Item 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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Overview
The discussion and analysis throughout this report contains certain forward-looking terminology such as believes, anticipates,
will, and intends or comparable terminology. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Potential purchasers of Great Lakes
securities are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by the cautions and risks described herein. See Forward-Looking Statements at the front of this report.
Great Lakes began providing air charter service in 1979, and has provided scheduled passenger service since 1981. We provide scheduled air service to our hubs
under the Great Lakes brand. Connecting code share and interline e-ticket products are available to both United and Frontier Airlines at selected hubs. American Airlines, Delta Airlines, Frontier Airlines, United Airlines and U.S. Airways interline
e-ticket products are available at all of the hubs which we serve. Effective April 1, 2014, we will provide passenger service to 30 airports in 9 states.
Financial Highlights
We had operating revenue of $117.2
million for the year ending December 31, 2013, a 14.9 percent decrease compared to operating revenue of $137.8 million for the year ending December 31, 2012. We realized a $17.6 million decrease in passenger revenue and a $2.9 million
decrease in public service revenue.
We had operating income of $3.8 million for the year ending December 31, 2013, a 60.0 percent decrease compared
to operating income of $9.4 million for the year ending December 31, 2012. The $5.6 million decrease in operating income is attributable to a $20.6 million decrease in operating revenue offset by a $15.0 million decrease in operating expenses.
We had a net loss of $0.4 million for the year ending December 31, 2013, compared to net income of $2.9 million for the year ending
December 31, 2012. This $3.3 million decrease in net income is primarily a result of a decrease in operating revenue of $20.6 million offset by a decrease of operating expenses of $15.0 million, a decrease of income tax expense of $1.6 million
and interest expense decrease of $0.7 million.
As more completely discussed in Item 1, under heading Going Concern and Item 1A, the
curtailment of operations due to pilot shortages has had a negative impact on both revenue and operating income. As of December 31, 2013, and March 31, 2014, the Company was not in compliance with financial covenants in the Credit
Agreement. The negative impact from the pilot shortage on financial results and on the near term financial projections raises substantial doubt on the Companys ability to continue as a going concern. We are currently experiencing a shortage of
qualified pilots which has materially impacted our operations and financial condition. Furthermore, we are not in compliance with certain financial covenants contained in the Credit Agreement with GB Merchant Partners, LLC. and Crystal Capital LLC
(Lenders). The Company has entered into a short term Forbearance Agreement with its Lenders while we explore additional sources of working capital. See Item 1 Business, Pilot Shortage, and Going Concern.
24
Results of Operations
(dollars in thousands)
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For the Years Ended December 31,
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2013
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2012
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2011
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Cents
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% Increase
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Cents
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% Increase
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Cents
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per
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(decrease)
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per
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(decrease)
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per
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Amount
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ASM
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from 2012
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Amount
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ASM
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from 2011
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Amount
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ASM
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Operating revenues:
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Passenger
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$
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61,421
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(22.3
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)%
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$
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79,008
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11.3
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%
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$
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70,989
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Public service
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55,448
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(5.0
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)
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58,347
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11.3
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52,406
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Other
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327
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(22.9
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)
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424
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(56.3
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)
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970
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Total operating revenues
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117,196
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(14.9
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)%
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137,779
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10.8
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%
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124,365
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Salaries, wages, and benefits
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32,345
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9.7
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¢
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(5.4
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)%
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34,176
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8.6
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¢
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6.4
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%
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32,118
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8.7
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¢
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Aircraft fuel
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35,667
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10.7
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(14.8
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)
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41,871
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10.5
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7.5
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38,955
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10.5
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Aircraft maintenance materials and component repairs
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14,790
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4.4
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(11.2
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)
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16,649
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4.2
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24.5
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13,368
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3.6
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Depreciation and amortization
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6,400
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1.9
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9.8
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5,830
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1.5
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11.3
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5,236
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1.4
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Aircraft rental
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0.0
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(100.0
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1,418
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0.4
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(25.6
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1,907
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0.5
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Other rentals and landing fees
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6,438
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1.9
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(9.8
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7,136
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1.8
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18.0
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6,046
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1.6
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Other operating expense
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17,791
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5.3
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(16.4
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21,286
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5.4
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4.3
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20,411
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5.5
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Total operating expenses
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113,431
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33.9
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¢
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(11.6
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)%
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128,366
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32.3
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¢
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8.7
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%
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118,041
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31.9
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¢
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Operating income
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$
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3,765
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$
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9,413
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$
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6,324
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Increase/
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Increase/
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(decrease)
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(decrease)
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2013
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from 2012
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2012
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from 2011
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2011
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Available seat miles (thousands)
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334,426
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(15.8
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)%
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397,160
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7.2
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%
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370,376
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Revenue passenger miles (thousands)
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133,933
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(21.2
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)%
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169,929
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4.3
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%
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162,893
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Passenger load factor
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40.0
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%
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(6.5
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)%
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42.8
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%
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(2.7
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)%
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44.0
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%
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Average yield per revenue passenger mile
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45.9
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¢
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(1.3
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)%
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46.5
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¢
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6.7
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%
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43.6
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¢
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Revenue per available seat mile
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35.0
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¢
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0.9
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%
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34.7
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¢
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3.3
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%
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33.6
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¢
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Cost per available seat mile
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33.9
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¢
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5.0
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%
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32.3
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¢
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1.3
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%
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31.9
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¢
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Comparison of 2013 to 2012
Passenger Revenues
. Passenger revenues decreased 22.3% from 2012. The decrease in passenger revenues was largely due to a 21.2% decrease in
revenue passenger miles in addition to a 0.1% decrease in average yield per revenue passenger mile. The $17.6 million year-over year 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 earned through the Essential Air Service program decreased 5.0% to $55.4 million in 2013, as
compared to $58.3 million in 2012. The decrease in public service revenue is primarily attributable to our reduction of communities served which was partially offset with renewing EAS services in existing markets that required subsidy rate
increases. These factors contributed to a net decrease of $2.9 million of public service revenue in 2013 as compared to 2012.
25
Other Revenues
. Other revenues decreased 22.9% to $0.3 million in 2013. This decrease was mainly
due to a $0.1 million decrease in cargo revenues.
Operating Expenses
. Total operating expenses decreased 11.6%, or $14.9 million from the
previous year. The rate of expense reduction lagged the revenue drop-off as the Company adjusted its operating expenditures to match the new level of operations.
Salaries, wages, and benefits decreased 5.4% to $32.3 million or 9.7 cents per ASM compared to $34.2 million or 8.6 cents per ASM in 2012, which was primarily
attributable to decrease in employees needed to support the decrease in operations served, along with decreases in health insurance claims in 2013 compared to 2012. These decreases were partially offset by increase for workers compensation
insurance.
Aircraft fuel expense, in 2013, was $35.7 million, or 10.7 cents per ASM, a decrease of $6.2 million compared to 2012. In 2012, aircraft fuel
expense was $41.9 million, or 10.5 cents per ASM. The average cost of fuel decreased from $3.76 per gallon in 2012 to $3.67 per gallon in 2013. The effect of the $0.09 decrease in cost per gallon, along with a decrease in consumption, was a decrease
in total cost of approximately $6.2 million in 2013. At 2013 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 $98,000 annually.
Aircraft maintenance, materials and component repair expense was $14.8 million, or 4.4 cents per ASM, in 2013, a decrease of $1.9 million from 2012. In
comparison, our aircraft maintenance, materials, and repairs expense for 2012 was $16.6 million, or 4.2 cents per ASM. The 11.2% decrease in 2013 aircraft maintenance expense was primarily attributable to an 11.5% decrease in the number of
departures and an 11.4% decrease in aircraft block hour time. Aircraft maintenance, materials and component expense does not include internal salaries, wages and benefit expenses incurred as a result of employees performing aircraft maintenance.
