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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 51301-9211
-------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (712) 262-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes _____ No __X__
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 27, 1997 was approximately $9,486,401.
As of March 31, 1997 there were 7,589,121 shares of Common Stock of the
registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
- --------------------- -----------------
Proxy Statement for 1997 Annual Meeting of Shareholders Part III
FORM 10-K INDEX
Page
----
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DURING FOURTH QUARTER OF FISCAL YEAR . . . . . . . . . . 12
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . 13
Item 6. SELECTED FINANCIAL AND OPERATING DATA . . . . . . . . . 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION. . . . . . . . . . . . . . . . . . . . . . . . 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . 24
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . 41
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 41
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 41
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 41
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 41
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 42
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
i
PART I
ITEM 1. BUSINESS
GENERAL
Great Lakes Aviation, Ltd. ("Great Lakes") is a regional airline which
operates under three marketing identities (the "Regional 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
Midway Connection under a code sharing agreement with Midway Airlines
Corporation ("Midway"). On August 8, 1995 the Company began operations in
the Southwest United States and Mexico independently under its own code. As
of December 31, 1996, the Company operated a fleet of 42 Beechcraft Model
1900 19-passenger aircraft and 12 Embraer Brasilia 30-passenger aircraft.
References herein to the Company include Great Lakes and its wholly-owned
subsidiary.
The table below sets forth certain operating information for each of the
Regional Identities for the applicable period ended December 31, 1996.
United Midway Great Lakes
Express Connection Airlines Total
-------- ---------- ----------- ----------
Operating revenues (000's) $ 86,419 $ 14,785 $ 8,466 $ 109,670
Passengers 749,527 165,975 97,463 1,012,965
Available seat miles (000's) 510,932 101,509 65,863 678,304
Revenue passenger miles (000's) 235,963 39,396 24,248 299,607
% of passengers connecting with partner 45% 50% N/A N/A
Load factor 46.2% 38.8% 36.8% 44.2%
The Company's recent performance has caused certain liquidity problems.
See "Management's Discussion and Analysis of Financial Condition".
THE COMPANY'S REGIONAL IDENTITIES
UNITED EXPRESS
The United Express operation serves Chicago, Denver and Minneapolis-St.
Paul from 60 destinations in ten states located in the Upper Midwest as of
December 31, 1996. The Company became a "United Express" carrier in 1992
under a code sharing agreement with United and is one of the principal United
Express regional carriers.
The Company's code sharing and related agreements with United (the
"United Express Agreements") entitle the Company to use United's "UA" flight
designator code to identify its code sharing flights and fares in computer
reservation systems, United's "Apollo" reservation system (including United's
automated check-in, ticketing and boarding pass, and advance seat reservation
and baggage tracing systems), to use the United Express logo and aircraft
exterior paint schemes and uniforms similar to those of United and to
otherwise advertise and market its association with United. United Express
passengers participate in United's "Mileage Plus" frequent flyer program and
are eligible to receive a minimum of 500 United frequent flyer miles for each
trip on a United Express flight. The United Express Agreements also provide
for coordinated schedules and through fares. A through fare is a cost-saving
fare available to a prospective passenger who, in order to reach a particular
destination, transfers between the major carrier and that carrier's code
sharing partner. United establishes all through fares and the Company
receives a portion of the fares on a formula basis, subject to periodic
adjustment.
Under the United Express Agreements, United provides a number of
additional services to the Company. These include publication of the fares,
rules and related information that are part of the Company's contracts of
carriage
1
for passengers and freight; publication of the Company's code sharing flight
schedules and related information using the United "UA" flight designator
code and flight numbers assigned by United; provision of ground support
services at six airports served by both United and the Company; provision of
ticket handling services at United's ticketing locations; provision of
airport signage at airports where both the Company and United operate;
provision of United ticket stock and related documents; provision of expense
vouchers, checks and cash disbursements to passengers on code sharing flights
of Great Lakes inconvenienced by flight cancellations, diversions and delays;
and cooperation in the development and execution of advertising, promotion
and marketing efforts featuring United Express and the relationship between
United and the Company under the Agreements. The Company pays United monthly
a fee based on the total number of revenue passengers boarded on all of Great
Lakes' United Express flights. This fee varies depending on whether the
passenger travels through United hubs at Denver and Chicago, is carried to or
from other airports served by United or if the passenger is carried between
cities only served by Great Lakes. The Company also receives an incentive
amount for each passenger that connects with a United flight. In order to
reduce expenses on those routes where passengers have few opportunities to
connect with United, the Company removes the United Code and provides the
service as Great Lakes Airlines.
With the exception of certain pre-approved destinations connecting with
Minneapolis-St. Paul and Detroit, the United Express Agreements require the
Company to obtain United's prior consent to operate as a United Express
carrier on all routes. Additionally, the United Express Agreements restrict
the Company's ability to decrease its service to Denver and Chicago O'Hare
below certain minimum levels. Great Lakes has the exclusive right to provide
United Express service to and from Detroit and Minneapolis-St. Paul and on
existing Great Lakes' routes to and from Chicago O'Hare and Denver. The
United Express Agreements, however, prohibit the Company from entering into a
code sharing agreement with any other airline at Chicago, Denver, Des Moines,
Detroit, Minneapolis-St. Paul and Omaha. The code sharing agreement,
however, does not prohibit United from competing with Great Lakes. The United
Express Agreements may be canceled if the Company fails to meet certain
financial tests or performance standards or fails to maintain certain minimum
flight frequency levels.
The United Express Agreements restrict the ability of the Company to
merge with another company or dispose of its assets or aircraft without first
offering United a right of first refusal to acquire the Company, or such
assets or aircraft. United also has a right of first refusal with respect to
issuances by the Company of shares of its Common Stock or the sale by Douglas
G. Voss, the Chief Executive Officer of the Company, of his Common Stock.
United has the option to terminate the United Express Agreements in the event
that Great Lakes merges with, or is acquired by, another air carrier or any
affiliate thereof, subject to certain pre-approved exceptions.
The code sharing agreement with United terminates in April 1997 but is
subject to earlier termination upon failure of the Company to provide
specified levels of service or performance, not paying without just cause its
bills when due, or upon other specified events. Currently, the Company is in
default of a covenant of the United Express Agreement as a result of its
nonpayment of bills when due and is attempting to obtain a waiver of the
default from United. The Company has commenced negotiations with United to
renew the code sharing agreement, which the Company expects will be completed
on a mutually advantageous basis, although no assurance can be given that
this actually will be accomplished. Any termination or failure to renew this
agreement, any material adverse modification of this agreement, or any
substantial decrease in the number of routes served by the Company under this
agreement would have a material adverse effect on the Company's business. As
a result of the code sharing agreement, the Company's business is sensitive
to events and risks affecting United. If adverse events affect United's
business, the Company's business may also be adversely affected.
MIDWAY CONNECTION
Since October 1, 1995 the Company has operated as a "Midway Connection"
carrier under a marketing agreement ("Midway Connection Agreement") with
Midway. As of December 31, 1996, the Company's Midway Connection operation
served Raleigh/Durham from 14 destinations in Virginia, Georgia, North
Carolina, South Carolina, Ohio, Florida, Maryland and the District of
Columbia.
The Company's marketing agreement with Midway entitles the Company to
use Midway's "JI" flight designator code to identify its code sharing flights
and fares in computer reservation systems, (including Midway's automated
check-in, ticketing and boarding pass, and advance seat reservation and
baggage tracing systems), to use the "Midway Connection" logo and aircraft
exterior paint schemes and uniforms similar to those of Midway and to
otherwise advertise and market its association with Midway. The Company's
passengers on code sharing flights may
2
participate in American Airlines' frequent flyer program as long as Midway
participates in the American Airlines program. The Midway Connection
Agreement also provides for coordinated schedules and through fares. The
Company and Midway mutually establish through fares and the Company receives
a portion of the fares on a formula basis.
Under the Midway Connection Agreement, Midway provides a number of
additional services to the Company. These include publication of the fares,
rules and related information that are part of the Company's contracts of
carriage for passengers and freight; publication of the Company's code
sharing flight schedules and related information using the Midway "JI" flight
designator code and flight numbers assigned by Midway; provision of ticket
handling services at Midway's ticketing locations; provision of airport
signage at airports where both the Company and Midway operate; provision of
Midway ticket stock and related documents; provision of expense vouchers,
checks and cash disbursements to passengers on code sharing flights of the
Company inconvenienced by flight cancellations, diversions and delays; and
cooperation in the development and execution of advertising, promotion and
marketing efforts featuring Midway Connection and the relationship between
Midway and the Company.
With the exception of certain pre-approved destinations, the Midway
Connection Agreement requires the Company to obtain Midway's prior consent to
operate as a Midway Connection carrier on all routes. Under the terms of the
Midway Connection Agreement, the Company has the exclusive right to provide
Midway Connection service to and from Raleigh/Durham. The Midway Connection
Agreement, however, prohibits the Company from entering into a code sharing
agreement with any other airline at Raleigh/Durham.
