PINX:GLUX Great Lakes Aviation Ltd Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File No. 0-23224

 

 

GREAT LAKES AVIATION, LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Iowa   42-1135319
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
1022 Airport Parkway, Cheyenne, WY   82001
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (307) 432-7000

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated Filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 10, 2012, 8,924,990 shares of Common Stock of the registrant were issued and outstanding.

 

 

 


Table of Contents

GREAT LAKES AVIATION, LTD.

FORM 10-Q

For the Quarterly Period Ended June 30, 2012

INDEX

 

PART I - FINANCIAL INFORMATION

  

Item 1.

 

FINANCIAL STATEMENTS

     2   

Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     11   

Item 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     21   

Item 4.

 

CONTROLS AND PROCEDURES

     21   

PART II - OTHER INFORMATION

  

Item 1.

 

LEGAL PROCEEDINGS.

     21   

Item 1A.

 

RISK FACTORS.

     22   

Item 6.

 

EXHIBITS.

     22   

SIGNATURES

     23   

EXHIBIT INDEX

     E-1   

 

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Table of Contents
Item 1. FINANCIAL STATEMENTS

GREAT LAKES AVIATION, LTD.

Balance Sheets

(unaudited)

 

     June 30,
2012
    December 31,
2011
 
Assets     

Current assets:

    

Cash

   $ 3,931,314      $ 3,592,993   

Accounts receivable and other receivables

     12,706,802        9,945,461   

Inventories

     8,677,954        7,568,792   

Prepaid expenses and other current assets

     2,218,054        1,962,959   

Deferred income taxes

     3,789,530        3,789,530   
  

 

 

   

 

 

 

Total current assets

     31,323,654        26,859,735   
  

 

 

   

 

 

 

Property and equipment:

    

Flight equipment

     119,110,215        117,573,486   

Other property and equipment

     10,051,417        9,766,209   

Less accumulated depreciation and amortization

     (78,423,094     (75,696,512
  

 

 

   

 

 

 

Total property and equipment

     50,738,538        51,643,183   
  

 

 

   

 

 

 

Maintenance deposits

     2,057,911        1,718,943   

Other assets

     3,435,673        3,555,639   
  

 

 

   

 

 

 

Total assets

   $ 87,555,776      $ 83,777,500   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Notes payable and current maturities of long-term debt

   $ 3,250,000      $ 3,000,000   

Accounts payable

     3,556,342        4,301,993   

Accrued interest, unearned revenue and other liabilities

     5,767,396        4,447,321   
  

 

 

   

 

 

 

Total current liabilities

     12,573,738        11,749,314   
  

 

 

   

 

 

 

Long-term debt, net of current maturities

     26,723,333        26,473,333   

Deferred income taxes

     10,407,410        9,417,813   
  

 

 

   

 

 

 

Total liabilities

     49,704,481        47,640,460   
  

 

 

   

 

 

 

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: 8,924,990 and 8,919,990 shares

     89,250        89,200   

Paid-in capital

     31,475,109        31,473,597   

Accumulated earnings

     6,286,936        4,574,243   
  

 

 

   

 

 

 

Total stockholders’ equity

     37,851,295        36,137,040   

Commitments and contingencies

    
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 87,555,776      $ 83,777,500   
  

 

 

   

 

 

 

See accompanying notes to the financial statements.

 

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Table of Contents

GREAT LAKES AVIATION, LTD.

Statements of Income

(Unaudited)

 

    

For the Three Months

Ended June 30,

   

For the Six Months

Ended June 30,

 
     2012     2011     2012     2011  

Operating Revenues:

        

Passenger

   $ 21,480,343      $ 17,744,828      $ 39,406,083      $ 32,674,321   

Public service

     14,534,788        13,247,898        27,821,672        27,483,294   

Freight, charter, and other

     87,457        223,039        232,234        748,863   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     36,102,588        31,215,765        67,459,989        60,906,478   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Salaries, wages, and benefits

     8,378,358        7,951,310        16,462,072        15,885,428   

Aircraft fuel

     10,593,129        10,221,355        20,752,263        19,632,046   

Aircraft maintenance, materials, and repairs

     4,471,544        2,806,254        7,286,511        7,026,407   

Depreciation and amortization

     1,445,623        1,304,900        2,875,301        2,611,423   

Aircraft rental

     155,025        573,525        310,050        1,147,050   

Other rentals and landing fees

     1,824,686        1,678,513        3,675,716        3,257,756   

Other operating expenses

     5,324,282        5,168,283        10,593,052        10,484,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,192,647        29,704,140        61,954,965        60,045,084   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     3,909,941        1,511,625        5,505,024        861,394   

Other expense:

        

Interest expense, net of interest income of $783, $45, $1,192 and $1,952, respectively

     (1,274,638     (408,012     (2,570,790     (826,425
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,635,303        1,103,613        2,934,234        34,969   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     (1,098,462     (497,061     (1,221,541     (5,823
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,536,841      $ 606,552      $ 1,712,693      $ 29,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.17      $ 0.04      $ 0.19      $ 0.00   

Diluted

   $ 0.17      $ 0.04      $ 0.19      $ 0.00   

Weighted average shares outstanding:

        

Basic

     8,922,517        14,291,970        8,921,254        14,291,970   

Diluted

     9,061,512        14,372,214        9,042,915        14,412,806   

See accompanying notes to the financial statements.

 

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GREAT LAKES AVIATION, LTD.

