<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 March 31, 1997.
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 15, 1997 there were 7,586,354 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)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,626 $ 6,676
Accounts receivable 7,899 7,274
Inventories, net of accumulated allowance of
$3,221 in 1997 and $3,082 in 1996 13,340 12,668
Prepaid expenses and other current assets 2,063 2,254
-------- ---------
Total current assets 27,928 28,872
-------- ---------
PROPERTY AND EQUIPMENT:
Flight equipment 97,681 98,281
Other property and equipment 3,953 3,863
Less - Accumulated depreciation and amortization (15,952) (14,901)
-------- ---------
Total property and equipment 85,682 87,243
OTHER ASSETS 2,441 2,494
-------- ---------
$ 116,051 $118,609
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,578 $ 6,668
Notes Payable 5,000 5,000
Accounts payable 15,221 13,089
Accrued liabilities and unearned revenue 4,729 3,512
-------- ---------
Total current liabilities 31,528 28,269
LONG-TERM DEBT, net of current maturities 65,002 65,986
DEFERRED CREDITS 5,561 5,614
-------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized,
7,586,354 shares issued and outstanding at March 31, 1997,
7,586,326 shares issued and outstanding at December 31, 1996 76 76
Paid-in capital 28,927 28,920
Accumulated deficit (15,043) (10,256)
-------- ---------
Total stockholders' equity 13,960 18,740
-------- ---------
$116,051 $118,609
-------- ---------
-------- ---------
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
For the Three Months Ended March 31
(Unaudited)
(in thousands)
1997 1996
---------- ---------
OPERATING REVENUES:
Passenger $ 24,377 $ 21,966
Public service 1,279 484
Freight, charter and other 1,012 690
-------- ---------
Total operating revenues 26,668 23,140
-------- ---------
OPERATING EXPENSES:
Salaries, wages and benefits 7,476 6,299
Aircraft fuel 4,854 3,968
Aircraft maintenance materials and repairs 2,424 3,230
Commissions 1,835 1,641
Depreciation & amortization 1,438 1,455
Aircraft rental 3,468 2,304
Other rentals and landing fees 1,793 1,727
Other operating expenses 6,554 5,453
-------- ---------
Total operating expenses 29,842 26,077
-------- ---------
Operating loss (3,174) (2,937)
INTEREST EXPENSE 1,613 1,534
-------- ---------
Loss before income taxes (4,787) (4,471)
INCOME TAX EXPENSE (BENEFIT) - (1,698)
-------- ---------
Net loss $ (4,787) $ (2,773)
-------- ---------
-------- ---------
NET LOSS PER SHARE: $ (.63) $ (.37)
-------- ---------
-------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,586,341 7,582,632
-------- ---------
-------- ---------
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 Three Months Ended March 31
(Unaudited)
(in thousands)
1997 1996
---------- ---------
OPERATING ACTIVITIES:
Net loss $ (4,787) $ (2,773)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Depreciation and amortization 1,438 1,455
Deferred income taxes - (1,698)
Loss on sale of equipment 92 -
Change in current operating items:
Accounts receivable, net (625) (2,108)
Inventories, net (841) (1,460)
Prepaid expenses and deposits (1,145) (412)
Accounts payable and accrued liabilities 3,921 790
-------- ---------
Net cash flows used in operating activities (1,947) (6,206)
-------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (90) (411)
Sale of property and equipment - 10,400
Increase in other assets - (409)
-------- ---------
Net cash flows provided by (used in)
investing activities (90) 9,580
-------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 104 4,000
Repayment of debt (124) (10,989)
Proceeds from sale of common stock 7 23
-------- ---------
Net cash flows used in financing activities (13) (6,966)
-------- ---------
NET CHANGE IN CASH (2,050) (3,592)
CASH:
Beginning of period 6,676 6,784
-------- ---------
End of period $ 4,626 $ 3,192
-------- ---------
-------- ---------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 239 $ 1,536
-------- ---------
-------- ---------
Noncash transactions-
Deferred manufacturer's incentives received as:
Property and equipment $ (200) -
-------- ---------
-------- ---------
</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
1. 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 consolidated financial statements for the year ended December 31, 1996
and the notes thereto, included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission. The above 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.
