SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File No. 0-23224
GREAT LAKES AVIATION, LTD.
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(Exact name of registrant as specified in its charter)
IOWA 42-1135319
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1965 330th Street, Spencer, Iowa 51301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (712) 262-1000
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
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As of August 12, 1997 there were 7,589,121 shares of Common Stock, par
value $.01 per share, issued and outstanding.
1
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
June 30, 1997 December 31, 1996
----------------- --------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 604 $ 6,676
Accounts Receivable 4,525 7,274
Inventories, net of accumulated allowance of
$3,221 in 1997 and $3,082 in 1996 12,847 12,668
Prepaid expenses and other current assets 2,280 2,254
----------- ----------
Total Current Assets 20,256 28,872
----------- ----------
PROPERTY AND EQUIPMENT:
Flight Equipment 97,681 98,281
Other Property and Equipment 4,055 3,863
Less - Accumulated Depreciation and Amortization (17,165) (14,901)
----------- ----------
Total Property and Equipment 84,571 87,243
OTHER ASSETS 2,349 2,494
----------- ----------
$ 107,176 $ 118,609
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 10,689 $ 13,089
Current Maturities of Long-term Debt 6,128 6,668
Notes Payable 5,000
Unpaid Debt and Lease Installments
Major Aircraft Supplier 10,399
Other 2,428
Accrued Liabilities and Unearned Revenue 3,019 3,512
----------- ----------
Total Current Liabilities 32,663 28,269
LONG-TERM DEBT, net of current maturities 61,740 65,986
DEFERRED CREDITS 5,636 5,614
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized,
7,586,354 shares issued and outstanding at June 30, 1997,
7,586,326 shares issued and outstanding at December 31, 1996 76 76
Paid-in Capital 28,927 28,920
Accumulated Deficit (21,866) (10,256)
----------- ----------
Total Stockholders' Equity 7,137 18,740
----------- ----------
$ 107,176 $ 118,609
----------- ----------
----------- ----------
Note: The Balance Sheet at December 31, 1996 has been derived from
the audited financial statements as of that date, but does not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. See condensed notes to financial statements.
2
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30
(Unaudited)
(in thousands, except share and per share information)
For the Three Months Ended June 30 For the Six Months Ended June 30
---------------------------------- --------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- --------------
OPERATING REVENUES:
Passenger $ 18,023 $ 27,473 $ 42,400 $ 49,435
Public Service 918 746 2,197 1,230
Freight, charter and other 399 495 1,411 1,190
--------- --------- --------- ---------
Total operating revenues 19,340 28,714 46,008 51,855
--------- --------- --------- ---------
OPERATING EXPENSES:
Salaries, wages and benefits 4,318 6,912 11,794 13,211
Aircraft fuel 2,772 4,403 7,626 8,372
Aircraft maintenance materials and repairs 1,351 3,059 3,775 6,389
Commissions 1,336 2,111 3,171 3,752
Depreciation and amortization 1,111 1,369 2,549 2,824
Aircraft rental 2,171 2,782 5,639 5,087
Other rentals and landing fees 1,326 1,776 3,119 3,502
Other operating expenses 6,101 6,043 12,655 11,396
Shutdown expenses 4,217 - 4,217 -
--------- --------- --------- ---------
Total operating expenses 24,703 28,455 54,545 54,533
--------- --------- --------- ---------
Operating income (loss) (5,363) 259 (8,537) (2,678)
INTEREST EXPENSE (includes $576 of
interest expense related to grounded aircraft -
See Note 2.) 1,460 1,414 3,073 2,948
--------- --------- --------- ---------
Loss before income taxes (6,823) (1,155) (11,610) (5,626)
INCOME TAX EXPENSE (BENEFIT) - - - (1,698)
--------- --------- --------- ---------
Net loss $ (6,823) $ (1,155) $(11,610) $ (3,928)
--------- --------- --------- ---------
--------- --------- --------- ---------
NET LOSS PER SHARE: $ (.90) $ (0.15) $ (1.53) $ (0.52)
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,589,121 7,586,326 7,588,457 7,584,479
--------- --------- --------- ---------
--------- --------- --------- ---------
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30
(Unaudited)
(in thousands)
1997 1996
----------- ----------
OPERATING ACTIVITIES:
Net loss $ (11,610) $ (3,928)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 2,872 2,824
Deferred income taxes 0 (1,698)
Change in current operating items:
Accounts receivable, net 2,749 (800)
Inventories, net (179) (1,240)
Prepaid expenses and deposits (26) (864)
Deposits on flight equipment - 353
Unpaid lease installments (2,893)
Accounts payable and accrued liabilities 4,821 2,062
---------- ---------
Net cash flows used in operating activities (4,266) (3,291)
---------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (192) (1,365)
Sale of property and equipment - 20,789
Change in other assets 145 (663)
---------- ---------
Net cash flows provided by investing activities (47) 18,761
---------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of debt - 4,000
Repayment of debt and accrued interest (1,766) (22,571)
Proceeds from sale of common stock 7 23
---------- ---------
Net cash flows used in financing activities (1,759) (18,548)
---------- ---------
