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 September 30, 2007
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer 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 October 31, 2007, 14,081,970 shares of Common Stock of the registrant were issued and outstanding.
FORM 10-Q
For the Quarterly Period Ended September 30, 2007
INDEX
PART I - FINANCIAL INFORMATION |
2 | |||
Item 1. |
2 | |||
Item 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
9 | ||
Item 3. |
18 | |||
Item 4. |
19 | |||
19 | ||||
Item 1. |
19 | |||
Item 3. |
19 | |||
Item 6. |
20 | |||
21 |
i
Cautionary Statement Regarding Forward-Looking Statements
In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Great Lakes Aviation, Ltd. (Great Lakes or the Company) notes that certain statements in this Quarterly Report on Form 10-Q and elsewhere are forward-looking and provide other than historical information. The Companys management may also make oral, forward-looking statements from time to time. These forward-looking statements include, among others, statements concerning the Companys general business strategies, financing decisions, and expectations for funding expenditures and operations in the future. The words, believe, plan, continue, hope, estimate, project, intend, expect, and similar expressions reflected in such forward-looking statements are based on reasonable assumptions, and none of the 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.
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 Companys dependence on its code-sharing relationships with United Air Lines, Inc. (United Air Lines or United), which completed its reorganization under the United States Bankruptcy Code on February 1, 2006, and Frontier Airlines, Inc. (Frontier Airlines or Frontier); |
2) | the Companys ability to maintain compliance with the Companys restructured debt and lease obligations; |
3) | the effect of general economic conditions on business and leisure travel; |
4) | the incidence of domestic and international terrorism and military actions; |
5) | the incidence of pandemic diseases, storms, and other natural disasters; |
6) | the level of passenger confidence in the safety of air travel; |
7) | the volatility and level of fuel costs; |
8) | seasonality of passenger traffic; |
9) | the receipt of economically sufficient Essential Air Service subsidies; |
10) | increases in insurance and security expenses; |
11) | the possibility of increased competition from other air carriers (including United and Frontier) and from ground transportation; and |
12) | the level of regulatory and environmental costs. |
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. Changes may occur after that date, and the Company does not undertake to update any forward-looking statements except as required by law in the normal course of its public disclosure practices.
1
Item 1. | FINANCIAL STATEMENTS |
GREAT LAKES AVIATION, LTD.
Balance Sheets
(unaudited)
September 30, 2007 | December 31, 2006 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 4,555,804 | $ | 2,664,057 | ||||
Accounts receivable |
6,596,129 | 5,189,290 | ||||||
Inventories |
3,073,633 | 2,133,430 | ||||||
Prepaid expenses and other current assets |
1,180,731 | 2,282,978 | ||||||
Total current assets |
15,406,297 | 12,269,755 | ||||||
Property and equipment: |
||||||||
Flight equipment |
110,980,348 | 110,671,748 | ||||||
Other property and equipment |
8,413,719 | 8,767,842 | ||||||
Less accumulated depreciation and amortization |
(53,919,953 | ) | (50,383,206 | ) | ||||
Total property and equipment |
65,474,114 | 69,056,384 | ||||||
Other assets |
1,042,602 | 985,461 | ||||||
Total assets |
$ | 81,923,013 | $ | 82,311,600 | ||||
Liabilities and Stockholders Equity (deficit) |
||||||||
Current liabilities: |
||||||||
Notes payable and current maturities of long-term debt |
$ | 7,644,176 | $ | 7,642,876 | ||||
Accounts payable |
4,168,555 | 4,789,977 | ||||||
Accrued interest and other liabilities |
5,717,043 | 4,647,846 | ||||||
Total current liabilities |
17,529,774 | 17,080,699 | ||||||
Long-term debt, net of current maturities |
61,667,910 | 67,880,438 | ||||||
Deferred credits |
187,657 | 222,785 | ||||||
Stockholders equity (deficit): |
||||||||
Common stock, $0.01 par value. |
140,820 | 140,720 | ||||||
Authorized: 50,000,000 shares |
||||||||
Issued and outstanding: 14,081,970 at September 30, 2007 and 14,071,970 at December 31, 2006 |
||||||||
Paid-in capital |
33,482,644 | 33,468,644 | ||||||
Accumulated deficit |
(31,085,792 | ) | (36,481,686 | ) | ||||
Total stockholders equity (deficit) |
2,537,672 | (2,872,322 | ) | |||||
Commitments and Contingencies (Note 9) |
||||||||
Total liabilities and stockholders equity (deficit) |
$ | 81,923,013 | $ | 82,311,600 | ||||
See accompanying notes to financial statements.
2
GREAT LAKES AVIATION, LTD.
Statements of Operations
(Unaudited)
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Operating Revenues: |
||||||||||||||||
Passenger |
$ | 20,575,054 | $ | 17,050,707 | $ | 54,390,905 | $ | 46,265,957 | ||||||||
Public service |
5,905,023 | 6,058,574 | 16,448,147 | 18,190,762 | ||||||||||||
Freight, charter, and other |
193,378 | 388,730 | 573,642 | 1,066,814 | ||||||||||||
Total operating revenues |
26,673,455 | 23,498,011 | 71,412,694 | 65,523,533 | ||||||||||||
Operating expenses: |
||||||||||||||||
Salaries, wages, and benefits |
5,901,828 | 5,458,933 | 16,732,452 | 15,505,824 | ||||||||||||
Aircraft fuel |
6,623,915 | 5,356,672 | 17,499,434 | 15,010,556 | ||||||||||||
Aircraft maintenance, materials, and repairs |
3,757,406 | 2,114,511 | 10,750,677 | 9,393,595 | ||||||||||||
Depreciation and amortization |
1,407,208 | 1,430,619 | 4,217,184 | 4,330,230 | ||||||||||||
Aircraft rental |
155,025 | 440,397 | 465,075 | 1,321,191 | ||||||||||||
Other rentals and landing fees |
821,009 | 788,083 | 2,950,142 | 3,111,805 | ||||||||||||
Other operating expenses |
3,673,709 | 3,416,031 | 11,990,680 | 10,955,365 | ||||||||||||
Total operating expenses |
22,340,100 | 19,005,246 | 64,605,644 | 59,628,566 | ||||||||||||
Operating income |
4,333,355 | 4,492,765 | 6,807,050 | 5,894,967 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, net |
(469,913 | ) | (823,844 | ) | (1,723,242 | ) | (2,622,209 | ) | ||||||||
Gain on extinguishment of debt |
412,086 | 1,155,685 | 412,086 | 1,155,685 | ||||||||||||
Income before income taxes |
4,275,528 | 4,824,606 | 5,495,894 | 4,428,443 | ||||||||||||
Income tax expense |
(100,000 | ) | | (100,000 | ) | | ||||||||||
Net income |
$ | 4,175,528 | $ | 4,824,606 | $ | 5,395,894 | $ | 4,428,443 | ||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 0.30 | $ | 0.34 | $ | 0.38 | $ | 0.31 | ||||||||
Diluted |
$ | 0.29 | $ | 0.34 | $ | 0.37 | $ | 0.31 |
See accompanying notes to financial statements.
