THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON AUGUST 15, 1996
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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, 1996.
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 August 13, 1996 there were 7,586,326 shares of Common Stock, par value
$.01 per share, issued and outstanding.
<TABLE>
<CAPTION>
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share and per share information)
ASSETS June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 3,707 $ 6,785
Accounts receivable 9,280 8,480
Inventories, net of accumulated allowance of
$442 in 1996 and $356 in 1995 11,535 10,220
Prepaid expenses and other current assets 2,067 1,202
Deposits on flight equipment -- 353
--------- ---------
Total current assets 26,589 27,040
PROPERTY AND EQUIPMENT:
Flight equipment 98,750 124,666
Other property and equipment 3,660 3,370
Less - Accumulated depreciation and amortization (12,538) (16,005)
--------- ---------
Total property and equipment 89,872 112,0301
OTHER ASSETS 2,200 1,644
DEFERRED INCOME TAXES 244 --
--------- ---------
$ 118,905 $ 140,715
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,050 $ 4,820
Accounts payable 10,030 7,154
Accrued liabilities and unearned revenue 3,385 2,927
--------- ---------
Total current liabilities 18,465 14,901
LONG-TERM DEBT, net of current maturities 68,676 87,478
DEFERRED CREDITS 4,129 5,342
DEFERRED INCOME TAXES -- 1,454
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 7,586,326 shares issued and outstanding at
June 30, 1996, 7,580,723 shares issued and outstanding
at December 31, 1995 76 76
Paid-in capital 28,920 28,897
Retained earnings (accumulated deficit) (1,361) 2,567
--------- ---------
Total stockholders' equity 27,635 31,540
--------- ---------
$ 118,905 $ 140,715
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
</TABLE>
<TABLE>
<CAPTION>
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share information)
For the Three Months Ended June 30 For the Six Months Ended June 30
---------------------------------- --------------------------------
1996 1995 1996 1995
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 27,473 $ 19,159 $ 49,435 $ 34,205
Public service 746 650 1,230 1,239
Freight, charter and other 495 810 1,190 1,334
----------- ----------- ----------- -----------
Total operating revenues 28,714 20,619 51,855 36,778
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 6,912 4,957 13,211 9,644
Aircraft fuel 4,403 3,223 8,372 6,216
Aircraft maintenance materials and repairs 3,059 2,314 6,389 4,081
Commissions 2,111 1,618 3,752 2,907
Depreciation & amortization 1,369 1,509 2,824 3,030
Aircraft rental 2,782 852 5,087 1,469
Other rentals and landing fees 1,776 1,234 3,502 2,165
Other operating expenses 6,043 3,980 11,396 7,408
----------- ----------- ----------- ----------
Total operating expenses 28,455 19,687 54,533 36,920
----------- ----------- ----------- ----------
Operating income (loss) 259 932 (2,678) (142)
INTEREST EXPENSE 1,414 1,804 2,948 3,497
----------- ----------- ----------- ----------
Loss before income taxes (1,155) (872) (5,626) (3,639)
INCOME TAX BENEFIT -- (330) (1,698) (1,372)
------------ ----------- ----------- ----------
Net loss $ (1,155) $ (542) $ (3,928) (2,267)
=========== =========== =========== ==========
NET LOSS PER SHARE: $ (.15) $ (.07) $ (.52) $ (.30)
=========== =========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 7,586,326 7,578,585 7,584,479 7,576,802
=========== =========== =========== ==========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30
(Unaudited)
(in thousands)
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,928) $ (2,267)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 2,824 3,030
Deferred income taxes (1,698) (1,372)
Change in current operating items:
Accounts receivable, net (800) (2,523)
Inventories, net (1,240) (491)
Prepaid expenses and deposits (864) (904)
Deposits on flight equipment 353 2,098
Accounts payable and accrued liabilities 2,062 (530)
-------- --------
Net cash flows used in operating activities (3,291) (2,959)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,365) (5,079)
Sale of property and equipment 20,789 5,254
Increase in other assets (663) (151)
-------- --------
Net cash flows provided by
investing activities 18,761 25
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 4,000 7,569
Repayment of debt (22,571) (8,483)
Proceeds from sale of common stock 23 26
-------- --------
Net cash flows used in
financing activities (18,548) (888)
-------- --------
NET CHANGE IN CASH (3,078) (3,821)
CASH:
Beginning of period 6,785 5,396
-------- --------
End of period $ 3,707 $ 1,574
======== ========
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 2,952 $ 3,611
Income taxes -- --
======== ========
Noncash transactions-
Deferred manufacturer's incentives received as:
Other assets -- 326
Property and equipment -- 240
Inventory 414 150
Accounts payable credits -- 304
-------- --------
$ 414 1,020
======== ========
Reclassification of deferred credit relating
to cancellation of Embraer Agreement $ 1,156 --
======== ========
Conversion of capital leases into operating leases -- $ 14,203
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
GREAT LAKES AVIATION, LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information furnished in the consolidated financial
statements includes normal recurring adjustments and reflects all adjustments
which are, in the opinion of management, necessary for a fair presentation of
such consolidated financial statements. The Company's business is seasonal and,
accordingly, interim results are not 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 financial
statements for the year ended December 31, 1995, and the notes thereto, included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
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.
