<PAGE>
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, 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 November 11, 1996, there were 7,586,326 shares of Common Stock, par value
$.01 per share, issued and outstanding.
1
<PAGE>
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
ASSETS September 30, 1996 December 31, 1995
------------------ -----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 6,591 $ 6,785
Accounts receivable 11,124 8,480
Inventories, net of accumulated allowance of
$486 in 1996 and $313 in 1995 13,385 10,220
Prepaid expenses and other current assets 1,760 1,202
Deposits on flight equipment -- 353
-------- --------
Total current assets 32,860 27,040
-------- --------
PROPERTY AND EQUIPMENT:
Flight equipment 98,885 124,666
Other property and equipment 3,720 3,370
Less - Accumulated depreciation and amortization (13,691) (16,005)
-------- --------
Total property and equipment 88,914 112,031
OTHER ASSETS 2,158 1,644
DEFERRED INCOME TAXES 162 --
-------- --------
$124,094 $140,715
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,050 $ 4,820
Notes Payable 5,000 --
Accounts payable 12,286 7,154
Accrued liabilities and unearned revenue 3,547 2,927
-------- --------
Total current liabilities 25,883 14,901
LONG-TERM DEBT, net of current maturities 67,457 87,478
DEFERRED CREDITS 4,127 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 September 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) (2,369) 2,567
-------- --------
Total stockholders' equity 27,509 31,540
-------- --------
$124,094 $140,715
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
2
<PAGE>
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
For the Three Months Ended September 30 For the Nine Months Ended September 30
---------------------------------------------------------------------------------
1996 1995 1996 1995
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 29,482 $ 23,070 $ 78,917 $ 57,275
Public service (EAS) 1,053 761 2,283 2,001
Freight, charter and other 639 799 1,829 2,133
------------------ ------------------ ------------------ ------------------
Total operating revenues $ 31,174 24,630 83,029 61,409
------------------ ------------------ ------------------ ------------------
OPERATING EXPENSES:
Salaries, wages and benefits 6,947 5,520 20,157 15,163
Aircraft fuel 5,500 3,741 13,873 9,957
Aircraft maintenance materials and
repairs 3,811 2,420 10,199 6,501
Commissions 2,109 1,793 5,861 4,701
Depreciation & amortization 1,375 1,509 4,199 4,539
Aircraft rental 3,083 1,531 8,169 3,000
Other rentals and landing fees 1,897 1,422 5,398 3,588
Other operating expenses 5,939 4,631 17,337 12,038
------------------ ------------------ ------------------ ------------------
Total operating expenses 30,661 22,567 85,193 59,487
------------------ ------------------ ------------------ ------------------
Operating income (loss) 513 2,063 (2,164) 1,922
INTEREST EXPENSE 1,439 1,972 4,388 5,469
------------------ ------------------ ------------------ ------------------
Income (Loss) before income
taxes (926) 91 (6,552) (3,547)
INCOME TAX EXPENSE (BENEFIT) 82 42 (1,616) (1,330)
------------------ ------------------ ------------------ ------------------
Net loss $ (1,008) $ 49 $ (4,936) (2,217)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
NET LOSS PER SHARE: $ (.13) $ .01 $ (.65) $ (.29)
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,586,326 7,580,723 7,585,099 7,578,124
------------------ ------------------ ------------------ ------------------
------------------ ------------------ ------------------ ------------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
<PAGE>
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,936) $ (2,217)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization 4,199 4,539
Deferred income taxes (1,616) (1,330)
Change in current operating items:
Accounts receivable, net (2,644) (3,494)
Inventories, net (3,259) (1,653)
Prepaid expenses and deposits (557) (798)
Deposits on flight equipment 353 2,817
Accounts payable and accrued liabilities 4,478 2,557
--------- ---------
Net cash flows provided by (used in)
operating activities (3,982) 421
INVESTING ACTIVITIES:
Purchases of property and equipment (1,559) (16,589)
Sale of property and equipment 20,789 5,255
Increase in other assets (674) (161)
--------- ---------
Net cash flows provided by
investing activities 18,556 (11,495)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 9,000 20,962
Repayment of debt (23,791) (10,077)
Proceeds from sale of common stock 23 26
--------- ---------
Net cash flows used in financing activities (14,768) 10,911
--------- ---------
NET CHANGE IN CASH (194) (163)
CASH:
Beginning of period 6,785 5,396
--------- ---------
End of period $ 6,591 $ 5,233
--------- ---------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 4,409 $ 5,367
Income taxes -- --
--------- ---------
--------- ---------
Noncash transactions-
Deferred manufacturer's incentives received as:
Other assets -- 326
Property and equipment -- 1,846
Inventory 414 327
Accounts payable credits -- 498
--------- ---------
$ 414 2,997
--------- ---------
--------- ---------
Reclassification of deferred credit relating
to cancellation of Embraer Agreement $ 1,156 --
--------- ---------
--------- ---------
Conversion of capital leases into operating leases -- $ 14,203
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE>
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
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 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. During this period, the Company has not
achieved operational profits during its first and fourth fiscal quarters.
