Attached files
file | filename |
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EX-32.1 - EX-32.1 - GREAT LAKES AVIATION LTD | d563648dex321.htm |
EX-31.1 - EX-31.1 - GREAT LAKES AVIATION LTD | d563648dex311.htm |
EX-32.2 - EX-32.2 - GREAT LAKES AVIATION LTD | d563648dex322.htm |
EX-31.2 - EX-31.2 - GREAT LAKES AVIATION LTD | d563648dex312.htm |
EXCEL - IDEA: XBRL DOCUMENT - GREAT LAKES AVIATION LTD | Financial_Report.xls |
Table of Contents
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 June 30, 2013
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) |
Registrants 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated Filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 9, 2013, 8,974,990 shares of Common Stock of the registrant were issued and outstanding.
Table of Contents
GREAT LAKES AVIATION, LTD.
FORM 10-Q
For the Quarterly Period Ended June 30, 2013
PART IFINANCIAL INFORMATION |
||||||
Item 1. |
FINANCIAL STATEMENTS | 2 | ||||
Item 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 11 | ||||
Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 21 | ||||
Item 4. |
CONTROLS AND PROCEDURES | 21 | ||||
Item 1. |
LEGAL PROCEEDINGS | 21 | ||||
Item 1A. |
RISK FACTORS | 21 | ||||
Item 6. |
EXHIBITS | 22 | ||||
23 | ||||||
E-1 |
Table of Contents
GREAT LAKES AVIATION, LTD.
Balance Sheets
(unaudited)
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Assets | ||||||||
Current assets: |
||||||||
Cash |
$ | 2,739,134 | $ | 2,887,634 | ||||
Accounts receivable and other receivables |
9,468,626 | 9,235,433 | ||||||
Inventories |
9,024,497 | 8,971,610 | ||||||
Prepaid expenses and other current assets |
2,713,849 | 2,634,839 | ||||||
Deferred income taxes |
3,573,024 | 3,573,024 | ||||||
|
|
|
|
|||||
Total current assets |
27,519,130 | 27,302,540 | ||||||
|
|
|
|
|||||
Property and equipment: |
||||||||
Flight equipment |
124,816,878 | 124,406,769 | ||||||
Other property and equipment |
10,549,754 | 10,498,439 | ||||||
Less accumulated depreciation and amortization |
(84,045,303 | ) | (81,123,534 | ) | ||||
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|
|
|
|||||
Total property and equipment |
51,321,329 | 53,781,674 | ||||||
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|
|
|||||
Other assets |
2,710,212 | 3,288,281 | ||||||
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|
|
|||||
Total assets |
$ | 81,550,671 | $ | 84,372,495 | ||||
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|
|
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Liabilities and Stockholders Equity | ||||||||
Current liabilities: |
||||||||
Notes payable and current maturities of long-term debt |
$ | 3,750,000 | $ | 3,500,000 | ||||
Accounts payable |
3,609,881 | 4,604,906 | ||||||
Accrued interest, unearned revenue and other liabilities |
4,798,906 | 4,306,980 | ||||||
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|
|
|||||
Total current liabilities |
12,158,787 | 12,411,886 | ||||||
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|
|
|||||
Long-term debt, net of current maturities |
22,173,333 | 22,673,333 | ||||||
Deferred income taxes |
9,270,636 | 10,226,538 | ||||||
|
|
|
|
|||||
Total liabilities |
43,602,756 | 45,311,757 | ||||||
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|
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Preferred stock; $0.01 par value; Authorized: 25,000,000 shares. No shares issued or outstanding |
| | ||||||
Common stock; $0.01 par value; Authorized: 50,000,000 shares. Issued and outstanding: 8,974,990 shares |
89,750 | 89,750 | ||||||
Paid-in capital |
31,494,609 | 31,494,609 | ||||||
Retained earnings |
6,363,556 | 7,476,379 | ||||||
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|
|
|
|||||
Total stockholders equity |
37,947,915 | 39,060,738 | ||||||
Commitments and contingencies |
||||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 81,550,671 | $ | 84,372,495 | ||||
|
|
|
|
See accompanying notes to the financial statements.
2
Table of Contents
GREAT LAKES AVIATION, LTD.
Statements of Income (Loss)
(Unaudited)
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Operating Revenues: |
||||||||||||||||
Passenger |
$ | 16,141,017 | $ | 21,480,343 | $ | 31,375,761 | $ | 39,406,083 | ||||||||
Public service |
14,401,325 | 14,534,788 | 28,551,362 | 27,821,672 | ||||||||||||
Freight, charter, and other |
81,732 | 87,457 | 188,285 | 232,234 | ||||||||||||
|
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|
|
|
|
|||||||||
Total operating revenues |
30,624,074 | 36,102,588 | 60,115,408 | 67,459,989 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Salaries, wages, and benefits |
8,201,511 | 8,378,358 | 17,010,083 | 16,462,072 | ||||||||||||
Aircraft fuel |
9,234,155 | 10,593,129 | 19,228,500 | 20,752,263 | ||||||||||||
Aircraft maintenance, materials, and repairs |
4,001,873 | 4,471,544 | 7,251,432 | 7,286,511 | ||||||||||||
Depreciation and amortization |
1,601,716 | 1,445,623 | 3,202,480 | 2,875,301 | ||||||||||||
Passenger aircraft rental |
| 150,000 | | 300,000 | ||||||||||||
Other rentals and landing fees |
1,812,898 | 1,829,711 | 3,799,634 | 3,685,766 | ||||||||||||
Other operating expenses |
4,428,486 | 5,324,282 | 9,285,400 | 10,593,052 | ||||||||||||
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|
|||||||||
Total operating expenses |
29,280,639 | 32,192,647 | 59,777,529 | 61,954,965 | ||||||||||||
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|
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|
|
|
|||||||||
Operating income |
1,343,435 | 3,909,941 | 337,879 | 5,505,024 | ||||||||||||
Other expense: |
||||||||||||||||
Interest expense, net of interest income of $553, $783, $1,015 and $1,192, respectively |
(1,097,947 | ) | (1,274,638 | ) | (2,203,238 | ) | (2,570,790 | ) | ||||||||
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Income (loss) before income taxes |
245,488 | 2,635,303 | (1,865,359 | ) | 2,934,234 | |||||||||||
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|
|
|
|
|
|
|||||||||
Income tax benefit (expense) |
(99,610 | ) | (1,098,462 | ) | 752,536 | (1,221,541 | ) | |||||||||
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Net income (loss) |
$ | 145,878 | $ | 1,536,841 | $ | (1,112,823 | ) | $ | 1,712,693 | |||||||
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Net income (loss) per share: |
||||||||||||||||
Basic |
$ | 0.02 | $ | 0.17 | $ | (0.12 | ) | $ | 0.19 | |||||||
Diluted |
$ | 0.02 | $ | 0.17 | $ | (0.12 | ) | $ | 0.19 | |||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
8,974,990 | 8,922,517 | 8,974,990 | 8,921,254 | ||||||||||||
Diluted |
8,974,990 | 9,061,512 | 8,974,990 | 9,042,915 |
See accompanying notes to the financial statements.
