GREAT LAKES AVIATION LTD - FORM 10-Q

GREAT LAKES AVIATION LTD - FORM 10-Q - November 14, 2014

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GREAT LAKES AVIATION LTD Reports

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - GREAT LAKES AVIATION LTD	Financial_Report.xls
EX-32.1 - EX-32.1 - GREAT LAKES AVIATION LTD	d815247dex321.htm
EX-31.2 - EX-31.2 - GREAT LAKES AVIATION LTD	d815247dex312.htm
EX-32.2 - EX-32.2 - GREAT LAKES AVIATION LTD	d815247dex322.htm
EX-31.1 - EX-31.1 - GREAT LAKES AVIATION LTD	d815247dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

¨	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):

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 November 11, 2014, 8,974,990 shares of Common Stock of the registrant were issued and outstanding.

GREAT LAKES AVIATION, LTD.

FORM 10-Q

For the Quarterly Period Ended September 30, 2014

INDEX


PART I—FINANCIAL INFORMATION
Item 1.	CONDENSED FINANCIAL STATEMENTS (UNAUDITED)	2
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
Item 4.	CONTROLS AND PROCEDURES	26

PART II—OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	27
Item 1A.	RISK FACTORS	27
Item 3.	DEFAULTS UPON SENIOR SECURITIES	28
Item 6.	EXHIBITS	28

SIGNATURES		29

EXHIBIT INDEX		30

Item 1. FINANCIAL STATEMENTS

GREAT LAKES AVIATION, LTD.

Condensed Balance Sheets

(unaudited)


	As of September 30, 2014			As of December 31, 2013
Assets
Current assets:
Cash	$	3,926,164		$	6,597,927
Accounts receivable and other receivables		5,653,930			7,118,868
Inventories		7,167,352			8,667,751
Prepaid expenses and other current assets		2,790,315			3,154,713
Deferred income taxes		1,457,049			1,457,049

Total current assets		20,994,810			26,996,308

Property and equipment:
Flight equipment		125,463,235			125,027,613
Other property and equipment		10,678,845			10,604,094
Less accumulated depreciation and amortization		(91,629,611	)		(87,029,483	)

Total property and equipment		44,512,469			48,602,224

Other assets		1,682,165			2,279,968

Total assets	$	67,189,444		$	77,878,500

Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable and current maturities of long-term debt	$	24,721,333		$	24,173,333
Accounts payable		2,635,756			3,684,161
Accrued interest, unearned revenue and other liabilities		2,981,483			3,525,843

Total current liabilities		30,338,572			31,383,337

Deferred income taxes		4,348,084			7,877,096

Total liabilities		34,686,656			39,260,433

Commitments and contingencies
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 shares		89,750			89,750
Paid-in capital		31,494,609			31,494,609
Retained earnings		918,429			7,033,708

Total stockholders’ equity		32,502,788			38,618,067

Total liabilities and stockholders’ equity	$	67,189,444		$	77,878,500

See accompanying notes to the condensed financial statements.

GREAT LAKES AVIATION, LTD.

Condensed Statements of Income (Loss)

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
Operating Revenues:
Passenger	$	8,147,891		$	16,872,807		$	23,208,086		$	48,248,568
Public service		8,190,285			14,584,411			21,035,344			43,135,773
Freight, charter, and other		40,330			136,896			123,595			325,181

Total operating revenues		16,378,506			31,594,114			44,367,025			91,709,522

Operating expenses:
Salaries, wages, and benefits		4,797,153			8,025,642			15,832,953			25,035,725
Aircraft fuel		4,454,621			9,178,841			12,937,966			28,407,341
Aircraft maintenance, materials, and repairs		746,730			4,429,861			3,371,064			11,681,293
Depreciation and amortization		1,532,579			1,598,979			4,742,283			4,801,459
Other rentals and landing fees		668,183			970,034			3,259,683			4,769,668
Other operating expenses		3,290,289			4,168,572			10,497,015			13,453,972

Total operating expenses		15,489,555			28,371,929			50,640,964			88,149,458

Operating income (loss)		888,951			3,222,185			(6,273,939	)		3,560,064
Other expense:
Interest expense, net of interest income of $319, $348, $639 and $1,363, respectively		(1,258,928	)		(1,074,623	)		(3,376,231	)		(3,277,861	)

Income (loss) before income taxes		(369,977	)		2,147,562			(9,650,170	)		282,203

Income tax benefit (expense)		134,647			(880,326	)		3,534,891			(127,790	)

Net income (loss)	$	(235,330	)	$	1,267,236		$	(6,115,279	)	$	154,413

Net income (loss) per share:
Basic	$	(0.03	)	$	0.14		$	(0.68	)	$	0.02
Diluted	$	(0.03	)	$	0.14		$	(0.68	)	$	0.02
Weighted average shares outstanding:
Basic		8,974,990			8,974,990			8,974,990			8,974,990
Diluted		8,974,990			8,974,990			8,974,990			8,974,990

See accompanying notes to the condensed financial statements.

GREAT LAKES AVIATION, LTD.

Condensed Statements of Cash Flows

(Unaudited)


	For the Nine Months Ended June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(6,115,279	)	$	154,413
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		4,742,283			4,801,459
Loss on items beyond economic repair		107,421			264,341
Amortization of debt issuance costs		625,219			481,005
Deferred tax benefit		(3,529,012	)		(100,634	)
Change in current operating items:
Accounts receivable		1,464,938			309,516
Inventories		1,500,399			744,051
Prepaid expenses and other current assets		303,615			(1,090,476	)
Other assets		597,803			780,540
Accounts payable		(1,048,405	)		(1,199,762	)
Accrued interest, unearned revenue and other liabilities		(544,360	)		(111,038	)

Net cash (used) provided by operating activities		(1,895,378	)		5,033,415

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of flight equipment and other property and equipment		(759,949	)		(1,165,060	)

Net cash flows used in investing activities		(759,949	)		(1,165,060	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt		(1,452,000	)		(2,625,000	)
Proceeds from borrowing		2,000,000			1,500,000
Payment for debt issuance costs		(564,436	)		—

Net cash used by financing activities		(16,436	)		(1,125,000	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(2,671,763	)		2,743,355
Cash and Cash Equivalents:
Beginning of period		6,597,927			2,887,634

End of period	$	3,926,164		$	5,630,989

Supplementary cash flow information:
Cash paid during the period for interest (contractual)	$	2,720,975		$	2,827,581
Cash paid during the period for income taxes	$	5,661		$	72,230

See accompanying notes to the condensed financial statements.

GREAT LAKES AVIATION, LTD.

