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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ---------------
Commission File No. 0-23224
GREAT LAKES AVIATION, LTD.
(Exact name of registrant as specified in its charter)
IOWA 42-1135319
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1022 Airport Parkway, Cheyenne, Wyoming 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 Exchange Act).
YES [ ] NO [X]
As of June 30, 2003, there were 14,071,970 shares of Common Stock, par value
$0.01 per share, issued and outstanding.
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION .............................................3
ITEM 1. FINANCIAL STATEMENTS ....................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ...................................20
ITEM 4. CONTROLS AND PROCEDURES ................................20
PART II. OTHER INFORMATION ................................................20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ........................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .......................20
SIGNATURES ..................................................................23
1
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 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 no statements contained in this Form 10-Q and
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
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 share relationships with United Air
Lines, Inc. ("United"), which is undergoing reorganization under the United
States Bankruptcy Code, and Frontier Airlines, Inc. ("Frontier");
2) the outcome of United's bankruptcy proceedings and whether United elects to
assume or reject its amended code share agreement with the Company;
3) the Company's ability either to:
(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 service from its current and projected cash
flow;
4) the effect of general economic conditions on business and leisure travel;
5) the incidence of domestic and international terrorism and military action;
6) the level of passenger confidence in the safety of air travel;
7) the volatility of fuel costs;
8) the 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.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREAT LAKES AVIATION, LTD.
Balance sheets
(unaudited)
Assets June 30, 2003 December 31, 2002
------------- -----------------
Current assets:
Cash $ 1,544,102 $ 357,924
Accounts receivable, net of allowance of $160,000 at
June 30, 2003 and December 31, 2002 6,512,969 8,802,045
Inventories, net 4,218,670 5,325,291
Prepaid expenses and other current assets 309,186 222,630
------------ ------------
Total current assets 12,584,927 14,707,890
------------ ------------
Property and equipment:
Flight equipment, including aircraft to be returned 148,150,009 147,839,945
Other property and equipment 7,452,593 7,366,312
Less accumulated depreciation and amortization (38,822,130) (34,852,955)
------------ ------------
Total property and equipment 116,780,472 120,353,302
------------ ------------
Other assets 1,025,113 1,121,044
------------ ------------
$130,390,512 $136,182,236
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Note payable and current maturities of long-term debt $ 13,368,097 $ 12,353,104
Long-term debt classified as current 118,051,057 119,858,463
Accounts payable 12,617,902 14,102,042
Accrued liabilities and unearned revenue 10,336,563 9,974,642
Deferred lease payments 6,531,944 5,665,742
------------ ------------
Total current liabilities 160,905,563 161,953,993
------------ ------------
Long-term debt, net of current maturities 427,651 672,285
Deferred credits 639,885 713,866
Stockholders' deficit:
Common stock, $0.01 par value. Authorized 50,000,000 shares;
issued and outstanding 14,071,970 and 14,052,166 shares at
June 30, 2003 and December 31, 2002 140,720 140,522
Paid-in capital 33,468,644 33,462,257
Accumulated deficit (65,191,951) (60,760,687)
------------ ------------
Total stockholders' deficit (31,582,587) (27,157,908)
------------ ------------
$130,390,512 $136,182,236
============ ============
See condensed notes to financial statements
3
GREAT LAKES AVIATION, LTD.
Statements of Operations
For the Three and Six Months Ended June 30, 2003 and June 30, 2002
(Unaudited)
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Operating revenues:
Passenger $11,248,562 $13,534,655 $21,263,377 $25,525,841
Public service 6,404,293 8,753,035 12,251,222 15,941,128
Freight, charter, and other 565,305 851,962 1,429,258 1,746,122
----------- ----------- ----------- -----------
Total operating revenues 18,218,160 23,139,652 34,943,857 43,213,091
----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages, and benefits 5,364,409 6,106,754 11,558,069 12,504,988
Aircraft fuel 2,721,007 2,996,573 6,013,867 5,565,758
Aircraft maintenance, materials and repairs 1,936,995 3,015,257 4,257,335 4,665,407
Commissions 68,870 295,505 132,353 619,888
Depreciation and amortization 2,026,055 1,760,525 4,059,678 3,526,349
Aircraft rental 812,219 1,854,060 1,518,108 3,890,142
Other rentals and landing fees 1,119,897 1,680,337 2,631,039 3,564,012
Other operating expense 3,691,306 3,645,333 7,630,576 7,600,503
----------- ----------- ----------- -----------
Total operating expenses 17,740,758 21,354,344 37,801,025 41,937,047
----------- ----------- ----------- -----------
Operating profit (loss) 477,402 1,785,308 (2,857,168) 1,276,044
Other expense:
Interest expense, net 990,831 1,721,025 1,574,096 3,594,180
Gain on insurance recovery -- (1,413,024) -- (1,413,024)
----------- ----------- ----------- -----------
Profit (loss) before income taxes (513,429) 1,477,307 (4,431,264) (905,112)
Income tax expense -- -- -- --
----------- ----------- ----------- -----------
Net profit (loss) $ (513,429) $ 1,477,307 $(4,431,264) $ (905,112)
=========== =========== =========== ===========
Net profit (loss) per share:
Basic and Diluted $ (0.04) $ 0.17 $ (0.32) $ (0.10)
=========== =========== =========== ===========
Average number of shares outstanding:
Basic and Diluted 14,052,166 8,680,186 14,052,166 8,680,186
=========== =========== =========== ===========
See condensed notes to financial statements
4
GREAT LAKES AVIATION, LTD.
Statements of Cash Flow
For the Six Months Ended June 30
(Unaudited)
2003 2002 (1)
----------- -----------
OPERATING ACTIVITIES:
Net loss $(4,431,264) $ (905,112)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation, amortization and provision for obsolescence 4,059,678 3,526,349
Gain on insurance recovery -- (1,413,024)
Change in current operating items:
(Increase)/decrease in accounts receivable 2,289,076 (1,882,507)
(Increase)/decrease in inventories 1,106,621 1,062,353
(Increase)/decrease in prepaid expenses and other current assets (86,556) (42,425)
Increase/(decrease) in accounts payable and accrued liabilities (1,161,824) 3,243,409
Increase/(decrease) in deferred lease payments 866,202 3,842,194
----------- -----------
Net cash provided by operating activities 2,641,933 7,431,237
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of flight equipment and other property and equipment (486,848) (321,961)
Decrease (increase) in other assets 95,931 (368,675)
Proceeds from insurance recovery -- 973,316
----------- -----------
Net cash flows provided (used) in investing activities (390,917) 282,680
----------- -----------
CASH FLOW USED IN FINANCING ACTIVITIES
Repayment of Long term debt (1,071,423) (4,231,363)
Payments on line of credit -- (4,609,808)
Proceeds from sale of common stock 6,585 --
----------- -----------
Net cash used in financing activities (1,064,838) (8,841,171)
----------- -----------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 1,186,178 (1,127,254)
Cash and Cash Equivalents, beginning of period 357,924 1,514,565
----------- -----------
Cash and Cash Equivalents, end of period $ 1,544,102 $ 387,311
----------- -----------
(1) Amounts include the one-time effect of recording an insured loss of one
owned and one leased Beechcraft 1900D aircraft, plus various aircraft
inventory parts, in a hangar fire on May 14, 2002.
