UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-23224
GREAT LAKES AVIATION, LTD.
(Exact name of registrant as specified in its charter)
| Iowa | 42-1135319 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 1022 Airport Parkway, Cheyenne, WY | 82001 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (307) 432-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of April 30, 2004, 14,071,970 shares of Common Stock of the registrant were issued and outstanding.
FORM 10-Q
For the Quarterly Period Ended March 31, 2004
INDEX
| 1 | ||||
| 2 | ||||
| Item 1. |
2 | |||
| Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 10 | ||
| Item 3. |
19 | |||
| Item 4. |
19 | |||
| 19 | ||||
| Item 1. |
19 | |||
| Item 3. |
20 | |||
| Item 5. |
20 | |||
| Item 6. |
20 | |||
| 23 | ||||
i
Cautionary Statement Regarding Forward-Looking Statements
In accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Great Lakes Aviation, Ltd. (“Great Lakes” or the “Company”) notes that certain statements in this Quarterly Report on Form 10-Q and elsewhere are forward-looking and provide other than historical information. The Company’s management may also make oral, forward-looking statements from time to time. These forward-looking statements include, among others, statements concerning the Company’s general business strategies, financing decisions, and expectations for funding expenditures and operations in the future. The words, “believe,” “plan,” “continue,” “hope,” “estimate,” “project,” “intend,” “expect,” and similar expressions reflected in such forward-looking statements are based on reasonable assumptions, and none of the statements contained in this Quarterly Report on Form 10-Q or elsewhere should be relied upon as predictions of future events. Such statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise, and may be incapable of being realized. The risks and uncertainties that are inherent in these forward-looking statements could cause actual results to differ materially from those expressed in or implied by these statements.
As more fully described in this report, important factors that could cause results to differ materially from the expectations reflected in any forward-looking statements include:
| 1) | the Company’s dependence on its code-sharing relationships with United Air Lines, Inc. (“United Air Lines” or “United”), which is undergoing reorganization under the United States Bankruptcy Code, and Frontier Airlines, Inc. (“Frontier Airlines” or “Frontier”); |
| 2) | the outcome of United’s bankruptcy proceedings, including whether United amends or rejects its code share agreement with the Company; |
| 3) | the Company’s ability to either: |
| (i) | return to, and remain in compliance with the Company’s existing debt and lease obligations, including those debt and lease obligations that were restructured as of December 31, 2002, or |
| (ii) | re-negotiate the Company’s debt and lease obligations to a level that the Company can reasonably service, based upon the Company’s current and projected cash flows; |
| 4) | the effect of general economic conditions on business and leisure travel; |
| 5) | the incidence of domestic and international terrorism and military actions; |
| 6) | the level of passenger confidence in the safety of air travel; |
| 7) | the volatility of fuel costs; |
| 8) | seasonality of passenger traffic; |
| 9) | the continued receipt of Essential Air Service subsidies at currently contemplated rates; |
| 10) | the uncertainty concerning future insurance and security expenses; and |
| 11) | the possibility of increased competition from other air carriers (including United) and from ground transportation. |
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. Changes may occur after that date, and the Company does not undertake to update any forward-looking statements except as required by law in the normal course of its public disclosure practices.
1
PART 1 - FINANCIAL INFORMATION
GREAT LAKES AVIATION, LTD.
