GLUX Great Lakes Aviation Ltd (CE)

See accompanying notes to the financial statements.

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See accompanying notes to the financial statements.

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See accompanying notes to the financial statements.

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See accompanying notes to financial statements.

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Great Lakes Aviation, Ltd.

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Comparison of Second Quarter 2014 to Second Quarter 2013

Passenger Revenues . Passenger revenues were $8.1 million in the second quarter of 2014, a decrease of 49.6% from $16.1 million in the second quarter of 2013. The $8.0 million quarter-over-quarter decrease in passenger revenues was attributable to the curtailment of operations due to a severe shortage of available qualified pilots in combination with a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields. In the second quarter of 2014, passenger revenue of $8.1 million included nonrecurring passenger revenue of $1.7 million related nonrecurring amounts collected from another carrier. These amounts resulted from a reconciliation of the passenger revenues generated by our proration formulas with this carrier.

Public Service Revenues. Public service revenues collected through the EAS Program decreased 53.6% to $6.7 million during the second quarter of 2014, as compared to $14.4 million during the second quarter of 2013. The decrease in public service revenue was mostly due a 59.5% decrease in departures due to the industry-wide shortage of qualified pilots. At June 30, 2014 and June 30, 2013, we served 20 and 32 communities, respectively, on a subsidized basis under the EAS Program.

Other Revenues. Other revenues declined 54.9%, mainly due to decline of cargo revenues resulting from 59.5% decline in departures during the second quarter of 2014 compared to the second quarter of 2013.

Operating Expenses. Total operating expenses were $16.3 million, or 55.0 cents per ASM, in the second quarter of 2014, as compared to $29.3 million, or 32.5 cents per ASM in the second quarter of 2013.

Salaries, Wages, and Benefits . Salaries, wages, and benefits were $5.0 million in the second quarter of 2014, a decrease of 38.9% from $8.2 million in the second quarter of 2013. The decrease in salaries, wages, and benefits was mostly attributable to the decreased number of employees as a result of the decreased operations due to the industry-wide shortage of qualified pilots.

Aircraft Fuel Expense . Aircraft fuel and into-plane expense was $4.1 million, or 13.9 cents per ASM, in the second quarter of 2014. In comparison, our aircraft fuel and into-plane expense for the second quarter of 2013 was $9.2 million, or 10.3 cents per ASM. The 55.4% decrease in our aircraft fuel expense was attributable to a reduction in fuel consumption which was the result of a 67.1% decrease in ASMs.

The average cost of fuel increased from $3.54 per gallon in the second quarter of 2013 to $3.60 per gallon in the second quarter of 2014. At second quarter 2014 rates of consumption, a one-cent increase or decrease in the price per gallon of fuel will increase or decrease our fuel expense by approximately $46,000 annually.

Aircraft Maintenance, Materials, and Component Repairs . Aircraft maintenance, materials, and component repairs expense was $0.8 million during the second quarter of 2014, which was a 80.7% decrease from $4.0 million during the second quarter of 2013. The decrease was primarily attributable to the reduction of component repairs and the timing of engine overhaul expenses resulting from the reduced operations.

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

Other Rentals and Landing Fees Expense . Other rentals and landing fees decreased by $0.6 million from $1.8 million during the second quarter of 2013 to $1.2 million during the second quarter of 2014. The decrease was mainly attributable to decreased landing fees resulting from the 59.5% reduction in departures along with reduced hub rental expense.

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Other Operating Expenses . Other operating expenses were $3.6 million, or 12.1 cents per ASM during the second quarter of 2014, which was a decrease from $4.4 million, or 4.9 cents per ASM during the second quarter of 2013. The decrease was mainly attributable to decreases in passenger related expenses of $462,000, pilot related expenses of $372,000, deicing expenses of $164,000, insurance expense of $140,000, other expenses of $130,000 and employee related expenses $75,000. These were partially offset by increased legal and professional fees of $487,000.

Interest Expense . We incurred interest expense of $1.1 million in the second quarter of 2014, which was consistent with $1.1 million in the second quarter of 2013.

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

Results of Operations for the Six Months Ended June 30, 2013 and 2012

The following table sets forth certain financial information regarding our results of operations for the six months ended June 30, 2013 and 2012.