Statements of Cash Flows

(Unaudited)

 

     For the Six Months Ended June 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 1,712,693      $ 29,146   

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

     2,875,301        2,611,423   

Loss on items beyond economic repair

     113,195        69,691   

Amortization of deferred debt restructuring gain

     —          (599,945

Amortization of debt issuance costs

     320,669        —     

Deferred tax expense (benefit)

     989,597        (114,660

Change in current operating items:

    

Accounts receivable

     (2,761,341     (1,149,959

Inventories

     (1,109,162     22,125   

Prepaid expenses and other current assets

     (575,764     867,934   

Maintenance deposits

     (338,968     (77,456

Other assets

     119,966        (137,534

Accounts payable

     (745,652     (425,628

Accrued interest, unearned revenue and other liabilities

     1,320,075        559,817   

Deferred credits

     —          (23,419
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,920,609        1,631,535   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of flight equipment and other property and equipment

     (2,083,850     (644,677
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (2,083,850     (644,677
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of notes payable and long-term debt

     (1,500,000     (3,826,967

Proceeds from the issuance of debt

     2,000,000        —     

Proceeds from the issuance of common stock

     1,562        —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     501,562        (3,826,967
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     338,321        (2,840,109

Cash and Cash Equivalents:

    

Beginning of period

     3,592,993        5,716,105   
  

 

 

   

 

 

 

End of period

   $ 3,931,314      $ 2,875,996   
  

 

 

   

 

 

 

Supplementary cash flow information:

    

Cash paid during the period for interest (contractual)

   $ 2,257,584      $ 1,428,271   

Cash paid during the period for income taxes

   $ 876,682      $ 69,035   

See accompanying notes to the financial statements.

 

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GREAT LAKES AVIATION, LTD.

Statements of Stockholders’ Equity

Six Months Ended June 30, 2012

(unaudited)

 

     Common stock      Paid-in capital      Accumulated
deficit
     Total  
     Shares      Amount           

Balance at January 1, 2012

     8,919,990       $ 89,200       $ 31,473,597       $ 4,574,243       $ 36,137,040   

Exercise of stock options

     5,000         50         1,512         —           1,562   

Net income

     —           —           —           1,712,693         1,712,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2012

     8,924,990       $ 89,250       $ 31,475,109       $ 6,286,936       $ 37,851,295   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to financial statements.

 

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Great Lakes Aviation, Ltd.

Notes to Financial Statements

June 30, 2012

(unaudited)

 

1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial statements for the respective periods. Interim results are not necessarily indicative of results for a full year. The financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2011.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the salvage value of fixed assets; the valuation of deferred tax assets, fixed assets, maintenance deposits and inventory; and reserves for employee benefit obligations and other contingencies.

Business

Great Lakes Aviation, Ltd. (Great Lakes, the Company, we or us) is a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines) and Frontier Airlines, Inc. (Frontier or Frontier Airlines). Our code share agreements allow our mutual customers to purchase connecting flights through our code share partners and to share other benefits such as baggage transfer and frequent flyer benefits (in certain instances), while we maintain our own branding on our planes and ticket counters and our own designator code on all our flights. Terms of the United Airlines agreement provide for code sharing on designated flights to and from the Company’s Denver, CO, Los Angeles, CA and Phoenix, AZ hubs. Terms of the Frontier agreement provide for code sharing on designated flights to and from the Company’s Albuquerque, NM, Denver, CO, Los Angeles, CA, and Phoenix, AZ hubs. The Company’s code share agreements do not have fixed termination dates and are cancellable by either party upon sufficient notice.

Currently, we estimate that approximately 32% of Great Lakes’ connecting passenger traffic utilizes the United code share product line and approximately 21% of Great Lakes’ connecting passenger traffic utilizes the Frontier code share product line.

Approximately 41.2% and 45.1% of the Company’s total revenue during the six-month periods ended June 30, 2012 and 2011, 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 for federal fiscal years 2011 through 2014. Federal fiscal year 2014 ends on September 30, 2015.

The Company provides charter air services to private individuals, corporations, and athletic teams. The Company also carries cargo on most of the Company’s scheduled flights.

At August 10, 2012, the Company served 48 airports, of which 35 locations receive EAS subsidy, in 14 states with a fleet of six Embraer EMB-120 Brasilia and 28 Raytheon/Beechcraft 1900D regional airliners. The Company currently operates hubs at Albuquerque, NM, Denver, CO, Las Vegas, NV, Los Angeles, CA, Minneapolis, MN and Phoenix, AZ.

Liquidity

The Company has historically used debt to finance the purchase of its aircraft. On November 16, 2011, the Company entered into a new financing agreement with GB Merchant Partners, LLC, serving as Collateral Agent,

 

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and Crystal Capital LLC, serving as Administrative Agent (the “Credit Agreement”). Terms of the financing include a four-year term loan in the amount of $24 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 Company’s obligations to the lenders identified in the Credit Agreement are secured by substantially all assets of the Company, including all owned aircraft.

The Company has subsequently drawn down $7.5 million on the revolving credit facility. The draws are secured by accounts receivable, parts inventory and spare engines. The Company also was required to pay a closing fee based on the initial facility commitment, and is required to pay a monthly unused line fee, a specified fee for certain prepayments of the term loan, and certain administrative and fronting fees related to the Credit Agreement. The term loan and the revolving loan credit facility are set to mature on November 16, 2015.

The Company’s mandatory contractual principal and interest obligations for the next 12 months will be approximately $7.4 million. In addition to the mandatory contractual principal and interest obligations, the Company is required to make principal payments, based on a percentage of excess cash flows, on September 30 of each year beginning September 30, 2012, as determined in the Credit Agreement.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” which relates to fair value measurement (FASB ASC Topic 820), which amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The amendments generally represent clarification of FASB ASC Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this pronouncement for its fiscal year beginning January 1, 2012. This pronouncement did not have a material effect on the Company’s consolidated financial statements.

 

2. Accounting for Maintenance Deposits

The Company is required to make maintenance deposit payments for two of its Embraer EMB-120 Brasilia leased aircraft to the lessor. These maintenance deposits are refunded if and when the Company performs specified maintenance activities. At June 30, 2012 and December 31, 2011, the Company had maintenance deposits of approximately $2.1 million and $1.7 million respectively. These maintenance deposits are accounted for in accordance with ASC subtopic 840-10, whereby the deposits are capitalized until such time as the maintenance event occurs, or the Company determines it is no longer probable that an amount on deposit with its lessor will be returned to reimburse the costs of the maintenance activities incurred by the lessee. When an amount on deposit is less than probable of being returned, it shall be recognized as additional expense. The Company has evaluated the maintenance deposits on account and determined that, based on historical and forecasted usage of the aircraft and the ability to perform maintenance to meet the requirements of receiving reimbursement for the deposits on account, that all amounts on deposit are probable of being returned as a result of the maintenance expected to be performed on the aircraft’s components prior to the leased aircraft’s lease expiration. The Company will continue to evaluate its maintenance deposit account as the leases progress towards lease expiration in April 2013, and make the determination if any existing or future maintenance deposits should be expensed if it becomes less than probable that the deposits will be returned.

