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 September 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
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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
- - ----------------------------------------------------
(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 / /
As of November 6, 1998 there were 8,590,843 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)
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,940 $ 6
Restricted funds - interest bearing deposits - 2,247
Accounts Receivable, net allowance for doubtful accounts
of approximately $923 and $923 respectively 11,467 5,473
Inventories, net 15,143 12,288
Prepaid expenses and other current assets 31 818
------------------ -----------------
Total Current Assets 28,581 20,832
PROPERTY AND EQUIPMENT:
Flight Equipment 44,012 46,781
Other Property and Equipment 4,475 4,185
Less - Accumulated Depreciation and Amortization (7,284) (9,656)
------------------ -----------------
Total Property and Equipment 41,203 41,310
OTHER ASSETS 1,651 1,616
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$ 71,435 $ 63,758
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------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 12,654 10,306
Accounts Payable 11,463 9,462
Deferred lease payments 627 1,367
Accrued liabilities and unearned revenue 5,423 5,291
------------------ -----------------
Total Current Liabilities 30,167 26,426
LONG-TERM DEBT, net of current maturities 28,438 28,471
DEFERRED LEASE PAYMENTS 2,625 3,247
DEFERRED CREDITS 4,302 4,487
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 8,590,843 and 7,589,121 shares issued and
outstanding at September 30, 1998 and December 31, 1997 86 76
Paid-in Capital 31,569 29,577
Accumulated Deficit (25,752) (28,526)
------------------ -----------------
Total Stockholders' Equity 5,903 1,127
------------------ -----------------
$ 71,435 $ 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 the
unaudited interim consolidated financial statements.
2
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
(in thousands, except share and per share information)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
OPERATING REVENUES:
Passenger $ 30,493 $ 18,159 $ 68,086 $ 60,559
Public Service 4,201 1,623 10,865 3,820
Freight, charter and other 1,490 592 3,551 2,003
----------- ----------- ----------- -----------
Total operating revenues 36,184 20,374 82,502 66,382
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 7,830 4,539 20,779 16,333
Aircraft fuel 4,091 2,515 10,151 10,141
Aircraft maintenance materials and component
repairs 2,709 909 6,702 4,684
Commissions 1,772 1,285 4,132 4,456
Depreciation and amortization 972 940 2,441 3,489
Aircraft rental 4,336 1,850 11,935 7,489
Other rentals and landing fees 1,820 1,206 4,357 4,325
Other operating expenses 6,872 4,250 16,620 16,905
Shutdown and other nonrecurring expenses - 2,638 - 6,855
----------- ----------- ----------- -----------
Total operating expenses 30,402 20,132 77,117 74,677
----------- ----------- ----------- -----------
Operating income (loss) 5,782 242 5,385 (8,295)
INTEREST EXPENSE 781 1,287 2,469 4,360
----------- ----------- ----------- -----------
Income (Loss) before income taxes 5,001 (1,045) 2,916 (12,655)
INCOME TAX EXPENSE (BENEFIT) 140 - 140 -
----------- ----------- ----------- -----------
Net Income (Loss) $ 4,861 $ (1,045) $ 2,776 $ (12,655)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE:
Basic $ 0.61 $ (0.14) $ 0.36 $ (1.67)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ 0.56 $ (0.14) $ 0.33 $ (1.67)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES USED IN
COMPUTATION
Basic 7,916,930 7,589,121 7,700,247 7,588,680
Diluted 8,690,412 7,589,121 8,473,729 7,588,680
The accompanying condensed notes to the unaudited consolidated interim financial
statements are an integral part of these statements.