Condensed Statements of Stockholders’ Equity

Nine Months Ended September 30, 2014

(unaudited)


	Common stock						Retained
	Shares		Amount		Paid-in capital		earnings			Total
Balance at January 1, 2014		8,974,990	$	89,750	$	31,494,609	$	7,033,708		$	38,618,067
Net loss		—		—		—		(6,115,279	)		(6,115,279	)

Balance at September 30, 2014		8,974,990	$	89,750	$	31,494,609	$	918,429		$	32,502,788

See accompanying notes to condensed financial statements.

Great Lakes Aviation, Ltd.

Notes to Condensed Financial Statements

September 30, 2014

(unaudited)

1.	Basis of Presentation

The accompanying unaudited condensed 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 condensed 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, 2013.

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

Business

Passenger Revenue

Great Lakes Aviation, Ltd. (Great Lakes, the Company, we or us) is a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines). Our code share agreement allows our mutual customers to purchase connecting flights through our code share partner 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 agreement and independent branding, the Company has developed electronic ticketing (e-ticket) interline agreements with American Airlines, Delta Airlines, United Airlines and U.S. Airways.

The Company operated under a code share agreement with Frontier Airlines (Frontier) from May, 2001 through September 30, 2014. Effective October 1, 2014, the Company’s code share and interline e-ticketing agreements with Frontier were terminated.

The Company estimates that approximately 36% of Great Lakes’ passenger traffic utilized the United code share product line and approximately 23% of Great Lakes’ passenger traffic utilized the Frontier code share product line.

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

Public Service Revenue

Approximately 47% of the Company’s total revenue during each of the nine months ended September 30, 2014 and 2013, respectively, were generated by services provided under the Essential Air Service (EAS) program administered by the United States Department of Transportation (DOT). The FAA Modernization and Reform Act of 2012 was enacted into law on February 14, 2012. This legislation provides for the authorization of the Essential Air Service program through September 30, 2015.

As of November 11, 2014, the Company served 29 airports, of which 21 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. In order to service the interest and principal payments on this debt, the Company relies on cash generated from operations.

The Company has experienced a shortage of qualified pilots which has caused the Company to curtail operations and reduce capacity. The pilot shortage and its effect on operations are expected to continue until the Company can hire and train enough pilots to reestablish operations in those markets in which the Company was forced to suspend service. The curtailment of operations has had a negative impact on revenue, operating income and operating cash flows which is expected to continue. Due to this negative impact on revenue, operating income and operating cash flows, the Company was not in compliance as of September 30, 2014 and does not expect to be in compliance with the debt to earnings coverage covenant in its credit agreement. Until the Company is able to re-staff a sufficient number of qualified pilots to restore service to suspended markets, or refinance its existing debt obligations, it expects that it will not have sufficient liquidity to service its current debt obligations.

The above circumstances and near term projections of significant net losses and negative operating cash flows in combination with the expectation the Company will not be in compliance with the terms of our current senior credit facility, and the lender’s ability to call our debt, raise substantial doubt about the Company’s ability to continue as a going concern. Our financial statements are prepared on a going concern basis in accordance with United States generally accepted accounting principles and do not include any adjustments that might result from the outcome of this uncertainty. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. Our credit facility matures on November 16, 2015. As a result of not being in compliance under our senior credit facility and the expectation the Company will not be in compliance with the terms of the senior credit facility throughout 2014 and into 2015, all borrowings (approximately $24.7 million) under our senior credit facility are classified as current as of September 30, 2014. Our operating and capital plans for the next twelve months call for dedication of substantially all of our excess cash flow to the repayment of indebtedness.

Effective September 23, 2014, the Company entered into the Fifth Amendment and Third Forbearance to Credit Agreement (the “Forbearance Agreement”) with its lenders Crystal Financial LLC and GB Merchant Partners, LLC (the “Lenders”). The Forbearance Termination Date is on the earlier of (i) December 1, 2014 or (ii) the date on which Great Lakes commits additional breaches under the Credit Agreement.

The Company is currently pursuing a new financing facility. There is no assurance the Company will be able to complete a new financing facility on acceptable terms.

2.	Earnings per share

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


	Three months ended September 30,					Nine months ended September 30,
	2014			2013		2014			2013
Numerator:
Net Income (loss)	$	(235,330	)	$	1,267,236	$	(6,115,279	)	$	154,413
Denominator:
Weighted average shares outstanding, basic		8,974,990			8,974,990		8,974,990			8,974,990
Weighted average shares outstanding, diluted		8,974,990			8,974,990		8,974,990			8,974,990
Net income (loss) per share, basic and diluted	$	(0.03	)	$	0.14	$	(0.68	)	$	0.02

For the three and nine month periods ended September 30, 2014 and September 30, 2013 there were no options or other potentially dilutive securities outstanding.

3.	Accrued Liabilities

Accrued liabilities consisted of the following balances at September 30, 2014 and December 31, 2013:


	September 30, 2014		December 31, 2013
Unearned revenue		1,063,279		1,221,257
Other accruals		107,254		—
Accrued property taxes		250,375		74,962
Accrued interest		315,481		286,701
Accrued payroll		1,245,094		1,942,923

Total accrued liabilities	$	2,981,483	$	3,525,843

4.	Long-Term Debt

The following table sets forth, as of September 30, 2014 and December 31, 2013, the carrying amount of the Company’s 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:


	September 30, 2014			December 31, 2013
Long-term debt:
GB/Crystal Term Loan—principal	$	16,200,000		$	15,200,000
GB/Crystal Revolving Loan- principal		8,521,333			8,973,333

Total long-term debt		24,721,333			24,173,333
Less current portion:
GB/Crystal Term Loan—principal (1)		(24,721,333	)		(24,173,333	)

Total current portion		(24,721,333	)		(24,173,333	)

Total long-term portion	$	0		$	0

(1)	All debt is classified as current as a result of not being in compliance with our credit agreement and the lender’s ability to call our debt upon expiration of the current Forbearance 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 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 the first and second anniversaries of the loan. At September 30, 2014, the prepayment penalty was 2%. At November 17, 2014, under the terms of the Credit Agreement, the prepayment penalty is eliminated. As of September 30, 2014, $16.2 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 nine–month period ending September 30, 2012, and for each subsequent twelve-month period thereafter. The Company was not required to make an excess cash flow payment for the 12 month periods ending September 30, 2013 and September 30, 2014.

The term loan is set to mature on November 16, 2015 at which time the outstanding principal balance due is scheduled to be $11.8 million. The other $4.4 million is scheduled to be paid at various intervals prior to that date. Other than the deferral of $2 million of payments, discussed below, all payments have been made in accordance with the original Credit Agreement.

As of September 30, 2014, $8.5 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 revolving loan credit facility is set to mature on November 16, 2015 at which time any outstanding principal balance will be due. The Company was also required to pay a closing fee based on the initial facility commitment, and is required to pay a monthly unused line fee, a specified fee for certain prepayments of the term loan, and certain administrative and fronting fees related to the Credit Agreement.

