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 September 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 October 31, 2002, there were 15,511,005 shares of Common Stock, $.01 par
value, of the Registrant outstanding.
MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-Q
For the period ended September 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 Unaudited Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
CERTIFICATIONS 32
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 Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues:
Passenger service $ 92,600 $ 99,356 $ 288,246 $ 331,327
Cargo 1,204 1,919 4,314 7,355
Other 10,095 7,816 31,336 24,837
------------ ------------ ------------ ------------
Total operating revenues 103,899 109,091 323,896 363,519
------------ ------------ ------------ ------------
Operating expenses:
Salaries, wages and benefits 40,001 42,643 117,590 128,545
Aircraft fuel and oil 21,190 21,889 56,730 70,709
Commissions 4,321 5,671 14,070 19,045
Dining services 5,152 6,987 15,358 20,801
Station rental, landing and other fees 9,192 8,601 27,906 28,072
Aircraft maintenance materials and repairs 11,974 12,281 31,298 41,728
Depreciation and amortization 5,157 5,366 15,877 15,597
Aircraft rentals 6,334 6,279 18,957 18,344
Impairment loss -- -- 29,911 8,839
Other 13,943 11,898 40,309 39,264
------------ ------------ ------------ ------------
Total operating expenses 117,264 121,615 368,006 390,944
------------ ------------ ------------ ------------
Operating loss (13,365) (12,524) (44,110) (27,425)
------------ ------------ ------------ ------------
Other (expense) income:
Interest income 344 277 911 752
Interest expense (774) (871) (2,583) (1,924)
Other, net 162 8,255 39,744 8,233
------------ ------------ ------------ ------------
Total other (expense) income (268) 7,661 38,072 7,061
------------ ------------ ------------ ------------
Loss before income tax credit (13,633) (4,863) (6,038) (20,364)
Income tax credit (5,044) (1,799) (2,233) (7,534)
------------ ------------ ------------ ------------
Net Loss $ (8,589) $ (3,064) $ (3,805) $ (12,830)
============ ============ ============ ============
Loss per common share - basic $ (0.55) $ (0.22) $ (0.26) $ (0.93)
============ ============ ============ ============
Loss per common share - diluted $ (0.55) $ (0.22) $ (0.26) $ (0.93)
============ ============ ============ ============
Weighted average shares - basic 15,510,648 13,830,547 14,471,989 13,827,697
Weighted average shares - diluted 15,510,648 13,830,547 14,471,989 13,827,697
See notes to unaudited consolidated financial statements.
2
Part I Item 1 - Financial Statements
MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
ASSETS 2002 2001
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents:
Unrestricted $ 36,890 $ 46,923
Restricted 20,970 --
--------- ---------
Total cash and cash equivalents 57,860 46,923
Accounts receivable:
Traffic, less allowance for doubtful accounts of $162 and $149
at September 30, 2002 and December 31, 2001, respectively 9,179 8,135
Income tax refund 2,373 10,300
Other receivables 653 3,348
--------- ---------
Total accounts receivable 12,205 21,783
Inventories 8,153 7,568
Prepaid expenses:
Commissions 1,976 2,128
Other 3,224 2,699
--------- ---------
Total prepaid expenses 5,200 4,827
Deferred income taxes 10,730 9,392
--------- ---------
--------- ---------
Total current assets 94,148 90,493
Property and equipment, at cost 369,339 381,809
Less accumulated depreciation and amortization 141,146 125,303
--------- ---------
Net property and equipment 228,193 256,506
Landing slots and leasehold rights, less accumulated amortization of $3,546
and $3,260 at September 30, 2002 and December 31, 2001, respectively 3,204 3,490
Aircraft purchase deposits and pre-delivery progress payments 42,390 3,500
Other assets 2,874 3,382
--------- ---------
Total assets $ 370,809 $ 357,371
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,679 $ 15,864
Notes payable 8,000 38,000
Current maturities of long-term debt 10,125 2,013
Air traffic liability 59,300 55,812
Accrued liabilities:
Vacation pay 6,441 6,021
Scheduled maintenance expense 6,045 4,980
Frequent Flyer awards 2,712 2,570
Other 28,248 26,612
--------- ---------
Total current liabilities 125,550 151,872
Long-term debt 25,386 35,097
Long-term debt on pre-delivery progress payments 28,554 --
Deferred income taxes 26,236 22,932
Noncurrent scheduled maintenance expense 5,985 6,521
Accrued pension and other postretirement benefits 11,801 10,368
Deferred Frequent Flyer partner revenue 8,382 8,215
Other noncurrent liabilities 7,436 7,630
--------- ---------
Total liabilities 239,330 242,635
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 at September 30, 2002
and December 31, 2001, respectively 162 145
Additional paid-in capital 32,181 11,702
Treasury stock, at cost (15,654) (15,706)
Retained earnings 114,790 118,595
--------- ---------
Total shareholders' equity 131,479 114,736
--------- ---------
Total liabilities and shareholders' equity $ 370,809 $ 357,371
========= =========
See notes to unauditd 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)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Operating activities:
Net loss $ (3,805) $ (12,830)
Items not involving the use of cash:
Impairment loss 29,911 8,839
Depreciation and amortization 15,877 15,597
Deferred income taxes 1,966 1,482
Other, net (10,778) 3,704
Changes in operating assets and liabilities:
Accounts receivable 8,078 (1,292)
Inventories (585) (483)
Prepaid expenses (373) (901)
Accounts payable (11,185) 5,206
Accrued liabilities 2,727 (2,250)
Air traffic liability 3,488 8,673
Deferred Frequent Flyer partner revenue 167 567
------------- --------------
Net cash provided by operating activities 35,488 26,312
------------- --------------
Investing activities:
Capital expenditures (4,871) (57,884)
Aircraft purchase deposits and pre-delivery
progress payments (38,890) (3,500)
Aircraft purchase deposits returned - 1,900
Other, net 468 (231)
------------- --------------
Net cash (used in) investing activities (43,293) (59,715)
------------- --------------
Financing activities:
Funding of pre-delivery progress payments 28,554 -
Funds received from private equity placement 20,527 -
Proceeds from aircraft financing - 35,080
Proceeds from debt financing - 18,000
Proceeds from sale and leaseback transactions - 10,500
Payment on note payable (30,000) -
Other, net (339) 2,932
------------- --------------
Net cash provided by financing activities 18,742 66,512
------------- --------------
Net increase in cash and cash equivalents 10,937 33,109
Cash and cash equivalents, beginning of period 46,923 15,703
------------- --------------
Cash and cash equivalents, end of period $ 57,860 $ 48,812
============= ==============
See notes to unaudited condensed consolidated financial statements.
