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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File No. 0-23224
GREAT LAKES AVIATION, LTD.
(Exact name of registrant as specified in its charter)
Iowa 42-1135319
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
(Address of principal executive offices)
1022 Airport Parkway, Cheyenne, WY 82001
----------------------------------------
Registrant's telephone number, including area code: (307)432-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of April 1, 2002 was approximately $3,857,195.
As of April 1, 2002, there were 8,657,651 shares of Common Stock of the
registrant issued and outstanding.
Documents Incorporated By Reference
Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K.
Document Incorporated Part of Form 10-K
- ------------------------------------------------------- -----------------
Proxy Statement for 2002 Annual Meeting of Shareholders Part III
FORM 10-K INDEX
Page
PART I........................................................................1
Item 1. BUSINESS........................................................1
Item 2. PROPERTIES......................................................8
Item 3. LEGAL PROCEEDINGS...............................................9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............9
PART II......................................................................10
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................10
Item 6. SELECTED FINANCIAL AND OPERATING DATA..........................10
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................25
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES .....................................46
PART III.....................................................................47
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............47
Item 11. EXECUTIVE COMPENSATION.........................................47
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................47
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................47
PART IV......................................................................48
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................................48
SIGNATURES...................................................................51
EXHIBIT INDEX................................................................52
i
PART I
Item 1. BUSINESS
Forward-Looking Information
In accordance with the "safe harbor" provisions of the Private Securities Reform
Act of 1995, Great Lakes Aviation, Ltd. ("Great Lakes" or the "Company") notes
that certain statements in this Form 10-K and elsewhere which are
forward-looking and which provide other than historical information, involve
risks and uncertainties that may impact the Company's results of operations.
These forward-looking statements include, among others, statements concerning
the Company's general business strategies, financing decisions, and expectations
for funding expenditures and operations in the future. When used herein, the
words, "believe," "plan," "continue," "hope," "estimate," "project," "intend,"
"expect," and similar expressions reflected in such forward-looking statements
are based on reasonable assumptions, and no statements contained in this Form
10-K should be relied upon 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
inherent in these forward-looking statements could cause actual results to
differ materially from those expressed in or implied by these statements. For a
discussion on current financial condition of the Company, see Item 7.
As more fully described below, important factors that could cause results to
differ materially from the expectations reflected in any forward-looking
statement herein include among other things: (1) the results of negotiations
with certain lessors to return unneeded aircraft and restructure Great Lakes'
financial obligations for those and other aircraft; (2) the Company's dependence
on its code-sharing relationship with United Airlines, Inc. and Frontier
Airlines, Inc.; (3) the Company's inability to pay current maturities of
existing indebtedness, and operating lease payments; (4) the effect of general
economic conditions on business and leisure travel which impacts the Company's
revenues; (5) fuel costs; (6) seasonality; (7) continued receipt of Essential
Air Service subsidies at currently contemplated rates; (8) ability to control
increased security costs; and (9) as to valuation of the Company's common stock,
the Company's noncompliance with the Nasdaq continued listing requirements.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only of the day hereof. The information
contained in this Form 10-K is believed by the Company to be accurate as of the
date hereof. Changes may occur after that date and the Company will not update
that information except as required by law in the normal course of its public
disclosure practices.
General
Great Lakes is a regional airline that began providing scheduled passenger
service under its own marketing identity on October 12, 1981. On April 26, 1992
the Company began operating a large portion of its route network as a United
Express carrier. The United Express marketing program included painting of
aircraft with a United Express paint scheme, branding of station facilities and
uniforming Great Lakes customer service employees with United designated
uniforms. On February 1, 2001, the Company reached a new three year code share
agreement with United (the "United Code Share Agreement") that authorized the
return of aircraft, station signage and customer service personnel to the Great
Lakes market identity. The United Code Share Agreement was implemented in phases
beginning on May 1, 2001. Over the course of 2001, significant monies were
invested by the Company in returning to Great Lakes market identity. The United
Code Share Agreement authorizes the Company to enter into similar code share
agreements with other airlines. The Company negotiated a code share agreement
with Frontier Airlines, Inc. which was signed on May 3, 2001 and implemented in
phases beginning on July 7, 2001. Under the terms of the Company's new code
share agreements, schedules are published to enable its customers easy booking
and purchasing of time efficient schedules. Customers that travel to and from
only the hubs (Denver, Chicago O'Hare, Minneapolis and Phoenix) purchase tickets
that are 100% Great Lakes product.
At March 1, 2002, the Company served 35 destinations in 10 states to and from
Denver as code sharing partners with both United and Frontier. It also served 5
destinations in 3 states to and from Chicago, 6 destinations in 3 states to and
from Minneapolis and 3 destinations in 3 states to and from Phoenix.
1
As of December 31, 2001, the Company's fleet consisted of 40 Beechcraft Model
1900D 19-passenger aircraft and eight Embraer Model 120 30-passenger aircraft.
The Company also has four Beechcraft Model 1900C aircraft that are used
exclusively for freight operations. As more fully explained below, certain of
these aircraft are currently in excess of Company requirements, and negotiations
are underway to return them to their lessors. The Company cannot predict the
terms under which these returns will occur or their financial statement impact.
The terrorist attacks of September 11 had a significant impact on the business
of the Company. Following the attacks, the Company took immediate action to
reduce its level of operations to best serve the reduced level of passenger
traffic that was available to it. However, as was the case with most of the
airline industry, these actions were not sufficient to avoid catastrophic losses
from the initial grounding of all flights, increased expenses and substantially
reduced passenger revenues.
In response, on September 22, 2001 Congress passed the Air Transportation Safety
and Systems Stabilization Act ("Stabilization Act"). The act includes for all
U.S. airlines and air cargo carriers the following key provisions: (i) $5
billion in cash compensation, of which $4.5 billion is available to commercial
passenger airlines and is allocated based on the lessor of available seat miles
during August 2001 or the direct and incremental losses (including lost
revenues) incurred by the airline from September 11, 2001 through December 31,
2001; (ii) subject to certain conditions, the availability of up to $10 billion
in federal government guarantees of certain loans made to air carriers for which
credit is not reasonably available as determined by a newly established Air
Transportation Stabilization Board; (iii) the authority of the Secretary of
Transportation to reimburse air carriers for increases in the cost of war risk
insurance over the premium; (iv) and a $100 million limit on the liability with
respect to acts of terrorism committed within 180 days following enactment of
the Act. During 2001, Great Lakes was allocated a total of $1.9 million under
the act of which $1.6 million had been received by the end of the year.
The requirements of the commercial loans guaranteed by the federal government to
provide working capital for future operation of the airlines and for other
purposes have proven to be too restrictive to permit their use by Great Lakes.
In addition to benefits for the entire airline industry, the act also took
notice of the unique requirements of providing service to small communities by
increasing additional funding for Essential Air Service ("EAS"). Congress set
the EAS funding level at $113 million for the fiscal year ending September 30,
2002, which compares to a level of $50 million for the prior fiscal year. As a
result of these increases and the reduction of non EAS service, the Company's
EAS revenues in 2002 are expected to be approximately $30 million (33% of total
revenue) as contrasted to 19.3 million (19%) in 2001 and $14.9 million (11%) in
2000.
Due to significant losses in 2000 and 2001, the Company has exhausted its
available sources of working capital and has no financing agreements in place
under which it can secure additional funds. As more fully described below, the
Company is in arrears in its payments to substantially all the institutions
providing financing for the Company's aircraft, which has resulted in
substantially all of its long-term debt obligation being reclassed into current
liabilities as of December 31, 2001. One institution which provided lease
financing for two of the Company's aircraft has filed a complaint seeking
recovery of all scheduled payments under the leases. The Company plans to
continue to seek additional sources of working capital, negotiate settlements
with certain creditors and lessors (including the foregoing lessor of two
aircraft) to whom it expects to return its surplus aircraft and utilize funds
from the more compensatory level of EAS payments to make payments to creditors
as cash flows allow. If it is unable to generate adequate funding through a
combination of additional financing, settlements with creditors and improving
financial performance, the Company may be required to make further reductions in
operating levels and develop other mechanisms to provide sufficient operating
funds. No assurances can be made that the Company will be successful in finding
alternatives to allow it to continue as a going concern or that its creditors
won't impose conditions that result in a corporate restructuring or ceasing
operations.
2
The Company's auditors have included in their report dated April 10, 2002 on the
financial statements an explanatory paragraph to the effect that substantial
doubt exists regarding the Company's ability to continue as a going concern due
to the Company's recurring losses from operations and limited sources of
additional liquidity. See the financial statements.
United and Frontier Code Sharing Relationships
Prior to May 1, 2001, the Company had been operating scheduled passenger and
airfreight service exclusively as United Express under a cooperative marketing
agreement with United Airlines, Inc. ("United"). On February 1, 2001, the
Company and United entered into a new three-year code sharing agreement, which
became effective May 1, 2001. Under this new agreement, the Company no longer
operates under the name "United Express"; rather, it operates under its own name
but continues to use the UA code for connecting service to United points beyond
the Company's hubs. The United agreement provides for use of United's flight
designator for Great Lakes flights connecting with United flights in Denver,
Chicago, Minneapolis and Phoenix, and permits the Company to enter into code
sharing agreements with certain other carriers. The United agreement also
requires United to provide approximately $2.5 million in financial support to
Great Lakes to cover a portion of the Company's cost of returning to marketing
itself under its own identity. The Company has been utilizing the reimbursements
to offset amounts due United for prior services. As of December 31, 2001, United
was still obligated for approximately $1.5 million under this agreement. The
Company and United are currently negotiating to reduce the number of cities to
which Great Lakes will provide code sharing service as a part of United's
program to overcome the United Pilot contractual limitations to increasing the
use of Regional Jet aircraft by United's Express partners.