The Company is a regional airline which operates under three marketing
identities: United Express, Midway Connection and Great Lakes Airlines. The
Company is one of several companies operating as United Express under code
sharing agreements with United Air Lines, Inc. ("United"). While the Company
does not compete against other United Express carriers on routes that it serves,
it does compete with them to receive the right to serve additional markets under
a United agreement. On October 1, 1995 the Company began operating as Midway
Connection under a code sharing agreement with Midway Airlines Corporation
("Midway"), and in August 1995 the Company began operations in the Southwest
United States and Mexico independently under its own code.
In the most recent two years, the Company has experienced significant operating
losses as a result of increased competition in the marketplace, operational and
equipment reliability challenges, and expenses relating to expansion of the
fleet types. The difficult environment in which the Company competes may
continue into the future. While the Company is making significant efforts to
achieve profitability, primarily through revised scheduling including
reallocation of Brasilia assets from the East Coast to the United Express
system, continuing losses would ultimately result in significant liquidity
pressures. If this were to occur, there can be no assurances that additional
debt or equity capital could be obtained on terms favorable to the Company.
AIRCRAFT TRANSACTIONS
The Company's airline fleet consists of Beechcraft Model 1900 (Beechcraft)
19-passenger and Embraer Brasilia (Brasilia) 30-passenger aircraft summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
Beechcraft Beechcraft Beechcraft Beechcraft
1900C 1900D Brasilia 1900C 1900D Brasilia
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Owned 15 6 4 23 6 4
Leased under operating leases 14 8 8 7 2 8
-- -- -- -- -- --
29 14 12 30 8 12
== == == == == ==
</TABLE>
The Company entered into an agreement in 1994 to acquire five new Brasilia
30-passenger aircraft and options to acquire up to an additional 15 aircraft
(the Embraer Agreement ). Two of these aircraft were delivered in December 1994,
and three in 1995. On October 31, 1995, the Company exercised its option to
acquire five additional Brasilias at an aggregate price of approximately
$39,000,000. As a part of this Purchase Agreement the Company was granted
incentives which in certain instances required the purchase of additional new
aircraft in order to fully earn these incentives. In July 1996, the Embraer
Agreement was terminated and $1,155,543 of deferred credits (approximately half
of which is represented by remaining amounts owed on a spare engine) was
reclassified to accounts payable and related deposits totaling $353,000 were
reclassified to accounts receivable.
On January 1, 1996, the Company sold four aircraft to Beech. The Company began
leasing these four aircraft from Beech for 12 years, but has the option to
return the aircraft upon 30 day notice. At the termination of the lease, the
Company will be required to comply with certain aircraft refurbishment
provisions. One of these four aircraft was returned to Beech in April of 1996.