Depreciation and amortization expense was $6.4 million in 2013 and $5.8 million in 2012. The increase in depreciation is primarily due to addition of
flight equipment in fourth quarter of 2012 and other property and equipment purchased.
We had no passenger aircraft rental expense during 2013 compared
to $1.4 million in 2012. In December 2012, we purchased aircraft that we were previously leasing. We currently own all of our passenger service aircraft.
Other rentals and landing fees decreased 9.8% to $6.4 million in 2013 from $7.1 million in 2012. The decrease is mostly due to reduced hub expenses
attributable to a reduction in the number of departures and an annual rate adjustment from Denver International Airport that was $0.2 million higher than the credit we received in 2012.
Other operating expenses decreased 16.4% in 2013 to $17.8 million, or 5.3 cents per ASM from $21.3 million or 5.4 cents per ASM in 2012. The decrease in other
operating expenses is primarily due to decreases in pilot training and associated lodging expenses of $1.4 million, passenger related expenses of $1.1 million, contract airline handling of $0.6 million, employee related expenses of $0.3 million,
insurance of $0.2 million, professional fees of $0.2 million and other expenses of $0.2 million. These were offset by increases for deicing expense of $0.5 million.
26
Interest Expense.
Interest expense was $4.3 million during 2013, a decrease of 13.8% from $5.0
million in 2012 as a result of reducing our long-term debt.
Income Tax Expense
. We had an income tax benefit of $0.1 million in 2013
compared to income tax expense of $1.5 million in 2012. The provision for income tax benefit in 2013, as a percentage of income before taxes, was 20 percent compared to 34.1 percent income tax expense in 2012.
As of December 31, 2013, we had approximately $18.7 million of federal net operating loss carry-forwards which will be available to offset future taxable
income. We also had $12.9 million of state net operating loss carry-forwards, of which $9.2 million ($0.5 million tax effected) is expected to expire unused and $3.7 million will be available to offset future taxable income. A valuation allowance of
approximately $507,000 remained at December 31, 2013 for state net operating loss carry-forwards that may not be utilized before they expire.
Comparison of 2012 to 2011
Passenger
Revenues
. Passenger revenues increased 11.3% from 2011. The increase in passenger revenues was largely due to a 4.3% increase in revenue passenger miles in addition to a 6.7% increase in average yield per revenue passenger mile.
Public Service Revenues
. Public service revenues earned through the Essential Air Service program increased 11.3% to $58.3 million in 2012, as
compared to $52.4 million in 2011. The increase in public service revenue is primarily attributable to our expansion into our Minneapolis hub, which serves communities requiring higher subsidization, in combination with renewing EAS services in
existing markets that required subsidy rate increases. These factors contributed to a net increase of $5.9 million of public service revenue in 2012 as compared to 2011.
Other Revenues
. Other revenues decreased 56.3% to $0.4 million in 2012. This decrease was mainly due to a $0.5 million decrease in ground
handling services provided to other carriers who served the same locations in which we had ongoing operations.
Operating Expenses
. Total
operating expenses increased 8.7%, or $10.3 million from the previous year.
Salaries, wages, and benefits increased 6.4% to $34.2 million or 8.6 cents
per ASM compared to $32.1 million or 8.7 cents per ASM in 2011, which was primarily attributable to additional employees needed to support the increase in operations served, offset by decreases in health insurance claims in 2012 compared to 2011.
Aircraft fuel expense, in 2012, was $41.9 million, or 10.5 cents per ASM, an increase of $2.9 million compared to 2011. In 2011, aircraft fuel expense
was $39.0 million, or 10.5 cents per ASM. The average cost of fuel increased from $3.69 per gallon in 2011 to $3.76 per gallon in 2012. The effect of the $0.07increase in cost per gallon, along with an increase in consumption, was an increase in
total cost of approximately $2.9 million in 2012.
Aircraft maintenance, materials and component repair expense was $16.6 million, or 4.2 cents per ASM,
in 2012, an increase of $3.3 million from 2011. In comparison, our aircraft maintenance, materials, and repairs expense for 2011 was $13.4 million, or 3.6 cents per ASM. The 24.5% increase in 2012 aircraft maintenance expense was primarily
attributable to a 6.4% increase in the number of departures and a 7.9% increase in aircraft block hour time. Aircraft maintenance, materials and component expense does not include internal salaries, wages and benefit expenses incurred as a result of
employees performing aircraft maintenance.
27
Depreciation and amortization expense was $5.8 million in 2012 and $5.3 million in 2011. The increase in
depreciation is primarily due to addition of flight equipment and other property and equipment purchased.
Aircraft rental expense was $1.4 million in
2012, a decrease of 25.6% compared to $1.9 million in 2011. The decrease resulted mainly from the return of seven Beechcraft model 1900D aircraft leased from Raytheon during the second half of 2011. The $1.4 million of aircraft rental expense in
2012, consisted of $0.6 million of rental expense for two Embraer EMB-120 Brasilia aircraft. In December of 2012 we negotiated the early termination of these lease agreements and the purchase of the two Embraer EMB-120 Brasilia leased aircraft. As
result of the early termination of these leases and the acquisition of the aircraft, we incurred an additional $0.1 million of aircraft rental expense related to accelerated rent payments associated with the termination of these leases and a
non-cash aircraft rental expense of $0.7 million related to maintenance deposits expensed as a result of terminating the leases early. These expenses will be non-recurring going forward.
Other rentals and landing fees increased 18.0% to $7.1 million in 2012 from $6.0 million in 2011. The increase is mostly attributable to opening of our
Minneapolis hub as well as increased rent expense at pre-existing airport locations combined with incremental departures over the prior year.
Other
operating expenses increased 4.3% in 2012 to $21.3 million, or 5.4 cents per ASM from $20.4 million or 5.5 cents per ASM in 2011. The increase in other operating expenses is primarily due to increases in pilot training and associated lodging
expenses of $0.4 million, communications and utilities of $0.3 million, passenger related expenses of $0.3 million, employee related expenses of $0.2 million and other expenses of $0.2 million. These were offset by decreases for professional fees of
$0.2 million, deicing expense of $0.2 million and insurance expense of $0.1 million.
Interest Expense.
Interest expense was $5.0 million
during 2012, an increase of 91.3% from $2.6 million in 2011. In 2011, we amortized $0.6 million of deferred debt restructuring gains which had the effect of lowering our interest expense from $3.2 million to $2.6 million. The 2012 interest expense
increase is attributable to a combination of higher interest rates associated with our long-term debt and the absence of deferred debt restructuring gains that became fully amortized in June of 2011.
Income Tax Expense
. We had income tax expense of $1.5 million in 2012 compared to $6.7 million in 2011. The provision for income taxes, as a
percentage of income before taxes, decreased to 34.1 percent in 2012 from 38.6 percent in 2011.
As of December 31, 2012, we had approximately $20.8
million of federal net operating loss carry-forwards which will be available to offset future taxable income. We also had $13.3 million of state net operating loss carry-forwards, of which $9.5 million ($0.6 million tax effected) is expected to
expire unused and $3.8 million will be available to offset future taxable income. A valuation allowance of approximately $609,000 remained at December 31, 2012 for state net operating loss carry-forwards that may not be utilized before they
expire.
