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, 1999
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.
YES X NO
----- -----
As of May 13, 1999 there were 8,637,440 shares of Common Stock, par value
$.01 per share, issued and outstanding.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION...................................................... 3
Item 1. Financial Statements....................................................... 3
a) Condensed Consolidated Financial Statements......................... 3
b) Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998................................ 3
c) Condensed Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998.......................... 4
d) Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998.......................... 5
e) Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................ 12
PART II. OTHER INFORMATION.......................................................... 12
Item 1. Legal Proceedings.......................................................... 12
Item 2. Changes in Securities and Use of Proceeds.................................. 12
Item 3. Defaults Upon Senior Debt.................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders........................ 12
Item 5. Other Information.......................................................... 12
Item 6. Exhibits and Reports on Form 8-K........................................... 12
SIGNATURES.......................................................................... 14
EXHIBIT INDEX....................................................................... 15
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
CURRENT ASSETS:
Cash $ 1,042,000 $ 189,000
Accounts receivable, net allowance for doubtful accounts
of approximately $153,000 and $153,000 respectively. 8,166,000 8,375,000
Inventories, net 18,700,000 18,458,000
Prepaid expenses and other current assets 527,000 623,000
------------- -------------
Total current assets 28,435,000 27,645,000
------------- -------------
PROPERTY AND EQUIPMENT:
Flight equipment 46,408,000 45,533,000
Other property and equipment 4,652,000 4,553,000
Less accumulated depreciation and amortization (8,692,000) (7,968,000)
------------- -------------
Total property and equipment 42,368,000 42,118,000
OTHER ASSETS 2,911,000 3,019,000
------------- -------------
$ 73,714,000 $ 72,782,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 13,489,000 $ 13,647,000
Accounts payable 12,155,000 12,251,000
Deferred lease payments 3,381,000 1,021,000
Accrued liabilities and unearned revenue 3,905,000 3,751,000
------------- -------------
Total Current Liabilities 32,930,000 30,670,000
------------- -------------
LONG-TERM DEBT, net of current maturities 27,937,000 28,471,000
DEFERRED LEASE PAYMENTS 2,840,000 2,854,000
DEFERRED CREDITS 4,863,000 4,937,000
Common stock, $.01 par value; 50,000,000 shares
authorized, 8,637,440 and 8,590,843 shares issued
and outstanding at March 31, 1999, and December 31,
1998 respectively 86,000 86,000
Paid-in capital 31,610,000 31,569,000
Accumulated deficit (26,552,000) (25,805,000)
------------- -------------
Total stockholders' equity 5,144,000 5,850,000
------------- -------------
$ 73,714,000 $ 72,782,000
------------- -------------
------------- -------------
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)
1999 1998
------------ ------------
OPERATING REVENUES:
Passenger $ 23,718,000 $ 15,130,000
Public service 4,257,000 2,772,000
Freight, charter and other 2,208,000 959,000
------------ ------------
Total operating revenues 30,183,000 18,861,000
------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 8,267,000 6,079,000
Aircraft fuel 3,484,000 2,846,000
Aircraft maintenance materials
and component repairs 3,479,000 2,446,000
Commissions 1,356,000 998,000
Depreciation and amortization 897,000 547,000
Aircraft rental 4,306,000 3,499,000
Other rentals and landing fees 1,940,000 1,346,000
Other operating expenses 6,309,000 4,121,000
------------ ------------
Total operating expenses 30,038,000 21,882,000
------------ ------------
Operating income (loss) 145,000 (3,021,000)
INTEREST EXPENSE 892,000 857,000
------------ ------------
Loss before income taxes (747,000) (3,878,000)
INCOME TAX EXPENSE (BENEFIT) - -
------------ ------------
NET LOSS $ (747,000) $ (3,878,000)
------------ ------------
------------ ------------
BASIC AND DILUTED LOSS PER SHARE $ (.09) $ (.51)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,624,496 7,589,370
------------ ------------
------------ ------------
See condensed notes to financial statements
4
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31
(UNAUDITED)
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (747,000) $ (3,878,000)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 850,000 547,000
Change in current operating items:
Accounts receivable, net 209,000 (1,015,000)
Inventories, net (368,000) 628,000
Prepaid expenses and other current assets 96,000 (40,000)
Accounts payable and accrued liabilities 58,000 582,000
Deferred lease payments and deferred credits 2,272,000 -
------------ ------------
Net cash flows provided by (used in)
operating acitivies 2,370,000 (3,176,000)
------------ ------------
INVESTING ACTIVITIES:
Purchases of flight equipment and
other property and equipment (974,000) (68,000)
Proceeds from certificate of deposit - 1,123,000
Change in other assets 108,000 -
------------ ------------
