Item 1. BUSINESS
General
Great Lakes Aviation, Ltd. (Great Lakes or the Company) is a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United Air Lines or United) and Frontier Airlines, Inc. (Frontier Airlines or Frontier). As of March 15, 2008, the Company served twelve states with 32 destinations to and from Denver, Colorado, four destinations to and from Phoenix, Arizona, five destinations to and from St. Louis, Missouri, five destinations to and from Kansas City, Missouri and two destinations to and from Albuquerque, New Mexico.
The Company was incorporated on October 25, 1979, as an Iowa corporation and became a publicly traded company on January 21, 1994. General information about the Company can be found at www.flygreatlakes.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through the Company’s website as soon as reasonably practicable after the Company has filed such reports with, or furnished them to, the United States Securities and Exchange Commission. Information on the Company’s website is not incorporated into, nor a part of, this Form 10-K or the Company’s other securities filings.
Essential Air Service Program
The Company derived approximately 25% of its total revenue from the Essential Air Service program (EAS) in 2007, which is administered by the United States Department of Transportation (the 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. 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 revenues, as well as fluctuations in fuel and other costs, may cause EAS routes to become unprofitable during these two-year terms.
At the end of the two year term for EAS service to a particular city, the DOT may request 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.
Congress set the EAS funding level at $102 million for the federal fiscal year ended September 30, 2005, and $110 million for the fiscal years ending September 30, 2006 and 2007. Congress is currently proposing $110 million for the fiscal year ending September 30, 2008.
The Company initiated scheduled air service to Gallup, NM in July 2007 with the assistance of a grant awarded to the New Mexico Department of Transportation provided by the DOT Small Community Air Service Development Program. The Company will discontinue this service on March 30, 2008. Under a similar grant program, the Company discontinued service to Sierra Vista, AZ in the first quarter of 2007.
During 2007, the Company began providing EAS service to Burlington, IA; Marion, IL; Quincy, IL; Decatur, IL; Ft. Leonard Wood, MO and Great Bend, KS. The Company also discontinued scheduled services to Brookings, SD; Prescott, AZ and Kingman, AZ.
In October 2007, the Company’s proposal to provide Essential Air Service to serve Vernal, UT; Moab, UT; Ely, NV; Merced, CA and Visalia, CA was accepted by the DOT.
The Company’s proposal to provide Essential Air Service to serve seven Montana communities was accepted by the DOT on December 22, 2007.
Essential Air Service Program Activity Subsequent to December 31, 2007
On January 7, 2008, the Company commenced scheduled Essential Air Service to Vernal and Moab, UT from Denver, CO.
On February 6, 2008 the Company was selected to provide EAS service to Manhattan, KS and Salina, KS from Kansas City, MO, and Cape Girardeau, MO, Jackson, TN and Owensboro, KY from Kansas City, MO, St. Louis, MO or Cincinnati, OH.
As of February 29, 2008, the Company served 28 EAS communities on a subsidized basis.
United Air Lines and Frontier Airlines Code Share Relationships
United Air Lines. The Company has operated under a code share agreement with United Air Lines since 2001. The terms of the United code share agreement were amended effective July 18, 2003 and again on November 1, 2007. The current terms of the United code share agreement provide that the Company place United Air Lines flight designator codes on certain flights of the Company that connect with United flights in Albuquerque, NM; Denver, CO; Kansas City, MO and Phoenix, AZ, and anticipates adding Las Vegas, NV.
Frontier Airlines. On May 3, 2001, the Company entered into a code share agreement with Frontier, which was implemented July 9, 2001. The Frontier agreement provides for the use of Frontier’s flight designator code on Great Lakes’ flights connecting with Frontier’s flights in Denver. Accordingly, certain flights to and from Denver carry both the United Air Lines and Frontier Airlines flight designator codes as well as the Great Lakes flight designator.
Markets
As of December 31, 2007, the Company operated 232 weekday flights. Service scheduled to and from its five hubs include; 148 flights at Denver, 8 flights at Albuquerque, 12 flights at Phoenix, 20 flights at St. Louis and 12 flights at Kansas City, MO.
The Company frequently modifies its routes. For a current map of routes being flown, please visit our website at www.flygreatlakes.com.
As of March 28, 2008, the Company’s route map, consisting of current scheduled service and recently awarded Essential Air Service communities, is as follows:
Marketing
The Company’s services are marketed primarily by means of the Company’s internet web site, global distributions systems (travel agencies and travel agent web sites), the Company’s reservation call center and seat capacity made available through the Company’s code share agreements. The Company’s promotional programs emphasize the Company’s close affiliation with its code share partners and, in particular, the opportunity for the Company’s passengers to participate in related customer service benefits, such as frequent flyer programs.
Yield Management
The Company monitors its inventory and pricing of available seats utilizing yield management techniques. These processes enable the Company’s revenue control analysts to examine the Company’s past traffic and pricing trends, and to estimate the optimal number of seats to make available for sale at various fares. The analysts then monitors each flight to adjust seat allocations and booking levels, with the objective of maximizing total revenue for each flight.
Charter and Freight Service
The Company uses its Beechcraft 1900D’s and Embraer Brasilia aircraft to provide charter services to private individuals, corporations and athletic teams. The Company also carries freight and small packages on most of its scheduled flights. Combined revenues from the Company’s leases, charter flights and freight air service were 0.9%, 1.5%, and 1.6% of the Company’s total revenues for the years ended December 31, 2007, 2006, and 2005, respectively.
Seasonality
The airline industry generally is subject to cyclical moves in the economy. Because both personal discretionary travel and business travel may be expected to decline during periods of economic weakness, the airline industry tends to experience poorer financial results during such periods.
Seasonal factors, primarily weather conditions and 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 less cash flow for the Company 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.
Competition
The Company competes for passenger traffic with regional and major air carriers and ground transportation. The Company may also compete with other regional air carriers to receive EAS subsidies for providing air service to small communities. The Company’s competition from other air carriers varies from location to location and, in certain areas, comes from regional and major carriers who serve the same or nearby destinations as the Company, but through different hub and spoke systems. The Company could experience increased competition from competitors or on one or more of the Company’s routes.
Aircraft
As of December 31, 2007, the Company’s fleet consisted of 25 Beechcraft Model 1900D 19-passenger aircraft and six Embraer Brasilia Model 120 30-passenger aircraft.
Beechcraft 1900D Aircraft. The 19 passenger Beechcraft 1900D aircraft are pressurized, weather radar equipped, and offer a 310-mile per hour cruising speed.
Embraer Brasilia Aircraft. The 30-passenger Embraer Brasilia aircraft are pressurized, weather radar equipped, has restrooms, is staffed with a flight attendant, and offers a 330-mile per hour cruising speed.
A summary of the Company’s operating aircraft as of December 31, 2007, 2006 and 2005 is as follows:
As of December 31, 2007, the average age of the Company’s aircraft was approximately 13 years, and as of December 31, 2006, the average age of the Company’s aircraft was approximately 12 years as the Company has operated the same fleet of aircraft in both years.
Maintenance
The Federal Aviation Administration (the FAA) mandates periodic inspection and maintenance of commercial aircraft. The Company performs most of the maintenance and inspection of its aircraft and engines (except engine overhaul) using its own personnel. The heavy maintenance base is located at Cheyenne, Wyoming. Line maintenance is also performed in Denver, Colorado and Phoenix, Arizona. Parts and supplies inventories are maintained at these locations to promote the mechanical dispatch reliability of the fleet. The Company also maintains an inventory of spare engines and propellers for its fleet to allow for minimal downtime during major overhauls. The Company internally performs overhaul of selected aircraft components for its fleet.
As required under the Company’s Restructuring Agreement with Raytheon Aircraft Credit Corporation (Raytheon), dated as of December 31, 2002 (the 2002 Restructuring Agreement) (see Liquidity and Financing below), in April 2004, the Company entered into a five-year Fleet Management ProgramTM contract with Pratt & Whitney Canada (P&WC) under which P&WC supplies the Company with certain engine maintenance services (the FMP contract).
In July 2006, the Company amended the FMP contract to extend its term to June 30, 2011 and to reduce the hourly rate the Company pays per flight hour. Monthly amounts to be paid by the Company are based on the total number of Beechcraft 1900D engine flight hours at a fixed contractual rate. The contractual rate per flight hour is subject to annual fixed increases throughout the term of the contract, and the Company is recognizing this expense at a level rate throughout the term of the contract. Since the FMP contract amendment reduced hourly rates retroactively to July 1, 2005, the Company reflected a change in estimate and recorded an adjustment of $582,234 for the renegotiated rate which reduced the corresponding balance payable to P&WC and maintenance expense during the third quarter ending September 30, 2006.
Fuel
The Company expects to continue to be able to obtain fuel in quantities sufficient to meet its future requirements. The Company contracts, through intermediaries and directly with refiners for the purchase of a significant portion of its aircraft fuel requirements. However, standard industry contracts generally do not provide protection against fuel price increases and do not ensure availability of supply. Accordingly, an increase in the cost of fuel, if not accompanied by an equivalent increase in passenger revenues or subsidies,
could have a material adverse impact on the Company’s future operating results. During 2007, the Company’s average price of fuel, including taxes and plane service fees, was $2.76 per gallon, as compared to $2.42 in 2006 and $2.13 in 2005. At current rates of consumption, a one cent increase or decrease in the per gallon price of fuel will increase or decrease the Company’s fuel expense by approximately $93,000 annually.
Liquidity and Financing
In the first quarter of 2007 and the third and fourth quarters of 2006, the Company successfully renegotiated with its primary creditors to either extinguish debt or renegotiate the terms of their lease, debt, and significant contractual obligations.
Pratt and Whitney Canada
In July 2006, the Company amended its Fleet Management ProgramTM contract (the FMP contract) with Pratt & Whitney Canada (P&WC) to extend its term to June 30, 2011 and to reduce the hourly rate the Company pays per flight hour.
CIT Aerospace
On September 28, 2006, the Company extinguished its debt obligation with CIT Aerospace (CIT) by making cash payment of $2.1 million. During the first nine months of 2006, the Company made total payments of principal and interest on the CIT debt obligation in the amount of $2.7 million. As a result of the extinguishment of debt with CIT, the Company has realized a one-time gain of $1.1 million in the quarter ended September 30, 2006.
FINOVA Capital Corporation
The Company entered into a settlement agreement with FINOVA Capital Corporation (FINOVA) on October 20, 2006 after returning two Embraer Brasilia aircraft. The terms of the agreement allowed for a reduction in the balance of the outstanding lease obligations and accrued penalty interest from $1.4 million to $0.85 million, for which the Company entered into a promissory note payable in 45 equal monthly installments of $22,342, including interest, with the first payment being made October 31, 2006. In accordance with the provisions of SFAS No. 15, the Company recorded the FINOVA debt in the amount of $1.0 million. The Company prepaid the debt in the third quarter of 2007 at a discounted rate. As a result the Company recorded a gain of approximately $412,000.