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 Midway system to the United Express system,
5
<PAGE>
continuing losses will result in significant liquidity pressures and
violation of certain financial covenants contained in an agreement under
which the Company is operating two of its Embraer Brasilia aircraft and its
marketing agreement with United Airlines, Inc. 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, or at all, or that the applicable
institution would waive the violation of the financial covenants. The
majority of the financial agreements under which the Company operates the
remainder of its aircraft contain cross default provisions in the event
another institution were to accelerate a significant amount of debt as a
result of a default. The Company has not obtained commitments for additional
capital and unless it does so may be required to rely on increases in
financial performance to supply funds necessary for debt service and working
capital requirements.
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>
September 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 9 8 7 2 8
---------- ---------- -------- ---------- ---------- --------
29 15 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 require 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. Two of these four aircraft were returned to Beech, one in April
of 1996, and one in October 1996. The company intends to serve notice on the
remaining two aircraft.
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 aircraft purchased in
March and the aircraft purchased in June, the Company has sold an additional
five aircraft to Beech. The Company has leased back these aircraft from Beech
for a minimum of 24 months subject to a right of recall by Beech upon 90 days
notice.
6
<PAGE>
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.
7
<PAGE>
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 statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
Potential purchasers of the Company's securities are cautioned not to place
undue reliance on such forward-looking statements which are qualified in
their entirety by the cautions and risks described herein and in other
reports filed by the Company with the Securities and Exchange Commission.
The Company began providing air charter service in 1979, and has provided
scheduled passenger service in the Upper Midwest since 1981, along the East
Coast 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 September 30, 1996, the Company served 88
destinations in twenty states with 566 scheduled departures each weekday.
Essential Air Service
The Company participates in the U.S. Department of Transportation (DOT)
administered Essential Air Service (EAS) program through which the Company
currently receives federally funded subsidies for service at 16 communities.
Subsidy rates are negotiated with DOT, generally on a two year basis, and are
predicated on projected operating revenues and costs. During the first nine
months on 1996, the Company received $2.3 million in EAS revenues.
The Company has provided service under the subsidized EAS program since 1985
and had, prior to October 1994, generated profits from this program by
growing traffic revenues beyond subsidy bid forecasts and integrating service
with non-EAS operations. The Company at some communities grew traffic levels
to a point where subsidy was no longer required.
Two regional airline accidents in the fourth quarter of 1994 heightened the
public concern over the relative safety of regional airline services. The
Company believes this concern, voiced through the media, translated into
reduced ridership and revenues during hte past two years. Since there was no
mechanism or funding available to initiate renegotiation of existing rate
agreements in recognition of the downturn in revenues, the Company was forced
to continue operating EAS services without regard to return, or lack thereof,
on operating investment.