The Company provides scheduled passenger and air freight service via three
marketing identities (United Express, Midway Connection and Great Lakes
Airlines), the first two of which operate under code-sharing agreements with
major airlines.
The Company operates in the Upper Midwest as United Express under a cooperative
marketing agreement (United Express Agreement) with United Airlines, Inc.
(United). The term of the agreement expired April 25, 1997 (see Note 2).
Outside the scope of the United Express Agreement, the Company serves additional
destinations in the Upper Midwest as Great Lakes Airlines.
The Company operates along the East Coast as a "Midway Connection" carrier under
a cooperative marketing agreement (Midway Connection Agreement) with Midway
Airlines, Inc. (Midway). The Company and Midway have agreed to terminate the
Midway Connection Agreement effective November 1, 1997.
The Company also operates in Arizona and Mexico as Great Lakes Airlines.
Revenues during the quarter ended March 31, 1997 were derived 78% from United
Express operations, 16% from Midway Connection and 5% from Great Lakes Airlines
operations.
2. LIQUIDITY AND GOING-CONCERN MATTERS
The Company has suffered significant recent losses and negative operating cash
flows, has negative working-capital, has been unable to meet significant
current and long-term financial obligations, and has defaulted on certain
financial and operating agreements. These matters raise substantial doubt about
its ability to continue as
5
<PAGE>
a going concern. The Company's ability to continue as a going concern
depends upon successfully negotiating deferrals or a restructuring of its
financial obligations, negotiating extended or improved terms under its major
operating agreements, and ultimately, returning to sustained profitability.
Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the Company's primary aircraft supplier and largest creditor. The
Company has financed all 41 of 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 loan secured by accounts
receivable (collectively, the "Raytheon Agreements"). The Raytheon Agreements
went into default in 1997 due to the Company's non-payment of scheduled amounts
due. The Raytheon Agreements also contain cross-default provisions which may be
triggered if the Company's obligations to other creditors are accelerated as a
result of non-payment of those obligations. The default provisions of the
Raytheon Agreements give Raytheon the right to accelerate certain amounts due
under the Raytheon Agreements or repossess the aircraft or other assets securing
the Raytheon Agreements. The Company is currently in negotiations with Raytheon
to defer, refinance, or restructure all balances owed. While management
believes that initial discussions have been favorable, there can be no assurance
that such negotiations will be successful or that Raytheon will not exercise its
rights under the default provisions.
In addition, the Company has financed 11 of its Brasilia aircraft through five
lease and debt agreements with other unrelated entities (collectively, the
"Brasilia Agreements"). At December 31, 1996, one of the Brasilia Agreements
under which it operates two of these aircraft was in default due to violation of
a financial covenant. During 1997, all of the Brasilia Agreements went into
default due to non-payment of scheduled amounts due. Two of these Brasilia
Agreements have been subsequently modified to allow deferral of payment of the
defaulted amounts. Remedies available under the default provisions of the
Brasilia Agreements have not been exercised, but include possible repossession
and resale of the related aircraft, with the Company being responsible to pay
any shortfall between such sale proceeds and the balance of the underlying
obligations. The Company has received formal notice of default concerning
non-payment of obligations owed under one of the Brasilia Agreements under which
the Company leases a total of two Brasilia aircraft.
The Company has been in negotiations with its lessors and lenders for deferral
or other credit accommodations under the aforementioned lease and debt
agreements, and in conjunction with such negotiations is seeking amendments of
the agreements or waivers of the related defaults. There can be no assurance
that the lessors or lenders will agree to amend the agreements or waive the
defaults.
The Company has been continuing to extend and increase the past due amounts owed
to its trade vendors. There can be no assurance that the Company's trade
vendors will continue to supply the Company with goods and services on terms
acceptable to the Company or that they will agree to any credit accommodations
on past due amounts owed.