The net book values of the Company's inventory and flight equipment lost in
the hanger fire were $794,000 and $3.8 million respectively. As of the date
of the fire, the Company had an outstanding debt obligation for the owned
aircraft in the amount of $3.2 million. Upon receipt of insurance proceeds,
the Company incurred a liability to Raytheon Aircraft Credit Corporation
("Raytheon") for the stipulated loss value of the leased aircraft.
Insurance proceeds on the assets totaled $10.0 million of which $7.7
million was paid to Raytheon in satisfaction of (i) the outstanding debt
obligation, plus accrued interest, for the owned aircraft, (ii) the
stipulated loss value of the leased aircraft, and (iii) deferred lease
payments on the leased aircraft. A net gain on insurance recovery of $1.4
million was recognized representing the excess of the total insurance over
the sum of the net book value of the Company's assets that were destroyed
plus the outstanding liabilities on the leased aircraft.
At June 30, 2002, accounts receivable included a balance of $5.3 million to
be received from insurance companies, and accounts payable included a
liability to Raytheon in the amount of $4.6 million for outstanding
obligations related to the destroyed aircraft.
See condensed notes to financial statements.
5
GREAT LAKES AVIATION, LTD.
CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
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 Securities and Exchange Commission. The information furnished
in the 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. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested that
these financial statements be read in conjunction with the financial statements
for the year ended December 31, 2002 and the notes included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 revenues and expenses during the
reporting period. Significant estimates include the recording of passenger
revenues when passenger joint fares are utilized, government air service
subsidies and financial aid, depreciable lives, impairment and obsolescence,
lease termination costs and contractual aircraft return condition costs. Actual
results could differ from those estimates.
The Company
The Company operates as an independent airline and as a code-sharing partner
with United Air Lines, Inc. ("United") and Frontier Airlines, Inc. ("Frontier").
At August 1, 2003, the Company served 37 destinations in 11 states to and from
Denver and two destinations in two states to and from Phoenix as a code-sharing
partner with both United and Frontier. The Company also served four destinations
in two states to and from Minneapolis.
Current Year Developments
On February 28, 2003, the Company discontinued all operations at its Chicago
O'Hare hub along with corresponding service to the subsidized communities of
Manistee, Ironwood and Iron Mountain, Michigan and Oshkosh, Wisconsin after the
United States Department of Transportation ("DOT") elected to select a carrier
to provide EAS to a different hub for all points except Oshkosh. At Oshkosh the
community's eligibility for subsidy was terminated.
In April 2003, the Company began negotiations with United to modify and extend
the existing code share agreement beyond its current expiration date of April
30, 2004. During the negotiation process, United filed a preemptive motion in
the bankruptcy court to reject the code share agreement. On July 11, 2003 the
Company and United signed a Memorandum of Understanding ("MOU") outlining the
terms of the proposed amendment to the code share agreement. On July 18, 2003,
United withdrew its bankruptcy court motion to reject the code share agreement.
Also effective on that date, the Company and United
6
amended their code share agreement, formalizing the terms under which the two
companies will operate in the future.
Pursuant to the amendment to the code share agreement, the Company granted
United rights to enter five Denver hub markets for which the Company previously
had exclusivity rights. In exchange for releasing exclusivity with respect to
those markets, previous restrictions placed on the Company regarding code
sharing and frequent flier program participation at the Denver hub with other
major carriers was removed. The Company and United also agreed on a payment
structure for amounts the Company owes United.
Subject to the Company's compliance with the code share agreement, as amended,
as of December 31, 2005, United has agreed to extend the term of the code share
agreement through April 30, 2007. United may elect to assume or reject the
amended code share agreement in connection with its ongoing bankruptcy
proceedings.
Liquidity
Due to significant losses in 2001 and 2002, at December 31, 2002, the Company
had exhausted its outside sources of working capital and funds and was in
arrears in payments to all the institutions providing leases or debt financing
for the Company's aircraft. On December 31, 2002 and during the first four
months of 2003, the Company restructured its financing agreements with Raytheon
Aircraft Credit Corporation ("Raytheon") and certain other institutions
providing financing for the Company's aircraft. The effect of these
restructurings was to reduce the Company's total debt and lease obligations
owing to these creditors and to reduce the amount of the Company's scheduled
monthly debt and lease payments. The restructuring with Raytheon also provided
for the return of seven surplus aircraft not used in current operations to
Raytheon during the course of 2003.
During 2003, the Company, due to the effects of reduced traffic and
correspondingly reduced revenue during the Iraq War, has been unable to generate
sufficient cash flow to service the Company's restructured debt and lease
payment obligations as required by the Raytheon and other restructuring
agreements. As of June 30, 2003 the Company was approximately $4.9 million or
75% in arrears in respect of such rescheduled payments for the six months ending
June 30, 2003 and in default on substantially all of the Company's agreements
with the institutions providing financing for the Company's aircraft.
There are significant uncertainties regarding the Company's ability to achieve
the necessary cash flow to meet the payments required under the Raytheon and
other restructuring agreements due to a variety of factors beyond the Company's
control, including the outcome of United's reorganization in bankruptcy, the
evolution of United's continuing code share relationship with the Company;
reduced passenger demand as a result of general economic conditions, public
health concerns, security concerns and foreign conflicts; volatility of fuel
prices; and the amount of Essential Air Service funding and financial support
available from the U.S. government.