As of September 30, 2014 the Company was not in compliance with the leverage coverage ratio financial covenant contained in the Company’s Credit Agreement. Specifically the Company was required to maintain a leverage ratio, calculated by dividing average quarterly borrowings by trailing 12 month earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the Credit Agreement, of 2.25:1 or less. At September 30, 2014, the Company’s leverage ratio 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 auditor’s report over the Company’s financial statements for the fiscal year ended December 31, 2013 contained an explanatory paragraph referencing substantial doubt about the Company’s ability to continue as a going concern. These are both covenant violations that, absent a forbearance, permit the Company’s 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 Company’s senior credit facility and the expectation the Company will not be in compliance with the terms of the senior credit facility upon expiration of the forbearance and throughout the remainder of 2014 and into 2015, all borrowings (approximately $24.7 million) under the Company’s senior credit facility are classified as current maturities as of September 30, 2014.

On April 1, 2014, the Company and its Lenders have entered into a Third Amendment and Forbearance Agreement which terminated on April 30, 2014. As part of this agreement we agreed to a 2% increase in the applicable rate that we are paying on our loan agreements. The interest rate on our revolving credit facility increased to the greater of 30 day LIBOR plus 10% or 12.5%. The interest rate on our term loan will increased to the greater of 30 day LIBOR plus 13% or 17.5%.

Effective May 30, 2014, the Company entered into the Fourth Amendment and Second Forbearance to Credit Agreement (the “Forbearance Agreement”) with its Lenders which terminated on September 15, 2014. In consideration of entering into the Forbearance Agreement, the Lenders have agreed to lend the Company up to an additional $3.0 million under our term loan and defer an additional $2.0 million of amortization payments until the maturity of the loan, which were due and payable by September 30, 2014. As of September 30, 2014 the Company has borrowed an additional $2.0 million under the terms of the Forbearance Agreement and deferred a $2.0 million of amortization payments that, absent the forbearance, would have been payable by September 30, 2014. The Company also agreed to pay a forbearance fee of $242,000, a funding fee of $60,000, and a commitment fee of $60,000.

5.	Related Parties

The Company rents two six-passenger aircraft and a vehicle from Iowa Great Lakes Flyers, Inc., a corporation solely owned by Douglas G. Voss, the Company’s Chairman and major stockholder. Total payments for these leases were $21,375 for each of the nine months ending September 30, 2014 and 2013, respectively. As of September 30, 2014, Mr. Voss controlled 4,160,247 shares of common stock of the Company, representing approximately 46.4% of the Company’s outstanding common stock.

6.	Income Taxes

The Company’s annual effective income tax rate is estimated to be 36.6% for 2014. The Company’s effective tax rate includes non-deductible permanent tax differences. Prior to 2004, the Company reported significant cumulative losses and generated substantial net operating loss carryforwards. From 2007 through 2013, the Company utilized a portion of these carryforwards to offset taxable income.

Federal net operating loss carryforwards begin to expire in year 2021. The Company believes it is more likely than not that it will realize the benefit of the deductible temporary differences and these net operating loss carryforwards prior to expiration.

7.	Fair Value Measurements

A fair value hierarchy that prioritizes the inputs used to measure fair value has been established by ASC 820, Fair Value Measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:


Level 1		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2		Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and other inputs that are observable or can be corroborated by observable market data.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

Our financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities and long-term debt including the current portion. The carrying values of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values. These are considered Level 1 measurements. The carrying value of our long term debt reflects original cost and was $24.7 million and $24.2 million as of September 30, 2014 and December 31, 2013, respectively. For additional information, see Note 4 Long-Term Debt.

All of the Company’s debt is comprised of variable rate debt (see Note 4). Because there is not an active market for the Company’s 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.

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 Denver, CO, Los Angeles, CA, Minneapolis, MN and Phoenix, AZ.

We are regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines). Our code share agreement allows our mutual customers to purchase connecting flights through our code share partner and to share other benefits such as baggage transfer and frequent flyer benefits (in certain instances), while we maintain our own branding on our planes and ticket counters and our own designator code on all our flights. In addition to our code share agreement and independent branding, we have developed electronic ticketing (e-ticket) interline agreements with American Airlines, Delta Airlines, United Airlines and U.S. Airways.

We operated under a code share agreement with Frontier Airlines (Frontier) from May, 2001 through September 30, 2014. The Company has been informed by Frontier that, as part of Frontier’s transformation to an ultra-low cost carrier, their business model and subsequent change to a new reservation platform will no longer allow for interline agreements with other carriers. As a result, effective October 1, 2014, the Company’s code share and interline e-ticketing agreements with Frontier were terminated. As a result, effective October 1, 2014, our code share and interline e-ticketing agreements with Frontier were terminated. We estimate that approximately 23% of our ticket sales are generated by the Frontier code share and interline e-ticketing sales channels. These ticket sales represented approximately 10.5% of our total revenue for the nine-month period ending September 30, 2014.

Whereas we cannot currently quantify the effect of the termination of the Frontier code share and interline e-ticketing agreements, it is our belief that the majority of the Frontier passengers will migrate to other sales channels provided by Great Lakes if they intend to use air transportation to reach their final destination. Our belief is largely predicated on the fact that we are the only scheduled airline serving these particular destinations. The alternative for these passengers would be to utilize ground transportation or to not undertake their travel.

As of November 11, 2014, we served 29 airports in nine states with a fleet of six Embraer EMB-120 Brasilias and 28 Beech 1900D regional airliners.

As of September 30, 2014 we were not in compliance with the terms contained in the Company’s senior credit facility’s Credit Agreement. As a consequence our lenders have the right to declare our debt obligations of approximately $24.7 million to be immediately due and payable under the terms of the Credit Agreement. On September 23, 2014, the Company entered into the Fifth Amendment and Third Forbearance to the Credit Agreement with its Lenders. The Forbearance Termination Date is on the earlier of (i) December 1, 2014 or (ii) the date on which Great Lakes commits additional breaches under the Credit Agreement.

The Company is currently pursuing a new financing facility. There is no assurance the Company will be able to complete a new financing facility on acceptable terms.

Essential Air Service (“EAS”) Program

In the nine months ended September 30, 2014, we derived approximately 47% of our total revenue from the EAS program which is administered by the United States Department of Transportation (DOT). The EAS program was instituted under the Airline Deregulation Act of 1978 (the “Deregulation Act”), which allowed airlines greater freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the EAS program, certain communities are guaranteed specified levels of “essential air service.” In order to promote the provision of essential air services, the DOT may authorize the payment of federal subsidies to compensate an air carrier that is providing essential air services in otherwise unprofitable or minimally profitable markets.

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

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

As of November 11, 2014, we served 21 EAS communities on a subsidized basis.