Net cash flows provided by (used in)
investing activities (866,000) 1,055,000
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and long term debt - 3,955,000
Repayment of notes payable and long term debt (526,000) (1,840,000)
Payments on short-term note payable and line of credit (166,000) -
Proceeds from sale of common stock 41,000 -
------------ ------------
Net cash flows provided by (used in)
financing activities (651,000) 2,115,000
------------ ------------
NET CHANGE IN CASH 853,000 (6,000)
CASH:
Beginning of period 189,000 6,000
------------ ------------
End of period $ 1,042,000 $ -
------------ ------------
------------ ------------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 930,000 $ 760,000
------------ ------------
------------ ------------
See condensed notes to financial statements
5
GREAT LAKES AVIATION, LTD.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
BASIS OF PRESENTATION
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.
The Balance Sheet at December 31, 1998 has been derived from the audited
financial statements as of that date. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements for the year ended December 31, 1998 and the notes thereto
included in the Company's Annual Report on Form 10-K, and amended thereto,
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.
The Company is currently operating scheduled passenger and airfreight
service exclusively under a cooperative marketing agreement, (the "United
Express Agreement") with United Airlines, Inc. ("United"). (See United
Express Relationship)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and all hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities at their fair values.
Accounting for changes in the fair value of a derivative depends on its
designation and effectiveness. For derivatives that qualify as effective
hedges, the change in fair value will have no impact on earnings until the
hedged item affects earnings. For derivatives that are not designated as
hedging instruments, or for the
6
ineffective portion of a hedging instrument, the change in fair value will
affect current period earnings. At March 31, 1999, the Company had no
derivative instruments.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 which are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. 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.
OVERVIEW
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 April 25, 1997, but was extended
through December 31, 1997. The Company continues to operate under the terms
of the expired agreement. As of March 31, 1999, the Company served 71
destinations in 14 states with 292 scheduled departures each weekday.
As part of the realignment of United's relationships with its United Express
carriers on April 23, 1998, the Company replaced service from Denver which
had previously been provided by another United Express carrier. The service
represents a significant expansion of the Company's previous service.
The Company has suffered significant losses and negative operating cash flows
in the recent past, which raises substantial doubt about its ability to
continue as a going concern. The Company's viability as a going concern
depends upon its return to sustained profitability.
7
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 30, 1999 AND 1998
The following table sets forth certain financial information regarding the
Company:
For the Three Months Ended March 31
----------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 1999 1998
-------------------------------------- ----------------------
Cents % Increase/ Cents
Per decrease Per
Amount ASM from 1998 Amount ASM
------------ ----- ----------- ------------ -----
Total operating revenues $ 30,183,000 22.3 60.0% $ 18,861,000 20.3
------------ ---- ---- ------------ ----
Salaries, wages and benefits 8,267,000 6.1 36.0 6,079,000 6.5
Aircraft fuel 3,484,000 2.6 22.4 2,846,000 3.1
Aircraft maintenance materials and
component repairs 3,479,000 2.6 42.2 2,446,000 2.6
Commissions 1,356,000 1.0 35.9 998,000 1.1
Depreciation and amortization 897,000 0.7 64.0 547,000 0.6
Aircraft rental 4,306,000 3.2 23.1 3,499,000 3.8
Other rentals and landing fees 1,904,000 1.4 44.1 1,346,000 1.4
Other operating expense 6,309,000 4.7 53.0 4,121,000 4.4
------------ ---- ---- ------------ ----
Total operating expense 30,038,000 22.2 37.3 21,882,000 23.5
------------ ---- ---- ------------ ----
Operating income (loss) 145,000 0.1 - (3,021,000) (3.2)
------------ ---- ---- ------------ ----
SELECTED OPERATING DATA Increase (Decrease)
1999 from 1998 1998
---------- ------------------- ----------
Available Seat Miles (000s) 135,479 45.5% 93,098
Revenue Passenger Miles (000s) 58,201 38.0% 42,184
Passenger Load Factor 43.0% (2.3)pts 43.3%
Passengers carried 221,813 55.7% 142,427
Average Yield per Revenue passenger mile 40.8 cents 13.6% 35.9 cents
Revenue per ASM 22.3 cents 1.8 cents 20.5 cents
OPERATING REVENUES
Operating revenues increased 60.0% to $30.2 million in the first quarter of
1999 from $18.9 million during the first quarter of 1998. The increase in
operating revenues resulted from the increase in revenue passenger miles
flown by 38.0% to 58.2 million in the first quarter of 1999 from 42.2 million
during the first quarter of 1998 in conjunction with a 13.6% increase to 40.8
cents in average yield per revenue passenger mile in the first quarter of
1999 from 35.9 cents in the first quarter of 1998.