In November of 1995, federal budget cuts further reduced monies available for
air service subsidies. In response to the budget cuts, DOT amended the
service standards at each EAS community, reducing from a previous average of
18 weekly round trips down to 10 required weekly round trip flights. This
method of subsidy expenditure reduction differed from those of previous years
wherein communities were totally removed from the program, based on formulas
that included maximum subsidy per passenger and minimum distance from nearby
airports with significant air service levels. The Company believes that this
DOT action, which was guided by Congressional staff, resulted in
disproportionate reduction in revenues versus expenses.
In August 1996, prompted by legal action on the part of another EAS air
carrier, a U.S. Federal Court determined that DOT's arbitrary reduction in
subsidy payments was a breach of the EAS rate agreements, therefore enabling
an air carrier to immediately vacate any or all of the affected services.
Traditionally, Congress would appropriate funds on an annualized basis,
causing the EAS program to be subject to the changing budget cutting approach
of Congress. Congress, having recognized that the budget process was damaging
the program and that the new FAA Part 121 Air Carrier Certification
requirements would increase the cost to provide EAS services, modified the
program's funding source effective October 1, 1997.
In September of 1996, Congress passed separate bills which will increase
future EAS funding. EAS funding levels for federal fiscal year 1997 were
increased to $25.9 million from a 1996 appropriation of $22.6 million. As a
part of the FAA Reauthorization Act of 1997, Congress passed a comprehensive
change to EAS funding mechanisms. The new law mandates increases to future
EAS funding up to $50 million annually from monies being generated by new air
traffic control user fees to the extent such fees are generated. The
Department of Transportation will establish regulations which will determine
the amounts to be spent and the method of allocation. If sufficient amounts
are not allocated to Great Lakes, the Company intends to terminate service to
those EAS cities not providing an adequate return on investment.
Since the start of the substantially increased EAS funding has been delayed
until Oct. of 1997, the Company intends on fully utilizing its new rights made
available by the Federal Court ruling to stop operating losses experienced in
EAS markets. Accordingly, the Company expects to reduce the number of EAS
cities served by the Company during the course of the next nine months.
General
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.
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. In September 1996, this competitor
eliminated the remaining service into North Dakota. Great Lakes has adjusted
its schedules to take full benefit of additional traffic and revenues.
8
<PAGE>
As a part of the scheduling changes, Great Lakes has replaced the three
Brasilias previously operating in the Midway markets with Beech 1900's. The
three Brasilias were brought back to the Midwest and fly in the United
Express product line with this additional capacity being focused on United
Chicago O'Hare and Denver hubs. While transitional expenses resulted in
September as the Company moved all 30 seat Brasilia resources from the Midway
Connection system to the United Express system (eg: crews, aircraft parts and
tooling, repainted aircraft), 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
last half of 1995 and the first half of 1996 were reduced during the third
quarter of 1996. Notwithstanding the Company continued to realize
substantial losses in Midway Connection operations in the third quarter of
1996.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The following table sets forth certain financial information regarding the
Company:
<TABLE>
<CAPTION>
For the Three Months Ended September 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 $31,174 -- 26.6% $24,630 --
---------- --------- ----------
Salaries, wages and benefits 6,947 3.9CENTS 25.9 5,520 3.5CENTS
Aircraft fuel 5,500 3.1 47.0 3,741 2.4
Aircraft maintenance materials and repairs 3,811 2.1 57.5 2,420 1.5
Commissions 2,109 1.1 17.6 1,793 1.2
Depreciation and amortization 1,375 0.8 (8.9) 1,509 1.0
Aircraft rental 3,083 1.7 101.4 1,531 1.0