On May 3, 2001, The Company entered into a code sharing agreement with Frontier
Airlines, Inc. ("Frontier") which was implemented July 9, 2001. The Frontier
agreement, provides for the use of Frontier's flight designator for Great Lakes'
flights connecting with Frontier's flights in Denver. Accordingly, certain
flights to and from Denver carry both the United and Frontier designator as well
as the Great Lakes designator.
Markets
At December 31, 2001, the Company operated 87 departures daily from Denver, 12
departures daily from Chicago O'Hare, 7 departures daily from Minneapolis/St.
Paul and two departures daily from Phoenix.
Essential Air Service Program
The Airline Deregulation Act of 1978 ("The Deregulation Act") allowed airlines
great freedom to introduce, increase and generally reduce or eliminate service
to existing markets. Under the Essential Air Service Program, which is
administered by the Department of Transportation (DOT), certain communities that
received scheduled air service prior to the passage of the Deregulation Act are
guaranteed specified levels of "essential air service." The DOT may authorize
federal subsidies to compensate a carrier providing essential air service in
otherwise unprofitable or minimally profitable markets. If these subsidies are
eliminated, the Company may discontinue service to some or all of the subsidized
communities. An airline serving a community that qualifies for essential air
services is required to give the DOT advance notice before it 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. Significant fluctuations of fuel
and other costs can affect the profitability of EAS services during the two-year
term.
The DOT may request competitive proposals from other airlines at the end of the
contract period for EAS service to a particular city. Proposals, when requested,
are evaluated on, among other things, level of service provided, subsidy
requested, fitness of the applicant, and comments from the communities served.
3
In recognition of the results of the terrorist acts of September 11, and the
contractual obligation to provide a fixed level of service to EAS communities by
carriers receiving subsidies, the DOT authorized increases in subsidy rates to
recognize the reduced passenger revenues and higher level of expenses beginning
October 1, 2001. For Great Lakes, this resulted in EAS revenues of approximately
$7.5 million in the fourth quarter of 2001, up from approximately $4.3 million
under the old subsidy formulas. For 2002, EAS subsidies are expected to
approximate $30 million, up from $16.5 million that would have occurred under
the old subsidy formulas.
At December 31, 2001, the Company served 29 essential air service communities on
a subsidized basis. The Company earned $19.3 million, $14.9 million and $16.2
million in essential air service subsidies for the years ended December 31,
2001, 2000, and 1999, respectively.
Aircraft
At December 31, 2001, the Company's fleet consisted of 44 Beechcraft 1900
aircraft and eight Embraer passenger aircraft.
Forty of the Beechcraft aircraft are available for use in passenger service, and
four Beechcraft 1900 aircraft are being utilized exclusively for scheduled mail
and freight operations. The Beechcraft 1900D aircraft are pressurized, radar
equipped and offer a 300-mile per hour cruising speed for 19 passengers, plus
cargo, with a range of 850 miles. The Beechcraft 1900 aircraft is widely
regarded by airlines as an efficient and reliable aircraft for regional service.
At December 31, 2001, the Company owned 28 and leased 12 of the passenger
- -configured 1900 aircraft.
Because of the reduction of air service following the events of September 11 and
subject to further review based on recovering traffic levels, the Company
recently decided to reduce its 1900 fleet by ten of the passenger aircraft and
two of the aircraft in mail and cargo operations. As of December 31, 2001, the
Company owned 28 of its Beechcraft 1900 aircraft and leased the remaining 16
under agreements with remaining terms ranging from nine to thirteen years.
At December 31, 2001, the Brasilia aircraft were not in scheduled service but
were being used to a limited extent in charter service. Four of the Brasilia
aircraft are owned and four of these aircraft are leased under terms ranging
from 21 months to 11 years. The 30 passenger Embraer Brasilia aircraft are
equipped with advanced avionics, have restrooms, are staffed with a flight
attendant and offer a 330-mile per hour cruising speed with a range of 750
miles. It is the Company's intent to eliminate the four leased aircraft from its
fleet and place the four owned aircraft in scheduled service in May of 2002.
Elimination of the four leased Brasilia aircraft will require negotiation of
settlement agreement with the lessors covering resolution of rental payments
which are in arrears, future contractual rental payments and condition of the
aircraft when they are returned.
Great Lakes has not made scheduled debt or lease payments during 2001. Under the
debt agreements, the lender may, among other things, take possession of and sell
the aircraft which are collateral for the loans and recover any deficiency
between the total amount due the lender including interest, penalties and
expenses, and the proceeds from the sale of the assets. Similarly, the lease
agreements permit the lessors to, among other things, take back their aircraft
and sell or release the aircraft and recover the difference between the total
unpaid past and future payments due under the lease, interest and penalties and
the sale or anticipated rental stream from releasing the aircraft.
4
Summary of Aircraft
The table below shows the number and type of aircraft operated by the Company on
January 1, 2001 and December 31, 2001.
December 31, 2001
January 1, December 31, -----------------
2001 2001 Owned Leased
---------- ------------ ----- ------
Beechcraft 1900C 4 4 -- 4
Beechcraft 1900D 40 40 28 12
Embraer 120 8 8 4 4
----------- ------------ ----- ------
Total 52 52 32 20
=========== ============ ===== ======
As of December 31, 2001, the average ages of the Company's owned and leased
aircraft were 7.3 and 6.2 years, respectively. As of December 31, 2000, the
average ages of the Company's owned and leased aircraft were 6.3 and 5.2 years,
respectively.
Aircraft Debt and Leases
With the exception of debt related to three of its Brasilia aircraft, Great
Lakes has made only minor payments towards its debt and lease obligations during
the year 2001. As a result, the Company is not in compliance under its debt and
lease agreements with Raytheon Aircraft Corporation (together with its financing
affiliate, "Raytheon") and two lessors who provide two Brasilia aircraft each to
the Company. One of the lessors has filed an action in a United States District
Court to obtain payment of total amounts currently due of $0.9 million and all
rental payments which will become due in the future.
Raytheon is the Company's primary aircraft supplier and largest creditor.
Raytheon has provided financing for all of the Beech 1900 aircraft and one
Brasilia. Raytheon had also provided the Company with a $5 million working
capital line of credit and a $5 million short-term loan, both of which were
collateralized by all Beechcraft spare parts and equipment and accounts
receivable. The short-term loan was paid on January 7, 2000 from the proceeds of
a line of credit entered into with Coast Business Credit and on December 1,
2000, the Company converted the remaining balance on the working capital line to
a three-year term loan. On June 29, 2001, Great Lakes issued an 8% demand note
in the amount of $8,768,778 in payment of substantially all of the unpaid
interest, principal and lease installments that were applicable to the first six
months of 2001.
Based on its current level of operations, the Company is seeking to eliminate
from its fleet the four leased Brasilia, ten leased Beechcraft 1900D and two
leased Beechcraft 1900C aircraft, primarily by returning the aircraft and
negotiating settlements with their lessors. The Company is unable to estimate
the cost of returning the 16 aircraft to the lessors. The Company also plans to
restructure its debt obligations with Raytheon. No provision has been made in
the 2001 financial statements for any additional costs or losses (including
impairments) which may be incurred in connection with the return and settlement
of these agreements.
Maintenance
The FAA mandates periodic inspection and maintenance of commercial aircraft. The
Company performs most maintenance and inspection of its aircraft and engines
(except engine overhaul) using its own personnel. Heavy maintenance bases are
located at Cheyenne, Wyoming; Huron, South Dakota; and Grand Island, Nebraska.
Line maintenance is also performed in Denver, Colorado and at Chicago, Illinois.
The Company attempts to perform its maintenance at locations where its aircraft
are stored overnight to reduce maintenance costs and promote a higher level of
operating efficiency. Parts and supplies inventories are also maintained at
these locations to promote the mechanical dispatch reliability of the fleet. The
Company also maintains an inventory of spare
5
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.
In October 2001, Great Lakes became the first operator of Beechcraft 1900D
aircraft with Pratt & Whitney PT-67-A engines to be authorized by the FAA to
maintain its engines on an "on-condition" basis. The effect of this
authorization is to allow the Company to maintain its engines based upon
increased inspection procedures and computerized monitoring of engine conditions
rather than performing major maintenance at predetermined hard-time intervals.
The avoidance of unnecessary maintenance activity will substantially reduce the
annual cost of engine maintenance.
Slot Allocation
Under slot rules currently in effect at Chicago O'Hare, scheduled flights
operate between 2:15 P.M. and 9:14 P.M. only if an airline has obtained a slot
or slot exemption. As of December 31, 2001, the Company was utilizing eight
slots and slot exemptions allocated to it by DOT/FAA. In March 2000, Congress
passed legislation that will phase out slot rules at Chicago O'Hare by July 1,
2002. At that time, the Company will be able to schedule its arrivals and
departures without regulatory slot restrictions.