Liquidity, Financing and Capital Resources
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.
28
At December 31, 2013, our outstanding principal balance on the term loan was $15.2 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 12 months ending December 31, 2013, we invested $1.6 million of cash in aircraft, engines, rotable parts and other equipment. Rotable parts
acquisitions represented $1.5 million of the $1.6 million cash investment. We do not expect to acquire additional aircraft or engines in the foreseeable future.
At December 31, 2013 the Company has no aircraft lease obligations.
As more completely discussed in Item 1, under heading Going Concern and Item 1A, the curtailment of operations due to pilot shortages
has had a negative impact on both revenue and operating income. At December 31, 2013, 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 $24.2 million) immediately due and payable.
On April 1, 2014 the Company and its Lenders entered into a Third Amendment and Forbearance Agreement which terminates on April 30, 2014. Under the
terms of the agreement the Companys Lenders have agreed to refrain from exercising their right to declare the obligations to be immediately due and payable under the terms of the Credit 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 expect 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 or sales of assets.
Working Capital
Net cash provided by operating activities was $7.3 million at December 31, 2013 compared to $9.1 million at December 31, 2012. 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 $24.2 million) under our senior credit facility are classified as current maturities as of
December 31, 2013. Thus, we had negative working capital of $4.4 million and a current ratio of 0.86:1 at December 31, 2013, compared to positive working capital of $14.9 million and a current ratio of 2.2:1 at December 31, 2012.
For additional information regarding Liquidity and Capital Resources see Item 1A Risk Factors.
Operating Activities
. Net cash provided by operating activities for the year ended December 31, 2013 was $7.3 million as compared to $9.1
million for the year ended December 31, 2012.
Investing Activities
. Net cash used in investing activities for the year ended
December 31, 2013 was $1.6 million for the purchase of flight equipment and other property and equipment. Net cash used in investing activities for the year ended December 31, 2012 was $6.5 million.
29
Financing Activities
. Net cash used in financing activities for the year ended December 31,
2013 was $2.0 million, consisting of $3.5 million of contractual principal payments on long-term debt, offset by $1.5 million of incremental borrowings under our revolving credit facility.
Contractual Obligations
The following table summarizes
the contractual due dates of the Companys long-term debt obligations as of December 31, 2013, without considering the potential impact resulting from the covenant violations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
After 2016
|
|
|
Total
|
|
Long-term debtcontractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facility
|
|
$
|
4,000,000
|
|
|
$
|
11,200,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,200,000
|
|
Revolving credit facility
|
|
|
|
|
|
|
8,973,333
|
|
|
|
|
|
|
|
|
|
|
|
8,973,333
|
|
Contractual interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facility
|
|
|
2,353,097
|
|
|
|
1,514,722
|
|
|
|
|
|
|
|
|
|
|
|
3,867,819
|
|
Revolving credit facility
|
|
|
1,102,788
|
|
|
|
1,006,163
|
|
|
|
|
|
|
|
|
|
|
|
2,108,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
7,455,885
|
|
|
$
|
22,694,218
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,150,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See discussion below for contractual interest obligations.
Contractual Interest Expense
The projected contractual
interest expense on our long-term obligations (based on the minimum variable interest rate stated in the debt instruments, which is the rate in effect as of December 31, 2013) for the next five years and thereafter is as follows:
|
|
|
|
|
|
|
Variable Rate
|
|
|
|
Contractual
|
|
Maturity
|
|
Interest
|
|
2014
|
|
$
|
3,455,885
|
|
2015
|
|
|
2,520,885
|
|
2016
|
|
|
|
|
2017
|
|
|
|
|
2018
|
|
|
|
|
Thereafter
|
|
|
|
|
The preceding projected contractual interest rate expenses are calculated based on borrowings as of December 31, 2013.
Our contractual interest expense is subject to fluctuations in the amount of debt outstanding at any given time, particularly under our revolving credit facility, as well as increases in 30-day LIBOR. Effective April 1, 2014, as a result of
entering into a Third Amendment and Forbearance Agreement with our lenders, the Company 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.
30
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates,
judgments, and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements; revenues and expenses during the reporting period; and related disclosures of contingent assets and liabilities in the
financial statements and the accompanying notes. Actual results could differ from those estimates.
The United States Securities and Exchange Commission
(the SEC) has defined a companys most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results and that require us to make our most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified our critical accounting policies as including those addressed below. We also have other key accounting policies,
which involve the use of estimates, judgments, and assumptions. See Note 2, Summary of Significant Accounting Policies and Procedures, in the Notes to the Financial Statements for additional discussion of these items. Management believes
that its estimates and assumptions are reasonable, based on information presently available; however, changes in these estimates, judgments, and assumptions will occur as a result of future events. Accordingly, actual results could differ from
amounts estimated.
Depreciation and Residual Values of Aircraft
. In accounting for long-lived assets, we make estimates about the expected
useful lives, projected residual values, and the potential for impairment. Estimates of useful lives and residual values of aircraft are based on actual industry experience with the same or similar aircraft types and anticipated utilization of the
aircraft. Changing market prices of new and used aircraft, government regulations, and changes in our maintenance program or operations could result in changes to these estimates.
Accounting for Maintenance Deposits
. Until December 2012, the Company leased two of its Embraer EMB-120 Brasilia aircraft and, in addition to
the base rent, was required to pay supplemental rent (Maintenance Rent) based upon flight hours or cycles flown. Under the terms of the leases the lessor would reimburse the Company for performing specified maintenance activities. This
Maintenance Rent was accounted for as maintenance deposits in accordance with ASC subtopic 840-10, whereby the amount of the rent is capitalized and treated as a deposit against future maintenance expense until: (i) such time as a defined
maintenance event is performed and a reimbursement is received, or (ii) the Company determined it was no longer probable that all or a portion of the deposit would be refunded as a reimbursement of the costs of a maintenance activity. When an
amount on deposit is less than probable of being returned, it shall be recognized as additional expense.
In December of 2012, the Company negotiated the
early termination of these lease agreements and the purchase of these two leased aircraft. The maintenance deposits reflected in the Companys financial statements at the time of the early lease termination were expected to be reimbursed by the
lessor over the original remaining lease term prior to our decision to early terminate the lease and purchase the aircraft. In connection with the early termination of the aircraft leases and purchase of the aircraft, the Company surrendered its
maintenance deposits of $2.2 million, other receivables from the lessor of $0.4 million, and cash of $1.6 million, for total consideration of $4.2 million. The Company estimated the fair value of the acquired aircraft at the time of purchase, using
the guidance in ASC 820, Fair Value Measurement, at $3.5 million, which was $0.7 million less than the total consideration paid to the lessor. As a result, the Company incurred additional aircraft rental expense of $0.7 million in December of 2012.
At December 31, 2013 and December 31, 2012, the Company had no maintenance deposits.
31
Inventories
. Inventories are comprised primarily of expendable spare aircraft parts, fuel,
materials, and supplies relating to flight equipment, which are recorded at the lower of cost (average cost) or market. Expendable spare aircraft parts are subject to reserves for obsolescence.
Aircraft Valuation and Impairments
. In accordance with ASC Section 360-10-35 (originally Statement of Financial Accounting Standards
No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed of
) long-lived assets, such as property, plant, equipment and aircraft, subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal
group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value.
