FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to____________________
Commission file number 1-13934
MIDWEST EXPRESS HOLDINGS, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1828757
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6744 South Howell Avenue
Oak Creek, Wisconsin 53154
-------------------------------------------
(Address of principal executive offices)
(Zip code)
414-570-4000
-------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
As of July 31, 2002, there were 15,510,457 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended June 30, 2002
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 24
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
1
Part I Item 1 - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues:
Passenger service $ 104,095 $ 124,170 $ 195,645 $ 231,970
Cargo 1,491 2,590 3,110 5,436
Other 10,389 8,739 21,242 17,022
------------ ------------ ------------ ------------
Total operating revenues 115,975 135,499 219,997 254,428
------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits 39,618 43,589 77,589 85,902
Aircraft fuel and oil 19,801 24,439 35,539 48,820
Commissions 5,155 7,140 9,749 13,374
Dining services 5,583 7,651 10,206 13,814
Station rental, landing and other fees 8,960 8,983 18,715 19,471
Aircraft maintenance materials and repairs 9,798 13,704 19,324 29,447
Depreciation and amortization 5,161 5,281 10,720 10,232
Aircraft rentals 6,313 6,025 12,622 12,065
Impairment loss -- 8,839 29,911 8,839
Other 13,664 14,568 26,367 27,366
------------ ------------ ------------ ------------
Total operating expenses 114,053 140,219 250,742 269,330
------------ ------------ ------------ ------------
Operating income (loss) 1,922 (4,720) (30,745) (14,902)
------------ ------------ ------------ ------------
Other (expense) income:
Interest income 342 247 567 475
Interest expense (873) (605) (1,809) (1,051)
Other, net 92 (11) 39,582 (22)
------------ ------------ ------------ ------------
Total other (expense) income (439) (369) 38,340 (598)
------------ ------------ ------------ ------------
Income (Loss) before income tax provision (credit) 1,483 (5,089) 7,595 (15,500)
Provision (Credit) for income taxes 548 (1,883) 2,811 (5,735)
------------ ------------ ------------ ------------
Net Income (Loss) $ 935 $ (3,206) $ 4,784 $ (9,765)
============ ============ ============ ============
Income (Loss) per common share - basic $ 0.07 $ (0.23) $ 0.34 $ (0.71)
============ ============ ============ ============
Income (Loss) per common share - diluted $ 0.07 $ (0.23) $ 0.34 $ (0.71)
============ ============ ============ ============
Weighted average shares - basic 14,055,278 13,829,402 13,944,052 13,826,249
Weighted average shares - diluted 14,131,780 13,829,402 14,024,125 13,826,249
See notes to unaudited condensed consolidated financial statements.
2
Part I Item 1 - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, December 31,
ASSETS 2002 2001
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents:
Unrestricted $ 66,066 $ 46,923
Restricted 19,539 --
--------- ---------
Total cash and cash equivalents 85,605 46,923
Accounts receivable:
Traffic, less allowance for doubtful accounts of $163 and $149
at June 30, 2002 and December 31, 2001 respectively 8,070 8,135
Income tax refund -- 10,300
Other receivables 982 3,348
--------- ---------
Total accounts receivable 9,052 21,783
Inventories 8,219 7,568
Prepaid expenses:
Commissions 1,927 2,128
Other 4,140 2,699
--------- ---------
Total prepaid expenses 6,067 4,827
Deferred income taxes 9,953 9,392
--------- ---------
Total current assets 118,896 90,493
Property and equipment, at cost 367,269 381,809
Less accumulated depreciation and amortization 135,560 125,303
--------- ---------
Net property and equipment 231,709 256,506
Landing slots and leasehold rights, less accumulated amortization of
$3,451 and $3,260 at June 30, 2002 and December 31, 2001 respectively 3,299 3,490
Aircraft purchase deposits and pre-delivery progress payments 36,119 3,500
Other assets 3,182 3,382
--------- ---------
Total assets $ 393,205 $ 357,371
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,880 $ 15,864
Income taxes payable 3,025 --
Notes payable 28,000 38,000
Current maturities of long-term debt 2,081 2,013
Air traffic liability 57,463 55,812
Accrued liabilities:
Vacation pay 6,212 6,021
Scheduled maintenance expense 5,917 4,980
Frequent Flyer awards 2,666 2,570
Other 25,788 26,612
--------- ---------
Total current liabilities 137,032 151,872
Long-term debt 34,039 35,097
Long-term debt on pre-delivery progress payments 23,002 --
Deferred income taxes 25,141 22,932
Noncurrent scheduled maintenance expense 6,299 6,521
Accrued pension and other postretirement benefits 11,624 10,368
Deferred Frequent Flyer partner revenue 8,378 8,215
Other noncurrent liabilities 7,490 7,630
--------- ---------
Total liabilities 253,005 242,635
Shareholders' equity:
Preferred stock, without par value, 5,000,000 authorized, no
shares issued and outstanding -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
16,224,531 and 14,549,531 shares issued, respectively 162 145
Additional paid-in capital 32,212 11,702
Treasury stock, at cost (15,661) (15,706)
Retained earnings 123,379 118,595
Cumulative other comprehensive income 108 --
--------- ---------
Total shareholders' equity 140,200 114,736
--------- ---------
Total liabilities and shareholders' equity $ 393,205 $ 357,371
========= =========
See notes to unaudited condensed consolidated financial statements.
3
Part I Item 1 - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
---- ----
Operating activities:
Net income (loss) $ 4,784 $ (9,765)
Items not involving the use of cash:
Impairment loss 29,911 8,839
Depreciation and amortization 10,720 10,232
Deferred income taxes 1,648 1,136
Other (11,586) 2,447
Changes in operating assets and liabilities:
Accounts receivable 11,231 (462)
Inventories (651) 207
Prepaid expenses (1,132) (685)
Accounts payable (9,984) 334
Accrued liabilities 3,203 (2,930)
Air traffic liability 1,651 7,350
Deferred Frequent Flyer partner revenue 163 334
-------- --------
Net cash provided by operating activities 39,958 17,037
-------- --------
Investing activities:
Capital expenditures (2,630) (51,993)
Aircraft purchase deposits and progress payments (32,619) (3,500)
Aircraft purchase deposits and progress payments returned -- 1,900
Other 273 158
-------- --------
Net cash (used in) investing activities (34,976) (53,435)
-------- --------
Financing activities:
Funding of pre-delivery progress payments 23,002 --
Proceeds from aircraft financing -- 35,080
Funds received from private equity placement 20,527 --
Payment on note payable (10,000) --
Other 171 2,626
-------- --------
Net cash provided by financing activities 33,700 37,706
-------- --------
Net increase in cash and cash equivalents 38,682 1,308
Cash and cash equivalents, beginning of period 46,923 15,703
-------- --------
Cash and cash equivalents, end of period $ 85,605 $ 17,011
======== ========
See notes to unaudited condensed consolidated financial statements.
4
Midwest Express Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Business and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for the three- and six-month periods ended June 30, 2002 and 2001 are
unaudited and reflect all adjustments (consisting only of normal
recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results
for the interim periods. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contained in the Midwest Express Holdings, Inc. (the "Company") Annual
Report on Form 10-K for the year ended December 31, 2001. The results of
operations for the three- and six-month periods ended June 30, 2002 are
not necessarily indicative of the results for the entire fiscal year
ending December 31, 2002.