Yield Management
The Company closely monitors its inventory and pricing of available seats with a
computerized yield management system. This system enables the Company's revenue
control analysts to examine the Company's past traffic and pricing trends and to
estimate the optimal allocation of seats by fare class (the number of seats made
available for sale at various fares). The analysts then monitor each flight to
adjust seat allocations and booking levels, with the objective of maximizing the
total revenue for each flight.
Marketing
The Company's services are marketed primarily by means of listings in
computerized reservation systems and the Official Airline Guide, and through
direct contact with travel agencies and corporate travel departments. The
Company's promotional programs emphasize the Company's close affiliation with
its code sharing partners and the right of the Company's passengers to
participate in United's "Mileage Plus" frequent flyer program.
Competition
The Company competes primarily with regional and major air carriers and
automobile transportation. 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 destinations as the Company but through
different hub and spoke systems. The domestic airline industry has undergone
major structural changes since the enactment of the Deregulation Act.
Deregulation has made possible the rapid entry of competitors into the Company's
markets, and competitors are able to adjust fares rapidly to improve their
competitive position.
Almost all markets are subject to a high degree of price competition both from
established carriers and low fare jet carriers. The Company believes, however,
that its ability to compete in its market areas is strengthened by its code
sharing relationships with United, and Frontier at Denver and United at Chicago
O'Hare. In 2001 Great Lakes, United and Frontier combined carried 75.5% of the
total passengers carried at Denver. The Company competes with other airlines by
offering frequent flights, flexible schedules and competitive fares. In
addition, the Company's competitive position benefits from the large number of
participants in United's "Mileage Plus" frequent flyer program who receive
mileage credits on flights operated by Great Lakes under its own identity and on
connecting flights with United. These participants may also use their awards to
travel on Great Lakes' flights for which Great Lakes is then compensated.
6
There can be no assurance that the Company will not experience increased
competition from existing competitors or from new entrants on one or more of the
Company's routes.
Fuel
The Company has not experienced difficulty with fuel availability and expects to
continue to be able to obtain fuel in quantities sufficient to meet its future
requirements. The Company contracts directly with refiners for the purchase of
portions of its fuel. 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, would have a material impact on the
Company's future operating results. During 2001 the Company's average price of
fuel including taxes and into plane service fees was $1.25 per gallon as
compared to $1.26 in 2000 and $0.93 in 1999. At current rates of consumption, a
one cent increase or decrease in the per gallon price of fuel will increase or
decrease expense by $115,000 annually.
Employees
At the end of the year 2001, the Company had 762 full-time and 174 part-time
employees, down from 965 full-time and 323 part-time employees at the end of the
year 2000, as follows:
2001 2000
---- -----
Classification:
Pilot 219 303
Station personnel 484 582
Maintenance personnel 161 290
Administrative and clerical personnel 43 59
Flight attendants 2 18
Management 27 36
---- -----
Total employees 936 1,288
==== =====
The reduction of personnel occurred primarily in the fourth quarter of 2001
following reductions in operations, including the removal of the Brasilia fleet
from scheduled service and use only in charter service. The Company intends to
add ten additional flight attendants to support the reintroduction of four
Brasilia aircraft into scheduled service in May 2002.
The Company's pilots are represented by the International Brotherhood of
Teamsters. The agreement with the pilots became amendable October 30, 2000. The
Company's flight attendants are also represented by the International
Brotherhood of Teamsters, and the agreement with the flight attendants became
amendable April 1, 2002.
The Company's mechanic's and maintenance clerks are represented by the
International Association of Machinists ("IAM"). The mechanics agreement becomes
amendable November 1, 2005, and the maintenance clerk's agreement became
amendable March 1, 2002.
The Company believes that relations with its employees are satisfactory.
Charter and Freight Service
The Company uses its Beech and Brasilia aircraft to provide charter services to
private individuals, corporations and athletic teams. The Company also carries
freight, mail and small packages on most of its scheduled flights and has two
Beechcraft 1900C aircraft devoted to providing service under a subcontract for
carriage of mail for the US Postal Service. Revenues from its charter flights
and freight and mail deliveries were 4.1 percent, 3.8
7
percent and 4.4 percent of the Company's total revenues for the years ended
December 31, 2001, 2000 and 1999, respectively.
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, and is also subject to
regulation by the FAA with respect to certain safety related matters.
The Deregulation Act 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; to prohibit certain
pricing practices; to mandate conditions of carriage; and to make ongoing
determinations of a carrier's fitness, willingness and ability to properly and
lawfully provide air transportation. The DOT also has the power to bring
proceedings for the enforcement of its regulations under the 1958 Act, including
the assessment of civil penalties and the revocation of operating authority, and
to seek criminal sanctions.
The Company holds an air carrier-operating certificate issued by the FAA
pursuant to Part 121 of its regulations. The Company, as a commuter air carrier,
is licensed under Part 298 of the Economic Regulations of the DOT. The Company
is subject to the jurisdiction of the FAA with respect to its aircraft
maintenance and operations, including equipment, ground facilities, dispatch,
communications, training, weather observation, flight personnel and other
matters affecting air safety. To ensure compliance with its regulations, the FAA
requires airlines to obtain an operating certificate and operations
specifications for the particular aircraft and types of operations conducted by
the carrier, all of which are subject to suspension or revocation for cause.
The Company is subject to the jurisdiction of the Federal Communications
Commission regarding the use of its radio facilities. Local governments and
authorities in certain markets have adopted regulations governing various
aspects of aircraft operations, including noise abatement and 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 required by the DOT and
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 attack, 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 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 U.S.
government. The airlines and insurance industry, together with the United States
and other governments, are continuing to evaluate both the cost and options for
providing coverage of aviation insurance. 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 2. PROPERTIES
The Company leases gate and ramp facilities at 48 airports where ticketing,
passenger loading, and unloading are handled by Company personnel. Payments to
airport authorities for ground facilities are based on a number of
8
factors, including the amount of space used and flight volume. The Company also
leases aircraft hangar space for maintenance operations at four of the locations
it serves.
Effective January 1, 2000, the Company entered into a lease in Cheyenne,
Wyoming, for approximately 42,000 square feet of space for administration and
maintenance needs. In 2000 the Company constructed an additional leased facility
in Cheyenne. The facility is approximately 54,000 square feet and is used for
administrative, flight operations, and maintenance offices, maintenance and
hangar space.
The Company believes that it has adequate facilities for the conduct of its
current and planned operations.
Item 3. LEGAL PROCEEDINGS
On February 27, 2002, Finova Capital Corporation ("Finova") filed suit agains
the Company in the United States District Court for the District of Arizona. No.
Civ. 02-0362 PHX SMM. Finova alleges that the Company breached two airplane
lease agreements. Finova seeks damages, costs and attorney's fees. The Company
filed an answer to this complaint. The parties are presently engaged in
negotiations to resolve the dispute.
The Company is a also a defendant in a lawsuit arising from the collision of a
small aircraft with one of the Company's Beechcraft 1900 aircraft in Quincy,
Illinois on November 19, 1996. The collision occurred at the intersection of two
runways as the Company's aircraft was landing, and resulted in the death of all
ten passengers and the two crewmembers. The Company's insurance carrier is
providing for the Company's defense in the lawsuit and the Company believes that
all claims arising from the accident will be adequately covered by insurance.
The Company is a party to several routine pending legal proceedings, none of
which management believes are material to the Company.
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 three-month period ended December 31, 2001.
9
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded under the symbol "GLUX" on the NASDAQ
SmallCap Market. The Company's Common Stock began trading on January 19, 1994,
the date of its initial public offering. The initial public offering price of
the Company's Common Stock was $11.00 per share.
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 by Nasdaq. These prices represent inter-dealer prices without
adjustments for mark-up, mark-down or commission and do not necessarily reflect
actual transactions.
Stock Quotations High Low
-------------------- ----- ------
2001:
First quarter $2.50 $0.875
Second quarter 1.75 1.01
Third quarter 1.25 0.40
Fourth quarter 0.75 0.25
2000:
First quarter 3.00 1.75
Second quarter 2.25 1.47
Third quarter 2.00 1.06
Fourth quarter 2.25 0.63
As of April 1, 2002, the Company had approximately 1,800 holders of its Common
Stock. The closing price of its common stock on April 11, 2002, as reported by
the NASDAQ SmallCap Market was $0.778 per share. See discussion of Noncompliance
with the Nasdaq Continued Listing Requirements in Cautionary Factors.
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 and 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 upon the earnings, capital
requirements and operating and financial condition of the Company, and any
applicable restrictive debt and lease covenants, among other factors.
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, 2001 are derived from
the Company's financial statements. The financial statements for the year ended
December 31, 2001, 2000, 1999, 1998 and 1997 have been audited by KPMG LLP. The
financial statements as of December 31, 2001 and 2000 and for each of the years
in the three-year period ended December 31, 2001 and the reports 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.
The financial statements and selected data do not include any adjustments that
might result from the outcome of the uncertainty over the Company's ability to
continue as a going concern.