OPERATING EXPENSES
Total operating expenses increased to $30.0 million from $21.9 million in the
first quarter of 1998. However, the cost per ASM decreased to 22.2 cents per
ASM in the first quarter of 1999 from 23.5 cents per ASM in the first quarter
of 1998. The higher cost per ASM
8
in the first quarter of 1998 reflects the costs which were associated with
preparing for and implementing additional services which were added from the
Denver hub which began April 23, 1998.
Salaries, wages, and benefits expense decreased to 6.1 cents per ASM during
the first quarter of 1999, from 6.5 cents per ASM during the first quarter of
1998. This decrease was due to the effects of the larger ASM base provided by
the expansion of service during 1998.
Aircraft fuel expense per ASM decreased 22.4%, to 2.6 cents in the first
quarter of 1999 from 3.1 cents in the first quarter of 1999 as a result of
lower average fuel prices.
Aircraft parts and component repair expenses was 2.6 cents per ASM during the
first quarter of 1999 and was also 2.6 cents per ASM during the same period
in 1998.
Other operating expenses increased to 4.7 cents per ASM in the first quarter
of 1999 from 4.4 cents in the first quarter of 1998, reflecting higher fixed
expenses, including general and administrative, marketing, and communications
costs associated with the Company's expansion of service.
PROVISION FOR INCOME TAXES
No income tax benefit was recorded for the first quarter of 1999 considering
the Company is in a loss carry forward position and that the realization of
any benefits of such are substantially in doubt.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased to $1.0 million at March 31, 1999 from $189,000 at December
31, 1998. Net cash flows provided by operating activities were $2.4 million
in the first quarter of 1999 compared to cash flow uses of $3.2 million in
the first quarter of 1998. The major source of cash flows during the first
quarter of 1999 was from the deferral of certain lease payments on aircraft.
Capital expenditures related to aircraft and equipment totaled $875,000 in
the first quarter of 1999 and $0 during the first half of 1998. Principal
repayments were $692,000 in the first quarter of 1999, and there were no new
long-term borrowings during the quarter.
Long-term debt, net of current maturities of $3.0 million, totaled $27.9
million at March 31, 1999 compared to $28.5 million, net of current
maturities of $3.0 million, at December 31, 1998.
The Company has suffered significant losses in three of the last five years
and negative cash flows in two of the last three years. The Company has no
further availability on its $5 million line of credit with Raytheon Aircraft
Company and its financing affiliates (collectively, "Raytheon") and has no
other credit facilities available to it at this time.
9
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, positive operating cash flow and reaching viable long-term
agreements with Raytheon and United. These matters raise 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, 1998, contains a statement to this effect.
Raytheon is the Company's primary aircraft supplier and largest creditor. The
Company has financed all 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
(payable on demand and expiring on June 30, 1999) and a $5 million short term
loan, and collateralized by Beechcraft spare parts and equipment and accounts
receivable. The Company is actively seeking alternate lenders for these
short-term loans. Until such financing can be arranged, the Company expects
to extend the term on the current loans. However, no assurance can be given
that the alternate financing will be arranged, or that the current loans will
be extended. 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 Company currently leases five 1900C aircraft under month-to-month leases
for use in contracted mail service and as a spare passenger service aircraft.