NET CHANGE IN CASH (6,072) (3,078)
CASH:
Beginning of Period 6,676 6,785
---------- ---------
End of Period $ 604 $ 3,707
---------- ---------
---------- ---------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the year for-
Interest 1,460 2,952
---------- ---------
---------- ---------
Noncash transactions-
Deferred manufacturer's incentives received as:
Property and equipment (200)
Inventory 414
---------- ---------
$ (200) $ 414
---------- ---------
---------- ---------
Reclassification of deferred credit relating
to cancellation of Embraer Agreement $ - $ 1,156
---------- ---------
---------- ---------
The accompanying notes to consolidated financial statements
are an integral part of these statements
4
GREAT LAKES AVIATION, LTD.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished in the
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments which are, in the opinion of management, necessary
for a fair presentation of such consolidated financial statements. The
Company's business is seasonal and, accordingly, interim results are not
necessarily indicative of results for a full year. In addition, financial
results were significantly affected by temporary suspension of service and
reduced operating levels during the second quarter of 1997, as described
below. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements for the year ended
December 31, 1996 and the notes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
forgoing financial statements contain an opinion by the Company's independent
public accountants indicating substantial doubt as to the Company's ability
to continue as a going concern.
The consolidated financial statements include the accounts of Great Lakes
Aviation, Ltd. and its wholly-owned subsidiary (RDU Inc.), referred to
collectively as the Company. All significant inter-company transactions and
balances have been eliminated in consolidation.
During the period the company operated scheduled passenger and air freight
service under three marketing identities. In the upper Midwest the Company
operates under a cooperative marketing agreement (United Express Agreement)
with United Airlines, Inc. (United). The Company also serves certain
destinations in this area as Great Lakes Airlines.
Along the East Coast, the Company operated as Midway Connection under a
cooperative marketing agreement with Midway Airlines, Inc. (Midway). In
Mexico, Arizona and New Mexico the Company operated as Great Lakes Airlines.
All of the services provided as Midway Connection and Great Lakes Airlines in
Mexico, Arizona and New Mexico were terminated effective May 16, 1997.
Revenues during the quarter ended June 30, 1997 were derived 75.5% from
United Express operations, 14.4% from Midway Connection and 10.1% from Great
Lakes Airlines operations.
5
2. TEMPORARY SUSPENSION OF FLIGHT OPERATIONS AND RELATED EXPENSES
Subsequent to the temporary suspension of flight operations on May 16, 1997,
the Company incurred continuing operating costs and extraordinary maintenance
and other expenditures during the shutdown period, which continued after the
resumption of reduced level of services on May 23, 1997. These non-revenue
generating expenses are shown on the statement of operations as shutdown
expenses. Shutdown expenses incurred after June 30, 1997 will be reflected
in the corresponding financial statements. Shutdown expenses consist of
aircraft lease rentals and depreciation for aircraft not used in scheduled
service, rental of unused facilities, costs of non-utilized personnel and
similar costs as well as expenses related to the extensive FAA review of the
Company's operations including inspection related costs and unusual
maintenance costs in excess of normal recurring maintenance. Such operating
costs are summarized below:
Salaries, wages and benefits $ 1,833,044
Aircraft maintenance materials and repairs 575,686
Aircraft depreciation 322,824
Aircraft rental 978,715
Facilities rental 198,335
FAA penalty 300,000
Other expense 8,262
---------------
Total $ 4,216,866
---------------
---------------
In addition, the Company incurred interest cost of $575,680 during the period
related to aircraft not used in scheduled service. The above costs further
contributed to the liquidity problems of the Company as discussed below.
3. LIQUIDITY AND GOING-CONCERN MATTERS
The Company has suffered recent losses and negative operating cash flows, has
negative working capital, has been unable to meet significant current and
long-term financial obligations, and has defaulted on certain financial and
operating agreements. These matters have raised substantial doubt about its
ability to continue as a going concern and, as a result, the Report of
Independent Public Accountants on the financial statements for the year ended
December 31, 1996, contains a statement to this effect. The Company's ability
to continue as a going concern depends upon successfully obtaining additional
working capital financing, negotiating extended or improved terms under its
major operating agreement, and ultimately, returning to sustained
profitability. The suspension of service on May 16, 1997, and subsequent
reduced levels of service have resulted in substantial losses and an
increased need for additional financing.
Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the company's primary aircraft supplier and largest creditor.