3
Table of Contents
GREAT LAKES AVIATION, LTD.
Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (1,112,823 | ) | $ | 1,712,693 | |||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
3,202,480 | 2,875,301 | ||||||
Loss on items beyond economic repair |
211,728 | 113,195 | ||||||
Amortization of debt issuance costs |
320,669 | 320,669 | ||||||
Deferred tax expense (benefit) |
(955,902 | ) | 989,597 | |||||
Change in current operating items: |
||||||||
Accounts receivable |
(233,193 | ) | (2,761,341 | ) | ||||
Inventories |
(52,887 | ) | (1,109,162 | ) | ||||
Prepaid expenses and other current assets |
(399,679 | ) | (575,764 | ) | ||||
Maintenance deposits |
| (338,968 | ) | |||||
Other assets |
578,069 | 119,966 | ||||||
Accounts payable |
(995,025 | ) | (745,652 | ) | ||||
Accrued interest, unearned revenue and other liabilities |
491,926 | 1,320,075 | ||||||
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Net cash provided by operating activities |
1,055,363 | 1,920,609 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of flight equipment and other property and equipment |
(953,863 | ) | (2,083,850 | ) | ||||
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Net cash flows used in investing activities |
(953,863 | ) | (2,083,850 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Repayment of notes payable and long-term debt |
(1,750,000 | ) | (1,500,000 | ) | ||||
Proceeds from borrowing |
1,500,000 | 2,000,000 | ||||||
Proceeds from the issuance of common stock |
| 1,562 | ||||||
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|
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Net cash (used) provided by financing activities |
(250,000 | ) | 501,562 | |||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(148,500 | ) | 338,321 | |||||
Cash and Cash Equivalents: |
||||||||
Beginning of period |
2,887,634 | 3,592,993 | ||||||
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End of period |
$ | 2,739,134 | $ | 3,931,314 | ||||
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Supplementary cash flow information: |
||||||||
Cash paid during the period for interest (contractual) |
$ | 1,903,346 | $ | 2,257,584 | ||||
Cash paid during the period for income taxes |
$ | 67,549 | $ | 876,682 |
See accompanying notes to the financial statements.
4
Table of Contents
GREAT LAKES AVIATION, LTD.
Statements of Stockholders Equity
Six Months Ended June 30, 2013
(unaudited)
Common stock | Retained | |||||||||||||||||||
Shares | Amount | Paid-in capital | earnings | Total | ||||||||||||||||
Balance at January 1, 2013 |
8,974,990 | $ | 89,750 | $ | 31,494,609 | $ | 7,476,379 | $ | 39,060,738 | |||||||||||
Net income (loss) |
| | | (1,112,823 | ) | (1,112,823 | ) | |||||||||||||
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Balance at June 30, 2013 |
8,974,990 | $ | 89,750 | $ | 31,494,609 | $ | 6,363,556 | $ | 37,947,915 | |||||||||||
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See accompanying notes to financial statements.
5
Table of Contents
Great Lakes Aviation, Ltd.
Notes to Financial Statements
June 30, 2013
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with the Companys audited financial statements and notes thereto for the year ended December 31, 2012.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the salvage value of fixed assets; the valuation of deferred tax assets, fixed assets, inventory; and reserves for employee benefit obligations and other contingencies.
Business
Passenger Revenue
Great Lakes Aviation, Ltd. (Great Lakes, the Company, we or us) is a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United Airlines or United). Terms of the agreement provide for the Company to continue United Airlines code sharing for destinations the Company currently services to and from Denver, CO, Los Angeles, CA and Phoenix, AZ hubs.
The Company operates under a similar code share agreement with Frontier Airlines, Inc. (Frontier Airlines or Frontier). The Frontier agreement provides for the use of Frontiers flight designator code on the Companys flights connecting with Frontiers flights in Denver, CO, Los Angeles, CA, and Phoenix, AZ. Both of the Companys code share agreements do not have fixed termination dates and are cancellable by either party upon sufficient notice.
In addition to the Companys code share agreements and independent branding, the Company has developed electronic ticketing (e-ticket) interline agreements with American Airlines, Delta Airlines, Frontier Airlines, United Airlines and U.S. Airways.
Currently, we estimate that approximately 40% of Great Lakes passenger traffic utilizes the United code share product line and approximately 18% of Great Lakes passenger traffic utilizes the Frontier code share product line.
The Company provides charter air services to private individuals, corporations, and athletic teams. The Company also carries cargo on most of the Companys scheduled flights.
Public Service Revenue
Approximately 47% and 41% of the Companys total revenue during each of the six months ended June 30, 2013 and 2012, were generated by services provided under the Essential Air Service (EAS) program administered by the United States Department of Transportation (DOT). The FAA Modernization and Reform Act of 2012 was enacted into law on February 14, 2012. This legislation provides for the authorization of the Essential Air Service program through September 30, 2015.
6
Table of Contents
As of August 9, 2013, the Company served 45 airports, of which 32 locations receive EAS subsidy, in thirteen states with a fleet of six Embraer EMB-120 Brasilia and 28 Raytheon/Beechcraft 1900D regional airliners. The Company currently operates hubs at Denver, CO, Los Angeles, CA, Minneapolis, MN and Phoenix, AZ.
Liquidity
The Company has historically used debt to finance the purchase of its aircraft. On November 16, 2011, the Company entered into a financing agreement with GB Merchant Partners, LLC, serving as Collateral Agent, and Crystal Capital LLC, serving as Administrative Agent (the Credit Agreement). Terms of the financing include a four-year term loan in the amount of $24.0 million with a balance of $17.0 million at June 30, 2013 and a revolving loan credit facility in which the Company may borrow up to $10.0 million with a balance of $9.0 million at June 30, 2013. Pursuant to the terms of a pledge and security agreement and an aircraft security agreement, the Companys obligations to the lenders identified in the Credit Agreement are secured by substantially all assets of the Company, including all owned aircraft.
