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, 1998
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.
------------------------------------------------------
(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
- ----------------------------------------------------
(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.
/X/ YES / / NO
As of August 12, 1998 there were 7,590,843 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, 1998 December 31, 1997
----------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 718 $ 6
Restricted funds - interest bearing deposits - 2,247
Accounts Receivable, net allowance for doubtful accounts
of approximately $923 and $923 respectively. 8,055 5,473
Inventories, net 13,297 12,288
Prepaid expenses and other current assets 505 818
----------------- -----------------
Total Current Assets 22,575 20,832
----------------- -----------------
PROPERTY AND EQUIPMENT:
Flight Equipment 43,997 46,781
Other Property and Equipment 4,295 4,185
Less - Accumulated Depreciation and Amortization (6,479) (9,656)
----------------- -----------------
Total Property and Equipment 41,813 41,310
OTHER ASSETS 1,651 1,616
----------------- -----------------
$ 66,039 $ 63,758
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 12,953 $ 10,306
Accounts Payable 11,183 9,462
Deferred lease payments 1,939 1,367
Accrued liabilities and unearned revenue 4,709 5,291
----------------- -----------------
Total Current Liabilities 30,784 26,426
----------------- -----------------
LONG-TERM DEBT, net of current maturities 28,989 28,471
DEFERRED LEASE PAYMENTS 2,832 3,247
DEFERRED CREDITS 4,392 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 June 30, 1998 and December 31, 1997 76 76
Paid-in Capital 29,579 29,577
Accumulated Deficit (30,613) (28,526)
----------------- -----------------
Total Stockholders' Equity (958) 1,127
----------------- -----------------
$ 66,039 $ 63,758
----------------- -----------------
----------------- -----------------
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.
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
---------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- -------------- --------------
OPERATING REVENUES:
Passenger $ 22,463 $ 18,023 $ 37,593 $ 42,400
Public Service 3,892 918 6,664 2,197
Freight, charter and other 1,102 399 2,061 1,411
--------------- --------------- -------------- --------------
Total operating revenues 27,457 19,340 46,318 46,008
--------------- --------------- -------------- --------------
OPERATING EXPENSES:
Salaries, wages and benefits 6,870 4,318 12,949 11,794
Aircraft fuel 3,214 2,772 6,060 7,626
Aircraft maintenance materials
and component repairs 1,547 1,351 3,993 3,775
Commissions 1,362 1,336 2,360 3,171
Depreciation and amortization 922 1,111 1,469 2,549
Aircraft rental 4,100 2,171 7,599 5,639
Other rentals and landing fees 1,191 1,326 2,537 3,119
Other operating expenses 5,627 6,101 9,749 12,655
Shutdown and other nonrecurring expenses - 4,217 - 4,217
--------------- --------------- -------------- --------------
Total operating expenses 24,833 24,703 46,716 54,545
--------------- --------------- -------------- --------------
Operating income (loss) 2,624 (5,363) (398) (8,537)
INTEREST EXPENSE 831 1,460 1,688 3,073
--------------- --------------- -------------- --------------
Income (Loss) before income taxes 1,793 (6,823) (2,086) (11,610)
INCOME TAX EXPENSE (BENEFIT) - - - -
--------------- --------------- -------------- --------------
Net Income $ 1,793 $ (6,823) $ (2,086) $ (11,610)
--------------- --------------- -------------- --------------
--------------- --------------- -------------- --------------
NET INCOME PER SHARE:
Basic $ 0.24 $ (0.90) $ (0.27) $ (1.53)
--------------- --------------- -------------- --------------
Diluted $ 0.22 $ (0.90) $ (0.27) $ (1.53)
--------------- --------------- -------------- --------------
WEIGHTED AVERAGE SHARES USED IN COMPUTATION:
Basic 7,590,843 7,589,121 7,590,110 7,588,457
Diluted 8,327,685 7,589,121 7,590,110 7,588,457
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)
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (2,086) $ (11,610)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 1,128 2,872
Change in current operating items:
Accounts receivable, net (2,582) 2,749
Inventories, net (1,009) (179)
Prepaid expenses and deposits 278 119
Accounts payable and accrued liabilities 1,201 1,928
------------ ------------
Net cash flows used in operating activities (3,070) (4,121)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,613) (192)
Proceeds from certificate of deposit 2,247 -
------------ ------------
Net cash flows provided by
investing activities 634 (192)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and long term debt 5,582 -
Repayment of notes payable and long term debt (2,436) (1,766)
Proceeds from sale of common stock 2 7
------------ ------------
Net cash flows used in financing activities 3,148 (1,759)
------------ ------------
NET CHANGE IN CASH 712 (6,072)
CASH:
Beginning of Period 6 6,676
------------ ------------
End of Period $ 718 $ 604
------------ ------------
------------ ------------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 850 $ 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.