Ultimately, the Company must generate sufficient revenue and cash flow to meet
the Company's obligations as currently structured, obtain additional outside
financing or renegotiate the Company's restructured agreements with its
creditors in order to set a level of payments that can be reasonably
serviced with the cash flows generated by the Company under current market
conditions. The Company is engaged in on-going negotiations with Raytheon and
its other creditors with respect to its default under the terms of its debt and
lease agreements with these institutions.
7
The Company's auditors have included in their report dated March 17, 2003 on the
Company's financial statements for the year ended December 31, 2002 an
explanatory paragraph to the effect that substantial doubt exists regarding the
Company's ability to continue as a going concern due to the Company's recurring
losses from operations and the fact that the Company has liabilities in excess
of assets at December 31, 2002.
Stock Option Plans
The Company has adopted the Great Lakes Aviation, Ltd. Option Plan and the 1993
Director Stock Option Plan (the "Plans"). The Plans permit the grant of
qualified incentive stock options or nonqualified stock options covering in the
aggregate 1,300,000 shares of the Company's common stock to be granted to key
employees, officers and directors of the Company. The Company has elected the
pro forma disclosure option of SFAS 123. The Company will continue applying the
accounting treatment prescribed by the provisions of APB 25. Pro forma net
profit (loss) and pro forma net profit (loss) per share have been provided as if
SFAS 123 were adopted for all stock-based compensation plans.
The Company applies APB 25 and related interpretations in accounting for the
Plans, both of which are fixed stock option plans. Accordingly, no compensation
cost has been recognized for the Plans, as exercise prices are at least equal to
the fair market value of the Company's common stock on the date of grant. The
pro forma information in the following table shows the effect of determining the
compensation expense for the Company's Plans in accordance with SFAS 123:
-----------------------------------------------------------------------------------------------
Three months Six months
To June 30 To June 30
---------------------- -----------------------
2003 2002 2003 2002
--------- ---------- ----------- ---------
Net profit (loss) as reported $(513,429) $1,477,307 $(4,431,264) $(905,112)
Pro forma net profit (loss) $(541,970) $1,452,139 $(4,488,346) $(954,889)
Basic and diluted profit (loss)
per share as reported $ (0.04) $ 0.17 $ (0.32) $ (0.10)
Pro forma basic and diluted
profit (loss) per share $ (0.04) $ 0.17 $ (0.32) $ (0.10)
-----------------------------------------------------------------------------------------------
As required, the pro forma disclosures above are based on options granted since
January 1, 1995. For purposes of pro forma disclosures, the estimated fair value
of stock-based compensation plans and other options is amortized to expense
primarily over the vesting period of the options. Consequently, the effect of
applying SFAS 123 will differ in future periods.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). SFAS No. 146 requires that a liability for costs associated with
an exit or disposal activity be recognized when the liability is incurred. Under
EITF 94-3, a liability for exit costs, as defined in EITF 94-3, was recognized
at the date of an entity's commitment to an exit plan. SFAS No. 146 was adopted
by the Company as of January 1, 2003. The adoption of SFAS No. 146 will not have
a material impact on the Company's
8
financial condition or results of operations unless the Company enters into an
exit or disposal activity covered by this statement.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"), which amends SFAS No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"), by revising the
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also requires
additional disclosures in annual and interim financial statements related to
stock-based employee compensation. The Company adopted SFAS 148 on December 31,
2002, insofar as it relates to the additional disclosures required for
registrants that account for employee stock-based compensation under Accounting
Principles Bulletin (APB) Opinion 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." These disclosure requirements are effective for
financial statements issued after December 15, 2002. Interpretation No. 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company adopted Interpretation No. 45
in 2003 and it did not have a material impact on the Company's financial
condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which requires the consolidation of variable
interest entities, as defined therein. This Interpretation is applicable to
variable interest entities created after January 31, 2003. Variable interest
entities created prior to February 1, 2003 must be consolidated effective July
1, 2003. Disclosures are currently required if the Company expects to
consolidate any variable interest entities. The Company does not currently
believe that any material entities will be consolidated with the Company as a
result of this Interpretation.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." The
provisions of this Statement are effective for financial instruments entered
into or modified after May 31, 2003, and otherwise are effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not believe that the adoption of Statement No. 150 will have a material
impact on its financial condition or results of operations.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires the use
of estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements, revenues and
expenses during the reporting period and liabilities in the financial statements
and accompanying notes. Actual results could differ from those estimates. For a
discussion of the Company's critical accounting policies and estimates, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
The following table sets forth certain financial information regarding the
Company:
Statements of Operations Data
For the Three Months Ended June 30
-------------------------------------------------------
2003 2002
----------------------------------- -----------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 2002 (in 000s) ASM
--------- ----- ---------- --------- -----
Operating Revenues
Passenger $11,249 14.0(cent) (16.9)% $13,535 15.3(cent)
Public Service 6,404 8.0 (26.8) 8,753 9.9
Freight, charter, and other 565 0.7 (33.7) 852 1.0
------- ---- ------ ------- ----
Total Operating Revenues 18,218 22.7 (21.3) 23,140 26.1
Operating Expenses
Salaries, wages and benefits 5,364 6.7 (12.2) 6,107 6.9
Aircraft fuel 2,721 3.4 (9.2) 2,997 3.4
Aircraft maintenance, materials and repairs 1,937 2.4 (35.8) 3,015 3.4
Commissions 69 0.1 (76.7) 296 0.3
Depreciation and amortization 2,026 2.5 15.0 1,761 2.0
Aircraft rental 812 1.0 (56.2) 1,854 2.1
Other rentals and landing fees 1,120 1.4 (33.3) 1,680 1.9
Other operating expense 3,691 4.6 1.3 3,645 4.1
------- ---- ------ ------- ----
Total Operating Expenses 17,740 22.1 (16.9) 21,355 24.1
------- ---- ------ ------- ----
Operating Profit 478 0.6 (73.2) 1,785 2.0
------- ---- ------ ------- ----
Interest expense 991 1.2 (42.4) 1,721 1.9
Gain on insurance recovery -- -- (100.0) 1,413 1.6
------- ---- ------ ------- ----
Net Profit (loss) $ (513) (0.6)(cent) (134.7)% $ 1,477 1.7(cent)
======= ==== ====== ======= ====
Increase (Decrease)
2003 from 2002 2002
------- ------------------- -------
Selected Operating Data
Available Seat Miles (000s) 80,117 (9.6)% 88,665
Revenue Passenger Miles (000s) 29,906 (13.9)% 34,722
Passenger Load Factor 37.3% (1.9)pts 39.2%
Passengers Carried 108,066 (16.7)% 129,785
Average Yield per Revenue Passenger Mile 37.6(cent) (3.5)% 39.0(cent)
Cost per ASM 22.1(cent) (8.1)% 24.1(cent)
10
Passenger Revenues
Passenger revenues decreased by $2.3 million, or 16.9%, to $11.2 million in the
second quarter of 2003 from $13.5 million in the second quarter of 2002. This
decrease was due to a 4.8 million, or 13.9%, decrease in revenue passenger miles
to 29.9 million in the second quarter of 2003 from 34.7 million in the second
quarter of 2002 and a 1.4 cent, or 3.5%, decrease in the average yield per
revenue passenger mile to 37.6 cents in the second quarter of 2003 from 39.0
cents in the second quarter of 2002. The depressed economic climate together
with war and terrorist concerns led to a substantial reduction in passenger
traffic and a weak pricing environment. The Company responded to this reduced
passenger demand by reducing its available seat mile (ASM) capacity by 8,548,000
ASMs, or 9.6%, to 80,117,000 ASMs in the second quarter of 2003 from 88,665,000
ASMs in the second quarter of 2002 through the closure of its Chicago O'Hare hub
operations and a reduction of service in other markets. However, despite this
reduction in capacity the Company's passenger load factor fell by 1.9 points to
37.3% in the second quarter of 2003 from 39.2% in the second quarter of 2002.