It is uncertain at the time of this filing what impact the Company's voluntary
suspension of operations pursuant to an agreement with the FAA (see Item 5) will
have on the Company's negotiations with lessors, lenders and vendors.
On April 25, 1997, the term of the United Express Agreement expired. At that
time, the Company was in default of a covenant of the United Express Agreement
as a result of its non-payment of bills when due. The Company has earned the
majority of its revenues under the United Express Agreement and, in exchange for
certain per passenger fees, received certain benefits from its relationship with
United including the listing of its flights under United's computer reservation
system code. Management is negotiating with United to renew the United Express
Agreement. While management believes that initial discussions have been
favorable, there can be no assurance that such negotiations will be successful
or that the United Express Agreement can be renewed
6
<PAGE>
or extended on terms acceptable to the Company. Since April 25, 1997, the
Company has been continuing United Express operations under the same terms as
the expired United Express Agreement.
Since its inception in October 1995, significant operating losses have been
incurred from the Company's operations under the Midway Connection Agreement.
This is partially attributable to the fact that Midway reduced the number of
aircraft in its operation early in 1996 rather than expanding operations as it
had originally planned. This reduced the number of connecting opportunities for
the Company's flights and, in turn, potential traffic which could use the
Company's services. The Company and Midway have entered into an agreement to
terminate the Midway Connection Agreement effective November 1, 1997 at which
time the Company plans to terminate all services in areas currently operated
under the Midway Connection name. The Company is evaluating the future use or
disposition of the ten aircraft currently used in Midway Connection operations.
In June 1997 two of these aircraft will be removed from Midway Connection
service and placed in United Express service to accommodate seasonal increases
in traffic in the Upper Midwest.
The Company has made substantial revisions to its flight schedules and may make
further revisions in an effort to improve operating results. Service to several
unprofitable cities has been eliminated and new service to certain other cities
has been or is anticipated to be introduced. The Company continues to analyze
opportunities to improve its revenue optimization processes to increase revenue
passenger yields and to reduce certain operating expenses. The Company is also
analyzing opportunities to rationalize its capacity levels, optimize its
aircraft fleet and mix, and improve the deployment of its capacity. Further,
the Company has negotiated improved terms and subsidy rates on certain of its
routes subsidized by the U.S. Department of Transportation under the Essential
Air Service program. While management believes these initiatives will address
some of the causes of its recent operating losses, there can be no assurance
that the results from these actions will result in improved operating
performance or sustained profitability.
There can be no assurance that the Company's negotiations will be successful in
deferring or restructuring its current and long-term financial obligations,
extending or improving terms under its major operating agreements, or that its
operational improvement initiatives will result in improved operating
performance or sustained profitability. Such negotiations and initiatives will
require the Company to reach agreements with creditors, trade vendors and
code-sharing airlines on terms acceptable to the Company, none of which are
assured. If the Company is unsuccessful in its efforts, it may continue to be
unable to meet its current and future obligations, making it necessary to
undertake such other actions as may be appropriate to preserve asset values,
potentially including seeking protection from its creditors under applicable
bankruptcy laws. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
3. NEW ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", (SFAS 128), which
changes the way companies calculate their earnings per share (EPS). SFAS 128
replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be
disclosed. The Company is required to adopt SFAS 128 in the first quarter of
fiscal 1999, at which time all prior year EPS are to be restated in accordance
with SFAS 128.
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 that expired April 25, 1997. In
October 1995, the Company began operating as a Midway Connection carrier under a
cooperative marketing agreement with Midway which the parties recently agreed to
terminate effective November 1, 1997. As of March 31, 1997, the Company served
78 destinations in 20 states with 475 scheduled departures each weekday.
The Company has suffered significant recent losses and negative operating cash
flows, has negative working capital, has been unable to meet significant
current and long-term financial obligations, and has defaulted on certain
financial and operating agreements. These matters raise substantial doubt about
its ability to continue as a going concern. The Company's ability to continue
as a going concern depends upon successfully negotiating deferrals or a
restructuring of its financial obligations, negotiating extended or improved
terms under its major operating agreements, and ultimately, returning to
sustained profitability.