Mandatory contractual principal and interest obligations for the next 12 months will be approximately $7.2 million. In addition to the mandatory contractual principal and interest obligations, the Company is required to make principal payments, based on a percentage of excess cash flows, on September 30 of each year as determined in the Credit Agreement.
The Company has drawn down $9.0 million on the revolving credit facility as of June 30, 2013. The draws are secured by accounts receivable, parts inventory and spare engines. The Company was also required to pay a closing fee based on the initial facility commitment, and is required to pay a monthly unused line fee, a specified fee for certain prepayments of the term loan, and certain administrative and fronting fees related to the Credit Agreement. The term loan and the revolving loan credit facility are set to mature on November 16, 2015.
2. Earnings per share
The following table shows the computation of basic and diluted earnings per common share:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Numerator: |
||||||||||||||||
Net Income (loss) |
$ | 145,878 | $ | 1,536,841 | $ | (1,112,823 | ) | $ | 1,712,693 | |||||||
Denominator: |
||||||||||||||||
Weighted average shares outstanding, basic |
8,974,990 | 8,922,517 | 8,974,990 | 8,921,254 | ||||||||||||
Dilutive effect of employee stock options |
| 138,995 | | 121,661 | ||||||||||||
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Weighted average shares outstanding, diluted |
8,974,990 | 9,061,512 | 8,974,990 | 9,042,915 | ||||||||||||
Net income per share, basic |
$ | 0.02 | $ | 0.17 | $ | (0.12 | ) | $ | 0.19 | |||||||
Net income per share, diluted |
$ | 0.02 | $ | 0.17 | $ | (0.12 | ) | $ | 0.19 |
For the three and six month periods ended June 30, 2013 there were no outstanding stock options. For the three and six month periods ended June 30, 2012 no outstanding options were excluded from the calculation of net income per diluted common share as the exercise prices of all such options were lower than the average market price of common stock for the period.
7
Table of Contents
3. Accrued Liabilities
Accrued liabilities consisted of the following balances at June 30, 2013 and December 31, 2012:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Unearned revenue |
2,195,857 | 1,710,269 | ||||||
Accrued property taxes |
286,694 | 30,830 | ||||||
Accrued interest |
287,911 | 307,849 | ||||||
Accrued payroll |
2,028,444 | 2,258,032 | ||||||
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Total accrued liabilities |
$ | 4,798,906 | $ | 4,306,980 | ||||
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4. Long-Term Debt
The following table sets forth, as of June 30, 2013 and December 31, 2012, the carrying amount of the Companys long-term debt and the current maturities of long term debt. The carrying amount of the debt includes the principal payments contractually required under the debt agreements:
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
Long-term debt: |
||||||||
GB/Crystal Term Loanprincipal |
$ | 16,950,000 | $ | 18,700,000 | ||||
GB/Crystal Revolving Loanprincipal |
8,973,333 | 7,473,333 | ||||||
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|
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Total long-term debt |
25,923,333 | 26,173,333 | ||||||
Less: |
||||||||
GB/Crystal Term Loanprincipal |
(3,750,000 | ) | (3,500,000 | ) | ||||
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Total current portion |
(3,750,000 | ) | (3,500,000 | ) | ||||
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Total long-term portion |
$ | 22,173,333 | $ | 22,673,333 | ||||
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On November 16, 2011, the Company entered into a financing agreement with GB Merchant Partners, LLC, serving as Collateral Agent, and Crystal Capital LLC, serving as Administrative Agent. Terms of the financing include a four-year term loan in the amount of $24.0 million and a revolving loan credit facility in which the Company may borrow up to $10.0 million. Pursuant to the terms of a pledge and security agreement and an aircraft security agreement, the Companys obligations to the lenders identified in the Credit Agreement are secured by substantially all assets of the Company, including all owned aircraft. The term loan bears interest at a floating rate of 30 day LIBOR rate plus 11% with a minimum rate of 15.5%. Voluntary prepayments of the term loan are subject to prepayment penalties of 3% of the loan if prepaid prior to November 16, 2013 and declining in increments of 1% at each anniversary of the loan thereafter. As of June 30, 2013, $17.0 million was outstanding under the term loan. In addition to the scheduled contractual principal and interest obligations, the Company is required to make principal payments, based on a percentage of excess cash flows (as defined in the Credit Agreement), as measured on September 30 of each year. The Company was also required to pay a closing fee based on the initial facility commitment and certain administrative and fronting fees related to the Credit Agreement. The Company is required to prepay an amount equal to 50% of such excess cash flow for the twelvemonth period beginning September 30, 2012 and ending September 30, 2013, and each subsequent twelve-month period thereafter. The excess cash flow payments are to be applied to reduce the outstanding principal balance of the term loan.
The term loan is set to mature on November 16, 2015 at which time the outstanding principal balance due is scheduled to be $7.8 million.
As of June 30, 2013, $9.0 million was outstanding under the revolving credit facility secured by accounts receivable, parts inventory and spare engines. The revolving credit facility bears interest at the rate of 30 day LIBOR rate plus 8.0% with a minimum interest rate of 10.5%. The Company is required to pay a monthly unused line fee for the difference between the amount borrowed and the $10.0 million commitment amount. The revolving loan credit facility is set to mature on November 16, 2015 at which time any outstanding principal balance will be due.
8
Table of Contents
5. Related Parties
The Company rents two six-passenger aircraft and a vehicle from Iowa Great Lakes Flyers, Inc., a corporation solely owned by Douglas G. Voss, the Companys Chairman and major stockholder. Total payments for these leases were $14,250 for each of the six months ending June 30, 2013 and 2012, respectively. As of June 30, 2013, Mr. Voss controlled 4,160,247 shares of common stock of the Company, representing approximately 46.4% of the Companys outstanding common stock.
6. Income Taxes
The Companys annual effective income tax rate is estimated to be 40.8% for 2013. The Companys effective tax rate includes non-deductible permanent tax differences. Prior to 2004, the Company reported significant cumulative losses and generated substantial net operating loss carryforwards. From 2007 through the current period, the Company utilized a portion of these carryforwards to offset taxable income.
7. Fair Value Measurements
A fair value hierarchy that prioritizes the inputs used to measure fair value has been established by ASC 820, Fair Value Measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 |
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | |
Level 2 |
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and other inputs that are observable or can be corroborated by observable market data. | |
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the Financial Accounting Standards Board (the FASB).
Our financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities and long-term debt including the current portion. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values. These are considered Level 1 measurements.