Income Taxes
. We account for income taxes using the asset and liability method. Under that method, deferred income taxes are recognized for the
tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities and net
operating losses (NOLs) and tax credit carryforwards. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The tax net operating loss carryforwards (NOLs) that have been
generated are due in large part to the accelerated depreciation of property and equipment over a shorter useful life for tax purposes. Our NOLs will expire between 2021 and 2024. The book basis of property and equipment is approximately $36.1
million greater than the tax basis at December 31, 2013, all of which is expected to reverse during periods in which NOLs are available. Approximately $9.2 million ($0.5 million tax effected) of state NOLs are expected to expire unused and
accordingly a valuation allowance has been provided for these deferred tax assets. Based upon the projections for future taxable income over the periods in which the deferred tax assets become deductible, the Company believes it is more likely than
not that it will realize the benefits of most of the deductible temporary differences and NOLs. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
Liability Accruals and Reserves
. We are obligated under various agreements relating to employee health and
welfare, injuries, tax and fee remittances, and other contractual matters, some of which involve estimates of the ultimate amounts due and impacts of insurance coverage. Changes in the estimates and assumptions could occur and would result in actual
results being different than those estimated.
32
Effects of Inflation
We are subject to inflationary pressures from labor agreements, fuel price escalations, and increased operating costs at airports served by us. We attempt to
counteract the effects of inflation through fare increases, subsidy increases and capacity adjustments.
Environmental Matters
In the normal course of our operations, we are subject to various federal, state, local and foreign laws and regulations relating to environmental protection
matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are, and expect in the future to be, involved in various environmental matters and conditions
at, or related to, our properties. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigation related to our assets or
properties.
Off Balance Sheet Arrangements
An
off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets,
(3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the
company, or that engages in leasing, hedging or research and development arrangements with the company.
We have no off-balance sheet arrangements of the
types described in the four categories above that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements of the Company as of
December 31, 2013 and 2012 and for the each of the years in the three year period ended December 31, 2013, together with the Report of the Companys Independent Registered Public Accounting Firm, are included in this Form 10-K on the
pages indicated below.
Supporting schedules are omitted because they are inapplicable, not required, or the information is presented in the financial
statements or notes thereto.
35
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Great Lakes Aviation,
Ltd.:
We have audited the accompanying balance sheets of Great Lakes Aviation, Ltd. (the Company) as of December 31, 2013 and 2012, and the related
statements of income (loss), stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of Great Lakes Aviation, Ltd. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in note 1 to the financial statements, the Company has violated covenants within the credit agreement for the Companys senior credit facility and is projecting
covenant violations during 2014. Additionally, the Company has projected that cash flows from operations will not be sufficient to fund the Companys debt obligations during 2014. These factors raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans in regard to these matters are also described in note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Denver, Colorado
April 9, 2014
36
GREAT LAKES AVIATION, LTD.
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,597,927
|
|
|
$
|
2,887,634
|
|
Accounts receivable and other receivables
|
|
|
7,118,868
|
|
|
|
9,235,433
|
|
Inventories
|
|
|
8,667,751
|
|
|
|
8,971,610
|
|
Prepaid expenses and other current assets
|
|
|
3,154,713
|
|
|
|
2,634,839
|
|
Deferred income taxes
|
|
|
1,457,049
|
|
|
|
3,573,024
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
26,996,308
|
|
|
|
27,302,540
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Flight equipment
|
|
|
125,027,613
|
|
|
|
124,406,769
|
|
Other property and equipment
|
|
|
10,604,094
|
|
|
|
10,498,439
|
|
Less accumulated depreciation and amortization
|
|
|
(87,029,483
|
)
|
|
|
(81,123,534
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
48,602,224
|
|
|
|
53,781,674
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,279,968
|
|
|
|
3,288,281
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
77,878,500
|
|
|
$
|
84,372,495
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$
|
24,173,333
|
|
|
$
|
3,500,000
|
|
Accounts payable
|
|
|
3,684,161
|
|
|
|
4,604,906
|
|
Accrued interest, unearned revenue and other liabilities
|
|
|
3,525,843
|
|
|
|
4,306,980
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,383,337
|
|
|
|
12,411,886
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
|
|
|
|
22,673,333
|
|
Deferred income taxes
|
|
|
7,877,096
|
|
|
|
10,226,538
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
39,260,433
|
|
|
|
45,311,757
|
|
|
|
|
|
|
|
|
|
|
Preferred stock; $0.01 par value; Authorized: 25,000,000 shares.
|
|
|
|
|
|
|
|
|
No shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock; $0.01 par value; Authorized: 50,000,000 shares.
|
|
|
|
|
|
|
|
|
Issued and outstanding: 8,974,990 and 8,974,990 shares
|
|
|
89,750
|
|
|
|
89,750
|
|
Paid-in capital
|
|
|
31,494,609
|
|
|
|
31,494,609
|
|
Retained earnings
|
|
|
7,033,708
|
|
|
|
7,476,379
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
38,618,067
|
|
|
|
39,060,738
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
77,878,500
|
|
|
$
|
84,372,495
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
37
GREAT LAKES AVIATION, LTD.
Statements of Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
61,421,238
|
|
|
$
|
79,007,876
|
|
|
$
|
70,989,350
|
|
Public service
|
|
|
55,448,240
|
|
|
|
58,347,399
|
|
|
|
52,406,337
|
|
Freight, charter, and other
|
|
|
326,947
|
|
|
|
423,601
|
|
|
|
969,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
117,196,425
|
|
|
|
137,778,876
|
|
|
|
124,365,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits
|
|
|
32,345,669
|
|
|
|
34,175,706
|
|
|
|
32,117,733
|
|
Aircraft fuel
|
|
|
35,667,468
|
|
|
|
41,871,066
|
|
|
|
38,954,692
|
|
Aircraft maintenance, materials, and repairs
|
|
|
14,789,573
|
|
|
|
16,648,569
|
|
|
|
13,367,928
|
|
Depreciation and amortization
|
|
|
6,399,943
|
|
|
|
5,830,006
|
|
|
|
5,236,110
|
|
Aircraft rental
|
|
|
|
|
|
|
1,417,918
|
|
|
|
1,906,682
|
|
Other rentals and landing fees
|
|
|
6,437,633
|
|
|
|
7,136,225
|
|
|
|
6,046,212
|
|
Other operating expense
|
|
|
17,791,545
|
|
|
|
21,286,349
|
|
|
|
20,411,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
113,431,831
|
|
|
|
128,365,839
|
|
|
|
118,040,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,764,594
|
|
|
|
9,413,037
|
|
|
|
6,324,686
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense net of interest income of $1,664, $2,639 and $4,043 respectively
|
|
|
(4,317,753
|
)
|
|
|
(5,007,949
|
)
|
|
|
(2,618,222
|
)
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
13,696,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(4,317,753
|
)
|
|
|
(5,007,949
|
)
|
|
|
11,078,473
|
|
Income (loss) before income taxes
|
|
|
(553,159
|
)
|
|
|
4,405,088
|
|
|
|
17,403,159
|
|
Income tax benefit (expense)
|
|
|
110,488
|
|
|
|
(1,502,952
|
)
|
|
|
(6,714,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(442,671
|
)
|
|
$
|
2,902,136
|
|
|
$
|
10,688,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
0.33
|
|
|
$
|
0.78
|
|
Diluted
|
|
|
(0.05
|
)
|
|
|
0.32
|
|
|
|
0.78
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,974,990
|
|
|
|
8,923,269
|
|
|
|
13,629,671
|
|
Diluted
|
|
|
8,974,990
|
|
|
|
9,065,171
|
|
|
|
13,739,516
|
|
See accompanying notes to financial statements.
38
GREAT LAKES AVIATION, LTD.