 

3. Share-Based Compensation

The Great Lakes Aviation, Ltd. 1993 Incentive Stock Option Plan and Great Lakes Aviation, Ltd. 1993 Director Stock Option Plan both expired in 2003 and, therefore, no new options may be granted under either of these stock option plans. The Company has not established any new stock option plans for which it may grant stock options. The Company did not realize any tax deductions related to the exercise of stock options during the six month periods ended June 30, 2012 and June 30, 2011. The Company’s granted options qualify as incentive stock options (ISO) for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to

 

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the options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. The aggregate intrinsic value for options outstanding and exercisable at June 30, 2012 and June 30, 2011, was $124,240 and $117,101 respectively.

 

4. Earnings per share

The following table shows the computation of basic and diluted earnings per common share:

 

    

Three months ended

June 30,

    

Six months ended

June 30,

 
     2012      2011      2012      2011  

Numerator:

           

Net Income (loss)

   $ $1,536,841       $ $606,552       $ $1,712,693       $ $29,146   

Denominator:

           

Weighted average shares outstanding, basic

     8,922,517         14,291,970         8,921,254         14,291,970   

Dilutive effect of employee stock options

     138,995         80,244         121,661         120,836   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding, diluted

     9,061,512         14,372,214         9,042,915         14,412,806   

Net income per share, basic

   $ 0.17       $ 0.04       $ 0.19       $ 0.00   

Net income per share, diluted

   $ 0.17       $ 0.04       $ 0.19       $ 0.00   

For the three and six month periods ended June 30, 2011 and June 30, 2012 no outstanding options were excluded from the calculation of net income per diluted common share as the exercise prices of all such options were lower than the average market price of common stock for the period.

 

5. Accrued Liabilities

Accrued liabilities consisted of the following balances at June 30, 2012 and December 31, 2011:

 

     June 30,
2012
     December 31,
2011
 

Accrued expenses

   $ 10,087       $ 25,178   

Unearned revenue

     2,901,990         1,703,358   

Accrued property taxes

     336,042         226,318   

Accrued interest

     367,164         373,719   

Accrued payroll

     2,152,113         2,118,748   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 5,767,396       $ 4,447,321   
  

 

 

    

 

 

 

 

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6. Long-Term Debt

The following table sets forth, as of June 30, 2012 and December 31, 2011, the carrying amount of the Company’s long-term debt and the current maturities of long term debt. The carrying amount of the debt includes the principal payments contractually required under the debt agreements:

 

     June 30,
2012
    December 31,
2011
 

Long-term debt:

    

GB/Crystal Term Loan - principal

   $ 22,500,000      $ 24,000,000   

GB/Crystal Revolving Loan- principal

     7,473,333        5,473,333   
  

 

 

   

 

 

 

Total long-term debt

     29,973,333        29,473,333   

Less:

    

GB/Crystal Term Loan - principal

     (3,250,000     (3,000,000
  

 

 

   

 

 

 

Total current portion

     (3,250,000     (3,000,000
  

 

 

   

 

 

 

Total long-term portion

   $ 26,723,333      $ 26,473,333   

On November 16, 2011, the Company entered into a new financing agreement with GB Merchant Partners, LLC, serving as Collateral Agent, and Crystal Capital LLC, serving as Administrative Agent. Terms of the financing include a four-year term loan in the amount of $24 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 Company’s 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 June 30, 2012, $22.5 million was outstanding under the term loan. The term loan is set to mature on November 16, 2015 at which time the outstanding principal balance due, exclusive of any mandatory or voluntary prepayments, is scheduled to be $10.1 million.

As of June 30, 2012, $7.5 million was outstanding under the revolving credit facility secured by accounts receivable, parts inventory and spare engines. The revolving credit facility bears interest at the rate of 30 day LIBOR rate plus 8.0% with a minimum interest rate of 10.5%. The Company was also required to pay a closing fee based on the initial facility commitment, and is required to pay a monthly unused line fee, a specified fee for certain prepayments of the term loan, and certain administrative and fronting fees related to the Credit Agreement. The revolving loan credit facility is set to mature on November 16, 2015 at which time any outstanding principal balance will be due.

 

7. Related Parties

The Company rents two six-passenger aircraft and a vehicle from Iowa Great Lakes Flyers, Inc., a corporation solely owned by Douglas G. Voss, the Company’s Chairman and major stockholder. Total payments for these leases were $14,250 for each of the six months ending June 30, 2012 and 2011, respectively. As of June 30, 2012, Mr. Voss controlled 4,160,247 shares of common stock of the Company, representing approximately 46.6% of the Company’s outstanding common stock.

 

8. Income Taxes

The Company’s annual effective income tax rate is estimated to be 41.6% for 2012. The Company’s effective tax rate includes non-deductible permanent tax differences that comprise a significant percentage of projected annual pre-tax income. Prior to 2004, the Company reported significant cumulative losses and generated substantial net operating loss carryforwards. From 2007 through the current period, the Company utilized a portion of these carryforwards to offset taxable income.

 

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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:

 

Level 1    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2    Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and other inputs that are observable or can be corroborated by observable market data.
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy set forth by the Financial Accounting Standards Board (the “FASB”).

Our financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities and long-term debt including the current portion. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values. These are considered Level 1 measurements.

All of the Company’s debt is comprised of variable rate debt (see Note 6). There is not an active market for the Company’s notes. Based on the proximity of when the Company entered into its long-term debt to June 30, 2012 and the variable rate nature of the long-term debt, the carrying value of long-term debt approximates its fair value at June 30, 2012. The fair value of the long-term debt is a Level 3 measurement and takes into consideration inputs that include the future expected cash flows, the probability of early redemption, the probability of default on the part of the Company including overall creditworthiness, the interest rate of the debt and the prevailing interest rate in the market for similar financial instruments.