The Company took delivery of four new Beech 1900D aircraft in March 1996, two
such aircraft in April 1996 and one such aircraft in June 1996. All of these
aircraft have been financed by the manufacturer under 14 1/2 year operating
leases. In connection with the acquisition of the four March aircraft the
Company sold four aircraft to Beech in April 1996. The Company began leasing
these four aircraft from Beech for a minimum of 24 months subject to a right of
recall by Beech upon 90 days notice. In connection with the acquisition of the
June aircraft, the Company has reached an understanding with Beech to sell and
lease back one additional Beech 1900C aircraft. The terms thereof are in the
process of being finalized in a definitive agreement.
RECLASSIFICATIONS
Certain amounts and balances in 1995 financial statements have been reclassified
to conform with the 1996 presentation. These reclassifications had no effect on
net income or stockholders' equity as previously reported.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This discussion and analysis contains certain forward-looking terminology such
as "believes," "anticipates," "will," and "intends," or comparable terminology.
Such statement 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 since October 1995, and in the Southwest and Mexico since August 1995. In
April 1992, the Company began operating as a United Express carrier under a
cooperative marketing agreement with United. In October 1995, the Company began
operating as a Midway Connection carrier under a cooperative marketing agreement
with Midway. As of June 30, 1996, the Company served 87 destinations in nineteen
states with 588 scheduled departures each weekday.
During the period August 1995 to February 1996 the Company lost revenue and
incurred additional costs in connection with certain FAA mandated inspections of
Brasilia propeller blades following an August 1995 accident involving another
carrier. Having started the build up of the Brasilia fleet at the beginning of
1995, the Company did not have sufficient spare propeller blades to replace
those requiring additional inspection or replacement. As a result, a portion of
the Brasilias were grounded for an aggregate 223 aircraft days during this
period which produced additional costs for repairs and replacement service, loss
of pilot and aircraft utilization, and loss of revenue from downgraded and
canceled flights as well as general deterioration of service levels on routes
served by the Brasilias.
While it is difficult to quantify the economic effects with precision, the
Company estimates that pretax operating results were adversely affected by about
$2.0 million during this period ($1.2 million in 1995 and $800,000 in the first
quarter of 1996) as a result of aircraft and schedule disruption. The Company is
in discussion with the propeller manufacturer to seek a recovery of all or a
portion of this economic loss. However, no assurances can be provided that any
such recovery will be realized. The future acquisition of additional Brasilia
aircraft will depend in large part on a recovery of these losses by the Company.
The Company believes traffic was also negatively impacted, particularly on the
East Coast, by the adverse publicity associated with the ValuJet accident.
In the 1994 annual and subsequent reports, the Company discussed the adverse
impact of a start up jet carrier which entered four of the Company's North
Dakota markets in July 1994. In January 1995 the new competitor eliminated its
service in two of the markets and has subsequently reduced the frequency of
service in the remaining cities. This competitor has announced the final
termination of service into North Dakota effective September 10, 1996. Great
Lakes is adjusting its schedules to take full benefit of additional traffic and
revenues which now may be available to the Company.
As a part of the scheduling changes, Great Lakes will replace the three
Brasilias currently operating in the East Coast markets with Beech 1900's. The
three Brasilias will be brought back to the Midwest and flown in the United
Express product line with the additional capacity being focused on United
Chicago O'Hare and Denver hubs. The Company believes cost benefits will be
obtained from the centralization of the Brasilia fleet into one operating
region. Further, costs incurred for the Midway Connection initial development
phase, such as training and integration, experienced during the second half of
1995 and the first half of 1996 are expected to be substantially reduced during
the last half of 1996.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