4
Midwest Express Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Business and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for
the three- and nine-month periods ended September 30, 2002 and 2001 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 have been prepared in
accordance with accounting principles generally accepted in the United
States for interim financial information, in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X, and do not
include all of the information and footnotes required for complete, audited
financial statements. 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 nine-month periods ended September 30, 2002 are not
necessarily indicative of the results that may be expected 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 the 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
5
$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.
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 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 were
used to reduce indebtedness and provide general working capital.
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 nine-month periods ended September 30, 2002 and 2001, for the
two operating segments, Midwest Express and Astral, follows (in thousands).
6
Three Months Ended September 30, 2002
-------------------------------------
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $86,660 $18,636 ($1,397) $103,899
Operating (loss) (11,111) (2,254) - (13,365)
Depreciation and amortization expense 4,208 949 - 5,157
Interest income 371 1 (28) 344
Interest expense (774) (28) 28 (774)
(Loss) before income tax credit (11,383) (2,250) - (13,633)
Income tax credit (4,212) (832) - (5,044)
Total assets 319,252 66,202 (13,245) 372,209
Capital expenditures $1,820 $421 $ - $2,241
Three Months Ended September 30, 2001
-------------------------------------
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $93,637 $16,756 ($1,302) $109,091
Operating (loss) (10,269) (2,255) - (12,524)
Depreciation and amortization expense 4,577 789 - 5,366
Interest income 529 - (252) 277
Interest expense (871) (252) 252 (871)
(Loss) before income tax credit (3,095) (1,768) - (4,863)
Income tax credit (1,145) (654) - (1,799)
Total assets 343,537 54,986 (35,590) 362,933
Capital expenditures $5,534 $357 $ - $5,891
Nine Months Ended September 30, 2002
------------------------------------
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $272,613 $55,434 ($4,151) $323,896
Operating (loss) (41,000) (3,110) - (44,110)
Depreciation and amortization expense 13,143 2,734 - 15,877
Interest income 998 1 (88) 911
Interest expense (2,583) (88) 88 (2,583)
(Loss) income before income tax (credit) provision (42,372) 36,334 - (6,038)
Income tax (credit) provision (15,677) 13,444 - (2,233)
Total assets 319,252 66,202 (13,245) 372,209
Capital expenditures $3,694 $1,177 $ - $4,871
Nine Months Ended September 30, 2001
------------------------------------
Midwest
Express Astral Elimination Consolidated
------- ------ ----------- ------------
Operating revenues $315,118 $52,489 ($4,088) $363,519
Operating (loss) (23,526) (3,899) - (27,425)
Depreciation and amortization expense 13,611 1,986 - 15,597
Interest income 1,353 - (601) 752
Interest expense (1,924) (601) 601 (1,924)
(Loss) before income tax credit (16,603) (3,761) - (20,364)
Income tax credit (6,143) (1,391) - (7,534)
Total assets 343,537 54,986 (35,590) 362,933
Capital expenditures $35,693 $22,191 $ - $57,884
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 the 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. As of September 30, 2002, the Company had not hedged prices for future
fuel purchases.
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.
7. Debt Obligation Used for Aircraft Progress Payments
In the second quarter 2002, the Company entered into a loan agreement to fund
pre-delivery progress payments to The Boeing Company 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 $28.6 million
as of September 30, 2002. Under a financing commitment between the Company and
Boeing Capital Corporation ("BCC"), at each delivery date BCC will acquire and
pay for the aircraft delivered, 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 the 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. New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which is
effective for exit or disposal activities that are initiated after December 31,
2002. SFAS No. 146 requires that liabilities for the costs associated with exit
or disposal activities be recognized and measured initially at fair value only
when the liabilities are incurred, rather than when an entity commits to effect
an exit plan. The Company plans to adopt SFAS No. 146 on January 1, 2003. The
Company is currently reviewing SFAS No. 146, but does not expect it to have a
material impact on future financial statements or results of operations.
8
9. Debt Refinancing
On October 7, 2002, the Company amended the agreement relating to its bank
credit facility. Under the amended agreement, the Company has a $25.0 million
bank credit facility, declining in tranches to $18.5 million in mid-April 2003
compared with $45 million in availability prior to amending the credit
agreement. The credit facility, scheduled to expire August 30, 2003, is secured
(with certain exceptions) by substantially all non-aircraft personal property
assets of the Company, by certain aircraft and by a second priority lien on the
Company's headquarters facility. The credit agreement requires monthly
compliance with certain financial covenants. As of October 31, 2002, the Company
was in compliance with the financial covenants contained in the amended credit
agreement. The fees and borrowing costs under the amended credit agreement are
higher than they were prior to October 7, 2002. The interest rate on borrowings
under the facility is Prime plus 50 basis points.
9
Part I Item 2.
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Overview
Year-over-year comparisons of financial results and performance data may not be
meaningful because the comparisons are distorted by the impact of the events of
September 11, 2001.
The Company's third quarter 2002 operating loss was ($13.4) million, an increase
in loss of $0.9 million from third quarter 2001 operating loss of ($12.5)
million. Net loss for the quarter was ($8.6) million, an increase in loss of
$5.5 million from third quarter 2001 net loss of ($3.1) million. For the first
nine months of 2002, operating loss was ($44.1) million, an increase in loss of
$16.7 million from the operating loss for the first nine months of 2001 of
($27.4) million. Year-to-date 2002 net loss was ($3.8) million, an improvement
of $9.0 million from the corresponding year-to-date 2001 net loss of ($12.8)
million. Year-to-date 2002 net loss per share on a diluted basis was ($0.26), a
$0.67 improvement from 2001 net loss per share on a diluted basis of ($0.93).
Year-to-date 2002 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 the Fairchild arbitration settlement
over the cancellation of the 428JET program. Year-to-date 2001 results included
an $8.8 million (pre-tax) impairment charge related to the earlier-than-intended
retirement of eight owned DC-9-10 aircraft and non-operating income of $8.3
million (pre-tax) associated with a grant received under the Air Transportation
Safety and System Stabilization Act.
The Company's total revenue in third quarter 2002 decreased $5.2 million, or
4.8%, from third quarter 2001. Traffic, as measured by scheduled service revenue
passenger miles, increased 1.9% in the third quarter, while scheduled service
capacity, as measured by available seat miles ("ASMs"), increased 3.4%. Capacity
at Astral increased 30.0% because two additional regional jets were placed in
service and a number of routes were shifted from Midwest Express aircraft to
Astral's smaller aircraft to more efficiently handle decreased passenger levels.