ESSENTIAL AIR SERVICE
Under the Essential Air Service Program, which is administered by the U.S.
Department of Transportation (DOT), certain communities receive specified levels
of "essential air service" (EAS). The DOT may authorize federal subsidies to
compensate a carrier providing essential air service in otherwise unprofitable
or minimally profitable markets. Under the FAA Reauthorization Act of 1996,
beginning in October 1997, the program will be funded on an ongoing basis from
foreign air carrier overfly fees. If these subsidies are reduced or eliminated
in the future the Company may discontinue service to some or all of the
subsidized communities.
At March 31, 1997 and December 31, 1996, the Company served 18 essential air
service communities on a subsidized basis. The Company received $1.3 and $3.5
million in essential air service subsidies for the quarter ended March 31, 1997
and the year ended December 31, 1996, respectively. An airline serving a
community that qualifies for essential air services is required to give the DOT
advance notice before it may terminate, suspend or reduce service. Depending on
the circumstances, the DOT may require the continuation of existing service
(even if such service is being operated at a loss) until a replacement carrier
is found.
Consistent with current DOT service limits, aircraft departures in subsidized
service in 1997 are expected to be slightly below those in 1996. However,
through renegotiation of rates and modifications in service, the Company expects
to receive an increase of approximately $2.3 million in subsidy revenues from
providing such service in 1997. Negotiations are currently in progress with DOT
to establish rates which will recognize increased flight frequencies for subsidy
support at EAS cities effective October 1, 1997.
8
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The following table sets forth certain financial information regarding the
Company:
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
For the Three Months Ended March 31
---------------------------------------
1997 1996
-------------------------------------------- -----------------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(In 000'S) ASM From 1996 (In 000'S) ASM
------------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total operating revenues $26,668 15.2% $23,140
------------- ----------
Salaries, wages and benefits 7,476 4.8CENTS 18.7 6,299 4.1CENTS
Aircraft fuel 4,854 3.1 22.4 3,968 2.7
Aircraft maintenance materials and repairs 2,424 1.6 (25.0) 3,230 2.1
Commissions 1,835 1.2 11.9 1,641 1.1
Depreciation and amortization 1,438 0.9 (1.2) 1,455 1.0
Aircraft rental 3,468 2.2 50.6 2,304 1.5
Other rentals and landing fees 1,793 1.1 3.9 1,727 1.1
Other operating expense 6,554 4.2 20.2 5,453 3.6
------------- ----------- ---------- -----------
Total operating expenses 29,842 19.1 14.5 26,077 17.2
------------- ----------- ---------- -----------
Operating loss $(3,174) 8.1% $(2,937)
------------- ----------
------------- ----------
Interest expense (net) $ 1,613 1.0CENTS 5.2% $ 1,534 1.0CENTS
------------- ----------- ------- ---------- ----------
------------- ----------- ------- ---------- ----------
SELECTED OPERATING DATA
Increase
(decrease)
1997 From 1996 1996
---- --------- ----
Available seat miles (ASM) (000s) 155,038 2.0% 151,948
Revenue passenger miles (000s) 64,033 (2.9)% 65,938
Passenger load factor 41.5% (1.9) pts 43.4%
Passengers carried 212,011 (4.2)% 221,219
Average yield per revenue passenger mile 37.8cents 4.5cents 33.3cents
</TABLE>
OPERATING REVENUES
Operating revenues increased to $26.6 million or 15.2 percent in the first
quarter of 1997 from $23.1 million during the first quarter of 1996. The
increase in operating revenues resulted in part from the increase in the average
fare to $114.98 in the first quarter of 1997 from $99.28 during the first
quarter of 1996. Revenue passengers flown decreased by 4.2% to 212,011 in the
first quarter of 1997 from 221,219 during the first quarter of 1996 while ASMs
increased by 2.0 percent to 155.0 million in the first quarter of 1997 from
151.9 million during the first quarter of 1996. The increase in operating
revenues is also due to a 164.1% increase in public service revenue to $1.3
million in the first quarter of 1997 from $484,000 in the first quarter of 1996.