Other rentals and landing fees 1,897 1.0 33.4 1,422 0.9
Other operating expense 5,939 3.3 28.2 4,631 3.0
---------- ------ --------- ---------- ------
Total operating expenses 30,661 17.1 35.9 22,567 14.5
---------- ------ --------- ---------- ------
Operating income $ 513 -- (75.1)% $ 2,063 --
---------- ------ --------- ---------- ------
---------- ------ --------- ---------- ------
Interest expense (net) $ 1,439 0.8CENTS (27.0)% $ 1,972 1.3CENTS
---------- ------ --------- ---------- ------
---------- ------ --------- ---------- ------
Aircraft Expense
Depreciation and amoritzation $ 1,375 0.8CENTS (8.9)% $ 1,509 1.2CENTS
Aircraft rental 3,083 1.7 101.4 1,531 1.0
Interest expense (net) 1,439 0.8 (27.0) 1,972 1.3
---------- ------ --------- ---------- ------
$ 5,897 3.3CENTS 17.7% $ 5,012 3.5CENTS
---------- ------ --------- ---------- ------
---------- ------ --------- ---------- ------
</TABLE>
SELECTED OPERATING DATA
Increase
1996 from 1995 1995
---- --------- -----
Available seat miles (000s) 179,575 15.2% 155,877
Revenue passenger miles (000s) 79,946 9.7% 72,877
Passenger load factor 44.5% (2.3) pts 46.8%
Average yield per revenue passenger mile 36.9CENTS 5.2CENTS 31.7CENTS
9
<PAGE>
OPERATING REVENUES
Operating revenues increased 26.6 percent to $31.2 million in the third
quarter of 1996 from $24.6 million during the third quarter of 1995. The
increase in operating revenues resulted from the increase in revenue
passenger miles flown by 9.7% to 79.9 million in the third quarter of 1996
from 72.9 million during the third quarter of 1995 in conjunction with a 15.2
percent increase in capacity to 179.6 million ASMs in the third quarter of
1996 from 155.9 million ASMs during the third quarter of 1995. The addition
of Midway Connection and Arizona service accounted for 17.4% and 2.6%,
respectively, of the increase in operating revenues. The increase in
operating revenues was partially offset by a $365,000 reduction due to the
end of a training and aircraft rental contract with a university in the first
quarter of 1996. The 5.2CENTS increase in passenger yield is due primarily
to selected price increases 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 $30.7 million, or 17.1 cents per ASM,
in the third quarter of 1996 from $22.6 million, or 14.5 cents per ASM in the
third 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, as more fully detailed below.
Salaries, wages, and benefits expense increased to 3.9 cents per ASM during
the third quarter of 1996, from 3.5 cents per ASM during the third quarter of
1995, due to the increase in the number of mechanics and customer service
agents to build staff to required levels, and due to increased health
insurance claims expense.
Aircraft fuel expense per ASM increased to 3.1 cents in the third quarter of
1996 from 2.4 cents in the third quarter of 1995, due to increased fuel
prices from suppliers and the reinstatement of the 4.3 cents per gallon
federal excise tax on jet fuel in August 1996.
Maintenance materials and repairs expense increased to 2.1 cents per ASM in
the third quarter of 1996 from 1.5 cents per ASM in the third quarter of
1995. A lower rate of parts usage during the third quarter of 1996 was
offset by increased repairs and contract labor for the initial on-going
periodic maintenance checks on the Brasilia.
Other operating expenses increased to 3.3 cents per ASM in the third quarter
of 1996 from 3.0 cents in the third quarter of 1995, reflecting higher
passenger booking fees due to increases in rates and increased bookings and
higher credit card expenses for the Midway Connection and Great Lakes
Airlines operations. These increases were partially offset by lower United
program fees due to increased flying under the Company's own code
AIRCRAFT EXPENSE
The change in mix of aircraft expense towards increased aircraft rental
expense from depreciation and interest expense is due to a policy decision to
lease the majority of aircraft acquisitions in order to gain advantage of
lower capital costs. Further, concurrent with acquisitions of new beech
aircraft, older aircraft were being returned to Beech and reacquired under
reduced rate leases offering more flexible terms for early termination.
Interest expense also decreased in the third quarter of 1996 from the third
quarter of 1995, as a result of the decrease in the prime interest rate to
which a substantial portion of debt is tied.