Midway Connection services have been unprofitable. This is partially
attributable to the fact that Midway reduced the number of aircraft in their
operation early in 1996 rather than expanding operations as 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. As a result the Company is negotiating with Midway to
receive additional revenues to compensate it for providing current levels of
connecting traffic to Midway. There can be no assurance that these
negotiations will be successful. Early in 1997, the Company eliminated
unprofitable service to two communities and seasonably reduced flying to the
beach communities in the Midway Connection system.
The Midway Connection Agreement terminates October 1, 2004, but is
subject to immediate termination upon notice if either party becomes
insolvent, is not paying without just cause its bills when due, ceases to be
a going concern, makes an assignment for the benefit of creditors, or ceases
operations, unless the defaulting party posts a letter of credit to cover all
amounts potentially due to the other party. Either party may terminate the
Midway Connection agreement effective any time on or after October 1, 1997,
upon six months' prior written notice. In addition, if either party does not
perform any of its material covenants, agreements, terms or conditions under
the Midway Connection Agreement for a period of 30 days after written notice
to cure such default, then the other party may terminate the agreement upon
an additional 15 days' notice to the defaulting party. If it is determined
that the Company has failed to meet certain flight completion and on-time
performance standards for any three consecutive month period, then Midway may
terminate the Midway Connection Agreement upon 15 days' written notice to the
Company. At any time Midway could seek to terminate the Midway Connection
Agreement as a result of the Company's non-payment of bills when due and for
failure to perform under certain covenants in the agreement. As of March 31,
1997, the Company has not received any notice of breach or termination from
Midway and on April 4, 1997, received a letter from Midway stating that
Midway had no present intention of terminating the Midway Connection
Agreement. Any termination or failure to renew this agreement, any material
adverse modification of this agreement, or any substantial decrease in the
number of routes served by the Company under this agreement could have a
material adverse effect on the Company's business. As a result of the code
sharing agreement, the Company's business is sensitive to events and risks
affecting Midway. If adverse events affect Midway's business, the Company's
business may also be adversely affected.
GREAT LAKES AIRLINES
On August 8, 1995, the Company acquired from Arizona Airways, Inc.
("Arizona") certain aircraft parts, tools, furniture and fixtures, computer
equipment, accounts receivable and intellectual property (the "Assets")
pursuant to a foreclosure (the "Foreclosure") of a lien on the Assets. The
Foreclosure was for amounts owed the Company under a management assistance
and consulting services agreement, an aircraft parts purchase agreement, a
code sharing agreement, an aircraft lease agreement and other agreements,
between the Company and Arizona.
On August 8, 1995, the Company began service to the domestic
destinations (Tucson and Phoenix, AZ and Albuquerque, NM) previously served
by Arizona and on August 17, 1995 began service to the Mexican destinations
(Hermosillo, Guaymas, and Ciudad Obregon) previously served by Arizona.
Initially, the Company served these destinations under the trade name
"Arizona Airways Express," but beginning April 7, 1996, the Company began
providing this service under the name Great Lakes Airlines. Service between
Phoenix and Page/Lake Powell was
3
added in April 1996 with Federal Subsidy. In October 1996, the Company
began service between Show Low, Arizona and Phoenix with subsidy provided
by the local community.
UNITED EXPRESS MARKETS
CHICAGO
The Company's service to the Chicago O'Hare market is anchored by its
ownership of 54 slots and its lease of 12 slots allocated by the Federal
Aviation Administration ("FAA"). These slots are used primarily to provide
connecting opportunities with United flights. The Company's ability to
increase its passenger volume at Chicago O'Hare is limited by its allocation
of slots, and future increases in passenger volume are expected to come from
increased load factors, the acquisition of additional slots and the
concentrated use at O'Hare of currently operated larger aircraft. See "Slot
Allocation" and " Aircraft." During 1996, approximately 65 percent of Great
Lakes' passenger traffic was carried to or from Chicago. During 1996,
approximately 47 percent of the Great Lakes' traffic at Chicago O'Hare
connected with United, two percent connected with other airlines and 51
percent traveled exclusively on a Great Lakes flight ("on-line"). As of
December 31, 1996, Great Lakes had 48 weekday Chicago O'Hare departures
serving 31 destinations located in Iowa, Illinois, Indiana, Michigan,
Minnesota, South Dakota and Wisconsin.
In January 1997 the Company was awarded slot exemptions for the
specific purpose of providing 20 operations per day between Chicago O'Hare
Airport and Dubuque and Mason City, Iowa; Huron and Sioux Falls, South
Dakota; and Fargo, North Dakota. These slot exemptions may not be bought,
sold or traded without Department of Transportation ("DOT") approval. In
addition, these slot exemptions require the Company to provide minimum
amounts of Essential Air Service to certain small cities.
DENVER
The Company's primary strategy at Denver is to implement service in
markets where United and other major carriers have reduced service and to
feed that traffic to this United hub. The Company is currently in
negotiations with United with respect to the sharing of the expenses of
operating at the new Denver airport. Operating costs at the Denver airport
were $755,000 in 1994 and the Company recorded operating costs of $2.2
million in 1995 and $2.1 million in 1996. During 1996, approximately 25.7
percent of Great Lakes' passenger traffic was carried to or from Denver.
During 1996, approximately 55 percent of the Company's traffic at Denver
connected with United, one percent connected with other carriers and 44
percent was on-line. As of December 31, 1996, Great Lakes had 25 weekday
Denver departures serving 18 destinations located in Iowa, Minnesota,
Nebraska, North Dakota and South Dakota.
MINNEAPOLIS-ST. PAUL
As of December 31, 1996, Great Lakes had 21 weekday departures serving
19 destinations located in Colorado, Iowa, Michigan, Minnesota, North and
South Dakota, Nebraska and Wisconsin. During 1997, services in the
Minneapolis/St. Paul markets have been substantially reduced and the
remaining services are supported by the Essential Air Service Subsidy program.
MIDWAY CONNECTION MARKETS
During 1995, under an agreement with American Airlines, Midway began
serving certain routes at a hub formerly operated by American at Raleigh
Durham airport. This service was primarily to cities in the Northeast as
well as Florida and the Caribbean. At the end of 1996 Midway operated twelve
F100 and one A320 aircraft.
The Company's Midway Connection operation focuses primarily on providing
feed to and from Midway's service at Raleigh Durham to business markets in
the Northeast. In 1996 and 1995, 50% and 70%, respectively, of Midway
Connection's passengers connected with Midway.
In select markets the Company's passengers may also receive American
Airlines' AAdvantage frequent flyer program awards.
4
GREAT LAKES AIRLINES
In Arizona, New Mexico, certain cities in the Midwest and Mexico the
Company operates under the name Great Lakes Airlines. At December 31,1996,
it served 13 destinations, two of which are also served as United Express.
ESSENTIAL AIR SERVICE PROGRAM
The Deregulation Act allowed airlines great freedom to introduce,
increase and generally reduce or eliminate service to existing markets. Under
the Essential Air Service Program, which is administered by the DOT, certain
communities that received scheduled air service prior to the passage of the
Deregulation Act are guaranteed specified levels of "essential air service."
The DOT may authorize federal subsidies to compensate a carrier providing
essential air service in otherwise unprofitable or minimally profitable
markets. Beginning in October 1997, the program is funded on an ongoing
basis from foreign air carrier overfly fees. If these subsidies are
eliminated the Company may discontinue service to some or all of the
subsidized communities.
At December 31, 1996, the Company served 18 essential air service
communities on a subsidized basis. The Company received $3.5 million, $2.6
million and $2.7 million in essential air service subsidies for the years
ended December 31, 1996, 1995 and 1994, respectively. An airline serving a
community that qualifies for essential air services is required to give the
DOT advance notice before it may terminate, suspend or reduce service.
Depending on the circumstances, the DOT may require the continuation of
existing service until a replacement carrier is found.
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 from
providing such service. Further increases in subidy may result if DOT
authorizes increses of flight frequencies recognized for subsidy support at
EAS cities.
AIRCRAFT
GENERAL
At December 31, 1996, the Company operated a fleet of 42 Beechcraft 1900
aircraft and twelve Embraer Brasilia aircraft. The Beech aircraft are
pressurized, radar equipped and offer a 300-mile per hour cruising speed for
19 passengers, plus cargo, with a range of 850 miles. The Beechcraft 1900
aircraft is widely regarded by airlines as an efficient and reliable aircraft
for regional service. As of December 31, 1996, the Company owned 21 of its
Beechcraft 1900 aircraft and leased the remaining 21 under agreements with
remaining terms ranging from one month to 14 years.
The Embraer Brasilia aircraft are equipped with advanced avionics, have
stand-up cabins, restrooms, are staffed with a flight attendant for 30
passengers and offer a 360 mile per hour cruising speed with a range of 750
miles. As of December 31, 1996, the Company owned four of its Embraer
Brasilia aircraft and leased the remaining eight under agreements with
remaining terms ranging from 3 to 17 years.
5
SUMMARY OF AIRCRAFT ADDITIONS AND DELETIONS
The table below shows the number and type of aircraft operated by the
Company on January 1, 1996 and December 31, 1996 and the number and type of
aircraft acquired or retired from the Company's fleet during the year ended
December 31, 1996.
