UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-23224
GREAT LAKES AVIATION, LTD.
(Exact name of registrant as specified in its charter)
Iowa | 42-1135319 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1022 Airport Parkway, Cheyenne, WY | 82001 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (307) 432-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated Filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 9, 2014, 8,974,990 shares of Common Stock of the registrant were issued and outstanding.
GREAT LAKES AVIATION, LTD.
FORM 10-Q
For the Quarterly Period Ended March 31, 2014
PART I - FINANCIAL INFORMATION | ||||||
Item 1. |
FINANCIAL STATEMENTS | 2 | ||||
Item 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 11 | ||||
Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 19 | ||||
Item 4. |
CONTROLS AND PROCEDURES | 19 | ||||
PART II - OTHER INFORMATION | ||||||
Item 1. |
LEGAL PROCEEDINGS | 19 | ||||
Item 1A. |
RISK FACTORS | 20 | ||||
Item 3. |
DEFAULTS UPON SENIOR SECURITIES | 20 | ||||
Item 6. |
EXHIBITS | 20 | ||||
SIGNATURES | 21 | |||||
EXHIBIT INDEX | E-1 |
GREAT LAKES AVIATION, LTD.
Balance Sheets
(unaudited)
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Assets | ||||||||
Current assets: |
||||||||
Cash |
$ | 3,323,627 | $ | 6,597,927 | ||||
Accounts receivable and other receivables |
4,061,012 | 7,118,868 | ||||||
Inventories |
7,845,876 | 8,667,751 | ||||||
Prepaid expenses and other current assets |
2,571,542 | 3,154,713 | ||||||
Deferred income taxes |
1,457,049 | 1,457,049 | ||||||
|
|
|
|
|||||
Total current assets |
19,259,106 | 26,996,308 | ||||||
|
|
|
|
|||||
Property and equipment: |
||||||||
Flight equipment |
125,459,498 | 125,027,613 | ||||||
Other property and equipment |
10,676,695 | 10,604,094 | ||||||
Less accumulated depreciation and amortization |
(88,570,057 | ) | (87,029,483 | ) | ||||
|
|
|
|
|||||
Total property and equipment |
47,566,136 | 48,602,224 | ||||||
|
|
|
|
|||||
Other assets |
2,088,433 | 2,279,968 | ||||||
|
|
|
|
|||||
Total assets |
$ | 68,913,675 | $ | 77,878,500 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Notes payable and current maturities of long-term debt |
$ | 23,173,333 | $ | 24,173,333 | ||||
Accounts payable |
2,859,985 | 3,684,161 | ||||||
Accrued interest, unearned revenue and other liabilities |
3,137,540 | 3,525,843 | ||||||
|
|
|
|
|||||
Total current liabilities |
29,170,858 | 31,383,337 | ||||||
|
|
|
|
|||||
Deferred income taxes |
5,415,443 | 7,877,096 | ||||||
|
|
|
|
|||||
Total liabilities |
34,586,301 | 39,260,433 | ||||||
|
|
|
|
|||||
Preferred stock; $0.01 par value; Authorized: 25,000,000 shares. |
| | ||||||
No shares issued or outstanding |
||||||||
Common stock; $0.01 par value; Authorized: 50,000,000 shares. |
89,750 | 89,750 | ||||||
Issued and outstanding: 8,974,990 shares |
||||||||
Paid-in capital |
31,494,609 | 31,494,609 | ||||||
Retained earnings |
2,743,015 | 7,033,708 | ||||||
|
|
|
|
|||||
Total stockholders equity |
34,327,374 | 38,618,067 | ||||||
Commitments and contingencies |
| | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 68,913,675 | $ | 77,878,500 | ||||
|
|
|
|
See accompanying notes to the financial statements.
2
GREAT LAKES AVIATION, LTD.
Statements of Loss
(Unaudited)
For the Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Operating Revenues: |
||||||||
Passenger |
$ | 6,925,030 | $ | 15,234,744 | ||||
Public service |
6,158,220 | 14,150,037 | ||||||
Freight, charter, and other |
46,458 | 106,553 | ||||||
|
|
|
|
|||||
Total operating revenues |
13,129,708 | 29,491,334 | ||||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Salaries, wages, and benefits |
6,023,562 | 8,808,572 | ||||||
Aircraft fuel |
4,369,246 | 9,994,345 | ||||||
Aircraft maintenance, materials, and repairs |
1,850,609 | 3,249,559 | ||||||
Depreciation and amortization |
1,615,310 | 1,600,764 | ||||||
Other rentals and landing fees |
1,401,518 | 1,981,711 | ||||||
Other operating expenses |
3,634,690 | 4,861,939 | ||||||
|
|
|
|
|||||
Total operating expenses |
18,894,935 | 30,496,890 | ||||||
|
|
|
|
|||||
Operating Loss |
(5,765,227 | ) | (1,005,556 | ) | ||||
Other expense: |
||||||||
Interest expense, net of interest income of $160 and $462, respectively |
(986,869 | ) | (1,105,291 | ) | ||||
|
|
|
|
|||||
Loss before income taxes |
(6,752,096 | ) | (2,110,847 | ) | ||||
|
|
|
|
|||||
Income tax benefit |
2,461,403 | 852,146 | ||||||
|
|
|
|
|||||
Net loss |
$ | (4,290,693 | ) | $ | (1,258,701 | ) | ||
|
|
|
|
|||||
Net loss per share: |
||||||||
Basic |
$ | (0.48 | ) | $ | (0.14 | ) | ||
Diluted |
$ | (0.48 | ) | $ | (0.14 | ) | ||
Weighted average shares outstanding: |
||||||||
Basic |
8,974,990 | 8,974,990 | ||||||
Diluted |
8,974,990 | 8,974,990 |
See accompanying notes to the financial statements.
3
GREAT LAKES AVIATION, LTD.
Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income loss |
$ | (4,290,693 | ) | $ | (1,258,701 | ) | ||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
1,615,310 | 1,600,764 | ||||||
Loss on items beyond economic repair |
56,384 | 110,707 | ||||||
Amortization of debt issuance costs |
160,335 | 160,335 | ||||||
Deferred tax benefit |
(2,461,653 | ) | (959,475 | ) | ||||
Change in current operating items: |
||||||||
Accounts receivable |
3,057,856 | 288,292 | ||||||
Inventories |
821,875 | (681,681 | ) | |||||
Prepaid expenses and other current assets |
422,836 | (149,854 | ) | |||||
Other assets |
191,535 | 184,490 | ||||||
Accounts payable |
(824,176 | ) | (393,531 | ) | ||||
Accrued interest, unearned revenue and other liabilities |
(388,303 | ) | 163,269 | |||||
|
|
|
|
|||||
Net cash used by operating activities |
(1,638,694 | ) | (935,385 | ) | ||||
|
|
|
|
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CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of flight equipment and other property and equipment |
(635,606 | ) | (703,587 | ) | ||||
|
|
|
|
|||||
Net cash flows used in investing activities |
(635,606 | ) | (703,587 | ) | ||||
|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Repayment of notes payable and long-term debt |
(1,000,000 | ) | (875,000 | ) | ||||
Proceeds from borrowing |
| 1,500,000 | ||||||
|
|
|
|
|||||
Net cash (used) provided by financing activities |
(1,000,000 | ) | 625,000 | |||||
|
|
|
|
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
(3,274,300 | ) | (1,013,972 | ) | ||||
Cash and Cash Equivalents: |
||||||||
Beginning of period |
6,597,927 | 2,887,634 | ||||||
|
|
|
|
|||||
End of period |
$ | 3,323,627 | $ | 1,873,662 | ||||
|
|
|
|
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Supplementary cash flow information: |
||||||||
Cash paid during the period for interest (contractual) |
$ | 847,232 | $ | 922,681 | ||||
Cash paid during the period for income taxes |
$ | | $ | 14,313 |
See accompanying notes to the financial statements.
4
GREAT LAKES AVIATION, LTD.
Statements of Stockholders Equity
Three Months Ended March 31, 2014
(unaudited)
Common stock | Retained | |||||||||||||||||||
Shares | Amount | Paid-in capital | earnings | Total | ||||||||||||||||
Balance at January 1, 2014 |
8,974,990 | $ | 89,750 | $ | 31,494,609 | $ | 7,033,708 | $ | 38,618,067 | |||||||||||
Net loss |
| | | (4,290,693 | ) | (4,290,693 | ) | |||||||||||||
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|
|
|
|
|
|
|
|
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Balance at March 31, 2014 |
8,974,990 | $ | 89,750 | $ | 31,494,609 | $ | 2,743,015 | $ | 34,327,374 | |||||||||||
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See accompanying notes to financial statements.
5
Great Lakes Aviation, Ltd.
Notes to Financial Statements
March 31, 2014
(unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with the Companys audited financial statements and notes thereto for the year ended December 31, 2013.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the salvage value of fixed assets; the valuation of deferred tax assets, fixed assets, inventory; and reserves for employee benefit obligations and other contingencies.
Business
Passenger Revenue
Great Lakes Aviation, Ltd. (Great Lakes, the Company, we or us) is a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines) and Frontier Airlines, Inc. (Frontier or Frontier Airlines). Our code share agreements allow our mutual customers to purchase connecting flights through our code share partners and to share other benefits such as baggage transfer and frequent flyer benefits (in certain instances), while the Company maintains its own branding on our planes and ticket counters and our own designator code on all our flights. In addition to our code share agreements and independent branding, the Company has developed electronic ticketing (e-ticket) interline agreements with American Airlines, Delta Airlines, Frontier Airlines, United Airlines and U.S. Airways.
Currently, the Company estimates that approximately 37% of Great Lakes passenger traffic utilizes the United code share product line and approximately 26% of Great Lakes passenger traffic utilizes the Frontier code share product line.
The Company provides charter air services to private individuals, corporations, and athletic teams. The Company also carries cargo on most of the Companys scheduled flights.
Public Service Revenue
Approximately 47% and 48% of the Companys total revenue during each of the three months ended March 31, 2014 and 2013, respectively, were generated by services provided under the Essential Air Service (EAS) program administered by the United States Department of Transportation (DOT). The FAA Modernization and Reform Act of 2012 was enacted into law on February 14, 2012. This legislation provides for the authorization of the Essential Air Service program through September 30, 2015.
As of May 9, 2014, the Company served 30 airports, of which 20 locations receive EAS subsidy, in 9 states with a fleet of six Embraer EMB-120 Brasilia and 28 Beechcraft 1900D regional airliners. The Company currently operates hubs at Denver, CO, Los Angeles, CA, Minneapolis, MN and Phoenix, AZ.
6
Liquidity
The Company has historically used debt to finance the purchase of its aircraft.
The Company has experienced a shortage of qualified pilots which has caused the Company to curtail operations and reduce capacity. The pilot shortage and its effect on operations are expected to continue until the Company can hire and train enough pilots to reestablish operations in those markets in which the Company was forced to suspend service. The curtailment of operations has had a negative impact on both revenue and operating income which is expected to continue. Due to this negative impact on revenue and operating income, the Company does not expect to be in compliance with the debt to earnings coverage covenant in its credit agreement. As of March 31,2014, and December 31,2013, the Company was not in compliance with financial covenants contained in the credit agreement between it and its lenders.
Until the Company is able to re-staff a sufficient number of qualified pilots to restore service to suspended markets, it expects that it will not have sufficient liquidity to service its existing debt obligations.
The above circumstances and near term projections of significant net losses and negative operating cash flows in combination with the expectation the Company will not be in compliance with the terms of the senior credit facility, and the lenders ability to call our debt, raise substantial doubt about the Companys ability to continue as a going concern. Our financial statements are prepared on a going concern basis in accordance with United States generally accepted accounting principles and do not include any adjustments that might result from the outcome of this uncertainty. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. Our credit facility matures on November 16,2015. As a result of not being in compliance under our senior credit facility and the expectation the Company will not be in compliance with the terms of the senior credit facility throughout 2014, all borrowings (approximately $23.2 million) under our senior credit facility are classified as current maturities as of March 31, 2014. Our operating and capital plans for the next twelve months call for dedication of substantially all of our excess cash flow to the repayment of indebtedness.