Public Service Revenues
Public service revenues decreased by $2.4 million, or 26.8%, to $6.4 million in
the second quarter of 2003 from $8.8 million in the second quarter of 2002. The
Company reduced the number of communities it served on a subsidized basis by
four from 32 to 28, a 12.5% decrease, with the closure of the Company's
Manistee, Ironwood and Iron Mountain, Michigan and Oshkosh, Wisconsin markets
during the first quarter of 2003. Additional revenue adjustments arising from
changes in estimates relating to prior periods fell by $0.3 million to $0.4
million in the second quarter of 2003 as compared to $0.7 million in the second
quarter of 2002.
Operating Expenses
Total operating expenses decreased by $3.7 million, or 16.9%, to $17.7 million,
or 22.1 cents per ASM, in the second quarter of 2003 as compared to $21.4
million, or 24.1 cents per ASM, in the second quarter of 2002.
Salaries, wages, and benefits expense decreased by $0.7 million, or 12.2%, to
$5.4 million in the second quarter of 2003 from $6.1 million during the second
quarter of 2002 as a result of reductions in operations, staffing levels, hours
worked and salary cuts.
Aircraft fuel expenses decreased by $0.3 million, or 9.2%, to $2.7 million, or
3.4 cents per ASM, in the second quarter of 2003 from $3.0 million, or 3.4 cents
per ASM, in the second quarter of 2002. The decrease is attributable to a
reduction in flying operations, as the cost of aircraft fuel per ASM remained
unchanged between the periods.
Aircraft maintenance, materials and repair expense decreased by $1.1 million, or
35.8%, to $1.9 million, or 2.4 cents per ASM, during the second quarter of 2003
as compared to $3.0 million, or 3.4 cents per ASM, during the second quarter of
2002. This decrease was due to fewer scheduled engine overhauls and hot section
events in the second quarter of 2003 as compared to the second quarter of 2002.
Commissions decreased by $0.2 million, or 76.7%, to $0.1 million in the second
quarter of 2003 from $0.3 million during the same period of 2002. The decrease
was due to the fact that in June 2002 the Company followed a majority of the
airline industry by discontinuing paying commissions to travel agents on tickets
sold after that date.
11
Depreciation and amortization expense increased by $0.2 million, or 15.0%, to
$2.0 million, or 2.5 cents per ASM, in the second quarter of 2003 from $1.8
million, or 2.0 cents per ASM, in the second quarter of 2002. This increase
resulted from the purchase of nine formerly leased aircraft on December 31, 2002
as part of the Company's 2002 restructuring agreement with Raytheon. The
depreciation expense for the three months ended June 30, 2003 includes $0.2
million in respect of six surplus aircraft that are not used in current
operations and that will be returned to Raytheon during the course of 2003 in
accordance with the Company's 2002 restructuring agreement with Raytheon.
Aircraft rental expense declined by $1.1 million, or 56.2%, to $0.8 million in
the second quarter of 2003 from $1.9 million in the second quarter of 2002. The
decline in aircraft rental expense was due primarily to the purchase of nine
formerly leased aircraft on December 31, 2002 as part of the Company's 2002
restructuring agreement with Raytheon and the return of one leased Beechcraft
1900C aircraft during 2002. Aircraft rental expense includes $0.2 million of
lease expense on one surplus aircraft that is not used in current operations and
that will be returned to Raytheon during the course of 2003 in accordance with
the Company's 2002 restructuring agreement with Raytheon.
Other rentals and landing fees decreased by $0.6 million, or 33.3%, to $1.1
million in the second quarter of 2003 from $1.7 million in the second quarter of
2002. This reduction resulted from the Company's termination of business
activities at the Chicago O'Hare hub and the Manistee, Ironwood and Iron
Mountain, Michigan and Oshkosh, Wisconsin markets.
Other operating expenses increased by $0.1 million, or 1.3%, to $3.7 million in
the second quarter of 2003 from $3.6 million in the second quarter of 2002. The
increase in other operating expenses was primarily due to continuing consulting
and professional fees incurred by the Company in connection with various
financial restructurings undertaken by the Company during 2002 and the first
quarter of 2003.
Interest Expense
Interest expense declined by $0.7 million, or 42.4%, to $1.0 million in the
second quarter of 2003 from $1.7 million in the second quarter of 2002.
On December 31, 2002, the Company finalized an agreement with Raytheon regarding
lease and debt financing provided by Raytheon for the Company's Beechcraft 1900C
and 1900D aircraft fleet. The restructuring has been accounted for by the
Company in accordance with the provisions of Statement of Financial Accounting
Standards No. 15, "Accounting for Debtors and Creditors for Troubled Debt
Restructurings" ("SFAS 15"). Accordingly, the $22.3 million difference between
the amount of the restructured debt as recorded by the Company's books pursuant
to SFAS 15 and the contractual principal amounts of the restructured debt is
being amortized as a reduction to the Company's interest expense over a ten-year
period.