3
GREAT LAKES AVIATION, LTD.
Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 5,395,894 | $ | 4,428,443 | ||||
Adjustments to reconcile net income to net cash from operating activities |
||||||||
Depreciation and amortization |
4,217,184 | 4,330,230 | ||||||
Amortization of SFAS No. 15 |
(1,439,193 | ) | (1,682,250 | ) | ||||
Loss on disposition of assets |
128,394 | 43,854 | ||||||
Gain on extinguishment of debt |
(412,086 | ) | (1,155,685 | ) | ||||
Change in current operating items: |
||||||||
Increase in accounts receivable |
(1,406,839 | ) | (855,152 | ) | ||||
(Increase)/Decrease in inventories |
(940,203 | ) | 396,948 | |||||
Decrease in prepaid expenses and other current assets |
1,045,106 | 598,426 | ||||||
Increase in unearned revenue |
995,422 | 1,169,050 | ||||||
Decrease in accounts payable |
(621,422 | ) | (3,544,456 | ) | ||||
Increase in other current liabilities |
38,641 | 339,636 | ||||||
Increase in deferred lease payments |
| 748,116 | ||||||
Net cash provided by operating activities |
7,000,898 | 4,817,160 | ||||||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||
Purchase of flight equipment and other property and equipment |
(763,306 | ) | (401,613 | ) | ||||
Net cash flows used in investing activities |
(763,306 | ) | (401,613 | ) | ||||
CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||
Repayment of notes payable and long-term debt |
(4,359,945 | ) | (4,435,605 | ) | ||||
Proceeds from sale of common stock |
14,100 | | ||||||
Net cash used in financing activities |
(4,345,845 | ) | (4,435,605 | ) | ||||
NET INCREASE (DECREASE) IN CASH |
1,891,747 | (20,058 | ) | |||||
Cash |
||||||||
Beginning of period |
2,664,057 | 1,907,357 | ||||||
End of period |
$ | 4,555,804 | $ | 1,887,299 | ||||
Supplementary cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 3,889,795 | $ | 3,782,784 |
See accompanying notes to financial statements.
4
Great Lakes Aviation, Ltd.
Notes to Financial Statements
September 30, 2007
(unaudited)
NOTE 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, 2006.
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. Great Lakes Aviation, Ltd. (Great Lakes or the Company) considers its critical accounting policies involving more significant judgments and estimates to be those related to impairment of long-lived assets, deferred income taxes, and depreciation and residual values. Actual results could differ from those estimates. Certain prior year balances were reclassified to conform to the current year presentation. Commissions previously presented in other operating expenses line item on the Statement of Operations is now netted with passenger revenue. Unearned revenue and amortization of the balance relating to the Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring (SFAS No. 15) previously combined with accrued liabilities on the Statements of Cash Flows is now presented as separate line items. Those reclassifications had no impact on net income or stockholders deficit as previously reported.
Our financial statements have been prepared assuming that Great Lakes will continue as a going concern. The Companys prior liquidity problems and negative working capital raised doubts about the Companys ability to continue as a going concern. The Company had current and total liabilities in excess of current and total assets at December 31, 2006, 2005, and 2004. The Companys ability to continue as a going concern will ultimately depend on the Companys ability to: (i) maintain adequate liquidity and (ii) continue to generate cash flows from operations to sustain operations and fund debt service requirements. The accompanying financial statements have been prepared on a going concern basis that assumes a continuity of operations and the realization of assets and liabilities in the ordinary course of business. The financial statements do not include any adjustments that might result if the Company were forced to discontinue operations.
NOTE 2. Stock Based Compensation
For the nine month period ended September 30, 2007, there were no options granted, cancelled or forfeited; and 10,000 options outstanding were exercised at a purchase price of $1.41 per share. For the nine month period ended September 30, 2006, there were no options granted, cancelled, exercised or forfeited. The Company did not realize any tax deductions related to the exercise of stock options during the first nine months. The Company will record such deductions to additional paid in capital when realized. There are no shares available for grant under the Plans as of September 30, 2007 and 2006. The aggregate intrinsic value for options outstanding and exercisable at September 30, 2007 and 2006 was $1,029,290 and $357,415 respectively.
5
Note 3. Earnings per share
The following table shows the computation of basic and diluted earnings per common share:
Three months ended September 30, |
Nine months ended September 30, | |||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||
Numerator: |
||||||||||||
Net income |
$ | 4,175,528 | $ | 4,824,606 | $ | 5,395,894 | $ | 4,428,443 | ||||
Denominator: |
||||||||||||
Weighted average shares outstanding, basic |
14,078,818 | 14,071,970 | 14,074,278 | 14,071,970 | ||||||||
Dilutive effect of employee stock options |
364,326 | 306,048 | 370,248 | 283,663 | ||||||||
Weighted average shares outstanding, diluted |
$ | 14,443,144 | $ | 14,378,018 | $ | 14,444,526 | $ | 14,355,633 | ||||
Net income per share, basic |
$ | 0.30 | $ | 0.34 | $ | 0.38 | $ | 0.31 | ||||
Net income per share, diluted |
$ | 0.29 | $ | 0.34 | $ | 0.37 | $ | 0.31 |
For the three month period ending September 30, 2007 and September 30 2006, there were 120,000 outstanding options excluded in the calculation of net income per diluted common share because the effect would have been anti-dilutive.
For the nine months ended September 30, 2007, there were no options excluded in the calculation of net income per diluted common share. For the nine months ended September 30, 2006, outstanding options of 140,000 were excluded from the calculation of net income per diluted common share because the effect would have been anti-dilutive.
NOTE 4. Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109, or FIN 48, on January 1, 2007. The Company did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2002. State jurisdictions that remain subject to examination range from 2002 to 2006. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.
The Company policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor has the Company recognized any related interest expense during 2007.
6
NOTE 5. Accrued Liabilities.
Accrued liabilities consisted of the following balances at September 30, 2007 and December 31, 2006:
September 30, 2007 |
December 31, 2006 | |||||
Accrued expenses |
$ | 437,345 | $ | 380,401 | ||
Unearned Revenue |
3,633,522 | 2,638,099 | ||||
Accrued property taxes |
220,665 | 350,013 | ||||
Accrued payroll |
1,425,511 | 1,272,642 | ||||
Accrued interest |
| 6,691 | ||||
Total accrued liabilities |
$ | 5,717,043 | $ | 4,647,846 | ||
NOTE 6. Notes Payable and Long-Term Debt
At September 30, 2007, the Company was current with respect to all of the Companys aircraft debt, senior debt and lease obligations.