2. Impairment Loss
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 became
effective for the Company on January 1, 2002, and superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of." Under SFAS No. 144, if the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
In addition, SFAS No. 144 allows the analysis to be applied to a group of
assets. For long-lived assets to be abandoned, the remaining depreciable
life of the long-lived asset may need to be revised. For long-lived
assets to be sold, SFAS No. 144 clarifies the classification of the
long-lived asset and the criteria for such treatment.
During the first quarter 2002, the Company decided to accelerate the
retirement of the DC-9 fleet of Midwest Express Airlines, Inc. ("Midwest
Express") in anticipation of accelerated deliveries of Boeing 717
aircraft. In connection with this decision, the Company performed
evaluations to determine, in accordance with SFAS No. 144, whether
probability-weighted future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of
these aircraft would be less than the aggregate carrying amounts. As a
result of the evaluation, the Company determined that the estimated
probability-weighted future cash flow would be less than their carrying
amount, resulting in impairment as defined by SFAS No. 144. Consequently,
in the first quarter 2002 the cost bases of these assets were reduced to
reflect the fair market value at the date of the decision, resulting in a
$29.9 million (pre-tax) impairment loss, and the remaining depreciable
lives were adjusted for the new retirement schedule. In determining the
fair market value of these assets, the
5
Company considered market trends in aircraft dispositions, data from
third parties and management estimates.
3. Settlement of Arbitration
Astral Aviation, Inc., doing business as Skyway Airlines, The Midwest
Express Connection ("Astral"), currently operates 10 Fairchild Dornier
32-passenger 328JET regional jets. In September 2001, the Company settled
its arbitration with Fairchild Dornier GmbH ("Fairchild") over the
cancellation of the Dornier 428JET program. In first quarter 2002, the
Company recorded as other income $39.5 million (pre-tax) associated with
the settlement. The previously disclosed anticipated gain of $46 million
was reduced following Fairchild's filing of insolvency in 2002 due
primarily to a decrease in the estimated fair market value of the two
Fairchild Dornier 328JET regional jets that the Company received in
January and February 2002. The Company does not expect to receive any
additional benefits from the settlement due to Fairchild's insolvency,
and does not expect to receive any additional Fairchild Dornier 328JET
regional jets.
4. Private Placement of Common Stock
During the second quarter 2002, the Company generated gross proceeds of
$21.9 million through the private placement of 1,675,000 shares of the
Company's common stock to qualified institutional investors at $13.09 per
share. Net proceeds, after commissions and expenses, of $20.5 million
will be used to reduce indebtedness and provide general working capital,
including capital to support the startup of the new Boeing 717 aircraft
program.
5. Segment Reporting
Midwest Express and Astral constitute the reportable segments of the
Company. The Company's reportable segments are strategic units that are
managed independently because they provide different services, with
different cost structures and marketing strategies. Additional detail on
segment reporting is included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001. Financial information for
the three and six month periods ended June 30 on the two operating
segments, Midwest Express and Astral, follows.
6
Three Months Ended June 30, 2002 (unaudited)
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $97,397 $20,065 ($1,487) $115,975
Operating income (loss) 2,003 (81) - 1,922
Depreciation and amortization expense 4,229 932 - 5,161
Interest income 371 - (29) 342
Interest expense (873) (29) 29 (873)
Income (loss) before income tax provision (credit) 1,593 (110) - 1,483
Provision (credit) for income taxes 589 (41) - 548
Total assets 338,428 66,250 (11,473) 393,205
Capital expenditures $1,059 $330 $ - $1,389
Three Months Ended June 30, 2001 (unaudited)
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $117,226 $19,821 ($1,548) $135,499
Operating (loss) income (5,178) 458 - (4,720)
Depreciation and amortization expense 4,592 689 - 5,281
Interest income 474 - (227) 247
Interest expense (605) (227) 227 (605)
(Loss) income before income tax (credit) provision (5,320) 231 - (5,089)
(Credit) provision for income taxes (1,969) 86 - (1,883)
Total assets 317,968 53,820 (32,568) 339,220
Capital expenditures $14,282 $10,430 $ - $24,712
Six Months Ended June 30, 2002 (unaudited)
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $185,952 $36,799 ($2,754) $219,997
Operating (loss) (29,889) (856) - (30,745)
Depreciation and amortization expense 8,936 1,784 - 10,720
Interest income 627 - (60) 567
Interest expense (1,809) (60) 60 (1,809)
(Loss) income before income tax (credit) provision (30,989) 38,584 - 7,595
(Credit) provision for income taxes (11,465) 14,276 - 2,811
Total assets 338,428 66,250 (11,473) 393,205
Capital expenditures $1,874 $756 $ - $2,630
Six Months Ended June 30, 2001 (unaudited)
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $221,481 $35,733 ($2,786) $254,428
Operating (loss) (13,258) (1,644) - (14,902)
Depreciation and amortization expense 9,035 1,197 - 10,232
Interest income 824 - (349) 475
Interest expense (1,051) (349) 349 (1,051)
(Loss) before income tax (credit) (13,507) (1,993) - (15,500)
(Credit) for income taxes (4,998) (737) - (5,735)
Total assets 317,968 53,820 (32,568) 339,220
Capital expenditures $30,159 $21,834 $ - $51,993
7
6. Derivative Instruments and Hedging Activities
The Company utilizes option contracts to mitigate the exposure to the
fluctuation in aircraft fuel prices in accordance with the Company's financial
risk management policy. This policy was adopted by the Company to document the
Company's philosophy toward financial risk and outline acceptable use of
derivatives to mitigate that financial risk. The options establish ceiling
prices for anticipated jet fuel purchases and serve as hedges of those
purchases. The Company does not hold or issue derivative instruments for trading
purposes. At June 30, 2002, the Company had options in place to hedge 10% of its
projected fuel purchases in the third quarter of 2002. At June 30, 2002, the
options were valued at $0.3 million and included in other prepaid expenses in
the unaudited condensed consolidated balance sheet. The value of the options is
determined using estimates of fair market value provided by the institutions
that wrote the options.
The Company accounts for its fuel hedge derivative instruments as cash flow
hedges, as defined in SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Therefore, all changes in the fair value of the derivative
instruments that are considered effective are recorded in other comprehensive
income until the underlying hedged fuel is consumed. As of June 30, 2002, the
Company had $0.1 million in unrealized gains, net of tax, in other comprehensive
income related to hedges of anticipated jet fuel purchases in the third quarter
of 2002. Comprehensive income (loss) was $0.7 million and $4.9 million for the
three and six month periods ended June 30, 2002 and $(3.2) million and $(9.8)
million for the three and six month periods ended June 30, 2001, respectively.
7. Debt Obligation Used for Aircraft Progress Payments
In second quarter 2002, the Company entered into a loan agreement to fund
pre-delivery progress payments to Boeing for new Boeing 717 aircraft. The
Company obtained the loan from Kreditanstalt fur Wiederaufbau Bank ("KfW") with
the assistance of Rolls-Royce Deutschland Ltd. & Co. KG ("Rolls-Royce").
Rolls-Royce agreed to guarantee this loan agreement on behalf of the Company.
The loan agreement provides up to $45.0 million in pre-delivery progress payment
financing, against which the Company has borrowed $23.0 million as of June 30,
2002. Under a financing commitment between the Company and Boeing Capital
Corporation ("BCC"), at each delivery date BCC will acquire and pay for each
aircraft including interest accrued on the debt owed KfW, and then lease the
aircraft to the Company. At that time, BCC will reimburse the Company in full
for the pre-delivery progress payments the Company has made. To the extent the
Company originally funded such payments through KfW, the Company will use the
amounts reimbursed to repay the related debt to KfW. Interest will accrue from
date of borrowing to the aircraft delivery date and be included in the final
purchase price. This debt has been classified as long-term in the accompanying
balance sheet.