The following table sets forth certain financial information regarding the
Company:
<TABLE>
<CAPTION>
For the Three Months Ended June 30
----------------------------------
STATEMENT OF OPERATIONS DATA
1996 1995
----------------------------------------- ----------------------
Cents Cents
Amount Per % increase Amount Per
(in 000's) ASM from 1995 (in 000's) ASM
---------- ----- --------- ---------- ----
<S> <C> <C> <C> <C> <C>
Total operating revenues $28,714 -- 39.3% $20,619 --
------- -------
Salaries, wages and benefits 6,912 4.0(cent) 39.4 4,957 3.8(cent)
Aircraft fuel 4,403 2.5 36.6 3,223 2.4
Aircraft maintenance materials and repairs 3,059 1.7 32.2 2,314 1.7
Commissions 2,111 1.2 30.5 1,618 1.2
Depreciation and amortization 1,369 0.8 (9.3) 1,509 1.1
Aircraft rental 2,782 1.6 226.5 852 0.7
Other rentals and landing fees 1,776 1.0 43.9 1,234 1.0
Other operating expense 6,043 3.5 51.8 3,980 3.0
------- ---- ----- ------- ----
Total operating expenses 28,455 16.3 44.5 19,687 14.9
------- ---- ----- ------- ----
Operating income $ 259 -- (72.2)% $ 932 --
======= ==== ===== ======= ----
Interest expense (net) $ 1,414 0.8(cent) (21.6)% $ 1,804 1.4(cent)
======= ==== ===== ======== =====
Aircraft Expense
Depreciation and amoritzation $ 1,369 0.8(cent) (9.3)% 1,509 1.1(cent)
Aircraft rental 2,782 1.6 226.5 852 0.7
Interest expense (net) 1,414 0.8 (21.6) 1,804 1.4
------- ---- ----- ------- ----
$ 5,565 3.2(cent) 33.6% $ 4,165 3.2(cent)
======= ===== ====== ======== =====
SELECTED OPERATING DATA
Increase
1996 from 1995 1995
------- --------- -------
Available seat miles (000s) 174,900 32.2% 132,306
Revenue passenger miles (000s) 78,981 31.9% 59,865
Passenger load factor 45.2% (0.1) pts 45.3%
Average yield per revenue passenger mile 34.8(cent) 2.8(cent) 32.0(cent)
</TABLE>
OPERATING REVENUES
Operating revenues increased 39.3 percent to $28.7 million in the second quarter
of 1996 from $20.6 million during the second quarter of 1995. The increase in
operating revenues resulted from the increase in revenue passenger miles flown
by 31.9% to 79.0 million in the second quarter of 1996 from 59.9 million during
the second quarter of 1995 in conjunction with a 32.2 percent increase in
capacity to 174.9 million ASMs in the second quarter of 1996 from 132.3 million
ASMs during the second quarter of 1995. The addition of Midway Connection and
Great Lakes Airlines service accounted for 20.1% and 6.7%, respectively, of the
increase in operating revenues. The increase in operating revenues was partially
offset by a $321,000 reduction due to the end of a training and aircraft rental
contract with a university in the first quarter of 1996. The 2.8(cent) increase
in passenger yield is due primarily to selected price increases in the past
three quarters in key markets, moving service from lower yield markets to higher
yield markets, and due to a strong emphasis on managing advanced passenger
bookings.
OPERATING EXPENSES
Total operating expenses increased to $28.5 million, or 16.3 cents per ASM, in
the second quarter of 1996 from $19.7 million, or 14.9 cents per ASM in the
second quarter of 1995. The increase of total operating expenses reflect the
costs associated with expansion of the Company's aircraft fleet and increased
level of operations, except as detailed below.
Salaries, wages, and benefits expense increased to 4.0 cents per ASM during the
second quarter of 1996, from 3.8 cents per ASM during the second quarter of
1995, due to the increase in the number of mechanics to build staff to required
levels, and due to increased health insurance claims expense.
Aircraft fuel expense per ASM increased to 2.5 cents in the second quarter of
1996 from 2.4 cents in the second quarter of 1995 due to the expiration of the
airline industry's 4.3(cent) fuel tax exemption and due to higher fuel prices.
Maintenance materials and repairs expense remained constant at 1.7 cents per ASM
during the second quarter of 1996 and 1995. A lower rate of parts usage during
the second quarter of 1996 was offset by higher contract labor for additional
scheduled aircraft maintenance in the second quarter of 1996.
Other operating expenses increased to 3.5 cents per ASM in the second quarter of
1996 from 3.0 cents in the second quarter of 1995, reflecting higher passenger
booking fees due to increases in rates and increased bookings for the Midway
Connection operations, additional hotels and transportation for repositioning of
pilots and flight attendants associated with the increase in the number of
aircraft, and higher credit card expenses for the Midway Connection and Great
Lakes Airlines operations.