The Company has financed all 41 of its Beechcraft 1900 aircraft and one of
its Brasilia aircraft under related lease and debt agreements with Raytheon,
and Raytheon has also extended the Company a $5 million loan secured by
accounts receivable (collectively, the "Raytheon Agreements"). The Raytheon
Agreements went into default in 1997 due to the Company's non-payment of
scheduled amounts due. The Raytheon Agreements also contain cross-default
provisions which may be triggered if the Company's obligations to other
creditors are accelerated as a result of non-payment of those obligations.
The default provisions of the Raytheon
6
Agreements give Raytheon the right to accelerate certain amounts due under
the Raytheon Agreements or repossess the aircraft or other assets securing
the Raytheon Agreements.
On July 16, 1997 the Company reached an agreement with Raytheon pursuant to
which Raytheon provided a short term loan of $4 million. This loan, which
was originally due on July 29, 1997, has been extended until August 30, 1997
and may, at the sole option of Raytheon, be extended on a month-to-month
basis until October 31, 1997. This loan, as well as existing Raytheon
indebtedness has been collateralized with all previously unpledged Beech
aircraft spare parts and equipment. The agreement also calls for the parties
to negotiate the terms for the payment of past due amounts to Raytheon
relating to the first half of 1997 amounting to $10.4 million. In addition,
Raytheon was granted warrants for a period of ten years, exercisable
commencing July 16, 1998, to purchase one million shares of Great Lakes
common stock at a price of $.75 per share. As long as the Company is in
compliance with the July 16, 1997 agreement, all defaults under any other
financing agreements with Raytheon have been waived.
The Company believes that it will require an additional loan of approximately
$2.5 million by the end of August 1997 to meet its working capital
requirements and has requested Raytheon to provide these additional funds.
Raytheon has not agreed to make this advance and there can be no assurance
that these funds can be obtained from other sources if Raytheon declines to
provide them.
In addition to the Raytheon financing, the Company has financed 11 of its
Brasilia aircraft through five lease and debt agreements with other unrelated
entities (collectively, the "Brasilia Agreements"). At December 31, 1996,
one of the Brasilia Agreements under which it operates two of these aircraft
was in default due to violation of a financial covenant. During 1997, all of
the Brasilia Agreements went into default due to non-payment of scheduled
amounts due.
The Company has executed amendments to four of the Brasilia Agreements which
reschedule the amounts due. The fifth agreement under which the Company
leased two used Embraers for periods ending December 31, 1998, and June 30,
1999, was terminated by the lessor by the exercise of its rights as a result
of the default. These two aircraft have been returned to the lessor.
The Company continues to have past due trade accounts. Notes totaling
approximately $880,000 have been issued to certain of the creditors which, in
general, require payment over a one year period. The Company believes that
it has reached an appropriate accommodation with its key suppliers and that
it will be able to obtain necessary good and services on acceptable terms as
long as timely payment is made for current purchases.
On April 25, 1997, the Company's United Express Agreement with United
Airlines expired. Subsequently the term of the Agreement was extended until
August 31, 1997 while a new agreement is being negotiated. The Company is in
default of various covenants in the United Express Agreement as a result of
its non-payment of bills when due and not maintaining certain financial
ratios. Both of these defaults have been waived by United until August 31,
1997. The Company has historically earned the majority of its revenues under
the United Express Agreement. In exchange for certain per passenger fees,
the Company receives certain benefits from its relationship with United
including the listing of its flights under United's computer reservation
system code. While management believes that initial
7
discussions for a new agreement have been favorable, there can be no
assurance that such negotiations will be successful or that the existing
United Express Agreement can be renewed.
The Company has made substantial revisions to its flight schedules and may
make further revisions in an effort to improve operating results. Service in
the Southeastern United States as Midway Express and in the Southwestern
United States as Great Lakes Airlines has been terminated. The Company is
also analyzing opportunities to rationalize its capacity levels, optimize its
aircraft fleet and mix, and improve the deployment of its capacity. Further,
the Company has negotiated improved terms and subsidy rates on certain of its
routes subsidized by the U.S. Department of Transportation under the
Essential Air Service program.
There can be no assurance that the Company's negotiations will be successful
in obtaining additional working capital financing or improving terms under
its major operating agreement or that its operational improvement initiatives
will result in improved operating performance or sustained profitability.
Such negotiations and initiatives will require the Company to reach
agreements with Raytheon and United on terms acceptable to the Company, none
of which are assured. If the Company is unsuccessful in its efforts, it may
continue to be unable to meet its current and future obligations, making it
necessary to undertake such other actions as may be appropriate to preserve
asset values, potentially including seeking protection from its creditors
under applicable bankruptcy laws. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
4. NEW ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", (SFAS 128),
which changes the way companies calculate their earnings per share (EPS).