 

10. Subsequent Event

We evaluated events after June 30, 2012, through the date the financial statements were issued, and determined any events or transactions occurring during this period that would require recognition or disclosure are appropriately addressed in these financial statements.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company

We were incorporated on October 25, 1979 as an Iowa corporation and became a publicly traded company in January 1994. We commenced scheduled air service operations on October 12, 1981. Great Lakes Airlines currently operates hubs at Albuquerque, NM, Denver, CO, Los Angeles, CA, Las Vegas, NV, Minneapolis, MN and Phoenix, AZ.

We are a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines) and Frontier Airlines, Inc. (Frontier or Frontier Airlines). Our code share agreements allow our mutual customers to purchase connecting flights through our code share partners and to share other benefits such as baggage transfer and frequent flyer benefits (in certain instances), while we maintain our own branding on our planes and ticket counters and our own designator code on all our flights. As of August 10, 2012, we served 48 airports in 14 states with a fleet of six Embraer EMB-120 Brasilias and 28 Raytheon/Beech 1900D regional airliners.

Essential Air Service (“EAS”) Program

We derived approximately 41% of our total revenue from the EAS program in the six month period ending June 30, 2012, which is administered by the United States Department of Transportation (DOT). The EAS program was instituted under the Airline Deregulation Act of 1978 (the “Deregulation Act”), which allowed airlines greater freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the EAS program, certain communities are guaranteed specified levels of “essential air service.” In order to promote the provision of essential air services, the DOT may authorize the payment of federal subsidies to compensate an air carrier that is providing essential air services in otherwise unprofitable or minimally profitable markets.

The FAA Modernization and Reform Act of 2012 was enacted into law on February 14, 2012. This legislation provides for the authorization of the EAS program for federal fiscal years 2011 through 2014. Federal fiscal year 2014 ends on September 30, 2015. The FAA Modernization and Reform Act of 2012 reaffirmed the Congressional commitment to the continuance of the Essential Air Service program. The EAS program does require a portion of the funding through annual Congressional appropriations.

An airline serving a community that qualifies for essential air services is required to give the DOT advance notice before the airline may terminate, suspend, or reduce service. Depending on the circumstances, the DOT may require the continuation of existing service until a replacement carrier is found. EAS rates are normally set for two-year periods for each city. Significant fluctuations in passenger traffic, fares and associated revenues, as well as fluctuations in fuel and other costs, may cause EAS routes to become unprofitable during these two-year terms. Near the end of the two year term for EAS service to a particular city, the DOT will request service proposals from the Company and competitive proposals from other airlines. Proposals, when requested, are evaluated on, among other things, the level of service provided, the amount of subsidy requested, the fitness of the applicant, and comments from the communities served.

As of August 10, 2012, we served 35 EAS communities on a subsidized basis.

EAS Program Activity Subsequent to January 1, 2012

On February 1, 2012, March 11, 2012 and March 17, 2012, we initiated service to our Minneapolis hub from Pierre, SD (non-EAS subsidized), Ironwood, MI, and Jamestown, ND and Williston, ND (non-EAS subsidized), respectively.

On April 2, 2012 we commenced service from Watertown, SD to Minneapolis, MN and on April 11th we initiated service from Fort Dodge, IA and Mason City, IA to Minneapolis, MN.

On April 4, 2012 we discontinued EAS service to Garden City, KS and transitioned this service to another carrier.

 

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On May 17, 2012 we initiated service from Thief River Falls, MN to our Minneapolis hub.

Financial Highlights

We had operating revenue of $67.5 million for the six-month period ending June 30, 2012, a 10.8 percent increase compared to operating revenue of $60.9 million for the six-month period ending June 30, 2011. We realized a $6.7 million increase in passenger revenue and an $0.3 million increase in public service revenue compared to the prior year period. Additionally, we realized a $0.5 million decrease in other revenue, which was principally attributable to the termination of ground handling services provided to other carriers in certain destinations where both Great Lakes and the other carriers provided scheduled air service.

We had operating income of $5.5 million for the six-month period ending June 30, 2012, compared to a operating income of $0.9 million for the six-month period ending June 30, 2011. The $4.6 million increase in operating income is attributable to a $6.6 million increase in operating revenue and a $1.9 million increase in operating expenses including fuel expense increasing by $1.2 million.

We had net income of $1.7 million for the six-month period ending June 30, 2012, compared to net income of $29,146 for the six-month period ending June 30, 2011. The increase in net income is primarily a result of a $6.6 million increase in operating revenues, partially offset by operating expense increasing by $1.9 million, interest expense increasing $1.7 million and income tax expense increasing $1.2 million.

 

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Results of Operations for the Three Months Ended June 30, 2012 and 2011

The following table sets forth certain financial information regarding our results of operations for the three months ended June 30, 2012 and 2011.

Statement of Income Data

(dollars in thousands)

(unaudited)

 

     For the Three Months Ended June 30,  
     2012     2011  
     Amount
(in thousands)
    Cents
per
ASM
    % Increase
(Decrease)
from 2011
    Amount
(in thousands)
    Cents
per
ASM
 

Operating revenues:

          

Passenger

   $ 21,480        21.2 ¢      21.0   $ 17,745        19.2 ¢ 

Public service

     14,535        14.4        9.7        13,248        14.3   

Freight, charter and other

     88        0.1        (60.5     223        0.2   
  

 

 

   

 

 

     

 

 

   

 

 

 

Total operating revenues

     36,103        35.7        15.7        31,216        33.8   
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating expenses:

          

Salaries, wages, and benefits

     8,378        8.3        5.4        7,951        8.6   

Aircraft fuel

     10,593        10.5        3.6        10,221        11.1   

Aircraft maintenance, materials and repairs

     4,472        4.4        59.4        2,806        3.0   

Depreciation and amortization

     1,446        1.4        10.8        1,305        1.4   

Aircraft rental

     155        0.2        (73.0     574        0.6   

Other rentals and landing fees

     1,825        1.8        8.7        1,679        1.8   

Other operating expenses

     5,324        5.3        3.0        5,168        5.6   
  

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

     32,193        31.8        8.4        29,704        32.1   
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     3,910        3.9        158.6        1,512        1.6   