3
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
(in thousands)
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 2,776 $ (12,655)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 2,100 4,125
Change in current operating items:
Accounts receivable, net (5,994) (988)
Inventories, net (2,855) (616)
Prepaid expenses and deposits 787 814
Accounts payable and accrued liabilities 2,133 1,358
----------- -----------
Net cash flows used in operating activities (1,053) (7,962)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,628) (234)
Proceeds from certificate of deposit 2,247 -
----------- -----------
Net cash flows provided by (used in)
investing activities 619 (234)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 5,582 5,204
Repayment of debt (4,716) (1,865)
Proceeds from sale of common stock 1,502 -
----------- -----------
Net cash flows used in financing activities 2,368 3,339
----------- -----------
NET CHANGE IN CASH 1,934 (4,857)
CASH:
Beginning of Period 6 6,676
----------- -----------
End of Period $ 1,940 $ 1,819
----------- -----------
----------- -----------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 1,745 $ 203
----------- -----------
----------- -----------
Noncash transactions-
Issuance of Common Stock for
repayment of indebtedness $ 500 $ -
----------- -----------
----------- -----------
Deferred manufacturer's incentives received as:
Property and equipment $ - $ (200)
----------- -----------
----------- -----------
The accompanying condensed notes to the unaudited consolidated interim 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
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.
The FAA notified the Company in June 1998 that it had met all the provisions set
forth in the Order. Due to the suspension of operations during 1997, the
operating results for the third 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 converted, so that all
passenger service currently provided by the Company is operated as United
Express.
5
Revenues during the quarter ended September 30, 1998 were derived 99.7% from
United Express operations and 0.3% 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. In April 1992, the
Company began operating as a United Express carrier under a cooperative
marketing agreement with United that expired December 31, 1997. (See United
Express Relationship, discussed below.) As of September 30, 1998, the Company
served 68 destinations in 13 states with 422 scheduled departures each weekday.
Prior to the most recent quarter, the Company had suffered significant recurring
losses and negative cash flows, which have raised doubts about its ability to
continue as a going concern. The Company is heavily dependent on Raytheon
Aircraft Company and United for its liquidity requirements, however neither
Raytheon Aircraft Company nor United is under any current obligation to provide
further financing to the Company. (See Liquidity and Capital Resources,
discussed below.) The Company's viability as a going concern depends upon its
ability to remain profitable.
The Company has significantly expanded its route structure within the United
Express Marketing Relationship during 1998. 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. The Company's current
focus is on expansion of service at United's Denver hub.
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
reduced or eliminated the Company may discontinue service to some or all of the
subsidized communities.
6
At September 30, 1998, the Company served 29 essential air service communities
on a subsidized basis. The Company received $4.2 million and $1.6 million in
essential air service subsidies for the quarters ended September 30, 1998 and
1997, 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
$17.3 million on an annualized basis, as follows:
ANNUAL
SUBSIDY
RATE
ORDER # (IN THOUSANDS) EXPIRES
--------- -------------- --------
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
Ironwood, MI 97-07-06 359 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 $ 17,328
--------------
--------------
* 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 has established a database to monitor the hardware
and software modifications necessary to make all systems Year 2000 compliant.
Certain modifications have been made as part of this process. The cost of
completing these modifications has not yet been determined, but it is not
expected to be material. The Company has identified third party sources for
information and critical vendors upon which the Company must rely, including
aircraft manufacturers, governmental agencies, and United, and has begun the
compliance inquiry process. It is anticipated that this process will be
complete by December 31, 1998, and any remediation costs determined by April
1, 1999. As a result of the code sharing relationship, the Company's business
is sensitive to events and risks affecting United. Failure by United to