All of the Companys debt is comprised of variable rate debt (see Note 4). Because there is not an active market for the Companys notes, and the Company is unable to determine an appropriate discount rate to use in estimating the fair value of this obligation or the probability of early redemption, it is not practical to estimate the fair value of the debt.
9
Table of Contents
8. Subsequent Event
We evaluated events after June 30, 2013, through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
10
Table of Contents
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
We were incorporated on October 25, 1979 as an Iowa corporation and became a publicly traded company in January 1994. We commenced scheduled air service operations on October 12, 1981. Great Lakes Airlines currently operates hubs at Denver, CO, Los Angeles, CA, Minneapolis, MN and Phoenix, AZ.
We are a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines) and Frontier Airlines, Inc. (Frontier or Frontier Airlines). Our code share agreements allow our mutual customers to purchase connecting flights through our code share partners and to share other benefits such as baggage transfer and frequent flyer benefits (in certain instances), while we maintain our own branding on our planes and ticket counters and our own designator code on all our flights. In addition to our code share agreements and independent branding, we have developed electronic ticketing (e-ticket) interline agreements with American Airlines, Delta Airlines, Frontier Airlines, United Airlines and U.S. Airways.
As of August 9, 2013, we served 45 airports in thirteen states with a fleet of six Embraer EMB-120 Brasilias and 28 Raytheon/Beech 1900D regional airliners.
Essential Air Service (EAS) Program
We derived approximately 47% of our total revenue from the EAS program in the six month period ending June 30, 2013, which is administered by the United States Department of Transportation (DOT). The EAS program was instituted under the Airline Deregulation Act of 1978 (the Deregulation Act), which allowed airlines greater freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the EAS program, certain communities are guaranteed specified levels of essential air service. In order to promote the provision of essential air services, the DOT may authorize the payment of federal subsidies to compensate an air carrier that is providing essential air services in otherwise unprofitable or minimally profitable markets.
The FAA Modernization and Reform Act of 2012 was enacted into law on February 14, 2012. This legislation provides for the authorization of the EAS program for federal fiscal years 2011 through 2015. Federal fiscal year 2015 ends on September 30, 2015. The FAA Modernization and Reform Act of 2012 reaffirmed the Congressional commitment to the continuance of the Essential Air Service program. The EAS program does require a portion of the funding through annual Congressional appropriations.
An airline serving a community that qualifies for essential air services is required to give the DOT advance notice before the airline 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. EAS rates are normally set for two-year periods for each city. Significant fluctuations in passenger traffic, fares and associated revenues, as well as fluctuations in fuel and other costs, may cause EAS routes to become unprofitable during these two-year terms. Near the end of the two year term for EAS service to a particular city, the DOT will request service proposals from the Company and competitive proposals from other airlines. Proposals, when requested, are evaluated on, among other things, the level of service provided, the amount of subsidy requested, the fitness of the applicant, and comments from the communities served.
As of August 9, 2013, we served 32 EAS communities on a subsidized basis.
EAS Program Activity Subsequent to January 1, 2013
On February 1, 2013 we continued our service to Dickinson, ND, which was previously supported by an EAS subsidy, on a non-subsidized basis.
On February 12, 2013 the U.S. Department of Transportation terminated the eligibility of Ely, NV under the EAS program effective April 1, 2013. We operated our last flight to Ely, NV on March 31, 2013 and consequently discontinued operations at our Las Vegas, NV hub.
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Financial Highlights
We had operating revenue of $60.1 million for the six-month period ending June 30, 2013, an 11.0% decrease compared to operating revenue of $67.5 million for the six-month period ending June 30, 2012. We realized a $8.0 million decrease in passenger revenue and an $0.7 million increase in public service revenue compared to the prior year period. The $8.0 million period-over-period decrease in passenger revenues was primarily attributable to a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields. The 12.3% decrease in passengers carried during the first six months of 2013 was primarily attributable to these same schedule reductions. The scheduled service reductions in these markets, whose average trip length exceeded 500 miles, contributed to an 8.3% decrease in available seat miles (ASM) in the first six months of 2013 compared to the first six months of 2012.
We had operating income of $0.3 million for the six-month period ending June 30, 2013, compared to operating income of $5.5 million for the six-month period ending June 30, 2012. The $5.2 million decrease in operating income is attributable to a $8.1 million decrease in passenger revenue partially offset by a $2.2 million decrease in operating expenses and $0.7 million increase in public service revenue.
We realized a net loss of $1.1 million for the six-month period ending June 30, 2013, compared to net income of $1.7 million for the six-month period ending June 30, 2012. The decrease in net income is primarily a result of a $7.3 million decrease in operating revenue partially offset by a $2.2 million decrease in operating expenses and interest expense decreasing by $0.4 million and an income tax benefit of $0.8 million for the six-month period ending June 30, 2013 compared to an income tax expense of $1.9 million for the period for the six-month period ending June 30, 2012.
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Results of Operations for the Three Months Ended June 30, 2013 and 2012
The following table sets forth certain financial information regarding our results of operations for the three months ended June 30, 2013 and 2012.
Statement of Income (Loss) Data
(dollars in thousands)
(unaudited)
For the Three Months Ended June 30, | ||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||
Year over Year | ||||||||||||||||||||
Revenue/Cost | ||||||||||||||||||||
Cents | Increase | Cents | ||||||||||||||||||
Amount | per | (Decrease) | Amount | per | ||||||||||||||||
(in thousands) | ASM | Percentage | (in thousands) | ASM | ||||||||||||||||
Operating revenues: |
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Passenger |
$ | 16,141 | 17.9 | ¢ | (24.9 | )% | $ | 21,480 | 21.2 | ¢ | ||||||||||
Public service |
14,401 | 16.0 | (0.9 | ) | 14,535 | 14.4 | ||||||||||||||
Freight, charter and other |
82 | 0.1 | (6.8 | ) | 88 | 0.1 | ||||||||||||||
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Total operating revenues |
30,624 | 34.0 | (15.2 | ) | 36,103 | 35.7 | ||||||||||||||
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Operating expenses: |
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Salaries, wages, and benefits |
8,202 | 9.1 | (2.1 | ) | 8,378 | 8.3 | ||||||||||||||
Aircraft fuel |
9,234 | 10.3 | (12.8 | ) | 10,593 | 10.5 | ||||||||||||||
Aircraft maintenance, materials and repairs |
4,002 | 4.4 | (10.5 | ) | 4,472 | 4.4 | ||||||||||||||
Depreciation and amortization |
1,602 | 1.8 | 10.8 | 1,446 | 1.4 | |||||||||||||||
Passenger Aircraft rental |
| 0.0 | (100.0 | ) | 150 | 0.1 | ||||||||||||||
Other rentals and landing fees |
1,813 | 2.0 | (0.9 | ) | 1,830 | 1.8 | ||||||||||||||
Other operating expenses |
4,428 | 4.9 | (16.8 | ) | 5,324 | 5.3 | ||||||||||||||
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Total operating expenses |
29,281 | 32.5 | (9.0 | ) | 32,193 | 31.8 | ||||||||||||||
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Operating income (loss) |
1,343 | 1.5 | (65.7 | ) | 3,910 | 3.9 | ||||||||||||||
Interest expense, net |
(1,098 | ) | (1.2 | ) | (13.9 | ) | (1,275 | ) | (1.3 | ) | ||||||||||
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Income (Loss) before income taxes |
245 | 0.3 | ¢ | (90.7 | )% | 2,635 | 2.6 | ¢ | ||||||||||||
Income tax benefit (expense) |
(99 | ) | (0.1 | ) | (91.0 | ) | (1,098 | ) | (1.1 | ) | ||||||||||
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Net Income (Loss) |
$ | 146 | 0.2 | ¢ | (90.5 | )% | $ | 1,537 | 1.5 | ¢ | ||||||||||
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Selected Operating Data
The following table sets forth certain selected operating data regarding our operations for the three months ended June 30, 2013 and 2012.