Midwest Express' capacity increased 0.8%. Traffic decreased 0.2% at Midwest
Express, but increased 28.2% at Astral due to additional aircraft in service.
Both airlines benefited from fewer flight cancellations with Midwest Express
achieving a 98.9% flight completion rate and Astral achieving a 98.8% flight
completion rate.
Third quarter revenue yield decreased 10.1% at Midwest Express and 13.6% at
Astral. The decreases in revenue yield were 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 $4.4 million, or 3.6%, to $117.3 million
in third
10
quarter 2002. In the third quarter, the Company realized savings from lower fuel
prices and companywide cost-reduction efforts, with reduced costs in most
expense categories. Year-to-date 2002 operating costs include a $29.9 million
(pre-tax) impairment charge related to the early retirement of the Company's
DC-9 fleet. Year-to-date 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. Additional detail on cost changes is included in subsequent
sections.
The airline industry continues to operate in an uncertain domestic and global
economy. The Company's revenues have been adversely affected by a reduction in
business travel and a general decline in the demand for air travel following the
events of September 11, 2001. In addition, increased costs related to enhanced
security measures and aviation-related insurance have adversely impacted the
Company's results of operations. The Company has taken, and will continue to
take, decisive action to increase its operating revenues and decrease costs, and
the Company hopes to return to profitability in fiscal 2003; but given the
adverse economic and industry conditions it is impossible to project when the
Company will return to profitability. The Company cannot ensure that it can
increase or even sustain revenues, that it can reduce costs or that travel
demand will increase during these uncertain financial market conditions.
11
Operating Statistics
The following table provides selected operating statistics for Midwest Express
and Astral.
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Midwest Express Operations
- --------------------------
Origin & Destination Passengers 494,729 495,807 1,484,547 1,590,561
Scheduled Service Revenue Passenger Miles (000s) 481,351 482,461 1,460,422 1,537,035
Scheduled Service Available Seat Miles (000s) 825,339 818,694 2,386,704 2,514,418
Total Available Seat Miles (000s) 841,459 823,301 2,436,900 2,536,425
Load Factor (%) 58.3 % 58.9 % 61.2 % 61.1 %
Revenue Yield $0.1540 $0.1713 $0.1597 $0.1815
Revenue per Scheduled Service ASM (1) $0.0933 $0.1054 $0.1016 $0.1158
Total Cost per Total ASM (2) $0.1162 $0.1262 $0.1164 $0.1300
Average Passenger Trip Length (miles) 973.0 973.1 983.7 966.3
Number of Flights 11,495 11,567 33,083 36,395
Into-plane Fuel Cost per Gallon $0.843 $0.895 $0.787 $0.941
Full-time Equivalent Employees at End of Period 2,539 2,704 2,539 2,704
Aircraft in Service at End of Period 34 34 34 34
Astral Operations
- -----------------
Origin & Destination Passengers 150,751 132,331 428,906 397,933
Scheduled Service Revenue Passenger Miles (000s) 49,110 38,314 138,198 113,067
Scheduled Service Available Seat Miles (000s) 103,450 79,592 293,924 237,030
Total Available Seat Miles (000s) 103,472 79,627 294,148 237,079
Load Factor (%) 47.5 % 48.1 % 47.0 % 47.7 %
Revenue Yield $0.3765 $0.4356 $0.3982 $0.4626
Revenue per Scheduled Service ASM (1) $0.1791 $0.2102 $0.1877 $0.2212
Total Cost per Total ASM $0.2019 $0.2387 $0.1990 $0.2378
Average Passenger Trip Length (miles) 325.8 289.5 322.2 284.1
Number of Flights 14,488 13,326 41,181 41,058
Into-plane Fuel Cost per Gallon $0.945 $0.991 $0.874 $1.022
Full-time Equivalent Employees at End of Period 607 624 607 624
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.
12
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 September 30, Nine Months Ended September 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 $0.098 89.1% $0.110 91.1% $0.106 89.0% $0.119 91.1%
Cargo 0.001 1.2% 0.002 1.7% 0.002 1.3% 0.003 2.0%
Other 0.011 9.7% 0.009 7.2% 0.011 9.7% 0.009 6.9%
------ ----- ------ ----- ------ ----- ------ -----
Total Operating Revenues $0.110 100.0% $0.121 100.0% $0.119 100.0% $0.131 100.0%
------ ----- ------ ----- ------ ----- ------ -----
Operating Expenses:
Salaries, wages and benefits $0.042 38.5% $0.047 39.1% $0.043 36.3% $0.046 35.4%
Aircraft fuel and oil 0.022 20.4% 0.024 20.1% 0.021 17.5% 0.025 19.5%
Commissions 0.005 4.2% 0.006 5.2% 0.005 4.3% 0.007 5.2%
Dining Services 0.005 5.0% 0.008 6.4% 0.006 4.7% 0.008 5.7%
Station rental, landing,
other fees 0.010 8.8% 0.010 7.9% 0.010 8.6% 0.010 7.7%
Aircraft maint., materials
and repairs 0.013 11.5% 0.014 11.3% 0.011 9.7% 0.015 11.5%
Depreciation and amortization 0.005 5.0% 0.006 4.9% 0.006 4.9% 0.006 4.3%
Aircraft rentals 0.007 6.1% 0.007 5.7% 0.007 5.9% 0.007 5.0%
Impairment Loss 0.000 0.0% 0.000 0.0% 0.011 9.2% 0.003 2.4%
Other 0.015 13.4% 0.013 10.9% 0.015 12.5% 0.014 10.8%
------ ----- ------ ----- ------ ----- ------ -----
Total Operating Expenses $0.124 112.9% $0.135 111.5% $0.135 113.6% $0.141 107.5%
------ ----- ------ ----- ------ ----- ------ -----
Total ASMs (000s) 944,932 902,928 2,731,048 2,773,504
Note: Numbers, percents and totals in this table may not be recalculated due to rounding.
13
Three Months Ended September 30, 2002 Compared With
Three Months Ended September 30, 2001
Operating Revenues
Year-over-year comparisons of financial and performance data may not be
meaningful because the comparisons are distorted by the impact of the events of
September 11, 2001.