On March 9, 2007, the Company and Raytheon Aircraft Credit Corporation (Raytheon) entered into an Amended and Restated Restructuring Agreement (the Amended Agreement), which amends and restates in its entirety the Restructuring Agreement between the Company and Raytheon dated as of December 31, 2002, (the 2002 Restructuring Agreement). Pursuant to the Amended Agreement, the Company issued to Raytheon 25 amended and restated promissory notes (the Aircraft Notes), each secured by an amended security agreement in the related aircraft. The Aircraft Notes replace the existing notes issued by the Company to Raytheon on December 31, 2002. Each of the Aircraft Notes has an original principal amount of $2.2 million, for a total amount of $52.9 million, bears interest at a fixed rate of 6.75% per annum, and provides for monthly payments in arrears starting on March 30, 2007. The Aircraft Notes mature on June 30, 2011 to coincide with the expiration of the Term Cost PlanTM Agreement (the FMP contract), at which time a final payment of $1.3 million will be due for each aircraft. The fixed rate of 6.75% on the Aircraft Notes represents a significant reduction in interest expense and eliminates variable interest rate risk on all of the Companys aircraft debt.
Under the Amended Agreement, the Company issued to Raytheon a promissory note (the Senior Note) that replaced both the existing senior note and subordinated note issued by the Company to Raytheon on December 31, 2002. The Senior Note has an original principal amount of $13.2 million and bears interest at a rate of 7.00% per annum. Interest on the Senior Note is payable monthly in arrears on the last day of each month, commencing on March 30, 2007. Beginning with the calendar quarter ending June 30, 2007, the Senior Note provides for quarterly payments of principal on June 30, September 30, and December 30 each year until the note matures on December 30, 2015.
The Amended Agreement restated the terms of the notes; therefore, at December 31, 2006, the carrying amounts of the Raytheon notes consisted of 25 aircraft promissory notes and two long-term notes payable.
At December 31, 2006, the Company was in arrears on payments of principal and interest in the amount of $12.5 million, which included interest on the Aircraft Debt in the amount of $2.8 million. In accordance with FASB Statement of Financial Accounting Standards No. 6 (FAS 6), Classification of Short Term Obligations Expected to be Refinanced, the amount of long-term debt that would otherwise be due after one year would have been reflected on the Companys balance sheet as long-term obligations classified as current. Since the Company had entered into the Amended Agreement on March 9, 2007, with Raytheon Aircraft Credit Corporation (Raytheon), before the financial statements were issued, the amounts had been reclassified to non-current at December 31, 2006.
On April 27, 2007, the Company and FINOVA amended the September 30, 2006 promissory note payable to FINOVA which had originally provided for 45 consecutive monthly payments of $22,342 ending June 30, 2010. The amended note provided for continued scheduled monthly payments of $22,342 through June 30, 2007 followed by three consecutive monthly payments of $130,747 commencing July 30, 2007 through September 30, 2007. The note has been paid in full and all debt owing under the note forgiven. The Company recorded a gain of approximately $412,000 as a result of this forgiveness of debt in the third quarter when the debt was extinguished.
7
The amount of long-term debt also includes additional amounts of debt recorded pursuant to the provisions of the SFAS No. 15. This additional debt is being amortized as a reduction of interest expense over the remaining term of the debt.
The following table sets forth, as of September 30, 2007 and December 31, 2006, the amounts of the Companys long-term debt, the amounts of current maturities of long-term debt and the additional amounts of debt recorded by the Company pursuant to SFAS No. 15:
September 30, 2007 |
December 31, 2006 |
|||||||
Long-Term Debt: |
||||||||
Raytheon Aircraft Credit Corporation |
$ | 63,723,630 | $ | 67,602,232 | ||||
Additional carrying value under SFAS No. 15 |
5,588,456 | 7,118,672 | ||||||
FINOVA promissory note |
| 802,410 | ||||||
Total long-term debt |
69,312,086 | 75,523,314 | ||||||
Less: |
||||||||
Raytheon Aircraft Credit Corporation current maturities of long term debt and additional carrying value under SFAS No. 15 |
(7,644,176 | ) | (7,374,767 | ) | ||||
Other current maturities of long-term debt |
| (268,109 | ) | |||||
Long-term debt net of current maturities |
$ | 61,667,910 | $ | 67,880,438 | ||||
Reduction of Debt Balances. During the first nine months of 2007, the Company made principal payments in the aggregate amount of $4.4 million against the Companys outstanding debt balances and recognized a gain of $0.4 million on forgiveness of debt. The Company also reduced the additional carrying value under SFAS No. 15 by $1.4 million due to the amortization of the additional carrying value which was $5.6 million and $7.1 million as of September 30, 2007 and December 31, 2006 respectively.
NOTE 7. Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. Management is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact, if any, on the Companys consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early adoption is allowed under certain circumstances. Management is currently evaluating the requirements of SFAS No. 159 and has not yet determined the impact, if any, on the Companys financial statements.
8
NOTE 8. Related Parties
As of September 30, 2007, Raytheon owned 5,371,980 shares of Common Stock of the Company, representing an approximate 38.2% interest in the Companys outstanding Common Stock.
As of September 30, 2007, Douglas G. Voss, the Companys Chairman and major shareholder, is the beneficial owner of 5,681,000 shares of Common Stock, which includes 300,000 shares of Common Stock subject to currently exercisable options and represents 40.4% of the outstanding Common Stock of the Company. Accordingly, Mr. Voss and Raytheon are in a position to control the management and affairs of the Company.
NOTE 9. Commitments and Contingencies
Debt and Lease Payment Obligations. The following table summarizes the Companys major debt and lease payment obligations for periods beginning as of October 1 and ending as of September 30 for each of the designated time periods:
2008 | 2009-2010 | 2011-2012 | After 2012 | Total | |||||||||||
Long-term debt |
$ | 5,920,153 | $ | 12,370,581 | $ | 39,674,771 | $ | 5,758,125 | $ | 63,723,630 | |||||
SFAS 15 amounts |
1,724,023 | 2,945,660 | 918,773 | | 5,588,456 | ||||||||||
Total debt |
7,644,176 | 15,316,241 | 40,593,544 | 5,758,125 | 69,312,086 | ||||||||||
Aircraft lease obligations |
600,000 | 1,200,000 | 1,200,000 | 300,000 | 3,300,000 | ||||||||||
Non-aircraft lease commitments |
1,817,735 | 4,030,567 | | | 5,848,302 | ||||||||||
Total Obligations |
$ | 10,061,911 | $ | 20,546,808 | $ | 41,793,544 | $ | 5,758,125 | $ | 78,460,388 | |||||
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The Company
The Company is a regional airline operating as an independent carrier and as a code share partner with United Airlines, Inc. (United Airlines or United) and Frontier Airlines, Inc. (Frontier Airlines or Frontier). As of November 9, 2007, the Company provides scheduled passenger service at 43 airports in eleven states with a fleet of Embraer EMB-120 Brasilias and Raytheon/Beech 1900D regional airliners. A total of 228 weekday flights are scheduled daily, including 142 flights at Denver, ten flights at Albuquerque, 20 flights at St. Louis, 12 flights at Kansas City and 12 flights at Phoenix. All scheduled flights are operated under the Great Lakes Airlines marketing identity in conjunction with code-share agreements with United and Frontier at the Denver International Airport and Phoenix International Airport hubs. See Note 1 to the Financial Statements for a discussion of liquidity and the Companys ability to continue as a going concern.