On April 1, 2014, the Company and its lenders entered into a Third Amendment and Forbearance Agreement which terminated on April 30, 2014. The Company is in negotiations with its lenders on extending the term of the Forbearance Agreement.
To meet our capital needs, we are considering several alternatives, including, but not limited to, additional equity financings, debt financings, and other funding transactions, including the sale or sale-leaseback of certain aircraft. There can be, however, no assurance that we will be able to complete any such transaction on acceptable terms or otherwise.
2. Earnings per share
The following table shows the computation of basic and diluted earnings per common share:
Three months ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Numerator: |
||||||||
Net Loss |
$ | (4,290,693 | ) | $ | (1,258,701 | ) | ||
Denominator: |
||||||||
Weighted average shares outstanding, basic |
8,974,990 | 8,974,990 | ||||||
Net income per share, basic |
$ | (0.48 | ) | $ | (0.14 | ) | ||
Net income per share, diluted |
$ | (0.48 | ) | $ | (0.14 | ) |
For the three month periods ended March 31, 2014 and March 31, 2013 there were no options or other potentially dilutive securities outstanding.
7
3. Accrued Liabilities
Accrued liabilities consisted of the following balances at March 31, 2014 and December 31, 2013:
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Unearned revenue |
1,253,938 | 1,221,257 | ||||||
Accrued property taxes |
154,176 | 74,962 | ||||||
Accrued interest |
266,155 | 286,701 | ||||||
Accrued payroll |
1,463,271 | 1,942,923 | ||||||
|
|
|
|
|||||
Total accrued liabilities |
$ | 3,137,540 | $ | 3,525,843 | ||||
|
|
|
|
4. Long-Term Debt
The following table sets forth, as of March 31, 2014 and December 31, 2013, the carrying amount of the Companys long-term debt and current maturities of long term debt. The carrying amount of the debt consists of the principal payments contractually required under the debt agreements:
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Long-term debt: |
||||||||
GB/Crystal Term Loan - principal |
$ | 14,200,000 | $ | 15,200,000 | ||||
GB/Crystal Revolving Loan - principal |
8,973,333 | 8,973,333 | ||||||
|
|
|
|
|||||
Total long-term debt |
23,173,333 | 24,173,333 | ||||||
Less current portion: |
||||||||
GB/Crystal Term Loan - principal (1) |
(23,173,333 | ) | (24,173,333 | ) | ||||
|
|
|
|
|||||
Total current portion |
(23,173,333 | ) | (24,173,333 | ) | ||||
|
|
|
|
|||||
Total long-term portion |
$ | 0 | $ | 0 | ||||
|
|
|
|
(1) | All debt is classified as current as a result of not being in compliance with our credit agreement. |
On November 16, 2011, the Company entered into a new financing agreement (the Credit Agreement) with GB Merchant Partners, LLC, serving as Collateral Agent, and Crystal Capital LLC, serving as Administrative Agent. Terms of the financing include a four-year term loan in the amount of $24 million and a revolving loan credit facility in which the Company may borrow up to $10 million. Pursuant to the terms of a pledge and security agreement and an aircraft security agreement, the Companys obligations to the lenders identified in the Credit Agreement are secured by substantially all assets of the Company, including all owned aircraft. The term loan bears interest at a floating rate of 30 day LIBOR rate plus 11% with a minimum rate of 15.5%. Voluntary prepayments of the term loan are subject to prepayment penalties ranging from 4% prior to the first anniversary of the loan and declining in increments of 1% at each anniversary of the loan thereafter. As of March 31, 2014, $14.2 million was outstanding under the term loan. In addition to the scheduled contractual principal and interest obligations, the Company is required to make principal payments, based on a percentage of excess cash flows (as defined in the Credit Agreement), as measured on September 30 of each year beginning September 30, 2012. The Company is required to prepay an amount equal to 50% of such excess cash flow for the ninemonth period ending September 30, 2012, and for each subsequent twelve-month period thereafter. The excess cash flow payments are to be applied to reduce the outstanding principal balance of the term loan. The Company made an excess cash flow payment on November 14, 2012, in the amount of $2.3 million.
8
The term loan is set to mature on November 16, 2015 at which time the outstanding principal balance due is scheduled to be $7.8 million.
As of March 31, 2014, $9.0 million was outstanding under the revolving credit facility, secured by accounts receivable, parts inventory and spare engines. The revolving credit facility bears interest at the rate of 30 day LIBOR rate plus 8.0% with a minimum interest rate of 10.5%. The revolving loan credit facility is set to mature on November 16, 2015 at which time any outstanding principal balance will be due.
The Company was also required to pay a closing fee based on the initial facility commitment, and is required to pay a monthly unused line fee, a specified fee for certain prepayments of the term loan, and certain administrative and fronting fees related to the Credit Agreement.
As of March 31, 2014 the Company was not in compliance with the leverage coverage ratio financial covenant contained in the Companys senior credit facilitys Credit Agreement. Specifically the Company was required to maintain a leverage ratio, calculated by dividing average quarterly borrowings by trailing 12 month earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the Credit Agreement, of 2.25:1 or less. At March 31, 2014, the Companys leverage ratio was calculated to be 4.27:1, which was not in compliance with the terms of the Credit Agreement. Furthermore, the Company does not expect to be in compliance with its leverage ratio covenants throughout the balance of 2014 as EBITDA is calculated on a trailing 12-month basis. At March 31, 2014 the Company did not submit its audited annual report to its lenders within the prescribed timeframe required by the terms of the Credit Agreement. Furthermore, the auditors report over the Companys financial statements for the fiscal year ended December 31, 2013 contained an explanatory paragraph referencing substantial doubt about the Companys ability to continue as a going concern. These are both covenant violations that permit the Companys lenders to exercise their right to declare our debt obligations to be immediately due and payable under the terms of the Credit Agreement. As a result of not being in compliance with the terms of the Companys senior credit facility and the expectation the company will not be in compliance with the terms of the senior credit facility throughout 2014, all borrowings (approximately $23.2 million) under the Companys senior credit facility are classified as current maturities as of March 31, 2014.
