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 March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 NO X
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As of May 14, 1998 there were 7,590,843 shares of Common Stock, par value $.01
per share, issued and outstanding.
1
INDEX
Page
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PART I. FINANCIAL INFORMATION.............................................. 3
ITEM 1.
a) Condensed Consolidated Financial Statements........................ 3
b) Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997............................... 3
c) Condensed Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997......................... 4
d) Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997......................... 5
e) Notes to Condensed Consolidated Financial Statements............... 6
ITEM 2.
a) Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 7
PART II. OTHER INFORMATION.................................................. 13
ITEM 5. Other Information.................................................. 13
ITEM 6. Exhibits........................................................... 14
SIGNATURES......................................................... 17
2
PART I: FINANCIAL INFORMATION
ITEM 1
- ------
FINANCIAL STATEMENTS
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
March 31, 1998 December 31, 1997
-------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ - $ 6
Restricted funds - interest bearing deposits 1,124 2,247
Accounts Receivable, net allowance for doubtful accounts
of approximately $923 and $923 respectively. 6,488 5,473
Inventories, net 11,660 12,288
Prepaid expenses and other current assets 858 818
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Total Current Assets 20,130 20,832
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PROPERTY AND EQUIPMENT:
Flight Equipment 46,781 46,781
Other Property and Equipment 4,253 4,185
Less - Accumulated Depreciation and Amortization (10,034) (9,656)
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Total Property and Equipment 41,000 41,310
OTHER ASSETS 1,616 1,616
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$ 62,746 $ 63,758
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-------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 13,400 $ 10,306
Accounts Payable 10,596 9,462
Deferred lease payments 1,183 1,367
Accrued liabilities and unearned revenue 4,437 5,291
-------------- -----------------
Total Current Liabilities 29,616 26,426
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LONG-TERM DEBT, net of current maturities 27,783 28,471
DEFERRED LEASE PAYMENTS 3,632 3,247
DEFERRED CREDITS 4,466 4,487
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 7,590,843 and 7,589,121 shares issued and
outstanding at March 31, 1998. 76 76
Paid-in Capital 29,577 29,577
Accumulated Deficit (32,404) (28,526)
-------------- -----------------
Total Stockholders' Equity (2,751) 1,127
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$ 62,746 $ 63,758
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-------------- -----------------
Note: The Balance Sheet at December 31, 1997, 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.
3
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
(in thousands, except share and per share information)
For the Three Months Ended March 31
----------------------------------
1998 1997
--------------- ---------------
OPERATING REVENUES:
Passenger $ 15,130 $ 24,377
Public Service 2,772 1,279
Freight, charter and other 959 1,012
--------------- ---------------
Total operating revenues 18,861 26,668
--------------- ---------------
OPERATING EXPENSES:
Salaries, wages and benefits 6,079 7,476
Aircraft fuel 2,846 4,854
Aircraft maintenance materials and repairs 2,446 2,424
Commissions 998 1,835
Depreciation and amortization 547 1,438
Aircraft rental 3,499 3,468
Other rentals and landing fees 1,346 1,793
Other operating expenses 4,121 6,554
--------------- ---------------
Total operating expenses 21,882 29,842
--------------- ---------------
Operating income (loss) (3,021) (3,174)
INTEREST EXPENSE 857 1,613
--------------- ---------------
Loss before income taxes (3,878) (4,787)
INCOME TAX EXPENSE (BENEFIT) - -
--------------- ---------------
NET LOSS $ (3,878) $ (4,787)
--------------- ---------------
--------------- ---------------
BASIC AND DILUTED LOSS PER SHARE $ (.51) $ (.63)
--------------- ---------------
--------------- ---------------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,589,370 7,586,341
--------------- ---------------
--------------- ---------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
(in thousands)
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net loss $(3,878) $(4,787)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 547 1,438
Loss on sale of equipment - 92
Change in current operating items:
Accounts receivable, net (1,015) (625)
Inventories, net 628 (841)
Prepaid expenses and deposits (40) (1,145)
Accounts payable and accrued liabilities 582 3,921
-------- --------
Net cash flows used in operating activities (3,176) (1,947)
-------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (68) (90)
Proceeds from certificate of deposit 1,123 -
-------- --------
Net cash flows provided by
investing activities 1,055 (90)
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FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and long term debt 3,955 104
Repayment of notes payable and long term debt (1,840) (124)
Proceeds from sale of common stock - 7
-------- --------
Net cash flows used in financing activities 2,115 (13)
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NET CHANGE IN CASH (6) (2,050)
CASH:
Beginning of Period 6 6,676
-------- --------
End of Period $ - $ 4,626
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-------- --------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 760 $ 239
-------- --------
-------- --------
Noncash transactions-
Deferred manufacturer's incentives received as:
Property and equipment $ - $ (200)
-------- --------
-------- --------
The accompanying notes to consolidated financial statements are an integral part
of these statements
5
GREAT LAKES AVIATION, LTD.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
GENERAL
The consolidated financial statements included herein have been prepared by
the Great Lakes Aviation, Ltd. (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.