Statements of Stockholders Equity
Years Ended December 31, 2013, 2012, and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in capital
|
|
|
Earnings
|
|
|
Total
|
|
Balance at January 1, 2011
|
|
|
14,291,970
|
|
|
$
|
142,920
|
|
|
$
|
33,568,669
|
|
|
$
|
(4,771,030
|
)
|
|
$
|
28,940,559
|
|
Repurchase and retirement of common stock
|
|
|
(5,371,980
|
)
|
|
|
(53,720
|
)
|
|
|
(2,095,072
|
)
|
|
|
(1,342,995
|
)
|
|
|
(3,491,787
|
)
|
Net income and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,688,268
|
|
|
|
10,688,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
8,919,990
|
|
|
|
89,200
|
|
|
|
31,473,597
|
|
|
|
4,574,243
|
|
|
|
36,137,040
|
|
Exercise of stock options
|
|
|
55,000
|
|
|
|
550
|
|
|
|
21,012
|
|
|
|
|
|
|
|
21,562
|
|
Net income and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,902,136
|
|
|
|
2,902,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
8,974,990
|
|
|
$
|
89,750
|
|
|
$
|
31,494,609
|
|
|
|
7,476,379
|
|
|
$
|
39,060,738
|
|
Net (loss) and comprehensive (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(442,671
|
)
|
|
|
(442,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
8,974,990
|
|
|
$
|
89,750
|
|
|
$
|
31,494,609
|
|
|
$
|
7,033,708
|
|
|
$
|
38,618,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
39
GREAT LAKES AVIATION, LTD.
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(442,671
|
)
|
|
$
|
2,902,136
|
|
|
$
|
10,688,268
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,399,943
|
|
|
|
5,830,006
|
|
|
|
5,236,110
|
|
Loss on items beyond economic repair
|
|
|
372,629
|
|
|
|
303,692
|
|
|
|
166,117
|
|
Amortization of deferred debt restructuring gain
|
|
|
|
|
|
|
|
|
|
|
(599,945
|
)
|
Amortization of debt issuance costs
|
|
|
641,339
|
|
|
|
641,339
|
|
|
|
78,153
|
|
Non-cash gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(13,696,695
|
)
|
Deferred tax expense
|
|
|
(233,467
|
)
|
|
|
1,025,231
|
|
|
|
5,586,974
|
|
Change in current operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,116,565
|
|
|
|
710,028
|
|
|
|
(845,050
|
)
|
Inventories
|
|
|
303,859
|
|
|
|
(1,402,818
|
)
|
|
|
(977,583
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,161,214
|
)
|
|
|
(671,880
|
)
|
|
|
715,679
|
|
Maintenance deposits
|
|
|
|
|
|
|
(41,057
|
)
|
|
|
305,501
|
|
Other assets
|
|
|
1,008,313
|
|
|
|
(373,982
|
)
|
|
|
184,309
|
|
Accounts payable
|
|
|
(920,745
|
)
|
|
|
302,913
|
|
|
|
1,068,028
|
|
Accrued interest, unearned revenue and other liabilities
|
|
|
(781,137
|
)
|
|
|
(140,341
|
)
|
|
|
106,851
|
|
Deferred credits
|
|
|
|
|
|
|
|
|
|
|
(35,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,303,414
|
|
|
|
9,085,267
|
|
|
|
7,981,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of flight equipment and other property and equipment
|
|
|
(1,593,121
|
)
|
|
|
(6,512,188
|
)
|
|
|
(3,859,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
(1,593,121
|
)
|
|
|
(6,512,188
|
)
|
|
|
(3,859,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable and repurchase of common stock
|
|
|
(3,500,000
|
)
|
|
|
(5,300,000
|
)
|
|
|
(33,182,962
|
)
|
Proceeds from the issuance of debt
|
|
|
1,500,000
|
|
|
|
2,000,000
|
|
|
|
29,473,333
|
|
Payments for debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(2,535,755
|
)
|
Proceeds from the exercise of stock options
|
|
|
|
|
|
|
21,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,000,000
|
)
|
|
|
(3,278,438
|
)
|
|
|
(6,245,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
3,710,293
|
|
|
|
(705,359
|
)
|
|
|
(2,123,112
|
)
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
2,887,634
|
|
|
|
3,592,993
|
|
|
|
5,716,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
6,597,927
|
|
|
$
|
2,887,634
|
|
|
$
|
3,592,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest (contractual)
|
|
$
|
3,698,776
|
|
|
$
|
4,434,100
|
|
|
$
|
3,144,060
|
|
Cash paid during the year for income taxes
|
|
$
|
189,809
|
|
|
$
|
1,454,359
|
|
|
$
|
368,576
|
|
Non-cash purchase of flight equipment
|
|
$
|
|
|
|
$
|
1,760,000
|
|
|
$
|
|
|
See accompanying notes to financial statements.
40
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
Passenger Revenue
Great Lakes
Aviation, Ltd. (Great Lakes, the Company, we or us) is a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United Airlines or United) and Frontier Airlines, Inc. (Frontier Airlines or
Frontier). Our code share agreements allow our mutual customers to purchase connecting flights though 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 had developed electronic ticketing (e-ticket) interline
agreements with American Airlines, Delta Airlines, Frontier Airlines, United Airlines, and U.S. Airways.
Currently, we estimate that approximately 39% of
Great Lakes passenger traffic utilizes the United code share product line and approximately 19% 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 42% of the Companys total revenue during each of the twelve months ended December 31, 2013 and 2012, 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 April 1, 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.
Liquidity
The Company has
historically used debt to finance the purchase of its aircraft.
As of September 30, 2013, and December 31, 2013, the Company was not in
compliance with financial covenants contained in the credit agreement between it and its lenders. Furthermore, the Company experienced a pilot shortage in the 4
th
quarter of 2013 which has caused
the Company to curtail operations and reduce capacity. The pilot shortage and its effect on operations are expected to continue into 2014 or until the Company can hire and train enough pilots to reestablish operations in those markets in which the
Company was forced to suspend or terminate service. The curtailment of operations 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 throughout 2014.
Until the Company is able to re-staff a sufficient number of
qualified pilots to restore service to suspended or terminated markets, it expects that it will not have sufficient liquidity to service its existing debt obligations.
41
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
The above circumstances and near term projections indicate 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 throughout 2014, and the lenders ability to call our debt, raise substantial doubt about the Companys ability to
continue as a going concern. Our audited financial statements for the fiscal year ended December 31, 2013 were 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 $24.2 million) under our senior credit facility are classified as current maturities as of December 31, 2013. 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 terminates on April 30, 2014. Under the terms of this agreement the Companys lenders have agreed to refrain from exercising their right to declare the obligations to
be immediately due and payable under the terms of the Credit 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.
Gain on Extinguishment of Debt and Return of Raytheon Shares
In November of 2011, for the consideration of $27 million, Raytheon agreed to terminate principal amounts of $30.6 million of Aircraft Notes from the Company,
secured by 25 Beechcraft 1900D aircraft, and a $6.6 million Senior Note, secured by four Embraer Brasilia EMB 120 aircraft and all other assets of the Company. Raytheon also agreed to return 5,371,980 shares of Great Lakes common stock. The Company
deemed $3.5 million of the $27 million payment to Raytheon to be for the repurchase of common stock and $23.5 million for the settlement of the outstanding debt obligations. Proceeds were first allocated to the repurchase of the equity, based on the
fair value of the equity at the date of agreement with Raytheon, and the remainder was allocated to the settlement of debt, in accordance with the guidance in ASC 505-30-30, Equity. As a result of this transaction, the Company realized a non-cash
gain on the extinguishment of debt of $13.7 million representing the difference between the $23.5 million and the carrying value of the debt of $37.2 million.