General information about the Company can be found at www.flygreatlakes.com. The Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through the Companys web site as soon as reasonably practicable after the Company has filed such reports with, or furnished them to, the United States Securities and Exchange Commission (the SEC). Information on the Companys web site is not incorporated into, nor a part of, this Quarterly Report on Form 10-Q or any of the Companys other filings with the SEC.
Air Service Markets
Essential Air Service Contracts. As of September 30, 2007, the Company provided essential air service to 23 communities that maintain eligibility in the U.S. Department of Transportation Essential Air Service Program.
On October 7, 2007, the Company initiated scheduled air service from Burlington, IA to both St. Louis, MO and Kansas City, MO. On the same day the Company began servicing Fort Leonard Wood, MO. to St. Louis, MO. On November 4, 2007, the Company initiated scheduled air service to Quincy, Decatur and Marion, IL to St. Louis, MO.
9
The Company discontinued scheduled air service to Brookings, SD on October 1, 2007 as a result of the U.S. Department of Transportation terminating Essential Air Service subsidy eligibility. On October 4, 2007, the Company was awarded Essential Air Service contracts to provide scheduled air service to Merced and Visalia, CA and Ely, NV from Las Vegas, NV, as well as, Vernal and Moab, UT from Denver, CO.
Other Service. In July 2007, the Company commenced scheduled air service to Gallup, NM with the assistance of a grant awarded to the New Mexico Department of Transportation provided by the DOT Small Community Air Service Development Program. The Company discontinued service to Aberdeen, SD on November 5, 2007.
United Airlines Code Share Agreement. Effective November 1, 2007, the Company and United Air Lines amended the terms of their code share agreement to be extended until November 1, 2010. Other terms of the amendment provide for the Company to implement United Air Lines code sharing for destinations the Company currently services to and from Albuquerque, NM, Denver, Co, Kansas City, MO and Phoenix, AZ hubs, as well as, Las Vegas, NV hub when it should become operational.
10
Results of Operations for the Three Months Ended September 30, 2007 and 2006.
The following table sets forth certain financial information regarding the Companys results of operations for the three months ended September 30, 2007 and 2006.
Statement of Operations Data
(dollars in thousands)
For the Three Months Ended September 30, | |||||||||||||||||
2007 | 2006 | ||||||||||||||||
Amount (in thousands) |
Cents per ASM |
% Increase (decrease) from 2006 |
Amount (in thousands) |
Cents per ASM |
|||||||||||||
Operating revenues |
|||||||||||||||||
Passenger |
$ | 20,575 | 24.2 | ¢ | 20.7 | % | $ | 17,051 | 23.2 | ¢ | |||||||
Public service |
5,905 | 7.0 | (2.5 | ) | 6,059 | 8.3 | |||||||||||
Other |
193 | 0.2 | (50.4 | ) | 389 | 0.5 | |||||||||||
Total operating revenues |
26,673 | 31.4 | 13.5 | 23,498 | 32.0 | ||||||||||||
Salaries, wages, and benefits |
5,902 | 7.0 | 8.1 | 5,459 | 7.4 | ||||||||||||
Aircraft fuel |
6,624 | 7.8 | 23.7 | 5,357 | 7.3 | ||||||||||||
Aircraft maintenance, materials and repairs |
3,757 | 4.4 | 77.7 | 2,114 | 2.9 | ||||||||||||
Depreciation and amortization |
1,407 | 1.7 | (1.7 | ) | 1,431 | 1.9 | |||||||||||
Aircraft rental |
155 | 0.2 | (64.8 | ) | 440 | 0.6 | |||||||||||
Other rentals and landing fees |
821 | 1.0 | 4.2 | 788 | 1.1 | ||||||||||||
Other operating expenses |
3,674 | 4.3 | 7.6 | 3,416 | 4.7 | ||||||||||||
Total operating expenses |
22,340 | 26.3 | 17.5 | 19,005 | 25.9 | ||||||||||||
Operating income |
4,333 | 5.1 | (3.6 | ) | 4,493 | 6.1 | |||||||||||
Interest expense, net |
(470 | ) | (0.6 | ) | (43.0 | ) | (824 | ) | (1.1 | ) | |||||||
Gain on extinguishment of debt |
412 | 0.5 | (64.4 | ) | 1,156 | 1.6 | |||||||||||
Income before income taxes |
4,275 | 4.9 | (11.4 | ) | 4,825 | 6.6 | |||||||||||
Income tax expense |
(100 | ) | | ||||||||||||||
Net income |
$ | 4,175 | 4.9 | ¢ | (13.5 | )% | $ | 4,825 | 6.6 | ¢ | |||||||
11
Selected Operating Data
The following table sets forth certain selected operating data regarding the Companys operations for the three months ended September 30, 2007 and 2006.
September 30, 2007 |
Increase/ (decrease) from 2006 |
September 30, 2006 |
|||||||||
Selected Operating Data: |
|||||||||||
Available seat miles (in thousands) (1) |
84,909 | 15.6 | % | 73,424 | |||||||
Revenue passenger miles (in thousands) (2) |
43,530 | 21.8 | % | 35,734 | |||||||
Revenue passengers carried |
159,736 | 15.6 | % | 138,236 | |||||||
Departures flown |
17,835 | 11.8 | % | 15,955 | |||||||
Passenger load factor (3) |
51.3 | % | 5.3 | % | 48.7 | % | |||||
Average yield per revenue passenger mile (4) |
47.3 | ¢ | -1.0 | % | 47.8 | ¢ | |||||
Revenue per available seat miles (5) |
31.4 | ¢ | -2.2 | % | 32.1 | ¢ | |||||
Cost per available seat mile (6) |
26.3 | ¢ | 1.5 | % | 25.9 | ¢ | |||||
Average passenger fare (7) |
$ | 128.80 | 4.1 | % | $ | 123.67 | |||||
Average passenger trip length (miles) (8) |
273 | 5.4 | % | 259 | |||||||
Average cost per gallon of fuel |
$ | 2.81 | 10.2 | % | $ | 2.55 |
(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 Third Quarter 2007 to Third Quarter 2006
Passenger Revenues. Passenger revenues were $20.6 million in the third quarter of 2007, an increase of 20.7% from $17.1 million in the third quarter of 2006. The $3.5 million increase in passenger revenues is primarily attributable to a 21.8% increase in revenue passenger miles and increase in average passenger fare during the third quarter of 2007. The Companys available seat mile (ASM) capacity for the third quarter of 2007 increased 15.6% from the ASM capacity for the third quarter of 2006 as a result of an increase in the number of the Companys regularly scheduled flights.