AIRCRAFT EXPENSE
The change in mix of aircraft expense towards increased aircraft rental expense
from depreciation and interest expense is due to the increasing number of
aircraft leased, along with the conversion of five capital leases to operating
leases in June 1995, but offset by increased investment in owned aircraft.
Interest expense also decreased in the second quarter of 1996 from the second
quarter of 1995, as a result of the decrease in the prime interest rate to which
a substantial portion of debt is tied.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 0 percent in the second quarter of 1996 and
38 percent in the second quarter of 1995. In recognition of the Company's
financial results of recent periods and the uncertainties of the airline
competitive environment, in the current period the Company has elected to cease
recognizing future tax benefits until it is reasonably assured that such
benefits would be realized.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The following table sets forth certain financial information regarding the
Company:
<TABLE>
<CAPTION>
For the Three Months Ended June 30
----------------------------------
STATEMENT OF OPERATIONS DATA
1996 1995
------------------------------------------ ----------------------
Cents Cents
Amount Per % increase Amount Per
(in 000's) ASM from 1995 (in 000's) ASM
---------- ---- --------- ------------ ----
<S> <C> <C> <C> <C> <C>
Total operating revenues $ 51,855 -- 41.0% $ 36,778 --
---------- ----- -----------
Salaries, wages and benefits 13,211 4.0(cent) 37.0 9,644 3.8(cent)
Aircraft fuel 8,372 2.6 34.7 6,216 2.4
Aircraft maintenance materials
and repairs 6,389 2.0 50.3 4,081 1.6
Commissions 3,752 1.1 29.1 2,907 1.1
Depreciation and amortization 2,824 0.9 (6.8) 3,030 1.2
Aircraft rental 5,087 1.6 246.3 1,469 0.6
Other rentals and landing fees 3,502 1.1 61.8 2,165 0.9
Other operating expense 11,396 3.4 57.2 7,408 2.9
---------- ----- ----- ------------ ----
Total operating expenses 54,533 16.7 47.7 36,920 14.5
---------- ----- ----- ------------ ----
Operating loss $ (2,678) -- -- $ (142) --
========== ===== ===== ============ ----
Interest expense (net) $ 2,948 0.9(cent) (15.7)% $ 3,497 1.4(cent)
========== ===== ===== ============ ====
Aircraft Expense
Depreciation and amoritzation $ 2,824 0.9(cent) (6.8)% 3,030 1.2(cent)
Aircraft rental 5,087 1.6 246.3 1,469 0.6
Interest expense (net) 2,948 0.9 (15.7) 3,497 1.4
---------- ----- ---- ------------ ----
$ 10,859 3.4(cent) 35.8% $ 7,996 3.2(cent)
========== ===== ===== ============ ====
SELECTED OPERATING DATA
Increase
1996 from 1995 1995
------- --------- -------
Available seat miles (000s) 326,849 28.8% 253,836
Revenue passenger miles (000s) 144,919 31.7% 109,997
Passenger load factor 44.3% 1.0 pts 43.3%
Average yield per revenue passenger mile 34.1(cent) 3.0(cent) 31.1(cent)
</TABLE>
OPERATING REVENUES
Operating revenues increased 41.0 percent to $51.9 million in the first half of
1996 from $36.8 million during the first half of 1995. The increase in operating
revenues resulted from the increase in revenue passenger miles flown by 31.7% to
144.9 million in the first half of 1996 from 110.0 million during the first half
of 1995 in conjunction with a 28.8 percent increase in capacity to 326.8 million
ASMs in the first half of 1996 from 253.8 million ASMs during the first half of
1995. The addition of Midway Connection and Great Lakes Airlines service
accounted for 16.7% and 7.4%, respectively, of the increase in operating
revenues. The increase in operating revenues was partially offset by a $569,000
reduction due to the end of a training and aircraft rental contract with a
university in the first quarter of 1996. The 3.0(cent) increase in passenger
yield is due primarily to selected price increases in the past three quarters in
key markets, moving service from lower yield markets to higher yield markets,
and due to a strong emphasis on managing advanced passenger bookings. Due to the
addition of the Midway Connection flying which initially were shorter routes,
the length of haul for the Company decreased causing the yield to increase. The
new cities which were added to the Midway Connection system during 1996 has
increased the length of haul and therefore caused the yield to decrease from the
first quarter of 1996.