Pilot Shortage

New Federal Aviation Administration (“FAA”), pilot qualification rules imposed as part of the Airline Safety and Federal Aviation Administration Extension Act of 2010 in combination with revised FAR Part 117 Flight Crewmember Flight and Duty Limitations and Rest Requirements, (“FAR Part 117”), have created an industry-wide shortage of qualified pilots and negatively affected our operations and financial condition.

These new rules resulted in a greatly accelerated demand for qualified pilots as air carriers proceeded to increase pilot staffing requirements to compensate for the loss of crew efficiency due to the new rules. As a result, Great Lakes lost a large portion of its pool of qualified pilots with ATP certification to airlines operating aircraft with more seat availability and hence greater pilot earnings potential.

The Airline Safety and Federal Aviation Administration Extension Act of 2010 was enacted in August 2010. Among many other pilot training directives, the legislation mandated that first officers (co-pilots) obtain an Airline Transport Pilot certification (“ATP”) prior to being qualified to perform crewmember duties in scheduled airline passenger service under FAR Part 121 regulatory requirements. A key factor to enable a pilot to receive an ATP certificate is the accumulation of 1,500 flight hours.

Furthermore, the legislation directed the FAA Administrator to conduct a rule making proceeding, to identify specific academic training courses that would provide for exemptions to the 1,500 hour requirement. The FAA published the final rule in the Federal Register on July 15, 2013. These rules became effective August 1, 2013. As a result of the rule making process, first officers may be eligible to receive a “restricted privileges” ATP with a minimum of 750 hours if they were a military pilot, 1,000 hours if they have received a bachelor’s degree from an accredited educational institution with an aviation major and 1,250 hours if they have received an associate’s degree from an accredited educational institution with an aviation major. It should be noted that accredited educational institutions provide very limited actual flight experience and that graduates from these institutions typically will have received between 250 to 350 hours of actual flight time.

These new pilot qualification rules have severed the historical path in which pilots have had the opportunity to build enough hours so they could advance their careers. Great Lakes has historically provided this career path for more than 32 years. Prior to this new rule, regulatory requirements provided for pilots to become eligible as first officers for a FAR Part 121 air carrier with a minimum of 250 hours of experience. The new rules also mandate that a first officer must have 1,000 hours as a FAR Part 121 first officer in an air carrier operation prior to being eligible to serve as a captain in a FAR Part 121 airline. As an alternative, the rule provides for captain eligibility under FAR Part 121 for pilots who accumulate 1,000 hours of pilot in command time in a FAR Part 135 operation.

The current supply of pilot candidates who qualify under the new regulations is severely limited. It is difficult for Great Lakes, which operates Beech 1900D turboprop aircraft, to compete for qualified pilots with other airlines operating 50 seat regional jets and larger equipment.

As a result, we have had to reduce scheduled departures by suspending service to multiple communities eligible for Essential Air Service, and other non-EAS markets. These actions resulted in a reduction of revenue and operating expenses. The rate of expense reduction will inherently lag the revenue drop-off as the Company aggressively adjusts its operating expenditures to match the new level of operations.

In April of 2013, Great Lakes submitted a written proposal to the FAA seeking authority to operate Beech 1900D aircraft in a nine seat passenger configuration utilizing FAR Part 135 pilot hiring requirements, while maintaining and complying with all other FAR Part 121 operational and maintenance standards.

On March 18, 2014, the Company received from the FAA new operations specifications allowing the Company to hire pilots under FAR Part 135 regulatory requirements. This will allow us to restore first officer staffing levels while maintaining FAR Part 121 hiring, training and employment standards as we have always done as a Part 121 carrier. From February 2014 through October 2014 we have hired 69 new pilots. Of the 69 new hire pilots, 49 have completed training and are operating in revenue generating scheduled air service.

The Company’s pilots are represented by the Sheet Metal, Air, Rail Transportation Union (“SMART”). The Company entered into a new agreement with the pilots on September 16, 2014. This agreement will continue in full force and effect for four years and thereafter is subject to amendment, which would reopen collective bargaining.

EAS Program Activity Subsequent to January 1, 2014

Primarily as a result of the pilot shortage, the company suspended EAS service to the following cities since January 1, 2014:

Moab and Vernal, UT

Pueblo, AZ

Clovis, NM

Devils Lake and Jamestown, ND

Ft. Dodge and Mason City, IA

Ironwood, MI

Hays and Great Bend, KS

In addition to the EAS subsidized cities above, in March of 2014, the Company terminated service to Dickinson and Williston, ND which were not EAS subsidized cities. In September of 2014, we terminated service to Telluride, CO.

Financial Highlights

We had operating revenue of $44.4 million for the nine-month period ending September 30, 2014, a 51.6% decrease compared to operating revenue of $91.7 million for the nine-month period ending September 30, 2013. We realized a $25.0 million decrease in passenger revenue and public service revenue decreased $22.1 million compared to the prior year period. The $25.0 million or 51.9% period-over-period decrease in passenger revenues and the $22.1 million or 51.2% decrease in public service revenues was primarily attributable to a reduction of scheduled service as a result of a 56% reduction in the number of pilots available created by the industry-wide shortage of qualified pilots. This shortage of qualified pilots resulted in a 63.8% decrease in available seat miles and a 56.3% decrease in departures which resulted in 58.1% decrease in revenue passengers carried. The decrease in available seat miles was due to the decreased departures and to the reconfiguration of certain aircraft with fewer seats.

We had an operating loss of $6.3 million for the nine-month period ending September 30, 2014, compared to operating income of $3.6 million for the nine-month period ending September 30, 2013. The $9.8 million decrease in operating income is attributable to a $47.3 million decrease in operating revenue, partially offset by a $37.5 million decrease in operating expenses. We realized a net loss of $6.1 million for the nine-month period ending September 30, 2014, compared to net income of $0.2 million for the nine-month period ending September 30, 2013. The increase in net loss is primarily a result of a $47.3 million decrease in operating revenue partially offset by a $37.5 million decrease in operating expenses, a $0.1 million increase in interest expense and a $3.7 million increase in income tax benefit.

Results of Operations for the Three Months Ended September 30, 2014 and 2013

The following table sets forth certain financial information regarding our results of operations for the three months ended September 30, 2014 and 2013.