8
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
The Company's second quarter 2002 operating income was $1.9 million, an increase
of $6.6 million from second quarter 2001 operating loss of ($4.7) million. Net
income for the quarter was $0.9 million, a $4.1 million improvement from second
quarter 2001 net loss of ($3.2) million. For the first six months of 2002,
operating loss was ($30.7) million, an increase in loss of $15.8 million from
the operating loss for the first six months of 2001 of ($14.9) million.
Year-to-date 2002 net income was $4.8 million, an improvement of $14.6 million
from the year-to-date 2001 net loss of ($9.8) million. Year-to-date 2002 net
income per share on a diluted basis was $0.34, a $1.05 improvement from 2001 net
loss per share on a diluted basis of ($0.71). First quarter 2002 and
year-to-date results include a $29.9 million (pre-tax) impairment charge related
to the early retirement of the Company's DC-9 fleet and other income of $39.5
million (pre-tax) associated with an arbitration settlement with Fairchild over
the cancellation of the 428JET program. Second quarter 2001 and year-to-date
results include an $8.8 million (pre-tax) impairment charge related to the
earlier-than-intended retirement of eight owned DC-9-10 aircraft.
The Company's total revenue in second quarter 2002 decreased $19.5 million, or
14.4%, from second quarter 2001. Traffic, as measured by scheduled service
revenue passenger miles, decreased 7.7% in second quarter, while scheduled
service capacity, as measured by available seat miles ("ASMs"), decreased 2.0%.
Capacity at Astral increased 21.7% because two additional regional jets were in
service and a number of Midwest Express routes were shifted from Midwest Express
aircraft to Astral's smaller aircraft to more efficiently handle decreased
passenger levels. Midwest Express decreased capacity 4.4% to better align
capacity with lower travel demand following the events of September 11. Traffic
decreased 9.3% at Midwest Express, but increased 12.8% at Astral due to
additional aircraft in service and fewer flight cancellations than second
quarter 2001.
Second quarter revenue yield decreased 11.2% at Midwest Express and 10.5% at
Astral. The decrease in revenue yield was due in large part to a substantial
decline in high-yield business travel, new pricing structures that enable
business travelers to purchase tickets at lower fares, industrywide heavy fare
discounting implemented to stimulate travel demand, and increased competition in
some markets.
The Company's operating costs decreased by $26.2 million, or 18.7%, to $114.1
million in second quarter 2002. Second quarter 2001 operating expenses included
an $8.8 million (pre-tax) impairment charge related to the earlier-than-intended
retirement of eight owned DC-9-10 aircraft. In second quarter 2002, the Company
realized savings from lower fuel prices and Companywide cost-reduction efforts,
with reduced costs in all categories except aircraft rentals. Additional detail
on cost changes is included in subsequent sections.
9
Operating Statistics
The following table provides selected operating statistics for Midwest Express
and Astral.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Midwest Express Operations
Origin & Destination Passengers 529,979 598,850 989,818 1,094,754
Revenue Passenger Miles (000s) 518,566 571,523 979,071 1,054,574
Scheduled Service Available Seat Miles (000s) 823,744 861,293 1,561,365 1,695,724
Total Available Seat Miles (000s) 839,508 869,807 1,595,440 1,713,124
Load Factor (%) 63.0 % 66.4 % 62.7 % 62.2 %
Revenue Yield $0.1622 $0.1827 $0.1625 $0.1862
Revenue per Scheduled Service ASM (1) $0.1062 $0.1263 $0.1061 $0.1209
Total Cost per Total ASM (2) $0.1136 $0.1306 $0.1165 $0.1319
Average Passenger Trip Length (miles) 978.5 954.4 989.1 963.3
Number of Flights 11,422 12,524 21,588 24,828
Into-plane Fuel Cost per Gallon $0.798 $0.938 $0.757 $0.963
Full-time Equivalent Employees at End of Period 2,492 2,752 2,492 2,752
Aircraft in Service at End of Period 34 35 34 35
Astral Operations
Origin & Destination Passengers 153,760 147,234 278,155 265,602
Revenue Passenger Miles (000s) 49,529 43,909 89,087 74,754
Scheduled Service Available Seat Miles (000s) 102,894 84,522 190,474 157,437
Total Available Seat Miles (000s) 102,916 84,528 190,676 157,452
Load Factor (%) 48.1 % 51.9 % 46.8 % 47.5 %
Revenue Yield $0.4029 $0.4502 $0.4102 $0.4764
Revenue per Scheduled Service ASM (1) $0.1945 $0.2344 $0.1924 $0.2268
Total Cost per Total ASM $0.1958 $0.2291 $0.1975 $0.2374
Average Passenger Trip Length (miles) 322.1 298.2 320.3 281.5
Number of Flights 14,193 14,189 26,693 27,732
Into-plane Fuel Cost per Gallon $0.884 $1.023 $0.835 $1.038
Full-time Equivalent Employees at End of Period 586 576 586 576
Aircraft in Service at End of Period 25 23 25 23
(1) Passenger, cargo and other transport-related revenue divided by scheduled service ASMs.
(2) Excluding impairment loss.
Note: All statistics exclude charter operations except the following: total available seat miles ("ASMs"),
cost per total ASM, into-plane fuel cost, number of employees and aircraft in service. Aircraft acquired but
not yet placed into service are excluded from the aircraft in service statistic. Numbers in this table may not
be recalculated due to rounding.
10
The following table provides operating revenues and expenses for the Company
expressed as cents per total ASM, including charter operations, and as a
percentage of total revenues:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Per Total % of Per Total % of Per Total % of Per Total % of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- ------- --- -------
Operating Revenues:
Passenger Service $0.110 89.7% $0.130 91.6% $0.109 88.9% $0.124 91.2%
Cargo 0.002 1.3% 0.003 1.9% 0.002 1.4% 0.003 2.1%
Other 0.011 9.0% 0.009 6.5% 0.012 9.7% 0.009 6.7%
------ ---- ------ ---- ------ ---- ------ ----
Total Operating Revenues $0.123 100.0% $0.142 100.0% $0.123 100.0% $0.136 100.0%
------- ------ ------- ------ ------- ------ ------- ------
Operating Expenses:
Salaries, wages and benefits $0.042 34.2% $0.046 32.2% $0.043 35.3% $0.046 33.8%
Aircraft fuel and oil 0.021 17.1% 0.026 18.0% 0.020 16.2% 0.026 19.2%
Commissions 0.005 4.4% 0.007 5.3% 0.005 4.4% 0.007 5.3%
Dining Services 0.006 4.8% 0.008 5.7% 0.006 4.6% 0.007 5.4%
Station rental, landing, other
fees 0.010 7.7% 0.009 6.6% 0.010 8.5% 0.010 7.6%
Aircraft maint., materials and
repairs 0.010 8.4% 0.014 10.1% 0.011 8.8% 0.016 11.6%
Depreciation and amortization 0.005 4.5% 0.006 3.9% 0.006 4.9% 0.005 4.0%
Aircraft rentals 0.007 5.4% 0.006 4.4% 0.007 5.7% 0.006 4.7%
Impairment Loss 0.000 0.0% 0.009 6.5% 0.017 13.6% 0.005 3.5%
Other 0.015 11.8% 0.015 10.8% 0.015 12.0% 0.015 10.8%
------ ----- ------ ----- ------ ----- ------ -----
Total Operating Expenses $0.121 98.3% $0.147 103.5% $0.140 114.0% $0.144 105.9%
======= ===== ======= ====== ======= ====== ======= ======
Total ASMs (000s) 942,424 954,335 1,786,116 1,870,575
Note: Numbers, percents and totals in this table may not be recalculated due to rounding.