Public Service Revenues. At September 30, 2007, the Company served 23 communities on a subsidized basis under the U.S. Department of Transportation Essential Air Service Program and scheduled air service to Gallup, New Mexico with the assistance of a grant awarded to the New Mexico Department of Transportation provided by the DOT Small Community Air Service Development Program. Public service revenues collected through the Essential Air Service Program decreased 2.5% to $5.9 million during the third quarter of 2007, as compared to $6.1 million during the third quarter of 2006. The decrease in public service revenue was due primarily to a net decrease of two communities served by the Company under the Essential Air Service Program.
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Other Revenues. Other revenues were $0.2 million during the third quarter of 2007, a decrease of 50.4% from the third quarter of 2006. The 50.4% decrease was primarily due to termination of rental income from the lease of two Beechcraft 1900D aircraft in 2006 which have been returned to scheduled service.
Operating Expenses. Total operating expenses were $22.3 million, or 26.3 cents per ASM, in the third quarter of 2007, as compared to $19.0 million, or 25.9 cents per ASM in the third quarter of 2006.
Salaries, Wages, and Benefits. Salaries, wages, and benefits were $5.9 million in the third quarter of 2007, an increase of 8.1% from $5.5 million in the third quarter of 2006. The increase in salaries, wages, and benefits is primarily attributable to increases resulting from increased staffing and pay rate increases offset by a decrease in the cost of employee related insurance.
Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $6.6 million, or 7.8 cents per ASM, in the third quarter of 2007, an increase of $1.3 million. In comparison, the Companys aircraft fuel and into-plane expense for the third quarter of 2006 was $5.4 million, or 7.3 cents per ASM. The average cost of fuel increased from $2.55 per gallon in the third quarter of 2006 to $2.81 per gallon in the third quarter of 2007. The effect of the $0.26 increase in cost per gallon was an increase in total cost of $0.5 million in 2007. The 23.7% increase in the Companys aircraft fuel expense is attributable to a 15.3% increase in consumption as the result of a 15.6% increase in Companys available seat miles, along with a 10.2% increase in the average cost of fuel per gallon.
At current rates of consumption, a one cent increase or decrease in the per gallon price of fuel will increase or decrease the Companys fuel expense by approximately $92,000 annually.
Aircraft Maintenance, Materials and Repairs. Aircraft maintenance, materials and repairs expense was $3.8 million during the third quarter of 2007, which was a 77.7% increase from $2.1 million during the third quarter of 2006. The 2007 increase is attributable to increased overhauled engines which are not covered under the Term Cost PlanTM Agreement (the FMP contract) contract and 2006 had an adjustment reducing expenses related to the restructuring of the FMP contract.
Depreciation and amortization. Depreciation and amortization expense was $1.4 million during the third quarter of 2007, which was at approximately the same level as the third quarter of 2006.
Aircraft Rental. Aircraft lease expense was $0.2 million during the third quarter of 2007, a decrease of 64.8% from $0.4 million in the third quarter of 2006. The reduction was primarily attributable to the reduced monthly rental payments for the two aircraft leased from Boeing Capital Corporation (Boeing). On December 20, 2006, the Company and Boeing entered into a settlement agreement which reduced the monthly rental payments for each aircraft.
Other Rentals and Landing Fees Expense. Other rentals and landing fees expense was $0.8 million during the third quarter of 2007, which was at the same level as the third quarter of 2006.
Other Operating Expenses. Other operating expenses were $3.7 million, or 4.3 cents per ASM, during the third quarter of 2007, an increase of 7.6% from $3.4 million, or 4.7 cents per ASM, during the third quarter of 2006. The increase in other operating expenses is primarily due to an increase of approximately $64,000 in pilot training and associated lodging expenses, $72,000 for passenger booking fees, $50,000 for de-icing expenses in Denver and $72,000 for other expenses resulting from increased operations.
Interest Expense. Interest expense was $0.5 million during the third quarter of 2007, a decrease of 43.0% from $0.8 million during the third quarter of 2006. The decrease was primarily the result of non-recurring penalty interest in 2007 and lower fixed interest rates on reduced principal balances. These decreases were partially offset by a reduction in the SFAS No. 15 credits in interest expense related to the restructured Raytheon debt.
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Gain on Extinguishment of Debt. During the third quarter of 2007, the Company recognized a $0.4 million gain on the settlement and extinguishment of debt on previously leased Embraer Brasilia aircraft from FINOVA. During the third quarter of 2006, the Company recognized a $1.1 million gain on the settlement and extinguishment of debt on three Embraer Brasilia aircraft financed by CIT.
Income Tax Expense (Benefit). The realization of any income tax benefits from the Companys loss carry forward position remains substantially in doubt. The $100,000 of expense was the result of 2007 estimated alternative minimum tax. At September 30, 2007, the Company has fully reserved the deferred tax asset which is approximately $11.8 million.
As of September 30, 2007, the Company has reviewed its net deferred tax assets and has not recognized the potential tax benefits arising therefrom because at this time management believes it is more likely than not that the benefits will not be realized in future years. In making this assessment, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. Management has fully reserved the net deferred tax asset at September 30, 2007. The assessment of recognition of potential tax benefits is under continuing review and may change at a later date.
Results of Operations for the Nine Months Ended September 30, 2007 and 2006.
The following table sets forth certain financial information regarding the Companys results of operations for the nine months ended September 30, 2007 and 2006.