become Year 2000 compliant could have a material adverse effect on the
Company's business and financial conditions. 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 is developing a contingency plan for Year 2000 exposure,
and intends to incorporate the plan 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
SEPTEMBER 30, 1998 AND 1997
The following table sets forth certain financial information regarding the
Company:
STATEMENT OF OPERATIONS DATA
For the Three Months Ended September 30
----------------------------------------------------------------------
1998 1997
---------------------------------------- -------------------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 1997 (in 000s) ASM
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING REVENUES 36,184 25.7 77.6% $20,374 21.8
---------- ---------- ---------- ---------- ----------
Salaries, Wages and Benefits 7,830 5.6 72.5 4,539 4.9
Aircraft Fuel 4,091 2.9 62.7 2,515 2.7
Aircraft Parts and Component Repair 2,709 1.9 198.0 909 1.0
Commissions 1,772 1.3 37.9 1,285 1.4
Depreciation and Amortization 972 0.7 3.4 940 1.0
Aircraft Rental 4,336 3.1 134.4 1,850 2.0
Other Rentals and Landing Fees 1,820 1.3 50.9 1,206 1.3
Other Operating Expense 6,872 4.9 61.7 4,250 4.5
Shutdown and other nonrecurring expenses - - - 2,638 2.8
---------- ---------- ---------- ---------- ----------
Total Operating Expenses 30,402 21.6 51.0% 20,132 21.6
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Operating Income 5,782 4.1 - 242 0.2
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest Expense (net) 781 0.6 (39.3)% 1,287 1.4
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA Increase/(Decrease)
1998 from 1997 1997
------------------- --------------------------- --------------------
Available Seat Miles (000s) 140,777 50.6% 93,447
Revenue Passenger Miles (000s) 80,622 63.6% 49,276
Passenger Load Factor 57.3% 4.6pts 52.7%
Passengers Carried 277,709 73.0% 160,512
Average Yield per Revenue Passenger Mile 37.8CENTS 2.4% 36.9CENTS
Passenger Revenue per Available Seat Mile 21.7CENTS 11.9% 19.4CENTS
OPERATING REVENUES
Operating revenues increased 77.6% to $36.2 million in the third quarter of 1998
from $20.4 million during the third quarter of 1997. The increase in operating
revenues resulted from the increase in revenue passenger miles flown by 63.6 %
to 80.6 million in the third quarter of 1998 from 49.3 million during the third
quarter of 1997 in conjunction with a 50.6% increase in capacity to 140.8
million ASMs in the third quarter of 1998 from 93.4 million ASMs during the
third quarter of 1997. In addition, public service revenue increased 158.8% to
$4.2 million in the third quarter of 1998 from $1.6 million in the third quarter
of 1997. Load factors and revenues in the third quarter of 1998 were favorably
impacted by the pilot strike against Northwest Airlines, Inc. which, management
believes increased revenues by approximately $1 million.
9
OPERATING EXPENSES
Total operating expenses increased to $30.4 million, or 21.6 cents per ASM, in
the third quarter of 1998 from $20.1 million, or 21.5 cents per ASM in the third
quarter of 1997. The 1998 increase is primarily a result of the Denver expansion
during the second quarter of 1998.
Salaries, wages, and benefits expense increased to 5.6 cents per ASM during the
third quarter of 1998, from 4.9 cents per ASM during the third quarter of 1997,
due to pay increases incurred as a result of the new labor agreements in late
1997 with the Company's pilots and mechanics, and additional staffing associated
with the Denver expansion.
Aircraft fuel expense per ASM increased to 2.9 cents in the third quarter of
1998 from 2.7 cents in the third quarter of 1997, primarily due to the higher
unit cost at certain locations within the Company's route structure, including
the Denver expansion.
Maintenance materials and component repairs expense increased to 1.9 cents per
ASM during the third quarter of 1998 from 1.0 cents per ASM during the third
quarter of 1997. This is mainly due to utilization and maintenance of the entire
aircraft fleet during the third quarter of 1998. In the third quarter of 1997,
only selected aircraft with lower maintenance needs were being operated as a
part of the phased return to service following the voluntary suspension in May
1997.
Aircraft rental expense increased to 3.1 cents per ASM in the third quarter of
1998 from 2.0 cents per ASM in the third quarter of 1997. The increase is
primarily due to an increase in the number of aircraft under operating leases,
and the upgrade of the Company's Beechcraft fleet from 1900C aircraft to 1900D
aircraft.
Other operating expenses increased to 4.9 cents per ASM in the third quarter of
1998 from 4.5 cents in the third quarter of 1997. The higher costs in 1998
result from additional general and administrative costs associated with the
significant expansion at the Denver hub.