11
Three Months Ended June 30, 2002 Compared With
Three Months Ended June 30, 2001
Operating Revenues
Company operating revenues totaled $116.0 million in second quarter 2002, a
$19.5 million, or 14.4%, decrease from second quarter 2001. Passenger revenues
accounted for 89.7% of total revenues and decreased $20.1 million, or 16.2%,
from second quarter 2001 to $104.1 million. The decrease is attributable to a
9.2% decrease in revenue yield and a 7.7% decrease in passenger volume, as
measured by revenue passenger miles.
Midwest Express passenger revenue decreased $20.3 million, or 19.4%, from 2001
to $84.1 million. This decrease was primarily caused by an 11.5% decrease in
origin and destination passengers as travel demand was less than second quarter
2001 following the events of September 11 and as a result of the weak economy.
Total capacity, as measured by scheduled service ASMs, decreased 4.4% due to one
less aircraft in scheduled service during second quarter 2002 as the Company
attempted to align capacity with lower demand. Load factor decreased from 66.4%
in 2001 to 63.0% in 2002. Revenue yield decreased 11.2% due to decreased
business travel as a result of the weak economy, changes in the industry pricing
structure that enabled business passengers to purchase tickets at lower fares,
increased competition in some markets, and heavy fare discounting used to
stimulate travel demand.
Astral passenger revenue increased $0.2 million, or 1.0%, from second quarter
2001 to $20.0 million. This increase was primarily caused by a 4.4% increase in
origin and destination traffic. Total capacity, as measured by scheduled service
ASMs, increased 21.7% due to the addition of two new regional jets in scheduled
service. Astral added new service in first quarter 2002 from Milwaukee to
Minneapolis-St. Paul and Baltimore. Also, in first quarter 2002, the following
routes from Milwaukee were shifted to smaller Astral aircraft to more
efficiently handle decreased passenger levels: Cleveland, Columbus,
Raleigh/Durham and Washington Dulles. Passenger volume, as measured by revenue
passenger miles, increased 12.8%. Load factor decreased from 51.9% in second
quarter 2001 to 48.1% in second quarter 2002, and revenue yield decreased 10.5%
due to decreased business travel as a result of the weak economy, lower fares
that were used to stimulate travel demand, and a revised mix of longer flights
with lower yields. The average passenger trip length increased 24 miles, or
8.0%.
Revenue from cargo, charter and other services increased $0.6 million in second
quarter 2002. Revenue from charter sales increased $1.2 million in second
quarter 2002 as more aircraft time was available for charter service and the
Company had exclusive charter rights for two Major League Baseball teams. Cargo
revenue decreased $1.1 million, or 42.4%, with most of the decrease due to lower
U.S. Postal Service mail volumes, in large part the result of new security
directives and restrictions.
Operating Expenses
Second quarter 2002 operating expense decreased $26.2 million, or 18.7%, from
second quarter 2001. Reduced costs occurred in all categories except aircraft
rentals. Second quarter 2001
12
operating expenses included an $8.8 million (pre-tax) impairment charge related
to the earlier-than-intended retirement of eight owned DC-9-10 aircraft. Cost
per ASM at Midwest Express decreased 19.3% in second quarter 2002, or 13.0%,
excluding the aircraft impairment charge. Astral cost per total ASM decreased
14.5% as a result of lower costs in all categories except depreciation and
amortization.
Salaries, wages and benefits decreased $4.0 million, or 9.1%, from second
quarter 2001 to $39.6 million. The labor cost decrease reflects the reduction of
250 full-time equivalent employees (260 reductions at Midwest Express partially
offset by 10 additions at Astral). The headcount decrease was primarily the
result of furloughing employees. Second quarter 2001 results included a $0.5
million restructuring charge related to a workforce reduction program that
eliminated positions and resulted in additional costs for severance pay. In
October 2001, the Company implemented a salary freeze for all employees except
pilots, whose wages are covered by a collective bargaining agreement. The pay
freeze will be removed effective October 1, 2002. Employees will be eligible for
an increase after they have had their compensation frozen for 12 months. A $0.4
million reduction in overtime pay also contributed to decreased labor costs.
These decreases were partially offset by higher medical insurance costs. On a
cost per total ASM basis, labor costs decreased 8.0% from 4.6(cent) in 2001 to
4.2(cent) in 2002.
Aircraft fuel and oil and associated taxes decreased $4.6 million, or 19.0% to
$19.8 million in second quarter 2002. Into-plane fuel prices decreased 14.5% in
second quarter 2002, averaging 81.0(cent) per gallon versus 94.7(cent) per
gallon in second quarter 2001, and resulted in a $3.4 million (pre-tax)
favorable price impact. Fuel consumption decreased 5.4% in the quarter as a
result of the capacity reductions at Midwest Express. The Company had option cap
agreements relating to about 25% of its second quarter 2002 fuel volume, and
those agreements provided a $0.3 million benefit for the quarter. Fuel costs in
July 2002 trended downward, averaging 79.6(cent) per gallon. The Company has
hedged prices for 10% of its projected third quarter fuel requirements.
Commissions for travel agents and commissions related to credit card
transactions decreased $2.0 million, or 27.8%, from second quarter 2001 to $5.2
million. The decrease was due to a 16.2% decrease in passenger revenue as well
as savings realized because of increased travel booked directly through the
Company's reservations centers and Web site, and other travel-related Web sites.
In addition, in September 2001, the Company lowered the maximum travel agent
commission to a 5% base with a maximum commission of $20 roundtrip or $10
one-way. Commissions as a percentage of passenger revenue decreased from 5.8% in
second quarter 2001 to 5.0% in second quarter 2002.
Dining services costs decreased $2.1 million, or 27.0%, from second quarter 2001
to $5.6 million. The decrease was due to the implementation of roundtrip
catering on most flights, an 11.5% decrease in Midwest Express origin and
destination passengers and lower food prices. Roundtrip catering allows meals to
be loaded only at the origin city of a roundtrip route, rather than loading the
aircraft at both cities on the route. Total dining services costs per Midwest
Express passenger (including food, beverage, linen, catering equipment and
supplies) decreased from $12.47 in second quarter 2001 to $10.22 for second
quarter 2002.
13
Station rental, landing and other fees were $9.0 million in both second quarter
2002 and second quarter 2001. A decrease of flight segments and 7.3% lower costs
at Midwest Express were offset by 21.2% higher costs at Astral. On a cost per
ASM basis, these costs increased 1.0%.
Aircraft maintenance material costs decreased $3.9 million, or 28.5%, from
second quarter 2001 to $9.8 million. The decrease at Midwest Express was caused
by lower costs in almost all maintenance categories including lower DC-9 engine
overhaul costs, lower purchased maintenance costs, lower maintenance materials,
and cost savings realized through the MSG-3 aircraft maintenance program, that
was fully implemented in June 2001. Under this program, the Company divides
major airframe maintenance events into smaller, more frequent events that result
in fewer duplicate tasks. Maintenance costs at Astral increased $0.5 million. On
a cost per total ASM basis, these costs decreased 27.6%.
Depreciation and amortization decreased $0.1 million, or 2.3%, from second
quarter 2001 to $5.2 million. On a cost per total ASM basis, these costs
decreased 1.0%.