Company operating revenues totaled $103.9 million in third quarter 2002, a $5.2
million, or 4.8%, decrease from third quarter 2001. Passenger revenues accounted
for 89.1% of total revenues and decreased $6.8 million, or 6.8%, from third
quarter 2001 to $92.6 million. The decrease is attributable to an 8.5% decrease
in revenue yield and a decrease of 0.9 points in load factor partially offset by
a 1.9% increase in passenger volume, as measured by revenue passenger miles.
Third quarter 2001 results include non-operating income of $8.3 million
(pre-tax) associated with a federal grant received under the Air Transportation
Safety and System Stabilization Act.
Midwest Express passenger revenue decreased $8.6 million, or 10.4%, from 2001 to
$74.1 million. Revenue yield decreased 10.1% due to a substantial decline in
high-yield business travel, increased competition in some markets, the sluggish
economy and a depressed pricing environment resulting from airlines attempting
to stimulate travel demand and capture market share by reducing fares. Load
factor decreased from 58.9% in 2001 to 58.3% in 2002. Total capacity, as
measured by scheduled service ASMs, increased 0.8% while passenger volume, as
measured by scheduled service revenue passenger miles, decreased 0.2%.
Astral passenger revenue increased $1.8 million, or 10.8%, from third quarter
2001 to $18.5 million. This increase was primarily caused by added capacity and
a 13.9% increase in origin and destination traffic. Total capacity, as measured
by scheduled service ASMs, increased 30.0% due to the addition of two new
regional jets in scheduled service. Passenger volume increased 28.2%. Load
factor decreased from 48.1% in third quarter 2001 to 47.5% in third quarter
2002, and revenue yield decreased 13.6% due to a substantial decline in
high-yield business travel, lower fares used to stimulate travel demand, and a
revised mix of flights that included a greater percentage of longer flights with
lower yields. The average passenger trip length increased 36 miles, or 12.5%.
Revenue from cargo, charter and other services increased $1.6 million in third
quarter 2002. Revenue from charter sales increased $1.8 million in third quarter
2002 as more aircraft time was available for charter service and the Company had
exclusive charter rights for two professional baseball teams and other sports
teams. Cargo revenue decreased $0.7 million, or 37.3%, with most of the decrease
due to lower U.S. Postal Service mail volumes, in large part the result of new
federal security directives and restrictions.
Operating Expenses
Third quarter 2002 operating expense decreased $4.4 million, or 3.6%, from third
quarter 2001. The decrease was primarily the result of lower labor costs, lower
fuel costs, decreased commission costs and lower dining services costs partially
offset by higher costs in the "other"
14
category (insurance costs, advertising and a nonrecurring property tax credit in
2001). Cost per total ASM (unit costs) at Midwest Express decreased 7.9%, from
12.6(cent) to 11.6(cent) in third quarter 2002; Astral's cost per total ASM
decreased 15.4%, from 23.9(cent) to 20.2(cent).
Salaries, wages and benefits decreased $2.6 million, or 6.2%, from third quarter
2001 to $40.0 million. The labor cost decrease reflects the reduction of 182
full-time equivalent employees (165 at Midwest Express and 17 at Astral) since
September 30, 2001. The Company decreased headcount throughout 2001 and 2002 to
better align with reduced capacity and passenger levels, and to reduce costs
given the poor revenue environment. 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 was removed effective October 1,
2002 and employees are eligible for a pay increase after they have had their
compensation frozen for 12 months. A salary freeze for officers and other
members of senior management has been in effect for a longer period of time and
remains in effect. A $0.2 million reduction in overtime pay also contributed to
decreased labor costs. These decreases were partially offset by higher pilot
labor costs and higher medical insurance costs. On a cost per total ASM basis,
labor costs decreased 10.4% from 4.7(cent) in 2001 to 4.2(cent) in 2002.
Aircraft fuel and oil and associated taxes decreased $0.7 million, or 3.2% to
$21.2 million in third quarter 2002. Into-plane fuel prices decreased 5.4% in
third quarter 2002, averaging 85.7(cent) per gallon versus 90.6(cent) per gallon
in third quarter 2001, and resulted in a $1.4 million (pre-tax) favorable price
impact. Fuel consumption increased 2.4% in the quarter as a result of the
capacity additions at Astral. The Company had option cap agreements relating to
about 10% of its third quarter 2002 fuel volume, and those agreements provided a
$0.2 million benefit for the quarter. Fuel costs in October 2002 trended upward,
averaging 94.9(cent) per gallon. As of November 12, 2002, the Company had not
hedged prices for future fuel purchases.
Commissions for travel agents and commissions related to credit card
transactions decreased $1.4 million, or 23.8%, from third quarter 2001 to $4.3
million. The decrease was due to a 6.8% decrease in passenger revenue as well as
savings realized because of an increase in 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 5.7% in
third quarter 2001 to 4.7% in third quarter 2002.
Dining services costs decreased $1.8 million, or 26.3%, from third quarter 2001
to $5.2 million. The decrease was due to the implementation of roundtrip
catering on most flights 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 $13.74 in third quarter 2001 to $9.97 in third
quarter 2002. The events of September 11 negatively impacted third quarter 2001
food costs due to wasted meals from canceled flights following the shutdown of
air traffic for approximately three days.
15
Station rental, landing and other fees increased $0.6 million, or 6.9%, from
third quarter 2001 to $9.2 million. The increase was primarily the result of an
8.7% increase of flight segments at Astral, 22.2% higher costs at Astral and
2.0% higher costs at Midwest Express. On a cost per ASM basis, these costs
increased 2.1%.
Aircraft maintenance material costs decreased $0.3 million, or 2.5%, from third
quarter 2001 to $12.0 million. The decrease was caused by lower costs in almost
all maintenance categories at Midwest Express including lower DC-9 engine
overhaul costs, lower maintenance materials and lower purchased maintenance
costs. The decrease was partially offset by a $0.7 million nonrecurring payment
for MD-80 engine modifications. On a cost per total ASM basis, Midwest Express
costs decreased 10.2%. Maintenance costs at Astral increased $0.5 million, but
decreased 11.3% on a cost per total ASM basis.
Depreciation and amortization decreased $0.2 million, or 3.9%, from third
quarter 2001 to $5.2 million. On a cost per total ASM basis, these costs
decreased 8.2%. Depreciation associated with the two additional regional jets
was more than offset by lower depreciation on the DC-9 fleet following the asset
impairment charge in first quarter 2002.
Aircraft rental costs were $6.3 million for both third quarter 2002 and third
quarter 2001. On a cost per total ASM basis, these costs decreased 3.6%
primarily due to higher aircraft utilization at Astral.