PROVISION FOR INCOME TAXES
The provision for income taxes in the third quarter of 1998 relates primarily to
state income taxes in certain jurisdictions where the Company does not have tax
loss carryforwards. In recognition of the Company's financial results of recent
periods and the uncertainties of the airline competitive environment, the
Company has not recognized a benefit for existing federal and state net
operating loss carryforwards.
10
5. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
The following table sets forth certain financial information regarding the
Company:
STATEMENT OF OPERATIONS DATA
For the Nine Months Ended September 30
---------------------------------------------------------------------
1998 1997
---------------------------------------- ------------------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 1996 (in 000s) ASM
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING REVENUES $ 82,502 23.6 24.3% $ 66,382 19.2
---------- ---------- ---------- ---------- ----------
Salaries, Wages and Benefits 20,779 5.9 27.2 16,333 4.7
Aircraft Fuel 10,151 2.9 0.1 10,141 2.9
Aircraft Parts and Component Repair 6,702 1.9 43.1 4,684 1.4
Commissions 4,132 1.2 (7.3) 4,456 1.3
Depreciation and Amortization 2,441 0.7 (30.0) 3,489 1.0
Aircraft Rental 11,935 3.4 59.4 7,489 2.2
Other Rentals and Landing Fees 4,357 1.2 0.7 4,325 1.2
Other Operating Expense 16,620 4.8 (1.7) 16,905 4.9
Shutdown and other nonrecurring expenses - - - 6,855 2.0
---------- ---------- ---------- ---------- ----------
Total Operating Expenses 77,117 22.0 3.3% 74,677 21.6
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Operating Income 5,385 1.6 - (8,295) (2.4)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Interest Expense (net) 2,469 0.7 (43.4)% 4,360 1.3
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SELECTED OPERATING DATA Increase/(Decrease)
1998 from 1997 1997
------------------- --------------------------- --------------------
Available Seat Miles (000s) 349,807 1.2% 345,678
Revenue Passenger Miles (000s) 181,982 15.8% 157,196
Passenger Load Factor 52.0% 6.5pts 45.5%
Passengers Carried 627,102 19.5% 524,618
Average Yield per Revenue Passenger Mile 37.4CENTS (2.9)% 38.5CENTS
Passenger Revenue per Available Seat Mile 19.5CENTS 11.4% 17.5CENTS
OPERATING REVENUES
Operating revenues increased 24.3 percent to $82.5 million in the first three
quarters of 1998 from $66.4 million during the first three quarters of 1997. The
increase in operating revenues resulted from the increase in revenue passenger
miles flown by 15.8 % to 182.0 million in the first three quarters of 1998 from
157.2 million during the first three quarters of 1997 in conjunction with a 1.2%
increase in capacity to 349.8 million ASMs in the first three quarters of 1998
from 345.7 million ASMs during the first three quarters of 1997. In addition,
public service revenue increased 184.4% to $10.9 million in the first three
quarters of 1998 from $3.8 million in the first three quarters of 1997.
11
OPERATING EXPENSES
Total operating expenses increased 3.3% to $77.1 million in the first three
quarters of 1998 from $74.7 million in the first three quarters of 1997. Total
operating expenses increased to 22.0 cents per ASM in the first three quarters
of 1998 from or 21.6 cents per ASM in the first three quarters of 1997, due to
the costs associated with the Company's expansion of service at it's Denver hub.
Salaries, wages, and benefits expense increased to 5.9 cents per ASM during the
first three quarters of 1998, from 4.7 cents per ASM during the first three
quarters 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, the Denver hub expansion has resulted in increased hiring and training
of pilots, and hiring and training of additional customer service personnel.
Aircraft fuel expense per ASM was 2.9 cents for the first three quarters of 1998
and 2.9 cents for the first three quarters of 1997.
Maintenance materials and component repairs expense increased to 1.9 cents per
ASM during the first three quarters of 1998, from 1.4 cents per ASM in the first
three quarters of 1997, mainly due to utilization and maintenance of the entire
aircraft fleet during 1998. Following the voluntary suspension of service in May
1997, only selected aircraft with lower maintenance needs were being operated as
a part of the phased return to service during 1997.