On April 1, 2014 the Company and GB Merchant Partners, LLC and Crystal Capital LLC have entered into a Third Amendment and Forbearance Agreement which terminated on April 30, 2014. As part of this agreement we agreed to a 2% increase in the applicable rate that we are paying on our loan agreements. The interest rate on our revolving credit facility will increase to the greater of 30 day LIBOR plus 10% or 12.5%. The interest rate on our term loan will increase to the greater of 30 day LIBOR plus 13% or 17.5%. The Company is in negotiations with its lenders on extending the term of the Forbearance Agreement.
5. Related Parties
The Company rents two six-passenger aircraft and a vehicle from Iowa Great Lakes Flyers, Inc., a corporation solely owned by Douglas G. Voss, the Companys Chairman and major stockholder. Total payments for these leases were $7,125 for each of the three months ending March 31, 2014 and 2013, respectively. As of March 31, 2014, Mr. Voss controlled 4,160,247 shares of common stock of the Company, representing approximately 46.4% of the Companys outstanding common stock.
6. Income Taxes
The Companys annual effective income tax rate is estimated to be 36.5% for 2014. The Companys effective tax rate includes non-deductible permanent tax differences. Prior to 2004, the Company reported significant cumulative losses and generated substantial net operating loss carryforwards. From 2007 through 2013, the Company utilized a portion of these carryforwards to offset taxable income.
Federal net operating loss carryforwards begin to expire in year 2021. The Company believes it is more likely than not that it will realize the benefit of the deductible temporary differences and these net operating loss carryforwards prior to expiration.
9
7. Fair Value Measurements
A fair value hierarchy that prioritizes the inputs used to measure fair value has been established by ASC 820, Fair Value Measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. | |
Level 2 | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and other inputs that are observable or can be corroborated by observable market data. | |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the Financial Accounting Standards Board (the FASB).
Our financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities and long-term debt including the current portion. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values. These are considered Level 1 measurements. The carrying value of our long term debt including the current portion reflects original cost net of unamortized deferred debt restructuring gain and was $23.2 million and $24.2 million as of March 31, 2014 and December 31, 2013, respectively. For additional information, see Note 4 Long-Term Debt.
All of the Companys debt is comprised of variable rate debt (see Note 4). Because there is not an active market for the Companys notes, and the Company is unable to determine an appropriate discount rate to use in estimating the fair value of this obligation or the probability of early redemption, it is not practical to estimate the fair value of the debt.
8. Subsequent Event
We evaluated events after March 31, 2014, through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.
10
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The Company
We were incorporated on October 25, 1979 as an Iowa corporation and became a publicly traded company in January 1994. We commenced scheduled air service operations on October 12, 1981. Great Lakes Airlines currently operates hubs at Denver, CO, Los Angeles, CA, Minneapolis, MN and Phoenix, AZ.
We are a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines) and Frontier Airlines, Inc. (Frontier or Frontier Airlines). Our code share agreements allow our mutual customers to purchase connecting flights through our code share partners and to share other benefits such as baggage transfer and frequent flyer benefits (in certain instances), while we maintain our own branding on our planes and ticket counters and our own designator code on all our flights. In addition to our code share agreements and independent branding, we have developed electronic ticketing (e-ticket) interline agreements with American Airlines, Delta Airlines, Frontier Airlines, United Airlines and U.S. Airways.
As of May 9, 2014, we served 30 airports in nine states with a fleet of six Embraer EMB-120 Brasilias and 28 Beech 1900D regional airliners.
As of March 31, 2014 the Company was not in compliance with the leverage coverage ratio financial covenant contained in the Companys senior credit facilitys Credit Agreement. As a consequence the Companys lenders have the right to declare our debt obligations of approximately $23.2 million to be immediately due and payable under the terms of the Credit Agreement.
Essential Air Service (EAS) Program
We derived approximately 47% of our total revenue from the EAS program in the three months ended March 31, 2014, which is administered by the United States Department of Transportation (DOT). The EAS program was instituted under the Airline Deregulation Act of 1978 (the Deregulation Act), which allowed airlines greater freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the EAS program, certain communities are guaranteed specified levels of essential air service. In order to promote the provision of essential air services, the DOT may authorize the payment of federal subsidies to compensate an air carrier that is providing essential air services in otherwise unprofitable or minimally profitable markets.
The FAA Modernization and Reform Act of 2012 was enacted into law on February 14, 2012. This legislation provides for the authorization of the EAS program for federal fiscal years 2011 through 2015. Federal fiscal year 2015 ends on September 30, 2015. The FAA Modernization and Reform Act of 2012 reaffirmed the Congressional commitment to the continuance of the Essential Air Service program. The EAS program obtains a portion of the funding through annual Congressional appropriations.
An airline serving a community that qualifies for essential air services is required to give the DOT advance notice before the airline may terminate, suspend, or reduce service. Depending on the circumstances, the DOT may require the continuation of existing service until a replacement carrier is found. EAS rates are normally set for two-year periods for each city. Significant fluctuations in passenger traffic, fares and associated revenues, as well as fluctuations in fuel and other costs, may cause EAS routes to become unprofitable during these two-year terms. Near the end of the two year term for EAS service to a particular city, the DOT will request service proposals from the Company and competitive proposals from other airlines. Proposals, when requested, are evaluated on, among other things, the level of service provided, the amount of subsidy requested, the fitness of the applicant, and comments from the communities served.
As of May 9, 2014, we served 20 EAS communities on a subsidized basis.