Statement of Income (Loss) Data

(dollars in thousands)

(unaudited)


	For the Three Months Ended September 30,
	2014									2013
	Amount (in thousands)			Cents per ASM			Year over Year Revenue/Cost Increase (Decrease) Percentage			Amount (in thousands)			Cents per ASM
Operating revenues:
Passenger	$	8,148			30.1	¢		(51.7	)%	$	16,873			19.5	¢
Public service		8,190			30.2			(43.8	)		14,584			16.9
Freight, charter and other		40			0.1			(70.8	)		137			0.2

Total operating revenues		16,378			60.4			(48.2	)		31,594			36.6

Operating expenses:
Salaries, wages, and benefits		4,797			17.7			(40.2	)		8,026			9.3
Aircraft fuel		4,455			16.4			(51.5	)		9,179			10.6
Aircraft maintenance, materials and repairs		747			2.8			(83.1	)		4,430			5.1
Depreciation and amortization		1,533			5.7			(4.1	)		1,599			1.9
Other rentals and landing fees		668			2.5			(31.1	)		970			1.1
Other operating expenses		3,290			12.1			(21.1	)		4,168			4.8

Total operating expenses		15,490			57.2			(45.4	)		28,372			32.9

Operating income (loss)		888			3.3			(72.4	)		3,222			3.7
Interest expense, net		(1,259	)		(4.6	)		17.1			(1,075	)		(1.2	)

Income (Loss) before income taxes		(371	)		(1.4	)¢		(117.3	)%		2,147			2.5	¢
Income tax benefit (expense)		135			0.5			(115.3	)		(880	)		(0.1	)

Net Income (Loss)	$	(236	)		(0.9	)¢		(118.6	)%	$	1,267			1.5	¢

Selected Operating Data

The following table sets forth certain selected operating data regarding our operations for the three months ended September 30, 2014 and 2013.


	September 30, 2014			Increase (Decrease) from 2013			September 30, 2013
Selected Operating Data:
Available seat miles (in thousands) (1)		27,101			-68.6	%		86,336
Revenue passenger miles (in thousands) (2)		13,963			-61.2	%		36,016
Revenue passengers carried		49,448			-61.3	%		127,883
Departures flown		9,147			-49.6	%		18,147
Passenger load factor (3)		51.5	%		23.5	%		41.7	%
Average yield per revenue passenger mile (4)		58.4	¢		24.8	%		46.8	¢
Revenue per available seat miles (5)		60.4	¢		65.0	%		36.6	¢
Cost per available seat mile (6)		57.2	¢		73.9	%		32.9	¢
Average passenger fare (7)	$	164.78			24.9	%	$	131.94
Average passenger trip length (miles) (8)		282			0.0	%		282
Average cost per gallon of fuel	$	3.52			-4.9	%	$	3.70

(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. For comparative purposes, the change in period over period ASMs was not only affected by fewer departures in 2014 versus 2013, but as the Company was forced to transition to operating Beech 1900s in a nine seat configuration to mitigate the effect of new pilot qualification rules; operating a flight with nine seats versus 19 seats had a significant effect on period over period ASMs. The standalone effect of operating nine seat Beech 1900s versus 19 seat Beech 1900s resulted in a decrease of 16,713,900 ASMs in the three month period ended September 30, 2014.

(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. For prior year comparative purposes, considering the standalone effect of operating a portion of the Beech 1900 fleet in a nine seat configuration versus a 19 seat configuration; revenue per ASM would have decreased to 37.4 cents per ASM from the 60.4 cents per ASM (as illustrated above) for the three month period ended September 30, 2014.

(6)

“Cost per available seat mile” represents operating expenses divided by available seat miles. For prior year comparative purposes, considering the standalone effect of operating a portion of the Beech 1900 fleet in a nine seat configuration versus a 19 seat configuration; cost per ASM would have decreased to 35.4 cents per ASM from the 57.2 cents per ASM (as illustrated above) for the three month period ended September 30, 2014.

(7)	“Average passenger fare” represents passenger revenue divided by the number of revenue passengers carried.

(8)	“Average passenger trip length” represents revenue passenger miles divided by the number of revenue passengers carried.

Comparison of Third Quarter 2014 to Third Quarter 2013

Passenger Revenues. Passenger revenues were $8.1 million in the third quarter of 2014, a decrease of 51.7% from $16.9 million in the third quarter of 2013. The $8.8 million quarter-over-quarter decrease in passenger revenues was attributable to the curtailment of operations due to a severe shortage of available qualified pilots in combination with a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields.

Public Service Revenues. Public service revenues collected through the EAS Program decreased 43.8% to $8.2 million during the third quarter of 2014, as compared to $14.6 million during the third quarter of 2013. The decrease in public service revenue was mostly due to a 49.6% decrease in departures due to the industry-wide shortage of qualified pilots. At September 30, 2014 and September 30, 2013, we served 21 and 32 communities, respectively, on a subsidized basis under the EAS Program.

Other Revenues. Other revenues declined 70.8%, mainly due to decline of cargo revenues resulting from a decrease in markets we serve and a 49.6% decline in departures during the third quarter of 2014 compared to the third quarter of 2013.

Operating Expenses. Total operating expenses were $15.5 million, or 57.2 cents per ASM, in the third quarter of 2014, as compared to $28.4 million, or 32.9 cents per ASM in the third quarter of 2013.

Salaries, Wages, and Benefits. Salaries, wages, and benefits were $4.8 million in the third quarter of 2014, a decrease of 40.2% from $8.0 million in the third quarter of 2013. The decrease in salaries, wages, and benefits was mostly attributable to the decreased number of employees as a result of the decreased operations due to the industry-wide shortage of qualified pilots.

Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $4.5 million, or 16.4 cents per ASM, in the third quarter of 2014. In comparison, our aircraft fuel and into-plane expense for the third quarter of 2013 was $9.2 million, or 10.6 cents per ASM. The 51.5% decrease in our aircraft fuel expense was primarily attributable to a reduction in fuel consumption which was primarily the result of 49.6% fewer departures in the third quarter of 2014.

The average cost of fuel decreased from $3.70 per gallon in the third quarter of 2013 to $3.52 per gallon in the third quarter of 2014.

Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $0.7 million during the third quarter of 2014, which was an 83.1% decrease from $4.4 million during the third quarter of 2013. The decrease was primarily attributable to the reduction of component repairs and the timing of engine overhaul expenses resulting from the reduced operations. The decreases in maintenance expense are largely attributable to having more engines available to satisfy the reduced levels of service. We expect that engine repair expense will trend back to normalized levels relative to the number of departures flown.

Depreciation and amortization. Depreciation and amortization expense was $1.5 million during the third quarter of 2014 which was consistent with $1.6 million in the third quarter of 2013.

Other Rentals and Landing Fees Expense. Other rentals and landing fees decreased by $0.3 million from $1.0 million during the third quarter of 2013, to $0.7 million during the third quarter of 2014. The decrease was mainly attributable to decreased landing fees resulting from the 49.6% reduction in departures along with reduced hub rental expense.

Other Operating Expenses. Other operating expenses were $3.3 million, or 12.1 cents per ASM during the third quarter of 2014, which was a decrease from $4.2 million, or 4.8 cents per ASM during the third quarter of 2013. The decrease was mainly attributable to decreases in passenger related expense and pilot related expenses. These were partially offset by increased legal and professional fees.

Interest Expense. We incurred interest expense of $1.3 million in the third quarter of 2014, compared to $1.1 million in the third quarter of 2013. The increase was mainly attributable to increased prepaid debt fee amortization and an increased interest rate on borrowings.