The $15.70 increase in average fare and the 4.5cents 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.
9
<PAGE>
OPERATING EXPENSES
Total operating expenses increased to $29.8 million, or 19.1 cents per ASM, in
the first quarter of 1997 from $26.1 million, or 17.2 cents per ASM in the first
quarter of 1996. The increase of total operating expenses reflect the costs
associated with the increased level of operations and higher fuel costs, as more
fully detailed below.
Salaries, wages, and benefits expense increased to 4.8 cents per ASM during the
first quarter of 1997, from 4.1 cents per ASM during the first quarter of 1996,
due to increases in maintenance and customer service payroll expenses and to
increased health insurance claims expense.
Aircraft fuel expense per ASM increased to 3.1 cents in the first quarter of
1997 from 2.7 cents in the first quarter of 1996, due to increased fuel prices
from suppliers. The average cost per gallon increased by 11.5 cents from first
quarter 1996 to first quarter 1997.
Aircraft maintenance materials and repairs expense decreased to 1.6 cents per
ASM in the first quarter of 1997 from 2.1 cents per ASM in the first quarter of
1996. The decrease in expense is mainly due to a $1.3 million decrease in
engine overhaul expense as six fewer engine overhauls were performed in the
first quarter of 1997 than the first quarter of 1996.
Aircraft rental expense increased to 2.2 cents per ASM in the first quarter of
1997 from 1.5 cents per ASM in the first quarter of 1996. This resulted
primarily from the acquisition of ten new Beech 1900D aircraft under leases.
Other operating expenses increased to 4.2 cents per ASM in the first quarter of
1997 from 3.6 cents in the first quarter of 1996, reflecting higher passenger
booking fees due to increases in rates 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 and a decrease in the number of passengers. In addition,
training and lodging costs increased due to FAA Part 121 conversion. Airline
supplies (deicing fluid) and interrupted trip expense also increased due to the
increase in weather related flight irregularities in the first quarter of 1997
as compared with the first quarter of 1996.
Following a 15 month period involving substantial changes in operating
procedures and a major training effort, on March 19, 1997, the Company completed
its transition to meet FAA Part 121 operating requirements. The Company
estimates that it incurred an adverse economic impact of about $1.3 million
during that period resulting from additional expenses and revenue loss from
reduced operating performance as key personnel used their time to facilitate the
transition.
INCOME TAXES
The Company's effective tax rate was 0 percent in the first quarter of 1997 and
38.0 percent in the first quarter of 1996. In recognition of the Company's
financial results of recent periods and other uncertainties, the Company has
elected to cease recording future tax benefits until it is reasonably assured
that such benefits would be realized.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $2.1 million to $4.6 million at March 31, 1997 from $6.7 million
at December 31, 1996. Net cash flows used in operating activities were $1.9
million and $6.2 million in the first quarter of 1997 and 1996, respectively.
The major use of such cash flows in the first quarter of 1997 was the funding of
the Company's $4.8 million loss. Accounts payable and accrued liabilities at
March 31, 1997 include past due lease installments of $2.8 million and interest
payable of $1.4 million associated with due but unpaid debt installments.
The Company has suffered significant recent losses and negative operating cash
flows, has negative working capital, has been unable to meet significant
current and long-term financial obligations, and has defaulted on certain
financial and operating agreements. These matters raise substantial doubt about
its ability to continue as a going concern. The Company's ability to continue
as a going concern depends upon successfully negotiating deferrals or a
restructuring of its financial obligations, negotiating extended or improved
terms under its major operating agreements, and ultimately, returning to
sustained profitability.
Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the Company's primary aircraft supplier and largest creditor. The
Company has financed all 41 of 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 loan secured by accounts
receivable (collectively, the "Raytheon Agreements"). The Raytheon Agreements
went into default in 1997 due to the Company's non-payment of scheduled amounts
due. The Raytheon Agreements also contain cross-default provisions which may be
triggered if the Company's obligations to other creditors are accelerated as a
result of non-payment of those obligations. The default provisions of the
Raytheon Agreements give Raytheon the right to accelerate certain amounts due
under the Raytheon Agreements or repossess the aircraft or other assets securing
the Raytheon Agreements. The Company is currently in negotiations with Raytheon
to defer, refinance, or restructure all balances owed. While management
believes that initial discussions have been favorable, there can be no assurance
that such negotiations will be successful or that Raytheon will not exercise its
rights under the default provisions.
In addition, the Company has financed 11 of its Brasilia aircraft through
five lease and debt agreements with other unrelated entities (collectively,
the "Brasilia Agreements"). At December 31, 1996, one of the Brasilia
Agreements under which it operates two of these aircraft was in default due
to violation of a financial covenant. During 1997, all of the Brasilia
Agreements went into default due to non-payment of scheduled amounts due.
Two of these Brasilia Agreements have been subsequently modified to allow
deferral of payment of the defaulted amounts. Remedies available under the
default provisions of the Brasilia Agreements have not been exercised, but
include possible repossession and resale of the related aircraft, with the
Company being responsible to pay any shortfall between such sale proceeds and
the balance of the underlying obligations. The Company also has received
formal notice of default, which is currently unresolved, concerning
non-payment of obligations owed under one of the Brasilia Agreements under
which the Company leases a total of two Brasilia aircraft.
The Company has been in negotiations with its lessors and lenders for deferral
or other credit accommodations under the aforementioned lease and debt
agreements, and in conjunction with such negotiations is seeking amendments of
the agreements or waivers of the related defaults. There can be no assurance
that the lessors or lenders will agree to amend the agreements or waive the
defaults.
The Company has been continuing to extend and increase the past due amounts owed
to its trade vendors. There can be no assurance that the Company's trade
vendors will continue to supply the Company with goods and services on terms
acceptable to the Company or that they will agree to any credit accommodations
on past due amounts owed.
11
<PAGE>
It is uncertain at the time of this filing what impact the Company's voluntary
suspension of operations pursuant to an agreement with the FAA (see Item 5) will
have on the Company's negotiations with lessors, lenders and vendors.
On April 25, 1997, the term of the United Express Agreement expired. At that
time, the Company was in default of a covenant of the United Express Agreement
as a result of its non-payment of bills when due. The Company has earned the
majority of its revenues under the United Express Agreement and, in exchange for
certain per passenger fees, received certain benefits from its relationship with
United including the listing of its flights under United's computer reservation
system code. Management is negotiating with United to renew the United Express
Agreement. While management believes that initial discussions have been
favorable, there can be no assurance that such negotiations will be successful
or that the United Express Agreement can be renewed or extended on terms
acceptable to the Company. Since April 25, 1997, the Company has been
continuing United Express operations under the same terms as the expired United
Express Agreement.
Since its inception in October 1995, significant operating losses have been
incurred from the Company's operations under the Midway Connection Agreement.
This is partially attributable to the fact that Midway reduced the number of
aircraft in its operation early in 1996 rather than expanding operations as it
had originally planned. This reduced the number of connecting opportunities for
the Company's flights and, in turn, potential traffic which could use the
Company's services. The Company and Midway have entered into an agreement to
terminate the Midway Connection Agreement effective November 1, 1997 at which
time the Company plans to terminate all services in areas currently operated
under the Midway Connection name. The Company is evaluating the future use or
disposition of the ten aircraft currently used in Midway Connection operations.
In June 1997 two of these aircraft will be removed from Midway Connection
service and placed in United Express service to accommodate seasonal increases
in traffic in the Upper Midwest
The Company has made substantial revisions to its flight schedules and may make
further revisions in an effort to improve operating results. Service to several
unprofitable cities has been eliminated and new service to certain other cities
has been or is anticipated to be introduced. The Company continues to analyze
opportunities to improve its revenue optimization processes to increase revenue
passenger yields and to reduce certain operating expenses. The Company is also
analyzing opportunities to rationalize its capacity levels, optimize its
aircraft fleet and mix, and improve the deployment of its capacity. Further,
the Company has negotiated improved terms and subsidy rates on certain of its
routes subsidized by the U.S. Department of Transportation under the Essential
Air Service program. While management believes these initiatives will address
some of the causes of its recent operating losses, there can be no assurance
that the results from these actions will result in improved operating
performance or profitability.