Aircraft rental expense increased to 3.4 cents per ASM in the first nine months
of 1998 from 2.2 cents per ASM in the first nine months of 1997. The increase is
primarily due to an increase in the number of aircraft under operating leases,
and the upgrade of the Company's Beechcraft fleet from 1900C aircraft to 1900D
aircraft.
Other operating expenses decreased to 4.8 cents per ASM in the first three
quarters of 1998 from 4.9 cents per ASM in the first three quarters of 1997.
6. LIQUIDITY AND CAPITAL RESOURCES
Cash increased to $1.9 million at September 30, 1998 from $0.06 million at
December 31, 1997. Net cash flows used in operating activities were $1.0 million
and $8.0 million in the first three quarters of 1998 and 1997, respectively. The
major use of such cash flows in the first three quarters of 1998 was a $6.0
million increase in accounts receivable, and a $2.9 million increase in
inventories, partially offset by an increase in accounts payable and accrued
expenses.
Capital expenditures related to aircraft and equipment totaled $1.6 million in
the first three quarters of 1998 and $234,000 during the first three quarters of
1997. Principal repayments on notes payable and long-term debt were $5.2 million
and new short-term borrowings were $5.6 million in the first three quarters of
1998.
Long-term debt, net of current maturities of $2.3 million, totaled $28.4 million
at September 30, 1998 compared to $27.7 million, net of current maturities of
$6.1 million, at September 30, 1997.
12
On August 31, 1998, the Company sold one million shares of its Common Stock
for aggregate consideration of $2 million consisting of approximately
$500,000 as the cancellation of outstanding debt obligations, with the
balance in cash. (See Part II, Item 2. Below.)
Prior to the most recent quarter, the Company had suffered recurring losses and
negative cash flows, which have raised doubt about its ability to continue as a
going concern. The Company is heavily dependent on Raytheon Aircraft Company and
its financing affiliates ("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 doubt about the
Company's 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
December 31, 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 September 30, 1998 and the number and type of aircraft
acquired or retired from the Company's fleet during the nine months ended
September 30, 1998.
- - -------------------------------------------------------------------------------------------------------
January 1, September 30, September 30, 1998
1998 Acquisitions Retirements 1998 Owned Leased
- - -------------------------------------------------------------------------------------------------------
Beechcraft 1900C 19 5 19 5 - 5
- - -------------------------------------------------------------------------------------------------------
1900D 18 22 - 40 6 34
- - -------------------------------------------------------------------------------------------------------
Embraer 120 10 - 2 8 4 4
- - -------------------------------------------------------------------------------------------------------
Total 47 27 21 53 10 43
- - -------------------------------------------------------------------------------------------------------
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
is currently leasing five 1900C aircraft for use in contracted mail service
and as spare passenger service aircraft. Raytheon provided financing for the
above acquisitions.
During the first half of 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
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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.
7. UNITED EXPRESS RELATIONSHIP
The Company's 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 has began providing service to Denver
from 21 additional cities since April 23, 1998. As a result of United's
restructuring, 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.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Under a purchase agreement dated August 31, 1998, the Company sold one
million shares of its Common Stock to two investors, one of which is an
entity controlled by Mr. Douglas G. Voss, the President of the Company. The
aggregate consideration received by the Company was $2 million consisting
of approximately $500,000 as the cancellation of outstanding debt
obligations to the entity controlled by Mr. Voss, with the balance in
cash. The private placement transaction was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, as the transaction
did not constitute a public offering and Rule 506 of Regulation D.
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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
Not applicable.
ITEM 6 Other Information
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 10 Stock Purchase Agreement, dated August 31, 1998, by and
between the Company and Iowa Great Lakes Flyers, Inc. and Tennebaum &
Co. LLC.
Exhibit 27 Financial Data Schedule
b) The Company filed the following documents with the Commission during
the quarter for which this report is filed:
(1) The Company's Current Report on Form 8-K filed on September 10,
1998 (File No. 23224) relating to the Company meeting the
necessary requirements to be listed on the Nasdaq SmallCap
Market.
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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: November 10, 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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