Note 2.
|
Summary of Significant Accounting Policies and Procedures
|
(a) Use of Estimates
. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Companys management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses during the reporting period. 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, maintenance deposits and inventory; and reserves for employee benefit obligations and other contingencies.
42
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
(b) Cash and Cash Equivalents
. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily convertible into cash. Cash equivalents are not subject to significant risk from fluctuations in interest rates and as a result, the carrying amount of cash equivalents
approximates fair value. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition, and in high quality and relatively risk-free investment products. Our cash investment policy
limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.
(c) Accounts Receivable and Other Receivables
. Approximately 94% of accounts receivable balances are due from various airlines,
credit card companies, or the United States government.
The table below shows the composition and approximate percentages attributable to
our receivables at December 31, 2013 and 2012.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
United Airlines
|
|
|
12
|
%
|
|
|
11
|
%
|
Frontier Airlines
|
|
|
8
|
|
|
|
9
|
|
Other Airlines
|
|
|
5
|
|
|
|
2
|
|
Credit card companies
|
|
|
14
|
|
|
|
14
|
|
United States government
|
|
|
55
|
|
|
|
60
|
|
Other
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
100
|
%
|
|
|
100
|
%
|
All receivables are pledged as collateral under the Companys debt agreements.
(d) Inventories
. Inventories consist of fuel, expendable spare parts, materials, and supplies relating to flight equipment.
Inventories are stated at the lower of average cost or market. Expendable parts are charged to maintenance expense as used. Inventories consisting of expendable spare parts and equipment are pledged as collateral for our loan agreements. The balance
of fuel held in inventories was $1.0 million and $0.8 million as of December 31, 2013 and 2012, respectively.
(e) Property and
Equipment
. Property and equipment includes aircraft and major parts relating to such aircraft. Property is stated at cost and depreciated on a straight-line basis for financial reporting purposes over estimated useful lives of 10 to 20 years
for flight equipment and 3 to 10 years for other property and equipment. The estimated lives used to record depreciation on the Companys aircraft may be affected by the revenue generating capability of the aircraft, technology, policies
regarding EAS subsidies promulgated by the DOT, and changes in strategy by the Company. In accounting for long-lived assets, we make estimates about the expected useful lives and projected residual values. Estimates of useful lives and residual
values of aircraft are based on
43
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
actual industry experience with the same or similar aircraft types and anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations, and
changes in our maintenance program or operations could result in changes to these estimates. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the asset. Accelerated methods of depreciation are used for
tax reporting purposes. All owned aircraft are pledged as collateral for our loan agreements
(f) Impairment of Long Lived
Assets
.
In accordance with ASC Section 360-10-35, (originally Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of
) long-lived assets, such as property, plant, equipment, and aircraft, subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported
at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value.
(g) Other Assets
.
Other assets consist primarily of prepayments of debt issuance costs, deposits with financial
institutions, bonding companies, facilities lessors, aircraft lessors and others to secure the payment of fixed obligations. We incurred $2.5 million of debt issuance costs in 2011. At December 31, 2013, the unamortized debt issuance costs are
$1.2 million, of which $0.6 million is classified as a prepaid expense that will be amortized in 2014 and $0.5 million is classified in other assets which will amortize in 2015. Security deposits related to long-term facility leases were $1.2
million at December 31, 2013 and 2012.
(h) Maintenance Deposits
.
Until December 2012, the Company leased two of
its Embraer EMB-120 Brasilia aircraft and, in addition to the base rent, was required to pay supplemental rent (Maintenance Rent) based upon flight hours or cycles flown. Under the terms of the leases the lessor would reimburse the
Company for performing specified maintenance activities. This Maintenance Rent was accounted for as maintenance deposits in accordance with ASC subtopic 840-10, whereby the amount of the rent is capitalized and treated as a deposit against future
maintenance expense until: (i) such time as a defined maintenance event is performed and a reimbursement is received, or (ii) the Company determined it was no longer probable that all or a portion of the deposit would be refunded as a
reimbursement of the costs of a maintenance activity. When an amount on deposit is less than probable of being returned, it shall be recognized as additional expense.
In December of 2012, the Company negotiated the early termination of these lease agreements and the purchase of these two leased aircraft. The
maintenance deposits reflected in the Companys financial statements at the time of the early lease termination were expected to be reimbursed by the lessor over the original remaining lease term prior to our decision to early terminate the
lease and
44
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
purchase the aircraft. In connection with the early termination of the aircraft leases and purchase of the aircraft, the Company surrendered its maintenance deposits of $2.2 million, other
receivables from the lessor of $0.4 million, and cash of $1.6 million, for total consideration of $4.2 million. The Company estimated the fair value of the acquired aircraft at the time of purchase, using the guidance in ASC 820, Fair Value
Measurement, at $3.5 million, which was $0.7 million less than the total consideration paid to the lessor. As a result, the Company incurred additional aircraft rental expense of $0.7 million in December of 2012. At December 31, 2013 and
December 31, 2012, the Company had no maintenance deposits.
(i) Revenue Recognition
.
Revenue generated from
passenger, cargo, and other activities are recorded as revenue either when the respective services are rendered or when the time for use of the ticket has expired, one year after the date of issuance, and are net of excise taxes, passenger facility
charges and security fees. Unused tickets issued by the Company are recorded in the accompanying balance sheets as unearned revenue.
The
Company also receives public service subsidy revenues for providing air service to certain communities that do not generate sufficient traffic to fully support profitable air service under the EAS program. With respect to awarded EAS subsidy cases,
the Company records revenues based on departures performed at departure rates that were approved by the DOT during the term of service agreement.
(j) Code Share Relationships.
At December 31, 2013, the Company operated under code share agreements with United Airlines
and Frontier Airlines. These code share agreements are prorate agreements whereby the passengers fare is split between the two carriers based on the distance traveled by the passenger on each airline. Revenue from these code share agreements
is recorded as passenger revenue when the services are rendered. The Company also participates in Uniteds Mileage Plus frequent flyer program. If a customer books travel on United which includes a segment on Great Lakes, the United
customer earns points in their United frequent flier account for the miles flown on the Great Lakes segment. When a United frequent flier customer earns sufficient points to earn an award, he or she can choose whether to redeem those points on a
United flight connecting with a Great Lakes flight. Our participation in Uniteds frequent flyer program does not require us to issue tickets in exchange for frequent flyer awards. Award redemption can only be facilitated through United on
United flights in conjunction with a Great Lakes flight. Tickets sold to passengers on Great Lakes ticket stock for Great Lakes flight segments (ZK designator) are not eligible to accrue United frequent flyer credits. The Company accounts for the
incremental cost to fly United frequent flyer passengers at the time of service since the Company does not have sufficient information to estimate future awards expected to be redeemed on a Great Lakes segment, and an estimated frequent flyer
liability would be insignificant in the aggregate given the historical volume of awards used for flights including Great Lakes segments.
(k) Income Taxes
. The Company accounts for income taxes using the asset and liability method. Under that method, deferred income
taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax basis of existing assets
and liabilities and net operating losses and tax credit carryforwards. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized. The effect on deferred taxes from a change in tax
rates is recognized in income in the period that includes the enactment date.
45
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
(l) Income (Loss) Per Share
. Basic income (loss) per share has been computed by
dividing the net income for a particular year by the weighted average number of shares of common stock outstanding during such year. Diluted earnings per share reflects the potential dilution of securities that could share in earnings. The Company
currently has 8,974,990 shares of common stock outstanding.