4
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.
Under terms of a consent order (the Order) with the Federal Aviation
Administration (FAA), the Company temporarily suspended its flight operations on
May 16, 1997 and resumed flight operations on a limited basis on May 23, 1997.
Under terms of the Order, the Company was assessed a civil penalty of
$1,000,000, of which $700,000 was to be forgiven after one year if the Company
continued to comply with all of the terms and conditions of the Order. The
Company has been notified that it has met all the provisions set forth in the
Order, and the $700,000 civil penalty has been forgiven. Due to the suspension
of operations during the second quarter of 1997, the operating results for the
second quarter of 1998 are not directly comparable to the prior period.
During the first six months 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 half 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 continued to operate as Great Lakes Airlines on one route in the
Midwest. On June 15, 1998, service on that route was
5
converted, so that all passenger service currently provided by the Company is
operated as United Express.
Revenues during the quarter ended June 30, 1998 were derived 97.0% from United
Express operations and 3.0% from Great Lakes Airlines operations.
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.
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 June 30,
1998, the Company served 69 destinations in 13 states with 429 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 is heavily dependent on Raytheon Aircraft Company and its financing
affiliates (collectively "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. The Company is
currently providing all of United's 19 seat regional service at both the Chicago
O'Hare and Denver hubs.
6
2. 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.
At June 30, 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 currently in effect are expected to generate essential air service
revenues of approximately $18.7 million on an annualized basis, as follows:
RATE
ORDER # (IN THOUSANDS) EXPIRES
-------- -------------- --------
Alpena/Sault Ste. Marie, MI 97-09-15 $ 398 9/9/98
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 98-07-24 359 6/30/00
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 98-07-08 480 ***
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 $ 18,723
-------------
-------------
*Service scheduled to begin in 1998
**Expires two years from date of agreement
***Rate effective until further Department action
7
3. YEAR 2000 UPDATE
The Company has reviewed its computer systems and application programs for Year
2000 compliance, and is in the process of establishing a database to monitor the
hardware and software modifications necessary to make all systems Year 2000
compliant. The cost of completing these modifications has not yet been
determined, but it is not expected to be material. The Company has begun to
identify third party sources for information and critical vendors upon which the
Company must rely. The Company's business, financial condition, and results of
operations could be materially adversely affected by the failure of its systems
and applications or those operated by others. The Company does not have an
established contingency plan for Year 2000 exposure, but intends to create one
as part of its overall efforts to ensure that its systems are Year 2000
compliant by mid-1999.