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, 1997 and the notes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission. The
foregoing 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. RDU, Inc. currently has no
activity and is not being utilized by the Company.
During the first fiscal quarter of 1998, the Company operated scheduled
passenger and airfreight service under two marketing identities. The Company
operates under a cooperative marketing agreement "United Express Agreement"
with United Airlines, Inc. (United). During the first quarter of 1997, the
Company also operated as Midway Connection under a code sharing agreement
with Midway Airlines Corporation, and in the Southwestern United States and
Mexico independently under its own code as Great Lakes Airlines. The service
provided under these two operating identities was discontinued on May 16,
1997, although the Company still operates as Great Lakes Airlines on one
route in the Midwest.
Revenues during the quarter ended March 31, 1998 were derived 96.8% from
United Express operations and 3.2% from Great Lakes Airlines operations.
6
ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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 was extended through December 31, 1997. As
of March 31, 1998, the Company served 51 destinations in 11 states with 318
scheduled departures each weekday.
The Company has suffered significant recurring losses and negative cash
flows, which raise substantial doubt about its ability to continue as a going
concern. The Company has no further availability on its $5 million line of
credit with Raytheon. The Company is heavily dependent on Raytheon and
United for its liquidity requirements, however neither Raytheon nor United is
under any current obligation to provide further financing to the Company.
The Company's viability as a going concern depends upon its return to
sustained profitability.
The Company has returned to its historical core route structure with the
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 controls 74 operating slots and
revenue passenger yields are highest and at United's Denver hub.
ESSENTIAL AIR SERVICE
The Airline Deregulation Act of 1978 ("The Deregulation Act") allowed
airlines great freedom to introduce, increase and generally reduce or
eliminate service to existing markets. Under the Essential Air Service
Program, which is administered by the Department of Transportation (DOT),
certain communities that received scheduled air service prior to the passage
of the Deregulation Act are guaranteed specified levels of "essential air
service." The DOT may authorize federal subsidies to compensate a carrier
providing essential air service in otherwise unprofitable or minimally
profitable markets. If these subsidies are eliminated the Company may
discontinue service to some or all of the subsidized communities.