Boeing Corporation
On December 20, 2006, the Company and Boeing Capital Corporation (Boeing) entered into a Settlement Agreement and Lease Amendment that discharged the Company’s obligations for defaulted rent and other payments due to Boeing under lease agreements for two Embraer aircraft. The total discharged payment defaults were $10,067,097. Simultaneously, the Company paid Boeing a lump sum of $1,150,000 and a maintenance rent payment for two aircraft engines. The lease was amended to: (i) reduce the monthly rental payments for each aircraft; (ii) require the Company to pay “maintenance rent,” which will be reimbursable upon completion of certain maintenance events; and (iii) remove the Company’s option to purchase the aircraft at the end of the April 2013 lease term at the aircraft’s then fair market value. The total discharged deferred lease payments were $8.3 million and total discharge including accrued interest and penalties resulted in a gain for 2006 of $10.1 million. The Settlement Agreement and Lease Amendment cured all existing defaults with Boeing.
Raytheon Aircraft Credit Corporation
On March 9, 2007, the Company and Raytheon Aircraft Credit Corporation (Raytheon) entered into an Amended and Restated Restructuring Agreement (the Amended Agreement), which amends and restates in its entirety the Restructuring Agreement between the Company and Raytheon dated as of December 31, 2002, (the 2002 Restructuring Agreement). Pursuant to the Amended Agreement, the Company issued to Raytheon 25 amended and restated promissory notes (the Aircraft Notes), each secured by an amended security agreement in the related aircraft. The Aircraft Notes replace the existing notes issued by the Company to Raytheon on December 31, 2002. Each of the Aircraft Notes has an original principal amount of $2,116,573.70, for a total amount of $52,914,343, bears interest at a fixed rate of 6.75% per annum, and provides for monthly payments in arrears starting on March 30, 2007. The Aircraft Notes mature on June 30, 2011, at which time a final payment of $1,306,674.84 will be due for each aircraft. The fixed rate of 6.75% on the Aircraft Notes represents a significant reduction in interest expense and eliminates variable interest rate risk on all of the Company’s aircraft debt.
Under the Amended Agreement, the Company issued to Raytheon a promissory note (the Senior Note) that replaces the existing senior note and subordinated note issued by the Company to Raytheon on December 31, 2002. The Senior Note has an original principal amount of $13,174,754.62 and bears interest at a rate of 7.00%. Interest on the Senior Note is payable monthly in arrears on the last day of each month, commencing on March 30, 2007. Beginning with the calendar quarter ending June 30, 2007, the Senior Note will provide for quarterly payments of principal on June 30, September 30, and December 30 each year until the note matures on December 30, 2015. As additional security for the Senior Note, the Company pledged four Embraer Brasalia aircraft; as well as, all other assets of the Company. For additional information regarding the Company’s arrangements with Raytheon, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources.”
As further consideration for the concessions granted by Raytheon in the 2002 Restructuring Agreement, the Company issued 5,371,980 shares of the Company’s common stock to Raytheon, representing an approximate 38.2% interest in the Company’s then outstanding shares of common stock. In addition, the Company granted Raytheon observer rights for meetings of the Company’s Board of Directors, but without any right to vote or enter into any discussions at any Board of Directors meetings. As part of the Amended Agreement, Raytheon has relinquished its observer rights.
The Amended Agreement requires the Company to file a shelf registration statement with the Securities and Exchange Commission to permit Raytheon to resell its shares of Company Common Stock, which the Company has agreed to file by April 30, 2008.
The debt payments to be made under the Amended Agreement are closely aligned with the Company’s forecasted cash flows. Under the Amended Agreement, the Company is no longer required to comply with any financial covenant ratios. The Amended Agreement provides for limitations on capital expenditures, incremental indebtedness, anti-dilution of the Company’s common stock, restrictions on equity issuances, encumbrances of assets, and mergers and acquisitions without Raytheon’s prior consent.
Other Leases
The Company leases office and hangar space, and office equipment for its headquarters, reservation facilities, airport facilities, and certain other equipment. The Company also leases certain airport gate and terminal facilities on a month-to-month basis.
Release of Tax Valuation Allowance
Until the fourth quarter of 2007, the Company had recorded a valuation allowance to fully reserve its net deferred tax assets. In the fourth quarter of 2007, the Company determined that it is more likely than not that the Company will be able to utilize most of its net operating loss carryforwards prior to their expiration and other
deferred tax assets as they reverse. As a result, the Company released most of its deferred tax asset valuation allowance and recorded a $10.5 million income tax benefit on the Company’s income statement which represents the difference between the $10.7 million deferred tax benefit and $0.2 million of alternative minimum tax expense. As of December 31, 2007, the Company has approximately $66.5 million of Federal net operating loss carryforwards, which will be available to offset future taxable income. A valuation allowance of $500,000 remains at December 31, 2007 for state net operating loss carryforwards that may not be recovered.
Transportation Security Administration
At June 30, 2004, the Company was obligated to the Transportation Security Administration for $2.5 million, representing collections from passengers for security fees and amounts due from the Company for aviation security infrastructure fees. On August 11, 2004, the Company restructured this obligation into an installment note. This obligation was retired on June 20, 2007.
Employees
At March 1, 2008, the Company had 581 full-time and 348 part-time active employees, as compared to 557 full-time and 288 part-time active employees at March 1, 2007.
The Company’s pilots are represented by the International Brotherhood of Teamsters (IBT). The Company’s labor agreement with the pilots became amendable on October 30, 2000. In May 2006, the Company and the IBT agreed to binding arbitration to achieve a new three year labor agreement. On September 16, 2006, the arbitrator ruled on terms that resulted in a new labor agreement that will not become amendable until September 16, 2009.
The Company’s flight attendants are also represented by the International Brotherhood of Teamsters, and the Company’s agreement with the flight attendants became amendable on April 1, 2002. Negotiations with the flight attendants are inactive at the present time.
The Company’s mechanics and maintenance clerks are represented by the International Association of Machinists (IAM). The Company’s agreement with the mechanics became amendable on November 1, 2005, and the Company’s agreement with the maintenance clerks became amendable on March 1, 2002. On October 19, 2007, the IAM, the designated collective bargaining representative of the class and craft of Mechanics and Related and Clerical employees, sued the Company in Colorado federal court. The following Monday, October 22, 2007, the Company sued the IAM in Minnesota. For additional detail with respect to the status of these matters, see Item 3 of this report, “Legal Proceedings” below.
In 2003, the Company’s dispatchers voted to be represented by the International Brotherhood of Teamsters. Negotiations with the dispatchers are inactive at the present time.
Executive Officers of the Registrant
The following table provides information with respect to the Company’s executive officers as of March 15, 2008.
Douglas G. Voss. Mr. Voss co-founded the Company in 1979 and served in the position of Chief Executive Officer from the Company’s inception until December 31, 2002. Mr. Voss has served as a director of the Company since the Company’s inception and became Chairman of the Board of Directors on December 31, 2002. Mr. Voss became a pilot in 1974 and holds both an Airline Transport Pilot Certificate and an Airframe and Powerplant Mechanic Certificates. Mr. Voss is a graduate of Colorado Aero Tech. Mr. Voss has previously served the Company in the FAA Air Carrier Certificate required operational control positions of Director of Operations and Director of Maintenance.
Charles R. Howell IV. Mr. Howell became the Chief Executive Officer of the Company on December 31, 2002. Mr. Howell served as Chief Operating Officer from August 2002 until December 31, 2002. Prior to joining the Company, Mr. Howell was the President and Chief Executive Officer of Corporate Airlines, Inc., a Nashville-based airline that he co-founded in 1996.
Michael O. Matthews. Mr. Matthews became the Vice President and Chief Financial Officer of the Company on March 28, 2005. Mr. Matthews joined the Company in November 2004 as Vice President of Finance. Prior to joining the Company, Mr. Matthews was employed as Director of Treasury for Budget Group, Inc. Prior to joining Budget Group, Inc. in 2000, Mr. Matthews held management positions in the financial services industry including Newcourt Financial, MetLife Capital, Sanwa Business Credit and Societe Generale Financial Corporation.
Michael L. Tuinstra. Mr. Tuinstra became the Company’s Treasurer in January 2002. From August 1998 to January 2002, Mr. Tuinstra served as the Company’s Director of Purchasing and Inventory Control. From August 1998 until April 1999, Mr. Tuinstra was the Company’s budget and financial analyst.
Regulation
In accordance with the provisions of the Federal Aviation Act of 1958, as amended (the 1958 Act), the Company is an air carrier subject to regulation by the DOT, primarily with respect to economic matters. As a commuter air carrier, the Company is licensed under Part 298 of the Economic Regulations of the DOT.
The Company holds an air carrier operating certificate issued by the Federal Aviation Administration (FAA) pursuant to Part 121 of the FAA’s regulations. To ensure compliance with its regulations, the FAA requires that an airline obtain an operating certificate and operations specifications for each particular aircraft and type of operations conducted by the carrier, all of which are subject to suspension or revocation for cause. As a result, the Company is subject to the jurisdiction of the FAA with respect to the Company’s operations, aircraft maintenance, and safety related matters, including, but not limited to, equipment, ground facilities, dispatch, communications, training, weather observation, flight personnel, and other matters affecting air safety.
The Deregulation Act of 1978 eliminated many regulatory constraints so that airlines became free to set fares and, with limited exceptions, to establish domestic routes without the necessity of seeking government approval. The DOT is still authorized to establish consumer protection regulations in order to prohibit certain pricing
practices, mandate conditions of carriage, and make ongoing determinations of a carrier’s fitness, willingness, and ability to provide air transportation properly and lawfully. The DOT also has the power to bring proceedings to enforce its regulations under the 1958 Act and seek penalties, including the assessment of civil penalties, the revocation of operating authority, and criminal sanctions.
The Aviation and Transportation Security Act requires the adoption of certain security measures by airlines and airports, including the screening of passengers and baggage. The security measures are being partially funded by a per flight segment tax on tickets. The Company is responsible for certain security costs above this level.
The Company is subject to the jurisdiction and regulations of the Federal Communications Commission regarding the use of the Company’s radio facilities. In addition, local governments and authorities in certain markets have adopted regulations governing various aspects of aircraft operations, including noise abatement, curfews, and use of airport facilities. The Company believes that it is in compliance with all such regulations.
Insurance
The Company carries the types and amounts of insurance that are required by the DOT and are customary in the regional airline industry, including coverage for public liability, property damage, aircraft loss or damage, baggage and cargo liability, and workers’ compensation.
As a result of the September 11 terrorist attacks, aviation insurers have significantly increased premiums for all aviation coverage, while dramatically reducing the amount of coverage available for war-risk occurrences. In response to the reduction in coverage, the Air Transportation Safety and System Stabilization Act (the Stabilization Act) provided U.S. air carriers with the option to purchase certain war-risk liability insurance from the United States government on an interim basis at rates that are more favorable than those available in the private market. The Company has purchased this coverage and anticipates renewing it for as long as the coverage is available from the United States government. The airline and insurance industries, together with the United States and other governments, are continuing to evaluate both the cost of aviation insurance and options for providing insurance coverage. The Company anticipates that it will follow industry practices with respect to sources of insurance. The Company believes that its insurance is adequate as to amounts and risks covered. There can be no assurance, however, that the limits of the Company’s insurance will be sufficient to cover any catastrophic loss.