There can be no assurance that the Company's negotiations will be successful in
deferring or restructuring its current and long-term financial obligations,
extending or improving terms under its major operating agreements, or that its
operational improvement initiatives will result in improved operating
performance or sustained profitability. Such negotiations and initiatives will
require the Company to reach agreements with creditors, trade vendors and
code-sharing airlines on terms acceptable to the Company, none of which are
assured. If the Company is unsuccessful in its efforts, it may continue to be
unable to meet its current and future obligations, making it necessary to
undertake such other actions as may be appropriate to preserve asset values,
potentially including seeking protection from its creditors under applicable
bankruptcy laws. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
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During the first quarter of 1996, the Company had a line-of-credit
arrangement with a bank totaling $5 million. In March 1996, the credit
facility was terminated and a $4 million loan was obtained from an aircraft
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 loan was obtained from
the same aircraft supplier. Interest on this loan is payable monthly and the
principal amount was due on March 31, 1997 but has not been paid. This loan
is collateralized by accounts receivable.
In October 1996, the Company entered into an agreement with a vendor in which
$1.8 million of outstanding invoices were converted into a short-term promissory
note bearing interest of prime plus 1%. On March 12, 1997, the Company sold
five spare engines to this vendor in consideration of a $950,000 reduction of
its short-term note.
Capital expenditures related to aircraft and equipment totaled $90,000 in the
first quarter of 1997 and $411,000 during the first quarter of 1996. Principal
repayments and new long-term borrowing were nominal in the first quarter of
1997. Principal repayments exceeded long-term borrowings by $7.0 million in the
first quarter of 1996.
Long-term debt, net of current maturities of $6.5 million, totaled $65.0 million
at March 31, 1997 compared to $66.0 million, net of current maturities of $6.7
million, at December 31, 1996. As of March 31, 1997, the long-term debt bears
interest at rates ranging from 6.6 to 9.1 percent and are payable monthly or
quarterly through July, 2007. All financing was provided by Beech Acceptance
Corporation, Inc. and CIT Group/Equipment Financing, Inc. and is collateralized
by 25 related aircraft.
Item 5. FAA INSPECTION
On May 16, 1997, following inspections of the Company's operations by the FAA,
the Company and the FAA entered into an agreement whereby the Company
voluntarily suspended flight operations on May 16, 1997 pending a thorough
review of the Company's maintenance and record keeping procedures. Under the
Agreement, the Company may not operate its aircraft in revenue service until
approved by the FAA. The FAA maintains that the Company utilized improperly
trained personnel to perform aircraft maintenance, and has alleged that the
Company has operated unairworthy aircraft. Based upon currently available
information, the Company strongly disagrees with the FAA position.
The Company expects to receive a detailed Consent Order from the FAA on or
before May 21, 1997 which will describe the required actions to be taken by the
Company in order to resume operations. Until the receipt of this Consent Order,
no estimate can be made with respect to when the Company might resume operations
or the cost of complying with the Consent Order. However, the combination of
loss of revenue during the suspension of operations and the cost of complying
with the Consent Order is likely to have a material adverse impact on the
Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 10.1 Agreement between the Company and the Federal Aviation
Administration dated May 16, 1997.
b) On March 18, 1997, the Company filed Form 8-K reporting matters
relating to the financial condition of the registrant.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunder duly authorized.
GREAT LAKES AVIATION, LTD.
Dated: May 20, 1997 By /s/ Douglas G. Voss
-----------------------------------
Douglas G. Voss
President and Chief Executive Officer
By /s/ A. L. Maxson
------------------------------------
A. L. Maxson
Executive Vice President Finance
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