Interest expense, net

     (1,275     (1.3     212.5        (408     (0.4
  

 

 

   

 

 

     

 

 

   

 

 

 

Income before income taxes

     2,635        2.6 ¢      138.7     1,104        1.2 ¢ 

Income tax expense

     (1,098     (1.1     120.9        (497     (0.5
  

 

 

   

 

 

     

 

 

   

 

 

 

Net Income

   $ 1,537        1.5 ¢      153.2   $ 607        0.7 ¢ 
  

 

 

   

 

 

     

 

 

   

 

 

 

 

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Table of Contents

Selected Operating Data

The following table sets forth certain selected operating data regarding our operations for the three months ended June 30, 2012 and 2011.

 

     June 30,
2012
    Increase
(Decrease)
from 2011
    June 30,
2011
 

Selected Operating Data:

      

Available seat miles (in thousands) (1)

     101,123        9.4     92,422   

Revenue passenger miles (in thousands) (2)

     44,937        9.8     40,928   

Revenue passengers carried

     141,147        6.8     132,167   

Departures flown

     20,036        7.7     18,609   

Passenger load factor (3)

     44.4     0.2     44.3

Average yield per revenue passenger mile (4)

     47.8 ¢      10.1     43.4 ¢ 

Revenue per available seat miles (5)

     35.7 ¢      5.6     33.8 ¢ 

Cost per available seat mile (6)

     31.8 ¢      -0.9     32.1 ¢ 

Average passenger fare (7)

   $ 152.18        13.3   $ 134.26   

Average passenger trip length (miles) (8)

     318        -0.3     319   

Average cost per gallon of fuel

   $ 3.75        -3.4   $ 3.88   

 

(1) “Available seat miles” or “ASMs” represent the number of seats available for passengers in scheduled flights multiplied by the number of scheduled miles those seats are flown.
(2) “Revenue passenger miles” or “RPMs” represent the number of miles flown by revenue passengers.
(3) “Passenger load factor” represents the percentage of seats filled by revenue passengers and is calculated by dividing revenue passenger miles by available seat miles.
(4) “Average yield per revenue passenger mile” represents the average passenger revenue received for each mile a revenue passenger is carried.
(5) “Revenue per available seat mile” represents the average total operating revenue received for each available seat mile.
(6) “Cost per available seat mile” represents operating expenses divided by available seat miles.
(7) “Average passenger fare” represents passenger revenue divided by the number of revenue passengers carried.
(8) “Average passenger trip length” represents revenue passenger miles divided by the number of revenue passengers carried.

Comparison of Second Quarter 2012 to Second Quarter 2011

Passenger Revenues. Passenger revenues were $21.5 million in the second quarter of 2012, an increase of 21.0% from $17.7 million in the second quarter of 2011. The $3.7 million quarter-over-quarter increase in passenger revenues was primarily attributable to a 6.8% increase in passengers carried during the second quarter of 2012 in combination with a 13.3% increase in average passenger fare. Our ASM capacity for the second quarter of 2012 increased 9.4% from the ASM capacity in the second quarter of 2011 as a result of more miles flown per departure (stage length) and more departures flown.

Public Service Revenues. Public service revenues collected through the EAS Program increased 9.7% to $14.5 million during the second quarter of 2012, as compared to $13.2 million during the second quarter of 2011. The increase in public service revenue was mostly due to a net increase in EAS communities served. At June 30, 2012 and June 30, 2011, we served 35 and 29 communities, respectively, on a subsidized basis under the EAS Program.

 

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Table of Contents

Other Revenues. Other revenues were $0.1 million during the second quarter of 2012, a decrease of 60.5% from the second quarter of 2011. The 60.5% decrease was due to decreases in contract ground handling activity for other carriers serving the same destinations which we serve.

Operating Expenses. Total operating expenses were $32.2 million, or 31.8 cents per ASM, in the second quarter of 2012, as compared to $29.7 million, or 32.1 cents per ASM in the second quarter of 2011.

Salaries, Wages, and Benefits. Salaries, wages, and benefits were $8.4 million in the second quarter of 2012, an increase of 5.4% from $8.0 million in the second quarter of 2011. The increase in salaries, wages, and benefits was mostly attributable to the increase of ground support employees for new markets, partially offset by a reduction in cost of benefits.

Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $10.6 million, or 10.5 cents per ASM, in the second quarter of 2012. In comparison, our aircraft fuel and into-plane expense for the second quarter of 2011 was $10.2 million, or 11.1 cents per ASM. The 3.69% increase in our aircraft fuel expense was attributable to a 9.4% increase in the ASMs, partially offset by a reduction in the average cost of fuel per gallon.

The average cost of fuel decreased from $3.88 per gallon in the second quarter of 2011 to $3.75 per gallon in the second quarter of 2012. The effect of the $0.13 decrease in cost per gallon was a decrease in total fuel cost of approximately $0.4 million in the second quarter of 2012, which when coupled with the increase in consumption resulted in a net increase of approximately $0.4 million.

Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $4.5 million during the second quarter of 2012, which was a 59.4% increase from $2.8 million during the second quarter of 2011. The increase was primarily attributable to increased parts expense partially associated with an increased number of scheduled airframe inspections during 2012. These were partially offset by reduced engine overhaul expense due to the termination of our Fleet Management Program (FMP) with Pratt and Whitney Canada Corporation, which expired by its terms on June 30, 2011.

Depreciation and amortization. Depreciation and amortization expense was $1.4 million during the second quarter of 2012 and $1.3 million in the second quarter of 2011. The increase is mainly due to the addition of three Beechcraft 1900D aircraft acquired in the fourth quarter of 2011 and the first quarter of 2012.

Aircraft Rental. Aircraft lease expense was $0.2 million during the second quarter of 2012 compared to $0.6 million during the second quarter of 2011. The decrease was attributable to the return of seven leased Beechcraft 1900D aircraft during 2011.