December 31, 1996
-----------------
January 1, 1996 Acquisitions Retirements December 31, 1996 Owned Leased
--------------- ------------ ----------- ----------------- ----- ------
Beechcraft 1900C 30 -- 6 24 15 9
1900D 8 10 -- 18 6 12
Embraer 120
New 5 -- -- 5 1 4
Used 7 -- -- 7 3 4
--- --- --- --- --- ---
Total 50 10 6 54 25 29
--- --- --- --- --- ---
--- --- --- --- --- ---
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. In July 1996, the Embraer Agreement
was terminated.
During 1996 the Company sold eight Beechcraft 1900C aircraft to
Raytheon and leased them back under 12 year operating leases with an option
to return upon 30 day notice during the first two years. At the termination
of the lease, the Company will be required to comply with certain aircraft
refurbishment provisions. Gains and losses on these transactions are amortized
over the first two years of the lease agreement because this is the maximum
term for which the Company expects to retain the aircraft. If a lease is
terminated early the full amount of the remaining unamortized gain or loss is
recognized at that time. Five of the sale/leaseback aircraft were returned
to Raytheon. One of the sale/leaseback aircraft was destroyed in November 1996.
The Company intends to provide notice to terminate the lease on the remaining
two aircraft.
Since January 1, 1996, the Company took delivery of ten new Beechcraft
1900D aircraft. All of these aircraft have been financed by the manufacturer
under 14-1/2 year operating leases. In connection with the lease of these
new Beechcraft 1900D aircraft, the Company acquired the right to sell to
Raytheon certain Beechcraft 1900C aircraft at prices equal to the unamortized
balance of the amounts owed on the aircraft. In addition, the Company also
obtained the right to sell one Beechcraft 1900C pledged as collateral to
secure performance under a lease agreement wherein the Company operates two
of its Brasilia aircraft. Management intends to sell that Beechcraft 1900C
aircraft under this agreement and use substantially all of the proceeds of
this sale to purchase a certificate of deposit to continue to collateralize
this Brasilia lease. No significant amount of cash will be generated from
these transactions.
As of December 31, 1996, the average ages of the Company's owned and
leased aircraft were 5.3 and 3.9 years, respectively.
AIRCRAFT DEBT AND LEASES
As of March 31, 1997, the Company's aircraft lease agreements are
scheduled to expire in 1998 and thereafter.
The aircraft lease agreements contain provisions which the Company
believes are typical of leases for the type of aircraft involved. These terms
include the requirement that the Company pay all taxes, maintenance,
insurance and other operating expenses; general and tax indemnities from the
Company; condition-on-return provisions; and default provisions, including
cross-default provisions with other leases or agreements.
6
In 1996 the Company has suffered significant losses in 1996 and 1995 and
negative operating cash flow in 1996, has been unable to meet significant
current and long-term financial obligations, and has defaulted on certain
financial and operating agreements.
Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the Company's primary aircraft supplier and largest creditor.
The Company has financed all 42 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 nonpayment 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
negotiating 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 2 of these aircraft was in
default due to violation of a financial covenant. During 1997, all of the
other four Brasilia Agreements went into default due to non-payment of
scheduled amounts due. One of these Brasilia Agreements has 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 two of the Brasilia Agreements under which the Company
leases a total of 4 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.
MAINTENANCE
The FAA mandates periodic inspection and maintenance of commercial
aircraft. The Company performs most maintenance and inspection of its
aircraft and engines (except engine overhaul) using its own personnel. Great
Lakes supports its fleet by utilizing eighteen decentralized maintenance
bases capable of performing these functions. These bases are located at
Williston, North Dakota; Fargo, North Dakota; Devils Lake, North Dakota;
Huron, South Dakota; Duluth, Minnesota; St. Paul, Minnesota; Grand Island,
Nebraska; Sioux City, Iowa; Spencer, Iowa; Chicago, Illinois; Springfield,
Illinois; Sault Ste. Marie, Michigan; Muskegon, Michigan; Marquette,
Michigan; Raleigh/Durham, North Carolina; Tucson, Arizona; Terre Haute,
Indiana and Denver, Colorado. The Company believes that performing its
maintenance at locations where its aircraft are stored overnight reduces
maintenance costs and promotes a higher level of operating efficiency.
Maintenance is performed at the locations where flights terminate at the
end of the day to minimize costly ferry flying and maximize the amount of
time aircraft may be accessed for maintenance procedures. Parts and supplies
inventories are also maintained at these locations to promote the mechanical
dispatch reliability of the fleet. The Company also maintains an inventory of
spare engines and propellers for its fleet to allow for minimal downtime
during major overhauls. The Company performs certain major maintenance
overhauls to its fleet which it believes most other regional airlines have
performed by outside contractors.
SLOT ALLOCATION
At Chicago O'Hare, scheduled flights during most times of day may be
conducted only if an airline has obtained a slot. Of the 54 slots allocated
to the Company by the FAA as of December 31, 1996, 27 may be used for
aircraft with up to 75 seats and the remainder may be used for aircraft with
up to 110 seats.
7
Outstanding slots at FAA slot-controlled airports are currently freely
exchanged between airlines and other persons, bought or sold (often with
gates or other on-ground assets), or leased. Slot values depend on several
factors, including the airport, the time of day, the number and availability
of slots, and whether they are commuter or air carrier slots. Interests in
slots have also been used by airlines as collateral to secure debt financings
and other obligations. The DOT and FAA must be advised of all slot transfers
and must determine that each such transfer will not be injurious to the
Essential Air Service Program. The transfer of a slot obtained in an
FAA-administered lottery is limited for two years after its acquisition to
either transfers for other lottery slots at the same airport or sales or
leases to new entrants or incumbent slot holders with a small number of slots.
In addition to the foregoing, on during January 1997 the Company was
awarded slot exemptions for the specific purpose of providing 20 operations
per day between Chicago O'Hare Airport and Dubuque and Mason City, Iowa;
Huron and Sioux Falls, South Dakota; and Fargo, North Dakota. These slot
exemptions may not be bought, sold or traded without DOT approval.
The FAA's slot regulations require the use of each slot at least 80
percent of the time, measured on a bi-monthly basis. Failure to do so without
a waiver from the FAA (which is granted only in exceptional cases) subjects
the slot to recall by the FAA. In addition, the slot regulations provide that
slots do not represent a property right, but represent an operating privilege
subject to FAA control and that slots may be withdrawn by the FAA at any time
without compensation to meet the DOT's operational needs (such as providing
slots for international or essential air transportation or providing slots
for new entrant carriers).
Since the creation of the slot system in 1968, and subsequent to the
adoption of the FAA's slot allocation, use and transfer regulations in 1985,
there have been and are currently pending several proposals introduced in
Congress and discussions within the DOT and the FAA regarding slots. In
August 1993, the National Commission To Ensure A Strong Competitive Airline
Industry recommended that the "FAA review the rule that limits operations at
`high density' airports with the aim of either removing these artificial
limits or raising them to the highest level consistent with safety
requirements." In October 1993, Congress passed a bill requiring the FAA to
undertake a one-year review of whether slot restrictions can be eliminated or
substantially eased. In August 1995, Congress passed legislation granting the
FAA authority to create additional slots for essential air service,
international and certain domestic jet operations. Great Lakes has received
28 slots to date pursuant to the August 1995 legislation.
Effective October 29, 1995, pursuant to an option agreement, United
purchased ten of the Company's landing and takeoff slots at Chicago O'Hare
airport for $3.85 million. Concurrently, the Company has an agreement to
lease these slots from United until May 1997 at which time the Company
intends to extend the lease. These ten slots were the only slots owned by
the Company which were not encumbered by requirements to provide essential
air service to small communities. United has an option to purchase or lease
all or any portion of the remaining 54 slots, until expiration of the United
Express Agreement in April 1997. United may acquire the Company's remaining
54 slots for the lesser of their fair market value or $26.2 million.
United's acquisition of the Company's remaining 54 slots is subject to the
approval of the DOT and the assumption by United of essential air service
responsibility to certain communities. In the event United acquires any of
the Company's remaining 54 slots, the Company has the right to lease the
slots from United for a period of one year thereafter.
YIELD MANAGEMENT
The Company closely monitors its inventory and pricing of available
seats with a computerized yield management system. This system enables the
Company's revenue control analysts to examine the Company's past traffic and
pricing trends and to estimate the optimal allocation of seats by fare class
(the number of seats made available for sale at various fares). The analysts
then monitor each flight to adjust seat allocations and overbooking levels,
with the objective of maximizing the total revenue for each flight.
8
MARKETING
For United Express, Midway Connection and Great Lakes Airlines
operations, the Company's services are marketed primarily by means of
listings in computerized reservation systems and the OFFICIAL AIRLINE GUIDE,
advertising and promotions, and through direct contact with travel agencies
and corporate travel departments. The Company's advertising and promotional
programs emphasize the Company's close affiliation with United, Midway and
other major carriers, including coordinated flight schedules and the right of
the Company's passengers to participate in United's "Mileage Plus" and
American Airlines' "AAdvantage" frequent flyer programs.
COMPETITION
The Company competes primarily with regional and major air carriers and
automobile transportation. The Company's competition from other air carriers
varies from location to location and, in certain areas, comes from regional
and major carriers who serve the same destinations as the Company but through
different hub and spoke systems. The domestic airline industry has undergone
major structural changes since the enactment of the Airline Deregulation Act
of 1978 (the "Deregulation Act"). Since that time, there has been
substantial consolidation and integration of both major and regional
carriers, including the acquisition or association of most regional carriers
by or with major carriers. Deregulation has made possible the rapid entry of
competitors into the Company's markets, and competitors are able to adjust
fares rapidly to improve their competitive position.