SFAS 128 replaces primary EPS with basic EPS. Basic EPS is computed by
dividing reported earnings by weighted average shares outstanding, excluding
potentially dilutive securities. Fully diluted EPS, termed diluted EPS
under SFAS 128, is also to be disclosed. The Company is required to adopt
SFAS 128 in the first quarter of fiscal 1999, at which time all prior year
EPS are to be restated in accordance with SFAS 128.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1. OVERVIEW
The discussion and analysis in this section and in the notes to the financial
statements contain certain forward-looking terminology such as "believes,"
"anticipates," "will," and "intends," or comparable terminology. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Potential
purchasers of the Company's securities are cautioned not to place undue
reliance on such forward-looking statements which are qualified in their
entirety by the cautions and risks described herein and in other reports
filed by the Company with the Securities and Exchange Commission.
8
The Company began providing air charter service in 1979, and has provided
scheduled passenger service in the Upper Midwest since 1981, along the East
Coast from October 1995 to May 1997, and in the Southwest and Mexico from
August 1995 to May 1997. In April 1992, the Company began operating as a
United Express carrier under a cooperative marketing agreement with United
that expired April 25, 1997, but has been extended through August 31, 1997.
As of June 30, 1997, the Company served 26 destinations in 7 states with 170
scheduled departures each weekday.
The Company has suffered significant recent losses and negative operating
cash flows, has negative working-capital, has been unable to meet significant
current and long-term financial obligations, and has defaulted on certain
financial and operating agreements. These matters raise substantial doubt
about its ability to continue as a going concern. The Company's ability to
continue as a going concern depends upon obtaining additional working capital
financing, negotiating extended or improved terms under its major operating
agreement, and ultimately, returning to sustained profitability.
2. TEMPORARY SUSPENSION OF FLIGHT OPERATIONS
AND REVISED MARKETING FOCUS
On May 16, 1997 following inspections of the Company's operations by the FAA,
the Company and the FAA entered into an agreement whereby the Company
voluntarily suspended flight operations pending a thorough review of the
Company's maintenance and recordkeeping procedures. On May 23, 1997, the
Company resumed limited operations at five cities after entering into a
Consent Order (the "Order") with the FAA. This Order imposed a civil penalty
of $1,000,000 of which $300,000 is being paid in installments through June 1
1998 and $700,000 which will be forgiven if the Company complies with all the
terms and conditions of the Order. The Order also required the Company to,
among other things, inspect each of the Company's aircraft and demonstrate to
the FAA's satisfaction that the Company has sufficient equipment, qualified
personnel, manuals, systems, procedures and financial resources to safely
conduct operations.
After evaluating the effects of the temporary shutdown, the Company announced
on June 2, 1997 that it would not resume its Midway Connection Services which
were previously scheduled to terminate on November 1, 1997. Following this,
the Company elected not to resume services in Arizona, New Mexico and the
country of Mexico which it had served under the Great Lakes Airlines
designation. Concurrently, the Company rescheduled its United Express
operations in an effort to achieve profitability.
The Company has returned to its historical core route structure with primary
focus being that of the United Express marketing relationship. Within that
relationship the Company is maximizing its operating advantage at Chicago's
O'Hare Airport where the Company possesses 74 operating slots and revenue
passenger yields are highest. A reduced level of service has been reinstated
at United's Denver hub where revenue passenger yields are lower and the
majority of its operations receive federal subsidies under the Essential Air
Service Program.
9
The Company plans to have its operations fully restored by September 1, 1997
consistent with the refocused marketing strategy at which time scheduled
aircraft departures and available seat miles will have been reduced by 33%
and 37%, respectively from what they would have been under the former
strategy. Revenues are expected to decline by a lesser amount.
At the reduced level of service, including planned service increases during
the last half of 1997, the Company currently has fifteen Beechcraft Model
1900C and previously had two Brasilia EMB120 aircraft surplus to its
requirements. As a result of a default under the agreement under which the
Company operated two of its Brasilias, the lessor terminated the lease and
has taken back its aircraft. The Company is currently negotiating with
several aircraft operators to sublease to them the surplus 1900C aircraft.
Losses, if any, to be incurred as a result of such dispositions are
indeterminable at this time.
3. ESSENTIAL AIR SERVICE
Under the Essential Air Service Program, which is administered by the U.S.
Department of Transportation (DOT), certain communities receive specified
levels of "essential air service" (EAS). The DOT may authorize federal
subsidies to compensate a carrier providing essential air service in
otherwise unprofitable or minimally profitable markets. Under the FAA
Reauthorization Act of 1996, beginning in October 1997, the program will be
funded on an ongoing basis from foreign air carrier overfly fees. If these
subsidies are reduced or eliminated in the future the Company may discontinue
service to some or all of the subsidized communities.