ITEM 1A.
ITEM 1A. RISK FACTORS
Financial Condition of the Company
During the year ended December 31, 2006 and in March 2007 the Company had successfully renegotiated with its lenders to extinguish debt or renegotiate the terms of their lease and debt agreements. Failure by the Company to comply with the terms and conditions of its debt and lease obligations could affect the Company’s ability to secure additional financing to facilitate growth. These transactions are discussed further in notes (2), (5) and (7) of the accompanying financial statement.
Dependence on Relationship with United Air Lines
Currently, the Company estimates that approximately 40% of Great Lakes’ connecting passenger traffic with United Air Lines flights utilizes the United code share product line. As a result of the Company’s relationship with United Air Lines (United), the Company’s business is sensitive to events and risks affecting United. If adverse events affect United’s business, the Company’s business could also be adversely affected. Such events include the ability of United to achieve financial viability after exiting Chapter 11 bankruptcy reorganization, changes in United’s business plan or model, employee strikes or job actions, significant curtailment of services, and terrorist events. However, to the extent that the Company is successful in developing both its own identity in its route system and its code share relationship with Frontier Airlines and interline partnerships with other airlines, the Company will reduce its dependence on United and mitigate the effects of any adverse events that are related solely to United.
Terrorist Events
The Company’s operations are sensitive to changes in the economy and airline industry that are caused by, or related to, past and future terrorist attacks. Such changes include, but are not limited to, the impact of additional airline and security charges on Company costs, reduced customer demand for travel, the cost and availability of war-risk and other aviation insurance (including the federal government’s provision of third party war-risk coverage).
War
War or other military action by the United States or other countries could have a significant effect on passenger traffic.
Dependence on Essential Air Service Revenues
In 2007, the Company received approximately $24.1 million of EAS subsidies as compensation for Essential Air Service provided by the Company to small cities, as compared to $23.9 million in 2006. EAS subsidies are expected to remain a significant portion of the Company’s revenues in future years. The total amount of EAS subsidy ultimately received by the Company over an extended period is determined by, among other things, overall funding levels to the DOT by Congress, competitive bids by other carriers, schedule modifications at the request of the DOT, and the Company’s optimization of its schedules.
The DOT awards EAS subsidies through competitive bidding and the Company could lose its EAS subsidy to competitors. In addition, the DOT has the right to cancel EAS arrangements if it determines that the communities served by such arrangements are no longer eligible.
Effect of General Economic Conditions
The airline industry is significantly affected by general economic conditions. During recent recessions, most airlines reduced fares in an effort to increase traffic. Economic and competitive conditions in the airline industry have contributed to a number of airline bankruptcies. A worsening of current economic conditions, or an extended period of recession, whether nationally or regionally would have a material adverse effect on the Company’s operations. See “Forward-Looking Statements” at the front of this report.
Fuel Costs
Aircraft fuel is a major component of the Company’s operating expenses. Aircraft fuel represented approximately 28.4% of the Company’s operating expenses in 2007 compared to 24.8% of the Company’s operating expenses in 2006. The Company does participate in risk-based fuel hedging instruments. The Company’s cost of fuel varies directly with market conditions, and the Company has no guaranteed long-term sources of supply. Generally, the Company intends to follow industry trends by raising fares in response to significant fuel price increases. However, the Company’s ability to pass on increased fuel costs through fare or EAS subsidy increases may be limited by economic and competitive conditions. Accordingly, a reduction in the availability of, or an increase in the price of fuel, could have a material adverse effect on both the Company’s cash flow from operations and the Company’s profitability. In the fiscal year ended December 31, 2007, the Company’s average price per gallon of fuel consumed increased to an average of $2.76 per gallon compared to the average price per gallon of $2.42 for the fiscal year ending December 31, 2006. The Company estimates that every $.01 increase in the price per gallon of fuel equates to an annualized increase in fuel expense of approximately $93,000 based on 2007 operating activity.
Control by Principal Stockholders
Raytheon, the Company’s principal creditor, owns 5,371,980 shares of the Company’s common stock, representing an approximate 38.2% interest in the Company’s outstanding shares of common stock. Raytheon acquired the shares in consideration for concessions granted by Raytheon pursuant to the 2002 Restructuring Agreement
Mr. Douglas G. Voss, Chairman of the Board of the Company, beneficially owns or controls approximately 39.5% of the outstanding shares of the Company’s common stock, including shares owned by Ms. Gayle R. Brandt. Pursuant to a Marital Dissolution Stipulation and Property Settlement, Ms. Brandt granted to Mr. Voss an Irrevocable Proxy to vote her shares of the Company’s common stock until June 28, 2010.
Accordingly, Mr. Voss and Raytheon are in a position to control the management and affairs of the Company.
Limited Market for Company Securities
The Company’s Common Stock was delisted from the Nasdaq Small Cap Market on August 14, 2002. As a result of the delisting, the Company’s Common Stock has become subject to certain rules of the SEC relating to “penny stocks.” These rules require broker-dealers to make a suitability determination for purchasers and to receive the purchaser’s prior written consent for a purchase transaction, thus restricting the ability to purchase or sell the securities in the open market. Trading of the Company’s Common Stock is conducted on the Over-the-Counter Bulletin Board, which was established for securities that do not meet NASDAQ listing requirements. Consequently, trading the Company’s Common Stock may be more difficult because of lower trading volumes, transaction delays, and reduced security analyst and news media coverage of the Company. These factors could also contribute to lower prices and larger spreads in the bid and ask prices for the Company’s Common Stock.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None
Item 2.
Item 2. PROPERTIES
The Company leases approximately 96,000 square feet of space for maintenance, operations, and administration in Cheyenne, Wyoming.
The Company leases gate, terminal and ramp facilities at 44 airports where ticketing and passenger loading and unloading are handled by Company personnel. Payments to airport authorities for ground facilities are based on a number of factors, including the amount of space used and flight volume.
The Company believes that it has adequate facilities for the conduct of its current and planned operations.
As of December 31, 2007, the Company’s fleet consisted of 25 Beechcraft Model 1900D 19-passenger aircraft and six Embraer Brasilia Model 120 30-passenger aircraft. For additional information with respect to the Company’s aircraft, see the discussion in Item 1 of this report, “Business-Aircraft” above.
Item 3.
Item 3. LEGAL PROCEEDINGS
On October 19, 2007, International Association of Machinists and Aerospace Workers (the “IAM”), the designated collective bargaining representative of the class and craft of Mechanics and Related and Clerical employees, sued the Company in Colorado federal court. The following Monday, October 22, 2007, the Company sued the IAM in Minnesota.
These lawsuits arise out of a dispute regarding whether the Company has been relieved of its Railway Labor Act obligations to bargain collectively with the IAM and to maintain the status quo until the bargaining process is exhausted. The union lawsuit seeks to require the Company to engage in mediated bargaining and to refrain from changing the terms, conditions and wages of aircraft maintenance employees. The Company lawsuit seeks to free the parties from further bargaining and to authorize unilateral action regarding maintenance employee employment.
On October 31, 2007 the Colorado federal court entered a temporary restraining order preventing the Company from increasing mechanic pay. Later on November 7, that court entered a preliminary injunction that prohibits unilateral action and compels the Company to participate in bargaining under the auspices of the National Mediation Board. The IAM subsequently agreed to an October 2007 Company proposed wage increase for mechanics effective November 1, 2007. In the meantime the federal court in Minnesota denied the Company’s motion for an injunction against mediated bargaining. The Company has appealed both the Minnesota and Colorado federal court rulings.
On December 5, 2007, the Company’s mechanics and maintenance clerks’ representatives submitted an Application for Investigation of Representation Dispute to the National Mediation Board seeking to decertify the IAM as their union representatives. The application is currently being investigated by the National Mediation Board. The litigation in the Minnesota and Colorado federal district courts and the related appeals to the 8th and 10th Circuit federal appellate courts have been stayed pending the outcome of the National Mediation Board investigation and any ensuing union representative decertification vote.
The Company is a party to other ongoing legal claims and assertions arising in the ordinary course of business. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company’s shareholders during the year ended December 31, 2007.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock is traded under the symbol “GLUX.OB” on the Over-the-Counter Bulletin Board (the OTCBB). The following table sets forth the range of high and low sale prices for the Company’s Common Stock for each of the fiscal quarters for the past two years as reported on the OTCBB. These prices represent inter-dealer prices without adjustments for mark-up, mark-down, or commission and do not necessarily reflect actual transactions.
As of March 3, 2008, the Company had approximately 319 record holders of its Common Stock.
The transfer agent for the Company’s Common Stock is Wells Fargo Bank Minnesota, N.A., 161 North Concord Exchange, South St. Paul, Minnesota 55075-0738, telephone: (651) 450-4064.
The Company has not paid any dividends on its Common Stock since its initial public offering in January 1994. The Company expects that, for the foreseeable future, it will follow a policy of retaining earnings in order to finance the continued development of its business. Payment of dividends is within the discretion of the Company’s Board of Directors and will depend, among other factors, upon the earnings, capital requirements, operating and financial condition of the Company, and any applicable restrictive debt and lease covenants. Under its March 9, 2007 Amended and Restated Restructuring Agreement with Raytheon, the Company has agreed not to pay dividends. There were no sales of unregistered securities of the Company during the fiscal year ended December 31, 2007.
See Item 12 with respect to securities authorized for issuance under equity compensation plans.
Item 6.
Item 6. SELECTED FINANCIAL AND OPERATING DATA
The following statement of operations and balance sheet data as of, and for each of, the years in the five-year period ended December 31, 2007 are derived from the Company’s financial statements. The financial statements for the years ended December 31, 2007, 2006, 2005, 2004, and 2003 have been audited by KPMG LLP. The financial statements as of December 31, 2007 and 2006, and for each of the years in the three-year
period ended December 31, 2007, and the report thereon, are included elsewhere in this Form 10-K. The following selected financial data should be read in conjunction with, and are qualified in their entirety by, the financial statements and the notes thereto included elsewhere in this Form 10-K.
(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” 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) “Break-even passenger load factor” represents the percentage of available seat miles that must be flown by revenue passengers at the average yield (net of commissions and fees) for airline operations to break even.
(5) “Average yield per revenue passenger mile” represents the average passenger revenue received for each mile a revenue passenger is carried.
(6) “Revenue per available seat mile” represents the average total operating revenue received for each available seat mile.
(7) “Operating cost per available seat mile” represents operating expenses divided by available seat miles.
(8) “Average passenger fare” represents passenger revenue divided by the number of revenue passengers carried.
(9) “Average passenger trip length” represents revenue passenger miles divided by the number of revenue passengers carried.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The discussion and analysis throughout this report contains certain forward-looking terminology such as “believes,” “anticipates,” “will,” and “intends” or comparable terminology. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Potential purchasers of the Company’s securities are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by the cautions and risks described herein. See “Forward-Looking Statements” at the front of this report.