Almost all markets are subject to a high degree of price competition
both from established carriers and low fare jet carriers. The Company
believes, however, that its ability to compete in its market areas is
strengthened by its code sharing relationships with United and Midway.
United's substantial presence at Chicago O'Hare and Denver, enhances the
importance to Great Lakes of the United "UA" flight designator code in the
Upper Midwest. Beginning in mid-1996 and continuing into 1997, the Company's
scheduled operations at Minneapolis/St. Paul have been substantially reduced
and the resources redeployed to Chicago and Denver where United's dominant
position is expected to generate greater connecting traffic to the
Company's flights. The Company competes with other airlines by offering
frequent flights, flexible schedules and low fares. In addition, the
Company's competitive position benefits from the large number of participants
in United's "Mileage Plus" and American Airlines' "AAdvantage" frequent flyer
programs who fly regularly to or from the markets served by the Company. The
Company's code sharing agreement with United does not prohibit United from
competing with the Company. The code sharing agreements requires the Company
to obtain United's and Midway's written consent before commencing service on
routes other than certain pre-approved routes.
There can be no assurance that the Company will not experience increased
competition from existing competitors or from new entrants on one or more of
the Company's routes.
FUEL
The Company has not experienced difficulty with fuel availability and
expects to be able to obtain fuel at prevailing prices in quantities
sufficient to meet its future requirements. The Company contracts directly
with refiners for the purchase of its fuel. Standard industry contracts
generally do not provide protection against fuel price increases and do not
ensure availability of supply. The Company has generally been able to pass on
increases in fuel costs in the form of fare increases.
9
EMPLOYEES
On December 31, 1996, the Company had 1198 full-time and 216 part-time
employees as follows:
CLASSIFICATION:
Pilots . . . . . . . . . . . . . . . . . . . . . . . . . . 354
Station personnel . . . . . . . . . . . . . . . . . . . . 673
Maintenance personnel. . . . . . . . . . . . . . . . . . . 182
Administrative and clerical personnel. . . . . . . . . . . 127
Flight attendants. . . . . . . . . . . . . . . . . . . . . 58
Management . . . . . . . . . . . . . . . . . . . . . . . . 20
-----
Total employees 1,414
-----
-----
On March 4, 1996 the International Brotherhood of Teamsters was
certified to represent the pilots and have informed the Company of their
intent to renegotiate the contract which became amendable on April 30, 1996.
The Company and union jointly made application to the National Mediation
Board for mediation services. Negotiations are on-going. During 1996 the
flight attendants voted to be represented by the Teamsters Union.
The Company's mechanics are represented by the International Association
of Machinists ("IAM"), a national labor organization. On February 1, 1994,
the Company entered into its initial agreement with the IAM which provided
for wage increases and benefit improvements. This agreement becomes
amendable on November 1, 1997.
The Company believes that relations with its employees are satisfactory.
CHARTER AND FREIGHT SERVICE
Great Lakes uses available aircraft and from time to time leases four
and six passenger aircraft from an affiliated company to provide charter
services to private individuals, corporations and groups such as collegiate
athletic teams. Great Lakes also carries freight, mail and small packages on
most of its scheduled flights. Revenues from its charter flights and freight
deliveries were 1.6 percent, 1.5 percent and 1.2 percent of the Company's
total revenues for the years ended December 31, 1996, 1995 and 1994,
respectively.
REGULATION
In accordance with the provisions of the Federal Aviation Act of 1958,
as amended (the "1958 Act"), Great Lakes is an air carrier subject to
regulation by the DOT, primarily with respect to economic matters, and is
also subject to regulation by the FAA with respect to certain safety related
matters.
The Deregulation Act eliminated many regulatory constraints so that
airlines became free to set fares and, with limited exceptions, to establish
domestic routes without the necessity of seeking government approval. The DOT
is still authorized to establish consumer protection regulations; to prohibit
certain pricing practices; to mandate conditions of carriage; and to make
ongoing determinations of a carrier's fitness, willingness and ability to
properly and lawfully provide air transportation. The DOT also has the power
to bring proceedings for the enforcement of its regulations under the 1958
Act, including the assessment of civil penalties and the revocation of
operating authority, and to seek criminal sanctions.
The Company holds a commuter air carrier operating certificate issued by
the FAA pursuant to Part 135 of its regulations. The Company, as a commuter
air carrier, is licensed under Part 298 of the Economic Regulations of the
DOT.
10
The Company is subject to the jurisdiction of the FAA with respect to
its aircraft maintenance and operations, including equipment, ground
facilities, dispatch, communications, training, weather observation, flight
personnel and other matters affecting air safety. To ensure compliance with
its regulations, the FAA requires airlines to obtain an operating certificate
and operations specifications for the particular aircraft and types of
operations conducted by the carrier, all of which are subject to suspension
or revocation for cause.
The Company is subject to the jurisdiction of the Federal Communications
Commission regarding the use of its radio facilities. Local governments and
authorities in certain markets have adopted regulations governing various
aspects of aircraft operations, including noise abatement and curfews and use
of airport facilities. The Company believes that it is in compliance with all
such regulations.
The use of landing and take-off slots at Chicago O'Hare is heavily
regulated by the FAA. The FAA has the authority to revoke a carrier's slots
for failure to comply with FAA regulations.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below are the names, ages and positions of the executive
officers of the Company.
Great Lakes
- -----------
Name Age Title
---- --- -----
Douglas G. Voss . . . . . . . 42 Chief Executive Officer, President
and Chairman of the Board of Directors
A. L. Maxson . . . . . . . . 61 Executive Vice President Finance,
Chief Financial Officer and Director
Richard H. Fontaine . . . . . 56 Senior Vice President Marketing
Roberta L. Dircks . . . . . . 52 Vice President, Controller and
Chief Accounting Officer
Background of Executive Officers
--------------------------------
DOUGLAS G. VOSS. Mr. Voss co-founded Great Lakes in 1979 and has served
in the positions of Chief Executive Officer and director since the Company's
inception. Mr. Voss became a pilot in 1974 and holds both an Airline
Transport Pilot Certificate and an Airframe and Powerplant Mechanic
Certificate. Mr. Voss is a graduate of Colorado Aero Tech. In 1977 and 1978,
Mr. Voss was employed as a mechanic for a subsidiary of Beechcraft. He has
served Great Lakes in a number of operational positions, including Director
of Maintenance and Director of Operations.
A. L. MAXSON. Mr. Maxson became the Company's Chief Financial Officer
and a director in December 1993 after serving the Company in a consulting
capacity for several months. Mr. Maxson began his career in the aviation
industry in 1966 when he joined Southern Airways, Inc. as its Controller and
was made Chief Financial Officer shortly thereafter. Southern Airways, Inc.
was ultimately merged with North Central Airlines Inc. to create Republic
Airlines Inc., where Mr. Maxson also served as Chief Financial Officer. Mr.
Maxson became Vice President Financial Planning for Northwest Airlines, Inc.
upon that company's acquisition of Republic Airlines, Inc. in 1986. Mr.
Maxson remained with Northwest Airlines, Inc. until 1991, and was
self-employed as a financial consultant during the period from 1991 to
December of 1993. Mr. Maxson is a Director of Aero Systems Engineering, Inc.
RICHARD H. FONTAINE. Mr. Fontaine rejoined Great Lakes in his present
position on September 25, 1995. He previously had held the positions at
Great Lakes of President and Chief Operating Officer from 1991 to 1993 and
Executive Vice President and Chief Operating Officer from 1988 to 1991. In
the interim he was employed by GP Express Airlines ("GP Express") as
Executive Vice President and President. Previously he had been at Alliance
Airlines as Executive Vice President from 1986 to 1988, Simmons Airlines as
Senior Vice President of Planning in 1985 and 1986, Mississippi Valley
Airlines as Vice President from 1982 to 1985 and United Airlines in various
positions from 1967 to 1982.
11
ROBERTA L. DIRCKS. Ms. Dircks joined Great Lakes in her present
position in August 1994. She was Vice President and Controller at Gage
Marketing Group from August 1992 to August 1994 at which time she joined
Great Lakes. Ms. Dircks was Vice President, Chief Financial Officer and
Secretary for Vital Heart Systems from December 1991 to August 1992. She
served as Deputy State Auditor for the State of Minnesota from April 1991 to
December 1991. Ms. Dircks held several positions with Northwest Airlines and
Republic Airlines from 1985 to 1991; most recently, she served as Staff Vice
President with responsibility for the cost analysis and control department of
Northwest Airlines. She is a Certified Public Accountant.
The officers of the Company are elected annually and serve at the
discretion of the Board of Directors.
INSURANCE
The Company carries the types and amounts of insurance required by the
DOT and customary in the regional airline industry, including coverage for
public liability, property damage, aircraft loss or damage, baggage and cargo
liability and workers' compensation. The United Express Agreements and the
Midway Connection Agreement require the Company to maintain certain specified
levels of insurance coverage. The Company believes that the insurance is
adequate as to amounts and risks covered. There can be no assurance, however,
that the limits of the Company's insurance will be sufficient to cover any
catastrophic loss.