(m) Stock Option Plans
. For the years ending December 31,
2013, 2012 and 2011 there were no stock-based compensation awards granted.
(n) Aircraft Maintenance
. The Company operates
under an FAA-approved continuous inspection and maintenance program. The Company accounts for maintenance activities on the direct expense method. Under this method, major airframe overhaul maintenance costs are recognized as expense as maintenance
services are performed. Routine maintenance and repairs are charged to operations as incurred. In the event an engine undergoes a significant repair or overhaul, the Company may determine that it is more appropriate to capitalize the repair or
overhaul depending on the specific nature of the maintenance activity performed.
(o) Fair Value of Financial Instruments
.
Fair value estimates, methods, and assumptions of financial instruments are set forth below:
Cash, accounts receivable, accounts
payable, and accrued liabilities.
The carrying amount approximates fair value because of the short-term nature of these instruments.
Long-term debt
. All of the Companys debt is comprised of variable rate debt (see Note 5). 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.
Aircraft Leases
Prior to
December 27, 2012 the Company operated two leased Embraer Brasilia Model 120 aircraft, which were accounted for under operating lease agreements. The Company negotiated the early termination of these lease agreements and the purchase of these
two leased aircraft in December of 2012. The Company was required to make supplemental rent payments to cover the cost of major scheduled maintenance overhauls of these aircraft which were reimbursable to the Company at the time maintenance
activities were completed. These supplemental rentals are based on the number of flight hours flown and/or flight departures and are recorded as maintenance deposits. See Note 2(h)
Summary of Significant Accounting Policies and Procedures
Maintenance Deposits
for the Companys accounting policy. As a result of the early termination of the aircraft leases and purchase of the aircraft by the Company, it was no longer probable that $0.7 million of maintenance deposits would be
refunded when maintenance activity was performed and the Company incurred additional
46
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
aircraft rental expense of $0.7 million in December of 2012. During the years ended December 31, 2013, 2012 and 2011 supplemental rent expense recorded as a result of the maintenance rent
provisions in the leases was $0.0, $0.7 and $0.4 million, respectively. At December 31, 2013, the Company had no commitments under aircraft operating leases.
Other Leases
The Company leases office and hangar space,
spare engines and office equipment for its headquarters, reservation facilities, airport facilities, and certain other equipment. The Companys headquarter lease provides for three five-year renewal options making this facility available to the
Company through the year 2020. The Company also leases certain airport gate facilities on a month-to-month basis. Facilities rental expense under operating leases, including month-to-month leases, for the years ended December 31, 2013, 2012 and
2011 was $3.7 million, $3.9 million, and $3.1 million, respectively.
Note 4.
|
Accrued Liabilities
|
Accrued liabilities consisted of the following balances at December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Unearned revenue
|
|
|
1,221,257
|
|
|
|
1,710,269
|
|
Accrued property taxes
|
|
|
74,962
|
|
|
|
30,830
|
|
Accrued Interest
|
|
|
286,701
|
|
|
|
307,849
|
|
Accrued payroll
|
|
|
1,942,923
|
|
|
|
2,258,032
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
3,525,843
|
|
|
$
|
4,306,980
|
|
|
|
|
|
|
|
|
|
|
Note 5.
|
Notes Payable and Long-Term Debt
|
The following table sets forth, as of December 31, 2013 and 2012, 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:
47
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
GB/Crystal Term Loanprincipal
|
|
|
|
|
|
$
|
15,200,000
|
|
|
$
|
18,700,000
|
|
GB/Crystal Revolving Loanprincipal
|
|
|
|
|
|
|
8,973,333
|
|
|
|
7,473,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
|
|
|
|
24,173,333
|
|
|
|
26,173,333
|
|
Less current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
GB/Crystal Term Loanprincipal (1)
|
|
|
(1
|
)
|
|
|
(24,173,333
|
)
|
|
|
(3,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current portion
|
|
|
|
|
|
|
(24,173,333
|
)
|
|
|
(3,500,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term portion
|
|
|
|
|
|
$
|
0
|
|
|
$
|
22,673,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
December 31, 2013, $15.2 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 first excess cash flow payment was paid
November 14, 2012, in the amount of $2.3 million.
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 December 31, 2013, $9.0 million was outstanding under the revolving credit facility, secured by
accounts receivable, parts inventory and spare engines. The revolving credit facility bears interest at the rate of 30 day LIBOR rate plus 8.0% with a minimum interest rate of 10.5%. The 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.
48
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
As of December 31, 2013 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 divided 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 December 31, 2013, the Companys leverage ratio was calculated to be 2.4:1, 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 $24.2 million) under the Companys senior credit facility are classified as current maturities as of December 31, 2013.
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
terminates on April 30, 2014. Under the terms of the agreement the Companys lenders have agreed to refrain from exercising their right to declare the obligations to be immediately due and payable under the terms of the Credit Agreement
and the other loan documents. 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 following table summarizes the
contractual due dates of the Companys long-term debt obligations as of December 31, 2013, without considering the potential impact resulting from the covenant violation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
After 2016
|
|
|
Total
|
|
Long-term debtcontractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan facility
|
|
$
|
4,000,000
|
|
|
$
|
11,200,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,200,000
|
|
Revolving credit facility
|
|
|
|
|
|
|
8,973,333
|
|
|
|
|
|
|
|
|
|
|
|
8,973,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
4,000,000
|
|
|
|
20,173,333
|
|
|
|
0
|
|
|
|
|
|
|
|
24,173,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The tax net operating loss carryforwards (NOLs)
that have been generated are due in large part to the accelerated depreciation of property and equipment over a shorter useful life for tax purposes. The Companys NOLs will expire between 2021 and 2024. The book basis of property and equipment
is
49
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
approximately $36.1 million greater than the tax basis at December 31, 2013, all of which is expected to reverse during periods in which NOLs are available. Approximately $9.2 million ($0.5
million tax effected) of state NOLs are expected to expire unused and accordingly a valuation allowance has been provided for these deferred tax assets. Based upon the projections for future taxable income over the periods in which the deferred tax
assets become deductible, the Company believes it is more likely than not that it will realize the benefits of most of the deductible temporary differences and NOLs.
The Companys estimated net operating loss carryforwards for federal income tax purposes totaling approximately $18.7 million at December 31, 2013,
expire in years 2021 through 2024 as follows (in thousands):
|
|
|
|
|
Year of Expiration
|
|
Amount
|
|
2021
|
|
|
12,656
|
|
2023
|
|
|
4,011
|
|
2024
|
|
|
2,055
|
|
|
|
|
|
|
|
|
$
|
18,722
|
|
|
|
|
|
|
In order for the Company to utilize these NOLs prior to expiration, the Company would need to generate taxable income of $18.7
million during the next 10 years, or approximately $1.9 million per year.