Other Rentals and Landing Fees Expense. Other rentals and landing fees expense was $1.8 million during the second quarter of 2012, which was an increase from $1.7 million during the second quarter of 2011. The increase was mainly attributable to incremental destinations served.

Other Operating Expenses. Other operating expenses were $5.3 million, or 5.3 cents per ASM during the second quarter of 2012, compared to $5.2 million, or 5.6 cents per ASM during the second quarter of 2011.

Interest Expense. Interest expense was $1.3 million during the second quarter of 2012, compared to $0.4 million in the second quarter of 2011. Contractual interest expense, including deferred debt restructuring gains of $0.3 million, was $0.7 million in the second quarter of 2011. The increase is attributable to increased contractual interest under the November 2011 financing agreement of $1.1 million and $0.2 million of amortization associated with $2.5 million of costs incurred related to the new financing agreement.

Income Tax Expense. For the three months ended June 30, 2012, we recorded income tax expense of $1,098,462 and for the three months ended June 30, 2011, we recorded an income tax benefit of $497,061. Our estimated effective federal and state income tax rate is 41.6% for the three months ended June 30, 2012. Our effective tax rate includes non-deductible permanent tax differences that comprise a significant percentage of projected annual pre-tax income.

 

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Table of Contents

Results of Operations for the Six Months Ended June 30, 2012 and 2011

The following table sets forth certain financial information regarding our results of operations for the six months ended June 30, 2012 and 2011.

Statement of Income Data

(dollars in thousands)

(unaudited)

 

     For the Six Months Ended June 30,  
     2012     2011  
     Amount
(in thousands)
    Cents
per
ASM
    % Increase
(Decrease)
from 2011
    Amount
(in thousands)
    Cents
per
ASM
 

Operating revenues:

          

Passenger

   $ 39,406        20.0 ¢      20.6   $ 32,674        17.6 ¢ 

Public service

     27,822        14.2        1.2        27,483        14.8   

Freight, charter and other

     232        0.1        (69.0     749        0.4   
  

 

 

   

 

 

     

 

 

   

 

 

 

Total operating revenues

     67,460        34.3        10.8        60,906        32.9   
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating expenses:

          

Salaries, wages, and benefits

     16,462        8.4        3.6        15,885        8.6   

Aircraft fuel

     20,752        10.6        5.7        19,632        10.6   

Aircraft maintenance, materials and repairs

     7,287        3.7        3.7        7,026        3.8   

Depreciation and amortization

     2,875        1.5        10.1        2,612        1.4   

Aircraft rental

     310        0.2        (73.0     1,147        0.6   

Other rentals and landing fees

     3,676        1.9        12.8        3,258        1.8   

Other operating expenses

     10,593        5.4        1.0        10,485        5.7   
  

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

     61,955        31.5        3.2        60,045        32.4   
  

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     5,505        2.8        539.4        861        0.5   

Interest expense, net

     (2,571     (1.3     211.3        (826     (0.4
  

 

 

   

 

 

     

 

 

   

 

 

 

Income before income taxes

     2,934        1.5 ¢      8,282.9     35        0.0 ¢ 

Income tax expense

     (1,221     (0.6     20,250.0        (6     0.0   
  

 

 

   

 

 

     

 

 

   

 

 

 

Net Income

   $ 1,713        0.9 ¢      5,806.9   $ 29        0.0 ¢ 
  

 

 

   

 

 

     

 

 

   

 

 

 

 

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Table of Contents

Selected Operating Data

The following table sets forth certain selected operating data regarding our operations for the six months ended June 30, 2012 and 2011.

 

     June 30,
2012
    Increase
(Decrease)
from 2011
    June 30,
2011
 

Selected Operating Data:

      

Available seat miles (in thousands) (1)

     196,614        6.1     185,230   

Revenue passenger miles (in thousands) (2)

     85,476        11.1     76,958   

Revenue passengers carried

     265,707        6.9     248,555   

Departures flown

     38,606        2.3     37,723   

Passenger load factor (3)

     43.5     4.8     41.5

Average yield per revenue passenger mile (4)

     46.1 ¢      8.5     42.5 ¢ 

Revenue per available seat miles (5)

     34.3 ¢      4.3     32.9 ¢ 

Cost per available seat mile (6)

     31.5 ¢      -2.8     32.4 ¢ 

Average passenger fare (7)

   $ 148.31        12.8   $ 131.46   

Average passenger trip length (miles) (8)

     322        2.2     315   

Average cost per gallon of fuel

   $ 3.77        2.2   $ 3.69   

 

(1) “Available seat miles” or “ASMs” represent the number of seats available for passengers in scheduled flights multiplied by the number of scheduled miles those seats are flown.
(2) “Revenue passenger miles” or “RPMs” represent the number of miles flown by revenue passengers.
(3) “Passenger load factor” represents the percentage of seats filled by revenue passengers and is calculated by dividing revenue passenger miles by available seat miles.
(5) “Average yield per revenue passenger mile” represents the average passenger revenue received for each mile a revenue passenger is carried.
(5) “Revenue per available seat mile” represents the average total operating revenue received for each available seat mile.
(6) “Cost per available seat mile” represents operating expenses divided by available seat miles.
(7) “Average passenger fare” represents passenger revenue divided by the number of revenue passengers carried.
(8) “Average passenger trip length” represents revenue passenger miles divided by the number of revenue passengers carried.

Comparison of First Six Months 2012 to First Six Months 2011

Passenger Revenues. Passenger revenues were $39.4 million in the first six months of 2012, an increase of 20.6% from $32.7 million in the six months of 2011. The $6.7 million period-over-period increase in passenger revenues was primarily attributable to an 6.9% increase in passengers carried during the six months of 2012 in combination with a 12.8% increase in average passenger fare. Our ASM capacity for the first six months of 2012 increased 6.1% from the ASM capacity in the first six months of 2011 as a result of more miles flown per departure (stage length) and more departures flown.