ITEM 2. PROPERTIES
The Company leases gate and ramp facilities at 66 airports and leases
ticket counter space at the 64 locations where ticketing is handled by
Company personnel. Payments to airport authorities for ground facilities are
based on a number of factors, including the amount of space used and flight
volume. The Company also leases aircraft maintenance and hangar space at 18
of the locations it serves.
The Company leases approximately 15,000 square feet of space in Spencer,
Iowa for its administrative, flight operations and maintenance offices, in
addition to approximately 35,000 square feet of aircraft maintenance and
hangar space located adjacent thereto. As of April 1, 1997 the Company leased
an additional 32,000 square feet of space in Spencer for administration and
maintenance shops. For the Midway Connection operation, the Company leases
approximately 23,000 square feet of space in Raleigh, North Carolina for its
administrative, flight operations, maintenance offices, and aircraft
maintenance and hanger space. In addition, the Company leases approximately
8,400 square feet of office space in Bloomington, Minnesota for accounting
and administrative functions. The Company believes that it has adequate
facilities for the conduct of its current and planned operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit arising from the collision of a
small aircraft with one of the Company's Beechcraft 1900 aircraft in Quincy,
Illinois on November 19, 1996. The collision occurred at the intersection of
two runways as the Company's aircraft was landing, and resulted in the death
of all ten passengers and the two crew members. The Company's insurance
carrier is providing for the Company's defense in the lawsuit and the Company
believes that all claims arising from the accident will be adequately covered
by insurance.
The Company is not currently a party to any other material pending legal
proceedings. From time to time the Company may become involved in routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING FOURTH
QUARTER OF FISCAL YEAR
There were no matters submitted to a vote of the Company's shareholders
during the three-month period ended December 31, 1996.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded under the symbol "GLUX" on the
NASDAQ National Market System. The Company's Common Stock began trading on
January 19, 1994, the date of its initial public offering. The initial
public offering price of the Company's Common Stock was $11.00 per share.
The following table sets forth the range of high and low sale prices for
the Company's Common Stock and the dividends per share for each of the fiscal
quarters since the Company's Common Stock began trading. Quotations for such
periods are as reported by NASDAQ for National Market System issues.
Stock Quotations
- ----------------
1996
High Low
----- -----
First quarter $4.20 $3.50
Second quarter 6.75 3.50
Third quarter 5.38 2.75
Fourth quarter 4.13 1.63
1995
High Low
----- -----
First quarter $5.38 $3.00
Second quarter 6.50 3.75
Third quarter 7.38 5.38
Fourth quarter 6.00 3.00
As of March 31, 1997, the Company had approximately 1,800 holders of
record of its Common Stock.
The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A., 161 North Concord Exchange, South St. Paul, Minnesota,
55075-0738, telephone: (612) 450-4064.
The Company has not paid any dividends on its Common Stock since its
initial public offering in January 1994 and expects that for the foreseeable
future it will follow a policy of retaining earnings in order to finance the
continued development of its business. Payment of dividends is within the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements and operating and financial condition of the
Company, among other factors.
13
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share and selected operating data)
The following consolidated statement of earnings and consolidated
balance sheet data as of and for each of the years in the five-year period
ended December 31, 1996 are derived from the Company's consolidated financial
statements. The financial statements for the years ended December 31, 1996,
1995, 1994, 1993 and 1992 have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated financial statements as of
December 31, 1996 and 1995 and for each of the years in the three-year
period ended December 31, 1996 and the report thereon are included elsewhere
in this Form 10-K. The following selected financial data should be read in
conjunction with and are qualified in their entirety by the consolidated
Financial Statements and the notes thereto included elsewhere in this Form
10-K.
Year Ended December 31
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
STATEMENTS OF EARNINGS DATA:
Passenger and public service revenues $107,528 $ 81,215 $67,784 $58,000 $39,501
Other revenues 2,142 2,981 2,224 2,370 2,722
-------- -------- ------- ------- -------
Total operating revenues 109,670 84,196 70,008 60,370 42,223
-------- -------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits 27,801 21,407 16,157 11,958 8,863
Aircraft fuel 19,377 14,181 12,123 9,879 7,094
Aircraft maintenance materials and repairs 13,248 9,229 8,612 6,631 3,600
Commissions 7,704 6,211 5,340 4,412 3,147
Depreciation and amortization 5,634 6,029 4,852 3,562 3,022
Aircraft rental 11,643 5,213 1,151 458 122
Other rentals and landing fees 6,794 5,370 3,416 2,861 2,015
Other operating expense 25,871 17,315 13,157 10,921 7,008
-------- -------- ------- ------- -------
Total operating expenses 118,072 84,955 64,808 50,682 34,871
-------- -------- ------- ------- -------
Operating income (loss) (8,402) (759) 5,200 9,688 7,352
Interest expense, net (5,875) (7,282) (5,370) (6,266) (6,549)
Gain on sale of slots -- 3,850 -- -- --
-------- -------- ------- ------- -------
Income (loss) before income tax expense (14,277) (4,191) (170) 3,422 803
Provision (benefit) for income taxes (1,454) (1,503) ( 65) 1,300 305
-------- -------- ------- ------- -------
Net income (loss) before extraordinary item (12,823) (2,688) (105) 2,122 498
Extraordinary item:
Gain on extinguishment of debt,
net of income taxes of $312,000 -- -- 509 -- --
-------- -------- ------- ------- -------
Net income (loss) $(12,823) $ (2,688) $ 404 $ 2,122 $ 498
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Net income (loss) per share $ (1.69) $ (0.35) $ 0.05 $ 0.45 $ 0.11
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Average number of common shares outstanding 7,585 7,579 7,365 4,700 4,700
14
Year Ended December 31
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
SELECTED OPERATING DATA:
Available seat miles (000s)(1) 678,304 566,290 477,602 369,545 260,557
Revenue passengers carried 1,012,965 805,190 663,627 611,528 395,341
Revenue passenger miles (000s)(2) 299,607 248,625 213,034 181,580 118,876
Departures flown 165,972 147,748 133,493 106,423 80,858
Passenger load factor (3) 44.2% 43.9% 44.6% 49.1% 45.6%
Break-even passenger load factor (4) 51.5% 49.5% 44.7% 41.5% 38.4%
Average yield per revenue passenger mile (5) 34.7CENTS 31.6CENTS 30.5CENTS 30.9CENTS 33.2CENTS
Operating cost per available seat mile (6) 17.4CENTS 15.0CENTS 13.6CENTS 13.7CENTS 13.3CENTS
Average passenger fare (7) $ 102.69 $ 97.58 $ 97.99 $ 91.87 $ 95.83
Average passenger trip length (miles) (8) 296 309 321 297 301
Aircraft in service (end of period) 54 50 41 34 27
Destinations served (end of period) 86 73 55 47 42
BALANCE SHEET DATA:
Working capital (deficit) $ 603 $ 12,138 $ 10,615 $ (629) $ (392)
Total assets 119,109 140,715 141,934 103,316 80,367
Long-term debt, net of current maturities 65,986 87,478 89,393 83,896 68,000
Stockholders' equity 18,740 31,540 34,202 4,962 2,841
(1) "Available seat miles" or "ASMs" represent the number of seats available
for passengers in scheduled flights multiplied by the number of scheduled
miles those seats are flown.
(2) "Revenue passenger miles" or "RPMs" represent the number of miles flown by
revenue passengers.
(3) "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles by
available seat miles.
(4) "Break-even passenger load factor" represents the percentage of available
seat miles which must be flown by revenue passengers at the average yield
(net of commissions and fees) for airline operations to break even.
(5) "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.
(6) "Operating cost per available seat mile" represents operating expenses
divided by available seat miles.
(7) "Average passenger fare" represents passenger revenue divided by the
number of revenue passengers carried.
(8) "Average passenger trip length" represents revenue passenger miles divided
by the number of revenue passengers carried.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 December 31, 1996, the
Company served 86 destinations in twenty states with 527 scheduled departures
each weekday.
The Company has suffered significant losses in 1996 and 1995 and negative
operating cash flow in 1996, 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. See "Liquidity and Capital Resources".
In prior reports the Company has noted that it incurred an economic loss
of approximately $1.9 million during the period of August 1995 to February
1996 as a result of extraordinary FAA mandated inspections of Brasilia
propeller blades. The Company has resolved its claims related to these
losses at a substantially lesser amount.