Income Tax Expense. For the three months ended September 30, 2014, we recorded an income tax benefit of $0.1 million and for the three months ended September 30, 2013, we recorded an income tax expense of $0.9 million. Our estimated effective federal and state income tax rate is 36.6% for 2014.

Results of Operations for the Nine Months Ended September 30, 2014 and 2013

The following table sets forth certain financial information regarding our results of operations for the nine months ended September 30, 2014 and 2013.

Statement of Income (Loss) Data

(dollars in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2014									2013
							Year over Year
				Cents			Revenue/Cost						Cents
	Amount			per			Increase (Decrease)			Amount			per
	(in thousands)			ASM			Percentage			(in thousands)			ASM
Operating revenues:
Passenger	$	23,208			24.1	¢		(51.9	)%	$	48,249			18.1	¢
Public service		21,035			21.8			(51.2	)		43,136			16.2
Freight, charter and other		124			0.1			(61.8	)		325			0.1

Total operating revenues		44,367			46.0			(51.6	)		91,710			34.4

Operating expenses:
Salaries, wages, and benefits		15,833			16.4			(36.8	)		25,036			9.4
Aircraft fuel		12,938			13.4			(54.5	)		28,407			10.7
Aircraft maintenance, materials and repairs		3,371			3.5			(71.1	)		11,681			4.4
Depreciation and amortization		4,742			4.9			(1.2	)		4,801			1.8
Other rentals and landing fees		3,260			3.4			(31.7	)		4,770			1.8
Other operating expenses		10,497			10.9			(22.0	)		13,454			5.0

Total operating expenses		50,641			52.5			(42.6	)		88,149			33.1

Operating income (loss)		(6,274	)		(6.5	)		(276.2	)		3,561			1.3
Interest expense, net		(3,376	)		(3.5	)		3.0			(3,278	)		(1.2	)

Income (Loss) before income taxes		(9,650	)		(10.0	)¢		(3,509.9	)%		283			0.1	¢
Income tax benefit (expense)		3,535			3.7			(2,861.7	)		(128	)		0.0

Net Icome (Loss)	$	(6,115	)		(6.3	)¢		(4,045.2	)%	$	155			0.1	¢

Selected Operating Data

The following table sets forth certain selected operating data regarding our operations for the nine months ended September 30, 2014 and 2013.


	September 30, 2014			Increase (Decrease) from 2013			September 30, 2013
Selected Operating Data:
Available seat miles (in thousands) (1)		96,392			-63.8	%		266,569
Revenue passenger miles (in thousands) (2)		44,070			-57.7	%		104,273
Revenue passengers carried		151,176			-58.1	%		360,949
Departures flown		24,560			-56.3	%		56,230
Passenger load factor (3)		45.7	%		16.9	%		39.1	%
Average yield per revenue passenger mile (4)		52.7	¢		13.8	%		46.3	¢
Revenue per available seat miles (5)		46.0	¢		33.7	%		34.4	¢
Cost per available seat mile (6)		52.5	¢		58.6	%		33.1	¢
Average passenger fare (7)	$	142.03			6.3	%	$	133.67
Average passenger trip length (miles) (8)		292			1.0	%		289
Average cost per gallon of fuel	$	3.62			-1.9	%	$	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. For comparative purposes, the change in period over period ASMs was not only affected by fewer departures in 2014 versus 2013, but as the Company was forced to transition to operating Beech 1900s in a nine seat configuration to mitigate the effect of new pilot qualification rules; operating a flight with nine seats versus 19 seats had a significant effect on period over period ASMs. The standalone effect of operating nine seat Beech 1900s versus 19 seat Beech 1900s resulted in a decrease of 25,663,230 ASMs in the nine month period ended September 30, 2014.

(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. For prior year comparative purposes, considering the standalone effect of operating a portion of the Beech 1900 fleet in a nine seat configuration versus a 19 seat configuration; revenue per ASM would have decreased to 36.3 cents per ASM from the 46.0 cents per ASM (as illustrated above) for the nine month period ended September 30, 2014.

(6)

“Cost per available seat mile” represents operating expenses divided by available seat miles. For prior year comparative purposes, considering the standalone effect of operating a portion of the Beech 1900 fleet in a nine seat configuration versus a 19 seat configuration; cost per ASM would have decreased to 41.5 cents per ASM from the 52.5 cents per ASM (as illustrated above) for the nine month period ended September 30, 2014.

(7)	“Average passenger fare” represents passenger revenue divided by the number of revenue passengers carried.

(8)	“Average passenger trip length” represents revenue passenger miles divided by the number of revenue passengers carried.

Comparison of First Nine Months 2014 to First Nine Months 2013

Passenger Revenues. Passenger revenues were $23.2 million in the first nine months of 2014, a decrease of 51.9% from $48.2 million in the first nine months of 2013. The $25.0 million period-over-period 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. In the first nine months of 2014, passenger revenue of $23.2 million included nonrecurring passenger revenue of $1.7 million related to nonrecurring amounts collected from another carrier. These amounts resulted from a reconciliation of the passenger revenues generated by our proration formulas with this carrier.

Public Service Revenues. Public service revenues collected through the EAS Program decreased 51.2% to $21.0 million during the first nine months of 2014, as compared to $43.1 million during the first nine months of 2013. The decrease in public service revenue was mostly due a56.3% decrease in departures due to the industry-wide shortage of qualified pilots. At September 30, 2014 and September 30, 2013, we served 20 and 32 communities, respectively, on a subsidized basis under the EAS Program.

Other Revenues. Other revenues declined 61.8%, mainly due to decline of cargo revenues resulting from 56.3% decline in departures during the first nine months of 2014 compared to the first nine months of 2013.

Operating Expenses. Total operating expenses were $50.6 million, or 52.5 cents per ASM, in the first nine months of 2014, as compared to $88.1 million, or 33.1 cents per ASM in the first nine months of 2013.

Salaries, Wages, and Benefits. Salaries, wages, and benefits were $15.8 million in the first nine months of 2014, a decrease of 36.8% from $25.0 million in the first nine months of 2013. The decrease in salaries, wages, and benefits was mostly attributable to the decreased number of employees as a result of the decreased operations due to the industry-wide shortage of qualified pilots.

Aircraft Fuel Expense. Aircraft fuel and into-plane expense was $12.9 million, or 13.4 cents per ASM, in the first nine months of 2014. In comparison, our aircraft fuel and into-plane expense for the first nine months of 2013 was $28.4 million, or 10.7 cents per ASM. The 54.5% decrease in our aircraft fuel expense was primarily attributable to a reduction in fuel consumption which was the result of a 56.3% decrease in departures in the first nine months of 2014.