Public Service Revenues. Public service revenues collected through the EAS Program increased 1.2% to $27.8 million during the first six months of 2012, as compared to $27.5 million during the first six months of 2011. The increase in public service revenue was mostly due to a net increase in EAS communities served. At June 30, 2012 and June 30, 2011, we served 35 and 29 communities, respectively, on a subsidized basis under the EAS Program.

 

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Other Revenues. Other revenues were $0.2 million during the first six months of 2012, a decrease of 69.0% from the first six months of 2011. The 69.0% decrease was due to decreases in contract ground handling activity for other carriers serving the same destinations which we serve.

Operating Expenses. Total operating expenses were $62.0 million, or 31.5 cents per ASM, in the first six months of 2012, as compared to $60.0 million, or 32.4 cents per ASM in the first six months of 2011.

Salaries, Wages, and Benefits. Salaries, wages, and benefits were $16.5 million in the first six months of 2012, an increase of 3.6% from $15.9 million in the first six months of 2011. The increase in salaries, wages, and benefits was mostly attributable to the increase of ground support employees for new markets along with increases in the cost of benefits.

Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $20.8 million, or 10.6 cents per ASM, in the first six months of 2012. In comparison, our aircraft fuel and into-plane expense for the first six months of 2011 was $19.6 million, or 10.6 cents per ASM. The 5.7% increase in our aircraft fuel expense was attributable to a 6.1% increase in the ASMs, along with the increase in the average cost of fuel per gallon.

The average cost of fuel increased from $3.69 per gallon in the first six months of 2011 to $3.77 per gallon in the first six months of 2012. The effect of the $0.08 increase in cost per gallon was an increase in total fuel cost of approximately $0.4 million in the first six months of 2012, which when coupled with an increase in consumption resulted in a net increase of approximately $1.1 million. At rates of consumption for the first six months of 2012, a one cent increase or decrease in the per gallon price of fuel will increase or decrease our fuel expense by approximately $109,000 annually.

Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $7.3 million during the first six months of 2012, which was a 3.7% increase from $7.0 million during the first six months of 2011. The increase was primarily attributable to increased parts expense partially associated to an increased number of scheduled airframe inspections during 2012. These were partially offset by reduced engine overhaul expense due to the termination of our Fleet Management Program (FMP) with Pratt and Whitney Canada Corporation, which expired by its terms on June 30, 2011.

Depreciation and amortization. Depreciation and amortization expense was $2.9 million during the first six months of 2012 and $2.6 million in the first six months of 2011. The increase is mainly due to the addition of three Beechcraft 1900D aircraft acquired in the fourth quarter of 2011 and the first quarter of 2012.

Aircraft Rental. Aircraft lease expense was $0.3 million during the first six months of 2012 compared to $1.1 million during the first six months of 2011. The decrease was attributable to the return of seven leased Beechcraft 1900D aircraft during 2011.

Other Rentals and Landing Fees Expense. Other rentals and landing fees expense was $3.7 million during the first six months of 2012, which was an increase from $3.3 million during the first six months of 2011. The increase was mainly attributable to incremental destinations served.

Other Operating Expenses. Other operating expenses were $10.6 million, or 5.4 cents per ASM during the first six months of 2012, compared to the first six months of 2011 of $10.5 million, or 5.7 cents per ASM.

Interest Expense. Interest expense was $2.6 million during the first six months of 2012, compared to $0.8 million in the first six months of 2011. Interest expense, included deferred debt restructuring gains of $0.6 million in the first six months of 2011. The increase is attributable to increased contractual interest on the November 2011 financing agreement of $2.3 million and $0.3 million of amortization associated with $2.5 million of cost incurred related to the new financing agreement.

Income Tax Expense. For the six months ended June 30, 2012, we recorded income tax expense of $1,221,541 and for the six months ended June 30, 2011, we recorded an income tax expense of $5,823. Our estimated effective federal and state income tax rate is 41.63% for the six months ended June 30, 2012. Our effective tax rate includes non-deductible permanent tax differences that comprise a significant percentage of projected annual pre-tax income.

 

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Table of Contents

Seasonality

Seasonal factors, related to weather conditions and changes in passenger demand, generally affect our monthly passenger enplanements. We have historically shown a higher level of passenger enplanements in the May through October period as compared with the November through April period for many of the cities served. These seasonal factors have generally resulted in reduced revenues, lower operating income, and reduced cash flow for us during the November through April period. As a result of such factors, our revenues and earnings have shown a corresponding increase during the May through October period. EAS revenues are generated under subsidy per departure rates established by the DOT and we realize revenue as departures are performed. Inherently, most of our EAS revenues, other than winter weather related cancellations, are not affected by seasonality, but certain EAS markets do receive summer season increased departures which are eligible for subsidy revenue.

Liquidity, Financing and Capital Resources

As of June 30, 2012, working capital totaled $18.7 million and our current ratio was 2.49:1, compared to working capital at December 31, 2011, of $15.1 million and a current ratio of 2.29:1.

We have historically used debt to finance the purchase of our aircraft. On November 16, 2011, we entered into a new financing agreement with GB Merchant Partners, LLC, serving as Collateral Agent, and Crystal Capital LLC, serving as Administrative Agent (the “Credit Agreement”) at which time we borrowed a total of $29.5 million. 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 for a total of $34 million of available financing. As of June 30, 2012, the term loan has an outstanding principal balance of $22.5 million and we have borrowed $7.5 million under the revolving credit facility. The term loan is set to mature on November 16, 2015 at which time the outstanding principal balance due, exclusive of any mandatory or voluntary prepayments, is scheduled to be $10.1 million.

Pursuant to the terms of a pledge and security agreement and an aircraft security agreement, our obligations to the lenders identified in the Credit Agreement are secured by substantially all 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%.

As of June 30, 2012, we had borrowed $7.5 million on 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.

We believe the cash we expect to generate from operations and our ability to borrow under our revolving credit facility, remains adequate to meet our short-term and long-term liquidity requirements, meet debt service, and fulfill our other cash requirements.

Sources and Uses of Cash. As of June 30, 2012, our cash balance was $3.9 million, a $0.3 million increase from the cash balance of $3.6 million as of December 31, 2011. We made principal payments on debt of $1.5 million during the first six months of 2012. At June 30, 2012, we were current on payments due to our lenders and lessors.