RESULTS OF OPERATIONS
COMPARISON OF 1996 TO 1995
The following table sets forth certain financial and operating
information regarding the Company for the last three fiscal years:
16
------------------------------------------------------------------------------------
For the years ended December 31 (000's)
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
Cents % % Cents
per Increase Cents Increase per
Amount ASM from 1995 Amount per ASM from 1994 Amount ASM
-------- --------- ---- ------- --------- ---- ------- ----------
Total operating revenues $109,670 - 30.3% $84,196 - 20.3% $70,008 -
-------- --------- ---- ------- --------- ---- ------- ----------
Salaries, wages and benefits 27,801 4.1 CENTS 29.9 21,407 3.8 CENTS 32.5 16,157 3.4 CENTS
Aircraft fuel 19,377 2.9 36.7 14,181 2.5 17.0 12,123 2.5
Aircraft maintenance
materials and repairs 13,248 2.0 43.6 9,229 1.6 7.2 8,612 1.8
Commissions 7,704 1.1 24.0 6,211 1.1 16.3 5,340 1.1
Depreciation and
amortization 5,634 0.8 (6.6) 6,029 1.1 24.3 4,852 1.0
Aircraft rental 11,643 1.7 123.3 5,213 0.9 352.8 1,151 0.3
Other rentals and landing fees 6,794 1.0 26.5 5,370 0.9 57.2 3,416 0.7
Other operating expense 25,871 3.8 49.4 17,315 3.1 31.6 13,157 2.8
-------- --------- ---- ------- --------- ---- ------- ----------
Total operating expenses $118,072 17.4 39.% $84,954 15.0 CENTS 31.1% $64,808 13.6 CENTS
-------- --------- ---- ------- --------- ---- ------- ----------
Operating income (loss) $ (8,402) - (1008.4)% $ (758) - (114.6)% $ 5,200 -
-------- --------- ---- ------- --------- ---- ------- ----------
-------- --------- ---- ------- --------- ---- ------- ----------
Interest $ 5,875 0.9 CENTS (19.3)% $ 7,282 1.3 CENTS 35.6% $ 5,370 1.1 CENTS
-------- --------- ---- ------- --------- ---- ------- ----------
-------- --------- ---- ------- --------- ---- ------- ----------
Aircraft Expense
Depreciation and
Amortization $ 5,634 0.8CENTS (6.6)% $ 6,029 1.1 CENTS 24.3% $ 4,852 1.0 CENTS
Aircraft Rental 11,643 1.7 123.3 5,213 0.9 352.8 1,151 0.3
Interest expense, net 5,875 0.9 (19.3) 7,282 1.3 35.6 5,370 1.1
-------- --------- ---- ------- --------- ---- ------- ----------
$ 23,152 3.4CENTS 25.0% $18,524 3.3 CENTS 62.9% $11,373 2.4 CENTS
-------- --------- ---- ------- --------- ---- ------- ----------
-------- --------- ---- ------- --------- ---- ------- ----------
Change Change
1996 from 1995 1995 from 1994 1994
-----------------------------------------------------
Available seat miles (000's) 678,304 19.8% 566,290 18.6% 477,602
Revenue passenger miles (000's) 299,607 20.5% 248,625 16.7% 213,034
Passenger load factor 44.2% 0.3 pts 43.9% (0.7) pts 44.6%
Average yield per revenue
passenger mile 34.7 CENTS 3.1 CENTS 31.6 CENTS 1.1 CENTS 30.5 CENTS
OPERATING REVENUES: Operating revenues increased 30.3% to $109.6
million in 1996 from $84.2 million during 1995. The increase in operating
revenues resulted from the increase in revenue passenger miles flown by 20.5%
to 299.6 million in 1996 from 248.6 million during 1995 and an increase of
9.8% in yield per revenue passenger mile which increased from 31.6 cents in
1995 to 34.7 cents in 1996. This coincided with a 19.8% increase in capacity
to 678.3 million ASMs in 1996 from 566.3 million ASMs during 1995. The
addition of Midway Connection and Arizona service for the entire year
accounted for 54.6% and 26.8%, respectively, of the increase in operating
revenues. The increase in passenger yield is due primarily to the expiration
of the 10% transportation tax without a corresponding reduction in ticket
prices and increases in certain fares. Midway Connection's full year
operation increased the overall average as a result of its higher yield
produced from its passengers with shorter trips.
OPERATING EXPENSES: Total operating expenses increased to $118.1
million, or 17.4 cents per ASM, in 1996 from 85.0 million, or 15.0 cents per
ASM in 1995. In part, the increase in cost per ASM is due to decreased
utilization of the Embraer 120 aircraft because of two airworthiness
directives requiring frequent propeller inspections and lack of
17
replacement propeller blades during 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 4.1 cents per ASM
during 1996, from 3.8 cents per ASM during 1995, due to additional flight
attendant wages and additional pilot guarantees and training costs incurred
related to expansion of operations utilizing Brasilia aircraft, and FAA
Regulations Part 121 training. Customer service salaries increased to
facilitate the Company's expansion into new markets. In addition, mechanic
wages increased because of the previously discussed Brasilia propeller
inspections and replacement and increases in the number of mechanics to
build staff to required levels.
Aircraft fuel expense per ASM increased to 2.9 cents in 1996 from 2.5
cents in 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.
Aircraft maintenance and repairs expense increased to 2.0 cents per ASM
during 1996, from 1.6 cents per ASM in 1995, due to higher engine overhaul
expense and increased repairs and contract labor for the initial on-going
periodic maintenance checks on the Brasilia.
Aircraft expense increased to 3.4 cents per ASM during 1996, from 3.3
cents per ASM in 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 Raytheon and
reacquired under reduced leases offering more flexible terms for early
termination. Interest expense also decreased in 1996 from 1995, as a result
of the decrease in the prime interest rate to which a substantial portion of
debt is tied.
Other rentals and landing fee expenses increased to 1.0 cents per ASM
during 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, along with
increased administrative facility costs necessary for the Company's expansion
into new markets.
Other operating expenses increased to 3.8 cents per ASM in 1996 from 3.1
cents in 1995, reflecting higher passenger booking fees due to increases in
rates and increased bookings for the Midway Connection and higher credit card
expenses for the Midway Connection and Great Lakes Airlines operations.
These expenses were also increased due to flight cancellations resulting from
severe weather conditions in upper Midwest and to unanticipated turnover in
flight personnel due to major carrier hiring. During the fourth quarter of
1996, the Company accelerated its program to replace its Beechcraft 1900C
aircraft with 1900D aircraft. As a consequence, the Company believes it has
excess Beechcraft 1900C inventory and has made an adjustment for $1.5 million
dollars to reduce the inventory to estimated net realizable value. These
increases were partially offset by lower United program fees due to increased
flying under the Company's own code and insurance proceeds from the November
accident.
PROVISION (BENEFIT) FOR INCOME TAXES: The Company's effective rate was
10.2 percent in 1996 and 35.9 percent in 1995. In recognition of the
Company's financial results of recent periods the Company has elected to
cease recognizing future tax benefits until it is reasonably assured that
such benefits would be realized.
COMPARISON OF 1995 TO 1994
OPERATING REVENUES: Operating revenues increased 20.3% to $84.2 million
in 1995 from $70.0 million during 1994. The increase in operating revenues
resulted from the increase in revenue passenger miles flown by 16.7% to 248.6
million in 1995 from 213.0 million during 1994 in conjunction with a 18.6%
increase in capacity to 566.3 million ASMs in 1995 from 477.6 million ASMs
during 1994. The increase in passenger yield is due to moving service from
lower yield markets to higher yield markets and due to a slight increase in
prices in the general market and in some specific company markets. The
decline in load factor is due primarily to increased competition in existing
markets at a time when the Company was adding capacity to expand service to
new and existing routes for the United Express systems, mainly in the first
two quarters of 1995. See "Business-Competition." In addition, the
reduction in load factor is due to the introduction of Midway Connection
flying where the Company experienced a 23.7% load
18
factor from October through December 1995. The average load factor in the
first quarter of 1996 for Midway Connection was 37.2%.
OPERATING EXPENSES: Total operating expenses increased to $85.0 million,
or 15.0 cents per ASM, in 1995 from 64.8 million, or 13.6 cents per ASM in
1994. In part, the increase in cost per ASM is due to decreased utilization
of the Embraer 120 aircraft because of two airworthiness directives requiring
frequent propeller inspections and lack of replacement propeller blades. 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 3.8 cents per ASM
during 1995, from 3.4 cents per ASM during 1994, due to additional flight
attendant wages and additional pilot guarantees and training costs incurred
related to expansion of operations utilizing Brasilia aircraft, and customer
service salaries to facilitate the Company's expansion into new markets.
Aircraft maintenance, materials and repairs expense decreased to 1.6
cents per ASM during 1995, from 1.8 cents per ASM, in 1994, due to a lower
rate of engine overhauls in 1995. At December 31, 1995, the average age of
the aircraft in the Company's fleet was four years.
Depreciation and amortization increased to 1.1 cents per ASM in 1995 from
1.0 cents per ASM in 1994, while aircraft rental expense increased to 0.9
cents per ASM during 1995, from 0.3 cents per ASM in 1994, due to the
increasing number of aircraft leased, along with the conversion of five
capital leases to operating leases in June 1995.
Other rentals and landing fee expenses increased to 0.9 cents per ASM
during 1995, from 0.7 cents per ASM in 1994, as a result of higher facility
and landing fee costs at the new Denver International Airport, along with
increased administrative facility costs necessary for the Company's expansion
into new markets.
Other operating expenses increased to 3.1 cents per ASM in 1995 from 2.8
cents in 1994, reflecting higher passenger booking and United program fee
rates and increased hull insurance costs, as a result of fleet additions,
along with additional hotels and transportation for repositioning of pilots
and training costs associated with the increase in the number of aircraft.
There were also increased passenger food and supply costs associated with
increased Embraer 120 flights.