8
4. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
The following table sets forth certain financial information regarding the
Company:
STATEMENT OF OPERATIONS DATA
For the Three Months Ended June 30
---------------------------------------------------------------------
1998 1997
---------------------------------------- -------------------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 1997 (in 000s) ASM
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING REVENUES 27,457 23.7 42.0% $19,340 19.9
---------- ---------- ---------- ---------- ----------
Salaries, Wages and Benefits 6,870 5.9 59.1 4,318 4.4
Aircraft Fuel 3,214 2.8 15.9 2,772 2.9
Aircraft Maintenance Materials
and Component Repairs 1,547 1.3 3.8 1,351 1.4
Commissions 1,362 1.2 1.9 1,336 1.4
Depreciation and Amortization 922 0.8 (17.0) 1,111 1.1
Aircraft Rental 4,100 3.5 88.9 2,171 2.2
Other Rentals and Landing Fees 1,191 1.0 (10.2) 1,326 1.4
Other Operating Expense 5,627 4.9 (7.8) 6,101 6.3
Shutdown and other nonrecurring expenses - - - 4,217 4.0
---------- ---------- ---------- ---------- ----------
Total Operating Expenses 24,833 21.4 (0.1)% 24,703 25.4
---------- ---------- ---------- ---------- ----------
Operating Income (Loss) 2,624 2.3 - (5,363) -
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest Expense (net) 831 0.7 (43.1)% 1,460 1.5
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA Increase/Decrease
1998 from 1997 1997
----------- -------------------- ----------
Available Seat Miles (000s) 115,932 19.3% 97,193
Revenue Passenger Miles (000s) 59,176 34.8% 43,887
Passenger Load Factor 51.0% 5.8 pts 45.2%
Passengers Carried 206,966 36.1% 152,095
Average Yield per Revenue Passenger Mile 38.0 CENTS (3.1) CENTS 41.1 CENTS
Revenue per Available Seat Mile 19.4 CENTS 0.9 CENTS 18.5 CENTS
OPERATING REVENUES
Operating revenues increased 42.0% to $27.5 million in the second quarter of
1998 from $19.3 million during the second quarter of 1997. The increase in
operating revenues occurred as a result of a $4.5 million increase in passenger
revenue over the same period in the prior year. A 3.1-cent decrease in yield to
38.0 cents was offset by an increase of 34.8% in revenue passenger miles flown
to 59.2 million. In addition, public service revenues increased $3.0 million to
a total of $3.9 million, and other revenues increased $0.7 million to a total of
$1.1 million.
9
OPERATING EXPENSES
Total operating expenses were $24.8 million, or 21.4 cents per ASM, in the
second quarter of 1998 compared to $24.7 million or 25.4 cents per ASM in the
second quarter of 1997. The 1997 cost reflects the expenses associated with the
voluntary shutdown of 4.0 cents per ASM and the decrease in ASMs due to the
shutdown.
Salaries, wages, and benefits expense increased to 5.9 cents per ASM during the
second quarter of 1998, from 4.4 cents per ASM during the second quarter of
1997, partially due to pay increases incurred as a result of the new labor
agreements in late 1997 with the Company's pilots and mechanics. In addition,
preparation for the Denver hub expansion to 18 new cities resulted in increased
hiring and training of pilots, maintenance on aircraft to provide the new
service, and hiring and training of additional customer service personnel.
Aircraft fuel expense decreased to 2.8 cents per ASM in the second quarter of
1998 from 2.9 cents in the second quarter of 1997 due to lower fuel prices.
Aircraft maintenance materials and component repair expense decreased to 1.3
cents per ASM during the second quarter of 1998 from 1.7 cents per ASM during
the second quarter of 1997. Maintenance materials expense in 1998 was
favorably impacted by the use of certain inventoried parts which had been
partially reserved in prior years. This reduction in reserve resulted in a
reduction in maintenance materials expense of $320,000 or 0.3 cents per ASM.
Depreciation, aircraft rental, and interest expense have been impacted by the
aircraft transactions described in "Liquidity and Capital Resources" below, sale
and leaseback of aircraft during the last half of 1997, and the inclusion of
expenses related to unused aircraft as "Shutdown and Other Nonrecurring
Expenses" as a result of the temporary suspension of operations in the second
quarter of 1997.
Other operating expenses decreased to 4.9 cents per ASM in the second quarter of
1998 from 6.7 cents in the second quarter of 1997. In 1997, general and
administrative, marketing, communications, supplies, and contract airline
handling costs were spread across a lower ASM base as a result of the voluntary
shut down.
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 elected to
cease recognizing future tax benefits until it is reasonably assured that such
benefits will be realized.