Other operating expenses increased $2.0 million, or 17.2%, from third quarter
2001 to $13.9 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 $1.3
million, higher advertising costs and higher professional services costs were
partially offset by lower costs for legal services, crew room costs and other
items. Third quarter 2001 expenses were favorably impacted by a $1.0 million
property tax refund associated with the first six months of 2001, resulting from
legislation in the State of Wisconsin that exempted hub airlines from property
tax. On a cost per total ASM basis, other operating expenses increased 12.0%.
(Credit) for Income Taxes
Income tax credit for third quarter 2002 was ($5.0) million, a $3.2 million
increase from the 2001 credit of ($1.8) million. The effective tax rates for the
third 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 (Loss)
Net loss for third quarter 2002 was ($8.6) million, an increase of $5.5 million
from third quarter 2001 net loss of ($3.1) million.
16
Nine Months Ended September 30, 2002 Compared With
Nine Months Ended September 30, 2001
Operating Revenues
Year-over-year comparisons of financial and performance data may not be
meaningful because the comparisons are distorted by the impact of the events of
September 11, 2001.
Company operating revenues totaled $323.9 million for the nine months ended
September 30, 2002, a $39.6 million, or 10.9%, decrease from the first nine
months of 2001. Passenger revenues accounted for 89.0% of total revenues and
decreased $43.1 million, or 13.0%, from 2001 to $288.2 million. The decrease was
attributable to a 10.2% decrease in revenue yield and a 3.1% decrease in
passenger volume, as measured by revenue passenger miles. Load factor decreased
from 60.0% in 2001 to 59.6% in 2002. Third quarter 2001 results include
non-operating income of $8.3 million (pre-tax) associated with a grant received
under the Air Transportation Safety and System Stabilization Act.
Midwest Express passenger revenue decreased $45.8 million, or 16.4%, from 2001
to $233.2 million in 2002. This decrease was caused by a 5.0% decrease in
passenger volume, as measured by revenue passenger miles, and a 12.0% decrease
in revenue yield due to decreased business travel, the sluggish economy and
depressed fares. Total Midwest Express capacity, as measured by scheduled
service ASMs, decreased 5.1% as the Company worked to align capacity with lower
demand. Load factor increased from 61.1% in 2001 to 61.2% in 2002.
Astral passenger revenue increased $2.7 million, or 5.2%, from 2001 to $55.0
million in 2002. Traffic increased 22.2% on a 24.0% increase in capacity due to
two additional regional jets in service in 2002. Load factor decreased from
47.7% in 2001 to 47.0% in 2002. Revenue yield decreased 13.9%, from $0.46 in
2001 to $0.40 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 $3.5
million, or 10.7%, 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 professional baseball teams and other sports
teams. The increased charter revenue was offset by a $3.0 million decrease in
cargo revenue. Most of this decrease was due to lower U.S. Postal mail volumes,
in large part the result of new federal security directives and restrictions.
Operating Expenses
2002 operating expenses decreased $22.9 million, or 5.9%, from 2001 to $368.0
million. The Company realized savings from lower fuel prices and companywide
cost-reduction efforts, with reduced costs in all categories except
depreciation, aircraft rentals and other (insurance and advertising). 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
17
(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 4.4%,
from 14.1(cent) in 2001 to 13.5(cent) in 2002.
Salaries, wages and benefits decreased $11.0 million, or 8.5%, from 2001 to
$117.6 million in 2002. The labor cost decrease reflects the reduction of 182
full-time equivalent employees (165 reductions at Midwest Express and 17 at
Astral) since September 30, 2001. The Company decreased headcount throughout
2001 and 2002 to better align with reduced capacity and passenger levels, and to
reduce costs given the poor revenue environment. The headcount decrease was
primarily the result of furloughing employees, which reduced labor costs by
$11.2 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 salary freeze for officers and other members of senior management
has been in effect for a longer period of time. A $1.6 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 and less labor capitalized for maintenance projects. On a cost
per total ASM basis, labor costs decreased 7.1% from 4.6(cent) in 2001 to
4.3(cent) in 2002.
Aircraft fuel and oil and associated taxes decreased $14.0 million, or 19.8%,
from 2001 to $56.7 million in 2002. Into-plane fuel prices decreased 15.9% in
2002, averaging 79.9(cent) per gallon in 2002 versus 95.0(cent) per gallon in
2001, resulting in a $10.9 million favorable pre-tax price impact. Fuel
consumption decreased 4.6% in 2002 because of a decrease in flight operations at
Midwest Express.
Travel agent and credit card commissions decreased $5.0 million, or 26.1%, from
2001 to $14.1 million in 2002. On a cost per total ASM basis, commissions
decreased 25.0% from 2001. The decrease was primarily due to a 13.0% decrease in
passenger revenue, and by savings realized because of an increase in 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 5.7% in 2001 to 4.9% in 2002.
Dining service costs decreased $5.4 million, or 26.2%, from 2001 to $15.4
million in 2002. The decrease was due to the implementation of roundtrip
catering on most flights, a 6.7% 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 21.8%, from $12.79 in 2001 to $10.00 in 2002.
Station rental, landing and other fees decreased $0.2 million, or 0.6%, from
2001 to $27.9 million in 2002. The decrease was caused by 9.1% fewer flight
segments at Midwest Express partially offset by 0.3% more flight segments at
Astral. On a cost per total ASM basis, these costs increased 1.0%.
Aircraft maintenance material costs decreased $10.4 million, 25.0%, from 2001 to
$31.3 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
18
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 23.8%.
Depreciation and amortization increased $0.3 million, or 1.8%, from 2001 to
$15.9 million in 2002. On a cost per total ASM basis, these costs increased
3.4%.
Aircraft rental costs increased $0.6 million, or 3.3%, from 2001 to $19.0
million in 2002. On a cost per total ASM basis, these costs increased 4.9%.
A $29.9 million (pre-tax) impairment charge was recorded in first quarter 2002.
The Company accelerated 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.
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 accelerated 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 increased $1.0 million, or 2.7%, from 2001 to $40.3
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 increase was
primarily due to increased hull and liability insurance totaling $4.2 million
and $0.8 million in increased advertising, offset by cost decreases in crew
hotel rooms, consulting fees, communications, reservation fees, air cargo and
mail handling costs, Frequent Flyer costs, flight training, bad debt and other
items. On a cost per total ASM basis, other operating expenses increased 4.3%.