June 30, 2013 |
Increase (Decrease) from 2012 |
June 30, 2012 |
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Selected Operating Data: |
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Available seat miles (in thousands) (1) |
89,978 | -11.0 | % | 101,123 | ||||||||
Revenue passenger miles (in thousands) (2) |
35,721 | -20.5 | % | 44,937 | ||||||||
Revenue passengers carried |
122,829 | -13.0 | % | 141,147 | ||||||||
Departures flown |
18,828 | -6.0 | % | 20,036 | ||||||||
Passenger load factor (3) |
39.7 | % | -10.6 | % | 44.4 | % | ||||||
Average yield per revenue passenger mile (4) |
45.2 | ¢ | -5.4 | % | 47.8 | ¢ | ||||||
Revenue per available seat miles (5) |
34.0 | ¢ | -4.8 | % | 35.7 | ¢ | ||||||
Cost per available seat mile (6) |
32.5 | ¢ | 2.2 | % | 31.8 | ¢ | ||||||
Average passenger fare (7) |
$ | 131.41 | -13.6 | % | $ | 152.18 | ||||||
Average passenger trip length (miles) (8) |
291 | -8.5 | % | 318 | ||||||||
Average cost per gallon of fuel |
$ | 3.54 | -5.6 | % | $ | 3.75 |
(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) | Average yield per revenue passenger mile represents the average passenger revenue received for each mile a revenue passenger is carried. |
(5) | Revenue per available seat mile represents the average total operating revenue received for each available seat mile. |
(6) | 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. |
Comparison of Second Quarter 2013 to Second Quarter 2012
Passenger Revenues. Passenger revenues were $16.1 million in the second quarter of 2013, a decrease of 24.9% from $21.5 million in the second quarter of 2012. The $5.3 million quarter-over-quarter decrease in passenger revenues was primarily attributable to a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields. The 13.0% decrease in passengers carried during the second quarter of 2013 was primarily attributable to these same schedule reductions. The scheduled service reductions in these markets, whose average trip length exceeded 500 miles, contributed to an 11.0% decrease in available seat miles (ASM) in the second quarter of 2013 compared to the second quarter of 2012.
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Public Service Revenues. Public service revenues collected through the EAS Program of $14.4 million and $14.5 million were relatively flat for the second quarter of 2013 and 2012, respectively. At June 30, 2013 and June 30, 2012, we served 32 and 35 communities, respectively, on a subsidized basis under the EAS Program.
Other Revenues. Other revenues were $0.1 million during the second quarter of 2013, which was consistent with the second quarter of 2012.
Operating Expenses. Total operating expenses were $29.3 million, or 32.5 cents per ASM, in the second quarter of 2013, as compared to $32.2 million, or 31.8 cents per ASM in the second quarter of 2012.
Salaries, Wages, and Benefits. Salaries, wages, and benefits were $8.2 million in the second quarter of 2013, a decrease of 2.1% from $8.4 million in the second quarter of 2012. The decrease in salaries, wages, and benefits was mostly attributable to less labor expense associated with a 6% reduction in the number of departures compared to the second quarter of 2012.
At June 30, 2013, we had 743 full-time and 345 part-time active employees, as compared to 798 full-time and 347 part-time active employees at June 30, 2012.
Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $9.2 million, or 10.3 cents per ASM, in the second quarter of 2013. In comparison, our aircraft fuel and into-plane expense for the second quarter of 2012 was $10.6 million, or 10.5 cents per ASM. The 12.8% decrease in our aircraft fuel expense was attributable to a reduction in fuel consumption associated with fewer ASMs in combination with a lower average cost of fuel per gallon.
Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $4.0 million during the second quarter of 2013, which was a 10.5% decrease from $4.5 million during the second quarter of 2012. The decrease was primarily attributable to a reduction in parts expense as the result of the timing of scheduled maintenance activities.
Depreciation and amortization. Depreciation and amortization expense was $1.6 million during the second quarter of 2013 and $1.4 million in the second quarter of 2012. The increase in depreciation expense is a result of purchasing $6.5 million of flight equipment and other equipment in 2012.
Passenger Aircraft Rental. We had no passenger aircraft lease expense during the second quarter of 2013 compared to $0.2 million during the second quarter of 2012. In December 2012, we purchased aircraft which we were previously leasing. We currently own all of our passenger service aircraft.
Other Rentals and Landing Fees Expense. Other rentals and landing fees expense was $1.8 million during the second quarter of 2013, which was relatively unchanged from $1.8 million during the second quarter of 2012.
Other Operating Expenses. Other operating expenses were $4.4 million, or 4.9 cents per ASM during the second quarter of 2013, which was a decrease from $5.3 million, or 5.3 cents per ASM during the second quarter of 2012. The decrease was mainly attributable to decreases in passenger related expenses of $269,000, contract airline handling of $101,000, employee related expenses of $122,000, legal and professional fees of $97,000, insurance expense of $44,000 and other expenses of $79,000. These were partially offset by increased deicing expenses of $176,000.
Interest Expense. We incurred interest expense of $1.1 million in the second quarter of 2013, compared to $1.3 million in the second quarter of 2012 as a result of reducing our long-term debt.