Pilot Shortage
New Federal Aviation Administration (FAA), pilot qualification rules imposed as part of the Airline Safety and Federal Aviation Administration Extension Act of 2010 in combination with revised FAR Part 117 Flight Crewmember Flight and Duty Limitations and Rest Requirements, (FAR Part 117), have created an industry-wide shortage of qualified pilots and negatively affected our operations and financial condition.
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These new rules resulted in a greatly accelerated demand for qualified pilots as air carriers proceeded to increase pilot staffing requirements to compensate for the loss of crew efficiency due to the new rules. As a result, Great Lakes lost a large portion of its pool of qualified pilots with ATP certification to airlines operating aircraft with more seat availability and hence greater pilot earnings potential.
The Airline Safety and Federal Aviation Administration Extension Act of 2010 was enacted in August 2010. Among many other pilot training directives, the legislation mandated that first officers (co-pilots) obtain an Airline Transport Pilot certification (ATP) prior to being qualified to perform crewmember duties in scheduled airline passenger service under FAR Part 121 regulatory requirements. A key factor to enable a pilot to receive an ATP certificate is the accumulation of 1,500 flight hours.
Furthermore, the legislation directed the FAA Administrator to conduct a rule making proceeding, to identify specific academic training courses that would provide for exemptions to the 1,500 hour requirement. The FAA published the final rule in the Federal Register on July 15, 2013. These rules became effective August 1, 2013. As a result of the rule making process, first officers may be eligible to receive a restricted privileges ATP with a minimum of 750 hours if they were a military pilot, 1,000 hours if they have received a bachelors degree from an accredited educational institution with an aviation major and 1,250 hours if they have received an associates degree from an accredited educational institution with an aviation major. It should be noted that accredited educational institutions provide very limited actual flight experience and that graduates from these institutions typically will have received between 250 to 350 hours of actual flight time.
These new pilot qualification rules have severed the historical path in which pilots have had the opportunity to build enough hours so they could advance their careers. Great Lakes has historically provided this career path for more than 32 years. Prior to this new rule, regulatory requirements provided for pilots to become eligible as first officers for a FAR Part 121 air carrier with a minimum of 250 hours of experience. The new rules also mandate that a first officer must have 1,000 hours as a FAR Part 121 first officer in an air carrier operation prior to being eligible to serve as a captain in a FAR Part 121 airline. As an alternative, the rule provides for captain eligibility under FAR Part 121 for pilots who accumulate 1,000 hours of pilot in command time in a FAR Part 135 operation.
The current supply of pilot candidates who qualify under the new regulations is severely limited. It is difficult for Great Lakes, which operates Beech 1900D turboprop aircraft, to compete for qualified pilots with other airlines operating 50 seat regional jets and larger equipment.
As a result, we have had to reduce scheduled departures by suspending service to multiple communities eligible for Essential Air Service, and other non-EAS markets. These actions resulted in a reduction of revenue and operating expenses. The rate of expense reduction will inherently lag the revenue drop-off as the Company aggressively adjusts its operating expenditures to match the new level of operations.
In April of 2013, Great Lakes submitted a written proposal to the FAA seeking authority to operate Beech 1900D aircraft in a nine seat passenger configuration utilizing FAR Part 135 pilot hiring requirements, while maintaining and complying with all other FAR Part 121 operational and maintenance standards.
On March 18, 2014, the Company received from the FAA new operations specifications allowing the Company to hire pilots under FAR Part 135 regulatory requirements. This will allow us to restore first officer staffing levels while maintaining FAR Part 121 hiring, training and employment standards as we have always done as a Part 121 carrier.
EAS Program Activity Subsequent to January 1, 2014
Primarily as a result of the pilot shortage, the company suspended EAS service to the following cities since January 1, 2014:
Moab and Vernal, UT
Pueblo, AZ
Clovis, NM
Devils Lake, and Jamestown, ND
Ft. Dodge and Mason City, IA
Ironwood, MI
Thief River Falls, MN
Hays and Great Bend, KS
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In addition to the EAS subsidized cities above, in March of 2014, the Company terminated service to Dickinson and Williston, ND which were not EAS subsidized cities.
Financial Highlights
We had operating revenue of $13.1 million for the three-month period ending March 31, 2014, a 54.5% decrease compared to operating revenue of $29.5 million for the three-month period ending March 31, 2013. We realized an $8.3 million decrease in passenger revenue and public service revenue decreased $8.0 million compared to the prior year period. The $8.0 million or 54.5% period-over-period decrease in passenger revenues and the $8.0 million or 56.5% was primarily attributable to a reduction of scheduled service primarily attributable to a 61.7% reduction in number of pilots created by the industry-wide shortage of qualified pilots. This shortage of qualified pilots, resulted in a 56.0% decrease in available seat miles and 59.6% decrease in departures which resulted in 48.3% decrease in revenue passengers carried.
We had an operating loss of $5.8 million for the three-month period ending March 31, 2014, compared to an operating loss of $1.0 million for the three-month period ending March 31, 2013. The $4.8 million increase in operating loss is attributable to a $16.4 million decrease in operating revenue, partially offset by a $11.6 million decrease in operating expenses. We realized a net loss of $4.3 million for the three-month period ending March 31, 2014, compared to net loss of $1.3 million for the three-month period ending March 31, 2013. The increase in net loss is primarily a result of a $16.4 million decrease in operating revenue partially offset by a $11.6 million decrease in operating expenses, a $0.1 million decrease in interest expense and a $1.6 million increase in income tax benefit.
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Results of Operations for the Three Months Ended March 31, 2014 and 2013
The following table sets forth certain financial information regarding our results of operations for the three months ended March 31, 2014 and 2013.