7
At March 31, 1998, the Company served 21 essential air service communities on
a subsidized basis. The Company received $6.1 million, $3.5 million and $2.6
million in essential air service subsidies for the years ended December 31,
1997, 1996 and 1995, 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 until
a replacement carrier is found. The Company has negotiated increases in
rates and added additional cities and flight frequencies for which it
receives subsidy revenue. Subsidy rates in effect at April 14, 1998 are
expected to generate essential air service revenues of approximately $18.6
million on an annualized basis, as follows:
Annual
Subsidy
Rate
Order # (in thousands) Expires
-------- -------------- --------
Alpena/Sault Ste. Marie, MI 97-09-15 $ 398 12/31/98
Dickinson, ND 98-03-27 330 3/31/00
Fairmont, MN/Brookings, Yankton, SD/
Devils Lake, Jamestown, ND/Norfolk, NE 97-08-09 4,070 7/31/99
Fergus Falls, MN 98-02-04 * 997 **
Ironwood, MI 97-07-06 493 6/30/98
Manistee, MI 96-12-42 159 12/28/98
Mattoon, IL 97-05-03 218 2/28/99
Ottumwa, IA/Sterling-Rock Falls, IL 97-01-14 923 9/30/98
Mount Vernon, IL 96-08-23 246 6/30/98
Lamar, CO/Goodland, KS/Alliance, Chadron
Kearney, MCCook, NE 97-10-10 5,579 6/30/99
Cortez, CO/Dodge City, Garden city, Great
Bend, Hays, Liberal, KS 98-03-32 2,907 9/30/99
Alamosa, CO/Laramie, Rock Springs,
Worland, WY 98-04-25 2,303 4/30/00
--------------
TOTAL $18,623
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* Service scheduled to begin in 1998
** Expires two years from date of intial service
8
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The following table sets forth certain financial information regarding the
Company:
For the three Months Ended March 31
----------------------------------------------------
STATEMENT OF OPERATIONS DATA
1998 1997
---------------------------------- ----------------
Cents % increase/ Cents
Amount Per decrease Amount Per
(in 000's) ASM from 1997 (in 000's) ASM
--------- ----------- --------- ---------- ----
Total operating revenues $18,861 20.3 (29.3)% $26,668 17.2
------- ----- -------
Salaries, wages and benefits 6,079 6.5 (18.7) 7,476 4.8
Aircraft fuel 2,846 3.1 (41.4) 4,854 3.1
Aircraft maintenance materials
and repairs 2,446 2.6 0.9 2,424 1.6
Commissions 998 1.1 (45.6) 1,835 1.2
Depreciation and amortization 547 0.6 (62.0) 1,438 0.9
Aircraft rental 3,499 3.8 0.9 3,468 2.2
Other rentals and landing fees 1,346 1.4 (24.9) 1,793 1.1
Other operating expense 4,121 4.4 (37.1) 6,554 4.2
------- ---- ----- ------- ----
Total operating expenses 21,882 23.5 (26.7) 29,842 19.1
------- ---- ----- ------- ----
Operating loss (3,021) (3.2) 4.8 (3,174) (2.0)
------- ---- ----- ------- ----
------- ---- ----- ------- ----
Interest expense (net) 857 0.9 (46.9) 1,613 1.0
------- ---- ----- ------- ----
SELECTED OPERATING DATA Increase/(Decrease)
1998 from 1997 1997
----------------------------------------------
Available Seat Miles (000s) 93,098 (40.0)% 155,038
Revenue Passenger Miles (000s) 42,184 (34.1)% 64,033
Passenger Load Factor 45.3% 3.8 pts 41.5%
Passengers carried 142,427 (32.8)% 212,011
Average Yield per Revenue passenger mile 35.9 CENTS (1.9)% 37.8 CENTS
Revenue per ASM 20.3 CENTS 3.3 CENTS 17.2 CENTS
OPERATING REVENUES
Operating revenues decreased 29.3% to $18.9 million in the first quarter of
1998 from $26.6 million during the first quarter of 1997. The decrease in
operating revenues resulted from the decrease in revenue passenger miles
flown by 34.1% to 42.2 million in the first quarter of 1998 from 64.0 million
during the first quarter of 1997 in conjunction with a 48.0% decrease in
capacity to 93.1 million ASMs in the first quarter of 1998 from 155.0 million
ASMs during the first quarter of 1997. The decrease in ASMs is primarily a
result of the discontinuation of Great Lakes Airlines service in the
Southwest United States and Mexico, and the termination of service provided
under the Midway Agreement. Corresponding load factor increased 9.2% from
41.5% to 45.3%. The 29.3% decrease in operating revenue was not as sharp as
the decrease in capacity and revenue passenger miles flown due to a 116.7%
increase in public service revenue to $2.8 million in the first quarter of
1998 from $1.3 million during the first quarter of 1997.
9
OPERATING EXPENSES
Total operating expenses decreased in the first quarter of 1998 to $21.9
million from $29.8 million in the first quarter of 1997. However, the cost
per ASM increased to 23.5 cents per ASM in the first quarter of 1998 from
19.1 cents per ASM in the first quarter of 1997. The increase in cost per
ASM reflects the costs associated with preparing for additional service to be
added in the second quarter of 1998.