At June 30, 1997 and December 31, 1996, the Company served 4 and 18 essential
air service communities, respectively, on a subsidized basis. At the time the
Company's operations are fully restored, the Company expects to serve 21
cities on a subsidized basis. The Company received $2.2 and $3.5 million in
essential air service subsidies for the six months ended June 30, 1997 and
the year ended December 31, 1996, respectively. An airline serving a
community that qualifies for essential air services is required to give the
DOT advance notice before it may terminate, suspend or reduce service.
Depending on the circumstances, the DOT may require the continuation of
existing service (even if such service is being operated at a loss) until a
replacement carrier is found.
Consistent with current DOT service limits, aircraft departures in subsidized
service in 1997 are expected to be slightly below those in 1996. However,
through renegotiation of rates and modifications in service, the Company
expects to receive an increase of approximately $2.5 million in subsidy
revenues from providing such service in 1997. Negotiations were completed
during the quarter with DOT to establish rates which will recognize increased
flight frequencies for subsidy support.
10
4. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 1997 AND 1996
The following table sets forth certain financial information regarding the
Company:
STATEMENT OF OPERATIONS DATA
For the Three Months Ended June 30
---------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 1996 (in 000s) ASM
------------------------ ---------- ---------- ---------
TOTAL OPERATING REVENUES $ 19,340 (32.6)% $ 28,714
--------- ---------- ----------
Salaries, Wages and Benefits 4,318 4.4CENTS (37.5) 6,912 4.0CENTS
Aircraft Fuel 2,772 2.9 (37.0) 4,403 2.5
Aircraft Maintenance
Materials and Repairs 1,351 1.4 (55.8) 3,059 1.7
Commissions 1,336 1.4 (36.7) 2,111 1.2
Depreciation and Amortization 1,111 1.1 (18.8) 1,369 0.8
Aircraft Rental 2,171 2.2 (22.0) 2,782 1.6
Other Rentals and Landing Fees 1,326 1.4 (25.3) 1,776 1.0
Other Operating Expense 6,101 6.3 1.0 6,043 3.5
Shutdown expenses 4,217 4.3 - - -
--------- --------- ---------- ---------
Total Operating Expense 24,703 25.4CENTS (11.2)% 28,455 16.3
--------- ---------- ---------
Operating Income (Loss) $ (5,363) $ 259
--------- ----------
--------- ----------
Interest Expense (net) $ 1,460 1.5CENTS (37.5)% $ 1,414 0.8CENTS
--------- --------- --------- ---------- --------
--------- --------- --------- ---------- --------
SELECTED OPERATING DATA Increase/ (Decrease)
--------------------
1997 from 1996 1996
--------- ---------- ----------
Available Seat Miles (000s) 97,193 (44.4)% 174,900
Revenue Passenger Miles (000s) 43,887 (44.4)% 78,981
Passenger Load Factor 45.2% No Change 45.2%
Passengers carried (000s) 152,095 (43.5)% 269,203
Average Yield per Revenue passenger 41.1CENTS 6.3CENTS 34.8CENTS
mile
11
OPERATING REVENUES
Operating revenues decreased 32.6% to $19.3 million in the second quarter of
1997 from $28.7 million during the second quarter of 1996. The decrease in
operating revenues resulted from the decrease in revenue passenger miles
flown by 44.4% to 43.9 million in the second quarter of 1997 from 79.0
million during the second quarter of 1996 in conjunction with a 44.4%
decrease in capacity to 97.2 million ASMs in the second quarter of 1997 from
174.9 million ASMs during the second quarter of 1996. The 32.6% decrease in
operating revenue was not as sharp as the decrease in capacity and revenue
passenger miles flown due to a 6.3 cents increase in yield to 41.1 cents in
the second quarter of 1997 from 34.8 cents during the second quarter of 1996.
The increase in passenger yield is due to the higher percentage of the
Company's capacity having been focused on the higher yield Chicago O'Hare hub.
OPERATING EXPENSES
Total operating expenses decreased to $24.7 million, or 25.4 cents per ASM,
in the second quarter of 1997 from $28.5 million, or 16.3 cents per ASM in
the second quarter of 1996. The increase in cost per ASM reflects the costs
associated with the voluntary shutdown and the decrease in ASMs due to the
shutdown.
Salaries, wages, and benefits expense increased to 4.4 cents per ASM during
the second quarter of 1997, from 4.0 cents per ASM during the second quarter
of 1996, due to normal pay increases and a smaller ASM base across which to
spread fixed labor.
Aircraft fuel expense per ASM increased to 2.9 cents in the second quarter of
1997 from 2.5 cents in the second quarter of 1996 due to higher fuel prices,
which began rising dramatically in the fall of 1996 and subsequently dropped
in the spring of 1997, however, the cost did not return to the level of the
second quarter of 1996.