The average cost of fuel decreased from $3.69 per gallon in the first nine months of 2013 to $3.62 per gallon in the first nine months of 2014. At first nine months of 2014 rates of consumption, a one-cent increase or decrease in the price per gallon of fuel will increase or decrease our fuel expense by approximately $48,000 annually.

Aircraft Maintenance, Materials, and Component Repairs. Aircraft maintenance, materials, and component repairs expense was $3.4 million during the first nine months of 2014, which was a 71.1% decrease from $11.7 million during the first nine months of 2013. The decrease was primarily attributable to the reduction of component repairs and the timing of engine overhaul expenses resulting from the reduced operations. The decreases in maintenance expense are largely attributable to having more engines available to satisfy the reduced levels of service. We expect that engine repair expense will trend back to normalized levels relative to the number of departures flown.

Depreciation and amortization. Depreciation and amortization expense was $4.7 million during the first nine months of 2014 which was consistent with $4.8 million in the first nine months of 2013.

Other Rentals and Landing Fees Expense. Other rentals and landing fees decreased by $1.5 million from $4.8 million during the first nine months of 2013 to $3.3 million during the first nine months of 2014. The decrease was mainly attributable to decreased landing fees resulting from the 56.3% reduction in departures along with reduced hub rental expense.

Other Operating Expenses. Other operating expenses were $10.5 million, or 10.9 cents per ASM during the first nine months of 2014, which was a decrease from $13.5 million, or 5.0 cents per ASM during the first nine months of 2013. The decrease was mainly attributable to decreases in pilot related expenses, passenger related expenses, deicing expenses, and insurance expense. These were partially offset by increased legal and professional fees.

Interest Expense. We incurred interest expense of $3.4 million in the first nine months of 2014, compared to $3.3 million in the first nine months of 2013. The increase was mainly attributable to increased prepaid debt fee amortization and an increased interest rate on borrowings.

Income Tax Expense. For the nine months ended September 30, 2014, we recorded an income tax benefit of $3.4 million and for the nine months ended September 30, 2013, we recorded an income tax benefit of $3.3 million. Our estimated effective federal and state income tax rate is 36.6% for 2014.

Seasonality

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

Liquidity, Financing and Capital Resources

As a result of not being in compliance under our senior credit facility and the uncertainty of our liquidity position for the next 12 months, all borrowings (approximately $24.7 million) under our senior credit facility will be callable by the lender upon expiration of the current forbearance agreement and are classified as current maturities as of September 30, 2014. Thus, we had negative working capital of $9.3 million and a current ratio of 0.69:1 at September 30, 2014, compared to negative working capital of $4.4 million and a current ratio of 0.86:1 at December 31, 2013.

We have historically used debt to finance the purchase of aircraft. On November 16, 2011, we entered into a financing agreement with our lenders. Terms of the financing include a four-year term loan in the amount of $24 million and a revolving loan credit facility in which we may borrow up to $10 million.

At September 30, 2014, our outstanding principal balance on the term loan was $16.2 million and we had borrowed $8.5 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.

At September 30, 2014, the Company was not in compliance with financial covenants contained in the Credit Agreement, and it is not expected that the Company will be in compliance throughout the balance of 2014. As a result of such non-compliance our lenders have the right to declare all borrowings (approximately $24.2 million) immediately due and payable.

The Company is currently pursuing a new financing facility. There is no assurance the Company will be able to complete a new financing facility on acceptable terms.

For the nine months ending September 30, 2014, we invested $0.8 million of cash in aircraft, engines, rotable parts and other equipment, mostly represented by rotable parts acquisitions.

At September 30, 2014 the Company has no aircraft lease obligations.

Sources and Uses of Cash. As of September 30, 2014, our cash balance was $3.9 million. We made principal payments on term debt of $1.5 million and had additional borrowings on term debt of $2.0 million.

Cash Provided by Operating Activities. During the nine months ended September 30, 2014, our cash used by operating activities was $1.9 million. During the nine months we generated a net loss of $6.1 million and recorded non-cash depreciation and amortization of $4.7 million and a deferred tax benefit of $3.5 million. Other sources of cash included collection of accounts receivable of $1.5 million, a reduction in inventory of $1.5 million and a combined reduction in prepaid expenses, other current assets and other assets of $0.9 million. Uses of cash included payment of accounts payable of $1.0 million and reductions in accrued interest, unearned revenue and other liabilities of $0.5 million.

Cash Flows from Investing Activities. During the first nine months of 2014, we invested $0.8 million for the purchase of replacement aircraft rotable components and other property and equipment.

Cash Flows from Financing Activities. During the first nine months of 2014, we utilized $1.5 million of cash to reduce our outstanding notes payable and long-term debt balances and borrowed an additional $2.0 million under the terms of the Forbearance Agreement. Proceeds from additional borrowings, net of finance and legal fees, amounted to $1.4 million.

Forward-Looking Statements

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

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

1) our ability to hire and retain sufficient pilots to service existing routes and expand into other profitable routes;

2) our ability to restructure our current debt obligations and covenants and obtain additional sources of capital to provide for operating cash requirements either through additional financings and/or sales of assets;

3) the receipt of profitable levels of passenger revenues on the routes that we serve;

4) the continuation of Essential Air Service and our ability to capitalize on it;

5) the level of regulatory and environmental costs;

6) airline industry and broader economic conditions;

7) the continued connection capacity at our hubs and activities of our code share partners;

8) our ability to monetize our net operating loss carry forwards;

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

10) competition from other airlines and ground transportation companies;

11) the volatility of fuel costs;

12) the incidence of labor disruptions or strikes;

13) our ability to retain key personnel;

14) the incidence of aircraft accidents;

15) the incidence of technological failures or attacks;

16) maintenance costs related to aging aircraft;

17) the limited market for our securities;

18) the volatility of the market price of our common stock;

19) our concentration of stock ownership and control of the company by our Chairman and President;

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

21) no expectation of dividend;

22) anti-takeover provisions and other restrictions in our credit agreements.

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

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 September 30, 2014, 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 25.5% of our operating expenses in the nine-month period ending September 30, 2014. At rates of consumption for the first nine months of 2014, a one cent increase or decrease in the per gallon price of fuel will increase or decrease our fuel expense by approximately $48,000 annually.

Interest Rates

Our operations are capital intensive because the vast majority of our assets consist of flight equipment, which is financed primarily with long-term debt. At September 30, 2014, we had approximately $24.7 million of variable rate debt. Effective April 1, 2014, as a result of entering into a Third Amendment and Forbearance Agreement with our lenders, we agreed to a 2% increase in the applicable rate that we are paying on our loan agreements. The interest rate on our revolving credit facility will increase to the greater of 30 day LIBOR plus 10% or 12.5%. The interest rate on our term loan will increase to the greater of 30 day LIBOR plus 13% or 17.5%. Going forward, we could be subject to increased rates of interest on our debt if the 30 day LIBOR rate increases by more than 2.3 percentage points.