Statement of Loss Data
(dollars in thousands)
(unaudited)
For the Three Months Ended March 31, | ||||||||||||||||||||
2014 | Year over Year | 2013 | ||||||||||||||||||
Cents | Revenue/Cost | Cents | ||||||||||||||||||
Amount | per | Increase (Decrease) | Amount | per | ||||||||||||||||
(in thousands) | ASM | Percentage | (in thousands) | ASM | ||||||||||||||||
Operating revenues: |
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Passenger |
$ | 6,925 | 17.4 | ¢ | (54.5 | )% | $ | 15,235 | 16.9 | ¢ | ||||||||||
Public service |
6,158 | 15.5 | (56.5 | ) | 14,150 | 15.7 | ||||||||||||||
Freight, charter and other |
47 | 0.1 | (56.1 | ) | 107 | 0.1 | ||||||||||||||
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|
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Total operating revenues |
13,130 | 33.1 | (55.5 | ) | 29,492 | 32.7 | ||||||||||||||
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Operating expenses: |
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Salaries, wages, and benefits |
6,024 | 15.2 | (31.6 | ) | 8,809 | 9.8 | ||||||||||||||
Aircraft fuel |
4,369 | 11.1 | (56.3 | ) | 9,994 | 11.1 | ||||||||||||||
Aircraft maintenance, materials and repairs |
1,851 | 4.7 | (43.0 | ) | 3,250 | 3.6 | ||||||||||||||
Depreciation and amortization |
1,615 | 4.1 | 0.9 | 1,601 | 1.8 | |||||||||||||||
Other rentals and landing fees |
1,401 | 3.5 | (29.3 | ) | 1,982 | 2.2 | ||||||||||||||
Other operating expenses |
3,635 | 9.2 | (25.2 | ) | 4,862 | 5.4 | ||||||||||||||
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Total operating expenses |
18,895 | 47.6 | (38.0 | ) | 30,498 | 33.8 | ||||||||||||||
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Operating loss |
(5,765 | ) | (14.5 | ) | 473.1 | (1,006 | ) | (1.1 | ) | |||||||||||
Interest expense, net |
(987 | ) | (2.5 | ) | (10.7 | ) | (1,105 | ) | (1.2 | ) | ||||||||||
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Loss before income taxes |
(6,752 | ) | (17.0 | )¢ | 219.8 | % | (2,111 | ) | (2.3 | )¢ | ||||||||||
Income tax benefit |
2,461 | 6.2 | 188.8 | 852 | 0.9 | |||||||||||||||
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Net Loss |
$ | (4,291 | ) | (10.8 | )¢ | 240.8 | % | $ | (1,259 | ) | (1.4 | )¢ | ||||||||
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Selected Operating Data
The following table sets forth certain selected operating data regarding our operations for the three months ended March 31, 2014 and 2013.
March 31, 2014 |
Increase (Decrease) from 2012 |
March 31, 2013 |
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Selected Operating Data: |
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Available seat miles (in thousands) (1) |
39,722 | -56.0 | % | 90,256 | ||||||||
Revenue passenger miles (in thousands) (2) |
16,405 | -49.6 | % | 32,536 | ||||||||
Revenue passengers carried |
57,031 | -48.3 | % | 110,237 | ||||||||
Departures flown |
7,780 | -59.6 | % | 19,255 | ||||||||
Passenger load factor (3) |
41.3 | % | 14.7 | % | 36.0 | % | ||||||
Average yield per revenue passenger mile (4) |
42.2 | ¢ | -9.8 | % | 46.8 | ¢ | ||||||
Revenue per available seat miles (5) |
33.1 | ¢ | 1.2 | % | 32.7 | ¢ | ||||||
Cost per available seat mile (6) |
47.6 | ¢ | 40.8 | % | 33.8 | ¢ | ||||||
Average passenger fare (7) |
$ | 121.43 | -12.1 | % | $ | 138.20 | ||||||
Average passenger trip length (miles) (8) |
288 | -2.4 | % | 295 | ||||||||
Average cost per gallon of fuel |
$ | 3.75 | -1.8 | % | $ | 3.82 |
(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 Quarter 2014 to First Quarter 2013
Passenger Revenues. Passenger revenues were $6.9 million in the first quarter of 2014, a decrease of 54.5% from $15.2 million in the first quarter of 2013. The $8.3 million quarter-over-quarter decrease in passenger revenues was attributable to the curtailment of operations due to a severe shortage of available qualified pilots in combination with a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields.
Public Service Revenues. Public service revenues collected through the EAS Program decreased 56.5% to $6.2 million during the first quarter of 2014, as compared to $14.2 million during the first quarter of 2013. The decrease in public service revenue was mostly due a 59.6% decrease departures due to the industry-wide shortage of qualified pilots. At March 31, 2014 and March 31, 2013, we served 22 and 33 communities, respectively, on a subsidized basis under the EAS Program.
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Other Revenues. Other revenues declined 56.1%, mainly due to decline of cargo revenues resulting from 59.6% decline in departures during the first quarter of 2014 compared to the first quarter of 2013.
Operating Expenses. Total operating expenses were $18.9 million, or 47.6 cents per ASM, in the first quarter of 201, as compared to $30.5 million, or 33.8 cents per ASM in the first quarter of 2013.
Salaries, Wages, and Benefits. Salaries, wages, and benefits were $6.0 million in the first quarter of 2014, a decrease of 31.6% from $8.8 million in the first quarter of 2013. The decrease in salaries, wages, and benefits was mostly attributable to the decreased number of employees as a result of the decreased operations due to the industry-wide shortage of qualified pilots.
Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $4.4 million, or 11.1 cents per ASM, in the first quarter of 2014. In comparison, our aircraft fuel and into-plane expense for the first quarter of 2013 was $10.0 million, or 11.1 cents per ASM. The 56.3% decrease in our aircraft fuel expense was attributable to a reduction in fuel consumption which was the result of a 56.0% decrease in ASMs.
The average cost of fuel decreased from $3.82 per gallon in the first quarter of 2013 to $3.75 per gallon in the first quarter of 2014. At first quarter 2014 rates of consumption, a one-cent increase or decrease in the price per gallon of fuel will increase or decrease our fuel expense by approximately $47,000 annually.
Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $4.4 million during the first quarter of 2014, which was a 43.0% decrease from $3.2 million during the first quarter of 2013. The decrease was primarily attributable to the reduction of component repairs and the timing of engine overhaul expenses resulting from the reduced operations.
