) (228,000) Prepaid expense and other (240,266) 75,008 Accounts payable 2,656,555 (300,778) Accrued expenses 227,635 (109,532) Income taxes payable 30,537 (21,409) Total adjustments (2,414,287) 183,019 Net cash provided by (used in) operating activities (1,008,634) 1,021,449 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisition (715,981) - Capital expenditures (540,174) (295,091) Purchase of short term investments (960,757) (1,165,593) Sale of short term investments 716,446 - Proceeds from disposal of equipment - 415,000 Net cash used in investing activities (1,500,466) (1,045,684) CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable to bank 1,545,645 - Payment of cash dividend (265,143) (218 435) Repurchase of common stock (67,254) (508,215) Proceeds from exercise of stock options 18,750 5,000 Net cash provided by (used in) financing activities 1,231,998 (721,650) NET DECREASE IN CASH & EQUIVALENTS (1,277,102) (745,885) CASH & EQUIVALENTS AT BEGINNING OF PERIOD 2,377,898 2,213,841 CASH & EQUIVALENTS AT END OF PERIOD $ 1,100,796 1,467,956 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 3,760 491 Income/Franchise taxes 879,176 448,223 <FN> See notes to consolidated financial statements. 5 </TABLE>
AIR TRANSPORTATION HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. Financial Statements The Consolidated Balance Sheet as of December 31, 1997, the Consolidated Statements of Earnings for the three and nine-month periods ended December 31, 1997 and 1996 and the Consolidated Statements of Cash Flows for the nine-month periods ended December 31, 1997 and 1996 have been prepared by Air Transportation Holding Company, Inc. (the Company) without audit. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of December 31, 1997, and for prior periods presented, have been made. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 1997. The results of operations for the period ended December 31 are not necessarily indicative of the operating results for the full year. B. Acquisition On August 29, 1997, the Company acquired the Simon Deicer Division of Terex, Inc. for $715,000 cash. The acquisition, renamed Global Ground Support, LLC (Global), manufactures, sells and services aircraft deice equipment on a worldwide basis. The acquisition was accounted for using the purchase method; accordingly, the assets and liabilities (which included $1,522,000 inventory, $287,000 fixed assets and $3,000 accounts receivable, net of $1,048,000 in customer deposits and $49,000 warranty obligation) of the acquired entity have been recorded at their estimated fair value at the date of acquisition. Global's results of operations have been included in the Consolidated Statement of Income since the date of acquisition. The following table presents unaudited pro forma results of operations as if the acquisition had occurred on April 1, 1996. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of fiscal 1997 or of results which may occur in the future. Furthermore, no effect has been given in the pro forma information for operating benefits that are expected to be realized through the combination of the entities because precise estimates of such benefits cannot be quantified. Nine Months Ended December 31, (Unaudited) 1997 1996 Operating revenues $37,109,000 31,745,000 Net earnings 1,418,000 353,000 Net basic earnings per share .53 .13 6
C. Income Taxes The tax effect of temporary differences gave rise to the Company's deferred tax asset in the accompanying December 31, 1997 and March 31, 1997 consolidated balance sheets. The Company has recorded a valuation allowance in order to reduce its deferred tax asset to an amount which is more likely than not to be realized. Changes in the valuation allowance, related to future utilization of net operating losses, reduced the provision for income taxes by $44,000 and $72,000, respectively, during the nine-months ended December 31, 1997 and 1996. The income tax provisions for the three and nine-months ended December 31, 1997 and 1996 differ from the federal statutory rate primarily as a result of state income taxes and reductions in the valuation allowance. The Company completed the utilization of all federal net operating loss carryforwards available for tax return purposes during the quarter ended December 31, 1996. These carryforwards, to the extent realized, resulted in a reduction of goodwill, until goodwill was reduced to zero in the quarter ended June 30, 1996. D. Net Earnings Per Share Earnings per share has been calculated based on Statement of Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which became effective for the quarter ended December 31, 1997. As required by SFAS No. 128, per share data for all periods presented has been retroactively restated to conform to the new standard. Basic earnings per share has been compiled by dividing net earnings by weighted average number of common shares outstanding during each period. Shares issuable under employee stock options are considered common share equivalents and were included in the weighted average common shares for purposes of the diluted per share calculation. E. Reclassifications Certain reclassifications have been made in the 1996 financial statements to conform with the 1997 presentation. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview The Company's most significant component of revenue is generated through its air cargo subsidiaries, Mountain Air Cargo, Inc. (MAC) and CSA Air, Inc. (CSA), which are short-haul express air freight carriers flying nightly contracts for a major express delivery company out of 81 cities, principally located in 30 states in the eastern half of the United States and in Puerto Rico, Canada and the Virgin Islands. Under the terms of its dry-lease service contracts (which currently cover approximately 98% of the revenue aircraft operated), the Company passes through to its customer certain cost components of its operations without markup. The cost of fuel, landing fees, outside maintenance, aircraft certification and conversion, parts and certain other direct operating costs are included in operating expenses and billed to the customer as cargo and maintenance revenue. In 1993, the Company organized Mountain Aircraft Services, LLC (MAS) to engage in the sale of commercial aircraft parts and provide aircraft engine overhaul management and component repair services. In August 1997 the Company acquired certain assets and order backlog of Simon Deicer Company, a division of Terex Aviation Ground Equipment, Inc. located in Olathe, Kansas. The acquisition, renamed Global Ground Support, LLC (Global), manufactures, services and supports aircraft deicers on a worldwide basis. Global is operated as a subsidiary of MAS. Results of Operations Consolidated revenue increased $10,125,000 (40.1%) to $35,374,000 and $7,551,000 (84.9%) to $16,463,000, respectively, for the nine and three-month periods ended December 31, 1997 compared to their equivalent 1996 periods. The nine and three-month current period net increase in revenue primarily resulted from a $7,921,000 and $6,368,000 respective increase in revenue associated with the September 2, 1997 acquisition of Global, and increases in maintenance service, engine overhaul and parts revenue. Operating expenses increased $8,712,000 (36.0%) to $32,921,000 for the nine-month period ended December 31, 1997 and $6,582,000 (77.4%) to $15,089,000 for the three-month period ended December 31, 1997 compared to their equivalent 1996 periods. The change in operating expenses for the nine- month period consisted of the following: cost of flight operations increased $509,000 (5.4%), primarily as a result of additional costs associated with flight crews and airport fees; maintenance expense increased $971,000 (8.7%), primarily due to cost of parts required for heavy maintenance checks due on aircraft and increased maintenance staffing; ground equipment increased $6,040,000 (100.0%), as a result of the August 1997 Global acquisition; depreciation and amortization increased $67,000 (21.1%) as a result of additional depreciable assets purchased in the acquisition of Global, offset by depreciation related to the sale of aircraft in fiscal 1997; general and administrative expense increased $1,155,000 (36.4%) as a result of $562,000 in G&A costs associated with the Company's operation of Global and increased insurance, employee benefits, staffing, salary and wage rates. 8
Results of Operations (cont'd) Facility start-up expenses decreased $30,000 (13.9%) and, reflect for fiscal 1997, cost associated with the Company's start-up and relocation of maintenance operations to Kinston, N.C. compared to proposed merger and repair shop component start-up cost for fiscal 1998. The change in operating expenses for the three-month periods, except for the September 1997 acquisition of Global, primarily followed the nine month changes. As a percentage of operating revenue, operating income increased to 6.9% for the nine-month period ended December 31, 1997 from 4.1% for the equivalent period in 1996, and 8.3% for the three-month period ended December 31, 1997 from 4.5% for the equivalent period in 1996, primarily as a result of the addition of Global in September 1997.The $574,000 increase in non-operating