10
Year ended December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- --------- ---------
(In thousands, except per share and selected operating data)
Statement of Operations Data:
Passenger and public service revenues $ 97,030 126,914 122,890 108,467 81,335
Other revenues 4,410 6,676 8,480 5,565 2,455
---------- ---------- ---------- --------- ---------
Total operating revenues 101,440 133,590 131,370 114,032 83,790
---------- ---------- ---------- --------- ---------
Operating expenses:
Salaries, wages and benefits 31,124 35,162 33,037 29,106 22,091
Aircraft fuel 17,514 21,503 16,557 13,974 13,206
Aircraft repairs 15,122 17,491 17,478 9,426 7,041
Commissions 2,512 4,248 5,796 5,560 5,553
Depreciation and amortization 7,063 7,103 4,779 3,499 4,192
Aircraft rental 8,682 9,226 13,194 16,511 10,712
Other rentals and landing fees 6,363 7,808 6,504 6,375 5,443
Other operating expense 23,689 30,113 25,316 22,922 19,968
Non-recurring expenses -- -- -- 146 9,234
---------- ---------- ---------- --------- ---------
Total operating expenses 112,069 132,654 122,661 107,519 97,440
---------- ---------- ---------- --------- ---------
Operating (loss) income (10,629) 936 8,709 6,513 (13,650)
Interest expense, net 9,931 9,169 5,974 3,485 4,621
Federal grant (1,927)
Loss on sale of assets -- -- 7 191 --
---------- ---------- ---------- --------- ---------
Income (loss) before
income tax expense (18,634) (8,233) 2,728 2,837 (18,271)
Income tax expense (benefit) -- 6 -- 115 --
---------- ---------- ---------- --------- ---------
Net income (loss) $ (18,634) (8,239) 2,728 2,722 (18,271)
========== ========== ========== ========= =========
Net income (loss) per share: Basic $ (2.15) (0.95) 0.32 0.34 (2.41)
========== ========== ========== ========= =========
Net income (loss) per share: Diluted $ (2.15) (0.95) 0.29 0.34 (2.41)
========== ========== ========== ========= =========
Average number of common shares outstanding:
Basic 8,658 8,646 8,634 7,925 7,589
========== ========== ========== ========= =========
Average number of common shares outstanding:
Diluted 8,658 8,646 9,336 8,703 7,589
========== ========== ========== ========= =========
Balance Sheet Data:
Working capital (deficit) $(121,820) (10,366) (3,112) (3,025) (5,595)
Total assets 132,111 143,179 148,876 72,281 63,758
Long-term debt, net of current maturities 4,727 96,054 98,701 28,471 28,471
Stockholders' equity (deficit) (18,496) 130 8,619 5,850 1,127
Selected Operating Data:
Available seat miles (000s) (1) 428,707 525,872 526,095 489,213 438,272
Revenue passenger miles (000s) (2) 200,536 265,589 265,733 250,098 202,689
Revenue passengers carried 811,217 1,117,576 1,057,798 873,186 676,015
Departures flown 102,379 126,770 133,423 122,278 102,722
Passenger load factor (3) 46.8% 50.5% 50.5% 51.1% 46.2%
Break-even passenger load factor (4) 58.0% 52.9% 49.1% 49.3% 59.5%
Average yield per revenue passenger mile (5) 38.8(cent) 42.2(cent) 40.1(cent) 37.4(cent) 37.1(cent)
Operating cost per available seat mile (6) 26.1(cent) 25.2(cent) 23.3(cent) 22.0(cent) 22.2(cent)
Average passenger fare (7) $ 95.87 100.25 100.83 107.26 111.25
Average passenger trip length (miles) (8) 247 238 251 286 300
Aircraft in service (end of period) 52 52 52 53 47
Destinations served (end of period) 48 57 67 71 51
11
(1) "Available seat miles" or "ASMs" represent the number of seats available
for passengers in scheduled flights multiplied by the number of scheduled
miles those seats are flown.
(2) "Revenue passenger miles" or "RPMs" represent the number of miles flown by
revenue passengers.
(3) "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles by
available seat miles.
(4) "Break-even passenger load factor" represents the percentage of available
seat miles which 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) "Operating cost per available seat mile" represents operating expenses
divided by available seat miles.
(7) "Average passenger fare" represents passenger revenue divided by the number
of revenue passengers carried.
(8) "Average passenger trip length" represents revenue passenger miles divided
by the number of revenue passengers carried.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The discussion and analysis throughout this filing 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 and
in other reports filed by the Company with the Securities and Exchange
Commission. See Liquidity and Capital Resources for discussion of the Company's
financial condition.
The Company began providing air charter service in 1979, and has provided
scheduled passenger service in the Upper Midwest since 1981. Beginning in April
1992, the Company operated as a United Express carrier under a cooperative
marketing agreement with United, which terminated on April 30, 2001. The Company
now operates under its own name and as a code sharing partners with United and
Frontier. As of March 1, 2002 the Company provided passenger service to 48
airports in fifteen states with 7,578 scheduled departures each week.
12
Results of Operations
For the years ended December 31
-----------------------------------------------------------------------------------
(Dollars in thousands)
2001 2000 1999
---------------------------------- ------------------------------- ---------------
Cents % Increase Cents % Increase Cents
Per (decrease) Per (decrease) Per
Amount ASM from 2000 Amount ASM from 1999 Amount ASM
-------- ----- ---------- -------- ----- ----------- ------- -----
Operating revenues
Passenger $ 77,753 (30.6)% 112,037 5.0% 106,661
Public service 19,276 29.6 14,877 (8.3) 16,229
Other 4,410 (33.9) 6,676 (21.3) 8,480
--------- ------ -------- ------ --------
Total operating revenues 101,439 (24.1) 133,590 1.7 131,370
--------- ------ -------- ------ --------
Salaries, wages and benefits 31,124 7.3(cent) (11.5) 35,162 6.7(cent) 6.4 33,037 6.3(cent)
Aircraft fuel 17,514 4.1 (18.6) 21,503 4.1 29.9 16,557 3.1
Aircraft maintenance materials
and component repairs 15,122 3.6 (13.5) 17,491 3.3 0.1 17,478 3.3
Commissions 2,512 0.6 (40.9) 4,248 0.8 (26.7) 5,796 1.1
Depreciation and amortization 7,063 1.6 (0.6) 7,103 1.4 48.6 4,779 0.9
Aircraft rental 8,682 2.0 (5.9) 9,226 1.8 (30.1) 13,194 2.5
Other rentals and landing fees 6,363 1.5 (18.5) 7,808 1.5 20.0 6,504 1.2
Other operating expense 23,689 5.5 (21.3) 30,113 5.7 18.9 25,316 4.8
--------- ----- ------ -------- ------ ------ -------- -----
Total operating expenses 112,069 26.1(cent) (15.5)% 132,654 25.2(cent) (8.1)% 122,661 23.3(cent)
--------- ----- ------ -------- ------ ------ -------- -----
Operating income (loss) $(10,630) -- -- 936 -- -- 8,709 --
========= ===== ====== ======== ====== ====== ======== ======
Interest 9,931 2.4(cent) 8.3% 9,169 1.7(cent) 53.5% 5,974 1.1(cent)
========= ===== ====== ======== ===== ====== ======== ======
Increase (decrease) Increase (decrease)
2001 from 2000 2000 from 1999 1999
------- ------------------ ------- ------------------- -------
Available Seat Miles (000s) 428,707 (18.5)% 525,872 -- 526,095
Revenue Passenger Miles (000s) 200,536 (24.5)% 265,589 (0.1)% 265,733
Passenger Load Factor 46.8% (7.3)% 50.5% -- 50.5%
Average Yield per Revenue
Passenger Mile 38.8(cent) 8.1% 42.2(cent) 5.2% 40.1(cent)
Cost per ASM 26.1(cent) 3.6% 25.2(cent) 8.2% 23.3(cent)
13
Comparison of 2001 to 2000
Passenger Revenues: Passenger revenues and revenue passenger miles decreased
30.6% and 24.5% respectively, from 2000. As the Company continued to shift its
operational focus to the Denver hub, service was discontinued at a total of ten
cities serving Chicago O'Hare Airport by the end of the second quarter of 2001.
Service was also discontinued at Meigs Lakefront Airport in Chicago during the
month of August 2001. These closings resulted in a 47% reduction in total
departures for the Chicago market. The closing of service to and from these
cities contributed to a reduction in yield as the traffic mix was primarily
business oriented. The suspension of air service following the terrorist acts of
September 11th, and a subsequent 39% decrease in passengers flown during the
fourth quarter of 2001 as compared to the first and second quarters further
contributed to the decline in revenue for 2001.
Public Service Revenues: Public service revenues collected through the Essential
Air Service program increased 29.6% in 2001 compared to 2000. While EAS service
was discontinued at Mattoon, Illinois; Ottumwa, Iowa; and Yankton, South Dakota;
service was added at Page, Arizona and Moab and Vernal, Utah. The Company
further negotiated and became eligible to collect subsidy for service to Pierre,
South Dakota.
As a result of the September 11th terrorist acts, the Department of
Transportation, in Order number 2002-2-13, entitled "Order Authorizing Emergency
Essential Air Service Payments," made provisions for an immediate increase in
all subsidized rates effective retroactively to October 1, 2001. This order also
began the process of renegotiating all of the Company's subsidy contracts as of
October 1, 2001, to recognize the effects of the September 11th attacks on
airline operations - specifically higher insurance costs and lower passenger
revenues. These renegotiated rates will then supersede the interim rates through
the normal end of the contract period. Negotiations had also been completed for
10 of the 29 EAS cities the Company currently serves.
Other Revenues: Other revenues declined 33.9% in 2001. Freight revenue decreased
as a result of reduced capacity and increased security requirements governing
the acceptance of air freight following the September 11th terrorist acts.