INTEREST EXPENSE: Interest expense increased to 1.3 cents per ASM, in
1995 from 1.1 cents per ASM, during 1994, due to increased debt associated
with additional aircraft purchased which was partially offset by a reduction
in capitalized leases, as well as the increase in the prime interest rate to
which a substantial portion of debt is tied. All long-term debt outstanding
at December 31, 1995 was with Raytheon Acceptance Corporation, Inc. and CIT
Group/Equipment Financing, Inc., at interest rates ranging from 6.6 percent
to 9.75 percent.
PROVISION (BENEFIT) FOR INCOME TAXES: The Company's effective rate
was 35.9 percent in 1995 and 38.0 percent in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The major uses of working capital in 1996 were the net loss of $12.8
million and increase of inventory of $2.1 million offset by non cash charges
for depreciation of $5.6 million and the increase of accounts payable and
accrued liabilities of $5.4 million, the latter primarily from extending the
period of time before invoices were paid. Inventory increased by $2.1
million due to increased levels of Embraer 120 and Beechcraft 1900D parts.
The increase in inventory was offset by an increase of $1.5 million in a
valuation allowance to reduce the inventory to net realizable value.
Further mitigating the above uses of cash flows in operating activities
was the reduction in accounts receivable resulting from the advance
collection of $2.2 million owed by United. The Company's working capital
decreased to $.6 million at December 31, 1996 from $12.1 million at December 31,
1995. Cash decreased $.1 million to $6.7 million at December 31, 1996
from $6.8 million at December 31, 1995.
The Company has suffered significant losses in 1996 and 1995 and
negative operating cash flow in 1996, has been unable to meet significant
current and long-term financial obligations, and has defaulted on certain
financial and operating
19
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 42 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 $5 million
loan bears interest at 8.25%. Interest on this loan is payable monthly and
all advanced principle is to be repaid by March 31, 1997. 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
negotiating 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 2 of these aircraft was in default due to violation
of a financial covenant. During 1997, all of the other four Brasilia
Agreements went into default due to non-payment of scheduled amounts due.
One of these Brasilia Agreements has 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 two of the
Brasilia Agreements under which the Company leases a total of 4 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.
On October 26, 1996 the Company entered into an agreement with a vendor
in which $1,767,231 of outstanding invoices were converted into a short-term
promissory note bearing interest at prime plus 1%.
The Company had a line of credit arrangement with a bank totaling $5
million at December 31, 1995. During 1995 the average outstanding borrowing
was $780,000 with an average rate of borrowings of 9.4%. The maximum
borrowing for 1995 was $4.15 million. There were no borrowings outstanding
under this arrangement at December 31, 1995.
Capital expenditures related to aircraft and equipment totaled $2.6
million in 1996, $18.2 million during 1995, and $33.4 million in 1994.
Payment of debt exceeded borrowings by $14.2 million in 1996. Long-term
borrowings exceeded principal repayments by $10.2 million in 1995, and
$7.0 million in 1994.
Long-term debt, net of current maturities of $5.1 million, totaled $66.0
million at December 31, 1996 compared to $87.5 million net of current
maturities of $4.8 million, at December 31, 1995, and $89.4 million, net of
current maturities of $5.4 million, at December 31, 1994. As of December 31,
1996, the term notes bear interest at rates ranging from 6.6 to 9.0 percent
and are payable monthly or quarterly through June, 2009. All long-term debt
as of
20
December 31, 1996, relates to the acquisition of aircraft and funding of
operating losses and all financing was provided either by Raytheon or CIT
Group/Equipment Financing, Inc. and is collateralized by 24 related aircraft.
There are no financial covenants related to such long-term debt.
During 1996, the Company has taken delivery of ten new Beechcraft 1900D
aircraft. All of these aircraft have been financed by the manufacturer under
14-1/2 year operating leases.
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. As a part of the Embraer Agreement, the
Company was granted incentives, the benefit of which is amortized over the
lease term. In July 1996, the Embraer Agreement was terminated.
SEASONALITY
Since commencing operations, the Company has traditionally experienced
lower passenger load factors during the months of November through April.
This seasonality can be attributed primarily to relatively difficult winter
weather operating conditions in the Company's principal area of operations
and fewer vacation and other discretionary trips and reduced business travel
during these months. These seasonal factors have generally resulted in
reduced revenues, profitability and cash flow for the Company during these
months.
FREQUENT FLYER PROGRAM
On the Company's United Express and Midway Connection flights passengers
may earn miles in United's "Mileage Plus" and American Airlines "AAdvantage"
frequent flyer programs, and passengers may use mileage accumulated in these
programs to obtain discounted or free tickets for trips that might include a
flight segment on one of the Company's flights. No revenues are earned or
collected on free tickets awarded to passengers under the programs. Awards
earned under the frequent flyers programs have an expiration date three years
from the date earned. The programs also contain certain restrictions,
including blackout dates and capacity controlled bookings which substantially
limit the use of awards on certain flights and during the busiest periods.
The Company continually monitors the number of free travel award reservations
on its flight segments to ensure that they are within the capacity
restrictions defined in the "Mileage Plus" and "AAdvantage" programs. The
Company's yield management program and related seat restrictions minimize the
number of revenue passengers that may be displaced on any individual flight
segment. To date, the Company has not experienced any material use of
"Mileage Plus" and "AAdvantage" awards to obtain travel on flights, and the
incremental cost to the Company attributable to the exercise of frequent
flyer awards (consisting primarily of a minimal amount of additional gate and
passenger service expenses) has not been material. Awards used on the
Company's flights during the year ended December 31, 1996 represented
approximately 2.6% percent of the Company's total passengers. The Company
expects that this percentage will remain approximately the same for the
foreseeable future. Based on this low percentage, on the availability on
many of the Company's flights of otherwise vacant seats, and on the programs'
restrictions, the Company believes that the displacement, if any, of revenue
passengers by users of "Mileage Plus" and "AAdvantage" awards will not become
material. The Company continually monitors the number of awards redeemed and
will accrue the incremental costs associated with the "Mileage Plus" and
"AAdvantage" programs if they become material.
EFFECTS OF INFLATION
Inflation has not had a material effect on the Company's operations in
the past five years.
21
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
CAUTIONARY FACTORS
The Company wishes to caution stockholders and prospective investors that
the following important factors, among other identified in this Annual Report
on Form 10-K, could affect the Company's actual operating results, and that
such results could differ materially from those expressed in any
forward-looking statements made by the Company. The statements under this
caption are intended to serve as cautionary statements within the meaning of
the Private Securities Litigation Reform Act of 1995. The following
information is not intended to limit in any way the characterization of other
statements or information under other captions as cautionary statements for
such purpose. The order in which such factors appear below should not be
construed to indicate their relative importance or priority.
ADDITIONAL FINANCING REQUIREMENTS
The Company's ability to maintain operations at current levels is
materially dependent on its ability to obtain substantial additional
financing. 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 fleet types. The difficult environment in which the
Company competes will continue into the foreseeable future. While the
Company is making efforts to achieve profitability, primarily through revised
scheduling, including reallocation of Brasilia assets from the Midway system
to the United Express system, continuing losses have resulted in significant
liquidity pressures. The Company has significant financial obligations,
including interest bearing debt and capital lease obligations. The Company's
long-term debt and lease obligations require significant periodic cash
payments and the Company has not made these payments on a timely basis. The
Company has not obtained commitments for additional capital and will be
required to rely on increases in financial performance to supply funds
necessary for debt service and working capital requirements. There can be no
assurance that the Company's financial performance will improve sufficiently
to provide cash needed for operations.
DEPENDENCE ON RELATIONSHIP WITH UNITED
The Company generated approximately 79% of its revenues for the year
ended December 31, 1996 under the United Express Agreements described under
"Business - The Company's Regional Identities". The United Express
Agreements require the Company to comply with specific operating performance
standards and, with certain limited exceptions, restrict the ability of the
Company to merge with another company or dispose of its assets or aircraft
without first offering United a right of first refusal to acquire the Company
or such assets or aircraft. The United Express Agreements also prohibit the
Company from entering into similar arrangements with other carriers in
Chicago, Denver, Minneapolis-St. Paul, Detroit, Des Moines or Omaha without
United's prior approval. The United Express Agreements require the Company
to obtain United's prior consent to operate as a United Express carrier in
any market, except for certain pre-approved markets connecting with
Minneapolis-St. Paul or Detroit. The United Express Agreements terminate in
April 1997 and are subject to termination upon the failure of the Company to
provide specified levels of service or performance or upon other specified
events. A failure to renew the United Express Agreements, any termination or
materially adverse modification of the agreements, or any substantial
decrease in the number of routes served by the Company under the agreements
would have a materially adverse effect on the Company's business. As a
result of the United Express Agreements, the Company's business is sensitive
to events and risks affecting United. If adverse events affect United's
business, the Company's business will also be adversely affected.
22
UNITED OPTION TO PURCHASE O'HARE SLOTS
United holds an option to purchase or lease all or a portion of the 54
landing and takeoff slots which the Company holds at the Chicago O'Hare
airport. United may acquire these slots for the lesser of their fair market
value or $26.2 million. United's acquisition of the slots is subject to the
approval of DOT and the assumption by United of Essential Air Service
responsibility to certain communities. In the event United acquires these
slots, the Company has the right to lease the slots from United for a period
of only one year thereafter. In the event United exercises this option and
declines to extend the term of the lease-back to the Company, the Company's
operations at the Chicago O'Hare airport would be adversely affected.