The amortization of the $22.3 million difference required by SFAS 15 reduced
interest expense by $1.0 million in the second quarter of 2003 as compared to
the second quarter of 2002. Interest expense for the second quarter of 2003 was
further reduced by $0.2 million due to the reduction of outstanding contractual
debt balances and contractual interest rates as part of the terms of the
Company's 2002 restructuring agreement with Raytheon.
Offsetting the above decreases in interest expense, interest expense for the
second quarter of 2003 was increased by $0.3 million as compared to the second
quarter of 2002 as a result of the Company's purchase of nine formerly leased
aircraft. The purchase of the nine aircraft was financed by the issuance of
$22.5 million of new notes payable as part of the Company's 2002 restructuring
agreement with Raytheon. Interest expense for the second quarter of 2003 was
further increased by $0.2 million as
12
compared to the second quarter of 2002 due to increased penalty interest charges
accrued by the Company as a result of the Company's failure to meet its
scheduled debt and lease payment obligations.
Interest expense for the second quarter of 2003 includes $0.3 million related to
the debt on six surplus aircraft that are not used in current operations and
that will be returned to Raytheon during the course of 2003 in accordance with
the Company's 2002 restructuring agreement with Raytheon.
Gain on Insurance Recovery
In May 2002, one owned Beechcraft 1900D and one leased Beechcraft 1900D, along
with certain aircraft inventory parts, were destroyed in a fire in a Company
maintenance hanger located in Grand Island, Nebraska. The hanger facility, owned
by Hall County Airport Authority, was undergoing door modification at the time
of the fire. A gain on insurance recovery of $1.4 million was recognized in the
second quarter of 2002 representing the excess of the total insurance over the
net book value of the Company's assets that were destroyed and the liability
incurred on the leased aircraft.
Income Tax Expense (Benefit)
No income tax benefit was recorded for the quarters ended June 30, 2003 and 2002
because the realization of any benefits remains substantially in doubt.
13
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
The following table sets forth certain financial information regaring the
Company:
Statements of Operations Data
For the Six Months Ended June 30
-------------------------------------------------------
2003 2002
----------------------------------- -----------------
Cents % Increase Cents
Amount Per (decrease) Amount Per
(in 000s) ASM from 2002 (in 000s) ASM
--------- ----- ---------- --------- -----
Operating Revenues
Passenger $21,263 13.3(cent) (16.7)% $25,526 14.6(cent)
Public Service 12,251 7.7 (23.1) 15,941 9.1
Freight, charter, and other 1,430 0.9 (18.1) 1,746 1.0
------- ---- ------ ------- ----
Total Operating Revenues 34,944 21.9 (19.1) 43,213 24.7
Operating Expenses
Salaries, wages and benefits 11,558 7.3 (7.6) 12,505 7.1
Aircraft fuel 6,014 3.8 8.0 5,566 3.2
Aircraft maintenance, materials and repairs 4,257 2.7 (8.7) 4,665 2.7
Commissions 132 0.1 (78.7) 620 0.4
Depreciation and amortization 4,060 2.5 15.1 3,526 2.0
Aircraft rental 1,518 1.0 (61.0) 3,890 2.2
Other rentals and landing fees 2,631 1.7 (26.2) 3,564 2.0
Other operating expense 7,631 4.8 0.4 7,601 4.3
------- ---- ------ ------- ----
Total Operating Expenses 37,801 23.7 (9.9) 41,937 23.9
------- ---- ------ ------- ----
Operating Profit (loss) (2,857) (1.8) (323.9) 1,276 0.7
------- ---- ------ ------- ----
Interest expense 1,574 1.0 (56.2) 3,594 2.1
Gain on insurance recovery -- -- (100.0) 1,413 0.8
------- ---- ------ ------- ----
Net loss $(4,431) (2.8)(cent) 389.6% $ (905) (0.5)(cent)
======= ==== ====== ======= ====
Selected Operating Data
Increase (Decrease)
2003 from 2002 2002
------- ------------------- -------
Available Seat Miles (000s) 159,377 (9.0)% 175,181
Revenue Passenger Miles (000s) 55,149 (16.0)% 65,657
Passenger Load Factor 34.6% (2.9)pts 37.5%
Passengers Carried 201,846 (19.0)% 249,084
Average Yield per Revenue Passenger Mile 38.6(cent) (0.8)% 38.9(cent)
Cost per ASM 23.7(cent) (0.9)% 23.9(cent)
14
Passenger Revenues
Passenger revenues decreased by $4.2 million, or 16.7%, to $21.3 million in the
first half of 2003 from $25.5 million in the first half of 2002. This decrease
was due to a 10.6 million, or 16.0%, decrease in revenue passenger miles to 55.1
million in the first half of 2003 from 65.7 million in the first half of 2002
and a 0.3 cent, or 0.8%, decrease in the average yield per revenue passenger
mile to 38.6 cents in the first half of 2003 from 38.9 cents in the first half
of 2002. The depressed economic climate together with war and terrorist concerns
led to a substantial reduction in passenger traffic and a weak pricing
environment. The Company responded to this reduced passenger demand by reducing
its available seat mile (ASM) capacity by 15,804,000 ASMs, or 9.0%, to
159,377,000 ASMs in the first half of 2003 from 175,181,000 ASMs in the first
half of 2002 through the closure of its Chicago O'Hare hub operations and a
reduction of service in other markets. However, despite this reduction in
capacity the Company's passenger load factor fell by 2.9 points to 34.6% in the
first half of 2003 from 37.5% in the first half of 2002.
Public Service Revenues
Public service revenues decreased by $3.6 million, or 23.1%, to $12.3 million in
the first half of 2003 from $15.9 million in the first half of 2002. The Company
reduced the number of communities it served on a subsidized basis by four from
32 to 28, or a 12.5% decrease, with the closure of the Company's Manistee,
Ironwood and Iron Mountain, Michigan and Oshkosh, Wisconsin markets during the
first quarter of 2003.
Operating Expenses
Total operating expenses decreased by $4.1 million, or 9.9%, to $37.8 million,
or 23.7 cents per ASM, in the first half of 2003 as compared to $41.9 million,
or 23.9 cents per ASM, in the first half of 2002.
Salaries, wages, and benefits expense decreased by $0.9 million, or 7.6%, to
$11.6 million in the first half of 2003 from $12.5 million during the first half
of 2002 as a result of reductions in operations, staffing levels, hours worked
and salary cuts.