Salaries, wages, and benefits expense increased to 6.5 cents per ASM during
the first quarter of 1998, from 4.8 cents per ASM during the first quarter of
1997, due to pay increases incurred as a result of the new labor agreements
with the Company's pilots and mechanics. Substantial increases in labor
expense by Maintenance personnel and Pilot staffing are due to Maintenance's
preparation of aircraft and increased hiring and training of the Pilot group
in preparation for the Denver hub expansion into 14 new cities.
Aircraft fuel expense per ASM was 3.1 cents in the first quarter of 1998 and
3.1 cents in the first quarter of 1997.
Aircraft parts and component repair expenses increased to 2.6 cents per ASM
during the first quarter of 1998 from 1.6 cents per ASM during the first
quarter of 1997. This increase is due to a substantial increase in
maintenance activity in preparation for the service expansion to 14 cities in
the Company's Denver hub that was implemented on April 23, 1998, and the
preparation of 1900C and Brazilia aircraft for disposal.
Other operating expenses increased to 4.4 cents per ASM in the first quarter
of 1998 from 4.2 cents in the first quarter of 1997, due to a lower ASM base
across which to spread costs.
PROVISION FOR INCOME TAXES
In recognition of the Company's financial results of recent periods and the
uncertainties of the airline competitive environment, the Company has ceased
recognizing future tax benefits until it is reasonably assured that such
benefits will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased to $0 at March 31, 1998 from $5,000 at December 31, 1997. Net
cash flows used in operating activities were $3.1 million and $1.9 million in
the first quarter of 1998 and 1997, respectively. The major use of such cash
flows in the first quarter of 1998 was the funding of the Company's $3.9
million loss and an increase in accounts receivable offset by an increase in
accounts payable and accrued expenses, and a reduction in inventory. Accrued
liabilities and unearned revenues include amounts accrued for Brasilia
disposal and lease termination costs in the aggregate amount of $820,000 at
March 31, 1998. Payments of aircraft lease termination costs in the first
quarter of 1998 reduced the remaining liability by $737,000.
10
Capital expenditures related to aircraft and equipment totaled $68,000 in the
first quarter of 1998 and $90,000 during the first half of 1997. Principal
repayments on notes payable and long-term debt were $1.8 million and new
short term borrowings were $4.0 million in the first quarter of 1998.
Long-term debt, net of current maturities of $2.3 million, totaled $27.8
million at March 31, 1998 compared to $28.4 million, net of current
maturities of $2.1 million, at December 31, 1997.
The Company has suffered significant recurring losses and negative cash
flows, which raise substantial doubt about its ability to continue as a going
concern. The Company has no further availability on its $5 million line of
credit with Raytheon. The Company is heavily dependent on Raytheon and
United for its liquidity requirements, however neither Raytheon nor United is
under any current obligation to provide further financing to the Company.
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, 1997,
contains a statement to this effect.
Management believes that near term cash requirements will be met by
operations. The previously mentioned increase in Essential Air Service
revenue and the substantial improvement in financial performance of its
Denver hub operations should provide adequate resources to support the
operations of the Company.
Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the company's primary aircraft supplier and largest creditor.
The Company has financed 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 working capital line of credit,
and a $4 million short term loan. In addition, Raytheon was granted a
warrant 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.
On January 1, 1998 Raytheon provided the Company a short-term loan of $1
million. This loan, which was originally due on February 28, 1998, has been
extended to June 30, 1998. The $1 million loan, as well as existing Raytheon
indebtedness, has been collateralized with all previously unpledged Beech
aircraft spare parts and equipment and accounts receivable.
In April 1998, the Company entered into an agreement with another carrier to
lease, on a month to month basis, seven Beech 1900D aircraft. The Company is
currently pursuing a long-term financing agreement with Raytheon on these
aircraft as well as additional Beech 1900D aircraft. As a part of this
agreement the Company intends to trade six of its used 1900C aircraft to the
other carrier. Management does not anticipate any substantial gain or loss
from this transaction.
As discussed in the Company's Form 10-K for the year ended December 31, 1997,
the Company had 12 Brasilia 30-seat aircraft in its fleet as of July 1, 1997.