expense was principally due to a fiscal 1998 $418,000 provision to fulfill contractual benefits related to the death of the Company's Chairman and CEO and a $182,000 gain on sale of aircraft which took place in fiscal 1997. Pretax earnings increased $839,000 and $966,000 for the nine and three- month periods ended December 31, 1997 compared to their December 31, 1996 periods. The changes were respectively due to the second and third quarter current period profitable results of Global, which added $1,244,000 to the Company's pretax earnings for the nine-month period, partially offset by the above $418,000 obligation recorded in the first quarter of fiscal 1998. The provision for income taxes increased $272,000 and $378,000 for the nine and three-month periods ended December 31, 1997 compared to their respective 1996 periods due to changes in taxable income and effective tax rates. Seasonality Global's business has historically been highly seasonal. In general, the bulk of Global's revenues have been recognized during the second and third fiscal quarters, and comparatively little revenue has been recognized during the first and fourth fiscal quarters. The Company plans to reduce Global's seasonal fluctuation in revenues by broadening its product line to increase revenues in the first and fourth fiscal quarters. The remainder of the Company's business is not materially seasonal. Liquidity and Capital Resources As of December 31, 1997 the Company's working capital amounted to $7,602,000, an increase of $1,014,000 compared to March 31, 1997. The net increase primarily resulted from profitable operations offset by cash required for the Global acquisition. The Company's secured bank financing line provides credit in the aggregate of up to $4,000,000 through August 1998. Loans under the line of credit bear interest at the lender's prime rate less 25 basis points. Substantially all of the Company's accounts receivable and inventory, have been pledged as collateral under this financing arrangement. As of 9
Liquidity and Capital Resources (cont'd) December 31, 1997 the Company was in a net borrowing position against its credit line of $1,546,000. Management believes that funds anticipated from operations and existing credit facilities will provide adequate cash flow to meet the Company's financial needs for the foreseeable future. The respective nine-month periods ended December 31, 1997 and 1996 resulted in the following changes in cash flow: operating activities used $1,009,000 and provided $1,021,000, investing activities used $1,500,000 and $1,046,000 and financing activities provided and used, respectively, $1,232,000 and $722,000. Net cash decreased $1,277,000 and $746,000 for the respective nine-month periods ended December 31, 1997 and 1996. Cash used in operating activities was $2,030,000 more for the nine-months ended December 31, 1997 compared to the similar 1996 period, principally due to the change in net assets resulting from the operations of Global, partially offset by the deferred retirement obligations booked in 1997. Cash used in investing activities for the nine-months ended December 31, 1997 was approximately $455,000 more than the comparable period in 1996, principally due to expenditures related to the acquisition of Global, offset by net decreases in purchase of short-term investments. Cash provided by financing activities was $1,954,000 more in the 1997 nine-month period due to a note payable to bank and a reduction in the repurchase of common stock. During the nine months ended December 31, 1997 the Company repurchased 15,780 shares of its common stock at a total cost of $67,000. Pursuant to its previously announced stock repurchase program, $204,000 remains available for repurchase of common stock. Cost associated with the Company's start-up of an FAA approved 145 component repair facility which opened at Kinston, N. C. in May 1997, professional fees related to terminated first quarter merger discussions and start-up cost associated with Global amounted to $189,000 for the nine-month period ended December 31, 1997. There are currently no commitments for significant capital expenditures. The Company paid a $.10 per share cash dividend in June 1997. The Company's Board of Directors on August 7, 1997 adopted the policy to pay an annual cash dividend in the first quarter of each fiscal year, in an amount to be determined by the board. Year 2000 Issue The Company has initiated a comprehensive review of its computer systems to identify the systems that could be affected by the "year 2000 issue", which is the result of computer programs being written using two digits rather than four to define the applicable year. Like most owners of computer software, the Company will be required to modify significant portions of its software so that it will function properly in the Year 2000. The Company presently believes that, with modifications to existing software and conversions to new software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems. Management has not yet completely assessed the year 2000 compliance expense and related potential effect on the Company's earnings. 10