19
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
Dornier over the cancellation of its 428JET program. Following Fairchild's
filing of insolvency in 2002, the previously disclosed gain of $46 million was
reduced primarily due 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 Fairchild's insolvency, and does not expect to
receive any additional 328JET regional jets. Astral currently operates 10
32-passenger 328JET regional jets.
(Credit) for Income Taxes
Income tax credit for the first nine months of 2002 was ($2.2) million, a
decrease of $5.3 million from the 2001 credit of ($7.5) million. The effective
tax rate for the first nine months of 2002 and 2001 was 37.0%.
Net (Loss)
Net loss for the first nine months of 2002 was ($3.8) million, which reflects a
decrease in net loss of $9.0 million from 2001 net loss of $(12.8) million. The
net (loss) margin improved to (1.2%) in 2002 from (3.5%) in 2001.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $57.9 million (including $21.0
million of "restricted cash," as discussed more fully below) at September 30,
2002, compared with $46.9 million at December 31, 2001. Net cash provided by
operating activities totaled $35.5 million for the nine months ended September
30, 2002. Net cash used in investing activities totaled $43.3 million. Net cash
provided by financing activities for the nine months ended September 30, 2002
totaled $18.7 million due to proceeds received from the private equity placement
and funding associated with the pre-delivery progress payments related to the
Company's new Boeing 717 aircraft program, partially offset by the payment of
principal on the bank notes payable.
As of September 30, 2002, the Company had a working capital deficit of $31.4
million versus a $61.4 million deficit on December 31, 2001. The improvement in
the working capital deficit can be attributed 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.
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 were used to reduce indebtedness and provide general
working capital, including capital to
20
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 Safety and System Stabilization Act.
On October 7, 2002, the Company amended the agreement relating to its bank
credit facility. Under the amended agreement, the Company has a $25.0 million
bank credit facility, declining in tranches to $18.5 million in mid-April 2003,
compared with $45 million in availability prior to amending the credit
agreement. The Company intends to fund the pay-down from existing cash and cash
equivalents or cash flow from operations. The credit agreement, scheduled to
expire August 30, 2003, is secured (with certain exceptions) by substantially
all non-aircraft personal property assets of the Company, by certain aircraft
and by a second priority lien on the Company's headquarters facility. The credit
agreement requires monthly compliance with certain financial covenants. As of
October 31, 2002, the Company was in compliance with the financial covenants
contained in the amended credit agreement. The fees and borrowing costs under
the amended credit agreement are higher than they were prior to October 7, 2002.
The interest rate on borrowings under the facility is Prime plus 50 basis
points.
As of September 30, 2002, the Company had borrowings under the facility totaling
$8.0 million. In addition, the Company had letters of credit totaling
approximately $16.6 million 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.
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 one such 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 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 $19.9 million of the $21.0 million of restricted cash as of September
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 or leverage-type covenants,
breaches of the Company's obligations under the card processing agreement, and
default under the bank credit facility. The Company met all required credit card
processing agreement covenants for third quarter 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, certain aircraft and a third priority lien on the Company's
headquarters
21
facility. The Company does not anticipate that other credit card processors will
require similar protection.
The Company offers the Midwest Express MasterCard Program. As the Company
indicated it would in its Annual Report on Form 10-K for the year ended December
31, 2001, the Company has transitioned the Midwest Express MasterCard Program
from Elan Financial Services to Juniper Bank under an agreement effective July
1, 2002. The program allows Midwest Express to offer a cobranded credit card to
enhance loyalty to the airline and to increase Frequent Flyer membership. The
Company essentially generates income by selling Frequent Flyer program miles to
Juniper Bank, which in turn awards the miles to cardholders for purchases made
with their credit cards. In early fourth quarter 2002, Juniper Bank paid $20.0
million in cash to the Company related to the program as the agreement between
the parties required. In essence, this payment is in part the payment of a
minimum amount due for the period from July 1, 2002 to the date of payment and
in part the prepayment of a minimum amount due for the period from the date of
payment through June 30, 2003. Because the amounts that the Company will
ultimately receive from Juniper Bank under the agreement over its term can vary
depending upon actual results over the term of the agreement, the Company is
recognizing revenue under the agreement (subject to the Company's revenue
recognition policies for Frequent Flyer miles) based on actual credit card
purchase and mileage credit activity rather than based on the receipt of these
or similar cash payments that the agreement may obligate Juniper Bank to make.
Accordingly, the Company will reflect a liability on its balance sheet based on
the amount by which the cash the Company has received under the agreement
exceeds the revenue the Company has recognized under the agreement.
Capital spending totaled $4.9 million for the nine months ended September 30,
2002. Capital expenditures consisted primarily of capitalized aircraft spare
parts and an engine overhaul. The Company expects capital expenditures in 2002
to total approximately $8.0 million and consist primarily of refurbishment of an
MD-80 aircraft, engine overhauls and spare parts, Boeing 717 start-up
requirements, and technology.
As of September 30, 2002, the Company had made pre-delivery progress payments of
$38.9 million for the new Boeing 717 aircraft program of which $28.6 million was
funded under the KfW loan agreement. Under a financing commitment between the
Company and BCC, at each aircraft delivery date BCC will acquire and pay for the
aircraft delivered, 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 (see Note 7 to the Unaudited Condensed
Consolidated Financial Statements).
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
another MD-80 series aircraft. The term of the operating lease is 10 years. In
2001, the Company obtained debt financing for three Fairchild Dornier 328JET
regional jets that the Company owns, each for a period of up to 32 months at
fixed rates. These 328JET regional jets will likely be refinanced for longer
terms when the initial financing comes due in late 2003 for two jets and early
2004 for the third. The Company's ability to refinance these jets at that time
will be dependent in part on the then current fair market value of the jets.
The Company's Board of Directors has authorized a $30.0 million common stock
repurchase program. As of September 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 nine months ended September 30, 2002.