The Company began providing air charter service in 1979, and has provided scheduled passenger service in the Upper Midwest since 1981. The Company operates under its own name and as a code sharing partner with both United and Frontier Airlines. As of March 30, 2008, the Company is providing passenger service to 46 airports in twelve states.
Results of Operations
(dollars in thousands)
Comparison of 2007 to 2006
Passenger Revenues. Passenger revenues and revenue passenger miles increased 17.3% and 18.8%, respectively, from 2006. The increase in passenger revenues was largely due to the 18.8% increase in revenue passenger miles as a result of a 14.7% increase in revenue passengers carried. Reducing this affect, average yield per revenue passenger mile decreased 1.1%.
Public Service Revenues. Public service revenues earned through the Essential Air Service program increased 1.2% to $24.1 million in 2007, as compared to $23.9 million in 2006. The increase in public service revenues was attributable to changes in estimates relating to prior periods and rate changes on existing routes along with changes in the cities served, which was partially offset by a net decrease of one community served by the Company under the Essential Air Service Program.
Other Revenues. Other revenues decreased 43.4% to $0.7 million in 2007. This decrease was mainly due to termination of rental income from the lease of two Beechcraft 1900D aircraft in 2006. This decrease was partially offset by an increase in cargo revenue.
Operating Expenses. Total operating expenses increased 11.2%, or $8.8 million, from the previous year. However, operating expenses per ASM decreased from 27.8 cents in 2006 to 27.5 cents in 2007.
Salaries, wages, and benefits increased 7.2% to $22.5 million, which was primarily attributable to Company-wide increases in staffing levels and hours worked as a result of a 12.4% increase in ASMs and 10.6% increase in departures flown during 2007. The average number of pilots and other employees increased in 2007 compared to 2006 by 2.9% and 5.7%, respectively.
Aircraft fuel expense was $24.9 million, or 7.8 cents per ASM, in 2007, an increase of $5.4 million. In comparison, the Company’s aircraft fuel expense for 2006 was $19.5 million, or 6.9 cents per ASM. The average cost of fuel increased from $2.42 per gallon in 2006 to $2.76 per gallon in 2007. The effect of the $0.34 increase in cost per gallon was an increase in total cost of $2.7 million in 2007. The 27.6% increase in the Company’s aircraft fuel expense is attributable to a 13.3% increase in consumption as the result of a 12.4% increase in the Company’s available seat miles, along with a 14.1% increase in the average cost of fuel per gallon. At 2007 rates of consumption, a one cent increase or decrease in the per gallon price of fuel will increase or decrease the Company’s fuel expense by approximately $93,000 annually.
Aircraft maintenance, materials, and component repair expense increased 19.0% to $13.8 million. The 2007 increase in aircraft maintenance expense was primarily attributable to a one time reduction in 2006 of $0.7 million related to the restructuring of the FMP contract, $1.2 million in heavy maintenance checks and $0.2 million in Embraer Brasilia Model 120 engine overhauls. Overall, the cost per ASM for aircraft maintenance, excluding labor, increased to 4.3 cents in 2007, as compared to 4.1 cents in 2006.
Depreciation and amortization expense was $5.6 million during 2007, which was at approximately the same level as 2006.
Aircraft rental expense was $0.6 million during 2007, a decrease of 62.8% from $1.7 million during 2006. The reduction was primarily attributable to the reduced monthly rental payments for the two aircraft leased from Boeing.
Other rentals and landing fees decreased 7.5% to $4.2 million in 2007 from $4.6 million in 2006. The decrease in other rentals and landing fees expenses is mostly attributable to a reduction in costs at Denver International Airport.
Other operating expenses increased 8.4% in 2007 to $16.0 million, from $14.7 million in 2006. The increase in other operating expenses is primarily due to an increase of approximately $0.3 million in pilot training and associated lodging expenses as a result of an increase in the ASMs. Other increases include approximately $0.2 million for passenger booking fees, $0.4 million for deicing, $0.3 million for legal and professional fees and $0.3 million from increased operations. These increases were offset by reductions of hull and liability insurances of $0.3 million.
Interest Expense. Interest expense decreased 34.5% to $2.3 million in 2007, from $3.5 million in 2006. The decrease was primarily the result of non-recurring penalty interest expense in 2006 and lower fixed interest rates on reduced principal balances. These decreases were partially offset by a reduction in the SFAS No. 15 credits in interest expense related to the 2002 restructured Raytheon debt.
Gain on Extinguishment of Debt and Deferred Leases. During 2007, the Company recognized a $0.4 million gain on the settlement and extinguishment of debt on previously leased Embraer Brasilia aircraft from FINOVA. In 2006, the Company recognized a $8.9 million gain on the extinguishment of Boeing past due lease payments and contractual payments associated with the lease, a $1.1 million gain on the extinguishment of CIT debt and a $0.4 million gain on the extinguishment of FINOVA deferred lease payments.
Income Tax benefit (expense). Until the fourth quarter of 2007, the Company had recorded a valuation allowance to fully reserve its net deferred tax assets. In the fourth quarter of 2007, the Company determined that it is more likely than not that the Company will be able to utilize most of its net operating loss carryforwards prior to their expiration and other deferred tax assets as they reverse. As a result, the Company released most of its deferred tax asset valuation allowance and recorded a $10.5 million income tax benefit on the Company’s income statement which represents the difference between the $10.7 million deferred tax benefit and $0.2 million of alternative minimum tax. As of December 31, 2007, the Company has approximately $66.5 million of Federal net operating loss carryforwards, which will be available to offset future taxable income. A valuation allowance of $500,000 remains at December 31, 2007 for state net operating loss carryforwards that may not be recovered.
Comparison of 2006 to 2005
Passenger Revenues. Passenger revenues and revenue passenger miles increased 17.2% and 12.3%, respectively, from 2005. The increase in passenger revenues was largely due to the 12.3% increase in revenue passenger miles as a result of a 13.8% increase in revenue passengers carried. In addition, average yield per revenue passenger mile increased 4.2%.
Public Service Revenues. Public service revenues earned through the Essential Air Service program increased 9.1% to $23.9 million in 2006, as compared to $21.9 million in 2005. The increase in public service revenues was attributable to an increase in the number of subsidized communities served by the Company. Service was added in three communities, which was partially offset by a subsidy decrease resulting from service discontinued in one community.
Other Revenues. Other revenues increased 5.6% to $1.3 million in 2006. This increase was mainly due to increased cargo, charter and maintenance labor income.
Operating Expenses. Total operating expenses increased 7.8%, or $5.7 million, from the previous year. Operating expenses per ASM increased from 26.1 cents in 2005 to 27.8 cents in 2006.
Salaries, wages, and benefits increased 3.5% to $21.0 million, which was primarily attributable to Company-wide increases in staffing levels and hours worked. The average number of pilots and other employees increased in 2006 compared to 2005 by 5.0% and 3.4%, respectively.
Aircraft fuel expense increased 15.2% in 2006, even though fuel consumption increased 0.3%. The increase in fuel expense was a result of rising fuel costs in 2006. The Company’s average fuel cost per gallon increased 14.1% to $2.42 in 2006. Fuel costs contributed 6.04 cents and 6.89 cents to cost per ASM in 2005 and 2006 respectively. The effect of increased fuel costs contributed an incremental 0.85 cents to cost per ASM in 2006.
Aircraft maintenance, materials, and component repair expense increased 8.2% to $11.6 million. The increase in aircraft maintenance expense was primarily attributable the $1.2 million increase in heavy maintenance checks, $0.3 million in Embraer Brasilia Model 120 engine overhauls and $0.2 million in propeller overhauls performed in 2006 over 2005. These increases were partially offset by reduction of $0.7 million related to the restructuring of the FMP contract. Overall, the cost per ASM for aircraft maintenance increased to 4.1 cents in 2006, as compared 3.8 cents in 2005.
Depreciation expense decreased 9.1% to $5.7 million in 2006, from $6.3 million in 2005. The decrease was primarily attributable to the return of five surplus Beechcraft 1900D aircraft to Raytheon during 2005.
Other rentals and landing fees increased 12.9% in 2006. The increase occurred primarily because the Company received a lower reimbursement of the annual rate adjustments from Denver International Airport than the reimbursement it received during 2005, along with adjustments of rates on landing fees.
Other operating expenses increased 11.6% in 2006 to $14.7 million, from $13.2 million in 2005. The increase in other operating expenses is primarily due to an increase of approximately $0.3 million in pilot training and associated lodging expenses as a result of an increase in the number of pilots. Other increases include approximately $0.3 million for passenger booking fees, $0.2 million for legal and professional fees, $0.2 million from increased operations and increases resulting from 2005 reductions from credits for insurance audits of $0.3 million and contract handling credits of $0.2 million.
Interest Expense. Interest expense increased 13.4% to $3.5 million in 2006, from $3.1 million in 2005. The increase was primarily the result of reduced SFAS No. 15 amortization of $0.7 million on Raytheon restructured debt.
Income Tax benefit (expense). In 2005 and 2006 the realization of any income tax benefits from the Company’s loss carry forward position was substantially in doubt. The $115,000 of expense was the result of 2006 estimated alternative minimum tax of $60,000 and 2005 final alternative minimum tax return amount booked in 2006 of $55,000.
Gain on Disposal of Assets and Gain on Extinguishment of Debt. In 2006, the Company recognized a $8.9 million gain on the extinguishment of Boeing past due lease payments and contractual payments associated with the lease, a $1.1 million gain on the extinguishment of CIT debt and a $0.4 million gain on the extinguishment of FINOVA deferred lease payments. In 2005, the Company recognized gains on extinguishment of debt in the amount of $0.6 million as a result of the return of five debt-financed Beechcraft 1900D aircraft and $0.5 million gain on the sale of two spare Pratt & Whitney PT6A-67D engines.
Liquidity and Capital Resources
The Company recognized net income of $19.2 million for the year 2007 including a $10.5 million income tax benefit. Cash of $8.1 million was generated from operating activities and was the primary source of funds used to make $6.0 million in payments on notes payable and long-term debt.
Our liquidity depends to a large extent on the number of passengers who fly with us, the fares they pay, the rate and amount of EAS subsidy we receive, our operating and capital expenditures, our financing activities, and the cost of fuel.
We had cash and cash equivalents of $4.0 million and $2.7 million at December 31, 2007 and December 31, 2006, respectively. At December 31, 2007, total current assets were $19,639,202 as compared to $15,863,849 of total current liabilities, resulting in working capital of $3,775,353. At December 31, 2006, total current assets were $12,269,755 as compared to $15,731,942 of total current liabilities, resulting in negative working capital of $3,462,187. The increase in our working capital from December 31, 2006 to December 31, 2007 is largely a result of cash generated from operations and refinancing activities undertaken by the Company in 2006 and 2007. For further information on our financing plans, activities and commitments, see “Contractual Obligations” and “Raytheon Refinance Activities” below.
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2007 was $8,097,334 as compared to $6,808,067 for the year ended December 31, 2006. The increase in operating cash flows was primarily due to an increase in the number of passenger enplanements, an increase in passenger fares and incremental public service revenue.