OPERATING EXPENSES
Total operating expenses increased to $54.5 million, or 16.7 cents per ASM, in
the first half of 1996 from $36.9 million, or 14.5 cents per ASM in the first
half of 1995. In part, the increase in cost per ASM is due to decreased
utilization of the Brasilia aircraft because of FAA mandated propeller
inspections and lack of replacement propeller blades in the first quarter of
1996. The increase of total operating expenses reflect the costs associated with
expansion of the Company's aircraft fleet and increased level of operations,
except as detailed below.
Salaries, wages, and benefits expense increased to 4.0 cents per ASM during the
first half of 1996, from 3.8 cents per ASM during the first half of 1995, due to
additional flight attendant wages and pilot guarantees incurred related to
expansion of operations utilizing Brasilia aircraft, customer service wages to
facilitate the Company's expansion into new markets, mechanic wages incurred
because of the previously discussed Brasilia propeller inspections and
replacement and increase in the number of mechanics to build staff to required
levels, and due to increased health insurance claims expense.
Aircraft fuel expense per ASM increased to 2.6 cents in the first half of 1996
from 2.4 cents in the first half of 1995 due to the expiration of the airline
industry's fuel tax 4.3(cent) exemption and due to higher fuel prices.
Maintenance materials and repairs expense increased to 2.0 cents per ASM during
the first half of 1996, from 1.6 cents per ASM in the first half of 1995, due to
the higher engine overhaul expense during the first quarter of 1996 and contract
labor for additional scheduled aircraft maintenance in the first half of 1996.
Other rentals and landing fee expense increased 1.1 cents per ASM during the
first half of 1996, from 0.9 cents per ASM in 1995, as a result of higher
facility and landing fee costs at the new Denver International Airport in the
first quarter, as well as additional airport fees to facilitate the Company's
expansion into new markets.
Other operating expenses increased to 3.6 cents per ASM in the first half of
1996 from 2.9 cents in the first half of 1995, reflecting higher passenger
booking fee due to increases in rates and increased bookings for the Midway
Connection operations, additional hotels and transportation for repositioning of
pilots and flight attendants associated with the increase in the number of
aircraft, and higher credit card expenses for the Midway Connection and Great
Lakes Airlines operations.
AIRCRAFT EXPENSE
Aircraft expense increased to 3.4 cents per ASM during the first half of 1996,
from 3.2 cents per ASM in the first half of 1995 due to reduced utilization
because of the previously discussed Brasilia propeller inspections and
replacement, and due to one Brasilia not being flown in the first quarter
because of other mechanical problems. The change in aircraft expense to more
aircraft rental expense from depreciation and interest expense is due to the
increasing number of aircraft leased, along with the conversion of five capital
leases to operating leases in June 1995, but offset by increased investment in
owned aircraft. Interest expense also decreased in the first half of 1996 from
the first half of 1995, as a result of the decrease in the prime interest rate
to which a substantial portion of debt is tied.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 30.0 percent in the first half of 1996 and
38.0 in the first half of 1995. In recognition of the Company's financial
results of recent periods and the uncertainties of the airline competitive
environment, in the current period the Company has elected to cease recognizing
future tax benefits until it is reasonably assured that such benefits would be
realized.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities were $3.3 million and $3.0 million in
the first half of 1996 and 1995, respectively. Major uses of working capital in
the first half of 1996 were the Company's $3.9 million net loss combined with a
$800,000 increase in accounts receivable due to increased revenues, a $1.2
million increase in inventories due to the increase in the number of Brasilia
aircraft and overhauled engines, and a $864,000 increase in prepaids due to
prepaid aircraft rentals. These uses of working capital were offset by a $2.1
million increase in accounts payable and accrued liabilities due to an increase
in expense levels for 1996, and increases in accrued wages, unearned revenues,
and accrued engine reserves, and a $353,000 decrease in deposits on flight
equipment due to the cancellation on the Embraer options. The Company's working
capital decreased to $8.1 million at June 30, 1996 from $12.1 million at
December 31, 1995. Cash decreased $3.1 million to $3.7 million at June 30, 1996
from $6.8 million at December 31, 1995.