22
On April 23, 2001, the Company completed a $6.3 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 under the Company's $25.0 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, 2001 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 it will meet the financial covenants contained in its amended
credit agreement for the remainder of the credit agreement term and believes it
will meet all required covenants under the credit card processing agreement
discussed above for the remainder of 2002 and 2003. If the Company is not able
to comply with the covenants, then under reasonably foreseeable circumstances it
believes it will be able to obtain a waiver from the banks participating in the
credit facility and from the credit card processor. Based on such outlooks and
the Company's beliefs regarding its credit agreement and credit card processing
agreement, the Company believes its existing cash and cash equivalents, cash
flow from operations, and funds available from current credit facilities will be
adequate to meet its current and anticipated working capital requirements for
the remainder of the credit agreement term. If these sources are inadequate or
become unavailable, then the Company may pursue additional funds through the
financing of unencumbered assets and/or recovery of amounts withheld related to
credit card transactions, although there is no assurance the Company will be
successful in pursuing these additional funds or that they would be sufficient
to replace the sources that are inadequate or become unavailable. The Company's
beliefs discussed in this paragraph take into consideration the Company's
results of operations through third quarter 2002 and are based on a number of
assumptions including, without limitation, the following: (a) there is no
further material deterioration in general economic conditions or the airline
industry in particular relative to conditions in existence at the end of the
third quarter 2002, (b) there are no material adverse political developments or
domestic events, (c) there is no material change in the competitive environment
relative to the environment as it existed at the end of the third quarter 2002,
(d) there are no further material increases in costs associated with new FAA
security directives or the Aviation and Transportation Security Act, (e) the
Company successfully implements the cost reduction initiatives described below
in "Pending Developments" such that, going forward in 2003, the Company will
save $2 million per month relative to the costs of the Company would experience
without the initiatives and (f) the Company is able to refinance, in amounts
that approximate the amounts of debt that is due, the debt that is due in 2003
for two Fairchild Dornier 328JET regional jets that the Company owns. Actual
results could differ in a material and adverse manner depending on the ultimate
validity of these assumptions. In particular but without limitation there is
potential for insufficient liquidity if the Company's experience varies from
these assumptions.
23
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 Boeing 717 aircraft. In addition, under a financing
commitment between the Company and BCC, at each aircraft delivery date BCC will
acquire and pay for the aircraft delivered and then lease them to the Company.
With the loan agreement with KfW Bank and the BCC commitment, the Company
believes it has requisite financing for the Boeing 717 program. 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 does not anticipate that the financing commitment will
be terminated or that the Company will be unable to meet the conditions.
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:
o uncertainties related to general economic factors;
o industry conditions;
o labor relations;
o scheduling developments;
o government regulations, including increased costs for compliance with
new or enhanced government regulations;
o aircraft maintenance and refurbishment schedules, including the cost
of maintaining older aircraft in the Company's fleet;
o potential delays related to acquired aircraft;
24
o increases in fuel costs;
o competitive developments;
o interest rates;
o the Company's ability to meet certain financial covenants under the
amended bank credit facility and covenants under its credit card
processing agreement;
o increased costs for security related measures and insurance;
o uncertainties concerning ongoing financing for operations, including
the ability to finance the purchase of new aircraft;
o higher fixed costs associated with the Boeing 717 aircraft;
o potential aircraft incidents; and other events beyond the Company's
control (for example, traffic congestion and weather conditions); and
o terrorist attacks or fear of terrorist attacks, and other world
events, including the increased threat of U.S. military involvement in
overseas operations (for example, the threat of war with Iraq).
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.
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 began in third quarter 2002. The Company expects to place this aircraft
in service in early second quarter 2003.
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,
which 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
25
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.
Labor Relations - In April 1999, Midwest Express flight attendants elected the
Association of Flight Attendants, AFL-CIO, a labor union, for the purpose of
representation in collective bargaining. Negotiations for a first contract began
in January 2000. In October 2002, the flight attendants ratified a four-year
contract. The new contract includes pay increases and work rule changes that
will increase costs moderately throughout the contract term. Before the parties
agreed on the contract, the flight attendants made highly publicized threats to
disrupt flight operations through work actions that they referred to as "CHAOS."
The Company does not believe those threats or the measures the Company took to
be in a position to respond to them had a material effect on the Company's
revenues or expenses in the third quarter.
In June 2001, Astral began negotiating with its pilots which are represented by
the Air Line Pilots Association ("ALPA"), a collective bargaining labor union.
The Astral pilots' contract became amendable in January 2002. In July 2002, the
Company and ALPA jointly filed for mediation services from the National
Mediation Board. Negotiations continued during the third quarter and additional
sessions are scheduled for the fourth quarter 2002.
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," which connotes a
small airline, in the corporate name. Additionally, research shows that 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
26
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.
Sale of aircraft - In the third quarter 2002, the Company entered into a letter
of intent to sell two DC-9-10 aircraft to a foreign airline. One aircraft was
sold and delivered to the buyer in October for less than $1.0 million. The
second aircraft is expected to be sold and delivered in December for less than
$1.0 million. The net proceeds from the sales have been, or will be, used to
reduce indebtedness under the Company's bank credit facility.
Cost Reduction Efforts - By the end of December 2002, the Company plans to have
implemented a variety of cost-reduction initiatives such that, going forward in
2003, the Company will save $2 million per month relative to the costs the
Company would experience without the initiatives. On November 1, 2002, the
Company implemented an extensive schedule modification attempting to increase
revenue per available seat mile. The Company added capacity in some new markets,
while reducing flight frequencies in a number of existing markets in an effort
to better match capacity to demand. Effective November 1, the Company began
limiting its meal service to traditional meal times and offering passengers
three levels of meal service based on flight duration and market segment. The
new food service features freshly prepared items with a comfort food flavor and
highly personalized service, as well as complimentary champagne. The Company
continues to offer a choice of meal items including a hot selection. The Company
expects these changes will save $10 million per year on an annualized basis.
Much of the savings is expected to materialize from reduced setup and delivery
rather than the food product itself. The Company expects these changes to reduce
costs per meal to $5.50 from the current cost of more than $9. The Company also
has met with key vendors and suppliers to negotiate reduced costs. The Company
plans to reduce the workforce by 200 to 250 employees from September 2002 to the
end of 2002 through a combination of attrition and furloughs. As part of its
brand, Midwest Express has emphasized tangible amenities and a higher level of
customer service to differentiate itself from other airlines, and it will
continue that emphasis. As a consequence of the cost reduction efforts, it is
possible that some passengers will perceive some reduction in Midwest Express'
amenities and customer service and that there will be a corresponding weakening
of the brand, but the Company believes that risk is modest because Midwest
Express' amenities and customer service will still differentiate it from other
airlines.
Frequent Flyer Program - Effective October 1, 2002, the Company changed its
standard travel award level to 25,000 Frequent Flyer miles, while a companion
travel award requires 20,000 miles. The Company also provides two levels of
award tickets for domestic travel. The new choice awards eliminate capacity
controls for award tickets, thereby allowing customers to redeem an additional
25,000 miles for any available seat on Midwest Express or Skyway Airlines
flights on which the standard Frequent Flyer award seats have already been
filled. Standard awards remain subject to capacity controls, which limit seat
availability during peak travel times. As a result of these changes the Company
expects a non-cash reduction in costs to be recorded in the fourth quarter.