EFFECT OF GENERAL ECONOMIC CONDITIONS
The airline industry is significantly affected by general economic
conditions. During recent recessions, most airlines reduced fares in an
effort to increase traffic. Economic and competitive conditions in the
airline industry have contributed to a number of bankruptcies and
liquidations among airlines. A worsening of current economic conditions, or
an extended period of recession nationally or regionally, would have a
materially adverse effect on the Company's operations.
FUEL COSTS
Fuel is a major component of operating expense for all airlines. The
Company's cost of fuel varies directly with market conditions, and the
Company has no guaranteed long-term sources of supply. The Company intends
generally to follow industry trends by raising fares in response to
significant fuel price increases. However, the Company's ability to pass on
increased fuel costs through fare increases may be limited by economic and
competitive conditions. Accordingly, a reduction in the availability or an
increase in the price of fuel could have a materially adverse effect on the
Company's cash flow from operations and profitability.
SEASONALITY
Historically, the Company has experienced lower passenger load factors
during the months of November through April. This seasonality can be
attributed primarily to relatively difficult winter weather operating
conditions in the Company's principal area of operations, resulting in fewer
vacation and other discretionary trips and reduced business travel during
these months. These seasonal factors have generally resulted in reduced
revenues, increased operating losses and reduced cash flow for the Company
during these months.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Voss beneficially owns approximately 62% of the outstanding shares of
the Company's common stock. On October 22, 1996, Mr. Voss transferred
approximately one-half of the shares of the Company's common stock owned by
him, to his now ex-spouse, Ms. Gayle R. Voss, pursuant to the Marital
Dissolution Stipulation and Property Settlement. Ms. Voss has granted Mr.
Voss an Irrevocable Proxy to vote such securities until June 28, 2010. In
addition, the terms of the United Express Agreements require that Mr. Voss
control at least 51% of the Company's outstanding voting stock. Accordingly,
Mr. Voss will continue to be in a position to control the management and
affairs of the Company.
NO ASSURANCE AS TO LIQUIDITY ON THE NATIONAL MARKET SYSTEM
The Company's common stock is currently listed on The Nasdaq National
Market System. There can be no assurance that the Company's common stock
will be actively traded on such market or that it will continue to be listed
on such market.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company as of December 31, 1996
and 1995 together with Report of Independent Public Accountants are included
in this Form 10-K on the pages indicated below.
PAGE
Report of Independent Public Accountants................................... 25
Consolidated Balance Sheets as of December 31, 1996 and 1995............... 26
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994........................................ 27
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994........................................ 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994........................................ 29
Notes to Consolidated Financial Statements................................. 30
Supplemental Schedule to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts......................... 41
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted as
not required, not applicable or the information required has been included
elsewhere in the financial statements and related notes.
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Great Lakes Aviation, Ltd.:
We have audited the accompanying consolidated balance sheets of Great Lakes
Aviation, Ltd. (an Iowa corporation) and Subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great Lakes Aviation, Ltd.
and subsidiary as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered significant losses in 1996 and
1995 and negative operating cash flow in 1996, has been unable to meet its
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. Management's plans
in regard to these matters are also described in Note 2. 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule to the
consolidated financial statements is presented for the purposes of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 4, 1997
25
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Balance Sheets
As of December 31
ASSETS 1996 1995
------------ ------------
CURRENT ASSETS:
Cash $ 6,676,333 $ 6,784,516
Accounts receivable 7,273,766 8,480,199
Inventories, net (Note 3) 12,668,615 10,219,543
Prepaid expenses and other current assets 2,253,700 1,202,481
Deposits on flight equipment - 352,772
------------ ------------
Total current assets 28,872,414 27,039,511
------------ ------------
PROPERTY AND EQUIPMENT:
Flight equipment 98,281,251 124,665,915
Other property and equipment 3,863,011 3,369,788
Less - Accumulated depreciation and amortization (14,901,196) (16,005,052)
------------ ------------
Total property and equipment 87,243,066 112,030,651
OTHER ASSETS 2,493,869 1,644,530
------------ ------------
$118,609,349 $140,714,692
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable and current maturities of
long-term debt $ 11,667,911 $ 4,820,000
Accounts payable 13,089,639 7,154,558
Accrued liabilities and unearned revenue 3,512,073 2,926,746
------------ ------------
Total current liabilities 28,269,623 14,901,304
------------ ------------
LONG-TERM DEBT, net of current maturities 65,985,943 87,477,663
DEFERRED CREDITS 5,614,116 5,341,863
DEFERRED INCOME TAXES - 1,453,640
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 7 and 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 7,586,326 and 7,580,723 shares
issued and outstanding at December 31, 1996
and 1995 75,863 75,807
Paid-in capital 28,919,765 28,897,202
Retained earnings (accumulated deficit) (10,255,961) 2,567,213
------------ ------------
Total stockholders' equity 18,739,667 31,540,222
------------ ------------
$118,609,349 $140,714,692
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
26
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended December 31
1996 1995 1994
------------ ----------- -----------
OPERATING REVENUES:
Passenger $104,016,017 $78,574,780 $65,034,718
Public service 3,512,156 2,639,857 2,749,025
Freight, charter and other 2,141,517 2,981,448 2,224,477
------------ ----------- -----------
Total operating revenues 109,669,690 84,196,085 70,008,220
------------ ----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 27,800,983 21,406,644 16,156,867
Aircraft fuel 19,377,128 14,180,745 12,123,355
Aircraft maintenance materials
and repairs 13,247,641 9,229,072 8,612,097
Commissions 7,704,342 6,211,491 5,340,364
Depreciation and amortization 5,633,535 6,029,464 4,851,934
Aircraft rental 11,643,163 5,212,603 1,150,980
Other rentals and landing fees 6,793,660 5,369,654 3,415,732
Other operating expense 25,871,443 17,314,726 13,156,911
------------ ----------- -----------
Total operating expenses 118,071,895 84,954,399 64,808,240
------------ ----------- -----------
Operating income (loss) (8,402,205) (758,314) 5,199,980
------------ ----------- -----------
INTEREST EXPENSE (5,874,609) (7,282,294) (5,370,115)
GAIN ON SALE OF SLOTS - 3,850,000 -
------------ ----------- -----------
Loss before income taxes (14,276,814) (4,190,608) (170,135)
BENEFIT FOR INCOME TAXES (1,453,640) (1,503,000) (65,000)
------------ ----------- -----------
Net Loss before
extraordinary item $(12,823,174) $(2,687,608) $ (105,135)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt,
net of income taxes of
$311,953 (Note 5) -- -- 508,976
------------ ----------- -----------
Net income (loss) $(12,823,174) $(2,687,608) $ 403,841
------------ ----------- -----------
------------ ----------- -----------
NET INCOME (LOSS) PER SHARE:
Before extraordinary item $ (1.69) $ (.35) $ (.02)
Extraordinary item - - .07
------------ ----------- -----------
Net income (loss) per share $ (1.69) $ (.35) $ .05
------------ ----------- -----------
------------ ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,585,405 7,578,779 7,365,447
------------ ----------- -----------
------------ ----------- -----------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
27
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Comon Stock
---------------------- Retained
Earnings
Paid-In (accumulated
Shares Amount Capital deficit) Total
---------- -------- ----------- ------------ ------------
BALANCE, December 31, 1993 4,700,000 $ 47,000 $ 64,342 $ 4,850,980 $ 4,962,322
Issuance of common stock 2,875,000 28,750 28,806,604 - 28,835,354
Net income - - - 403,841 403,841
---------- -------- ----------- ------------ ------------
BALANCE, December 31, 1994 7,575,000 75,750 28,870,946 5,254,821 34,201,517
Issuance of common stock 5,723 57 26,256 - 26,313
Net loss - - - (2,687,608) (2,687,608)
---------- -------- ----------- ------------ ------------
BALANCE, December 31, 1995 7,580,723 75,807 28,897,202 2,567,213 31,540,222
Issuance of common stock 5,603 56 22,563 - 22,619
Net loss - - - (12,823,174) (12,823,174)
---------- -------- ----------- ------------ ------------
BALANCE, December 31, 1996 7,586,326 $ 75,863 $28,919,765 $(10,255,961) $(18,739,667)
---------- -------- ----------- ------------ ------------
---------- -------- ----------- ------------ ------------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
28
GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31
1996 1995 1994
------------- ----------- ----------
OPERATING ACTIVITIES:
Net income (loss) $(12,823,174) $(2,687,608) $403,841
Adjustments to reconcile net income (loss) to net
cash provided by (used in)
operating activities-
Depreciation and amortization 5,633,535 6,029,464 4,851,934
Deferred income taxes (1,453,640) (1,503,000) 247,000
Extraordinary item, net of income taxes - - (508,976)
Change in current operating items:
Accounts receivable, net 1,206,433 (2,147,639) (1,908,578)
Inventories, net (2,098,072) (1,926,992) (3,120,818)
Prepaid expenses and other current assets 195,868 (365,328) 390,702
Deposits on flight equipment 352,772 2,869,228 (3,222,000)
Accounts payable and accru