Aircraft rental costs increased $0.3 million, or 4.8%, from second quarter 2001
to $6.3 million. The costs associated with the addition of one leased MD-80
aircraft were mostly offset by the reduction in lease costs due to lower
interest rates for three DC-9 aircraft and five Beech 1900D aircraft. On a cost
per total ASM basis, these costs increased 6.1% due to lower aircraft
utilization at Midwest Express.
An $8.8 million (pre-tax) impairment charge was recorded in second quarter 2001
for eight company-owned DC-9-10 aircraft. During second quarter 2001, the
Company decided to accelerate the retirement of these aircraft beginning in
2003. In connection with this decision, the Company performed an evaluation, in
accordance with SFAS No. 121, to determine whether future cash flows
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of these aircraft would be less than the aggregate carrying
amount of these aircraft. As a result of the evaluation, the Company determined
that the estimated future cash flows expected to be generated by these aircraft
would be less than their carrying amounts, resulting in an impairment, as
defined SFAS No. 121. Consequently, the original cost bases of these aircraft
were reduced to reflect the fair market value at the date of the decision,
resulting in an $8.8 million (pre-tax) impairment charge.
Other operating expenses decreased $0.9 million, or 6.2%, from second quarter
2001 to $13.7 million. Other operating expenses consist primarily of advertising
and promotion, insurance, property taxes, consulting services, crew hotel rooms,
reservation fees, administration and other items. Higher insurance costs of $1.6
million were offset by lower property taxes, consulting services, crew hotel
rooms, software purchases, pilot training and other items. On a cost per total
ASM basis, these costs decreased 5.0%.
14
Provision for Income Taxes
Income tax expense for second quarter 2002 was $0.5 million, a $2.4 million
increase from the 2001 credit of ($1.9) million. The effective tax rates for the
first quarters of 2002 and 2001 were 37.0%. For purposes of calculating the
Company's income tax expense and effective tax rate, the Company treats amounts
payable to Kimberly-Clark Corporation under a tax allocation and separation
agreement entered into in connection with the Company's initial public offering
as if they were payable to taxing authorities.
Net Income (Loss)
Net income for second quarter 2002 was $0.9 million, an increase of $4.1 million
from second quarter 2001 net loss of ($3.2) million.
Six Months Ended June 30, 2002 Compared With
Six Months Ended June 30, 2001
Operating Revenues
Company operating revenues totaled $220.0 million for the six months ended June
30, 2002, a $34.4 million, or 13.5%, decrease from the first six months of 2001.
Passenger revenues accounted for 88.9% of total revenues and decreased $36.3
million, or 15.7%, from 2001 to $195.6 million. The decrease was attributable to
a 5.4% decrease in passenger volume, as measured by revenue passenger miles, and
a 10.8% decrease in yield. Load factor increased slightly from 60.9% in 2001 to
61.0% in 2002.
Midwest Express passenger revenue decreased $37.3 million, or 19.0%, from 2001
to $159.1 million in 2002. This decrease was caused by a 7.2% decrease in
passenger volume, as measured by revenue passenger miles, and a 12.7% decrease
in revenue yield. Total Midwest Express capacity, as measured by scheduled
service ASMs, decreased 7.9% due to one less aircraft in scheduled service
during 2002 as the Company attempted to align capacity with lower demand. Load
factor increased from 62.2% in 2001 to 62.7% in 2002.
Astral passenger revenue increased by $0.9 million, or 2.6%, from 2001 to $36.5
million in 2002. Traffic increased 19.2% on a 21.0% increase in capacity due to
two additional regional jets in service in 2002. Load factor decreased from
47.5% in 2001 to 46.8% in 2002. Revenue yield decreased 13.9%, from $0.48 in
2001 to $0.41 in 2002, primarily due to new service with longer flight segments
and lower-than-average system revenue yield, decreased business travel as a
result of the weak economy and heavy industrywide fare discounting to stimulate
travel demand.
The Company's revenue from cargo, charter and other services increased $1.9
million, or 8.4%, in 2002. Midwest Express benefited from increased revenue from
charter sales as more aircraft time was available for charter service (an
additional aircraft was dedicated to charter service) and the Company had
exclusive charter rights for two Major League Baseball teams. The increased
charter revenue was offset by a $2.3 million decrease in cargo revenue. Most of
this decrease was
15
due to lower U.S. Postal mail volumes, in large part the result of new security
directives and restrictions.
Operating Expenses
2002 operating expenses decreased $18.6 million, or 6.9%, from 2001 to $250.7
million. The Company realized savings from lower fuel prices and Companywide
cost reduction efforts, with reduced costs in all categories except depreciation
and aircraft rentals. 2002 operating costs include a $29.9 million (pre-tax)
impairment charge related to the early retirement of the Company's DC-9 fleet.
2001 operating costs included an $8.8 million (pre-tax) impairment charge
related to the earlier-than-intended retirement of eight owned DC-9-10 aircraft.
The Company's cost per total ASM decreased 2.5%, from 14.4(cent) in 2001 to
14.0(cent) in 2002.
Salaries, wages and benefits decreased $8.3 million, or 9.7%, from 2001 to $77.6
million in 2002. The labor cost decrease reflects the reduction of 250 full-time
equivalent employees (260 reductions at Midwest Express partially offset by 10
additions at Astral) since June 30, 2001. The headcount decrease was primarily
the result of furloughing employees, which reduced labor costs by $8.6 million.
In October 2001, the Company implemented a salary freeze for all employees
except pilots, whose wages are covered by a collective bargaining agreement. A
$1.5 million reduction in overtime also contributed to decreased labor costs.
These decreases were partially offset by increased benefit costs primarily due
to higher medical insurance costs. On a cost per total ASM basis, labor costs
decreased 5.4% from 4.6(cent) in 2001 to 4.3(cent) in 2002.
Aircraft fuel and oil and associated taxes decreased $13.3 million, or 27.2%,
from 2001 to $35.5 million in 2002. Into-plane fuel prices decreased 20.9% in
2002, averaging 76.8(cent) per gallon in 2002 versus 97.1(cent) per gallon in
2001, resulting in a $9.5 million favorable pre-tax price impact. Fuel
consumption decreased 8.0% in 2002 because of a decrease in flight operations.
Travel agent and credit card commissions decreased $3.6 million, or 27.1%, from
2001 to $9.7 million in 2002. On a cost per total ASM basis, commissions
decreased 23.7% from 2001. The decrease was primarily due to a 15.7% decrease in
passenger revenue, offset by savings realized because of increased travel booked
directly through the Company's reservations centers and Web site, and other
travel-related Web sites. Commissions, as a percentage of passenger revenue,
decreased from 5.8% in 2001 to 5.0% in 2002.
Dining service costs decreased $3.6 million, or 26.1%, from 2001 to $10.2
million in 2002. The decrease was due to the implementation of roundtrip
catering on most flights, a 9.6% decrease in origin and destination passengers
at Midwest Express, and lower food prices. Total dining service costs per
Midwest Express passenger (including food, beverage, linen, catering equipment
and supplies) decreased 18.9%, from $12.36 in 2001 to $10.02 in 2002.
Station rental, landing and other fees decreased $0.8 million, or 3.9%, from
2001 to $18.7 million in 2002. The decrease was caused by 13.0% fewer flight
segments at Midwest Express
16
and 3.7% fewer flight segments at Astral. On a cost per total ASM basis, these
costs increased 0.7%.
Maintenance costs decreased by $10.1 million, 34.4%, from 2001 to $19.3 million
in 2002. The decrease was caused by lower costs in almost all maintenance
categories including lower DC-9 engine overhaul costs, lower purchased
maintenance costs, lower maintenance materials, and cost savings realized
through the MSG-3 aircraft maintenance program, that was fully implemented in
June 2001. On a cost per total ASM basis, this category decreased by 31.3%.