27
New Accounting Pronouncement - In June 2002, the Financial Accounting Standards
Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," which is effective for exit or disposal activities that
are initiated after December 31, 2002. SFAS No. 146 requires that liabilities
for the costs associated with exit or disposal activities be recognized and
measured initially at fair value only when the liabilities are incurred, rather
than when an entity commits to effect an exit plan. The Company plans to adopt
SFAS No. 146 on January 1, 2003. The Company is currently reviewing SFAS No.
146, but does not expect it to have a material impact on future financial
statements or results of operations.
Insurance - Due to the events of September 11, aviation insurance carriers have
significantly increased the premiums for aviation insurance, as well as hull and
war-risk coverage (insurance coverage available to commercial air carriers for
liability to persons other than employees or passengers for claims resulting
from acts of terrorism, war or similar events). Under the Air Transportation
Safety and System Stabilization Act, U.S. air carriers may purchase certain war
risk liability insurance from the United States government on an interim basis
at rates that are more favorable than those available from private aviation
insurance carriers. The availability of this war risk liability insurance has
been extended through December 15, 2002. If this insurance is not extended
beyond December 15, 2002, then the Company's insurance costs could increase
significantly. Through the third quarter 2002, premiums for aviation-related
insurance had increased $4.2 million over 2001 levels.
Security Changes - By December 31, 2002, changes are required to baggage
screening and positive bag match to passengers. The Transportation Safety
Administration will impose these changes at all airports. The impact of these
changes on the Company's passengers is currently not known but may lead to
increased processing time for traveling passengers. The impact on the Company's
revenue and costs is unknown at this time.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Other than the change in the interest rate under the amended senior secured
revolving credit agreement from LIBOR plus 250 basis points to Prime plus 50
basis points, there have been no material changes in the Company's market risk
since December 31, 2001.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities and Exchange of 1934 (the "Exchange Act"), within 90
days prior to the filing date of this Quarterly Report on Form 10-Q, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Company's Chairman of the Board,
President and Chief Executive Officer and the Company's Senior Vice President,
Chief Financial Officer and Controller, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Exchange Act). Based upon their evaluation, of these
disclosure controls and procedures, the Company's Chairman of the Board,
President and Chief Executive Officer and the Company's Senior Vice President,
Chief Financial Officer and Controller concluded that the disclosure controls
and procedures were effective as of the date of such evaluation to ensure that
material information relating to the Company, including its consolidated
subsidiaries, was made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.
28
(b) Changes in internal controls. There were not any significant changes in the
Company's internal controls or other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
29
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
(10.1) Second Amendment to Senior Secured Revolving Credit Agreement, dated
as of June 28, 2002, by and among Midwest Express Holdings, Inc., the
lenders party thereto and U.S. Bank National Association.
(10.2) Third Amendment to Senior Secured Revolving Credit Agreement, dated as
of August 29, 2002, by and among Midwest Express Holdings, Inc., the
lenders party thereto and U.S. Bank National Association.
(10.3) Fourth Amendment to Senior Secured Revolving Credit Agreement, dated
as of September 30, 2002, by and among Midwest Express Holdings, Inc.,
the lenders party thereto and U.S. Bank National Association.
(10.4) Fifth Amendment to Senior Secured Revolving Credit Agreement, dated as
of October 7, 2002, by and among Midwest Express Holdings, Inc., the
lenders party thereto and U.S. Bank National Association.
(10.5) Intercreditor Agreement, dated as of October 7, 2002, by and among
U.S. Bank National Association; Bank One, NA; M&I Marshall & Ilsley
Bank; Thrivent Financial for Lutherans; and Midwest Express Holdings,
Inc.
(10.6) Mortgage and Security Agreement and Fixture Financing Statement,
granted as of October 30, 2002, by Midwest Express Holdings, Inc. to
U.S. Bank National Association for the lenders party to the Senior
Secured Revolving Credit Agreement, as amended.
(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
No reports on Form 8-K were filed during the quarter ended September
30, 2002.
30
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: November 14, 2002 By /s/ Timothy E. Hoeksema
------------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer
Date: November 14, 2002 By /s/ Robert S. Bahlman
------------------------------
Robert S. Bahlman
Senior Vice President,
Chief Financial Officer and Controller
31
CERTIFICATIONS
I, Timothy E. Hoeksema, Chairman of the Board, President and Chief
Executive Officer of Midwest Express Holdings, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Midwest Express
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
32
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Timothy E. Hoeksema
- --------------------------------
Timothy E. Hoeksema
Chairman of the Board, President
and Chief Executive Officer
33
I, Robert S. Bahlman, Senior Vice President, Chief Financial Officer and
Controller of Midwest Express Holdings, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Midwest Express
Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
34
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Robert S. Bahlman
- -----------------------------
Robert S. Bahlman
Senior Vice President, Chief Financial
Officer and Controller
35
EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Exhibit No. Description
(10.1) Second Amendment to Senior Secured Revolving Credit Agreement, dated
as of June 28, 2002, by and among Midwest Express Holdings, Inc., the
lenders party thereto and U.S. Bank National Association.
(10.2) Third Amendment to Senior Secured Revolving Credit Agreement, dated as
of August 29, 2002, by and among Midwest Express Holdings, Inc., the
lenders party thereto and U.S. Bank National Association.
(10.3) Fourth Amendment to Senior Secured Revolving Credit Agreement, dated
as of September 30, 2002, by and among Midwest Express Holdings, Inc.,
the lenders party thereto and U.S. Bank National Association.
(10.4) Fifth Amendment to Senior Secured Revolving Credit Agreement, dated as
of October 7, 2002, by and among Midwest Express Holdings, Inc., the
lenders party thereto and U.S. Bank National Association.
(10.5) Intercreditor Agreement, dated as of October 7, 2002, by and among
U.S. Bank National Association; Bank One, NA; M&I Marshall & Ilsley
Bank; Thrivent Financial for Lutherans; and Midwest Express Holdings,
Inc.
(10.6) Mortgage and Security Agreement and Fixture Financing Statement,
granted as of October 30, 2002, by Midwest Express Holdings, Inc. to
U.S. Bank National Association for the lenders party to the Senior
Secured Revolving Credit Agreement, as amended.
(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.
36