Income tax expense (benefit) for the years ended December 31, 2013, 2012
and 2011 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
42,502
|
|
|
|
(118,415
|
)
|
|
|
($75,913
|
)
|
State and local
|
|
|
80,471
|
|
|
|
(115,046
|
)
|
|
|
($34,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,973
|
|
|
|
($233,462
|
)
|
|
|
($110,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
137,096
|
|
|
|
1,316,899
|
|
|
$
|
1,453,995
|
|
State and local
|
|
|
340,626
|
|
|
|
(291,669
|
)
|
|
$
|
48,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
477,722
|
|
|
$
|
1,025,230
|
|
|
$
|
1,502,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
337,604
|
|
|
$
|
5,611,401
|
|
|
$
|
5,949,005
|
|
State and local
|
|
$
|
790,317
|
|
|
|
(24,431
|
)
|
|
$
|
765,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,127,921
|
|
|
$
|
5,586,970
|
|
|
$
|
6,714,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
The federal statutory tax rate of 34% for 2013 and 34% for 2012 and 35% for 2011 differs from the
Companys effective income tax rate for the years ended December 31, 2013, 2012, and 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Income tax expense (benefit) at the federal statutory income tax rate
|
|
$
|
(188,074
|
)
|
|
$
|
1,497,730
|
|
|
$
|
6,091,106
|
|
State income tax expense (benefit), net of federal income tax benefit
|
|
|
(7,718
|
)
|
|
|
134,530
|
|
|
|
507,910
|
|
Book expenses not deductible for tax purposes
|
|
|
102,827
|
|
|
|
139,389
|
|
|
|
125,959
|
|
Increase (Decrease) in valuation allowance
|
|
|
(104,942
|
)
|
|
|
(36,283
|
)
|
|
|
21,111
|
|
Impact of changes in rates
|
|
|
87,419
|
|
|
|
(232,413
|
)
|
|
|
(31,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
(110,488
|
)
|
|
$
|
1,502,952
|
|
|
$
|
6,714,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) as of December 31, 2013 and 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,020,027
|
|
|
$
|
7,844,304
|
|
Alternative minimum tax credit carryforwards
|
|
|
1,198,265
|
|
|
|
1,152,601
|
|
Inventory reserve
|
|
|
850,023
|
|
|
|
814,416
|
|
Deferred revenue
|
|
|
451,673
|
|
|
|
632,603
|
|
Other reserves
|
|
|
235,216
|
|
|
|
242,099
|
|
Other
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
9,755,204
|
|
|
|
10,686,208
|
|
Less: valuation allowance
|
|
|
(506,913
|
)
|
|
|
(609,436
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
9,248,291
|
|
|
|
10,076,772
|
|
Deferred tax liabilites:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(15,626,145
|
)
|
|
|
(16,668,935
|
)
|
Other
|
|
|
(42,193
|
)
|
|
|
(61,353
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(6,420,047
|
)
|
|
$
|
(6,653,516
|
)
|
|
|
|
|
|
|
|
|
|
The Company files income tax returns in the U.S., and various state and local jurisdictions. Federal tax returns remain
subject to examination for three years after a tax net operating loss is utilized, accordingly the tax returns may remain subject to audit beyond the original statute of limitations State jurisdictions also remain subject to examination.
The Company believes that its income tax filing positions and deductions related to tax periods subject to examination will be sustained upon audit and does
not anticipate any adjustments that will result in a material adverse effect on the Companys financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to
ASC 740-10-25.
51
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
Note 7.
|
Employee Benefit Plans
|
The Company maintains a qualified 401(k) employee retirement savings plan for the benefit of substantially all of the Companys
employees. The Company matches up to 4% of participating employees contributions. Company contributions, net of forfeitures, totaled $280,753 in 2013, $299,605 in 2012, and $317,299 in 2011.
In 1993, the Company adopted the Great Lakes Aviation, Ltd. 1993 Stock Option Plan and the Great Lakes Aviation, Ltd. 1993 Director Stock Option Plan
(collectively, the Plans). The Plans permitted the grant of stock options in the aggregate of 1,300,000 shares of the Companys common stock to key employees, officers, and directors of the Company. Pursuant to their terms, both Plans expired
on October 31, 2003, and no options have been granted after October 31, 2003. At December 31, 2013 and 2012, no options remained outstanding under the plans.
The following table provides a reconciliation of the numerators and denominators of the basic and diluted income per share computations for
the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
Per
|
|
|
|
Income (loss)
|
|
|
Shares
|
|
|
share
|
|
|
Income
|
|
|
Shares
|
|
|
share
|
|
|
Income
|
|
|
Shares
|
|
|
share
|
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
amount
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
amount
|
|
|
(numerator)
|
|
|
(denominator)
|
|
|
amount
|
|
Basic income per share attributable to common stockholders
|
|
$
|
(442,671
|
)
|
|
|
8,974,990
|
|
|
$
|
(0.05
|
)
|
|
$
|
2,902,136
|
|
|
|
8,923,269
|
|
|
$
|
0.33
|
|
|
$
|
10,688,268
|
|
|
|
13,629,671
|
|
|
$
|
0.78
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,902
|
|
|
|
|
|
|
|
|
|
|
|
109,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share attributable to common stockholders
|
|
$
|
(442,671
|
)
|
|
|
8,974,990
|
|
|
$
|
(0.05
|
)
|
|
$
|
2,902,136
|
|
|
|
9,065,171
|
|
|
$
|
0.32
|
|
|
$
|
10,688,268
|
|
|
|
13,739,516
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2013, 2012 and 2011, there were no stock options excluded from the calculation of
diluted earnings per share.
Under the terms of the Companys debt agreements, the Company is prohibited from paying dividends.
Note 9.
|
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:
52
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
|
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 $24.2 million and $26.2 million as of
December 31, 2013 and December 31, 2012, respectively. For additional information, see Note 5 Long-Term Debt.
All of the Companys debt is
comprised of variable rate debt (see Note 5). 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.
Note 10.
|
Transactions with Affiliates
|
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 the leases were $28,500 in 2013, $28,500 in 2012, and $28,500 in 2011. As of December 31, 2013, Mr. Douglas Voss controlled 4,160,247 shares of common stock of the
Company, representing an approximate 46.4% interest in the Companys outstanding common stock.
Note 11.
|
Commitments and Contingencies
|
Litigation
.
The Company is 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 the Companys financial position, results of operations, or cash flows.
Union Agreements
.
As of March 20, 2014, approximately 34 percent of the Companys employees are subject to union
agreements.
53
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2013 and December 31, 2012
The Companys pilots are represented by the United Transportation Union (UTU). The pilot
collective bargaining agreement became amendable on September 16, 2010. The Company and the UTU have been engaged in contract mediation under the auspices of the National Mediation Board (NMB).
The Companys flight attendants are also represented by the UTU. The Company entered into a new agreement with the flight attendants on May 17,
2011. This agreement will continue in full force and effect for four years and thereafter is subject to amendment, which would reopen collective bargaining.
The Companys mechanics and maintenance clerks are represented by the International Association of Machinists and Aerospace Workers (IAM).
The collective bargaining agreements between the Company and the clerks and mechanics represented by IAM, District 143, became amendable in 2002 and 2005, respectively. We are currently engaged in contract mediation under the auspices of the
National Mediation Board.
In 2003, the Companys dispatchers voted to be represented by the International Brotherhood of Teamsters. Negotiations
with the dispatchers are not active at the present time.
Note 12.
|
Subsequent Event
|
On April 1, 2014 the Company and GB Merchant Partners, LLC, and Crystal Capital LLC entered into a Third Amendment and Forbearance
Agreement which terminates on April 30, 2014. Under the terms of the agreement the Companys lenders have agreed to refrain from exercising their right to declare the obligations to be immediately due and payable under the terms of the
Credit Agreement.
The Company will use this time to explore additional sources of working capital that may include, but are not limited to, additional
equity financings, debt financings, and other funding transactions, including the sale or sale-leaseback of certain aircraft.
On March 31, 2014 the
Company made its scheduled principal payment of $1 million to GB Merchant Partners, LLC, and Crystal Capital LLC per the terms of the Credit Agreement.
54