Investing Activities. Net cash used in investing activities for the year ended December 31, 2007 was $709,300. Capital expenditures of $884,300 for the year ended December 31, 2007 included the purchase of flight equipment and other property and equipment. We received $175,000 primarily from the sale of a spare engine which was obsolete to the Company’s fleet
Net cash used in investing activities for the year ended December 31, 2006 was $594,142. Capital expenditures were $594,142 for the year ended December 31, 2006 and included the purchase of flight equipment and other property and equipment.
Financing Activities. Net cash used in financing activities for the year ended December 31, 2007 was $6,007,346. During the year ended December 31, 2007, we paid $6,029,571 of repayment of notes payable and long-term debt and we received proceeds of $22,225 from the sale of common stock.
Cash used in financing activities for the year ended December 31, 2006 was $5,457,225. During the year ended December 31, 2006, we paid $5,547,225 of repayment of notes payable and long-term debt.
Other Items That Impact Our Liquidity
Our liquidity position is impacted by our maintenance and fuel costs. For further information on our maintenance and fuel costs, see “Management’s Discussion and Analysis of Financial Position - Overview” above.
We continue to assess our liquidity position in light of our other capital requirements, the economy, our competition, and other uncertainties surrounding the airline industry. We intend to continue to examine other transactions as necessary to support our capital and operating needs. For further information on our financing plans, activities and commitments, see “Contractual Obligations” and “Raytheon Refinance Activities” below.
We cannot predict future trends or predict whether current trends and conditions will continue. Our future liquidity and capital resources may be impacted by many factors, including those described as “Risk Factors” in Item 1A of this report.
Raytheon Refinance Activity
On March 9, 2007 the Company and Raytheon entered into the Amended Agreement, which, amended and restated the 2002 Restructuring Agreement. Pursuant to the Amended Agreement, the Company issued to Raytheon 25 amended and restated promissory notes (the Aircraft Notes), each secured by an amended security agreement in the related aircraft. The Aircraft Notes replace the existing notes issued by the Company to Raytheon on December 31, 2002. Each of the Aircraft Notes has an original principal amount of $2,116,573.70, for a total amount of $52,914,343, bears interest at a fixed rate of 6.75% per annum, and provides for monthly payment in arrears starting on March 30, 2007. The Aircraft Notes mature on June 30, 2011. Outstanding balances on each note call for a principal payment of $1,306,675 per Aircraft Note for a total balloon payment of $32,666,875 at June 30, 2011. The fixed rate of 6.75% on the Aircraft Notes represents a significant reduction in interest expense and eliminates variable interest rate risk on all of the Company’s aircraft debt.
Under the Amended Agreement, the Company issued to Raytheon a promissory note (the “Senior Note”) that replaces the existing senior note and subordinated note issued by the Company to Raytheon on December 31, 2002. The Senior Note has an original principal amount of $13,174,754.62 and bears interest at a rate of 7.00%. Interest on the Senior Note is payable monthly in arrears on the last day of each month, commencing on March 30, 2007.
Beginning with the calendar quarter ending June 30, 2007, the Senior Note will provide for quarterly payments of principal on June 30, September 30 and December 30 each year until the note matures on December 30, 2015. As additional security for the Senior Note, the Company pledged four Embraer Brasalia aircraft; as well as, all other assets of the Company.
The Amended Agreement requires the Company to prepay amounts outstanding under the Company’s notes held by Raytheon in an amount equal to 70% of the “excess cash” for any fiscal year. “Excess cash” means as at the end of any fiscal year an amount equal to (i) the sum of the Company’s cash, cash equivalents and short term instruments, minus (ii) a minimum of $3,000,000 plus 4% of the difference between current and prior year revenue. On January 30, 2008 the company was required to make a mandatory cash payment to Raytheon in the amount of approximately $427,000. In conjunction with the mandatory cash payment of $427,000, the Company made a voluntary cash payment of approximately $138,000 which was applied to the prepayment of the remaining balance on the variable rate engine note totaling $565,045.
At December 31, 2006, the Raytheon notes consisted of 25 aircraft promissory notes and three long-term notes payable. Twenty-five of the promissory notes ($57.6 million at December 31, 2006) required payments of approximately $25,500 per month, with interest accruing on unpaid balances at the rate of LIBOR plus 375 basis points per annum. Each of these 25 promissory notes was to mature on December 31, 2012. During 2006, the Company made principal payments of $2.3 million on the Aircraft Debt. In addition the Company made payments of interest in the amount of $4.5 million. At December 31, 2006, outstanding principal amount of the Aircraft Debt was $50.9 million, while the carrying value of the Aircraft Debt on the Company’s books was $57.6 million. During 2006, amortization of the SFAS No. 15 amount on the Company’s books reduced principal by $2.1 million. At December 31, 2006, the Company was in arrears on payments of principal and interest for the aircraft debt in the amount of $12.5 million and was not in compliance with certain other financial covenants contained in the 2002 Restructuring Agreement. Of the three long-term notes payable, the first note payable ($5.9 million at December 31, 2005) required quarterly payments of principal and interest beginning in 2005, at which time payments of principal and interest in the amount of $362,000 was due and payable quarterly. Interest accrued on the unpaid balance of the first note payable at the rate of 8.25% per annum, and the note was to mature on December 31, 2009. The second note payable ($6.0 million at December 31, 2006) required payments beginning in 2006, at which time payments of interest ranging in amounts from $41,000 to $44,000 were due and payable quarterly. Interest accrued on the unpaid balances of the second note payable at the rate of 6% per annum. The second note payable was to mature on September 30, 2007, at which time all outstanding amounts under the note would have been due and payable. The third note payable ($1.0 million at December 31, 2006) requires monthly payments of principal in the amount of $37,500 plus interest beginning January 31, 2004 at which time payments of principal and interest would be due and payable monthly. Interest would accrue on the unpaid balance of the third note payable at the rate of LIBOR plus 400 basis points per annum. This third note payable was paid in full on January 30, 2008. The termination of this note leaves the Company with no variable interest rate risk.
Other Financing
Boeing Capital Corporation. On December 20, 2006, the Company and Boeing Capital Corporation (Boeing) entered into a Settlement Agreement and Lease Amendment that discharged the Company’s obligations for defaulted rent and other payments due to Boeing under lease agreements for two Embraer aircraft. The total discharged payment defaults were $10,067,097. Simultaneously, the Company paid Boeing a lump sum of $1,150,000 and a maintenance rent payment for two aircraft engines. The lease was amended to: (i) reduce the monthly rental payments for each aircraft; (ii) require the Company to pay “maintenance rent,” which will be reimbursable upon completion of certain maintenance events; and (iii) remove the Company’s option to purchase the aircraft at the end of the April 2013 lease term at the aircraft’s then fair market value. The total discharged deferred lease payments were $8.3 million and total discharge including accrued interest and penalties resulted in a gain for 2006 of $10.1 million. The Settlement Agreement and Lease Amendment cured all existing defaults with Boeing.
CIT. On September 28, 2006, the Company extinguished its debt obligation with CIT Aerospace (CIT) by making a cash payment of $2.1 million. During the first nine months of 2006, the Company made total payments of principal and interest on the CIT debt obligation in the amount of $2.7 million. As a result of the extinguishment of debt with CIT, the Company has realized a one-time gain of $1.1 million in the quarter ended September 30, 2006.
FINOVA. The Company entered into a settlement agreement with FINOVA Capital Corporation (FINOVA) on October 20, 2006 after returning two Embraer Brasilia aircraft. The terms of the agreement allowed for a reduction in the balance of the outstanding lease obligations and accrued penalty interest from $1.4 million to $0.85 million, for which the Company entered into a promissory note payable in 45 equal monthly installments of $22,342, including interest, with the first payment being made October 31, 2006. In accordance with the provisions of SFAS No. 15, the Company recorded the FINOVA debt in the amount of $1.0 million. The Company prepaid the debt in the third quarter of 2007 at a discounted rate. As a result the Company recorded a gain of approximately $412,000.
Contractual Obligations
The following table summarizes the Company’s major contractual payment obligations as of December 31, 2007:
(1) On January 30, 2008 the Raytheon Engine Note was prepaid in the amount of $565,045 consisting of $560,854 of principal and $4,192 of accrued interest.
See Item 7A
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks
The Company is susceptible to certain risks related to changes in the cost of aircraft fuel and changes in interest rates. As of December 31, 2007, the Company did not have any derivative financial instruments.
Aircraft Fuel
Due to the airline industry’s dependency on aircraft fuel for operations, airline operators, including the Company are substantially impacted by changes in aircraft fuel prices. Aircraft fuel represented approximately 28.4% of the Company’s operating expenses in 2007. A one-cent change in the average cost of aircraft fuel would impact the Company’s aircraft fuel expense by approximately $93,000 annually, based on fuel consumption in 2007.
Interest Rates
The Company’s operations are very capital intensive because the vast majority of the Company’s assets consist of flight equipment, which is financed primarily with long-term debt. As a result, the degree of the Company’s exposure to the market risk that is associated with changes in interest rates is directly related to the Company’s outstanding debt obligations. The Company’s cash flow had been negatively impacted by increases in interest rates because a significant portion of the Company’s long-term debt was financed with variable interest rates. Increases in interest rates also negatively impacted the fair value of the Company’s debt obligations that carried fixed rates of interest. The new notes bear interest at a fixed rate; therefore, at December 31, 2007, all but $0.6 million of the Company’s long-term debt was financed with fixed interest rates. The variable rate note was paid in full in January 2008, leaving only the fixed rate debt. See Note 7 to the Financial Statements.
Due to the amortization of the SFAS No. 15 amounts on the Company’s restructured debt obligations to Raytheon, the Company’s recorded interest expense will be significantly less than the contractual interest expense throughout the terms of the Raytheon notes. During 2007, the Company’s contractual interest expense for all long-term debt obligations was $4.5 million. In accordance with procedures set forth in SFAS No. 15, the Company amortized $1.8 million of the SFAS No. 15 balances. As a result, the Company’s net interest expense on long-term debt obligations, as reflected on the financial statements, was $2.3 million, net of interest income of $0.4 million for the year ended December 31, 2007.
The projected contractual interest expense on the Company’s long-term obligations (based on the interest rate stated in the debt instruments and December 31, 2007 rate for variable rate debt) for the next five years and thereafter is as follows:
(1) Subsequent to December 31, 2007, the variable rate note was paid in full.
In comparison, after applying the amortization of the SFAS No. 15 amounts against the Company’s contractual interest expense, the Company’s reportable interest expense using SFAS No. 15 for long-term obligation that is due in the five subsequent years and thereafter is estimated to be as follows:
(1) Subsequent to December 31, 2007, the variable rate note was paid in full.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company as of December 31, 2007, 2006 and 2005, together with the Report of the Independent Registered Public Accounting Firm, are included in this Form 10-K on the pages indicated below.