Depreciation and amortization. Depreciation and amortization expense was $1.6 million during the first quarter of 2014 which was consistent with $1.6 million in the first quarter of 2013.
Other Rentals and Landing Fees Expense. Other rentals and landing fees expense was $1.4 million during the first quarter of 2014, which was a decrease from $2.0 million during the first quarter of 2013. The decrease was mainly attributable to decreased landing fees resulting from the 59.6% reduction in departures along with reduced hub rental expense.
Other Operating Expenses. Other operating expenses were $3.6 million, or 9.2 cents per ASM during the first quarter of 2014, which was a decrease from $4.9 million, or 5.4 cents per ASM during the first quarter of 2013. The decrease was mainly attributable to decreases in pilot related expenses of $578,000, deicing expenses of $315,000, insurance expense of $158,000, passenger related expenses of $137,000 and other expenses of $167,000. These were partially offset by increased legal and professional fees of $128,000.
Interest Expense. We incurred interest expense of $1.0 million in the first quarter of 2014, compared to $1.1 million in the first quarter of 2013 as a result of reducing our long-term debt.
Income Tax Expense. For the three months ended March 31, 2014, we recorded an income tax benefit of $2.5 million and for the three months ended March 31, 2013, we recorded an income tax expense of $0.9 million. Our estimated effective federal and state income tax rate is 36.5% for the three months ended March 31, 2014.
Seasonality
Seasonal factors, related to weather conditions and changes in passenger demand, generally affect our monthly passenger enplanements. We have historically shown a higher level of passenger enplanements in the May through October period as compared with the November through April period for many of the cities served. These seasonal factors have generally resulted in reduced revenues, lower operating income, and reduced cash flow for us during
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the November through April period. As a result of such factors, our revenues and earnings have shown a corresponding increase during the May through October period. EAS revenues are generated under subsidy per departure rates established by the DOT and we realize revenue as departures are performed. Inherently, most of our EAS revenues, other than winter weather related cancellations, are not affected by seasonality, but certain EAS markets do receive summer season increased departures which are eligible for subsidy revenue.
Liquidity, Financing and Capital Resources
As a result of not being in compliance under our senior credit facility and the uncertainty of our liquidity position for the next 12 months, all borrowings (approximately $23.2 million) under our senior credit facility are classified as current maturities as of March 31, 2014, Thus, we had negative working capital of $9.9 million and a current ratio of 0.66:1 at March 31, 2014, compared to negative working capital of $4.4 million and a current ratio of 0.86:1 at December 31, 2013.
We have historically used debt to finance the purchase of aircraft. On November 16, 2011, we entered into a financing agreement with our lenders. Terms of the financing include a four-year term loan in the amount of $24 million and a revolving loan credit facility in which we may borrow up to $10 million.
At March 31, 2014, our outstanding principal balance on the term loan was $14.2 million and we had borrowed $9.0 million under the revolving credit facility.
Pursuant to the terms of a pledge and security agreement and an aircraft security agreement, our obligations to the lenders identified in the Credit Agreement are secured by substantially all assets of the Company, including all owned aircraft.
For the three months ending March 31, 2014, we invested $0.6 million of cash in aircraft, engines, rotable parts and other equipment, mostly represented by rotable parts acquisitions. We do not expect to acquire additional aircraft or engines in the foreseeable future.
At March 31, 2014 the Company has no aircraft lease obligations.
At March 31, 2014, the Company was not in compliance with financial covenants contained in the Credit Agreement, and it is not expected that the Company will be in compliance throughout the balance of 2014. As a result of such non-compliance our lenders have the right to declare all borrowings (approximately $23.2 million) immediately due and payable.
On April 1, 2014 the Company and its Lenders entered into a Third Amendment and Forbearance Agreement which terminated on April 30, 2014. The Company is in negotiations with its lenders on extending the term of the Forbearance Agreement. Until the Company is able to hire a sufficient number of qualified pilots, restructure its current debt obligations, and obtain additional cash funding sources, it is expected that the Company will not have sufficient liquidity to service its obligations. The Company is in discussions with its lenders and pursuing additional sources of financing and/or sales of assets.
Sources and Uses of Cash. As of March 31, 2014, our cash balance was $3.3 million. We made principal payments on term debt of $1.0 million.
Cash Provided by Operating Activities. During the three months ended March 31, 2014, our cash used by operating activities was $1.6 million. During the three months we generated a net loss of $4.3 million and recorded non-cash depreciation and amortization of $1.6 million. Other sources of cash included a reduction in accounts receivable of $3.1 million, a reduction in inventory of $0.8 million and a combined reduction in prepaid expenses, other current assets and other assets of $1.4 million. Uses of cash included $2.5 million of deferred tax benefit, a reduction in accounts payable of $0.8 million and reductions in accrued interest, unearned revenue and other liabilities of $0.4 million.
Cash Flows from Investing Activities. During the first three months of 2014, we invested $0.6 million for the purchase of replacement aircraft rotable components and other property and equipment.
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Cash Flows from Financing Activities. During the first three months of 2014, we utilized $1.0 million of cash to reduce our outstanding notes payable and long-term debt balances.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Great Lakes Aviation, Ltd. (Great Lakes, we, our, its, it or the Company) notes that certain statements in this Form 10-Q and elsewhere are forward-looking and provide other than historical information. Our management may also make oral, forward-looking statements from time to time. These forward-looking statements include, among others, statements concerning our general business strategies, financing decisions, and expectations for funding expenditures and operations in the future. The words may, will, believe, plan, continue, could, should, hope, estimate, project, intend, expect, anticipate and similar expressions reflected in such forward-looking statements are based on reasonable assumptions, and none of the forward-looking statements contained in this Form 10-Q or elsewhere should be relied on as predictions of future events. Such statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise, and may be incapable of being realized. The risks and uncertainties that are inherent in these forward-looking statements could cause actual results to differ materially from those expressed in or implied by these statements.