Aircraft fuel expenses increased by $0.4 million, or 8.0%, to $6 million, or 3.8
cents per ASM, in the first half of 2003 from $5.6 million, or 3.2 cents per
ASM, in the first half of 2002. The increase was the result of a 37.3% increase
in fuel prices attributed to the impact of the Iraq war that took place in the
first quarter of 2003 when fuel prices reached $1.36 per gallon as compared to
the $0.99 per gallon that prevailed in the first quarter of 2002. The adverse
impact of the sharp increase in fuel prices during the first quarter of 2003 was
partially offset by the Company's reduced level of flying operations in the
first half of 2003 as compared with the first half of 2002. The reduced level of
flying operations, due primarily to the closure of the Company's Chicago O'Hare
hub operations and the reduction of service in other markets, resulted in a
decrease in the number of ASMs by 15,804,000 or 9.0%, to 159,377,000 ASMs in the
first half of 2003 from 175,181,000 ASMs in the first half of 2002.
Aircraft maintenance, materials and repair expense decreased by $0.4 million, or
8.7%, to $4.3 million, or 2.7 cents per ASM, during the first half of 2003 as
compared to $4.7 million or, 2.7 cents per ASM, during the first half of 2002.
The cost of aircraft maintenance, materials and repair per ASM was unchanged
between the first half of 2003 and the first half of 2002. The decrease in the
aircraft maintenance, materials and repair expense was due primarily to the
reduced level of flying operations in the first half of 2003 as compared with
the first half of 2002 as described in the previous paragraph.
15
Commissions decreased by $0.5 million, or 78.7%, to $0.1 million in the first
half of 2003 from $0.6 million during the first half of 2002. The decrease was
due to the fact that in June 2002 the Company followed a majority of the airline
industry by discontinuing paying commissions to travel agents on tickets sold
after June 2002.
Depreciation and amortization expense increased by $0.6 million, or 15.1%, to
$4.1 million, or 2.5 cents per ASM, in the first half of 2003 from $3.5 million,
or 2.0 cents per ASM, in the first half of 2002. This increase resulted from the
purchase of nine formerly leased aircraft on December 31, 2002 as part of the
Company's 2002 restructuring agreement with Raytheon. The depreciation expense
for the six months ended June 30, 2003 includes $0.5 million in respect of six
surplus aircraft that are not used in current operations and that will be
returned to Raytheon during the course of 2003 in accordance with the Company's
2002 restructuring agreement with Raytheon.
Aircraft rental expense declined by $2.4 million, or 61.5%, to $1.5 million in
the first half of 2003 from $3.9 million in the first half of 2002. The decline
in aircraft rental expense was due primarily to the purchase of nine formerly
leased aircraft on December 31, 2002 as part of the Company's 2002 restructuring
agreement with Raytheon and the return of one leased Beechcraft 1900C aircraft
during 2002. Aircraft rental expense includes $0.3 million of lease expense on
one surplus aircraft that is not used in current operations and that will be
returned to Raytheon during the course of 2003 in accordance with the Company's
2002 restructuring agreement with Raytheon.
Other rentals and landing fees decreased by $1.0 million, or 26.2%, to $2.6
million in the first half of 2003 from $3.6 million in the first half of 2002.
The reduction resulted from the Company's termination of business activities in
the Chicago O'Hare hub and the Manistee, Ironwood and Iron Mountain, Michigan
and Oshkosh, Wisconsin markets.
Other operating expenses were broadly unchanged at $7.6 million for both the
first half of 2003 and the first half of 2002. This constant level of other
operating expenses reflects the fact that the majority of the Company's other
operating expenses are fixed overhead costs and are not directly affected by the
level of the Company's flying operations.
Interest Expense
Interest expense declined by $2.0 million, or 56.2%, to $1.6 million in the
first half of 2003 from $3.6 million in the second quarter of 2002.
On December 31, 2002, the Company finalized an agreement with Raytheon regarding
lease and debt financing provided by Raytheon for the Company's Beechcraft 1900C
and 1900D aircraft fleet. The restructuring has been accounted for by the
Company in accordance with the provisions of SFAS 15, "Accounting for Debtors
and Creditors for Troubled Debt Restructurings". Accordingly, the $22.3 million
difference between the amount of the restructured debt as recorded by the
Company's books pursuant to SFAS 15, and the contractual principal amounts of
the restructured debt is being amortized as a reduction to the Company's
interest expense over a ten-year period.
The amortization of the $22.3 million difference required by SFAS 15 reduced
interest expense by $2.1 million in the first half of 2003 as compared to the
first half of 2002. Interest expense for the first half of 2003 was further
reduced by $0.5 million compared to the first half of 2002 due to the reductions
of outstanding contractual debt balances and contractual interest rates as part
of the terms of the Company's 2002 restructuring agreement with Raytheon and the
Company's repayment in April 2002 of a line of credit with Coast Business
Credit.
16
Offsetting the above decreases in interest expense, interest expense for the
first half of 2003 increased by $0.6 million over the second half of 2002 as a
result of the Company's purchase of nine formerly leased aircraft. The purchase
of the nine aircraft was financed by the issuance of $22.5 million of new notes
payable in accordance with the Company's 2002 restructuring agreement with
Raytheon.
Interest expense for the first half of 2003 includes $0.6 million related to the
debt on six surplus aircraft that are not used in current operations and that
will be returned to Raytheon during 2003 in accordance with the Company's 2002
restructuring agreement with Raytheon.
Gain on Insurance Recovery
In May 2002, one owned Beechcraft 1900D and one leased Beechcraft 1900D, along
with certain aircraft inventory parts, were destroyed in a fire in a Company
maintenance hanger located in Grand Island, Nebraska. The hanger facility, owned
by Hall County Airport Authority, was undergoing door modification at the time
of the fire. A gain on insurance recovery of $1.4 million was recognized in the
second half of 2002 representing the excess of the total insurance over the net
book value of the Company's assets that were destroyed and the liability
incurred on the leased aircraft.
Income Tax Expense (Benefit)
No income tax benefit was recorded for the six months ended June 30, 2003 and
2002 because the realization of any benefits remains substantially in doubt.
Liquidity and Capital Resources
Total cash at June 30, 2003 was $1.5 million as compared to $0.4 million at June
30, 2002, an increase of $1.1 million, or 275%.