Supporting schedules are omitted because they are inapplicable, not required, or the information is presented in the financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Great Lakes Aviation, Ltd.:
We have audited the accompanying balance sheets of Great Lakes Aviation, Ltd. (the Company) as of December 31, 2007 and 2006, and the related statements of income, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Great Lakes Aviation, Ltd. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, effective January 1, 2007, and effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment.
/s/ KPMG LLP
Denver, Colorado
March 31, 2008
GREAT LAKES AVIATION, LTD.
Balance Sheets
December 31, 2007 and 2006
See accompanying notes to financial statements.
GREAT LAKES AVIATION, LTD.
Statements of Income
Years Ended December 31, 2007, 2006, and 2005
See accompanying notes to financial statements.
GREAT LAKES AVIATION, LTD.
Statements of Stockholders’ Equity (Deficit)
Years Ended December 31, 2007, 2006, and 2005
See accompanying notes to financial statements.
GREAT LAKES AVIATION, LTD.
Statements of Cash Flows
Years Ended December 31, 2007, 2006, and 2005
(1)
The March 9, 2007, Amended and Restated Restructuring Agreement between the Company and Raytheon included the conversion of accrued interest on the aircraft, senior and subordinated notes to debt in 2006.
(2)
The Company entered into a promissory note payable with FINOVA in exchange for a reduction in the balance of the outstanding lease obligations and accrued penalty interest in 2006.
See accompanying notes to financial statements.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31,
1) Business
Great Lakes Aviation, Ltd. (Great Lakes or the Company) is a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United Air Lines or United) and Frontier Airlines, Inc. (Frontier Airlines or Frontier). Effective May 1, 2001, the Company and United entered into a code share agreement, which expired on December 31, 2005. The Company and United continued to operate under the terms of their agreement, which expired on December 31, 2005, while they negotiated an ongoing agreement. Effective November 1, 2007, the Company and United amended the terms of their code share agreement to be extended until November 1, 2010. Other terms of the amendment provide for the Company to implement United Air Lines code sharing for destinations the Company currently services to and from Albuquerque, NM, Denver, CO, Kansas City, MO and Phoenix, AZ hubs. The Company is also working on establishing a Las Vegas, NV hub.
On May 3, 2001, the Company entered into a similar code share agreement with Frontier. However, the Frontier agreement does not have a fixed termination date but is terminable 180 days after written notice by either party.
Approximately 40%, 45%, and 46% of the Company’s passenger traffic during 2007, 2006, and 2005, respectively, were generated from Great Lakes’ passengers that connected with United flights utilizing the United code share product line.
In 2007, the Company derived approximately 25% of its total revenue from services provided under the Essential Air Service program administered by the United States Department of Transportation.
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.
As of December 31, 2007, the Company served twelve states with 32 destinations to and from Denver, Colorado, four destinations to and from Phoenix, Arizona, five destinations to and from St. Louis, Missouri, five destinations to and from Kansas City, Missouri and two destinations to and from Albuquerque, New Mexico.
(2) Subsequent Event
The Engine Note with Raytheon Aircraft Credit Corporation (Raytheon) in the amount of $560,882, which was scheduled to mature on March 31, 2009, was paid in full on January 30, 2008.
(3) Summary of Significant Accounting Policies and Procedures
(a) Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(b) Cash and cash equivalents. Cash and cash equivalents include highly liquid investments with original maturities of three months or less that are readily convertible into cash. Cash equivalents are not subject to significant risk from fluctuations in interest rates and as a result, the carrying amount of cash equivalents approximates fair value. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of sound financial condition, and in high quality and relatively risk-free investment products. Our cash investment policy limits the concentration of investments with specific financial institutions or among certain products and includes criteria related to credit worthiness of any particular financial institution.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
(c) Liability Accruals and Reserves. The Company is obligated under various agreements relating to employee health and welfare, injuries, tax and fee remittances, and other contractual matters, some of which involve estimates of the ultimate amounts due and impacts of insurance coverages. Changes in the estimates and assumptions could occur and would result in actual results being different than those estimated.
(d) Accounts Receivable. Substantially all accounts receivable balances are due from various airlines, credit card companies, or the United States government. Approximately 31%, 20%, and 40%, respectively, of the December 31, 2007 receivable balances, and 23%, 24% and 34%, respectively, of the December 31, 2006 receivable balances, are due from various airlines, credit card companies, and the United States government, respectively. All receivables are pledged as collateral securing the Company’s debt agreements.
(e) Inventories. Inventories consist of expendable spare parts, fuel, materials, and supplies relating to flight equipment. Inventories are stated at the lower of average cost (which approximates FIFO) or market. Expendable parts are charged to maintenance expense as used. Inventories consisting of expendable spare parts and equipment are pledged as collateral securing the Raytheon notes.
(f) Property and Equipment. Property and equipment includes aircraft and major parts relating to such aircraft. Property is stated at cost and depreciated on a straight-line basis for financial reporting purposes over estimated useful lives of 10 to 20 years for flight equipment and 3 to 10 years for other property and equipment. The estimated lives used to record depreciation on the Company’s aircraft may be affected by the volume of passenger traffic, fare levels, technology, policies regarding EAS subsidies promulgated by the DOT, and changes in strategy by the Company. In accounting for long-lived assets, we make estimates about the expected useful lives, projected residual values, and the potential for impairment. Estimates of useful lives and residual values of aircraft are based on actual industry experience with the same or similar aircraft types and anticipated utilization of the aircraft. Changing market prices of new and used aircraft, government regulations, and changes in our maintenance program or operations could result in changes to these estimates. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the asset. Accelerated methods of depreciation are used for tax reporting purposes. All owned aircraft are pledged as collateral securing the Raytheon notes.
(g) Impairment of Long Lived Assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, long-lived assets, such as property, plant, equipment, and aircraft, subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
(h) Other Assets. Other assets consist primarily of deposits with financial institutions, bonding companies, facilities lessors, and others to secure the payment of fixed obligations. Deposits related to long-term facility leases were $1.1 million and $1.0 million at December 31, 2007 and 2006, respectively.
(i) Revenue Recognition. Passenger, cargo, and other revenues are recorded as income either when the respective services are rendered or when the time for use of the ticket has expired, one year after the date of issuance, and are net of excise taxes, passenger facility charges and security fees. Unused tickets issued by the Company are recorded in the accompanying balance sheets as unearned revenue. The Company also receives public service subsidy revenues for providing air service to certain communities that do not generate sufficient traffic to fully support profitable air service. Public service subsidy revenues are recorded by the Company during the period in which the agreed on air service is furnished by the Company
With respect to closed EAS subsidy terms, while the Company continues to service the market, the Company records revenues based on rates that were approved by the Department of Transportation (DOT) during the term of the award.
(j) Code Share Relationships. At December 31, 2007, the Company operated under code share agreements with United Air Lines and Frontier Airlines. The Company also participates in United’s “Mileage Plus” frequent flyer program. The Company’s code share agreement with United Air Lines expired on December 31, 2005. The Company and United continued to operate under the terms of their agreement, which expired on December 31, 2005, while they negotiated an ongoing agreement. Effective November 1, 2007, the Company and United amended the terms of their code share agreement to be extended until November 1, 2010. Other terms of the amendment provide for the Company to implement United Air Lines code sharing for destinations the Company currently services to and from Albuquerque, NM, Denver, CO, Kansas City, MO and Phoenix, AZ hubs, as well as Las Vegas, NV hub when it should become operational. On May 3, 2001, the Company entered into a similar code share agreement with Frontier Airlines. However, the Frontier Airlines agreement does not have a fixed termination date but is terminable 180 days after written notice by either party. Passenger revenue under the code share agreements is recognized at the time services are rendered.
(k) Income Taxes. The Company accounts for income taxes using the asset and liability method. Under that method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax basis of existing assets and liabilities and net operating losses and tax credit carryforwards. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized. The effect on deferred taxes from a change in tax rates is recognized in income in the period that includes the enactment date.
(l) Income Per Share. Basic income per share has been computed by dividing the net income for a particular year by the weighted average number of shares of common stock outstanding during such year. Diluted earnings per share reflects the potential dilution of securities that could share in earnings.
(m) Reclassifications. Certain prior year amounts have been reclassified to conform to the present year presentation.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
(n) Stock Option Plans. Prior to January 1, 2006, the Company accounted for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Effective January 1, 2006, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method. Under the modified prospective transition method, compensation cost is recognized in the financial statements beginning with the effective date based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), for all unvested awards granted prior to the effective date of SFAS 123R. Results for prior periods are not restated using the modified prospective transition method.
Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123 for the year ended December 31, 2005, the Company’s net income and net income per share would have been adjusted as indicated below:
(o) Aircraft Maintenance. The Company operates under an FAA-approved continuous inspection and maintenance program. The Company accounts for maintenance activities on the direct expense method. Under this method, major airframe overhaul maintenance costs are recognized as expense as maintenance services are performed. Routine maintenance and repairs are charged to operations as incurred. Major Beechcraft 1900D engine maintenance is performed under a long-term contract which includes monthly payments that are established to recognize costs ratably over the term of the contract based upon actual usage of the engines.
Maintenance and repairs, including periodic aircraft overhauls, are expensed as incurred or when the component is placed in service. Major modifications that extend the life or improve the usefulness of aircraft are capitalized and depreciated over their estimated useful life.
(p) Fair Value of Financial Instruments. Fair value estimates, methods, and assumptions of financial instruments are set forth below:
Cash, accounts receivable, accounts payable, and accrued liabilities. The carrying amount approximates fair value because of the short-term nature of these instruments.
Long-term debt. Based on the Company’s concentration of long-term debt with one aircraft creditor, who is also a significant stockholder of the company, the fair value of long-term debt was not reasonably determinable.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
(q) Recent Accounting Pronouncements. In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). This statement permits all entities to elect to measure eligible financial instruments at fair value on a recurring basis. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and may not be applied retrospectively to prior fiscal years. The Company has not yet determined the impact of adopting FAS 159.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure about fair value measurements. This pronouncement applies to other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In December of 2007, the FASB agreed to a one year deferral of SFAS No. 157’s fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The Company has not yet determined the impact of adopting FAS 157.
(4) Accounts Receivable
The following represents the additions and deletions to the Company’s accounts receivable reserves for doubtful accounts during 2007, 2006, and 2005.
(5) Leases
Aircraft Leases
At December 31, 2007 and 2006 the Company operated two leased Embraer Brasilia Model 120 aircraft, which are accounted for under an operating lease agreement. In addition to scheduled future minimum lease payments, the Company is required to make supplemental rent payments to cover the cost of major scheduled maintenance overhauls of these aircraft and are reimbursable to the Company at the time maintenance overhauls are completed. These supplemental rentals are based on the number of flight hours flown and/or flight departures and are included in maintenance expense. The lease agreements require the Company to pay taxes, maintenance, insurance, and other operating expenses applicable to the leased property. During the years ended December 31, 2007, 2006 and 2005 supplemental rent payments were $497,778, $240,370 and $0 respectively.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
Other Leases
The Company leases office and hangar space, spare engines and office equipment for its headquarters, reservation facilities, airport facilities, and certain other equipment. The Company also leases certain airport gate facilities on a month-to-month basis.