Item 4.

CONTROLS AND PROCEDURES

We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the 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 September 30, 2014, 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

We are a party to ongoing legal claims and assertions arising in the ordinary course of business. Management believes that the resolution of these matters will not have a material adverse effect on our financial position, results of operations, or cash flows.

During the period covered by this Quarterly Report on Form 10-Q, there were no material developments in any legal proceedings previously reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 1A.

RISK FACTORS

We are not in compliance with financial covenants under our senior credit facility with our Lenders.

As of September 30, 2014, the Company was not in compliance with financial covenants contained in the Credit Agreement. Furthermore, the Company does not expect to be in compliance with the leverage ratio covenant throughout the balance of 2014 and into 2015. Furthermore, the auditor’s report over the Company’s financial statements for the fiscal year ended December 31, 2013 contained an explanatory paragraph referencing substantial doubt about the Company’s ability to continue as a going concern. These are covenant violations that permit the Company’s 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 Company’s senior credit facility and the expectation that the Company will not be in compliance with the terms of the senior credit facility throughout 2014, all borrowings (approximately $24.7 million) under the Company’s senior credit facility are classified as current maturities as of December 31, 2013.

On April 1, 2014, the Company and its Lenders entered into a Third Amendment and Forbearance Agreement which terminated on April 30, 2014. Under the terms of this agreement the Company’s lenders agreed to refrain from exercising their right to declare the obligations to be immediately due and payable under the terms of the Credit Agreement. On March 31, 2014, the Company also made its regularly scheduled debt payment to the lenders in the amount of $1 million. Effective May 30, 2014, the Company entered into the Fourth Amendment and Second Forbearance Agreement to the Credit Agreement with its Lenders in which the Lenders agreed to temporarily forbear from exercising certain rights and remedies under the Credit Agreement. The Forbearance Termination Date was on the earlier of (i) September 15, 2014 or (ii) the date on which Great Lakes committed additional breaches under the Credit Agreement. In consideration of entering into the Fourth Amendment and Second Forbearance Agreement, the Lenders agreed to lend the Company up to an additional $3.0 million under the term loan and to defer until the maturity of the loan an additional $2.0 million of amortization payments which were due and payable by September 30, 2014. As of September 30, 2014 the Company has borrowed an additional $2.0 million under the terms of the Fourth Amendment and Second Forbearance Agreement and deferred the $2.0 million of amortization payments that were payable by September 30, 2014. In addition the Company agreed to pay the Lenders a forbearance fee of $242,000, a funding fee of $60,000, and a commitment fee of $60,000, and it also agreed to hire three firms to market the Company’s excess aircraft and inventory and to hire a financial advisor to advise the Company on raising capital through additional equity financings, debt financings, or other liquidity events. Effective September 23, 2014, the Company entered into the Fifth Amendment and Third Forbearance to Credit Agreement with its Lenders, pursuant to which the Lenders have agreed to temporarily forbear from exercising certain rights and remedies under the Credit Agreement. The Forbearance Termination Date is the earlier of (i) December 1, 2014 or (ii) the date on which Great Lakes commits additional breaches under the Credit Agreement.

The Company is currently pursuing a new financing facility. There is no assurance the Company will be able to complete a new financing facility on acceptable terms.

Until the Company is able to re-staff with enough qualified pilots to restore service to suspended or terminated markets, or until the Company is able to successfully close on the refinancing of our existing debt obligations, it is expected that the Company will not have sufficient liquidity to service its existing debt obligations for the next 12 month period.

The Company cannot make assurances that its assets or cash flow from operations will be sufficient to repay borrowings under its existing debt obligations, either upon maturity or if accelerated, that it will be able to refinance or restructure the payments due under the terms of the Credit Agreement. In addition, the Company cannot make assurances that its efforts to obtain financing or other liquidity events will be successful. This would have a material adverse impact on our liquidity and financial position, and would raise substantial doubt about our ability to continue as a going concern.

With the exception of the foregoing 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, 2013, filed with the Securities and Exchange Commission on April 9, 2014.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

As of September 30, 2014 the Company was not in compliance with the leverage coverage ratio financial covenant contained in the Company’s senior credit facility’s Credit Agreement. Specifically the Company was required to maintain a leverage ratio, calculated by dividing average quarterly borrowings by trailing 12 month earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the Credit Agreement, of 2.25:1 or less. At September 30, 2014, the Company 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. Furthermore, the auditor’s report over the Company’s financial statements for the fiscal year ended December 31, 2013 contained an explanatory paragraph referencing substantial doubt about the Company’s ability to continue as a going concern. These are both covenant violations that permit the Company’s 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 Company’s 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 $24.7 million) under the Company’s senior credit facility are classified as current maturities as of September 30, 2014.

Effective September 23, 2014, the Company entered into the Fifth Amendment and Third Forbearance to Credit Agreement with its Lenders, pursuant to which the Lenders have agreed to temporarily forbear from exercising certain rights and remedies under the Credit Agreement. The Forbearance Termination Date is on the earlier of (i) December 1, 2014 or (ii) the date on which Great Lakes commits additional breaches under the Credit Agreement.

Item 6.

EXHIBITS

See “Exhibit Index.”

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: November 14, 2014	By:	/s/ Charles R. Howell IV
		Charles R. Howell IV
		Chief Executive Officer

	By:	/s/ Michael O. Matthews
		Michael O. Matthews
		Vice President and Chief Financial Officer

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)

10.1		Third Amendment and Forbearance to Credit Agreement dated April 1, 2014 between and among Great Lakes Aviation, Ltd., Crystal Financial LLC, and GB Credit Partners, LLC (incorporated by reference to Current Report on Form 8-K filed on April 3, 2014)

10.2		Fourth Amendment and Second Forbearance to Credit Agreement dated May 30, 2014 between and among Great Lakes Aviation, Ltd., Crystal Financial LLC, and GB Credit Partners, LLC (incorporated by reference to Current Report on Form 8-K filed on June 4, 2014)

10.3		Fifth Amendment and Third Forbearance to Credit Agreement dated September 23, 2014 between and among Great Lakes Aviation, Ltd., Crystal Financial LLC, and GB Credit Partners, LLC (incorporated by reference to Current Report on Form 8-K filed on September 29, 2014)

10.4		First Amendment to Fifth Amendment and Third Forbearance to Credit Agreement dated November 5, 2014 between and among Great Lakes Aviation, Ltd., Crystal Financial LLC, and GB Credit Partners, LLC (incorporated by reference to Current Report on Form 8-K filed on November 5, 2014)

31.1		Certification pursuant to Rule 13a-14(a) of Chief Executive Officer.

31.2		Certification pursuant to Rule 13a-14(a) of Chief Financial Officer.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer.

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer.

101		Financial Statements in XBRL format.

(1)	Incorporated by reference to the 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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