Two of these Brasilia aircraft were returned to the lessor through the
exercise of the lessor's rights as a result of the
11
Company's default on the leases for these aircraft in the second quarter of
1997. These aircraft have been transferred by the lessor to another carrier.
The estimated lease termination costs associated with these two returned
aircraft were included in Shutdown, and Other Nonrecurring Expenses in the
fourth quarter of 1997. On March 20, 1998 and April 22, 1998, the Company
disposed of two Brasilia aircraft by an agreed upon termination of the
underlying leases and transferring possession to another carrier. In
connection with the disposition of one of these aircraft, the Company
guaranteed the continued payment of certain purchase incentive payments by an
agency of the Brazilian government to the lessor, which incentive payments
had previously been received by the Company. The Company obtained an opinion
from Brazilian counsel to the effect that the disposition by the Company
would not effect the obligations of the Brazilian Government agency to
continue to make these incentive payments. Accordingly, the Company currently
has eight Brasilia aircraft in its fleet. As also mentioned in the Company's
Form 10-K for the year ended December 31, 1997, the Company entered into an
agreement with another carrier to dispose of its remaining Brasilia aircraft.
This agreement was terminated by a mutual agreement between the Company and
the other carrier. Any further dispositions of the Company's Brasilia
aircraft will be done on an aircraft-by-aircraft basis. The Company included
a charge against fourth quarter 1997 operations in Shutdown and Other
Nonrecurring Expenses for the estimated losses and costs associated with the
disposition of those Brasilia aircraft expected to be sold in 1998.
The company continues to have past due trade accounts. Notes totaling
approximately $1.8 million have been issued to certain of the creditors,
which, in general, require payment over a period of one year or less. The
balance of these notes was $650,000 as of March 31, 1998. 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.
UNITED EXPRESS RELATIONSHIP
The code sharing agreement with United expired in December 1997. The Company
believes its relationship with United is satisfactory, as evidenced by
United's recent selection of the Company as the United Express carrier for
additional routes serving the Denver airport. Since December 31, 1997, the
Company has been operating as if the principal day-to-day operational
provisions of the previous code sharing agreement are still effective. The
Company and United have entered into negotiations to renew the code sharing
agreement. The Company anticipates a favorable change in the method of
allocating passenger fares which will increase the Company's share of the
ticket price for passengers traveling a portion of their journey on United.
As part of their negotiations, United has restructured its operating
relationships with certain of its United Express carriers, pursuant to which
the Company began providing service to Denver from fourteen additional cities
effective April 23, 1998 and will begin to provide service to an additional
four cities on June 1, 1998. The effect of this will be that the Company
will become the only United Express carrier providing service with nineteen
seat aircraft at the Chicago and Denver hubs. While the Company expects a new
code sharing agreement to be finalized on a mutually advantageous basis, no
assurance can be given that this actually will be accomplished. Any failure
to enter into a new code sharing agreement with United, any material adverse
change in terms from the prior code sharing agreement, or
12
any substantial decrease in the number of routes served by the Company under
this agreement could have a material adverse effect on the Company's
business. As a result of the code sharing relationship with United, the
Company's business is sensitive to events and risks affecting United. If
adverse events affect United's business, the Company's business may also be
adversely affected.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
ITEM 5 OTHER INFORMATION
The Company's Common Stock is currently listed on the NASDAQ National Market.
In September 1997, the NASD issued new listing requirements for the NASDAQ
National Market System which became effective February 23, 1998. The changes
increase the standards for continued listing on the NASDAQ National Market.