At December 31, 2007, commitments under non-cancelable operating leases (excluding aircraft supplemental rent requirements) with terms in excess of one year were as follows:
The Company leases two Embraer Brasilia Model 120 aircraft from Boeing. At December 31, 2005, the Company was in arrears on its aircraft rental obligations under these leases in the amount of $7.3 million. The Company had also recorded a liability to Boeing in the amount of $1.3 million for accrued penalty interest on the missed lease payments. On December 20, 2006, the Company and Boeing entered into a Settlement Agreement that discharged the Company’s obligations for defaulted rent payments due to Boeing under lease agreements for these aircraft. The total discharged rental payments and penalty interest, that had accrued as of November 30, 2006, was $10,067,097. Simultaneously, the Company paid Boeing a lump sum of $1,150,000 and a maintenance payment for two aircraft engines. The lease was amended to: (i) reduce the monthly rental payments for each aircraft; (ii) require the Company to pay “maintenance rent,” which will be reimbursable upon completion of certain maintenance events; and (iii) remove the Company’s option to purchase the aircraft at the end of the April 2013 lease term at the aircrafts’ then fair market value. The lease agreements require the Company to pay taxes, maintenance, insurance, and other operating expenses applicable to the leased property. During the years ended December 31, 2007, 2006 and 2005 “maintenance rent” rent payments were $497,778, $240,370 and $0, respectively.
In November 2002, the Company entered into a Deferral Agreement with FINOVA with respect to a leased Embraer Brasilia aircraft, whereby the Company agreed to pay reduced lease payments through the end of the aircraft lease. The lease terminated on November 1, 2003, and the Company returned the aircraft in January 2004. The Company was responsible for costs of repair and refurbishment in order to satisfy the required aircraft return conditions. Accordingly, in 2004, the Company recognized a liability of $0.2 million for such expenditures. As of December 31, 2005, the Company had accrued lease payments, together with accrued penalty interest, in the amount of $1.3 million. On October 20, 2006, the Company entered into a settlement agreement with FINOVA. See Note (7) for a further discussion of the terms of the agreement.
Rental expense under operating leases, including month-to-month leases, for the years ended December 31, 2007, 2006 and 2005 was $2.6 million, $2.5 million, and $2.5 million, respectively.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
(6) Accrued Liabilities.
Accrued liabilities consisted of the following balances at December 31, 2007 and 2006:
At December 31, 2007, accrued property taxes decreased $295,496 as a result of timing of invoices received accordingly, accrued property taxes for 2007 were included in accounts payable.
(7) Notes Payable and Long-Term Debt
The following table sets forth, as of December 31, 2007 and December 31, 2006, the amounts of the Company’s long-term debt, the amounts of current maturities of long-term debt and the additional amounts of current and long-term debt recorded by the Company pursuant to SFAS No. 15:
A. The Raytheon Aircraft Credit Corporation (Raytheon) debt consists of 25 Aircraft Notes secured by Beechcraft model 1900D aircraft, a Senior Note secured by four Embraer Brasilia EMB 120 aircraft and all the assets of the Company, and an Engine Note which is unsecured. On March 9, 2007, the Company and Raytheon Aircraft Credit Corporation (Raytheon) entered into an Amended and Restated Restructuring Agreement (the Amended Agreement), which amends and restates in its entirety the Restructuring Agreement between the Company and Raytheon dated as of December 31, 2002, (the 2002 Restructuring Agreement). Pursuant to the Amended Agreement, the Company issued to Raytheon 25 amended and restated promissory notes (the Aircraft Notes), each secured by an amended security agreement in the related aircraft. The Aircraft Notes replace the existing notes issued by the Company to Raytheon on December 31, 2002. Each of the Aircraft Notes has an original principal amount of $2.2 million, for a total amount of $52.9 million, bears interest at a fixed rate of 6.75% per annum, and provides for monthly payments in arrears starting on March 30, 2007. The Aircraft Notes mature
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
on June 30, 2011, at which time a final payment of $1.3 million will be due for each aircraft. The fixed rate of 6.75% on the Aircraft Notes represents a significant reduction in interest expense and eliminates variable interest rate risk on all of the Company’s aircraft debt.
Under the Amended Agreement, the Company issued to Raytheon a promissory note (the Senior Note) that replaced both the existing senior note and subordinated note issued by the Company to Raytheon on December 31, 2002. The Senior Note has an original principal amount of $13.2 million and bears interest at a rate of 7.00% per annum. Interest on the Senior Note is payable monthly in arrears on the last day of each month, commencing on March 30, 2007. Beginning with the calendar quarter ending June 30, 2007, the Senior Note provides for quarterly payments of principal on June 30, September 30, and December 30 each year until the note matures on December 30, 2015. As additional security for the Senior Note, the Company pledged four Embraer Brasalia aircraft; as well as, all other assets of the Company.
Under the Amended Agreement, the Company did not amend the Engine Note, (0.6 million at December 31, 2007) required monthly payments of principal in the amount of $37,500 plus interest beginning January 31, 2004 at which time payments of principal and interest will be due and payable monthly. Interest will accrue on the unpaid balance of the Engine Note payable at the rate of LIBOR plus 400 basis points per annum. The Engine Note was to mature on March 31, 2009, but was subsequently prepaid on January 30, 2008.
The Amended Agreement requires the Company to prepay amounts outstanding under the Company’s notes held by Raytheon in an amount equal to 70% of the “excess cash” for any fiscal year. “Excess cash” means as at the end of any fiscal year an amount equal to (i) the sum of the Company’s cash, cash equivalents and short term instruments, minus (ii) a minimum of $3,000,000 plus 4% of the difference between current and prior year revenue. On January 30, 2008 the company was required to make a mandatory cash payment to Raytheon in the amount of approximately $427,000. In conjunction with the mandatory cash payment of $427,000, the Company made a voluntary cash payment of approximately $138,000 which was applied to the prepayment of the remaining balance on the variable rate engine note totaling $560,882.
The Amended Agreement restated the terms of the notes; therefore, at December 31, 2006, the carrying amounts of the Raytheon notes consisted of 25 aircraft promissory notes and two long-term notes payable.
At December 31, 2006, the Company was in arrears on payments of principal and interest in the amount of $12.5 million, which included interest on the Aircraft Debt in the amount of $2.8 million. In accordance with FASB Statement of Financial Accounting Standards No. 6 (FAS 6), Classification of Short Term Obligations Expected to be Refinanced, the amount of long-term debt that would otherwise be due after one year would have been reflected on the Company’s balance sheet as long-term obligations classified as current. Since the Company had entered into the Amended Agreement on March 9, 2007, with Raytheon Aircraft Credit Corporation (Raytheon), before the financial statements were issued, the amounts had been reclassified to non-current at December 31, 2006.
B. In August 2002, the Company entered into a Settlement Agreement with FINOVA, whereby the Company agreed to pay to FINOVA a total of $0.7 million, with interest at 10%, over a period of 48 months in settlement of amounts owed by the Company on the return of one leased Embraer Brasilia aircraft. This note was fully paid in 2006.
On April 27, 2007, the Company and FINOVA amended the September 30, 2006 promissory note payable to FINOVA which had originally provided for 45 consecutive monthly payments of $22,342 ending June 30, 2010. The amended note provided for continued scheduled monthly payments of
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
$22,342 through June 30, 2007 followed by three consecutive monthly payments of $130,747 commencing July 30, 2007 through September 30, 2007. The note has been paid in full and all debt owing under the note forgiven. The Company recorded a gain of approximately $412,000 as a result of this forgiveness of debt in the third quarter when the debt was extinguished.
The amount of long-term debt also includes additional amounts of debt recorded pursuant to the provisions of the SFAS No. 15. This additional debt is being amortized as a reduction of interest expense over the remaining term of the debt. Due to the amortization of the SFAS No. 15 amounts on the Company’s restructured debt obligations to Raytheon, the Company’s interest expense will be significantly less than the contractual interest expense throughout the terms of the Raytheon notes. During 2007, the Company’s contractual interest expense for all long-term debt obligations was $4.6 million. In accordance with procedures set forth in SFAS No. 15, the Company amortized $1.9 million of the SFAS No. 15 balances during 2007. As a result, the Company’s net interest expense on long-term debt obligations, as reflected in the financial statements, net of interest income, was $2.3 million, $3.5 million and $3.1 million on December 31, 2007, December 31, 2006 and December 31, 2005, respectively.
Reduction of Debt Balances.
As of December 31, 2007, the long-term debt obligations due in the five subsequent years and thereafter under their contractual terms were as follows:
The 2008 and 2009 maturities include $450,000 and $110,882, respectively for the engine note with Raytheon in accordance with the note’s contractual terms, however the Company repaid the note in full during January 2008.
(8) Income Taxes
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The tax net operating loss carryforwards (NOL’s) that have been generated are due in large part to the accelerated depreciation of property and equipment over a shorter useful life for tax purposes. Approximately eighty-five percent of our NOL’s expire between 2020 and 2024. Additionally, our book basis property and equipment is approximately $54 million larger than our tax basis, and is expected to reverse during periods in
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
which we have NOL’s available. Approximately $1.3 million ($500,000 tax effected) of our state NOL’s are expected to expire unused and accordingly we have a valuation allowance. Based upon the projections for future taxable income over the periods in which the deferred tax assets become deductible, we believe it is more likely than not that we will realize the benefits of most of our deductible temporary differences and NOL’s. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
The Company believes that over any cumulative three-year period the stock ownership percentages (by value) of “5-percent shareholders” (as such term is defined in Internal Revenue Code Section 382) have not increased, in the aggregate, by more than 50 percentage points over such shareholders’ lowest ownership percentages within any such cumulative three-year period. Accordingly, the Company believes that the Company’s ability to use its estimated net operating loss carry forwards is not subject to any annual limitations set forth in Internal revenue Code Section 382. Any future changes in stock ownership by one or more 5-percent shareholders could potentially subject the Company to such annual limitations.
A deferred income tax asset valuation allowance is established when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. After reducing the deferred income tax assets by the valuation allowance, the net deferred income tax assets represent the income tax benefits that are expected to be realized. The Company does not anticipate future taxable income from the forgiveness of debt for purposes of reducing an otherwise required valuation allowance. Until the fourth quarter of 2007, the Company had recorded a valuation allowance to fully reserve its net deferred tax assets. In the fourth quarter of 2007, the Company determined that it is more likely than not that the Company will be able to utilize most of its net operating loss carryforwards prior to their expiration and utilize its deferred tax assets as they reverse. As a result, the company released most of its deferred tax asset valuation allowance and recorded a $10.5 million income tax benefit on the Company’s 2007 income statement. The Company has approximately $66.5 million of federal net operating loss carryforwards, which will be available to offset future taxable income. A valuation allowance of $500,000 remains at December 31, 2007 for the deferred tax asset related to state net operating loss carryforwards that may not be recovered.