Income Tax Expense. For the three months ended June 30, 2013, we recorded an income tax expense of $0.1 million and for the three months ended June 30, 2012, we recorded an income tax expense of $1.0 million. Our estimated effective federal and state income tax rate is 40.8% for the three months ended June 30, 2013.
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Results of Operations for the Six Months Ended June 30, 2013 and 2012
The following table sets forth certain financial information regarding our results of operations for the six months ended June 30, 2013 and 2012.
Statement of Income (Loss) Data
(dollars in thousands)
(unaudited)
For the Six Months Ended June 30, | ||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||
Year over Year | ||||||||||||||||||||
Cents | Revenue/Cost | Cents | ||||||||||||||||||
Amount | per | Increase (Decrease) | Amount | per | ||||||||||||||||
(in thousands) | ASM | Percentage | (in thousands) | ASM | ||||||||||||||||
Operating revenues: |
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Passenger |
$ | 31,376 | 17.4 | ¢ | (20.4 | )% | $ | 39,406 | 20.0 | ¢ | ||||||||||
Public service |
28,551 | 15.8 | 2.6 | 27,822 | 14.2 | |||||||||||||||
Freight, charter and other |
188 | 0.1 | (19.0 | ) | 232 | 0.1 | ||||||||||||||
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Total operating revenues |
60,115 | 33.4 | (10.9 | ) | 67,460 | 34.3 | ||||||||||||||
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Operating expenses: |
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Salaries, wages, and benefits |
17,010 | 9.4 | 3.3 | 16,462 | 8.4 | |||||||||||||||
Aircraft fuel |
19,229 | 10.7 | (7.3 | ) | 20,752 | 10.6 | ||||||||||||||
Aircraft maintenance, materials and repairs |
7,251 | 4.0 | (0.5 | ) | 7,287 | 3.7 | ||||||||||||||
Depreciation and amortization |
3,202 | 1.8 | 11.4 | 2,875 | 1.5 | |||||||||||||||
Passenger Aircraft rental |
| 0.0 | (100.0 | ) | 300 | 0.2 | ||||||||||||||
Other rentals and landing fees |
3,800 | 2.1 | 3.1 | 3,686 | 1.9 | |||||||||||||||
Other operating expenses |
9,285 | 5.2 | (12.3 | ) | 10,593 | 5.4 | ||||||||||||||
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Total operating expenses |
59,777 | 33.2 | (3.5 | ) | 61,955 | 31.5 | ||||||||||||||
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Operating income (loss) |
338 | 0.2 | (93.9 | ) | 5,505 | 2.8 | ||||||||||||||
Interest expense, net |
(2,203 | ) | (1.2 | ) | (14.3 | ) | (2,571 | ) | (1.3 | ) | ||||||||||
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Income (Loss) before income taxes |
(1,865 | ) | (1.0 | )¢ | (163.6 | )% | 2,934 | 1.5 | ¢ | |||||||||||
Income tax benefit (expense) |
752 | 0.4 | (161.6 | ) | (1,221 | ) | (0.6 | ) | ||||||||||||
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Net Income (Loss) |
$ | (1,113 | ) | (0.6 | )¢ | (165.0 | )% | $ | 1,713 | 0.9 | ¢ | |||||||||
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Selected Operating Data
The following table sets forth certain selected operating data regarding our operations for the six months ended June 30, 2013 and 2012.
June 30, 2013 |
Increase (Decrease) from 2012 |
June 30, 2012 |
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Selected Operating Data: |
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Available seat miles (in thousands) (1) |
180,233 | -8.3 | % | 196,614 | ||||||||
Revenue passenger miles (in thousands) (2) |
68,257 | -20.1 | % | 85,476 | ||||||||
Revenue passengers carried |
233,066 | -12.3 | % | 265,707 | ||||||||
Departures flown |
38,083 | -1.4 | % | 38,606 | ||||||||
Passenger load factor (3) |
37.9 | % | -12.9 | % | 43.5 | % | ||||||
Average yield per revenue passenger mile (4) |
46.0 | ¢ | -0.2 | % | 46.1 | ¢ | ||||||
Revenue per available seat miles (5) |
33.4 | ¢ | -2.6 | % | 34.3 | ¢ | ||||||
Cost per available seat mile (6) |
33.2 | ¢ | 5.4 | % | 31.5 | ¢ | ||||||
Average passenger fare (7) |
$ | 134.62 | -9.2 | % | $ | 148.31 | ||||||
Average passenger trip length (miles) (8) |
293 | -9.0 | % | 322 | ||||||||
Average cost per gallon of fuel |
$ | 3.68 | -2.4 | % | $ | 3.77 |
(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) | Average yield per revenue passenger mile represents the average passenger revenue received for each mile a revenue passenger is carried. |
(5) | Revenue per available seat mile represents the average total operating revenue received for each available seat mile. |
(6) | 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. |
Comparison of First Six Months 2013 to First Six Months 2012
Passenger Revenues. Passenger revenues were $31.4 million in the first six months of 2013, a decrease of 20.4% from $39.4 million in the first six months of 2012. The $8.0 million period-over-period decrease in passenger revenues was primarily attributable to a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields. The 12.3% decrease in passengers carried during the first six months of 2013 was primarily attributable to these same schedule reductions. The scheduled service reductions in these markets, whose average trip length exceeded 500 miles, contributed to an 8.3% decrease in available seat miles (ASM) in the first six months of 2013 compared to the first six months of 2012.
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Public Service Revenues. Public service revenues collected through the EAS Program increased 2.6% to $28.6 million during the first six months of 2013, as compared to $27.8 million during the first six months of 2012. The increase in public service revenue was mostly due to incremental service dedicated to certain EAS markets in combination with renewals of EAS markets served at higher subsidy rates. At June 30, 2013 and June 30, 2012, we served 32 and 35 communities, respectively, on a subsidized basis under the EAS Program.
Other Revenues. Other revenues were $0.2 million during the first six months of 2013, which was consistent with the first six months of 2012.
Operating Expenses. Total operating expenses were $59.8 million, or 33.2 cents per ASM, in the first six months of 2013, as compared to $62.0 million, or 31.5 cents per ASM in the first six months of 2012.
Salaries, Wages, and Benefits. Salaries, wages, and benefits were $17.0 million in the first six months of 2013, an increase of 3.3% from $16.5 million in the first six months of 2012. The increase in salaries, wages, and benefits was mostly attributable to increased maintenance and ground personnel wages of approximately $290,000 combined with incremental employee insurance and tax expense of approximately $250,000.