Charter revenues were down as a result of the cancellation of various university
charters following the highly publicized fatal accident in January, 2001,
involving another charter operator and the Oklahoma State University basketball
team These revenue losses were partially offset by an increase in December,
2001, of the per pound rate paid by the U.S. Postal Service for mail carried on
the Company's air mail routes.
Operating Expenses: Total operating expenses decreased 15.5%, or $20.6 million
in 2001 compared to 2000. Cost per ASM increased 3.5% over 2000 to 26.1 cents
per ASM. The suspension of service following the September 11th terrorist acts
and the ensuing reduced schedule had a significant impact upon direct operating
costs.
Salaries, wages, and benefits decreased $4.0 million from 2000 as a result of
employee furloughs, pay reductions, and pay freezes following the September 11th
terrorist acts.
Aircraft fuel expense was down 18.6% in 2001 on flat average fuel costs of $1.25
per gallon. Overall consumption was down 18.2% in 2001 as a result of reduced
flying.
Aircraft maintenance, materials, and repairs showed a 13.5% decrease in 2001
from an overall reduction in flights year over year and the reduction of
utilization of the Company's aircraft.
Commissions were down 40.9% in 2001 because of a corresponding decrease in
passenger revenue, further reductions in the number of tickets purchased through
travel agencies, and continuing decreases in commission rates.
14
Depreciation and amortization and aircraft rental expenses were largely flat due
to the Company's aircraft fleet composition remaining unchanged from 2000.
Other rentals and landing fees decreased 18.5% in 2001 with no net change in
cost per ASM. Other rentals including terminal facilities expense at various
airports decreased as a result of the discontinuation of service in 15 markets.
Landing fees were reduced in conjunction with a corresponding decrease in total
landings.
Other operating expenses decreased 21.3% from 2000 representing a 0.2 cent per
ASM reduction in cost. The reduction was largely the result of the termination
of the United Airlines / United Express marketing agreement and its associated
franchise and marketing fees. Ongoing cost cutting efforts further contributed
to the reduction in expenses.
The Company recognized a grant of $1.9 million from the Air Transportation
Safety and System Stabilization Act, passed by Congress and signed into law by
the President on September 22, 2001.
Income Tax Expense (benefit): The realization of any benefits remains
substantially in doubt as the Company continues in its loss carry forward
position.
Comparison of 2000 to 1999
Passenger Revenues: Passenger revenues increased 5.0% from 1999 as a result of a
similar increase in yield per revenue passenger mile. This increase was produced
by fare increases instituted to recover the higher cost of fuel. However,
passenger traffic and revenue passenger miles remained flat between the two
years as a result of a shift in flying from longer stage length markets such as
Denver to Bismark, North Dakota and Sioux Falls, South Dakota to shorter stage
length markets such as Denver to Santa Fe, New Mexico and Gillette, Wyoming and
during the third quarter, disruptions and cancellations of United connecting
flights. Further, yield increases in 2000 were reduced from what they otherwise
would have been as a result of discount fares in the third and fourth quarters
instituted by United to regain market share lost during their schedule
disruptions.
Public Service Revenues: Reduced public service revenues resulted from
discontinuance of subsidized service to Fairmont, Minnesota, Goodland and
Greatbend, Kansas, and Lamar, Colorado.
Other Revenues: The decline in other revenues resulted from the discontinuation
of ground handling of certain other airlines.
Operating Expenses: Total operating expenses increased $10.0 million, or 8.1% to
$132.7 million, or 25.2 cents per ASM, in 2000 from $122.7 million, or 23.3
cents per ASM in 1999. The largest factor in the increase is increasing fuel
costs of $4.9 million in 2000, as described below.
Salaries, wages, and benefits expense increased $35.1 million to 6.7 cents per
ASM during 2000, from 6.3 cents per ASM during 1999, primarily as a result of
higher labor rates under the union agreements with the Company's mechanics and
flight crews.
Aircraft fuel expense increased $4.9 million in 2000, due to an increase in the
averageprice per gallon to $1.26 per gallon in 2000 from $.93 per gallon in
1999, or an increase of 35.5% per gallon.
Other rentals and landing fee expenses increased $1.3 million, or 20.0% to 1.5
cents per ASM during 2000, from 1.2 cents per ASM in 1999 primarily as a result
of increased activity at the Denver Hub.
Other operating expenses increased $4.8 million, or 19.0% to 5.7 cents per ASM
in 2000 from 4.8 cents in 1999, reflecting higher general and administrative,
marketing and communications costs.
15
Interest expense increased $3.2 million in 2000, primarily as a result of the
purchase in July 1999 of 22 additional aircraft that had previously been
financed as operating leases.
Income Tax Expense (benefit): No income tax benefit was recorded for 2000 due to
the fact that the Company is in a loss carry forward position and that the
realization of any benefits of such are substantially in doubt. The Company
incurred $6 thousand of state income tax expense in 2000.
Liquidity and Capital Resources
The Company suffered substantial losses during the fourth quarter of 2001 and
the year 2002. These losses produced a significant reduction in liquidity, and
the Company made only minor payments on the majority of its debt and lease
obligations during 2002. As a result, the Company is not in compliance on debt
obligations totaling $104,906,000 and in arrears on lease payment obligations of
$5,622,000. Although no formal action has been taken, the debt agreements allow
the lender to take action to collect the total amount of the debt. Therefore,
the amount of the debt which by its terms would otherwise be due after one year
is shown as long-term obligations classified as current. No provision has been
made in the 2001 financial statements for any additional costs or losses
(including impairments) which may be incurred in connection with the return and
settlement of these agreements.
The Company's ability to continue as a going concern depends upon its ability to
rapidly increase profitability and cash flow and/or obtain new sources of
financing to pay its obligations as they come due, upon maintaining adequate
liquidity, and achieving sustained profitability. The accompanying financial
statements have been prepared on a going concern basis which assumes continuity
of operations and realization of assets and liabilities in the ordinary course
of business. The financial statements do not include any adjustments that might
result if the Company was forced to discontinue its operations.
The Company's auditors have included in their report dated April 10, 2002 on the
financial statements an explanatory paragraph to the effect that substantial
doubt exists regarding the Company's ability to continue as a going concern due
to the Company's recurring losses from operations and limited sources of
additional liquidity. See the financial statements.
The terrorist attacks of September 11 brought about an immediate reduction of
passenger traffic as well as additional costs. The Company adjusted its level of
operations to better match the available traffic along with retiming its
schedules to align them with United's reduced capacity at Denver and Chicago.
Due to the recent losses arising before and after September 11, the Company has
exhausted its available sources of working capital and has no financing
agreements in place under which it can secure additional funds. As more fully
described below, the Company is in arrears in its payments to substantially all
the institutions providing financing for the Company's aircraft. One institution
which provided lease financing for two of the Company's aircraft has filed a
complaint seeking recovery of all scheduled payments under the leases. The
Company plans to continue to seek additional sources of working capital,
negotiate settlements with certain creditors and lessors and utilize funds from
the more compensatory level of EAS payments to make payments to creditors as
cash flows allow. If it is unable to generate adequate funding through a
combination of additional financing, settlements with creditors and improving
financial performance, the Company may be required to make further reduction in
operating levels and develop other mechanisms to provide sufficient operating
funds.
The Company has no agreements currently under which it could secure additional
funds. However, the Company has accelerated its cash flow by selling increasing
numbers of tickets on its own ticket stock and accelerating its collections from
other sources which in turn has reduced collateral available to support further
loans. Offsetting this acceleration is a requirement by credit card processors
to retain substantial amounts of the cash due Great Lakes in order to offset any
losses which might occur if Great Lakes were to fail to continue to provide
passenger air service. All of the aircraft and spare parts are pledged to secure
obligations. Accordingly, the Company does not have sufficient unencumbered
assets to obtain either a standard or government guaranteed loan. The Company
plans to seek additional outside debt and equity financing to the extent that
operations improve and it can demonstrate its creditworthiness on a cash flow
rather than collateral basis.
In order to improve its financial performance, the Company has reduced the
number of flights to attempt to match the lower level of traffic demand,
instituted an aggressive cost control program and focused the Company's
schedules on EAS routes where subsidies may offset reduced passenger service.
16
Essential Air Service: The DOT also recognized the change in economics as a
result of September 11 for carriers providing service to Essential Air Service
cities and ordered the renegotiation of all subsidy contracts retroactive to
October 1, 2001. DOT Order 2002-2-13 provides for the adjustment of subsidy
payments to recognize lower levels of passenger revenues and compensate carriers
for higher levels of costs such as insurance and security.
Contracts with the DOT for providing Essential Air Service, while nominally
permitting a 5% margin on costs, have usually been negotiated against an overall
program funding limitation by Congress which resulted in carriers accepting a
subsidy rate that historically was not fully compensatory. With the enactment of
the Air Transportation Safety and System Stabilization Act and associated
increased funding, Congress appropriated a total of $113 million in order to
compensate EAS carriers for their total increased costs, including those
resulting from September 11. This compares to an EAS subsidy level of $50
million for the federal fiscal year which ended September 30, 2001. Subsidy
amounts at higher levels as well as retroactive increases began to be paid
during March 2002. On an overall basis, the Company was receiving EAS subsidies
at an annual rate of approximately $16.5 million before September 11 and will
receive over $7 million for the fourth quarter of 2001. The Company currently
anticipates receiving approximately $30 million of EAS subsidies in 2002 to
compensate it for service it provides to small cities. This is an annual
increase of approximately $14 million or 88% increase for the currently flown
EAS route structure.