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Comparison of First Six Months 2014 to First Six Months 2013

Passenger Revenues . Passenger revenues were $15.1 million in the first six months of 2014, a decrease of 52.0% from $31.4 million in the first six months of 2013. The $16.3 million period-over-period decrease in passenger revenues was attributable to the curtailment of operations due to a severe shortage of available qualified pilots in combination with a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields. In the second quarter of 2014, passenger revenue of $8.1 million included nonrecurring passenger revenue of $1.7 million related nonrecurring amounts collected from another carrier. These amounts resulted from a reconciliation of the passenger revenues generated by our proration formulas with this carrier.

Public Service Revenues. Public service revenues collected through the EAS Program decreased 55.0% to $12.8 million during the first six months of 2014, as compared to $28.6 million during the first six months of 2013. The decrease in public service revenue was mostly due a 59.5% decrease in departures due to the industry-wide shortage of qualified pilots. At June 30, 2014 and June 30, 2013, we served 20 and 32 communities, respectively, on a subsidized basis under the EAS Program.

Other Revenues. Other revenues declined 55.9%, mainly due to decline of cargo revenues resulting from a decrease in markets we serve and a 59.5% decline in departures during the first six months of 2014 compared to the first six months of 2013.

Operating Expenses. Total operating expenses were $35.2 million, or 50.7 cents per ASM, in the first six months of 2014, as compared to $59.8 million, or 33.2 cents per ASM in the first six months of 2013.

Salaries, Wages, and Benefits . Salaries, wages, and benefits were $11.0 million in the first six months of 2014, a decrease of 35.1% from $17.0 million in the first six months of 2013. The decrease in salaries, wages, and benefits was mostly attributable to the decreased number of employees as a result of the decreased operations due to the industry-wide shortage of qualified pilots.

Aircraft Fuel Expense . Aircraft fuel and into-plane expense was $8.5 million, or 12.2 cents per ASM, in the first six months of 2014. In comparison, our aircraft fuel and into-plane expense for the first six months of 2013 was $19.2 million, or 10.7 cents per ASM. The 55.9% decrease in our aircraft fuel expense was attributable to a reduction in fuel consumption which was the result of a 61.6% decrease in ASMs.

The average cost of fuel decreased from $3.68 per gallon in the first six months of 2013 to $3.67 per gallon in the first six months of 2014. At first six months of 2014 rates of consumption, a one-cent increase or decrease in the price per gallon of fuel will increase or decrease our fuel expense by approximately $46,000 annually.

Aircraft Maintenance, Materials, and Component Repairs . Aircraft maintenance, materials, and component repairs expense was $2.6 million during the first six months of 2014, which was a 63.8% decrease from $7.3 million during the first six months of 2013. The decrease was primarily attributable to the reduction of component repairs and the timing of engine overhaul expenses resulting from the reduced operations.

Depreciation and amortization . Depreciation and amortization expense was $3.2 million during the first six months of 2014 which was consistent with $3.2 million in the first six months of 2013.

Other Rentals and Landing Fees Expense . Other rentals and landing fees decreased by $1.2 million from $3.8 million during the first six months of 2013 to $2.6 million during the first six months of 2014. The decrease was mainly attributable to decreased landing fees resulting from the 59.5% reduction in departures along with reduced hub rental expense.

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Other Operating Expenses . Other operating expenses were $7.2 million, or 10.4 cents per ASM during the first six months of 2014, which was a decrease from $9.3 million, or 5.2 cents per ASM during the first six months of 2013. The decrease was mainly attributable to decreases in pilot related expenses of $943,000, passenger related expenses of $597,000, deicing expenses of $479,000, insurance expense of $291,000, other expenses of $153,000, employee expenses of $126,000 and utilities of $77,000. These were partially offset by increased legal and professional fees of $587,000.

Interest Expense . We incurred interest expense of $2.1 million in the first six months of 2014, compared to $2.2 million in the first six months of 2013 as a result of our long-term debt.

Income Tax Expense. For the six months ended June 30, 2014, we recorded an income tax benefit of $3.4 million and for the six months ended June 30, 2013, we recorded an income tax benefit of $0.8 million. Our estimated effective federal and state income tax rate is 36.6% for the six months ended June 30, 2014.

Seasonality

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

Liquidity, Financing and Capital Resources

As a result of not being in compliance under our senior credit facility and the uncertainty of our liquidity position for the next 12 months, all borrowings (approximately $24.2 million) under our senior credit facility will be callable by the lender upon expiration of the current forbearance agreement and are classified as current maturities as of June 30, 2014. Thus, we had negative working capital of $10.5 million and a current ratio of 0.66:1 at June 30, 2014, compared to negative working capital of $4.4 million and a current ratio of 0.86:1 at December 31, 2013.