At June 30, 2013, we had 743 full-time and 345 part-time active employees, as compared to 798 full-time and 347 part-time active employees at June 30, 2012. We had 800 full-time and 365 part-time active employees at March 31, 2013 which caused our average active employees to be higher for the six month period ending June 30, 2013 compared to our average active employees for six month period ending June 30, 2012.
Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $19.2 million, or 10.7 cents per ASM, in the first six months of 2013. In comparison, our aircraft fuel and into-plane expense for the first six months of 2012 was $20.8 million, or 10.6 cents per ASM. The 7.3% decrease in our aircraft fuel expense was attributable to a reduction in fuel consumption associated with fewer ASMs in combination with a lower average cost of fuel per gallon. $1.1 million of the decrease in fuel expense is a result of less fuel consumed and $0.5 million is attributable to a $0.09 per gallon decrease in the average price of fuel compared to the same six-month period in 2012.
Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $7.3 million during the first six months of 2013, which was comparable to the first six months of 2012.
Depreciation and amortization. Depreciation and amortization expense was $3.2 million during the first six months of 2013 versus $2.9 million in the first six months of 2012. The increase in depreciation expense is a result of purchasing $6.5 million of flight equipment and other equipment in 2012.
Passenger Aircraft Rental. We had no passenger aircraft lease expense during the first six months of 2013 compared to $0.3 million during the first six months of 2012. In December 2012, we purchased aircraft which we were previously leasing. We currently own all of our passenger service aircraft.
Other Rentals and Landing Fees Expense. Other rentals and landing fees expense was $3.8 million during the first six months of 2013, which was an increase from $3.7 million during the first six months of 2012. The $114,000 increase was mostly attributable to activity at our Minneapolis hub, partially offset by terminating service at our Las Vegas hub.
Other Operating Expenses. Other operating expenses were $9.3 million, or 5.2 cents per ASM during the first six months of 2013, which was a decrease from $10.6 million, or 5.4 cents per ASM during the first six months of 2012. The $1.3 million decrease was mainly attributable to decreases in passenger related expenses of $590,000, contract airline handling of $308,000, employee related expenses of $179,000, legal and professional fees of $283,000, insurance expense of $115,000 and other expenses of $285,000. These were partially offset by increased deicing expenses of $452,000.
Interest Expense. We incurred interest expense of $2.2 million in the first six months of 2013, compared to $2.6 million in the first six months of 2012 as a result of reducing our long-term debt.
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Income Tax Expense. For the six months ended June 30, 2013, we recorded an income tax benefit of $0.8 million and for the six months ended June 30, 2012, we recorded an income tax expense of $1.2 million. Our estimated effective federal and state income tax rate is 40.8% for the six months ended June 30, 2013.
Seasonality
Seasonal factors, related to weather conditions and changes in passenger demand, generally affect our monthly passenger enplanements. We have historically shown a higher level of passenger enplanements in the May through October period as compared with the November through April period for many of the cities served. These seasonal factors have generally resulted in reduced revenues, lower operating income, and reduced cash flow for us during the November through April period. As a result of such factors, our revenues and earnings have shown a corresponding increase during the May through October period. EAS revenues are generated under subsidy per departure rates established by the DOT and we realize revenue as departures are performed. Inherently, most of our EAS revenues, other than winter weather related cancellations, are not affected by seasonality, but certain EAS markets do receive summer season increased departures which are eligible for subsidy revenue.
Liquidity, Financing and Capital Resources
As of June 30, 2013, working capital totaled $15.4 million and our current ratio was 2.26:1, compared to working capital at December 31, 2012, of $14.9 million and a current ratio of 2.20:1.
On November 16, 2011, we entered into a financing agreement with GB Merchant Partners, LLC, serving as Collateral Agent, and Crystal Capital LLC, serving as Administrative Agent (the Credit Agreement). Terms of the financing include a four-year term loan in the amount of $24.0 million with a current balance of $17.0 million and a revolving loan credit facility in which we may borrow up to $10.0 million with a current balance of $9.0 million. Pursuant to the terms of a pledge and security agreement and an aircraft security agreement, our obligations to the lenders identified in the Credit Agreement are secured by substantially all of our assets, including all owned aircraft.
Mandatory contractual principal and interest obligations for the next 12 months will be approximately $7.2 million. In addition to the scheduled contractual principal and interest obligations, we are required to make principal payments, based on a percentage of excess cash flows (as defined in the Credit Agreement), as measured on September 30 of each year. The Company is required to prepay an amount equal to 50% of such excess cash flow for the twelvemonth period beginning September 30, 2012 and ending September 30, 2013, and each subsequent twelve-month period thereafter. The excess cash flow payments are to be applied to reduce the outstanding principal balance of the term loan.
The term loan is set to mature on November 16, 2015 at which time the outstanding principal balance due is scheduled to be $7.8 million. The revolving loan credit facility is set to mature on November 16, 2015 at which time any outstanding principal balance will be due.
We believe that in the absence of unusual circumstances, the working capital currently available to us, together with our projected cash flows from operations, will be sufficient to meet our present financial requirements, meet debt service, and fulfill our other cash requirements for at least the next 12 months.
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Sources and Uses of Cash. As of June 30, 2013, our cash balance was $2.7 million. We made principal payments on term debt of $1.8 million and borrowed $1.5 million on the revolving loan during the first six months of 2013.
Cash Provided by Operating Activities. During the first six months of 2013, our cash flow from operating activities was $1.1 million. During the six months we generated a net loss of $1.1 million and recorded non-cash depreciation and amortization of $3.2 million.
Cash Flows from Investing Activities. During the first six months of 2013, we invested $1.0 million for the purchase of replacement aircraft rotable components and other property and equipment.
Cash Flows from Financing Activities. During the first six months of 2013, we utilized $1.8 million of cash to reduce our outstanding notes payable and long-term debt balances and drew an additional $1.5 million on the available revolving loan.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Great Lakes Aviation, Ltd. (Great Lakes, we, our, its, it or the Company) notes that certain statements in this Form 10-Q and elsewhere are forward-looking and provide other than historical information. Our management may also make oral, forward-looking statements from time to time. These forward-looking statements include, among others, statements concerning our 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, anticipate and similar expressions reflected in such forward-looking statements are based on reasonable assumptions, and none of the forward-looking statements contained in this Form 10-Q or elsewhere should be relied on 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.
Factors that could cause results to differ materially from the expectations reflected in any forward-looking statements include:
1) the receipt of sufficient passenger revenues on the routes that we serve;
2) the continued funding of the Essential Air Service program and our ability to continue to be awarded future service;
3) the volatility of fuel costs;
4) the effect of general economic conditions on business and leisure travel;
5) dependence on other air carrier connecting capacity at our hubs;
6) the payments and restrictions resulting from our contractual obligations;
7) the effect of rules regarding the effect of stock sales on the availability of net operating loss carryforwards;
8) exposure to increases in interest rates associated with our new debt financing;
9) our ability to maintain compliance with specified financial and non-financial covenants.