Statement of Operations Data
(dollars in thousands)
For the Nine Months Ended September 30, | |||||||||||||||||
2007 | 2006 | ||||||||||||||||
Amount (in thousands) |
Cents per ASM |
% Increase (decrease) from 2006 |
Amount (in thousands) |
Cents per ASM |
|||||||||||||
Operating revenues |
|||||||||||||||||
Passenger |
$ | 54,391 | 23.1 | ¢ | 17.6 | % | $ | 46,266 | 21.5 | ¢ | |||||||
Public service |
16,448 | 7.0 | (9.6 | ) | 18,191 | 8.4 | |||||||||||
Other |
574 | 0.2 | (46.2 | ) | 1,067 | 0.5 | |||||||||||
Total operating revenues |
71,413 | 30.3 | 9.0 | 65,523 | 30.4 | ||||||||||||
Salaries, wages, and benefits |
16,733 | 7.1 | 7.9 | 15,506 | 7.2 | ||||||||||||
Aircraft fuel |
17,499 | 7.4 | 16.6 | 15,011 | 7.0 | ||||||||||||
Aircraft maintenance materials and repairs |
10,751 | 4.6 | 14.4 | 9,394 | 4.4 | ||||||||||||
Depreciation and amortization |
4,217 | 1.8 | (2.6 | ) | 4,330 | 2.0 | |||||||||||
Aircraft rental |
465 | 0.2 | (64.8 | ) | 1,321 | 0.6 | |||||||||||
Other rentals and landing fees |
2,950 | 1.3 | (5.2 | ) | 3,112 | 1.4 | |||||||||||
Other operating expenses |
11,991 | 5.1 | 9.5 | 10,955 | 5.1 | ||||||||||||
Total operating expenses |
64,606 | 27.4 | 8.3 | 59,629 | 27.7 | ||||||||||||
Operating income |
6,807 | 2.9 | 15.5 | 5,895 | 2.7 | ||||||||||||
Interest expense, net |
(1,723 | ) | (0.7 | ) | (34.3 | ) | (2,622 | ) | (1.2 | ) | |||||||
Gain on extinguishment of debt |
412 | 0.2 | (64.4 | ) | 1,156 | 0.5 | |||||||||||
Income before income taxes |
5,496 | 2.3 | 24.1 | 4,428 | 2.1 | ||||||||||||
Income tax expense |
(100 | ) | | ||||||||||||||
Net income |
$ | 5,396 | 2.3 | ¢ | 21.9 | % | $ | 4,428 | 2.1 | ¢ | |||||||
14
Selected Operating Data
The following table sets forth certain selected operating data regarding the Companys operations for the nine months ended September 30, 2007 and 2006.
September 30, 2007 |
Increase/ (decrease) from 2006 |
September 30, 2006 |
|||||||||
Selected Operating Data: |
|||||||||||
Available seat miles (in thousands) (1) |
235,736 | 9.5 | % | 215,378 | |||||||
Revenue passenger miles (in thousands) (2) |
117,139 | 18.6 | % | 98,808 | |||||||
Revenue passengers carried |
430,704 | 13.7 | % | 378,803 | |||||||
Departures flown |
50,196 | 6.8 | % | 47,008 | |||||||
Passenger load factor (3) |
49.7 | % | 8.3 | % | 45.9 | % | |||||
Average yield per revenue passenger mile (4) |
46.4 | ¢ | -0.9 | % | 46.8 | ¢ | |||||
Revenue per available seat miles (5) |
30.3 | ¢ | -0.3 | % | 30.4 | ¢ | |||||
Cost per available seat mile (6) |
27.4 | ¢ | -1.1 | % | 27.7 | ¢ | |||||
Average passenger fare (7) |
$ | 126.28 | 3.4 | % | $ | 122.14 | |||||
Average passenger trip length (miles) (8) |
272 | 4.2 | % | 261 | |||||||
Average cost per gallon of fuel |
$ | 2.62 | 6.9 | % | $ | 2.45 |
(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 Nine Months 2007 to First Nine Months 2006
Passenger Revenues. Passenger revenues were $54.4 million in the first nine months of 2007, an increase of 17.6% from $46.3 million in the first nine months of 2006. The $8.1 million increase in passenger revenues is primarily attributable to an 18.6% increase in revenue passenger miles and increase in average passenger fare during the first nine months of 2007 offset by a 0.9% decrease in average yield. The Companys available seat mile (ASM) capacity for the first nine months of 2007 increased 9.5% from the ASM capacity for the first nine months of 2006 as a result of an increase in the number of the Companys regularly scheduled flights.
Public Service Revenues. At September 30, 2007, the Company served 23 communities on a subsidized basis under the U.S. Department of Transportation Essential Air Service Program and scheduled air service to Gallup, New Mexico with the assistance of a grant awarded to the New Mexico Department of Transportation provided by the DOT Small Community Air Service Development Program. Public service revenues collected through the Essential Air Service Program decreased 9.6% to $16.4 million during the first nine months of 2007, as compared to $18.2 million during the first nine months of 2006. The decrease in public service revenue was due primarily to a net decrease of two communities served by the Company under the Essential Air Service Program.
15
Other Revenues. Other revenues were $0.6 million during the first nine months of 2007, a decrease of 46.2% from the first nine months of 2006. The 46.2% decrease was primarily due to termination of rental income from the lease of two Beechcraft 1900D aircraft in 2006 which have been returned to scheduled service. This decrease was partially offset by an increase in cargo and charter income.
Operating Expenses. Total operating expenses were $64.6 million, or 27.4 cents per ASM, in the first nine months of 2007, as compared to $59.7 million, or 27.7 cents per ASM in the first nine months of 2006.
Salaries, Wages, and Benefits. Salaries, wages, and benefits were $16.7 million in the first nine months of 2007, an increase of 7.9% from $15.5 million in the first nine months of 2006. The increase in salaries, wages, and benefits is primarily attributable to increases resulting from increased staffing and pay rate increases.
Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $17.5 million, or 7.4 cents per ASM, in the first nine months of 2007, an increase of $2.5 million. In comparison, the Companys aircraft fuel and into-plane expense for the first nine months of 2006 was $15.0 million, or 7.0 cents per ASM. The average cost of fuel increased from $2.45 per gallon in the first nine months of 2006 to $2.62 per gallon in the nine months of 2007. The effect of the $0.17 increase in cost per gallon was an increase in total cost of $1.0 million in 2007. The 16.6% increase in the Companys aircraft fuel expense is attributable to a 9.9% increase in consumption as the result of a 9.5% increase in Companys available seat miles, along with a 6.9% increase in the average cost of fuel per gallon.
At current rates of consumption, a one cent increase or decrease in the per gallon price of fuel will increase or decrease the Companys fuel expense by approximately $92,000 annually.
Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $10.8 million during the first nine months of 2007, which was an 14.4% increase from $9.4 million during the first nine months of 2006. The 2007 increase is attributable to increased overhauled engines which are not covered under the FMP contract and 2006 had adjustment reducing expenses related to the restructuring of the FMP contract and increase number of scheduled airframe inspections during the 2007 period.
Depreciation and amortization. Depreciation and amortization expense was $4.2 million during the first nine months of 2007, which was at approximately the same level as the first nine months of 2006.
Aircraft Rental. Aircraft lease expense was $0.5 million during the first nine months of 2007, a decrease of 64.8% from $1.3 million in the first nine months of 2006. The reduction was primarily attributable to the reduced monthly rental payments for the two aircraft leased from Boeing Capital Corporation (Boeing). On December 20, 2006, the Company and Boeing entered into a settlement agreement which reduced the monthly rental payments for each aircraft.