Maintenance materials and repairs expense decreased to 1.4 cents per ASM
during the second quarter of 1997 from 1.7 cents per ASM during the second
quarter of 1996. This is mainly due to a decrease in the number of engine
overhauls performed from five during the second quarter of 1996 to two during
the second quarter of 1997.
Other operating expenses increased to 6.3 cents per ASM in the second quarter
of 1997 from 3.5 cents in the second quarter of 1996, reflecting higher
general and administrative, marketing, communications, supplies, and contract
airline handling costs spread across a lower ASM base.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 0 percent in the second quarter of 1997
and 0 percent in the second quarter of 1996. In recognition of the Company's
financial results of recent periods and the uncertainties of the airline
competitive environment, the Company has elected to cease recognizing future
tax benefits until it is reasonably assured that such benefits will be
realized.
12
5. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
The following table sets forth certain financial information regarding the
Company:
STATEMENT OF OPERATIONS DATA
For the Six Months Ended June 30
---------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 1996 (in 000s) ASM
--------------------------------------- --------------------------
TOTAL OPERATING REVENUES $ 46,008 (11.3)% $ 51,855
--------- ----------
Salaries, Wages and Benefits 11 794 4.7CENTS (10.7) 13,211 4.0CENTS
Aircraft Fuel 7,626 3.0 (8.9) 8,372 2.6
Aircraft Maintenance
Materials and Repairs 3,775 1.5 (40.9) 6,389 2.0
Commissions 3,171 1.3 (15.5) 3,752 1.1
Depreciation and Amortization 2,549 1.0 (9.7) 2,824 0.9
Aircraft Rental 5,639 2.2 10.9 5,087 1.6
Other Rentals and Landing Fees 3,119 1.2 (10.9) 3,502 1.1
Other Operating Expense 12,655 5.0 11.0 11,396 3.4
Shutdown expenses 4,217 1.7 -- --
--------- --------- ---------- --------
Total Operating Expense 54,545 21.6CENTS 54,533 16.7
--------- --------- ---------- --------
Operating Loss $ (8,537) $ (2,678)
--------- ----------
--------- ----------
Interest Expense (net) $ 3,073 1.2CENTS 4.2% $ 2,948 0.9CENTS
--------- --------- ------- ---------- --------
--------- --------- ------- ---------- --------
SELECTED OPERATING DATA
INCREASE/(DECREASE)
1997 FROM 1996 1996
---------- ---------- ----------
Available seat miles (000s) 252,231 (22.8)% 326,849
Revenue passenger miles (000s) 107,920 (25.5)% 144,919
Passenger load factor 42.8% (1.5)pts. 44.3%
Passengers carried (000s) 364,106 (25.8)% 490,432
Average yield per revenue passenger mile 39.3CENTS 5.2CENTS 34.1CENTS
13
OPERATING REVENUES
Operating revenues decreased 11.3 percent to $46.0 million in the first half
of 1997 from $51.9 million during the first half of 1996. The decrease in
operating revenues resulted from the decrease in revenue passenger miles
flown by 25.5 % to 107.9 million in the first half of 1997 from 144.9 million
during the first half of 1996 in conjunction with a 22.8% decrease in
capacity to 252.2 million ASMs in the first half of 1997 from 326.8 million
ASMs during the first half of 1996. The 11.3% decrease in operating revenues
was not as sharp as the 25.5% decrease in revenue passenger miles flown due
to a 5.2 cent increase in yield to 39.3 cents in the first half of 1997 from
34.1 cents in the first half of 1996. The increase in passenger yield is due
primarily to selected price increases in key markets, moving service from
lower yield markets to higher yield markets, and due to a strong emphasis on
managing advanced passenger bookings. In addition, public service revenue
increased 78.6% to $2.2 million in the first half of 1997 from $1.2 million
in the first half of 1996.
OPERATING EXPENSES
Total operating expenses remained unchanged from the first half of 1996 to
the first half of 1997 at $54.5 million. Total operating expenses increased
to 21.6 cents per ASM in the first half of 1997 from or 16.7 cents per ASM in
the first half of 1996. Reflecting the costs associated with the voluntary
shutdown and the decrease in ASMs, except as detailed below.
Salaries, wages, and benefits expense increased to 4.7 cents per ASM during
the first half of 1997, from 4.0 cents per ASM during the first half of 1996,
due to normal pay increases, increases in maintenance and customer service
payroll, increased health insurance claims expense in the first quarter of
1997, and a smaller ASM base across which to spread fixed labor costs.
Aircraft fuel expense per ASM increased to 3.0 cents in the first half of
1997 from 2.6 cents in the first half of 1996 due to higher fuel prices.