10
<PAGE>
PROVISION FOR INCOME TAXES
The Company's effective tax rate was (8.9) percent in the third quarter of 1996
and 46.0 percent in the third 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. However, in any month the
Company had earnings, income tax expense is recognized.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The following table sets forth certain financial information regarding the
Company:
<TABLE>
<CAPTION>
For the Three Months Ended September 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 $83,029 -- 35.2% $61,409 --
---------- ------ --------- ---------- ------
Salaries, wages and benefits 20,157 4.0CENTS 32.9 15,163 3.7CENTS
Aircraft fuel 13,873 2.7 39.3 9,957 2.4
Aircraft maintenance materials and repairs 10,199 2.0 56.9 6,501 1.6
Commissions 5,861 1.2 24.7 4,701 1.1
Depreciation and amortization 4,199 0.8 (7.5) 4,539 1.1
Aircraft rental 8,169 1.6 172.3 3,000 0.7
Other rentals and landing fees 5,398 1.1 50.5 3,588 0.9
Other operating expense 17,337 3.4 44.0 12,038 3.0
---------- ------ --------- ---------- ------
Total operating expenses 85,193 16.8 43.2 59,487 14.5
---------- ------ --------- ---------- ------
Operating loss $(2,164) -- (112.6)% $ 1,922 --
---------- ------ --------- ---------- ------
---------- ------ --------- ----------
Interest expense (net) $ 4,388 0.9CENTS (19.8)% $ 5,469 1.3CENTS
---------- ------ --------- ---------- ------
---------- ------ --------- ---------- ------
Aircraft Expense
Depreciation and amoritzation $ 4,199 0.8CENTS (7.5)% $ 4,539 1.1CENTS
Aircraft rental 8,169 1.6 172.3 3,000 0.7
Interest expense (net) 4,388 0.9 (19.8) 5,469 1.3
---------- ------ --------- ---------- ------
$16,756 3.3CENTS 28.8% $13,008 3.1CENTS
---------- ------ --------- ---------- ------
---------- ------ --------- ---------- ------
</TABLE>
SELECTED OPERATING DATA
Increase
1996 from 1995 1995
---- --------- -----
Available seat miles (000s) 506,424 23.6% 409,713
Revenue passenger miles (000s) 224,866 23.0% 182,874
Passenger load factor 44.4% (.2) pts 44.6%
Average yield per revenue passenger mile 35.1CENTS 3.8CENTS 31.3CENTS
OPERATING REVENUES
11
<PAGE>
Operating revenues increased 35.2 percent to $83.0 million in the first three
quarters of 1996 from $61.4 million during the first three quarters of 1995.
The increase in operating revenues resulted from the increase in revenue
passenger miles flown by 23.0% to 224.9 million in the first three quarters
of 1996 from 182.9 million during the first three quarters of 1995 in
conjunction with a 23.6 percent increase in capacity to 506.4 million ASMs in
the first three quarters of 1996 from 409.7 million ASMs during the first
three quarters of 1995. The addition of Midway Connection and Arizona
service accounted for 16.9% and 5.8%, respectively, of the increase in
operating revenues. The increase in operating revenues was partially offset
by a $936,000 reduction due to the end of training and aircraft rental
contract with a university in the first quarter of 1996. The 3.8CENTS
increase in passenger yield is due primarily to selected price increases 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.
OPERATING EXPENSES
Total operating expenses increased to $85.2 million, or 16.8 cents per ASM,
in the first three quarters of 1996 from $59.5 million, or 14.5 cents per ASM
in the first three quarters 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 three quarters of 1996, from 3.7 cents per ASM during the first
three quarters of 1995, due to additional customer service wages to
facilitate the Company's expansion into new markets and 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 2.7 cents in the first three
quarters of 1996 from 2.4 cents in the first three quarters of 1995 due to
increased fuel prices from suppliers and the reinstatement of the 4.3 cents
per gallon federal excise tax on jet fuel in August 1996.
Maintenance materials and repairs expense increased to 2.0 cents per ASM
during the first three quarters of 1996, from 1.6 cents per ASM in the first
three quarters of 1995, due to higher engine overhaul expense during the
first quarter of 1996 and increased repairs and contract labor for the
initial on-going periodic maintenance checks on the Brasilia in the second
and third quarters of 1996.