Balance Sheets
| March 31, 2004 (unaudited) |
December 31, 2003 |
|||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash |
$ | 1,418,123 | $ | 3,700,511 | ||||
| Accounts receivable, net of allowance of $160,000, at March 31, 2004 and December 31, 2003 |
5,160,893 | 6,148,793 | ||||||
| Inventories, net |
3,103,745 | 2,863,514 | ||||||
| Prepaid expenses and other current assets |
1,866,249 | 964,160 | ||||||
| Total current assets |
11,549,010 | 13,676,978 | ||||||
| Property and equipment: |
||||||||
| Flight equipment, including aircraft to be returned |
131,933,669 | 135,079,588 | ||||||
| Other property and equipment |
7,730,820 | 7,608,767 | ||||||
| Less accumulated depreciation and amortization |
(40,581,376 | ) | (39,715,272 | ) | ||||
| Total property and equipment |
99,083,113 | 102,973,083 | ||||||
| Other assets |
1,027,352 | 1,127,708 | ||||||
| Total assets |
$ | 111,659,475 | $ | 117,777,769 | ||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities: |
||||||||
| Notes payable and current maturities of long-term debt |
$ | 17,254,308 | $ | 16,369,997 | ||||
| Long-term debt classified as current |
94,363,461 | 98,557,635 | ||||||
| Accounts payable |
11,079,001 | 10,968,984 | ||||||
| Accrued liabilities and unearned revenue |
5,978,781 | 8,673,103 | ||||||
| Deferred lease payments |
7,205,657 | 7,721,004 | ||||||
| Total current liabilities |
135,881,208 | 142,290,723 | ||||||
| Long-term debt, net of current maturities |
289,172 | 336,100 | ||||||
| Deferred credits |
414,188 | 512,070 | ||||||
| Stockholders’ equity (deficit): |
||||||||
| Common stock, $0.01 par value. |
140,720 | 140,720 | ||||||
| Authorized: 50,000,000 shares |
||||||||
| Issued and outstanding: 14,071,970 at March 31, 2004 14,052,1 and at December 31, 2003 |
||||||||
| Paid-in capital |
33,468,644 | 33,468,644 | ||||||
| Accumulated deficit |
(58,534,457 | ) | (58,970,488 | ) | ||||
| Total stockholders’ equity (deficit) |
(24,925,093 | ) | (25,361,124 | ) | ||||
| Total liabilities and stockholders’ equity (deficit) |
$ | 111,659,475 | $ | 117,777,769 | ||||
See condensed notes to financial statements.
2
GREAT LAKES AVIATION, LTD.
Statements of Operations
For the Three Months Ended March 31,
(Unaudited)
| 2004 |
2003 |
|||||||
| Operating Revenues: |
||||||||
| Passenger |
$ | 12,607,044 | $ | 10,014,815 | ||||
| Public service |
5,199,296 | 5,846,929 | ||||||
| Freight, charter, and other |
280,781 | 863,953 | ||||||
| Total operating revenues |
18,087,121 | 16,725,697 | ||||||
| Operating expenses: |
||||||||
| Salaries, wages, and benefits |
5,815,523 | 6,193,660 | ||||||
| Aircraft fuel |
3,363,514 | 3,292,860 | ||||||
| Aircraft maintenance, materials, and repairs |
2,442,994 | 2,320,340 | ||||||
| Commissions |
60,889 | 63,483 | ||||||
| Depreciation and amortization |
1,724,980 | 2,033,623 | ||||||
| Aircraft rental |
625,357 | 705,889 | ||||||
| Other rentals and landing fees |
1,279,281 | 1,511,142 | ||||||
| Other operating expense |
4,021,535 | 3,939,262 | ||||||
| Total operating expenses |
19,334,073 | 20,060,259 | ||||||
| Operating income (loss) |
(1,246,952 | ) | (3,334,562 | ) | ||||
| Other income (expense): |
||||||||
| Interest expense, net |
(420,488 | ) | (583,265 | ) | ||||
| Net gain on disposal of assets |
43,924 | — | ||||||
| Gain on termination of aircraft lease |
709,988 | — | ||||||
| Gain on extinguishment of debt |
1,349,559 | — | ||||||
| Income (loss) before income taxes |
436,031 | (3,917,827 | ) | |||||
| Income tax expense |
— | — | ||||||
| Net income (loss) |
$ | 436,031 | $ | (3,917,827 | ) | |||
| Net income (loss) per share: |
||||||||
| Basic |
$ | 0.03 | $ | (0.28 | ) | |||
| Diluted |
$ | 0.03 | $ | (0.28 | ) | |||
| Average shares outstanding: |
||||||||
| Basic |
14,071,970 | 14,052,166 | ||||||
| Diluted |
14,079,397 | 14,052,166 | ||||||
See condensed notes to financial statements.
3
GREAT LAKES AVIATION, LTD.