Net cash provided by operating activities decreased by $4.8 million, or 65%, to
$2.6 million in the first half of 2003 as compared to $7.4 million in the first
half of 2002. $1.6 million of the decease resulted from the increase in the
Company's net loss, after adjusting for depreciation and the $1.4 million 2002
gain on insurance recovery, to a $0.4 million loss for the first half of 2003
compared to a $1.2 million profit in the first half of 2002. The remaining $3.2
million of the decrease in net cash provided by operating activities resulted
from a decrease in the funds provided from changes in working capital to $3.0
million in the first half of 2003 as compared to $6.2 million in the first half
of 2002.
Net cash from investing activities fell by $0.7 million, or 233%, to $0.4
million used in investment activities in the first half of 2003 from $0.3
million provided by investment activities in the first half of 2002. This
decrease in net cash from investing activities resulted from the inclusion in
the first half of 2002 of the $1.0 million proceeds from the hanger fire
insurance recovery, which was offset by $0.4 million of additional investment in
other assets, neither of which was repeated in the first half of 2003.
Net cash used in financing activities decreased by $7.7 million, or 88%, to $1.1
million in the first half of 2003 as compared to $8.8 million dollars in the
first half of 2002. The decrease was due primarily to decreased repayment of
long-term debt and the repayment of certain lines of credit during 2002.
17
On December 31, 2002 and during the first four months of 2003, the Company
restructured its debt and lease financing agreements with Raytheon and certain
other institutions providing financing for the Company's aircraft. The effect of
these restructurings was to reduce the Company's total debt and lease
obligations owing to these creditors and to reduce the amount of the Company's
scheduled monthly debt and lease payments. The restructuring agreement with
Raytheon also provided for the return of seven surplus aircraft to Raytheon
during 2003. The debt and lease rental payments that were to be made under the
restructuring agreements were closely aligned with previously expected cash
flows, and any shortfall from expected cash flows would inevitably result in the
Company's inability to make the scheduled payments.
As a result of declines in traffic and fare levels, together with higher fuel
costs, insurance and other costs, the Company has been unable to generate
sufficient cash flow during the first half of 2003 to service the rescheduled
debt and lease payments required by the Company's restructuring agreements with
Raytheon and other creditors. As of June 30, 2003 the Company was approximately
$4.9 million or 75% in arrears in respect of scheduled debt and lease payments
for the six months ending June 30, 2003 and in default on substantially all of
the Company's agreements with the institutions providing financing for the
Company's aircraft.
The Company was unable to meet its February, March and April debt and lease
payment obligations under the terms of the Raytheon restructuring agreement and
was only able to make substantially reduced payments in May and June. In
addition, the Company is not in compliance with certain financial covenants
required by the Raytheon restructuring agreement. On April 14, 2003, the Company
obtained a temporary waiver from Raytheon for such incidents of non-compliance.
This waiver, as extended by Raytheon, expired by its own terms on July 31, 2003.
The Company made substantially reduced monthly lease payments to Boeing Capital
Corporation ("Boeing") during the first half of 2003. In addition, the Company
has accrued $0.4 million of penalty interest on outstanding lease payments due
to Boeing. A letter of intent, executed by and between the Company and Boeing on
April 12, 2003, contemplated a possible restructuring of the Company's aircraft
lease obligations. The letter of intent, as extended, expired by its own terms
on April 30, 2003.
The Company made substantially reduced debt payments to The CIT Group/Equipment
Financing, Inc. ("CIT") in May and June 2003 and received a formal Notice of
Default from CIT on July 2, 2003.
During the first half of 2003, the Company made substantially reduced payments
in respect of its aircraft lease obligations to FINOVA Capital Corporation
("FINOVA"). The Company is current on its debt payment obligations to FINOVA.
The Company cannot determine with a high degree of confidence that it will be
able to make required payments under the Company's existing debt and lease
obligations, or to comply with the Company's debt and lease agreements in the
future. Therefore, the amount of the Raytheon and CIT debt that, pursuant to the
terms of the respective debt instruments, would otherwise be due after one year,
has been reclassified from a long-term liability to a current liability on the
Company's balance sheet. The Company continues to recognize the periodic
ownership and lease costs on the seven aircraft scheduled to be returned to
Raytheon during 2003.
The Company is engaged in on-going negotiations with Raytheon, Boeing, CIT and
FINOVA with respect to its default under the terms of its debt and lease
agreements with these institutions.
18
Ultimately, the Company must generate sufficient revenue and cash flow to meet
the Company's obligations as currently structured, obtain additional outside
financing or renegotiate the Company's restructuring agreements with its
creditors in order to set a level of payments that can be reasonably serviced
with the cash flows generated by the Company under current market conditions.
The Company's auditors have included in their report dated March 17, 2003 on the
Company's financial statements for the year ended December 31, 2002 an
explanatory paragraph to the effect that substantial doubt exists regarding the
Company's ability to continue as a going concern due to the Company's recurring
losses from operations and the fact that the Company has liabilities in excess
of assets at December 31, 2002.
At June 30, 2003, the Company had recorded liabilities of $2.5 million relating
to amounts owed to the Transportation Security Administration ("TSA") for
providing security service at airports served by the Company and passenger
service fees collected from passengers. The Emergency War Supplemental
Appropriation Act of 2003 provides for aid payments to airlines in relation to
amounts of such fees and charges remitted to the TSA. The regulations under
which such funds will be disbursed to the airlines are currently being
formulated by the TSA, and the amount of benefits that the Company may receive
under this program has not been determined.
Subsequent Events
On July 17, 2003 the first of seven surplus aircraft scheduled for return to
Raytheon during 2003 under the terms of the 2002 Raytheon restructuring
agreement was returned to Raytheon.
In April 2003, the Company began negotiations with United to modify and extend
the existing code share agreement beyond its current expiration date of April
30, 2004. During the negotiation process, United filed a preemptive motion in
the bankruptcy court to reject the code share agreement. On July 11, 2003 the
Company and United signed a Memorandum of Understanding ("MOU") outlining the
terms of the proposed amendment to the code share agreement. On July 18, 2003,
United withdrew its bankruptcy court motion to reject the code share agreement.
Also effective on that date, the Company and United amended their code share
agreement, formalizing the terms under which the two companies will operate in
the future.
Pursuant to the amendment to the code share agreement, the Company granted
United rights to enter five Denver hub markets for which the Company previously
had exclusivity rights. In exchange for releasing exclusivity with respect to
those markets, previous restrictions placed on the Company regarding code
sharing and frequent flier program participation at the Denver hub with other
major carriers was removed. The Company and United also agreed on a payment
structure for amounts the Company owes United.