Depreciation and amortization increased $0.5 million, or 4.8%, from 2001 to
$10.7 million in 2002. On a cost per total ASM basis, these costs increased
9.7%.
Aircraft rental costs increased $0.6 million, or 4.6%, from 2001 to $12.6
million in 2002. On a cost per total ASM basis, these costs increased 9.6%.
A $29.9 million (pre-tax) impairment charge was recorded in first quarter 2002.
The Company decided to accelerate the retirement of the Midwest Express DC-9
fleet in anticipation of accelerated deliveries of Boeing 717 aircraft. In
connection with this decision, the Company performed evaluations to determine,
in accordance with SFAS No. 144, whether probability-weighted future cash flows
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of these aircraft would be less than the aggregate carrying
amounts. As a result of the evaluation, the Company determined that the
estimated probability-weighted future cash flow would be less than their
carrying amount, resulting in impairment as defined by SFAS No. 144.
Consequently, the cost bases of these assets were reduced to reflect the fair
market value at the date of the decision, resulting in a $29.9 million (pre-tax)
impairment loss, and the remaining depreciable lives were adjusted for the new
retirement schedule. In determining the fair market value of these assets, the
Company considered market trends in aircraft dispositions, data from third
parties and management estimates.
Other operating expenses decreased $1.0 million, or 3.7%, from 2001 to $26.4
million in 2002. Other operating expenses consist primarily of advertising and
promotion, insurance, property taxes, legal fees, consulting services, crew
hotel rooms, reservation fees, administration and other items. The decrease was
primarily due to cost decreases in property taxes, consulting fees, crew hotel
rooms, reservation fees, flight training, charters, communications and other
items. These decreases were partially offset by increased hull and liability
insurance totaling $2.9 million. On a cost per total ASM basis, these costs
increased 0.9%.
Other income (expense)
In the first quarter 2002, the Company recorded other income of $39.5 million
(pre-tax) associated with the Company's settlement of arbitration with Fairchild
over the cancellation of its 428JET program. Following Fairchild's filing of
insolvency in 2002, the previously disclosed gain of $46 million was reduced due
primarily to a decrease in the estimated fair market value of two Fairchild
Dornier 328JET regional jets that the Company received in January and February
2002. The Company does not expect to receive any additional benefits from the
settlement due to
17
Fairchild's insolvency, and does not expect to receive any additional Fairchild
Dornier 328JET regional jets. Astral currently operates 10 Fairchild Dornier
32-passenger 328JET regional jets.
Provision (Credit) for Income Taxes
Income tax expense for the first six months of 2002 was $2.8 million, an
increase of $8.5 million from the 2001 credit of $(5.7) million. The effective
tax rate for the first six months of 2002 and 2001 was 37.0%.
Net Income (Loss)
Net income for the first six months of 2002 was $4.8 million, which reflects an
increase in net income of $14.6 million from 2001 net loss of $(9.8) million.
The net income (loss) margin improved to 2.2% in 2002 from (3.8%) in 2001.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $85.6 million (including $19.5
million of "restricted cash," as discussed more fully below) at June 30, 2002,
compared with $46.9 million at December 31, 2001. This increase was primarily
due to $20.5 million of net proceeds in second quarter 2002 from the private
placement of the Company's common stock. Net cash provided by operating
activities totaled $40.0 million for the six months ended June 30, 2002. Net
cash used in investing activities totaled $35.0 million. Net cash provided by
financing activities in second quarter 2002 totaled $33.7 million due to
proceeds received from the private equity placement and funding from KfW for the
pre-delivery progress payments related to the Boeing 717 program, partially
offset by the payment of principal on the bank notes payable in the first
quarter 2002.
As of June 30, 2002, the Company had a working capital deficit of $18.1 million
versus a $61.4 million deficit on December 31, 2001. The $46.0 million
improvement in the working capital deficit was primarily due to the receipt of
$25.0 million of cash proceeds associated with the Fairchild arbitration
settlement and $20.5 million in net proceeds from the private placement of the
Company's common stock. The working capital deficit is primarily due to the
Company's air traffic liability (which represents deferred revenue for advance
bookings, whereby passengers have purchased tickets for future flights and
revenue is recognized when the passenger travels) and Frequent Flyer program
liability (which represents deferred revenue and accrued costs associated with
future travel). Because of this, the Company expects to operate at a working
capital deficit, which is not unusual for the industry.
In June 2002, the Company generated gross proceeds of $21.9 million through the
private placement of 1,675,000 shares of the Company's common stock to qualified
institutional investors at $13.09 per share. Net proceeds, after commission and
expenses, of $20.5 million will be used to reduce indebtedness and provide
general working capital including capital to support the startup of the new
Boeing 717 aircraft program. Because of the equity financing, the Company
decided not to apply for a federal loan guarantee pursuant to the Air
Transportation and System Stabilization Act.
18
As of June 30, 2002, the Company had a $45.0 million bank credit facility. The
credit facility, scheduled to expire August 30, 2002, is secured (with certain
exceptions) by substantially all non-aircraft personal property assets of the
Company and by certain aircraft. The credit facility agreement requires
quarterly compliance with certain financial covenants. The fees and borrowing
costs under the agreement are higher than they were prior to August 31, 2001,
which is the date the facility became effective. The interest rate on borrowings
under the facility is LIBOR plus 250 basis points. That interest rate spread,
and certain fees and costs, are subject to reduction based on improved financial
covenant performance.
In June 2002, the credit facility was amended to reflect a reduction in the
credit commitment from $55.0 million to $45.0 million in conjunction with a
release of collateral from the facility. The release of collateral is related to
a loan agreement the Company entered into with KfW as lender and Rolls Royce as
guarantor to finance pre-delivery progress payments in connection with the
Company's purchase of Boeing 717 aircraft. The released collateral represents
the Company's right, title and interest under the purchase agreement with The
Boeing Company for the purchase of Boeing 717 aircraft.
As of June 30, 2002, the Company had borrowings under the facility totaling
$28.0 million. The Company made a $10.0 million payment of principal in January
2002 in connection with an amendment to the credit facility that reduced
borrowings. In July 2002 the Company made an additional $10.0 million principal
payment that reduced borrowings to $18.0 million but did not reduce
availability, which remained at $45.0 million. In addition, as of June 30, 2002,
letters of credit totaling approximately $16.6 million were outstanding under
the credit facility, reducing the available credit by that amount. The letters
of credit are primarily used to support financing of the Company's maintenance
facilities. As of August 14, 2002, the amounts of borrowings and letters of
credit under the facility were $18.0 million and $16.6 million, respectively.
As of June 30, 2002, the Company was in compliance with the financial covenants
contained in the bank credit agreement. If the Company does not extend or
replace the credit agreement through its existing banks and/or new banks at or
before the time it expires, then all amounts outstanding under the credit
agreement would otherwise become due and payable. The Company has had
discussions with its existing banks concerning an extension or replacement of
the credit agreement. Due to industry and economic conditions, terms of an
extension or replacement may not be as favorable as existing terms. As of the
date of this report, however, the Company believes it will be able to obtain an
extension or replacement of the credit agreement with its existing banks at
terms acceptable to the Company.