Statements of Cash Flows
For the Three Months Ended March 31,
(Unaudited)
| 2004 |
2003 |
|||||||
| OPERATING ACTIVITIES: |
||||||||
| Net income (loss) |
$ | 436,031 | $ | (3,917,827 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities |
||||||||
| Depreciation and amortization |
1,724,979 | 2,033,623 | ||||||
| Non-cash loss on write-off of obsolete parts inventory |
78,918 | |||||||
| Non-cash net gain on disposition of assets |
(43,924 | ) | — | |||||
| Non-cash gain on termination of lease |
(709,988 | ) | — | |||||
| Non-cash gain on extinguishment of debt |
(1,349,559 | ) | — | |||||
| Change in current operating items: |
||||||||
| (Increase)/Decrease in accounts receivable |
987,900 | 1,656,354 | ||||||
| (Increase)/Decrease in inventories |
(240,231 | ) | 314,621 | |||||
| (Increase)/Decrease in prepaid expenses and other current assets |
(902,089 | ) | (24,969 | ) | ||||
| Increase/(Decrease) in accounts payable |
110,017 | — | ||||||
| Increase/(Decrease) in accrued liabilities and unearned revenue |
86,676 | 734,473 | ||||||
| Increase/(Decrease) in deferred lease payments |
207,263 | 312,560 | ||||||
| Net cash provided by operating activities |
385,993 | 1,108,835 | ||||||
| CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||
| Purchase of flight equipment and other property and equipment |
(370,003 | ) | — | |||||
| Decrease (increase) in other assets |
356 | (203,517 | ) | |||||
| Net cash flows used in investing activities |
(369,647 | ) | (203,517 | ) | ||||
| CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||
| Repayment of notes payable and long-term debt |
(2,298,734 | ) | (775,179 | ) | ||||
| Net cash used in financing activities |
(2,298,734 | ) | (775,179 | ) | ||||
| NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS |
(2,282,388 | ) | 130,139 | |||||
| Cash and Cash Equivalents: |
||||||||
| Beginning of period |
3,700,511 | 357,924 | ||||||
| End of period |
$ | 1,418,123 | $ | 488,063 | ||||
| Supplementary cash flow information: |
||||||||
| Cash paid during the period for interest |
$ | 880,964 | $ | 363,984 | ||||
| Non-cash transactions: |
||||||||
| Extinguishment of outstanding debt principal on aircraft returned to Raytheon |
$ | 3,294,923 | $ | — | ||||
| Conversion of accrued liability into long-term note payable |
$ | 2,250,000 | — | |||||
See condensed notes to financial statements.
4
GREAT LAKES AVIATION, LTD.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
General
The financial statements included herein have been prepared by Great Lakes Aviation, Ltd. (the “Company”), without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC. The information furnished in the Company’s financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such financial statements. The Company’s business is seasonal and, accordingly, interim results are not necessarily indicative of results for a full year. However, the Company believes that the disclosures in this report are adequate to make the information presented not misleading. The accompanying financial statements should be read in conjunction with the Company’s financial statements for the year ended December 31, 2003 and the notes that were included in the Company’s 2003 Annual Report on Form 10-K filed with the SEC.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates utilized by the Company include ticket revenue, government air service subsidies, depreciable lives, impairment and obsolescence, and lease termination costs. Actual results could differ from those estimates.
NOTE 1. Liquidity and Going Concern
In an audit opinion report dated March 10, 2004 on the Company’s financial statements for the fiscal year ended December 31, 2003, the Company’s independent auditors included an explanatory paragraph stating (i) that the Company suffered significant losses in the years ended December 31, 2002 and 2001, and (ii) that, as of December 31, 2003, the Company had liabilities in excess of assets. As a result, the Company’s independent auditors indicated in the explanatory paragraph that these matters raised substantial doubt about the Company’s ability to continue as a going concern.
During the quarter ended March 31, 2004, the Company was unable to generate sufficient cash flows to fully service the Company’s outstanding aircraft debt and lease obligations. As a result, as of March 31, 2004, the Company was in arrears with respect to almost all of the Company’s aircraft debt and lease obligations. Furthermore, the Company cannot determine with a high degree of confidence that, during the remainder of the Company’s fiscal year 2004, the Company will be able to generate sufficient cash flows in order to satisfy the outstanding arrearages or remain in compliance with the Company’s aircraft debt and lease agreements. In the event that the Company is unable to (i) satisfy the outstanding arrearages, negotiate terms for restructuring the arrearages, or obtain alternative debt and lease financing, and (ii) make payments on all debt and lease obligations in a timely manner, the Company is at risk that one or more of the Company’s debt obligations will be accelerated, thereby forcing the Company to either seek legal protection from its creditors or discontinue operations.
As of the date of this report, the Company continues to negotiate with the Company’s primary aircraft debt lender, Raytheon Aircraft Credit Corporation (“Raytheon”), regarding a potential further restructuring of the Company’s debt financing with Raytheon.
5
GREAT LAKES AVIATION, LTD.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
With respect to the Company’s outstanding aircraft lease obligations, the Company continues to engage in negotiations with the Company’s aircraft lessors regarding potential terms of repayment for those outstanding obligations.
The Company’s financial statements included in this Quarterly Report on Form 10-Q have been prepared under the assumption that the Company will continue as a going concern. The financial statements do not include any adjustments that might result if the Company were forced to discontinue operations.
NOTE 2. Aircraft