Income tax expense (benefit) for the years ended December 31, 2007, 2006 and 2005 is presented below:
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
Current tax expense in 2007 and 2006 $154,881 and $115,115 respectively represents alternative minimum tax expenses. The federal statutory tax rate differs from the Company’s effective income tax rate for the years ended December 31, 2007, 2006, and 2005 as follows:
Deferred tax assets (liabilities) as of December 31, 2007 and 2006 were as follows (in thousands):
The Company files income tax returns in the U.S., and various state and local jurisdictions. The Company is not currently under examination by the IRS, tax returns remain subject to examination for 3 years after a tax net operating loss is utilized. State jurisdictions also remain subject to examination. The Company believes there will not be any material changes in unrecognized tax positions over the next twelve months.
The Company believes that its income tax filing positions and deductions related to tax periods subject to examination will be sustained upon audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48.
The Company has estimated net operating loss carry forwards for federal income tax purposes in a total amount of approximately $66.5 million at December 31, 2007, expiring in years from 2009 through 2026. The net change in the total valuation allowance for the fiscal year ended December 31, 2007 was a decrease of $13.8 million, which includes the effects of adjustments relative to filed tax returns. Federal net operating losses expire in the following years (in thousands):
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
(9) Employee Benefit Plans
(a) 401(k). The Company maintains a qualified 401(k) employee savings plan for the benefit of substantially all of the Company’s employees. The Company matches up to 4% of participating employees’ contributions. Company contributions net of forfeitures totaled $219,857 in 2007, $178,541 in 2006, and $65,570 in 2005.
(b) Stock Option Plans. In 1993, the Company adopted the Great Lakes Aviation, Ltd. 1993 Stock Option Plan and the Great Lakes Aviation, Ltd. 1993 Director Stock Option Plan (collectively, the Plans). The Plans permitted the grant of stock options in the aggregate of 1,300,000 shares of the Company’s common stock to key employees, officers, and directors of the Company. Pursuant to their terms, both Plans expired on October 31, 2003, and no options may be granted after October 31, 2003. However, all outstanding options shall remain in effect until such outstanding options have either expired or been cancelled.
Options granted under the Plans become 20% vested upon the completion of 12 continuous months of employment from the date of grant, with additional 20% vesting in each subsequent 12-month period of employment over a continuous five year period. The options expire after 10 years from the date of grant. Options are forfeited upon termination from employment for reasons other than retirement, death, or disability.
During the year ended December 31, 2007, there were no options granted, cancelled or forfeited; and 20,000 options outstanding were exercised at an average purchase price of $1.11 per share. For the year December 31, 2006, there were no options granted, cancelled, exercised or forfeited. The Company did not realize any tax deductions related to the exercise of stock options during 2007. The Company will record such deductions to additional paid in capital when realized. There are no shares available for grant under the Plans as of December 31, 2007. The aggregate intrinsic value for options outstanding and exercisable at December 31, 2007 was $968,561. There was no unrecognized compensation cost from unvested stock options as of December 31, 2007.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
A summary of the option activity under all stock option plans during the year ended December 31, 2007 is presented below:
(10) Income Per Share
The following table provides a reconciliation of the numerators and denominators of the basic and diluted income per share computations for the periods presented:
For the years ended December 31, 2007, 2006, and 2005, the number of stock options that were excluded from the calculation of diluted earnings per share, because the exercise of such options would have been anti-dilutive, totaled approximately 120,000, 120,000, and 160,000, respectively.
Under the Amended Agreement, the Company is prohibited from paying dividends.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
(11) Commitments and Contingencies
(a) Transactions with Affiliates. The Company rents 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 the various leases were $28,500 in 2007, $28,500 in 2006, and $30,700 in 2005. As of December 31, 2007 the Company had no balance payable.
As of December 31 2007, Raytheon owned 5,371,980 shares of common stock of the Company, representing an approximate 38.2% interest in the Company’s outstanding common stock.
(b) Litigation. The Company was a defendant in a lawsuit arising from a gear-up landing of one of the Company’s Beechcraft 1900D aircraft at O’Hare International Airport in Chicago, Illinois in 2001. On February 2, 2007 this matter was settled without any payment of claims by the Company.
On October 19, 2007, International Association of Machinists and Aerospace Workers (the “IAM”), the designated collective bargaining representative of the class and craft of Mechanics and Related and Clerical employees, sued the Company in Colorado federal court. The following Monday, October 22, 2007, the Company sued the IAM in Minnesota.
These lawsuits arise out of a dispute regarding whether the Company has been relieved of its Railway Labor Act obligations to bargain collectively with the IAM and to maintain the status quo until the bargaining process is exhausted. The union lawsuit seeks to require the Company to engage in mediated bargaining and to refrain from changing the terms, conditions and wages of aircraft maintenance employees. The Company lawsuit seeks to free the parties from further bargaining and to authorize unilateral action regarding maintenance employee employment.
On October 31, 2007 the Colorado federal court entered a temporary restraining order preventing the Company from increasing mechanic pay. The IAM subsequently agreed to an October 2007 Company proposed wage increase for mechanics effective November 1, 2007. Later on November 7, that court entered a preliminary injunction that prohibits unilateral action and compels the Company to participate in bargaining under the auspices of the National Mediation Board. In the meantime the federal court in Minnesota denied the Company’s motion for an injunction against mediated bargaining. The Company has appealed both the Minnesota and Colorado federal court rulings.
On December 5, 2007, the Company’s mechanics and maintenance clerks’ representatives submitted an Application for Investigation of Representation Dispute to the National Mediation Board seeking to decertify the IAM as their union representatives. The application is currently being investigated by the National Mediation Board. The litigation in the Minnesota and Colorado federal district courts and the related appeals to the 8th and 10th Circuit federal appellate courts have been stayed pending the outcome of the National Mediation Board investigation and any ensuing union representative decertification vote.
The Company is a party to other ongoing legal claims and assertions arising in the ordinary course of business. Management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
(c) Union Agreements. The Company’s pilots are represented by the International Brotherhood of Teamsters (IBT). The Company’s labor agreement with the pilots became amendable on October 30, 2000. In May 2006, the Company and the IBT agreed to binding arbitration to achieve a new three year labor agreement. On September 16, 2006, the arbitrator ruled on terms that resulted in a new labor agreement that will not become amendable until September 16, 2009.
Great Lakes Aviation, Ltd.
Notes to Financial Statements for December 31, 2007 and December 31, 2006
The Company’s mechanics and maintenance clerks are represented by the International Association of Machinists. The Company’s agreement with the mechanics became amendable on November 1, 2005, and the Company’s agreement with the maintenance clerks became amendable on March 1, 2002. Negotiations with the mechanics and maintenance clerks are active at the present time.
(12) Selected Quarterly Financial Data
The following table presents selected quarterly unaudited financial data for quarters during the year ended December 31, 2007 and 2006 (in thousands, except for per share information):
In the fourth quarter of 2007, the Company recorded a $10.5 million income tax benefit as the result of releasing its deferred tax asset valuation allowance. In the second quarter of 2007, the Company recognized gains from extinguishment of debt of $0.4 million. In the third quarter of 2006, the Company reduced maintenance expense by approximately $580,000 for estimates in the Fleet Management ProgramTM contract. In the third and fourth quarters of 2006, the Company recognized gains from extinguishment of debt and lease obligations of $1.1 million and $9.3 million respectively.
The above financial data includes normal recurring adjustments and reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of such financial data. The Company’s business is seasonal and, accordingly, interim results are not indicative of results for a full year.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements on any matters of accounting principles or financial statement disclosure between the Company and its independent auditors during the Company’s two most recent fiscal years or any subsequent interim period.
Item 9A(T).
Item 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(f)) that is designed to provide reasonable assurance that information that is required to be disclosed is accumulated and communicated to management timely. At the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be disclosed in the Company’s periodic filings with the SEC.
Management’s Annual Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. Based on this assessment, management believes that as of December 31, 2007, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the SEC to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
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.
Item 9B.
Item 9B. OTHER INFORMATION
Not applicable.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We incorporate by reference the information contained under the captions “Proposal 1 - Election of Directors,” “Our Board of Directors and Committees,” and “Section 16(a) Beneficial Reporting Compliance” in our definitive proxy statement for the 2008 annual meeting of shareholders.
Executive Officers
Pursuant to General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, information regarding the Company’s executive officers is provided in Part I of our Form 10-K under separate caption.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Company’s code of ethics satisfies the requirements of Item 406(b) of Regulation S-K. The Company’s code of ethics is posted on the Company’s web site at www.flygreatlakes.com. The Company intends to disclose any amendments to or waivers from a provision of its code of ethics that requires disclosure on its website at www.flygreatlakes.com.
Item 11.
Item 11. EXECUTIVE COMPENSATION
We incorporate by reference the information contained under the captions “Executive Compensation,” “Our Board of Directors and Committees,” “Compensation Committee Interlocks,” “and “Non-Employee Director Compensation” in our definitive proxy statement for the 2008 annual meeting of shareholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We incorporate by reference the information contained under the captions “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for the 2008 annual meeting of shareholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We incorporate by reference the information contained under the captions “Certain Relationships and Related Transactions,” and “Our Board of Directors and Committees” in our definitive proxy statement for the 2008 annual meeting of shareholders.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We incorporate by reference the information contained under the captions “Principal Accounting Fees and Services” in our definitive proxy statement for the 2008 annual meeting of shareholders.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
(1) Financial statements of the Company included in Item 8, “Financial Statements and Supplementary Data”:
(i) Report of Independent Registered Public Accounting Firm
(ii) Balance Sheets as of December 31, 2007 and 2006
(iii) Statements of Income for the Years Ended December 31, 2007, 2006 and 2005
(iv) Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2007, 2006 and 2005
(v) Statements of Cash Flows for the Years Ended December 31, 2007, 2006, and 2005
(vi) Notes to Financial Statements
Supporting schedules are omitted because they are inapplicable, not required, or the information is presented in the financial statements or notes thereto.
(2) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Exhibit Index to this Annual Report on Form 10-K (pages E-1 through E-3).
(b) An Exhibit Index is contained on page E-1.
(c) Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints Douglas G. Voss, Charles R. Howell IV, and Michael O. Matthews, and each of them individually, as his or her true and lawful agent, proxy, and attorney-in-fact, with full power of substitution and resubstitution for such individual and in such individual’s name, place, and stead, in any and all capacities, to act on, sign, and file with the Securities and Exchange Commission any and all amendments to this report together with all schedules and exhibits thereto and to take any and all actions that may be necessary or appropriate in connection therewith, and each such individual hereby approves, ratifies, and confirms all that such agents, proxies, and attorneys-in-fact, any of them, or any of his or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
E-1
(1) Incorporated by reference to the Company’s Registration Statement on Form S-1, Registration No. 33-71180.
E-2
(2) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. (File No. 0-23224)
(3) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. (File No. 0-23224)
(4) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. (File No. 0-23224)
(5) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. (File No. 0-23224)
(6) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. (File No. 0-23224)
(7) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. (File No. 0-23224)
(8) Incorporated by reference to the Company’s Current Report on Form 8-K filed December 27, 2006. (File No. 0-23224)
(9) Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. (File No. 0-23224)
(10) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. (File No. 0-23224)
E-3