Impact of Inflation The Company believes the impact of inflation and changing prices on its revenues and earnings is not material since the major cost components of its operations, consisting principally of fuel, aircraft, crew and certain maintenance costs are passed through to its customer under current contract terms. 11
PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Description 3.1 Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 3.2 By-laws of the Company, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996. 4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 10.1 Aircraft Dry Lease and Service Agreement dated February 2, between Mountain Air Cargo, Inc. and Federal Express Corporation, incorporated by reference to Exhibit 10.13 to Amendment No. 1 on Form 10-Q/A to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1993 10.2 Loan Agreement among NationsBank of North Carolina, N.A., the Company and its subsidiaries, dated January 17, 1995, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period ended December 31,1994 10.3 Aircraft Wet Lease Agreement dated April 1, 1994 between Mountain Air Cargo, Inc. and Federal Express Corporation, incorporated by reference to Exhibit 10.4 of Amendment No. 1 on Form 10-Q/Q to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1994 10.4 Adoption Agreement regarding the Company's Master 401(k) Plan and Trust, incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993* 10.5 Form of options to purchase the following amounts of Common Stock issued by the Company to the following executive officers during the following fiscal years ended March 31:* Number of Shares Executive Officer 1993 1992 1991 J. Hugh Bingham 150,000 150,000 200,000 John J. Gioffre 100,000 100,000 125,000 William H. Simpson 200,000 200,000 300,000 incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993. 12
10.6 Premises and Facilities Lease dated November 16, 1995 between Global TransPark Foundation, Inc. and Mountain Air Cargo, Inc., incorporated by reference to Exhibit 10.5 to Amendment No. 1 on form 10-Q/A to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1995. 10.7 Employment Agreement dated January 1, 1996 between the Company, Mountain Air Cargo Inc. and Mountain Aircraft Services, LLC and William H. Simpson, incorporated by reference to Exhibit 10.8 to the Company's Annual Report Form 10-K for the fiscal year ended March 31, 1996.* 10.8 Employment Agreement dated January 1, 1996 between the Company, Mountain Air Cargo Inc. and Mountain Aircraft Services, LLC and John J. Gioffre, incorporated by reference to Exhibit 10.9 to the Company's Annual Report Form 10-K for the fiscal year ended March 31, 1996.* 10.9 Employment Agreement dated January 1, 1996 between the Company, Mountain Air Cargo Inc. and Mountain Aircraft Services, LLC and J. Hugh Bingham, incorporated by reference to Exhibit 10.10 to the Company's Annual Report Form 10-K for the fiscal year ended March 31, 1996.* 10.10 Employment Agreement dated September 30, 1997 between Mountain Aircraft Services, LLC and J. Leonard Martin. 11.1 Computation of Primary and Fully Diluted Earnings per Common Share 21.1 List of subsidiaries of the Company, incorporated by reference to Exhibit 21.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997. 27.1 Financial Data Schedule (For SEC use only) * Management compensatory plan or arrangement required to be filed as an exhibit to this report. b. Reports on form 8-K No Current Reports on Form 8-K were filed in the third quarter of fiscal 1997. 13
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AIR TRANSPORTATION HOLDING COMPANY, INC. (Registrant) Date: February 10, 1998 /s/ Walter Clark Walter Clark, Chief Executive Officer Date: February 10, 1998 /s/ John Gioffre John J. Gioffre, Chief Financial Officer 14
AIR TRANSPORTATION HOLDING COMPANY, INC. EXHIBIT INDEX Exhibit PAGE 10.10 Employment agreement dated September 30, 1997 between Mountain Aircraft Services, LLC And J. Leonard Martin.............................16-26 11.1 Computation of Primary and Fully Diluted Earnings Per Common Share........................... 27 15