In addition, the Company is utilizing 22 1900D aircraft under short-term
operating leases. The Company is negotiating with Raytheon to purchase these
22 1900D aircraft through the issuance of notes payable to Raytheon. If this
transaction is consummated, it will increase the Company's flight equipment
and long-term debt by approximately $77 million. Management does not expect
the purchase, if consummated, to have a material impact on earnings.
Additionally, the Company has financed seven of its Brasilia aircraft through
lease and debt agreements with other unrelated entities.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 computer issue, common to most companies, concerns the
inability of information and noninformation systems to recognize and process
date-sensitive information after 1999 due to the use of only the last two
digits to refer to a year. This problem could affect both information systems
(software and hardware) and other equipment that relies on microprocessors.
Management has completed a Company-wide evaluation of this impact on its
computer systems, applications and other date-sensitive equipment. Systems
and equipment that are not Year 2000 compliant have been identified and
remediation efforts are in process. Certain equipment is currently being
10
updated or replaced, and the efforts will continue during the second quarter
of 1999 to complete the remediation process.
The Company is also in the process of monitoring the progress of material
third parties (vendors and business partners) in their efforts to become Year
2000 compliant. These third parties include, but are not limited to: aircraft
manufacturers, fuel and parts suppliers, governmental agencies, financial
institutions, and United. As a result of the code sharing relationship with
United, the Company's business is sensitive to events and risks affecting
United. The Company is actively working with United in efforts to reduce the
risk of adverse effects that might result from any failure to be Year 2000
compliant by United.
The Company relies primarily on outside sources for its software
requirements. Most of these software vendors have provided updated, Year 2000
compliant software. The remaining vendors are in the final process of testing
the upgrades and the Company anticipates delivery by August 31, 1999.
Internally developed applications have been updated to the extent possible,
and will be completed once the remediation process for equipment upgrades is
finished. As a result of the Company's use of third party software, the
primary cost for remediation is in the form of new or updated hardware.
Remaining remediation costs are not expected to exceed $50,000, with the
total cost for Year 2000 compliance issues of approximately $100,000.
The Company believes that the greatest potential for disruption lies not in
the Company's internal systems but rather in the external systems of the
Company's service providers. The Company believes, based on research to date,
that disruptions in these external systems will be short-lived, and that
through contingency planning the Company can minimize the impact on the
service it provides. The Company has begun to develop contingency plans, and
it expects to be completed by June 30, 1999. However, there can be no
guarantee that material third parties, on which the Company relies, will
properly address all Year 2000 issues on a timely basis or that their failure
to successfully address all issues would not have an adverse effect on the
Company.
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 selection, during 1998, 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 provided service to Denver from 24 additional cities
since April 23, 1998. As a result of this restructuring, the Company is the
only United Express carrier providing service with nineteen seat aircraft at
the Chicago and Denver hubs. The Company also intends to reduce its service
that it provides using 30 seat Brasilia aircraft. While the Company expects a
new code sharing agreement to be finalized on a mutually advantageous basis,
11
no assurance can be given that this actually will be accomplished. Certain
material provisions of the prior code sharing agreement and related
agreements, the "United Express Agreements" are described herein because any
new code sharing agreement may contain similar terms. 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
The Company is a party to routine litigation incidental to its
business, none of which is likely to have a material effect on
the Company's financial position.
ITEM 2 CHANGES IN SECURITIES
None to report.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to report.
ITEM 5 OTHER INFORMATION
None to report.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule.
12
(b) Reports on Form 8-K
The registrant filed no Current Reports on Form 8-K for
the quarter ended March 31, 1999.
13
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 13, 1999 By /s/ Douglas G. Voss
----------------------------
Douglas G. Voss
President and Chief Executive Officer
By /s/ Thomas J. Ahmann
----------------------------
Thomas J. Ahmann
Chief Financial Officer
14
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule
15