The Company has agreements with organizations that process credit card
transactions arising from purchases of air travel tickets by customers of the
Company. The Company has an agreement with an organization that processes
Mastercard/Visa transactions; this organization is also a lender under the bank
credit facility. Credit card processors have financial risk associated with
tickets purchased for travel in the future because although the processor
generally forwards the cash related to the purchase to the Company soon after
the purchase is completed, the air
19
travel generally occurs after that time and the processor would have liability
if the Company does not ultimately deliver the travel. The agreement with the
organization that processes Mastercard/Visa transactions was amended in January
2002 to allow the credit card processor to create and maintain a reserve account
that is funded by retaining cash that it otherwise would deliver to the Company
(i.e. "restricted cash"). As a result of this amendment, the credit card
processor has retained cash representing 75 percent of the credit card
processor's risk exposure (determined on a daily basis), or $18.0 million of
restricted cash as of June 30, 2002. The 75 percent level is the maximum that
the credit card processor may withhold unless a specified triggering event
occurs under the credit card processing agreement, at which time the credit card
processor may increase the reserve to 100 percent of its risk exposure. The
triggering events include failure of the Company to meet certain liquidity, net
worth or leverage-type covenants, breaches of the Company's obligations under
the card processing agreement, and default under the bank credit facility
agreement. The Company met all required credit card processing agreement
covenants for second quarter 2002. The Company anticipates meeting all required
credit card processing agreement covenants for the remainder of 2002. The credit
card processing agreement is secured by a second priority lien, with certain
exceptions, on substantially all non-aircraft personal property assets of the
Company and certain aircraft.
Capital spending totaled $2.6 million for the six months ended June 30, 2002.
Capital expenditures consisted primarily of capitalized aircraft spare parts and
an engine overhaul. The Company expects to spend approximately $12.0 million on
capital expenditures in 2002, primarily related to refurbishment of an MD-80
aircraft, engine overhauls and spare parts, Boeing 717 start-up requirements,
and technology.
In second quarter 2002, the Company made $32.6 million of pre-delivery progress
payments to Boeing for the new Boeing 717 aircraft. The Company used available
operating cash of $9.6 million to make such payments, and KfW made $23.0 million
of the payments on behalf of the Company under a finance facility (see Note 7 to
the unaudited Condensed Consolidated Financial Statements) with KfW. As of June
30, the Company had made $34.1 million in pre-delivery progress payments, of
which $23.0 million was funded through the KfW finance facility. Under a
financing commitment between the Company and BCC at each aircraft delivery date,
BCC will acquire and pay for each aircraft, including interest accrued on the
debt owed KfW, and BCC will then lease the aircraft to the Company. At that
time, BCC will reimburse the Company in full for the pre-delivery progress
payments the Company has made. To the extent the Company funded such payments
through KfW, the Company will use the amounts reimbursed to repay the related
debt to KfW. To the extent the Company originally funded such payments with
operating cash, the amounts reimbursed will represent available cash.
In June 2001, one MD-80 series aircraft was debt-financed for seven years at a
fixed interest rate. In July 2001, the Company completed a sale and leaseback of
an MD-80 series aircraft. The term of the operating lease is 10 years. Three
Fairchild Dornier 328JET regional jets were partially debt-financed in 2001,
each for a period of up to 32 months at fixed rates. The Fairchild Dornier
328JET regional jets will likely be refinanced for longer terms when the initial
financing comes due in 2003.
20
The Company's Board of Directors has authorized a $30.0 million common stock
repurchase program. As of June 30, 2002, the Company has repurchased a total of
842,015 shares of common stock at a cost of $17.0 million. No shares were
repurchased during the six months ended June 30, 2002.
On April 23, 2001, the Company completed a $7.0 million financing of a new
maintenance facility for Astral located at General Mitchell International
Airport. Construction was completed and occupancy occurred in February 2002. The
facility is financed by 32-year tax-exempt, variable-rate demand industrial
development revenue bonds issued by the City of Milwaukee. To ensure the
tax-exempt status, Milwaukee County is the owner of the facility. The bonds are
secured by a letter of credit, pursuant to the Company's $45.0 million credit
facility. Interest payments made to bondholders and amortization of principal
are recorded as rent expense.
Given the uncertainties associated with the aftermath of the events of September
11, and economic conditions in general and those of the airline industry in
particular, the Company continues to operate in a highly unpredictable
environment. Based on the current general economic and industry outlook, the
Company believes its existing cash and cash equivalents, cash flow from
operations, and funds available from current and renewed credit facilities will
be adequate to meet its current and anticipated working capital requirements
through 2002. If these sources are inadequate or become unavailable, then the
Company may pursue additional funds through the financing of unencumbered assets
and recovery of amounts withheld related to credit card transactions, although
there is no assurance these additional funds will be sufficient to replace the
sources that are inadequate or become unavailable. This belief takes into
consideration the Company's results of operations through second quarter 2002,
and are based on a number of assumptions including, without limitation, the
following: (a) the Company will be able to obtain an extension or replacement of
its existing credit agreement with its existing banks at terms acceptable to the
Company, (b) there is no further material deterioration in general economic
conditions or the airline industry in particular, (c) there are no material
adverse political developments or domestic events, (d) there is no material
change in the competitive environment, and (e) there are no further material
increases in costs associated with new FAA security directives or the Aviation
and Transportation Security Act. Actual results could differ in a material and
adverse manner depending on the ultimate validity of these assumptions.
Regardless, the Boeing 717 program discussed in the Pending Developments
section requires substantial cash and short-term financing for pre-delivery
payments, followed by long-term financing on or after delivery. As described in
Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements, in
the second quarter 2002, the Company entered into a loan agreement with KfW Bank
(guaranteed by Rolls-Royce) to fund a substantial portion of the pre-delivery
payments to Boeing for the 717 aircraft. In addition, under a financing
commitment between the Company and Boeing Capital Corporation ("BCC"), at each
aircraft delivery date, BCC will acquire and pay for each aircraft and then
lease them to the Company. Although BCC is able to terminate its financing
commitment if it deems that the Company has experienced a material adverse
change and the commitment is subject to other conditions, the Company
21
believes it has requisite financing for the Boeing 717 program as a result of
the loan agreement with KfW Bank and the BCC Commitment.
The Embraer regional jet program, with deliveries scheduled to begin in January
2004, requires less significant pre-delivery payments but will require long-term
financing on or after delivery. Long-term financing alternatives are being
evaluated, but lease financing is anticipated. Sources for this financing will
be determined closer to scheduled delivery dates. Availability of the requisite
financing cannot be assured.
Pending Developments
This Form 10-Q filing, particularly this Pending Developments section, contains
forward-looking statements that may state the Company's or management's
intentions, hopes, beliefs, expectations or predictions for the future. In the
following discussion and elsewhere in the report, statements containing words
such as "expect," "anticipate," "believe," "estimate," "goal," "objective" or
similar words are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
projected results due to factors that include but are not limited to
uncertainties related to general economic factors; industry conditions; labor
relations; scheduling developments; government regulations; aircraft maintenance
and refurbishment schedules, including the cost of maintaining older aircraft in
the Company's fleet; potential delays related to acquired aircraft; increase in
fuel costs; competitive developments; interest rates; the Company's ability to
extend or replace its existing credit facility, and its ability to meet certain
financial covenants; increased costs for security related measures, compliance
with new or enhanced government regulations and insurance; uncertainties
concerning ongoing financing for operations, including the ability to finance
the purchase of new aircraft; higher fixed costs associated with the Boeing 717
aircraft; potential aircraft incidents, and other events beyond the Company's
control (e.g., traffic congestion and weather conditions), terrorist attacks or
fear of terrorist attacks, and other world events. Additional information
concerning factors that could cause actual results to differ materially from
those in the forward-looking statements is contained from time to time in the
Company's SEC filings, including but not limited to the Company's Current Report
on Form 8-K dated June 19, 2002 and filed June 20, 2002 and its prospectus dated
July 3, 2002 included in the Registration Statement on Form S-3 No. 333-91246.