10) the incidence of domestic or international terrorism and military actions;
11) competition from other airlines and from ground transportation;
12) the incidence of labor disruptions or strikes;
13) dependence on our key personnel;
14) the incidence of aircraft accidents;
15) the level of regulatory and environmental costs;
16) the incidence of technological failures or attacks;
17) maintenance costs related to aging aircraft;
18) the possibility of substantial numbers of shares being sold by our current investors;
19) the limited market for our securities;
20) our ability to remediate timely any deficiencies in our internal controls;
21) no expectation of dividends; and
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22) anti-takeover provisions in our charter documents and Iowa law.
Readers are cautioned not to attribute undue certainty on the forward-looking statements contained herein, which speak only as of the date hereof. Changes may occur after that date, and we do not undertake to update any forward-looking statements except as required by law in the normal course of our public disclosure practices.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks
We are susceptible to certain risks related to changes in the cost of aircraft fuel and changes in interest rates. As of June 30, 2013, we did not have any derivative financial instruments.
Aircraft Fuel
Due to the airline industrys dependency on aircraft fuel for operations, airline operators including Great Lakes are impacted by changes in aircraft fuel prices. Aircraft fuel represented approximately 32.2% of our operating expenses in the six-month period ending June 30, 2013. At rates of consumption for the first six months of 2013, a one cent increase or decrease in the per gallon price of fuel will increase or decrease our fuel expense by approximately $106,000 annually.
Interest Rates
Our operations are very capital intensive because the vast majority of our assets consist of flight equipment, which is financed primarily with long-term debt. At June 30, 2013, we had approximately $25.9 million of variable rate debt. Going forward, we could be subject to increased rates of interest on our debt if the 30 day LIBOR rate increases by more than 2.25 percentage points.
Item 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2013, our disclosure controls and procedures were effective.
During the Companys most recent fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
There were no new legal proceedings initiated by or against us during the period covered by this Quarterly Report on Form 10-Q.
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During the period covered by this Quarterly Report on Form 10-Q, there were no material developments in any legal proceedings previously reported in our Annual Report on Form 10-K for the year ended December 31, 2012.
There has been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 26, 2013, except for the following risk factor, which is amended and restated in its entirety as set forth herein:
The airline industry is subject to extensive government regulation, and new regulations, or changes in interpretations of current regulations, could increase our operating costs or limit our operations.
In 2010 Congress passed legislation, effective August 1, 2013, which requires the Company to alter its minimum flight crew (pilot) hiring requirements for First Officers. The legislation statutorily required a minimum of 1,500 hours of piloting experience and an Airline Transport Pilot certificate. On July 8, 2013, as was directed by Congress, the Federal Aviation Administration (FAA) issued more robust, new pilot qualification standards, granting recognition of historical FAA and airline industry crew member flight training standards. With the application of the new rules, the supply of qualified pilot candidates eligible for hiring by the airline industry has been dramatically reduced. If, we are unable to secure the services of sufficient eligible pilots to staff our routes, our operations and results could be materially affected.
The airline industry has had a long history of recognizing and relying on regional airlines, such as Great Lakes, for providing initial FAR Part 121 pilot experience to facilitate career advancement to pilots who later are employed by network carriers.
New student pilot certificates have decreased dramatically, especially in the past three years, and subsequently the pool of eligible pilots qualified to be new hires into the airline industry has been diminishing significantly. In addition, the major network air carriers have done only minimal pilot hiring in the past 14 years because of the industry capacity reduction following the events of September 11, 2001, the most recent economic recession that began in the fall of 2008, and the increase in statutory mandatory retirement age for pilots from age 60 to age 65. Effective, January 2014, mandatory pilot retirements will again begin to force major network carriers to hire replacement pilots. Therefore, at the same time that pilots are now required to have more flight hours; due to the new rules, there are fewer pilots with adequate flight hours available for employment. Congress has requested that the General Accounting Office (GAO) issue a report regarding the airline industry pilot supply. The report is anticipated to be available in January 2014.
Airlines are subject to other extensive regulatory and legal compliance requirements that result in significant costs. The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that may necessitate significant expenditures. Other laws, regulations, taxes and airport rates and charges have also been imposed from time to time that significantly increase the cost of airline operations and/or reduce our revenue. The Aviation and Transportation Security Act, which became law in November 2011, mandated the federalization of certain airport security procedures and imposed additional security regulations on airports and airlines, most of which are funded by a per ticket tax on passengers and a tax on airlines.
We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. We expect to continue incurring expenses to comply with the FAAs regulations, as well as regulation by states, airports and municipalities that have jurisdiction over our operations. In addition, proposed laws, regulations, taxes and user fees, if enacted, may increase our operating expenses and otherwise affect our business. Examples of this are the recent proposals to impose substantial user fees on aviation (including airlines) to fund air traffic control system costs and upgrades to that system. Future regulatory action concerning climate change and aircraft emissions also could have a significant effect on the airline industry, including the potential for increased fuel costs, carbon taxes or fees or a requirement to purchase carbon credits. We cannot predict whether these or other new regulations may be imposed on airlines and we cannot assure you that laws or regulations enacted in the future will not materially adversely affect our business, financial condition, operating results and cash flows.
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See Exhibit Index.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GREAT LAKES AVIATION, LTD. | ||||||
Dated: August 12, 2013 | By: | /s/ Charles R. Howell IV | ||||
Charles R. Howell IV | ||||||
Chief Executive Officer | ||||||
By: | /s/ Michael O. Matthews | |||||
Michael O. Matthews | ||||||
Vice President and Chief Financial Officer |
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3.1 | Amended and Restated Articles of Incorporation. (1) | |
3.2 | Amended and Restated Bylaws. (1) | |
4.1 | Specimen Common Stock Certificate. (2) | |
31.1 | Certification pursuant to Rule 13a-14(a) of Chief Executive Officer. | |
31.2 | Certification pursuant to Rule 13a-14(a) of Chief Financial Officer. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer. | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer. | |
101 | Financial Statements in XBRL format. |
(1) | Incorporated by reference to the Companys Registration Statement on Form S-1/A, Registration No. 333-159256, as filed September 3, 2009. |
(2) | Incorporated by reference to the Companys Registration Statement on Form S-1, Registration No. 033-71180. |