Other rentals and landing fee expense increased to 1.1 cents per ASM during
the first three quarters 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 3.4 cents per ASM in the first three
quarters of 1996 from 3.0 cents in the first three quarters of 1995,
reflecting higher passenger booking fee due to increases in rates and
increased bookings for the Midway Connection operations and higher credit
card expenses for the Midway Connection and Great Lakes Airlines operations.
These increases were partially offset by lower United program fees due to
increased flying under the Company's own code.
12
<PAGE>
AIRCRAFT EXPENSE
Aircraft expense increased to 3.3 cents per ASM during the first three
quarters of 1996, from 3.1 cents per ASM in the first three quarters 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 mix of aircraft expense towards increased aircraft rental expense from
depreciation and interest expense is due to a policy decision to lease the
majority of aircraft acquisitions in order to gain advantage of lower capital
costs. Further, concurrent with acquisitions of new beech aircraft, older
aircraft were being returned to Beech and reacquired under reduced rate
leases offering more flexible terms for early termination. Interest expense
also decreased in the first three quarters of 1996 from the first three
quarters 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 24.7 percent in the first three quarters
of 1996 and 37.4 in the first three quarters 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. However, in any month the
Company has earnings, income tax expense is recognized.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by (used in) operating activities were $(4.0) million and
$421,000 in the first three quarters of 1996 and 1995, respectively. Major
uses of working capital in the first three quarters of 1996 were the
Company's $6.5 million pretax loss combined with a $2.6 million increase in
accounts receivable due to increased revenues, a $3.3 million increase in
inventories due to the increase in the number of Brasilia aircraft and a
$557,000 increase in prepaids due to prepaid aircraft rentals. These uses of
working capital were offset by a $4.5 million increase in accounts payable
and accrued liabilities due to an increase in expense levels for 1996, and
increases in accrued wages 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 $7.0 million at
September 30, 1996 from $12.1 million at December 31, 1995. Cash decreased
$200,000 to $6.6 million at September 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 $5.0 million loan was obtained from
the same equipment supplier. Interest on this loan is payable monthly 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. During this period, the Company has not
achieved operational profits during its first and fourth fiscal quarters.
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 Midway system to the United Express system,
continuing losses will result in significant liquidity pressures and
violation of certain financial covenants contained in an agreement under
which the Company is operating two of its Embraer Brasilia aircraft and its
marketing agreement with United Airlines, Inc. If this were to occur, there
can be no assurances that additional
13
<PAGE>
debt or equity capital could be obtained on terms favorable to the Company,
or at all, or that the applicable institution would waive the violation of
the financial covenants. The majority of the financial agreements under
which the Company operates the remainder of its aircraft contain cross
default provisions in the event another institution were to accelerate a
significant amount of debt as a result of a default. The Company has not
obtained commitments for additional capital and unless it does so may be
required to rely on increases in financial performance to supply funds
necessary for debt service and working capital requirements.
Capital expenditures related to aircraft and equipment totaled $1.6 million
in the first three quarters of 1996 and $16.6 million during the first three
quarters of 1995. Principal repayments exceeded long-term borrowings by
$14.8 million in the first three quarters of 1996. Long-term borrowings
exceeded principal repayments by $10.9 million in the first three quarters of
1995.
Long-term debt, net of current maturities of $5.1 million, totaled $67.5
million at September 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 September 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 debt 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 and one such aircraft in June 1996. All of
these aircraft have been financed by the manufacturer under 141/2 year
operating leases. In connection with the acquisition of the four aircraft in
March and the aircraft purchased in June, the Company sold five aircraft to
Beech. The Company has leased back these 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.
14
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No exhibits are filed herewith.
b) On October 22, 1996, the Company filed Form 8-K reporting an item
with respect to changes in control of registrant.
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 11, 1996 By /s/ A. L. Maxson
------------------------------------
A. L. Maxson
Executive Vice President Finance and
Chief Financial Officer
(Principal Financial Officer)
15
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