During the first quarter of 1996, the Company had a line of credit arrangement
with a bank totaling $5,000,000. In March 1996, the credit facility was
terminated and a $4,000,000 loan was obtained from an equipment supplier. The
interest on this loan is LIBOR plus 2%, and is being repaid on a monthly basis
over a five year period and is collateralized by a Brasilia aircraft. In August
1996, an additional $5 million credit facility was obtained from the same
equipment supplier. Presently, the Company has drawn down $2.5 million. The
remainder of the credit facility is available subject to the conditions stated
therein. The interest on this loan is prime, with interest being repaid on a
monthly basis, and all advanced principal to be repaid by March 31, 1997. This
loan is collateralized by accounts receivable.
In the most recent two years, the Company has experienced significant operating
losses as a result of increased competition in the marketplace, operational and
equipment reliability challenges, and expenses relating to expansion of the
fleet types. The difficult environment in which the Company competes may
continue into the future. While the Company is making significant efforts to
achieve profitability, primarily through revised scheduling including
reallocation of Brasilia assets from the East Coast to the United Express
system, continuing losses would ultimately result in significant liquidity
pressures. If this were to occur, there can be no assurances that additional
debt or equity capital could be obtained on terms favorable to the Company.
Capital expenditures related to aircraft and equipment totaled $1.4 million in
the first half of 1996 and $5.1 million during the first half of 1995. Principal
repayments exceeded long-term borrowings by $18.6 million in the first half of
1996 and $914,000 in the first half of 1995.
Long-term debt, net of current maturities of $5.1 million, totaled $68.7 million
at June 30, 1996 compared to $87.5 million, net of current maturities of $4.8
million, at December 31, 1995. $20.2 million of the decrease in long-term debt
was due to the sale and subsequent leaseback of eight aircraft to Beech. As of
June 30, 1996, the term notes bear interest at rates ranging from 6.6 to 9.1
percent and are payable monthly or quarterly through June, 2009. All financing
was provided by Beech Acceptance Corporation, Inc. and CIT Group/Equipment
Financing, Inc. and is collateralized by 24 related aircraft. There are no
financial covenants related to such long-term debt.
During December 1995, the FAA announced rules which require commuter airlines
with aircraft of 30 or fewer passenger seats operating under FAR Part 135 rules
to begin operating those aircraft under FAR Part 121 regulations. Based upon the
rules announced in December, the Company anticipates capital costs in 1997 and
future years of approximately $2.5 million to bring all aircraft into compliance
with the rules. In addition, ongoing costs of $700,000 in 1996 and unknown
amounts in subsequent years will be required to maintain compliance with these
rules.
The Company took delivery of four new Beech 1900D aircraft in March 1996 and two
such aircraft in April 1996. All of these aircraft have been financed by the
manufacturer under 14 1/2 year operating leases. In connection with the
acquisition of the four March aircraft the Company sold four aircraft to Beech
in April 1996. The Company began leasing these four aircraft from Beech for a
minimum of 24 months subject to a right of recall provision by Beech upon 90
days notice.
On October 31, 1995, the Company exercised an option to acquire two new Brasilia
30 passenger aircraft, subject to the availability of satisfactory financing. In
July 1996, the Embraer Agreement, as well as this option, was terminated.
Item 5. OTHER INFORMATION
NEW AIRCRAFT
For information concerning new aircraft, see Notes To The Financial Statements
included elsewhere in this Form 10-Q.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No exhibits are filed herewith.
b) On May 1, 1996, the Company filed an amendment to its Form 8-K
dated August 22, 1995.
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 13, 1996 By /s/A. L. Maxson
------------------------------------
A. L. Maxson
Executive Vice President Finance and
Chief Financial Officer
(Principal Financial Officer)
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