Other Rentals and Landing Fees Expense. Other rentals and landing fees expense was $2.9 million during the first nine months of 2007, which was a 5.2% decrease from $3.1 million during the first nine months of 2006. The decrease in other rentals and landing fees expenses for the first nine months of 2007 occurred primarily because of reduced landing rate at Denver International Airport.
Other Operating Expenses. Other operating expenses were $12.0 million, or 5.1 cents per ASM, during the first nine months of 2007, an increase of 9.4% from $11.0 million, or 5.1 cents per ASM, during the first nine months of 2006. The increase in other operating expenses is primarily due to an increase of approximately $413,000 for de-icing expenses in Denver, $290,000 for passenger booking fees, $172,000 in pilot training and associated lodging expenses and $123,000 for legal and professional fees.
Interest Expense. Interest expense was $1.7 million during the first nine months of 2007, a decrease of 34.3% from $2.6 million during the first nine months of 2006. The decrease was primarily the result of non-recurring penalty interest in 2007 and lower fixed interest rates on reduced principal balances. These decreases were partially offset by a reduction in the SFAS No. 15 credits in interest expense related to the restructured Raytheon debt.
16
Gain on Extinguishment of Debt. During the third quarter of 2007, the Company recognized a $0.4 million gain on the settlement and extinguishment of debt on previously leased Embraer Brasilia aircraft from FINOVA. During the third quarter of 2006, the Company recognized a $1.1 million gain on the settlement and extinguishment of debt on three Embraer Brasilia aircraft financed by CIT.
Income Tax Expense (Benefit). The realization of any income tax benefits from the Companys loss carry forward position remains substantially in doubt. The $100,000 of expense was the result of 2007 estimated alternative minimum tax. At September 30, 2007, the Company has fully reserved the deferred tax asset which is approximately $11.8 million.
As of September 30, 2007, the Company has reviewed its net deferred tax assets and has not recognized the potential tax benefits arising therefrom because at this time management believes it is more likely than not that the benefits will not be realized in future years. In making this assessment, management considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. Management has fully reserved the net deferred tax asset at September 30, 2007. The assessment of recognition of potential tax benefits is under continuing review and may change at a later date.
Liquidity and Capital Resources
Debt and Lease Payment Obligations. The following table summarizes the Companys major debt and lease payment obligations for periods beginning as of October 1 and ending as of September 30 for each of the designated time periods:
2008 | 2009-2010 | 2011-2012 | After 2012 | Total | |||||||||||
Long-term debt |
$ | 5,920,153 | $ | 12,370,581 | $ | 39,674,771 | $ | 5,758,125 | $ | 63,723,630 | |||||
SFAS 15 amounts |
1,724,023 | 2,945,660 | 918,773 | | 5,588,456 | ||||||||||
Total debt |
7,644,176 | 15,316,241 | 40,593,544 | 5,758,125 | 69,312,086 | ||||||||||
Aircraft lease obligations |
600,000 | 1,200,000 | 1,200,000 | 300,000 | 3,300,000 | ||||||||||
Non-aircraft lease commitments |
1,817,735 | 4,030,567 | | | 5,848,302 | ||||||||||
Total Obligations |
$ | 10,061,911 | $ | 20,546,808 | $ | 41,793,544 | $ | 5,758,125 | $ | 78,460,388 | |||||
Sources and Uses of Cash. As of September 30, 2007, the Companys cash balance was $4.6 million, a $1.6 million increase from the cash balance of $2.7 million as of December 31, 2006.
Cash Provided by Operating Activities. During the first nine months of 2007, the Company had positive cash flow from operating activities in the amount of $7.0 million. During the first nine months the Company generated $5.4 million of net income, and non-cash depreciation and amortization of $4.2 million. Non-cash amortization of SFAS No. 15 was $1.4 million along with the non-cash gain on extinguishment of debt $0.4 million and disposition of assets provide $0.1 million. Changes in current operating items used $0.9 million.
Cash Flows from Investing Activities. The Company paid $0.8 million primarily to replace aircraft rotable components.
Cash Flows from Financing Activities. The Company utilized $4.4 million of cash to reduce the Companys outstanding notes payable and long-term debt balances. At September 30, 2007, the Company was current on all payments due to its lenders and lessors.
As of September 30, 2007, the Company had negative working capital of $2.1 million, as compared to negative working capital of $4.8 million as of December 31, 2006.
At September 30, 2007, total assets were in excess of total liabilities by $2.5 million. The accounting treatment under SFAS No. 15 for recording of gains from the restructuring of debt obligations at December 31, 2002 required
17
that $22.3 million of such gain be deferred and amortized over the term of the restructured debt obligations thus extending the period over which this amount will be recognized. At September 30, 2007, the remaining unamortized amount of deferred gain was $5.6 million, which will be amortized as a reduction of interest expense during the years 2007 through 2011.
On March 9, 2007, the Company and Raytheon entered into an Amended and Restated Restructuring Agreement (the Amended Agreement), which amends and restates in its entirety the Restructuring Agreement between the Company and Raytheon dated as of December 31, 2002, (the 2002 Restructuring Agreement). Pursuant to the Amended Agreement, the Company issued to Raytheon 25 amended and restated promissory notes (the Aircraft Notes), each secured by an amended security agreement in the related aircraft. The Aircraft Notes replace the existing notes issued by the Company to Raytheon on December 31, 2002. Each of the Aircraft Notes has an original principal amount of $2.2 million, for a total amount of $52.9 million, bears interest at a fixed rate of 6.75% per annum, and provides for monthly payments in arrears starting on March 30, 2007. The Aircraft Notes mature on June 30, 2011 to coincide with the expiration of the FMP contract, at which time a final payment of $1.3 million will be due for each aircraft. The fixed rate of 6.75% on the Aircraft Notes represents a significant reduction in interest expense and eliminates variable interest rate risk on all of the Companys aircraft debt.
Under the Amended Agreement, the Company issued to Raytheon a promissory note (the Senior Note) that replaced both the existing senior note and subordinated note issued by the Company to Raytheon on December 31, 2002. The Senior Note has an original principal amount of $13.2 million and bears interest at a rate of 7.00% per annum. Interest on the Senior Note is payable monthly in arrears on the last day of each month, commencing on March 30, 2007. Beginning with the calendar quarter ending June 30, 2007, the Senior Note provides for quarterly payments of principal on June 30, September 30, and December 30 each year until the note matures on December 30, 2015. As of September 30, 3007 the remaining principal balance was $12.5 million.