Factors that could cause results to differ materially from the expectations reflected in any forward-looking statements include:
1) our ability to hire and retain sufficient pilots to service existing routes and expand into other profitable routes;
2) our ability to restructure our current debt obligations and covenants and obtain additional sources of capital to provide for operating cash requirements either through additional financings and/or sales of assets;
3) the receipt of sufficient passenger revenues on the routes that we serve;
4) the continuation of Essential Air Service and our ability to capitalize on it;
5) the level of regulatory and environmental costs;
6) airline industry and broader economic conditions;
7) the continued connection capacity at our hubs and activities of our code share partners;
8) our ability to monetize our net operating loss carry forwards;
9) the incidence of domestic or international terrorism and military actions;
10) competition from other airlines and ground transportation companies;
11) the volatility of fuel costs;
12) the incidence of labor disruptions or strikes;
13) our ability to retain key personnel;
14) the incidence of aircraft accidents;
15) the incidence of technological failures or attacks;
16) maintenance costs related to aging aircraft;
17) the limited market for our securities;
18) the volatility of the market price of our common stock;
19) our concentration of stock ownership and control of the company by our Chairman and President;
20) our ability to timely remediate any deficiencies in our internal controls;
21) no expectation of dividend;
22) anti-takeover provisions and other restrictions in our credit agreements.
Readers are cautioned not to attribute undue certainty on the forward-looking statements contained herein, which speak only as of the date hereof. Changes may occur after that date, and we do not undertake to update any forward-looking statements except as required by law in the normal course of our public disclosure practices.
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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks
We are susceptible to certain risks related to changes in the cost of aircraft fuel and changes in interest rates. As of March 31, 2014, we did not have any derivative financial instruments.
Aircraft Fuel
Due to the airline industrys dependency on aircraft fuel for operations, airline operators including Great Lakes are impacted by changes in aircraft fuel prices. Aircraft fuel represented approximately 23.1% of our operating expenses in the three-month period ending March 31, 2014. At rates of consumption for the first three months of 2014, a one cent increase or decrease in the per gallon price of fuel will increase or decrease our fuel expense by approximately $47,000 annually.
Interest Rates
Our operations are capital intensive because the vast majority of our assets consist of flight equipment, which is financed primarily with long-term debt. At March 31, 2014, we had approximately $23.2 million of variable rate debt. Effective April 1, 2014, as a result of entering into a Third Amendment and Forbearance Agreement with our lenders, we agreed to a 2% increase in the applicable rate that we are paying on our loan agreements. The interest rate on our revolving credit facility will increase to the greater of 30 day LIBOR plus 10% or 12.5%. The interest rate on our term loan will increase to the greater of 30 day LIBOR plus 13% or 17.5%. Going forward, we could be subject to increased rates of interest on our debt if the 30 day LIBOR rate increases by more than 2.3 percentage points.
Item 4. | CONTROLS AND PROCEDURES |
We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2014, our disclosure controls and procedures were effective.
During the Companys most recent fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 1. | LEGAL PROCEEDINGS |
We are a party to ongoing legal claims and assertions arising in the ordinary course of business. Management believes that the resolution of these matters will not have a material adverse effect on our financial position, results of operations, or cash flows.
During the period covered by this Quarterly Report on Form 10-Q, there were no material developments in any legal proceedings previously reported in our Annual Report on Form 10-K for the year ended December 31, 2013.
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Item 1A. | RISK FACTORS |
There has been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission on April 9, 2014.
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
As of March 31, 2014 the Company was not in compliance with the leverage coverage ratio financial covenant contained in the Companys senior credit facilitys Credit Agreement. Specifically the Company was required to maintain a leverage ratio, calculated by dividing average quarterly borrowings by trailing 12 month earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the Credit Agreement, of 2.25:1 or less. At March 31, 2014, the Companys leverage ratio was calculated to be 4.27:1, which was not in compliance with the terms of the Credit Agreement. Furthermore, the Company does not expect to be in compliance with its leverage ratio covenants throughout the balance of 2014 as EBITDA is calculated on a trailing 12-month basis. At March 31, 2014 the Company did not submit its audited annual report to its lenders within the prescribed timeframe required by the terms of the Credit Agreement. Furthermore, the auditors report over the Companys financial statements for the fiscal year ended December 31, 2013 contained an explanatory paragraph referencing substantial doubt about the Companys ability to continue as a going concern. These are both covenant violations that permit the Companys lenders to exercise their right to declare our debt obligations to be immediately due and payable under the terms of the Credit Agreement. As a result of not being in compliance with the terms of the Companys senior credit facility and the expectation the company will not be in compliance with the terms of the senior credit facility throughout 2014, all borrowings (approximately $23.2 million) under the Companys senior credit facility are classified as current maturities as of March 31, 2014.
See Exhibit Index.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GREAT LAKES AVIATION, LTD. | ||||||
Dated: May 15, 2014 | By: | /s/ Charles R. Howell IV | ||||
Charles R. Howell IV | ||||||
Chief Executive Officer | ||||||
By: | /s/ Michael O. Matthews | |||||
Michael O. Matthews | ||||||
Vice President and Chief Financial Officer |
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3.1 | Amended and Restated Articles of Incorporation. (1) | |
3.2 | Amended and Restated Bylaws. (1) | |
4.1 | Specimen Common Stock Certificate. (2) | |
10.1 | Third Amendment and Forbearance to Credit Agreement dated April 1, 2014 between and among Great Lakes Aviation, Ltd., Crystal Financial LLC, and GB Credit Partners, LLC (incorporated by reference to Current Report on Form 8-K filed on April 3, 2014) | |
31.1 | Certification pursuant to Rule 13a-14(a) of Chief Executive Officer. | |
31.2 | Certification pursuant to Rule 13a-14(a) of Chief Financial Officer. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer. | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer. | |
101 | Financial Statements in XBRL format. |
(1) | Incorporated by reference to the Companys Registration Statement on Form S-1/A, Registration No. 333-159256, as filed September 3, 2009. |
(2) | Incorporated by reference to the Companys Registration Statement on Form S-1, Registration No. 033-71180. |
E-1