Subject to the Company's compliance with the code share agreement, as amended,
as of December 31, 2005, United has agreed to extend the term of the code share
agreement through April 30, 2007. United may elect to assume or reject the
amended code share agreement in connection with its ongoing bankruptcy
proceedings.
In conjunction with the Company's code share agreement with Frontier, the
Company commenced the operation of two new routes from the Company's Denver hub
to Rapid City, South Dakota and Grand Junction, Colorado effective July 31, 2003
and August 1, 2003, respectively.
In accordance with the terms of the Company's lease agreements, on April 28,
2003, the Company gave notice to Raytheon of the Company's intent to return two
Beechcraft Model 1900C aircraft effective
19
June 30, 2003. The Company now anticipates that these two Beechcraft 1900C
aircraft will be returned to Raytheon during August 2003. The aircraft had
previously been utilized by the Company to carry mail for the U.S. Postal
Service to certain markets. Mail revenues related to these aircraft during the
first half of 2003 were approximately $1.0 million.
The Federal Aviation Administration increased estimates of passenger and baggage
weights for use in comparing total aircraft weight against aircraft limitations.
Weight limitations normally impact operations when the aircraft are operating in
hot weather or with full passenger loads. Consequently there could potentially
be flights during particularly hot weather when the Company's aircraft would be
unable to carry their full load of passengers. However, the Company believes
that due to its current relatively low load factors the impact of the new
estimated weights will have a minimal impact on its operation. Moreover there
may be modification of aircraft specifications to accommodate the new weight
standards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of quantitative and qualitative disclosures about market risk,
see Item 7A of the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, which is hereby incorporated by reference.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and the Treasurer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the Chief
Executive Officer and the Treasurer, concluded that the Company's disclosure
controls and procedures were effective in ensuring that material information
relating to the Company with respect to the period covered by this report were
made known to them. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of such evaluation.
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At December 31, 2002, the Company had three notes payable to The CIT
Group/Equipment Financing, Inc. ("CIT") with interest at 8.7% to 9.08%, totaling
$5.0 million for financing of three of its Brasilia aircraft, of which $214,000
was in arrears. In April 2003 the Company combined and modified the notes to
provide for reduced monthly payments through March 2008 at an interest rate of
LIBOR plus 275 basis points. The Company made substantially reduced payments to
CIT on the combined and modified notes in May and June 2003. The Company
received a formal Notice of Default from CIT on July 2, 2003. As of the date of
this report, the amount of the CIT debt was $5.0 million, of which $0.3 million
was in arrears.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws. (1)
20
4.1 Specimen Common Stock Certificate. (1)
10.1 Airport/Airport Facilities Lease Agreement, dated November 1,
1989, by and between Minneapolis-St. Paul Airport and the
Company. (1)
10.2 Great Lakes Aviation, Ltd. 1993 Stock Option Plan. (1)
10.3 1993 Director Stock Option Plan. (1)
10.4 Great Lakes Aviation, Ltd. Employee Stock Purchase Plan. (1)
10.5 Restructuring Agreement, dated December 31, 2002, by and between
Raytheon Aircraft Credit Corporation and the Company. (2)
10.6 Group A Return Conditions Note, dated December 31, 2002, issued
by the Company to Raytheon Aircraft Credit Corporation. (2)
10.7 Form of Promissory Note, dated December 31, 2002, issued by the
Company to Raytheon Aircraft Credit Corporation. (2)
10.8 Form of Security Agreement, dated December 31, 2002, by and
between Raytheon Aircraft Credit Corporation and the
Company. (2)
10.9 Form of First Amendment to Lease Agreement, dated December 31,
2002, by and between Raytheon Aircraft Credit Corporation and
the Company. (2)
10.10 Deferral Note, dated December 31, 2002, issued by the Company to
Raytheon Aircraft Credit Corporation. (2)
10.11 Senior Note, dated December 31, 2002, issued by the Company to
Raytheon Aircraft Credit Corporation. (2)
10.12 Subordinated Note, dated December 31, 2002, issued by the
Company to Raytheon Aircraft Credit Corporation. (2)
10.13 Security Agreement, dated December 31, 2002, by and between
Raytheon Aircraft Credit Corporation and the Company. (2)
10.14 Fourth Amendment to Security Agreement, dated December 31, 2002,
by and between Raytheon Aircraft Credit Corporation and the
Company. (2)
10.15 Amended and Restated Security Agreement, dated December 31,
2002, by and between Raytheon Aircraft Credit Corporation and
the Company. (2)
10.16 Form of Lockup Agreement, dated December 31, 2002. (2)
10.17 Press Release, dated December 31, 2002. (2)
10.18 Settlement Agreement and Covenant Not to Execute, dated August
1, 2002, by and between FINOVA Capital Corporation and the
Company. (2)
21
10.19 Deferral Agreement, dated November 1, 2002, by and between
FINOVA Capital Corporation and the Company. (2)
10.20 Employment Agreement, dated December 31, 2002, by and between
Douglas G. Voss and the Company. (2)
10.21 Employment Agreement, dated December 31, 2002, by and between
Charles R. Howell IV and the Company. (2)
10.22 Letter Agreement, dated April 11, 2003, by and between Boeing
Capital Corporation and the Company. (2)
10.23 Code Share and Regulatory Cooperation and Marketing Agreement,
dated February 1, 2001, by and between United Airlines, Inc. and
the Company, (3)
10.24 Code Share Agreement, dated May 3, 2001, by and between Frontier
Airlines, Inc. and the Company, as amended on February 8, 2002.
(3)
10.25 Amendment to Code Share and Regulatory Cooperation and Marketing
Agreement by and between United Airlines, Inc. and the Company
effective July 18, 2003. Filed herewith.
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2 Chief Financial Officer Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement
on Form S-1, Registration No. 33-71180.
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003.
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2003
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunder duly authorized.
GREAT LAKES AVIATION, LTD.
Dated: August 13, 2003 By: /s/ Charles R. Howell IV
------------------------------
Charles R. Howell IV
Chief Executive Officer
By: /s/ Michael L. Tuinstra
------------------------------
Michael L. Tuinstra
Treasurer
23
EXHIBIT INDEX
Exhibit No. Description
----------- ------------------------------------------------------------------
10.25 Amendment to Code Share and Regulatory Cooperation and Marketing
Agreement, by and between United Airlines, Inc. and the Company
effective July 18, 2003.
31.1 Chief Executive Officer certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2 Chief Financial Officer Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.