In accordance with FASB Statement of Financial Accounting Standards No. 6 (FAS 6), Classification of Short Term Obligations Expected to be Refinanced, the amount of long-term debt that would otherwise be due after one year would have been reflected on the Companys balance sheet as long-term obligations classified as current. Since the Company had entered into the Amended Agreement before the financial statements were issued, the long term amounts had been reclassified to non-current at December 31, 2006.
On April 27, 2007, the Company and FINOVA amended the September 30, 2006 promissory note payable to FINOVA Capital Corporation which had originally provided for 45 consecutive monthly payments of $22,342 ending June 30, 2010. The amended note provided for monthly payments of $22,342 through June 30, 2007 followed by three consecutive monthly payments of $130,747 commencing July 30, 2007 through September 30, 2007, at which time the note was considered paid in full. The Company recorded a gain of approximately $412,000 as a result of this forgiveness of debt in the third quarter when the debt was extinguished.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks
The Company is susceptible to certain risks related to changes in the cost of aircraft fuel. As of September 30, 2007, the Company did not have any derivative financial instruments.
Aircraft Fuel
Due to the airline industrys dependency upon aircraft fuel for operations, airline operators are substantially impacted by changes in aircraft fuel prices. The Companys earnings are affected by changes in the price and availability of aircraft fuel. Aircraft fuel represented approximately 27.1% of the Companys operating expenses in the first nine months of 2007. A one cent change in the average cost of aircraft fuel would impact the Companys aircraft fuel expense by approximately $92,000 annually, based upon fuel consumption in the first nine months of 2007.
18
Interest Rates
Prior to the March 9, 2007 Amended Agreement with Raytheon, the Companys cash flow had been negatively impacted by increases in interest rates because a significant portion of the Companys long-term debt was financed with variable interest rates. Increases in interest rates also negatively impacts the fair value of the Companys debt obligations that carried fixed rates of interest. The new notes, as part of the Amended Agreement bear interest at fixed rates of 6.75% and 7.0%. Therefore, all but $0.7 million of the Companys long-term debt is financed with fixed interest rates. The Amended Agreement has significantly mitigated the prior exposure the Company had to variable interest rate risk.
Due to the amortization of the SFAS No. 15 amounts, the interest expense recorded by the Company will be significantly less than the contractual interest actually paid throughout the term of the Raytheon notes. During the first nine months of 2007, the Companys contractual interest paid for all long-term debt obligations was $3.4 million. In accordance with procedures set forth in SFAS No. 15, the Company amortized $1.4 million of the SFAS No. 15 balances during the period resulting in net interest expense of $2.0 million for the first nine months.
Item 4. | CONTROLS AND PROCEDURES |
The Company maintains a system of disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(f)) that is designed to provide reasonable assurance that information that is required to be disclosed is accumulated and communicated to management timely. At the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be disclosed in the Companys periodic filings with the SEC.
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.
Item 1. | LEGAL PROCEEDINGS |
On October 19, 2007, International Association of Machinists and Aerospace Workers (the IAM), the designated collective bargaining representative of the class and craft of Mechanics and Related and Clerical employees, sued the Company in Colorado federal court. The following Monday, October 22, 2007, the Company sued the IAM in Minnesota.
These lawsuits arise out of a dispute regarding whether the Company has been relieved of its Railway Labor Act obligations to bargain collectively with the IAM and to maintain the status quo until the bargaining process is exhausted. The union lawsuit seeks to require the Company to engage in mediated bargaining and to refrain from changing the terms, conditions and wages of aircraft maintenance employees. The Company lawsuit seeks to free the parties from further bargaining and to authorize unilateral action regarding maintenance employee employment.
On October 31, 2007 the Colorado federal court entered a temporary restraining order preventing the Company from increasing mechanic pay. Later on November 7, that court entered a preliminary injunction the prohibits unilateral action and compels the Company to participate in bargaining under the auspices of the National Mediation Board. In the meantime the federal court in Minnesota denied the Companys motion for an injunction against mediated bargaining. An appeal of the Minnesota denial has been filed.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
At September 30, 2007, and as of October 31, 2007, the Company was current with respect to all of the Companys aircraft debt and lease obligations.
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Item 6. | EXHIBITS |
3.1 | Amended and Restated Articles of Incorporation. (1) |
3.2 | Amended and Restated Bylaws. (1) |
4.1 | Specimen Common Stock Certificate. (1) |
10.1 | Amended and Restated Restructuring Agreement, dated March 9, 2007, by and between Raytheon Aircraft Credit Corporation and the Company (2) |
10.2 | Senior Note, dated as of March 9, 2007, issued by the Company to Raytheon Aircraft Credit Corporation. (2) |
10.3 | First Amendment to Security Agreement dated as of March 9, 2007, by and between the Company and Raytheon Aircraft Credit Corporation. (2) |
10.4 | Form of Amended and Restated Promissory Note relating to 1900D aircraft, dated as of March 9, 2007, issued by the Company to Raytheon Aircraft Credit Corporation. (2) |
10.5 | Fifth Amendment to Security Agreement, dated as of March 9, 2007 by and between Raytheon Aircraft Credit Corporation and the Company. (2) |
10.6 | Form of First Amendment to Amended and Restated Security Agreement relating to 1900D aircraft, date as of March 9, 2007, by and between the Company and Raytheon Aircraft Credit Corporation. (2) |
10.7 | Form of Second Amendment to Amended and Restated Security Agreement relating to 1900D aircraft, date as of March 9, 2007, by and between the Company and Raytheon Aircraft Credit Corporation. |
10.8 | Form of Third Amendment to Amended and Restated Security Agreement relating to 1900D aircraft, date as of March 9, 2007, by and between the Company and Raytheon Aircraft Credit Corporation. |
31.1 | Certification pursuant to Rule 13a-14(a) of Chief Executive Officer. Filed herewith. |
31.2 | Certification pursuant to Rule 13a-14(a) of Chief Financial Officer (Principal Accounting and Financial Officer). Filed herewith. |
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. Filed herewith. |
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. Filed herewith. |
(1) | Incorporated by reference to the Companys Registration Statement on Form S-1, Registration No. 33-71180. |
(2) | Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2006. (File No. 0-23224) |
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Pursuant to the requirements of Section 13 or 15(d) 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: November 13, 2007 | By: | /s/ Charles R. Howell IV | ||
Charles R. Howell IV | ||||
Chief Executive Officer | ||||
By: | /s/ Michael O. Matthews | |||
Michael O. Matthews | ||||
Chief Financial Officer |
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EXHIBIT INDEX
31.1 | Certification pursuant to Rule 13a-14(a) of Chief Executive Officer (Principal Executive Officer). Filed herewith. |
31.2 | Certification pursuant to Rule 13a-14(a) of Chief Financial Officer (Principal Accounting and Financial Officer). Filed herewith. |
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 (Principal Executive Officer). Filed herewith. |
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 (Principal Accounting and Financial Officer). Filed herewith. |
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