Capacity - Due to the events of September 11 and their aftermath, the Company
reduced its flight schedule in the first half of the year to closer align it
with expected travel demand. The Company expects capacity to decrease 1-3% from
the prior year in the third quarter 2002 and increase 13-15% in fourth quarter
2002.
MD-80 Series Aircraft - The Company has one remaining owned MD-80 series
aircraft that has not been placed in service. The refurbishment process for this
aircraft is scheduled to begin in third quarter 2002.
22
Boeing 717 Aircraft - In April 2002, the Company announced that it had amended
its Boeing 717 aircraft order. The Company placed a firm order for 25 new Boeing
717 aircraft, with purchase rights for an additional 25 aircraft. The firm order
is valued at $940 million. Under the amended purchase agreement, delivery of the
aircraft is scheduled to begin in February 2003 and continue into 2005 at a rate
of one aircraft every month. The first Boeing 717 aircraft is expected to enter
scheduled service in March 2003. These aircraft will be used to replace Midwest
Express' DC-9 aircraft and expand service in existing and new markets. The
purchase will significantly affect the Company's cost structure by adding higher
fixed costs because the Boeing 717 aircraft will have higher ownership costs
(i.e., purchase costs, interest on loans used to pay the purchase price and
depreciation of the purchase price and, for leased planes, the lease payment
expense) than the Company's DC-9 aircraft. Benefits of the Boeing 717 aircraft
that would not be fixed in amount include greater fuel efficiency, lower
maintenance costs, improved dispatch reliability, increased aircraft
utilization, reduced regulatory compliance costs and higher revenues through
potential increased demand for air travel due to the fact that the Company is
using these aircraft. There is no assurance that the benefits of the Boeing 717
aircraft will outweigh the costs associated with these aircraft. Also, the
Company's Current Report on Form 8-K dated June 19, 2002 and filed June 20, 2002
discusses additional risks concerning the Boeing 717 program.
Regional Jet Aircraft - In April 2001, the Company signed a memorandum of
understanding placing firm orders for 20 new Embraer regional jets, with options
to purchase 20 additional aircraft (The firm order is valued at $400 million).
In August 2001, the parties signed a purchase agreement related to this order.
Under this purchase agreement, delivery of the 20 aircraft was scheduled to
begin in January 2002. In October 2001, due to ramifications of the events of
September 11, the Company reached an agreement with Embraer to delay deliveries
of the first aircraft to January 2003. For similar reasons, the Company reached
further agreement with Embraer in March 2002 to delay delivery of the first
aircraft until January 2004. This delay will allow the Company to concentrate on
the introduction of Boeing 717 aircraft to the Midwest Express fleet and provide
additional time for the Company to evaluate financing alternatives. The Company
plans to use the new Embraer regional jets to expand service in existing and new
markets. Because the regional jets are produced in three sizes, they are
expected to provide Astral with flexibility to serve markets with differing
capacity demands.
Insurance - Due to the events of September 11, aviation insurance carriers have
significantly increased the premiums to renew aviation insurance, as well as
war-risk coverage (insurance coverage available to commercial air carriers for
liability to persons other than employees for claims resulting from acts of
terrorism, war or similar events). The Company believes annual premiums for 2002
will increase approximately $5 million over 2001 levels.
Labor Relations - In April 1999, Midwest Express flight attendants elected the
Association of Flight Attendants ("AFA"), AFL-CIO, a labor union, for the
purpose of representation in collective bargaining. Negotiations began in
January 2000. In September 2000, AFA requested
23
assistance from the National Mediation Board ("NMB"). In July 2002, the NMB
released the Company and AFA from mediation after AFA rejected the NMB's proffer
of arbitration. Under the Railway Labor Act, a 30-day cooling-off period began
July 30 and will end at midnight on August 29. Following the cooling-off period,
if no contract agreement is achieved, the Company and the flight attendants can
implement legal self-help plans. The Company plans to continue operating in a
manner that minimizes disruptions to customers in response to any action (work
slow downs or stoppages) that the flight attendants might take. It is expected
that the Company and AFA will continue negotiations with a goal of completing a
contract.
In June 2001, Astral pilots, represented by the Air Line Pilots Association
("ALPA"), a labor union in collective bargaining, began negotiations. The Astral
pilots' contract became amendable in January 2002. In July 2002, the Company and
ALPA jointly filed for mediation services from the NMB.
Adoption of New Names and Corporate Symbol - In June 2002, the Company announced
that, beginning January 2003, Midwest Express will do business as "Midwest
Airlines" and Skyway Airlines will do business as "Midwest Connect." "Skyway
Airlines, Inc." will become the corporate name for the regional carrier,
replacing Astral Aviation, Inc. The Company's market research showed substantial
lost income outside core markets due to the word "Express" in the corporate
name, which connotes a small airline. Additionally, many travelers do not
understand the connection between Midwest Express and Skyway. The Company plans
to change the way it markets the regional product to better align it with the
mainline brand. The upcoming proposed acquisitions of 25 new Boeing 717 aircraft
and 20 Embraer regional jets provide an opportune time to make these name
changes in a cost-efficient manner as the new aircraft will arrive from the
manufacturers bearing the updated liveries with the new name and logo. The
Company plans to implement the changes over the next five years and estimates
2003 expenditures of $500,000 to $750,000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk since December
31, 2001.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 19, 2002, the Company sold 1,675,000 shares of its common stock, par
value $.01 per share, to certain qualified institutional investors at a price of
$13.09 per share in a private placement for an aggregate purchase price of
$21,925,750. Each share was accompanied by four-ninths of a Preferred Share
Purchase Right in accordance with the Rights Agreement, dated February 14, 1996,
as amended, between the Company and U.S. Bank, N.A. as successor in interest to
Firstar Trust Company.
24
Robert W. Baird & Co. Incorporated served as the exclusive placement agent to
the Company in connection with the private placement, and Raymond James &
Associates, Incorporated acted as an advisor to the Company in connection with
the private placement.
The Company sold its common stock in the private placement to the qualified
institutional investors in accordance with and in reliance upon the exemption
from securities registration afforded by Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 under Regulation D as promulgated by the United
States Securities and Exchange Commission under the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on April 24, 2002, the
following individuals were elected to the Board of Directors:
Authority Granted Authority Withheld
Timothy E. Hoeksema 12,792,337 104,673
James G. Grosklaus 12,794,433 102,577
Ulice Payne, Jr. 12,728,214 168,796
David H. Treitel 12,797,691 99,319
The terms of office for the following directors continued after the Company's
Annual Meeting: John F. Bergstrom, Fredrick P. Stratton, Jr., John W. Weekly,
Samuel K. Skinner, Elizabeth T. Solberg and Richard H. Sonnentag.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
(99.1) Written Statement of the Chairman of the Board, President and Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350.
(99.2) Written Statement of the Senior Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
Current Report on Form 8-K (Items 5 and 7) dated June 19, 2002 and
filed June 20, 2002 to announce the completion of a private placement
of 1,675,000 shares of the Company's common stock to qualified
Institutional Investors.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Midwest Express Holdings, Inc.
Date: August 14, 2002 By /s/ Timothy E. Hoeksema
---------------- ---------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 2002 By /s/ Robert S. Bahlman
---------------- ---------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
Exhibit No. Description
(99.1) Written Statement of the Chairman of the Board, President and Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350.
(99.2) Written Statement of the Senior Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.
28