Cash Provided by Operating Activities. During the first six months of 2012, we had positive cash flow from operating activities in the amount of $1.9 million. During the six months we generated net income of $1.7 million and recorded non-cash depreciation and amortization of $2.9 million.

Cash Flows from Investing Activities. During the first six months of 2012, we invested $2.1 million for the purchase of one Beechcraft 1900D aircraft along with replacement aircraft rotable components and other property and equipment.

Cash Flows from Financing Activities. During the first six months of 2012, we utilized $1.5 million of cash to reduce our outstanding notes payable and long-term debt balances and drew an additional $2.0 million on the available revolving loan for aircraft purchases made in December of 2011 and January of 2012. Net proceeds attributable to the exercise of common stock options granted under the1993 Director Stock Option Plan was $1,562.

 

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At June 30, 2012, total assets were in excess of total liabilities by $37.9 million.

Expansion to Minneapolis Hub

In December 2011, we commenced service to Devil’s Lake, ND from Minneapolis, MN. In March and April of 2012, we initiated service from Ironwood, MI, Watertown, SD, Fort Dodge, IA, Mason City, IA, and Jamestown, ND into our Minneapolis hub. In May we initiated service from Thief River Falls, MN to our Minneapolis hub. Service to these communities is subsidized under the EAS program. In addition to these EAS communities, we have also established non-EAS subsidized routes to Minneapolis from Pierre, SD and Williston, ND.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Great Lakes Aviation, Ltd. (Great Lakes, we, our, its, it or the Company) notes that certain statements in this Form 10-Q and elsewhere are forward-looking and provide other than historical information. Our management may also make oral, forward-looking statements from time to time. These forward-looking statements include, among others, statements concerning our general business strategies, financing decisions, and expectations for funding expenditures and operations in the future. The words “believe,” “plan,” “continue,” “hope,” “estimate,” “project,” “intend,” “expect,” “anticipate” and similar expressions reflected in such forward-looking statements are based on reasonable assumptions, and none of the forward-looking statements contained in this Form 10-Q or elsewhere should be relied on as predictions of future events. Such statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise, and may be incapable of being realized. The risks and uncertainties that are inherent in these forward-looking statements could cause actual results to differ materially from those expressed in or implied by these statements.

Factors that could cause results to differ materially from the expectations reflected in any forward-looking statements include:

1) the receipt of sufficient passenger revenues on the routes that we serve;

2) the continued funding of the Essential Air Service program;

3) the volatility of fuel costs;

4) the effect of general economic conditions on business and leisure travel;

5) dependence on other air carrier connecting capacity at our hubs;

6) the payments and restrictions resulting from our contractual obligations;

7) the effect of rules regarding the effect of stock sales on the availability of net operating loss carryforwards;

8) exposure to increases in interest rates associated with our new debt financing;

9) our ability to maintain compliance with specified financial and non-financial covenants;

10) the incidence of domestic or international terrorism and military actions;

11) competition from other airlines and from ground transportation;

12) the incidence of labor disruptions or strikes;

13) dependence on our key personnel;

14) the incidence of aircraft accidents;

15) the level of regulatory and environmental costs;

16) the incidence of technological failures or attacks;

17) maintenance costs related to aging aircraft;

 

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18) the possibility of substantial numbers of shares being sold by our current investors;

19) the limited market for our securities;

20) our ability to remediate timely any deficiencies in our internal controls;

21) no expectation of dividends; and

22) anti-takeover provisions in our charter documents and Iowa law.

Readers are cautioned not to attribute undue certainty on the forward-looking statements contained herein, which speak only as of the date hereof. Changes may occur after that date, and we do not undertake to update any forward-looking statements except as required by law in the normal course of our public disclosure practices.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

We are susceptible to certain risks related to changes in the cost of aircraft fuel and changes in interest rates. As of June 30, 2012, we did not have any derivative financial instruments.

Aircraft Fuel

Due to the airline industry’s dependency on aircraft fuel for operations, airline operators including Great Lakes are impacted by changes in aircraft fuel prices. Aircraft fuel represented approximately 33.5% of our operating expenses in the six-month period ending June 30, 2012. At rates of consumption for the first six months of 2012, a one cent increase or decrease in the per gallon price of fuel will increase or decrease our fuel expense by approximately $109,000 annually.

Interest Rates

Our operations are very capital intensive because the vast majority of our assets consist of flight equipment, which is financed primarily with long-term debt. At June 30, 2012, we have approximately $30.0 million of variable rate debt. Going forward, we could be subject to increased rates of interest on our debt if the 30 day LIBOR rate increases by more than 2.2 percentage points.

Item 4. CONTROLS AND PROCEDURES

We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 30, 2012, our disclosure controls and procedures were effective.

During the Company’s most recent fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

There were no new legal proceedings initiated by or against us during the period covered by this Quarterly Report on Form 10-Q.

 

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During the period covered by this Quarterly Report on Form 10-Q, there were no material developments in any legal proceedings previously reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 1A. RISK FACTORS

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on March 29, 2012.

Item 6. EXHIBITS

See “Exhibit Index.”

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    GREAT LAKES AVIATION, LTD.
Dated: August 10, 2012      

By: /s/ Charles R. Howell IV

      Charles R. Howell IV
      Chief Executive Officer
    By:  

/s/ Michael O. Matthews

      Michael O. Matthews
      Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

    3.1    Amended and Restated Articles of Incorporation. (1)
    3.2    Amended and Restated Bylaws. (1)
    4.1    Specimen Common Stock Certificate. (2)
  31.1    Certification pursuant to Rule 13a-14(a) of Chief Executive Officer.
  31.2    Certification pursuant to Rule 13a-14(a) of Chief Financial Officer.
  32.1    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer.
  32.2    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer.
101    Financial Statements in XBRL format.

 

(1) Incorporated by reference to the Company’s Registration Statement on Form S-1/A, Registration No. 333-159256, as filed September 3, 2009.
(2) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 033-71180.

 

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