10
5. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997
The following table sets forth certain financial information regarding the
Company:
STATEMENT OF OPERATIONS DATA
For the Six Months Ended June 30
---------------------------------------------------------------------
1998 1997
---------------------------------------- -------------------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 1997 (in 000s) ASM
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING REVENUES 46,318 22.2 0.7% $46,008 18.2
---------- ---------- ---------- ---------- ----------
Salaries, Wages and Benefits 12,949 6.2 9.8 11,794 4.7
Aircraft Fuel 6,060 2.9 (20.5) 7,626 3.0
Aircraft Maintenance Materials
and Component Repairs 3,993 1.9 2.0 3,775 1.5
Commissions 2,360 1.1 (25.6) 3,171 1.3
Depreciation and Amortization 1,469 0.7 (42.4) 2,549 1.0
Aircraft Rental 7,599 3.6 34.8 5,639 2.2
Other Rentals and Landing Fees 2,537 1.2 (18.7) 3,119 1.2
Other Operating Expense 9,748 4.7 (23.0) 12,655 5.0
Shutdown and other nonrecurring expenses - - 4,217 1.7
---------- ---------- ---------- ---------- ----------
Total Operating Expenses 46,715 22.3 (14.4)% 54,545 21.6
---------- ---------- ---------- ---------- ----------
Operating (Loss) (397) - - (8,537) -
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest Expense (net) 1,688 0.8 (45.1)% 3,073 1.2
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA Increase/Decrease
1998 from 1997 1997
----------- -------------------- ----------
Available Seat Miles (000s) 209,030 (17.1)% 252,231
Revenue Passenger Miles (000s) 101,360 (6.1)% 107,920
Passenger Load Factor 48.5% 5.7 pts 42.8%
Passengers Carried 349,393 (4.0)% 364,106
Average Yield per Revenue Passenger Mile 37.1 CENTS (2.2) CENTS 39.3 CENTS
OPERATING REVENUES
Operating revenues increased 0.7 percent to $46.3 million in the first half of
1998 from $46.0 million during the first half of 1997. The increase in
operating revenue occurred in spite of a $4.8 million decrease in passenger
revenues from the same period in the prior year. Revenue passenger miles flown
decreased by 6.4% to 101.4 million in the first half of 1998 in addition to
yield per revenue passenger mile decreasing 2.2 cents to 37.1 cents per RPM.
The decrease in revenues was offset by a combination of an increase of $4.5
million in public service revenues to a total of $6.7 million and a $0.6 million
increase in other revenues to a total of $2.1 million.
11
OPERATING EXPENSES
Total operating expenses decreased 14.4% to 46.7 million in the first half of
1998 from $54.5 million in the first half of 1997. Total operating expenses
increased to 22.3 cents per ASM in the first half of 1998 from 21.6 cents per
ASM in the first half of 1997. The increased cost per ASM reflects the costs
associated with preparing for additional service added in the second quarter of
1998, as described below.
Salaries, wages, and benefits expense increased to 6.2 cents per ASM during the
second quarter of 1998, from 4.7 cents per ASM during the second quarter of
1997, partially due to pay increases incurred as a result of the new labor
agreements in late 1997 with the Company's pilots and mechanics. In addition,
preparation for the Denver hub expansion to 18 new cities resulted in increased
hiring and training of pilots, maintenance on aircraft to provide the new
service, and hiring and training of additional customer service personnel.
Aircraft fuel expense decreased to 2.9 cents per ASM in the first half of 1998
from 3.0 cents per ASM the first half of 1997 due to declining fuel prices.
Aircraft maintenance materials and component repair expenses increased to 1.9
cents per ASM during the first half of 1998 from 1.5 cents per ASM during the
first half of 1997. This increase is due to a substantial increase in
maintenance activity in preparation for the service expansion to 18 cities from
the Company's Denver hub that was implemented on April 23 and June 1, 1998, and
the preparation of 1900C and Brazilia aircraft for disposal.
Depreciation, aircraft rental, and interest expense have been impacted by the
aircraft transactions described in "Liquidity and Capital Resources" below, sale
and leaseback of aircraft during the last half of 1997, and the inclusion of
expenses related to unused aircraft as "Shutdown and Other Nonrecurring
Expenses" as a result of the temporary suspension of operations in the second
quarter of 1997.
Other operating expenses decreased to 4.7 cents per ASM in the first half of
1998 from 5.0 cents per ASM in the first half of 1997, due to a decrease in
fixed general and administrative expenses.
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 elected to
cease recognizing future tax benefits until it is reasonably assured that such
benefits will be realized.
6. LIQUIDITY AND CAPITAL RESOURCES
Cash increased to $718,000 at June 30, 1998 from $6,000 at December 31, 1997.
Net cash flows used in operating activities were $3.1 million and $4.1 million
in the first half of 1998 and 1997, respectively. The major use of such cash
flows in the first half of 1998 was the funding of the Company's $2.1 million
loss and an increase in accounts receivable and inventory offset by an increase
in accounts payable and accrued expenses.