Debt and Leases: On January 7, 2000, the Company entered into an agreement with
Coast Business Credit to provide the Company with a $20 million revolving credit
facility, collateralized by accounts receivable. The maximum borrowings
available to the Company is based upon the amount of receivables available to
collateralize the amount being borrowed. At closing, $5 million of proceeds were
used to reduce short-term notes due to Raytheon.
The agreement with Coast Business Credit ("Coast") contains a covenant which
requires the Company to maintain a specific balance of tangible net worth. At
December 31, 2001 and 2000, the Company was not in compliance with that
covenant. Under the Coast agreement, such noncompliance permits Coast, at its
option, to require immediate prepayment of all amounts owed by Great Lakes to
Coast ($4.6 million at December 31, 2001). As a result of the non-compliance, on
May 15, 2001, Coast reduced the maximum amount which could be outstanding under
the agreement to $18 million through August 31, 2001, $14 million through
October 31, 2001 and $10 million to the revised maturity date of December 31,
2001. Concurrently, the interest rate on the loan was increased to 3.5% over the
prime rate at the Bank of America. In December 2001, the maturity date was
further extended to March 31, 2002 and the maximum amount of the loan was
reduced to $6.5 million. On March 28, 2002 Coast again further extended the
maturity date to April 30, 2002 and the maximum amount which could be
outstanding under the loan was reduced to $3.8 million. The Company expects to
liquidate the Coast loan from the receipt of the higher subsidy levels described
above.
Raytheon is the Company's primary aircraft supplier and largest creditor. The
Company has financed all of its Beechcraft 1900 aircraft and one of its Brasilia
aircraft under related lease and debt agreements with Raytheon. Raytheon had
also provided a $5 million working capital line of credit (payable on demand and
expiring on June 30, 1999) and a $5 million short-term loan, due on June 30,
1999, and collateralized by Beechcraft spare parts and equipment and accounts
receivable. The Company paid Raytheon $5 million on January 7, 2000 to
extinguish the $5 million Raytheon note upon closing of the agreement with Coast
Business Credit (Coast). Additionally, the Company converted the remainder of
the Raytheon working capital line of credit to a three-year term note on
December 1, 2000.
In 2001, the Company made only minor cash payments to Raytheon covering debt,
interest and lease payments. In June 2001, the Company issued a demand note in
the amount of $8,786,778 in payment of substantially all of the principal,
interest and lease rentals due on all Raytheon financed aircraft for the first
six months of 2001. At December 31, 2001, the Company was not in compliance with
the payment terms of any of the Raytheon debt, including the aircraft notes, the
June note referred to above and two other notes totaling $ 6.5 million as well
as
17
the lease rental agreements. As a result, in accordance with generally accepted
accounting principles, all of the long-term debt has been classified as a
current liability because of Raytheon's ability under the agreements to require
payment in full of the outstanding obligations in a short period of time. In the
case of the aircraft notes, if Raytheon were to demand repayment, the liability
is to be offset by amounts realized for subsequent disposition of the aircraft.
The Company currently has seven Beechcraft 1900D aircraft and eight Embraer
Brasilia EMB-120 aircraft which it is currently not using in its operations. The
Company hopes to again utilize its four owned Brasilias in scheduled operations
by replacing three Beech 1900D aircraft in May 2002, return the four leased
Brasilias and negotiate settlements with their owners. Because of the
uncertainties associated with future traffic demand, the Company plans to retain
the surplus Beech 1900D aircraft until future traffic levels become more
determinable and make a decision at that time as to the number, if any, of Beech
1900D which should be removed from the fleet.
The Company has proposed to Raytheon that a substantial portion of its debt be
converted into equity. The ability of Great Lakes to satisfy the Raytheon
obligations is contingent upon achieving a combination of an agreement to
restructure currently outstanding obligations including converting a portion of
the debt to equity, acquiring outside financing, and attaining profitable
operations and positive cash flow.
The Company is also not in compliance with four leases it has with two lessors
under which it operates four Embraer Brasisia aircraft. Subsequent to December
31, 2001, one vendor which leases two older aircraft has entered into a
memorandum of understanding with the Company whereby one of the aircraft has
been returned and will be leased to another carrier. For this aircraft the
Company has agreed to pay over a three or four year period $638,000 representing
rental arrearages and the difference between the Company' rental rate and the
new leasee's rental rate. There is a possibility that the Company may be able to
dispose of the second aircraft on similar terms.
The other Embraer leases cover two newer aircraft. The Company is in on-going
negotiations with the lessor to return these aircraft. The Company's obligation
under these leases is to pay past due rentals plus the stipulated loss value of
each aircraft offset by the fair market value of the aircraft. Unpaid rentals on
these aircraft totals $1.7 million and the stipulated loss value on each
aircraft is approximately $6.9 million. There has not been an appraisal to
determine the market value of these aircraft. No provision has been made in the
2001 financial statements for any additional costs or losses (including
impairments) which may be incurred in connection with the return and settlement
of these agreements.
Relationship with United: Great Lakes may be impacted in the future by scope
clauses contained in United's contract agreement with its pilots. As is the case
with many of the major carriers, United has agreed with its pilots to specific
limits on the number of turboprop and regional jet aircraft which may be
operated by its affiliates, either as a United Express or a code-sharing
partner, in relation to the number of jet aircraft which are flown by United
Pilots. There has been a substantial increase in the demand for use of regional
jets because of the improved matching of aircraft size to market demand, cost
savings from the lower cost structure of regional airlines and improved customer
acceptance over turboprop equipment. However, since there has not been
sufficient growth in the number of jet aircraft in United's fleet, United is
required to deny use of these aircraft by their affiliates on United designated
flights even though some of these aircraft may already be on order.
The contract restrictions are resulting in the major carriers renegotiating
their agreements with their express and code-sharing partners to reduce the
number of turboprop aircraft in their fleet and, in turn, increase the number of
regional jets which may be used. One of the results of this may be loss of air
service to a number of smaller cities which cannot support the greater number of
passengers per flight required to achieve profitability in the regional jets.
Negotiations are underway between Great Lakes and United to reduce the number of
turboprop aircraft and markets operated by Great Lakes as a code-sharing partner
to enable United's other partners to operate increased numbers of regional jets.
At the present time, the Company believes that the removal of the United code in
18
markets as currently contemplated will not have a significant impact on small
city service provided by Great Lakes.
Contractual Obligations
The following table summarizes our major contractual obligations as of December
31, 2001:
After
2002 2003, 2004 2005, 2006 2006 Total
----------- ----------- ----------- ----------- -----------
Long-term debt $15,111,114 16,689,821 15,143,083 55,241,516 102,185,534
Other debt 13,396,586 -- -- -- 13,396,586
Operating leases 8,469,888 15,729,276 15,002,976 37,527,110 76,729,250
----------- ----------- ----------- ----------- -----------
$36,977,588 32,419,097 30,146,059 92,768,626 192,311,370
=========== =========== =========== =========== ===========
See notes 3 and 4 to the financial statements.
Liquidity
The Company's cash and cash equivalents balance at December 31, 2001 was $1.5
million, a $0.5 million decrease from the December 31, 2000 balance. The Company
had negative working capital of $120 million as of December 31, 2001.
While the net loss increased substantially in 2001 as compared to 2000, cash of
$9.6 million was provided primarily by operating activities as a result of
increases in accounts payable which includes the non payment of interest and
lease rentals of $16.9 million.
Cash used by financing activities was $3 million in 2001 compared to cash
provided of $9.3 million in the same period of 2000. In 2001, $8.6 million of
the line of credit was repaid primarily through funds made available as a result
of the issuance of a demand note in the amount of $8,786,778 in payment of
substantially all of the principal, interest and lease rentals due on all
Raytheon financed aircraft for the first six months of 2001.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the use of estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, revenues and expenses
during the reporting period and related disclosures of contingent assets and
liabilities in the financial statements and the accompanying notes. The U.S.
Securities and Exchange Commission ("SEC") has defined a company's most critical
accounting policies as the ones that are most important to the portrayal of the
Company's financial condition and results, and which require the company to make
its most difficult and subjective judgments, often as a result of the need to
make estimates of matters that are inherently uncertain. Based on this
definition, the Company has identified its critical accounting policies as
including those addressed below. The Company also has other key accounting
policies, which involve the use of estimates, judgments and assumptions. See
Note 2 "Summary of Significant Accounting Policies and Procedures" in the Notes
to the Financial Statements for additional discussion of these items. Management
believes that its estimates and assumptions are reasonable, based on information
presently available; however, changes in these estimates, judgments and
assumptions will occur as a result of future events, and accordingly actual
results could differ from amounts estimated.
Essential Air Service Subsidy Rates. EAS revenues are recorded based on
completed contracts for providing service to individual cities and estimated
revenues based upon contract negotiations which could change once the agreements
are finalized.
19
Estimated lives used to record depreciation on aircraft and obsolescence
reserves for aircraft parts inventories. The economic lives used to record
depreciation may be affected by passenger traffic and fare levels, technology,
policies regarding EAS subsidies promulgated by the Department of Transportation
and changes in strategy by the Company. The foregoing may impact depreciation
rates, impairment, or both.
Costs to permanently remove leased aircraft from service. The return of excess
leased aircraft to their lessors will require recognition and settlement of past
due rent, future rental and penalties. The Company is unable to estimate the
amount of such costs which it will incur until agreements with the lessor are
finalized.