Maintenance materials and repairs expense decreased to 1.5 cents per ASM
during the first half of 1997, from 2.0 cents per ASM in the first half of
1996, due to nine fewer engine overhauls performed in the first half of 1997
compared with the first half of 1996.
Other operating expenses increased to 5.0 cents per ASM in the first half of
1997 from 3.4 cents per ASM in the first half of 1996, reflecting higher
passenger booking fees due to increases in rates and higher credit card
expenses for the Midway Connection and Great Lakes Airlines operations.
Airline supplies (deicing fluid) and interrupted trip expense also increased
in early 1997 versus early 1996 due to the increase in weather related flight
irregularities. Also, fixed expenses including general and administrative,
marketing , and communications are spread across a lower ASM base in the
first half of 1997.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 0 percent in the first half of 1997 and
30.0 percent in the first half of 1996. In recognition of the Company's
financial results of recent periods and the uncertainties of the airline
competitive environment, in the second quarter of 1996, the Company elected
to cease recognizing future tax benefits until it is reasonably assured that
such benefits will be realized.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $6.1 million to $ .6 million at June 30, 1997 from $6.7
million at December 31, 1996. Net cash flows used in operating activities
were $4.3 million and $3.3 million in the first half of 1997 and 1996,
respectively. The major use of such cash flows in the first half of 1997 was
the funding of the Company's $11.6 million loss offset by the deferral of
lease payments of $4.8 million.
The Company has suffered recent losses and negative operating cash flows, has
negative working capital, has been unable to meet significant current and
long-term financial obligations, and has defaulted on certain financial and
operating agreements. These matters have raised substantial doubt about its
ability to continue as a going concern and, as a result, the Report of
Independent Public Accountants on the financial statements for the year ended
December 31, 1996, contains a statement to this effect. The Company's ability
to continue as a going concern depends upon successfully obtaining additional
working capital financing, negotiating extended or improved terms under its
major operating agreement, and ultimately, returning to sustained
profitability. The suspension of service on May 16, 1997, and subsequent
reduced levels of service have resulted in substantial losses and an
increased need for additional financing.
Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the company's primary aircraft supplier and largest creditor.
The Company has financed all 41 of its Beechcraft 1900 aircraft and one of
its Brasilia aircraft under related lease and debt agreements with Raytheon,
and Raytheon has also extended the Company a $5 million loan secured by
accounts receivable (collectively, the "Raytheon Agreements"). The Raytheon
Agreements went into default in 1997 due to the Company's non-payment of
scheduled amounts due. The Raytheon Agreements also contain cross-default
provisions which may be triggered if the Company's obligations to other
creditors are accelerated as a result of non-payment of those obligations.
The default provisions of the Raytheon Agreements give Raytheon the right to
accelerate certain amounts due under the Raytheon Agreements or repossess the
aircraft or other assets securing the Raytheon Agreements.
On July 16, 1997 the Company reached an agreement with Raytheon pursuant to
which Raytheon provided a short term loan of $4 million. This loan, which
was originally due on July 29, 1997, has been extended until August 30, 1997
and may, at the sole option of Raytheon, be extended on a month-to-month
basis until October 31, 1997. This loan, as well as existing Raytheon
indebtedness has been collateralized with all previously unpledged Beech
aircraft spare parts and equipment. The agreement also calls for the parties
to negotiate the terms for the payment of past due amounts to Raytheon
relating to the first half of 1997 amounting to $10.4 million. In addition,
Raytheon was granted warrants for a period of ten years, exercisable
commencing July 16, 1998, to purchase one million shares of Great Lakes
common stock at a price of $.75 per share. As long as the Company is in
compliance with the July 16, 1997 agreement, all defaults under any other
financing agreements with Raytheon have been waived.
The Company believes that it will require additional working capital of
approximately $2.5 million by the end of August 1997 to meet its working
capital requirements and has requested Raytheon to provide these additional
funds. Raytheon is considering this request, however, there can be no
assurance that these funds can be obtained from other sources if Raytheon
declines to provide them.
15
In addition to the Raytheon financing, the Company has financed 11 of its
Brasilia aircraft through five lease and debt agreements with other unrelated
entities (collectively, the "Brasilia Agreements"). At December 31, 1996,
one of the Brasilia Agreements under which it operates two of these aircraft
was in default due to violation of a financial covenant. During 1997, all of
the Brasilia Agreements went into default due to non-payment of scheduled
amounts due.
The Company has executed amendments to four of the Brasilia Agreements which
reschedules the amounts due. The fifth agreement under which the Company
leased two used Embraers for periods ending December 31, 1998, and June 30,
1999, was terminated by the lessor by the exercise of its rights as a result
of the default. These two aircraft have been returned to the lessor.