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

At June 30, 2014, our outstanding principal balance on the term loan was $15.7 million and we had borrowed $8.5 million under the revolving credit facility.

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

For the six months ending June 30, 2014, we invested $0.6 million of cash in aircraft, engines, rotable parts and other equipment, mostly represented by rotable parts acquisitions. We do not expect to acquire additional aircraft or engines in the foreseeable future.

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

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

Effective May 30, 2014, the Company entered into the Fourth Amendment and Second Forbearance to Credit Agreement (the “Forbearance Agreement”) with its Lenders. Pursuant to the Forbearance Agreement, the Lenders have agreed to temporarily forbear from exercising certain rights and remedies under the Credit Agreement. The Forbearance Termination Date is on the earliest of (i) September 15, 2014 and (ii) the date on which Great Lakes commits additional breaches under the Credit Agreement. In consideration of entering into the Forbearance Agreement, the Lenders have agreed to lend the Company up to an additional $3.0 million under our term loan and defer until maturity of the loan, an additional $2.0 million of amortization payments which were due and payable by September 30, 2014. As of July 30, 2014 the Company has borrowed an additional $2.0 million under the terms of the Forbearance Agreement and deferred a $1.0 million amortization payment payable on June 30, 2014. The Company also agreed to pay a forbearance fee of $242,000, a funding fee of $60,000, and a commitment fee of $60,000. As of July 30, 2014, an additional $1 million is available for borrowing under the term loan.

To meet our capital needs, we are considering several alternatives, including, but not limited to, additional equity financings, debt financings, and other funding transactions, including the sale or sale-leaseback of certain aircraft. Also, as announced on June 30, 2014, the Company engaged Raymond James as its investment banker with respect to new financing options and strategic alternatives. There can be, however, no assurance that we will be able to complete any such transaction on acceptable terms or otherwise.

Sources and Uses of Cash . As of June 30, 2014, our cash balance was $3.2 million. We made principal payments on term debt of $1.5 million and had additional borrowings on term debt of $1.5 million.

Cash Provided by Operating Activities . During the six months ended June 30, 2014, our cash used by operating activities was $2.8 million. During the six months we generated a net loss of $5.9 million and recorded non-cash depreciation and amortization of $3.2 million and a deferred tax benefit of $3.4 million. Other sources of cash included a reduction in accounts receivable of $1.7 million, a reduction in inventory of $1.0 million and a combined reduction in prepaid expenses, other current assets and other assets of $0.7 million. Uses of cash included $3.4 million of deferred tax benefit, a reduction in accounts payable of $0.6 million and reductions in accrued interest, unearned revenue and other liabilities of $0.1 million.

Cash Flows from Investing Activities . During the first six months of 2014, we invested $0.6 million for the purchase of replacement aircraft rotable components and other property and equipment.

Cash Flows from Financing Activities . During the first six months of 2014, we utilized $1.5 million of cash to reduce our outstanding notes payable and long-term debt balances and borrowed an additional $1.5 million under the terms of the Forbearance Agreement. Proceeds from additional borrowings, net of finance and legal fees, amounted to $1.1 million.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Great Lakes Aviation, Ltd. (Great Lakes, we, our, its, it or the Company) notes that certain statements in this Form 10-Q and elsewhere are forward-looking and provide other than historical information. Our management may also make oral, forward-looking statements from time to time. These forward-looking statements include, among others, statements concerning our general business strategies, financing decisions, and expectations for funding expenditures and operations in the future. The words “may,” “will,” “believe,” “plan,” “continue,”

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“could,” “should,” “hope,” “estimate,” “project,” “intend,” “expect,” “anticipate” and similar expressions reflected in such forward-looking statements are based on reasonable assumptions, and none of the forward-looking statements contained in this Form 10-Q or elsewhere should be relied on as predictions of future events. Such statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise, and may be incapable of being realized. The risks and uncertainties that are inherent in these forward-looking statements could cause actual results to differ materially from those expressed in or implied by these statements.

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

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

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

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

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

5) the level of regulatory and environmental costs;

6) airline industry and broader economic conditions;

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

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

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

10) competition from other airlines and ground transportation companies;

11) the volatility of fuel costs;

12) the incidence of labor disruptions or strikes;

13) our ability to retain key personnel;

14) the incidence of aircraft accidents;

15) the incidence of technological failures or attacks;

16) maintenance costs related to aging aircraft;

17) the limited market for our securities;

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

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

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

21) no expectation of dividend;

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

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