Impact of Recently Issued Accounting Pronouncements
During 2001, the Financial Accounting Standards Board issued four new
pronouncements: New Accounting Pronouncements In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" which requires the use of the
purchase method and eliminates the option of using the pooling-of-interests
method of accounting for all business combinations. The provisions in this
statement apply to all business combinations initiated after June 30, 2001, and
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001, or later.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142) which requires that all
intangible assets acquired, other than those acquired in a business combination,
be initially recognized and measured based on the asset's fair value. The
Company is required to adopt the provisions of SFAS 142 effective January 1,
2002. Goodwill and certain identifiable intangible assets will not be amortized
under SFAS 142, but instead will be reviewed for impairment at least annually in
accordance with the provisions of this statement. This accounting pronouncement
presently has no impact on the Company as it does not have any intangible assets
on its balance sheet.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 (SFAS 143), Accounting for Asset Retirement Obligations, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and/or normal use of the asset. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. We do not expect the impact of adopting SFAS 143 to be significant.
In October 2001, the FASB issued Statement of Financial Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which addressed
financial accounting and reporting for the impairment or disposal of long-lived
assets. While Statement No. 144 supersedes Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, it
retains many of the fundamental provisions of that Statement. Statement No. 144
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of A
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. The
Company does not expect the impact of adopting SFAS No. 144 to be significant.
20
Frequent Flyer Program
The Company's passengers carried as a part of a code-sharing flight with United
or by Great Lakes, may earn miles in United's "Mileage Plus" frequent flyer
program. The Company and United are currently negotiating rates for paying
United for Frequent flyer miles awarded to Great Lakes' passengers and a rate to
be charged to United for Mileage Plus passengers flying on Great Lakes flights.
The Company believes that the agreement, when finalized, will produce a positive
cash flow to Great Lakes.
Effects of Inflation
Except for the price of fuel, inflation has not had a material effect on the
Company's operations in the past five years. The Company is subject to
inflationary pressures from labor agreements, fuel price escalations and costs
at airports served which it attempts to recover through fare and schedule
adjustments.
Seasonality
Historically, the Company has experienced lower passenger volumes during the
months of January through April and in November and December. This seasonality
can be attributed primarily to relatively difficult winter weather operating
conditions in the Company's principal area of operations, resulting in fewer
vacations and other discretionary trips and reduced business travel during these
months. These seasonal factors have generally resulted in reduced revenues,
increased operating losses and reduced cash flow for the Company during these
months.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
Cautionary Factors
The Company wishes to caution shareholders and prospective investors that the
following important factors, among others identified in this Annual Report on
Form 10-K, could affect the Company's actual operating results, and that such
results could differ materially from those expressed in any forward-looking
statements made by the Company. The statements under this caption are intended
to serve as cautionary statements within
21
the meaning of the Private Securities Litigation Reform Act of 1996. The
following information is not intended to limit in any way the characterization
of other statements or information under other captions as cautionary statements
for such purpose. The order in which such factors appear below should not be
construed to indicate their relative importance or priority.
Dependence on Relationship with United
Approximately 72% of Great Lakes passenger traffic connected with United flights
during December of 2001 and January of 2002. As a result of the relationship
with United, the Company's business is sensitive to events and risks affecting
United. If adverse events affect United's business, the Company's business is
also adversely affected. Such event could include employee strikes or job
actions, significant curtailment of services, and terrorists events. However, to
the extent that the Company is successful in developing its own identity on its
operating system and is successful in developing its code sharing relationship
with Frontier, it will reduce its dependence on United and mitigate the effects
of such adverse events if they relate to United only.
Great Lakes may also be impacted in its code sharing relationship with United by
provisions in United's agreement with its pilots which links growth in the
number of aircraft flown by United's Express and code sharing regional carrier
partners to growth in the number of aircraft flown by United pilots. Many of
United's regional carrier partners are flying Regional Jet aircraft which,
including the lower rates of pay of the regional carriers, are substantially
more efficient in less dense markets than are the aircraft flown by United'
pilots. To protect against major shifts of flying to the regional carriers,
United's pilots, like pilots at many other airlines, have negotiated growth
limitations on the amount of flying which may be done by the regional carriers.
In order to be able to increase the use of Regional Jet aircraft by its regional
carrier partners, United is reducing the number of turboprop aircraft, such as
those operated by Great Lakes, being flown under a United designation. As a part
of this effort, United is negotiating with the Company to reduce the number of
Great Lakes routes, and in turn, aircraft in United's code sharing program. This
will have the effect of reducing the traffic feed provided by Great Lakes to
United, but United will gain the benefit of lower cost operation on other
routes. The outcome of these negotiations as well as the impact upon the
revenues of Great Lakes are not known. While the Company could continue to
operate these route as Great Lakes Airlines, revenues may be adversely affected
which would result in losses from providing service to these cities and the need
for larger Essential Air Service subsidy payments or complete termination of
service in these small city markets.
Finova Suit
On February 27, 2002, FINOVA Capital Corporation ("FINOVA") filed suit against
the Company in the United States District Court for the District of Arizona. No.
Civ. 02-0362 PHX SMM. FINOVA alleges that the Company breached two airplane
lease agreements. FINOVA seeks damages, costs and attorneys' fees. The Company
has returned one of the aircraft for releasing by Finova to another carrier and
expects to return the other aircraft for releasing to the same customer. If
Finova's customer does not accept one or both of these aircraft Finova and Great
Lakes will continue to contest the suit.
Dependence on Essential Air Service Revenues
In 2001, 18.6% of the Company's revenues were received as EAS Subsidies, and is
expected to increase to 32.9% in 2002. Changes in Department of Transportation
policies with regard to payment of subsidies and reduction or loss of subsidies
as a result of competitive bidding may have a substantial impact on the Company.
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 bankruptcies and liquidations among airlines. A
worsening of current economic
22
conditions, or an extended period of recession nationally or regionally, would
have a materially adverse effect on the Company's operations.
Fuel Costs
Fuel is a major component of operating expense for all airlines. The Company's
cost of fuel varies directly with market conditions, and the Company has no
guaranteed long-term sources of supply. The Company intends generally 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 increases may be limited by economic and competitive conditions.
Accordingly, a reduction in the availability or an increase in the price of fuel
could have a material adverse effect on the Company's cash flow from operations
and profitability.
Settlement With Major Creditors
The Company is not in compliance with agreements with its major creditor and
lessor, Raytheon Aircraft Corporation as well as two other lessors, Boeing
Capital Corporation and Finova Credit Corporation. The Company is negotiating
with Raytheon to restructure the debt, including the conversion of a portion of
the debt into equity and to accept the return of certain leased Beechcraft 1900D
aircraft prior to the expiration of the lease terms. It is also negotiating with
Boeing and Finova to accept return of a total of four leased Embraer Brasilia
EMB-120 aircraft prior to the expiration of those lease agreements. The Company
cannot determine whether or not it will be successful in these negotiations, and
if successful, what the extra cost to the Company will be to terminate or
restructure the agreements.
Control by Principal Stockholder
Mr. Douglas G. Voss beneficially owns or controls approximately 65% of the
outstanding shares of the Company's common stock. On October 22, 1996, Mr. Voss
transferred approximately one-half of the shares of the Company's common stock
owned by him to his ex-spouse, Ms. Gayle R. Brandt, pursuant to the Marital
Dissolution Stipulation and Property Settlement. Ms. Brandt has granted Mr. Voss
an Irrevocable Proxy to vote such securities until June 28, 2010. Accordingly,
Mr. Voss will continue to be in a position to control the management and affairs
of the Company.
Noncompliance with the Nasdaq Continued Listing Requirements.
The Company's Common Stock is currently listed on The Nasdaq SmallCap Market.
The Company received a notice from Nasdaq regarding our non-compliance with the
$1.00 minimum bid price requirement stated in Marketplace Rule 4310(c)(4). The
Company has until August 13, 2002 to regain compliance with the minimum bid
price requirement, which would require its Common Stock to achieve a bid price
of $1.00 or more for a minimum of ten consecutive trading days. If The Company
fails to meet this requirement, or fails to maintain compliance with any other
listing requirement, its Common Stock will become subject to delisting from The
Nasdaq SmallCap Market.
If the Company's Common Stock does not continue to be listed on The Nasdaq
SmallCap Market, such Common Stock would become subject to certain rules of the
SEC relating to "penny stocks." Such 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. In addition, trading, if
any, would be conducted in the over-the-counter market in the so-called "pink
sheets" or on the OTC Bulletin Board, which was established for securities that
do not meet Nasdaq listing requirements. Consequently, selling our Common Stock
would be more difficult because smaller quantities of Common Stock could be
bought and sold, transactions could be delayed, and security analyst and news
media coverage of the Company may be reduced. These factors could result in
lower prices and larger spreads in the bid and ask prices
23
for the Company's Common Stock. The Company cannot assure you that its
securities will continue to be listed on The Nasdaq SmallCap Market.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risks Associated with Financial Statements
The risk inherent in the Company's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in those factors.
The Company is susceptible to certain risks related to changes in the cost of
aircraft fuel and changes in interest rates. At December 31, 2001, the Company
does not have any derivative financial instruments.