The Company continues to have past due trade accounts. Notes totaling
approximately $880,000 have been issued to certain of the creditors which, in
general, require payment over a one year period. The Company believes that
it has reached an appropriate accommodation with its key suppliers and that
it will be able to obtain necessary goods and services on acceptable terms as
long as timely payment is made for current purchases.
On April 25, 1997, the Company's United Express Agreement with United
Airlines expired. Subsequently, the term of the Agreement was extended until
August 31, 1997 while a new agreement is being negotiated. The Company is in
default of various covenants in the United Express Agreement as a result of
its non-payment of bills when due and not maintaining a specified financial
ratio. Both of these defaults have been waived by United until August 31,
1997. The Company has historically earned the majority of its revenues under
the United Express Agreement and has elected to operate exclusively as United
Express at the time the new agreement is completed. In exchange for certain
per passenger fees, the Company receives certain benefits from its
relationship with United including the listing of its flights under United's
computer reservation system code. While management believes that initial
discussions for a new agreement have been favorable, there can be no
assurance that such negotiations will be successful or that the existing
United Express Agreement can be renewed.
The Company has made substantial revisions to its flight schedules and may
make further revisions in an effort to improve operating results. Service in
the Southeastern United States as Midway Express and in the Southwestern
United States as Great Lakes Airlines has been terminated. The Company is
also analyzing opportunities to rationalize its capacity levels, reduce its
aircraft fleet, and improve the deployment of its capacity. Further, the
Company has negotiated improved terms and subsidy rates on certain of its
routes subsidized by the U.S. Department of Transportation under the
Essential Air Service program.
There can be no assurance that the Company's negotiations will be successful
in obtaining additional working capital financing or improving terms under
its major operating agreement or that its operational improvement initiatives
will result in improved operating performance or sustained profitability.
Such negotiations and initiatives will require the Company to reach
agreements with Raytheon and United on terms acceptable to the Company, none
of which are assured. If the Company is unsuccessful in its efforts, it may
continue to be unable to meet its current and future obligations, making it
necessary to undertake such other actions as may be appropriate to preserve
asset values, potentially including seeking protection from its creditors
under applicable bankruptcy laws. The financial statements do not include
any adjustments relating to the recoverability and classification of
16
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
In October 1996, the Company entered into an agreement with a vendor in which
$1.8 million of outstanding invoices were converted into a short-term
promissory note bearing interest of prime plus 1%. On March 12, 1997, the
Company sold five spare engines to this vendor in consideration of a $950,000
reduction of its short-term note.
Capital expenditures related to aircraft and equipment totaled $192,000 in
the first half of 1997 and $1.4 million during the first half of 1996.
Principal repayments and new long-term borrowing were minimal in the first
half of 1997. Principal repayments exceeded long-term borrowings by $18.6
million in the first half of 1996. Total unpaid debt and lease installments
totaled $12.8 million at June 30, 1997, including $10.4 million to a major
aircraft supplier as discussed above.
Long-term debt, net of current maturities of $6.1 million, totaled $61.7
million at June 30, 1997 compared to $66.0 million, net of current maturities
of $6.7 million, at December 31, 1996.
ITEM 5
NASDAQ LISTING
The Company's Common Stock is currently listed for trading on the NASDAQ
National Market System. Under applicable NASDAQ listing standards, the
Company is required to have two independent directors. One of the Company's
current independent directors, Luigi Talarico, Jr. has submitted his
resignation effective as of August 14, 1997, and the Company has not
nominated a successor independent director to stand for election at the
Company's 1997 annual meeting of shareholders. NASDAQ has notified the
Company that its shares of Common Stock are subject to delisting if a second
independent director is not elected by August 22, 1997. The Company is
currently considering three candidates for the second independent director
and will elect this director by August 22, 1997. If a second director is not
elected by August 22, 1997, the shares of the Company's Common Stock could be
delisted by NASDAQ, which could result in a substantial reduction in the
liquidity of an investment in the Company's Common Stock.
17
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a) No exhibits are filed herewith.
b) On May 30, 1997, the Company filed Form 8-K reporting matters
relating to the limited resumption of service and filed a copy of the
Consent Order entered into with the FAA on May 23, 1997.
c) On June 10, 1997, the Company filed Form 8-K reporting matters
relating to the termination of its marketing arrangements with Midway
Airlines.
d) On June 12, 1997, the Company filed Form 8-K reporting matters
relating to certain personnel changes.
SIGNATURES
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, thereunder duly authorized.
GREAT LAKES AVIATION, LTD.
Dated: August 14, 1997 By /s/ Douglas G. Voss
-------------------------------------
Douglas G. Voss
President and Chief Executive Officer
By /s/ Steven J. Wagner
-------------------------------------
Steven J. Wagner
Vice President and
Chief Accounting Officer
18