Companies may qualify for continued listing under two different Continued
Listing Standards. Standard 1 requires, among other things, Net Tangible
Assets greater than $4.0 million, Market Value of Public Float in excess of
$5.0 million, and a minimum Bid price greater than $1 per share. Standard 2
requires, among other things, Market Value of Public Float in excess of $15.0
million, and a minimum Bid price of $5 per share. Currently, the Company may
not be in compliance with the minimum requirements under either of these
standards. Under Standard 1, the Company does not meet the Net Tangible
Assets requirement. It is the Company's position that although not reflected
in the Company's financial statements, if recorded, the value of the
Company's airport slots at Chicago O'Hare would bring it into compliance with
the Net Tangible Assets requirement. The Company has submitted a plan of
compliance to NASDAQ which includes a statement
13
explaining the Company's position that it believes it is currently in
compliance with the Net Tangible Assets requirement when the value of the
Chicago slots are taken into account. No response has been received from
NASDAQ as of the date of this filing. No assurance can be given that the
Company's position will be accepted by NASDAQ. Should the Common Stock be
suspended from trading privileges on the NASDAQ National Market as a result
of the Company's failure to comply with any of the above, or other applicable
requirements, the Company, prior to re-inclusion, must comply with the
applicable continued listing standards prior to continued listing. However,
should the Common Stock be terminated from trading privileges on the NASDAQ
National Market, the Company, prior to re-inclusion, must comply with the
applicable requirements for initial listing on the NASDAQ National Market,
which are more stringent than the requirements for continued listing. There
can be no assurance that the Common Stock will continue to be listed on the
NASDAQ National Market.
In the event that the Common Stock is delisted from the NASDAQ National
Market and the Company fails other relevant criteria, trading, if any, in
shares of Common Stock would be subject to the full range of the Penny Stock
Rules. Under Exchange Act Rule 15g-8, broker-dealers must take certain steps
prior to selling a penny stock, which steps include: (i) obtaining financial
and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor;
(iii) providing the investor a written identification of the shares being
offered and in what quantity; and (iv) deliver to the investor a written
statement setting forth the basis on which the broker or dealer approved the
investor's account for the transaction. If the Penny Stock Rules are not
followed by a broker-dealer, the investor has no obligation to purchase the
shares. Accordingly, delisting from the NASDAQ National Market and the
application of the comprehensive Penny Stock Rules would make it more
difficult for broker-dealers to sell the Common Stock, purchasers of shares
of Common Stock would have difficulty in selling such shares in secondary
transactions and the per share price of such stock would likely be greatly
reduced.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 $4,000,000 Negotiable Promissory Note entered into between
registrant and Raytheon Aircraft Credit Corporation, dated
July 11, 1997, and amended July 31, 1997 and January 8,
1998.
10.2 Pledge and Assignment Agreement entered into between
registrant and Raytheon Aircraft Credit Corporation, dated
July 11, 1997.
10.3 Agreement Pertaining to Loans and Leases entered into
between registrant and Raytheon Aircraft Credit
Corporation, dated July 11, 1997.
10.4 Security Agreement and Encumbrance Against All Carrier
Aircraft Engines, Propellers, Appliances and Spare Parts
entered into between registrant and Raytheon Aircraft
Credit Corporation, dated July 11, 1997.
14
10.5 $1,000,000 Negotiable Promissory Note entered into between
registrant and Raytheon Aircraft Credit Corporation, dated
January 1, 1998.
27 Financial Data Schedule
(b) Current Reports on Form 8-K
The registrant filed no Current Reports on Form 8-K for the
quarter ended March 31, 1998.
15
EXHIBIT INDEX
10.1 $4,000,000 Negotiable Promissory Note entered into between registrant
and Raytheon Aircraft Credit Corporation, dated July 11, 1997, and
amended July 31, 1997 and January 8, 1998.
10.2 Pledge and Assignment Agreement entered into between registrant and
Raytheon Aircraft Credit Corporation, dated July 11, 1997.
10.3 Agreement Pertaining to Loans and Leases entered into between
registrant and Raytheon Aircraft Credit Corporation, dated July 11,
1997.
10.4 Security Agreement and Encumbrance Against All Carrier Aircraft
Engines, Propellers, Appliances and Spare Parts entered into between
registrant and Raytheon Aircraft Credit Corporation, dated July 11,
1997.
10.5 $1,000,000 Negotiable Promissory Note entered into between the
registrant and Raytheon Aircraft Credit Corporation, dated January 1,
1998.
27 Financial Data Schedule.
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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: May 14, 1998 By /s/ Douglas G. Voss
-----------------------
Douglas G. Voss
President and Chief Executive Officer
By /s/ Steven J. Wagner
-----------------------
Steven J. Wagner
Chief Accounting Officer
17