Aircraft Fuel
Airline operators are dependent upon fuel to operate and therefore, are impacted
by changes in aircraft fuel prices. Great Lakes' earnings are affected by
changes in the price and availability of aircraft fuel. Aircraft fuel
represented approximately 15.6% of Great Lakes' operating expenses in 2001. A
one-cent change in the average cost of aircraft fuel would impact the Company's
aircraft fuel expense by approximately $115,000 annually, based upon fuel
consumption in 2001.
Interest Rates
The Company's operations are very capital intensive, as the vast majority of
assets are flight equipment, which are long lived. Great Lakes' exposure to
market risk associated with changes in interest rates relates to its debt
obligations. The Company does have exposure to changes in cash flows resulting
from changes in interest rates as a significant portion of its long-term debt
has variable interest rates. Additionally, the Company is exposed to changes in
fair values of its debt obligations which carry fixed rates of interest. As
disclosed in Note 4 to the Consolidated Financial Statements, the Company has
total long-term debt outstanding of $102 million at December 31, 2001.
At December 31, 2001 The Interest Expense on long term obligations due in the
five subsequent years and thereafter are as follows:
Fixed Rate Average Fixed Variable Rate Average Variable
Maturity Amount Rate Amount Rate
- ---------- ---------- ------------- ------------- ----------------
2001 $1,266,985 8.96% $ 8,147,583 7.87%
2002 1,379,695 8.96 6,909,433 7.94
2003 1,461,161 8.96 7,352,631 7.94
2004 627,670 8.96 5,422,600 8.36
2005 678,825 9.08 5,853,250 8.36
Thereafter 1,345,041 9.08 65,465,173 8.36
24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company as of December 31, 2001 and 2000
together with Independent Auditor's Report are included in this Form 10-K on the
pages indicated below.
Page
Independent Auditors' Report.................................................26
Balance Sheets as of December 31, 2001 and 2000..............................27
Statements of Operations for the Years Ended December 31, 2001,
2000 and 1999.............................................................28
Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 2001, 2000, and 1999.........................................29
Statements of Cash Flows for the Years Ended December 31,
2001, 2000, and 1999......................................................30
Notes to Financial Statements................................................31
Supplemental Schedule to Financial Statements
Schedule II - Valuation and Qualifying Accounts..............................45
25
Independent Auditors' Report
The Board of Directors
Great Lakes Aviation, Ltd.:
We have audited the accompanying balance sheets of Great Lakes Aviation,
Ltd. (an Iowa Corporation) as of December 31, 2001 and 2000, and the related
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 2001. In
connection with our audits of the financial statements we have also audited the
financial statement schedule. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered significant losses in the year
ended December 31, 2001, and has liabilities in excess of current assets at
December 31, 2001. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
KPMG LLP
/s/ KPMG LLP
Denver, Colorado
April 10, 2002
26
GREAT LAKES AVIATION, LTD.
Balance sheets
December 31, 2001 and 2000
Assets 2001 2000
------------- -------------
Current assets:
Cash $ 1,514,565 1,995,706
Accounts receivable (note 5) 9,836,925 12,541,345
Inventories, net (notes 2 and 5) 8,100,037 6,528,026
Prepaid expenses and other current assets 1,363,904 923,985
------------- -------------
Total current assets 20,815,431 21,989,062
------------- -------------
Property and equipment:
Flight equipment (notes 3 and 4) 132,343,381 136,345,842
Other property and equipment 7,064,091 6,342,481
Less accumulated depreciation and amortization (30,198,893) (23,551,375)
------------- -------------
Total property and equipment 109,208,579 119,136,948
Other assets 2,086,577 2,053,288
------------- -------------
$ 132,110,588 143,179,298
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable and current maturities of long-term debt (note 4) $ 28,507,699 22,575,915
Long-term debt classified as current (note 4) 82,347,252 --
Accounts payable 16,646,584 14,175,927
Accrued liabilities and unearned revenue 7,108,643 3,561,177
Deferred lease payments 6,234,612 897,247
------------- -------------
Total current liabilities 140,844,790 41,210,266
------------- -------------
Long-term debt, net of current maturities (note 4) 4,727,169 96,053,979
Deferred credits 3,130,263 3,564,566
Deferred lease payments 1,903,929 2,220,729
Stockholders' equity (deficit) (note 4):
Common stock, $0.01 par value; 50,000,000 shares authorized,
8,657,651 and 8,657,651 shares issued and outstanding at
December 31, 2001 and 2000 86,802 86,577
Paid-in capital 31,367,185 31,358,847
Accumulated deficit (49,949,550) (31,315,666)
------------- -------------
Total stockholders equity (deficit) (18,495,563) 129,758
------------- -------------
Commitments and contingencies (notes 3, 4, and 9)
$ 132,110,588 143,179,298
============= =============
See accompanying notes to financial statements
27
GREAT LAKES AVIATION, LTD.
Statements of Operations
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------- ------------- -------------
Operating revenues:
Passenger $ 77,753,247 112,036,604 106,661,151
Public service 19,276,397 14,876,983 16,228,491
Freight, charter, and other 4,410,133 6,676,160 8,480,361
------------- ------------- -------------
Total operating revenues 101,439,777 133,589,747 131,370,003
------------- ------------- -------------
Operating expenses:
Salaries, wages, and benefits 31,123,960 35,162,270 33,037,214
Aircraft fuel 17,513,730 21,503,364 16,557,193
Aircraft maintenance materials and repairs 15,122,171 17,491,132 17,477,722
Commissions 2,512,020 4,247,974 5,796,046
Depreciation and amortization 7,063,272 7,103,304 4,778,770
Aircraft rental (note 4) 8,682,381 9,225,622 13,194,042
Other rentals and landing fees 6,362,654 7,808,230 6,503,750
Other operating expense 23,689,139 30,112,321 25,316,303
Non-recurring expenses (note 3) -- -- --
------------- ------------- -------------
Total operating expenses 112,069,327 132,654,217 122,661,040
------------- ------------- -------------
Operating income (10,629,550) 935,530 8,708,963
Other expense:
Interest expense, net 9,931,213 9,168,247 5,974,213
Federal grant (1,926,879) -- --
Loss on sale of assts and other property -- -- 6,771
------------- ------------- -------------
(Loss) income before income taxes (18,633,884) (8,232,717) 2,727,979
Income tax expense -- 6,116 --
------------- ------------- -------------
Net (loss) income $ (18,633,884) (8,238,833) 2,727,979
============= ============= =============
Net (loss) income per share:
Basic $ (2.15) (0.95) 0.32
Diluted (2.15) (0.95) 0.29
Average shares outstanding:
Basic 8,658,330 8,645,774 8,634,204
Diluted 8,658,330 8,645,774 9,335,991
See accompanying note to financial statements.
28
GREAT LAKES AVIATION, LTD.
Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2001, 2000, and 1999
Common stock
------------------------- Paid-in Accumulated
Shares Amount capital deficit Total
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 8,590,843 $ 85,908 31,568,800 (25,804,812) 5,849,896
Issuance of common stock 46,597 466 41,041 -- 41,507
Net income -- -- -- 2,727,979 2,727,979
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 8,637,440 86,374 31,609,841 (23,076,833) 8,619,382
Issuance of common stock 20,211 203 30,756 -- 30,959
Redemption of warrants -- -- (281,750) -- (281,750)
Net loss -- -- -- (8,238,833) (8,238,833)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 8,657,651 86,577 31,358,847 (31,315,666) 129,758
Issuance of common stock 22,535 225 8,338 -- 8,563
Redemption of warrants -- -- -- -- --
Net loss -- -- -- (18,633,884) (18,633,884)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 8,680,186 $ 86,802 31,367,185 (49,949,550) (18,495,563)
=========== =========== =========== =========== ===========
See accompanying notes to financial statements.
29
GREAT LAKES AVIATION, LTD.
Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------- ----------- -----------
Operating activities:
Net (loss) income $(18,633,884) (8,238,833) 2,727,979
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,063,272 6,932,179 4,778,770
Loss on disposal of assets, net 3,726 -- 6,771
Change in current operating items:
Accounts receivable, net 2,704,419 34,318 (4,201,073)
Inventories and major aircraft parts, net 2,017,869 1,943,207 (965,654)
Prepaid expenses and other current assets (439,919) (280,542) (20,905)
Accounts payable and accrued liabilities 892,624 (836,376) 1,200,024
Deferred lease payments 7,948,049 104,905 2,439,351
Other -- 176,733 593,083
------------- ----------- -----------
Net cash (used in) provided by operating activities 9,589,196 (164,409) 6,558,346
------------- ----------- -----------
Investing activities:
Purchases of flight equipment and other property and equipment (728,509) (1,154,641) (1,704,862)
Proceeds from the sale of flight equipment -- -- 15,131
Decrease (increase) in other assets (33,289) 3,213 85,321
------------- ----------- -----------
Net cash (used in) provided by investing activities (761,798) (1,151,428) (1,604,410)
------------- ----------- -----------
Financing activities:
Proceeds from issuance of debt -- -- 20,456
Repayment of notes payable and long-term debt (765,563) (5,882,457) (3,988,130)
Net proceeds from line of credit -- 9,360,834 --
Net payments on line of credit (8,551,539) -- (1,132,799)
Redemption of warrant -- (281,750) --
Proceeds from sale of common stock 8,563 30,959 41,507
------------- ----------- -----------
Net cash provided by (used in) financing activities (9,308,539) 3,227,586 (5,058,966)
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Net change in cash (481,141) 1,911,749 (105,030)
Cash:
Beginning of year 1,995,706