12
Capital expenditures related to aircraft and equipment totaled $1.6 million in
the first half of 1998 and $.2 million during the first half of 1997. Principal
repayments on notes payable and long-term debt were $2.2 million and new
borrowings were $7.5 million in the first half of 1998.
Long-term debt, net of current maturities of $2.3 million, totaled $29.0
million at June 30, 1998 compared to $28.5 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 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.
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 which has
been fully utilized, and a $5 million short term loan maturing September 30,
1998, both of which are collateralized by all Beech aircraft spare parts and
equipment and accounts receivable. 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.
Raytheon has not exercised the warrant as of the date of this filing.
The table below shows the number and type of aircraft operated by the Company on
January 1, 1998 and June 30, 1998 and the number and type of aircraft acquired
or retired from the Company's fleet during the six months ended June 30, 1998.
June 30, 1998
January 1, June 30, ----------------------
1998 Acquisitions Retirements 1998 Owned Leased
--------- --------------- -------------- ---------- --------- ----------
Beechcraft 1900C 19 -- 17 2 -- 2
1900D 18 22 -- 40 6 34
Embraer 120 10 -- 2 8 4 4
--------- --------------- -------------- ---------- --------- ----------
Total 47 22 19 50 10 40
--------- --------------- -------------- ---------- --------- ----------
--------- --------------- -------------- ---------- --------- ----------
In the second quarter of 1998, the Company purchased six Beechcraft 1900D
aircraft and concurrently sold its seven owned Beechcraft 1900C aircraft to
Raytheon. In addition, the Company acquired 16 1900D aircraft under long term
operating leases. As part of the agreements, Raytheon agreed to accept the
return of 12 1900C aircraft also operated under operating leases. The Company
has retained two of its 1900C aircraft for use in contracted mail service and as
spare passenger service aircraft. Raytheon provided financing for the above
acquisitions.
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
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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. As discussed 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 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 $233,000 as of June 30, 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.
7. 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. 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 an additional four cities on June 1, 1998. The effect of this is that
the Company has 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 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.
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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
The Annual Meeting of Shareholders was held on June 12, 1998.
Two Proposals were submitted for shareholder approval, both of which
passed with voting results as follows:
(1) To elect four directors for the ensuing year and until their
successors shall be elected and duly qualified.
For Withhold
---------- ----------
Douglas G. Voss 7,449,283 15,074
Vernon A. Mickelson 7,450,157 14,200
Gayle R. Voss 7,446,132 18,225
Ivan L. Simpson 7,449,157 15,200
(2) To ratify and approve the appointment of KPMG Peat Marwick LLP
as the Company's independent public accountants for the fiscal
year ending December 31, 1998.
For: 7,328,992 Against: 125,100
Abstain: 10,265 Non-Votes: 0
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ITEM 5. OTHER INFORMATION
Following an administrative hearing with NASDAQ on June 25, 1998, the Company's
common stock is presently listed on the NASDAQ Small-Cap Market under an
exception to NASDAQ's net tangible asset requirement for continued listing.
Under the terms of this exception, the Company must evidence net tangible assets
in excess of $4 million on or before September 10, 1998. The Company intends to
comply with the terms of this exception by raising up to $2.5 million of
additional equity capital through the sale of its common stock in a private
placement to two identified investors. No assurance can be given that this
private placement will be completed or that the Company will be able to satisfy
the terms of the exception granted by NASDAQ.
Should the Common Stock be suspended from trading privileges on the NASDAQ
Small-Cap Market as a result of the Company's failure to comply with forgoing
exception, or other applicable requirements, the Company, prior to re-inclusion,
must comply with the applicable requirements for initial listing on the NASDAQ
Small-Cap Market, which are more stringent than the requirements for continued
listing.
In the event that the Common Stock is delisted from NASDAQ, trading 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
NASDAQ 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) No exhibits are filed herewith.
b) The registrant filed no Current Reports on Form 8-K for the quarter ended
June 30, 1998.
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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: August 12, 1998 By /s/ Douglas G. Voss
--------------------------------
Douglas G. Voss
President and Chief Executive
Officer
By /s/ Richard A. Hanson
--------------------------------
Richard A. Hanson
Vice President and Controller
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